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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X|Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 29, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
10100 Reisterstown Road, Owings Mills, Maryland 21117
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 410/363-1111
Securities of the Registrant registered pursuant to Section 12(b)of the Act:None
Securities of the Registrant registered pursuant to Section 12(g)of the Act:None
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock of the Registrant held
by non-affiliates of the Registrant as of December 9, 2002. Not Applicable.
There is no market for the Common Stock of the Registrant.
The number of shares outstanding of the Registrant's common stock as of
December 9, 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
Item 1. BUSINESS
General
Sweetheart Holdings Inc. ("Sweetheart Holdings"), together with its
wholly owned subsidiary Sweetheart Cup Company Inc. ("Sweetheart Cup"), and its
subsidiaries, (the "Company"), believes it is one of the largest producers and
marketers of disposable foodservice and food packaging products in North
America. In Fiscal 2002, the Company had net sales of approximately $1.3
billion. The Company sells a broad line of disposable paper, plastic and foam
foodservice and food packaging products, consisting primarily of cups, lids,
plates, bowls, napkins and containers. The Company markets its products
primarily to leading foodservice distributors, national quick service chains and
catering companies, and retailers. The Company markets its products under both
private label brands and the Company's well-recognized Sweetheart(R), Trophy(R),
Sensations(R), Hoffmaster(R) and Lily(R) brands.
In addition, the Company designs, manufactures and leases container
filling and lidding equipment for use by dairies and other food processors. This
equipment is specifically designed by the Company to fill and seal the Company's
containers in its customers' plants. The Company also sells paper converting
equipment used primarily in the manufacture of paper cups and food containers.
With over 90 years of operating history, the Company has a diversified
customer base of over 5,000 customers, consisting primarily of (i) major
foodservice distributors, such as Sysco Corporation and U.S. Foodservice Inc.,
who serve national and regional institutional foodservice customers, (ii) quick
service chains, such as McDonald's Corporation and Burger King Corporation, and
convenience stores, such as 7 Eleven, Inc., (iii) national catering services,
such as ARAMARK Corporation and Sodexho Marriott Services, and (iv)
supermarkets, mass merchants, warehouse clubs and other retailers, such as The
Great Atlantic & Pacific Tea Company, Inc., The Kroger Co., Target Stores (a
division of Dayton Hudson Corp.), Wal-Mart Stores, Inc. and Price-Costco, Inc.
The Company's food packaging containers and lids are sold to national and
regional dairy and food companies such as Ben & Jerry's Homemade, Inc., Blue
Bell Creameries, L.P., Dean Foods Co. and Prairie Farms Dairy, Inc.
Following the terrorist attacks of September 11, 2001, the Company
experienced a decline in sales prices and volumes due to a number of factors,
including a significant reduction in business and leisure travel and a reduction
in foodservice and away-from-home dining. In addition to these factors affecting
our sales, our implementation of certain consolidation initiatives caused
temporary inefficiencies within our manufacturing operations, which increased
our cost structure and reduced our gross margin during recent periods.
As a result of these factors, together with difficult market
conditions, the Company has been unable to refinance its $110 million of 12.0%
senior subordinated notes due 2003 (the "$110 million Senior Subordinated
Notes") on terms acceptable to the Company. Unless current market conditions
change significantly, the Company may not have sufficient capital to refinance
the $110 million Senior Subordinated Notes when they mature on September 1,
2003. Moreover, if the Company is unable to complete the exchange offer and
consent solicitation or refinance, repay or extend the $110 million Senior
Subordinated Notes prior to March 1, 2003, its senior revolving credit facility
with Bank of America, N.A., as agent (the "Senior Credit Facility"), unless
otherwise amended, will become due and payable.
On November 21, 2002, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 relating to a proposed
offer to exchange newly issued $110 million
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senior subordinated notes due 2007 for all of the $110 million Senior
Subordinated Notes and a consent solicitation to eliminate and/or amend certain
restrictive covenants and other provisions governing the $110 million Senior
Subordinated Notes. The Company also intends to solicit consent to eliminate
and/or amend certain restrictive covenants and other provisions governing the
Company's $120 million of 9 1/2% Senior Subordinated Notes due 2007 (the "$120
million Senior Subordinated Notes"). The Company believes that the exchange
offer and consent solicitations will provide it with the necessary time to
execute its business plan and to further evaluate its strategic alternatives.
The Company is also 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, 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 and consent solicitations of the Company's
outstanding securities. There can be no assurances that any of these strategic
options will be consummated.
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
Group, Inc. ("SF Holdings"), American Industrial Partners Management Company,
Inc., American Industrial Partners Capital Fund L.P. ("AIP") and the other
stockholders of the Company 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 the Company ("the
Shares"), the "Original Stockholders"), all of the outstanding Shares not held
by SF Holdings (which consisted of 52% of the voting stock of the Company) 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 the Company. In addition and
in connection therewith, the Stockholders Agreement and related stockholders'
right agreement were terminated.
On March 25, 2002, pursuant to an Agreement and Plan of Merger, The
Fonda Group, Inc., a company under common control, ("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.
Manufacturing and Sales
The Company has historically sold its Sweetheart products under the
Sweetheart(R) brands as well as private labels to two principal customer groups,
institutional foodservice and food packaging customers. The Company has
historically sold its Fonda products under the Fonda(R) brand and private labels
to consumer and institutional foodservice customers. The Company also
manufactures and distributes disposable party goods products directly to the
specialty (party) channel of the Company's consumer market. Institutional
foodservice customers primarily purchase disposable hot and cold drink cups,
lids, food containers, plates, bowls, cutlery, straws, napkins, placemats, food
trays and tablecovers. The Company sells these products directly and through
distributors and national accounts. Consumer customers primarily purchase
disposable hot and cold drink cups, paper plates, bowls, napkins and
tablecovers. The Company sells these consumer products primarily to
supermarkets, mass merchants, warehouse clubs, discount chains and other
retailers. Food packaging customers primarily directly purchase paper and
plastic containers for the dairy and food processing industries. Food packaging
customers also lease filling and packaging machines designed and manufactured by
the Company that fill and seal the Company's containers in their plants. The
Company's specialty (party) channel customers purchase disposable plates,
napkins, cups, tablecovers and a variety of accessory decor items sold in
ensembles or separately to party goods retailers, mass merchants, drugstores and
supermarkets. The Company also manufactures and markets its products in Canada
and Mexico principally to institutional national accounts.
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The Company markets to both the distributor and end-use customer,
tailoring programs to meet the specific needs of the Company's target customers
and markets. The Company sells these programs, which include products, price,
promotional and merchandising materials, and training and sales/marketing
coverage, through a direct sales organization. The Company supports this process
by developing innovative new products, materials and processes, while leveraging
the Company's strong brand recognition and national network of manufacturing and
distribution centers. The Company focuses on two major customer groups, national
account quick service restaurants and distributors.
Products
The Company manufactures a broad line of disposable products. Paper,
foam and plastic cups, lids and straws represent the largest part of the
Company's North American operations. The largest single product type within this
category is cups, which the Company offers in various sizes (ranging from 3 to
64 ounces) for both hot and cold beverages. Brand names of the Company's
principal beverage service products include Sweetheart(R), Lily(R), Trophy(R),
PreferenceTM, Jazz(R), Gallery(R), Clarity(R), Lumina(R), Sherri(R),
ClearLight(R) and GoCupsTM.
The Company also offers a variety of other disposable foodservice
products, including paper, foam, and plastic plates, paper and plastic bowls,
portion cups, food containers, food trays, paper and plastic tubs, containers
and hinged foam containers. The Company 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), MaximizersTM and Scoop Cup are
some of the Company's carry-out service brands.
The Company sells paper plates and bowls to both the consumer and
institutional markets. These products include coated and uncoated white plates,
decorated plates and bowls and are offered in a range of sizes. Uncoated and
coated paper plates are considered commodity items and are generally purchased
by cost-conscious consumers for everyday use. Printed and decorated plates and
bowls, which are typically sold in lower count packages, are purchased for
everyday use as well as for parties and seasonal celebrations such as Halloween
and Christmas. The Company also sells, under its Sensations(R) brand, party
packages which include solid color paper plates with coordinating napkins, cups,
cutlery and tablecovers.
Napkins are sold under the Company's Hoffmaster(R), Fonda(R) and
Sensations(R) brands, as well as under national distributor private labels.
Napkin products range from decorated-colored, multi-ply napkins and simple
custom printed napkins featuring an end-user's name or logo to fully printed,
graphic-intensive napkins for the premium paper goods sector. Tablecovers,
ranging from economy to premium product lines, are sold in various prints and
colors under the Hoffmaster(R), Linen-Like(R), Windsor(R) and Sensations(R)
brands. The Company also sells placemats, traycovers, paper doilies, lunch bags,
paper portion cups and fluted products in a variety of shapes and sizes. The
Company manufactures unique decorated placemats in a variety of shapes. In
addition, the Company uses a proprietary technology to produce non-skid
traycovers that serve the particular needs of the airline and healthcare
industries.
The Company also manufactures paperboard and tissue party goods
products under the Company's Paper Art(R), Party Creations(R) ,Touch of Color(R)
and Creative Expressions(R) brand names.
The Company's other products include Flex-E-FormTM straight-wall paper
manufacturing technology and Flex-GuardTM, a spiral wound tamper-evident lid. In
addition, the Company provides foodservice customers with retail packages sold
through retailers under various Sweetheart(R) and private label brands.
4
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 their plants. The Company
leases its filling and lidding equipment to customers under the trade names
Auto-Pak, Flex-E-Fill(R) and FoodPac(R). The Company manufactures this equipment
in the Company's machine shop and assembly plants located in Owings Mills,
Maryland and Kensington, Connecticut. 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's product line
includes four sizes of cup formers, insulated paper cup machinery, paper lid
machines, high speed blanking machines, flat rim machinery and other related
equipment. The Company also sells spare parts, engineering services and machine
rehabilitation services and stamped sheet metal parts used for protective covers
and assemblies.
Production
The Company manufactures its products at 23 plants located throughout
North America. See "--Properties." The Company's manufacturing processes consist
of converting processed paperboard, paper, tissue and resin into finished
disposable foodservice products through the use of four principal technologies:
paper forming, thermoforming, injection molding, and foam extrusion and forming.
The Company provides its customers with a wide variety of printing (flexography,
letter press, paper lithography and plastic dry offset) options across these
various technologies. The Company operates approximately 300 printing presses
capable of producing high quality, customized graphics to meet its customers'
requirements. The Company believes that its ability to manufacture a broad line
of products enables it to provide its customers with numerous choices to meet
their needs. The Company's plants operate on a variety of manufacturing
schedules. Paper operations generally run five days per week, 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, 24 hours per day. Due to
the seasonality of customer demand, the Company's production is generally
greater during late spring and summer than during fall and winter.
The Company initiated its consolidation program in June 2001 which
included the rationalization, consolidation and process improvement of its
manufacturing facilities. The Company believes the consolidation program has
improved the efficiency of its manufacturing sites without any adverse impact on
customer service levels.
Raw Materials and Suppliers
Raw materials are a critical part of the Company's cost structure.
Principal raw materials for the Company's paper operations include solid
bleached sulfate paperboard, napkin tissue, bond paper and waxed bond paper
obtained directly from major North American manufacturers, along with wax
adhesives, coating and inks. The Company purchases paperboard, napkin tissue,
bond paper and waxed bond paper in "jumbo" rolls and then prints and converts
them into smaller rolls, or blanks, for processing into final products. The main
raw material for the Company's plastic operations is plastic resin (polystyrene,
polypropylene and high and low density polyethylene) purchased directly from
major petrochemical companies and other resin suppliers. The Company processes
and forms resin into cups, cutlery, meal service products, straws, lids and
containers. The Company manufactures foam products by melting polystyrene
plastic and adding a blowing agent that is then passed through a die and
extruded into sheets of plastic foam material. The foam is then formed into
cups, bowls and plates.
5
The Company purchases a substantial portion of its requirements for
paperboard and resin from several suppliers. The Company has a number of
potential suppliers for most of its raw materials and believes that current
sources of supply are sufficient to meet the Company's requirements.
Competition
The Company sells its products in extremely competitive markets.
Because of the low barriers to entry for new competitors, competition has been,
and may continue to be, intense as new entrants try to gain market share. The
Company's competitors include large multinational companies as well as regional
manufacturers. Some of the Company's competitors have greater financial and
other resources than the Company. The marketplace for the Company's products is
fragmented. The Company has competitors who compete across the full line of its
products, as well as those who compete against only some of the Company's
products. A few of the Company's competitors also produce paper or plastic raw
materials and have greater access to financial and other resources. The
Company's primary competitors in the institutional and consumer foodservice
markets include Dart Container Corporation, Dixie Foodservice Corp. (a division
of Georgia Pacific Corp.), Solo Cup Co., International Paper Food Service
Business (a division of International Paper Co.), AJM Packaging Corp., Dopaco,
Inc. ("Dopaco"), Genpak LLC and Pactiv Corporation. Major competitors in the
food packaging market include Landis Plastics, Inc., Interbake Foods Inc.,
Polytainer, Ltd. and Hutamaki, Inc. The Company's competitors in the disposable
tissue and other specialty products and party goods accessory products
categories include Duni Corp., Erving Paper Products Inc., American Tissue and
Wisconsin Tissue Mills Inc. (a subsidiary of SCA).
Customers
The Company believes that it holds leading market positions in the
institutional and consumer foodservice and food packaging markets for each of
the Company's major product categories. The Company has a diverse and extensive
customer base of over 5,000 customers located throughout North America, in both
the institutional and consumer markets. In the institutional market, the Company
sells to many major foodservice distributors and chain accounts, such as Sysco
Corporation, U.S. Foodservice Inc., Bunzl USA, Inc., McDonald's Corporation,
Burger King Corporation, ARAMARK Corporation and Sodexho Marriott Services. In
the consumer market the Company sells to supermarkets, mass merchants, warehouse
clubs and other retail stores, such as The Kroger Co., The Stop & Shop
Supermarket Co., Topco Associates Inc., The Great Atlantic & Pacific Tea
Company, Inc., Publix Supermarkets Inc., Target Stores (a division of Dayton
Hudson Corp.), Wal-Mart Stores, Inc., Price-Costco, Inc. and Staples Inc. The
Company has developed long-term relationships with many of the Company's
customers.
The Company markets its products primarily to customers in the United
States. During Fiscal 2002, approximately 7.0% of net sales were derived from
sales to customers in Mexico, Canada and Latin America. During Fiscal 2002,
sales to the Company's five largest customers represented approximately 26.7% of
net sales with no one customer accounting for more than 10%. The Company's
operating results could be adversely affected if the Company were to lose one or
more of its large national customers. The Company believes it has strong
relationships with its major national accounts which have been developed over
many years.
Environmental Matters
The Company and its operations are subject to comprehensive and
frequently changing federal, state, foreign and local environmental and
occupational health and safety laws and regulations, including
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laws and regulations governing emissions of air pollutants, discharge of waste
and storm water and the disposal of hazardous wastes. The Company is subject to
liability for the investigation and remediation of environmental contamination
(including contamination caused by other parties) at properties that it owns or
operates and at other properties where the Company or its predecessors have
arranged for the disposal of hazardous substances. As a result, the Company is
involved from time to time in administrative and judicial proceedings and
inquiries relating to environmental matters. The Company believes that, except
as noted below, there are currently no material pending environmental
investigations at the Company's plants or sites. However, there can be no
assurance that the Company will not be involved in any such proceeding in the
future and that any amount of future clean up costs and other environmental
liabilities will not be material. The Company spent less than $200,000 for
environmental compliance in Fiscal 2002 and anticipates spending less than
$200,000 for environmental compliance in Fiscal 2003.
The Company cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist at the Company's facilities. Enactment of stricter laws or
regulations or a stricter interpretation of existing laws and regulations may
require the Company to make additional expenditures by the Company, some of
which could be material.
The Clean Air Act mandates the phase out of certain refrigerant
compounds; therefore, the Company must upgrade or retrofit air conditioning and
chilling systems during the next few years. The Company has decided to replace
units as they become inefficient or unserviceable. The Company expects to
complete the replacement of all such units within the next five to ten years, at
an estimated total cost of less than $1.3 million.
Some of the Company's facilities contain asbestos. Although there is no
current legal requirement to remove such asbestos, the Company monitors such
asbestos on an ongoing basis and/or removes such asbestos as appropriate to
prevent the release of friable asbestos. The Company believes the costs
associated with such program will not be material to its business or financial
condition.
Certain of the Company's facilities are located in states that have
regulations governing emissions of nitrogen oxide. While the Company believes
that these regulations do not apply to its operations, the Company will continue
to monitor its operations for compliance.
On July 13, 1999, the Company received a letter from the U.S.
Environmental Protection Agency ("EPA") identifying the Company, 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 is not a final determination by the
EPA concerning the liability of the Company or the liability of any other
entity. The Company 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,
the Company 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 the Company responded to such inquiry. In both instances,
the Company has received no further communication from the EPA. The Company
denies liability and has no reason to believe the final outcomes of these
matters will have a material adverse effect on the Company's financial condition
or results of operations. However, no assurance can be given about the ultimate
effect on the Company, if any.
Technology and Research
The Company maintains facilities for the development of new products
and product line extensions in Owings Mills, Maryland and facilities for
machinery design in Kensington, Connecticut. A
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staff of engineers and technicians is responsible for product quality, process
control, improvement of existing products, development of new products and
processes, and technical assistance in adhering to environmental rules and
regulations.
During Fiscal 2001, the Company initiated a program to automate certain
of its manufacturing operations which were completed in Fiscal 2002. These
initiatives include the implementation of a robotic transfer and sorting system
for finished goods; automatic packaging; information systems upgrades; and
enhancements to printing processes. Also, the Company initiated new products and
production capabilities which will enable its plastics operations to address
existing and emerging market opportunities.
The Company tests new product concepts at facilities located in
Oshkosh, Wisconsin; Appleton, Wisconsin and St. Albans, Vermont. Management,
supervisors and experienced operators are responsible for plant safety, product
quality, process control, improvement of existing products, development of new
products and processes and technical assistance in adhering to environmental
rules and regulations.
The Company strives to expand its proprietary manufacturing technology,
further automate and streamline its manufacturing operations, improve upon
safety and performance, and develop improved manufacturing processes, equipment,
and product designs.
Employees
At September 29, 2002, the Company employed 7,777 persons, of whom
6,416 persons were hourly employees. Approximately 92.5% of the employees are
located at facilities in the United States. The Company currently has collective
bargaining agreements in effect at its facilities in Appleton, Wisconsin;
Augusta, Georgia; Indianapolis, Indiana; Kensington, Connecticut; Oshkosh,
Wisconsin; St. Albans, Vermont; Springfield, Missouri; Williamsburg,
Pennsylvania; Scarborough, Ontario, Canada and Cuautitlan, Mexico. The
collective bargaining agreements cover all production, maintenance and
distribution hourly-paid employees at each facility and contain standard
provisions relating to, among other things, management rights, grievance,
procedures, strikes and lockouts, seniority and union rights. As of September
29, 2002, approximately 33.6% of the Company's hourly employees were covered by
these collective bargaining agreements. The current expiration dates of the
Appleton; Augusta; Indianapolis; Kensington; Oshkosh; St. Albans; Springfield;
Williamsburg; Scarborough, Ontario; and Cuautitlan collective bargaining
agreements are March 31, 2006, October 30, 2005, December 1, 2007, September 30,
2004, June 2, 2007, January 31, 2005, February 29, 2004, June 11, 2004, November
30, 2003 and December 31, 2002, respectively. The Company considers its
relationship with its employees to be good.
Item 2. PROPERTIES
The Company operates 41 manufacturing and distribution facilities
located throughout North America. 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.
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Size
Type of (Approximate Owned/
Location Facility (1) square feet) Leased Lease Expiration
-------- ------------ ------------ ------ ----------------
Appleton, Wisconsin (2 facilities)............... M/W 271,000 O
W 132,000 L May 30, 2003
Augusta, Georgia (2 facilities).................. M/W 339,000 O
M/W 75,000 O
Chicago, Illinois (2 facilities)................. M/W 874,000 O
W 786,000 L February 28, 2003
Conyers, Georgia (2 facilities).................. M/W 350,000 O
W 555,000 O
Cuautitlan, Mexico (3 facilities)................ M 24,000 L September 3, 2009
W 26,000 L September 3, 2009
W 29,000 L April 1, 2010
Dallas, Texas ................................... M/W 1,304,000 O
El Cajon, California (2 facilities).............. M/W 101,000 L June 30, 2011
W 82,000 L July 31, 2010
Glens Falls, New York............................ M/W 59,000 O
Goshen, Indiana.................................. M/W 63,000 O
Hampstead, Maryland.............................. W 1,035,000 L May 30, 2020
Indianapolis, Indiana............................ W 735,000 L June 30, 2007
Kensington, Connecticut (4 facilities)........... M/W 96,000 L(2) May 15, 2010
M/W 112,000 L(2) May 15, 2010
W 30,000 L(2) May 15, 2010
W 34,000 L May 31, 2003
Lafayette, Georgia............................... M/W 197,000 L(3) April 30, 2003
Lakeland, Florida................................ M/W 45,000 L January 31, 2004
North Andover, Massachusetts..................... M/W 249,000 L October 31, 2020
North Las Vegas, Nevada (2 facilities)........... M/W 99,000 L August 31, 2010
W 96,000 L(4) August 31, 2010
Ontario, California.............................. W 396,000 L May 1, 2014
Oshkosh, Wisconsin............................... M/W 486,000 O
Owings Mills, Maryland (2 facilities)............ M/W 1,495,000 O
M/W 258,000 O
St. Albans, Vermont (3 facilities)............... M 115,000 O
W 186,000 L March 31, 2007
W 28,000 L August 31, 2003
Scarborough, Ontario, Canada M/W 400,000 O
(2 facilities)................................... W 125,000 L March 31, 2003
Somerville, Massachusetts........................ M/W 193,000 O(5)
Springfield, Missouri (2 facilities)............. M/W 924,000 O
W 415,000 L(6) March 25, 2003
Williamsburg, Pennsylvania (2 facilities)........ M 130,000 L(7) June 26, 2005
W 8,000 L June 26, 2005
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(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) Although operations at this facility ceased as of December 1, 2002, the
Company will continue to occupy this facility until April 30, 2003.
(4) The Company is subleasing 46,485 square feet to a third party from
September 1, 2000 until September 20, 2004. (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 and is in the process of selling this facility.
(6) The Company is subleasing 127,104 square feet to a third party from November
1, 2001 until March 25, 2003. (7) Subject to capital lease. (See Note 18 of the
Notes to the Financial Statements)
The Company leases a warehouse in Augusta, Georgia which was closed in
the latter part of Fiscal 1997. The Company is currently subleasing such
property to a third party and plans to sublet the property through the lease
termination date of March 31, 2008. The Company also leases a manufacturing
facility from its Chairman and Chief Executive Officer in Jacksonville, Florida
which was closed in Fiscal 1998. The Company is currently subleasing such
property to a third party and plans to sublet the property through the lease
termination date of December 31, 2014. See "--Certain Relationships and Related
Transactions".
The Company also occupies several retail and storage facilities located
in 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. LEGAL PROCEEDINGS
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 has completed paying out the termination liability and
associated expenses in connection with the Plan termination.
On July 13, 1999, the Company received a letter from the EPA
identifying the Company, among numerous others, as a "potential responsible
party" under CERCLA, at a site in Baltimore, Maryland. The EPA letter is not a
final determination by the EPA concerning the liability of the Company or the
liability of any other entity. The Company 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, the Company 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 the Company responded to such inquiry.
In both instances, the Company has received no further communication from the
EPA. The Company denies liability and has no reason to believe the final outcome
of these matters will have a material adverse effect on the Company's financial
condition or results of operations. However, no assurance can be given about the
ultimate effect on the Company, if any.
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. The Company 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
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Sweetheart Cup is a wholly owned subsidiary of Sweetheart Holdings,
which is a privately held corporation. No equity securities of Sweetheart
Holdings or Sweetheart Cup are publicly traded or registered under the
Securities Exchange Act of 1934, as amended, and there is no public trading
market for the stock.
Payment of cash dividends is restricted under the instruments governing
the Company's indebtedness. The Company has not paid cash dividends and does not
anticipate paying any cash dividends in the foreseeable future.
As of December 9, 2002, there was one holder of Sweetheart Holdings'
Class A Common Stock and Sweetheart Holdings' Class B Common Stock.
Item 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are selected historical consolidated financial data of
the Company at the dates and for the fiscal years shown. In June 2000, the
Company completed a sale-leaseback transaction, the proceeds of which were used
to retire certain existing indebtedness. Consequently, operating results for
Fiscal 2002, 2001 and 2000, as presented in the table below, are not comparable
to prior periods. The selected historical consolidated financial data at
September 29, 2002 and September 30, 2001 and for Fiscal 2002, 2001 and 2000 are
derived from historical consolidated 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 consolidated
financial data at September 24, 2000, September 26, 1999 and September 27, 1998
and for Fiscal 1999 and 1998 is derived from the audited historical consolidated
financial statements of the Company for such periods which are not included
herein.
11
Fiscal(1)
--------------------------------------------------------------------
(In thousands) 2002 2001 2000 1999 1998 (2)
------------ ------------ ------------ ------------ ------------
Statement of Operations Data (3):
Net sales $ 1,283,547 $ 1,316,672 $ 1,276,617 $ 1,182,004 $ 1,184,168
Cost of sales 1,130,264 1,143,806 1,090,286 1,022,800 1,057,100
------------ ------------ ------------ ------------ ------------
Gross profit 153,283 172,866 186,331 159,204 127,068
Selling, general and administrative expenses 114,823 113,231 112,559 118,479 122,918
Restructuring charge (credit) (4) 1,893 504 1,153 (512) 897
Asset impairment expense(5) 593 2,244 - - 6,828
Other expense (income), net(6) (7) 2,102 (9,836) (4,943) (1,563) (2,966)
------------ ------------ ------------ ------------ ------------
Operating income (loss) 33,872 66,723 77,562 42,800 (609)
Interest expense, net 37,079 38,919 52,608 58,413 58,656
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes, minority
interest, cumulative effect of change in
accounting principle and extraordinary loss (3,207) 27,804 24,954 (15,613) (59,265)
Income tax (benefit) expense (1,283) 11,220 10,096 (5,527) (23,537)
Minority interest in subsidiary 145 68 - - -
Cumulative effect of change in accounting
principle(8) - - - - 1,511
Extraordinary loss, net(9) 1,079 - 313 - -
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (3,148) $ 16,516 $ 14,545 $ (10,086) $ (37,239)
============ ============ ============ ============ ============
Balance Sheet Data (at end of year):
Cash and cash equivalents $ 8,035 $ 11,616 $ 4,828 $ 3,589 $ 18,572
Cash in escrow - 8 300 - 5,464
Working capital (deficiency) 126,804 249,450 173,299 (96,045) 187,127
Property, plant and equipment, net 252,491 260,666 254,844 374,666 403,375
Total assets 820,843 855,173 805,273 842,975 878,198
Total debt (10) 437,301 440,820 387,988 527,335 548,245
Shareholder's equity 47,237 56,130 45,074 29,946 36,196
(1) On March 25, 2002, Sweetheart Cup and Fonda entered into a merger
transaction that has been accounted for in a manner similar to
pooling-of-interests and, accordingly, the consolidated financials
statements have been restated for all periods presented.
(2) Prior to Fiscal 1999, Sweetheart's and Fonda's fiscal year ends were
September 30 and the last Sunday in July, respectively. In October 1998,
both Sweetheart and Fonda changed their fiscal year ends to the last Sunday
in September, effective for Fiscal 1999. The data as of and for the fiscal
year ended September 27, 1998 represents the consolidated results of
Sweetheart and Fonda for their respective year ends.
(3) The selected historical consolidated financial and operating data include
the operations of the Company and each of its acquisitions since the
respective dates of such acquisitions. See Note 7 of the Notes to the
Consolidated Financial Statements of the Company.
(4) During Fiscal 2002, the Company established a restructuring reserve of $0.3
million in conjunction with the planned closure of its Lafayette, Georgia
facility from which 101 primarily manufacturing positions were eliminated
and a restructuring reserve of $1.6 million in conjunction with planned
consolidation initiatives from which 475 primarily manufacturing positions
were eliminated. In Fiscal 2001, the Company recorded a restructuring
reserve in conjunction with the consolidation of the former administrative
offices of Creative Expressions Group, Inc. ("CEG"), an affiliate of the
Company, with its Oshkosh administrative offices. In Fiscal 2000, the
Company established a restructuring reserve for severance and related costs
for the elimination of its centralized machine shop and for the closure of
its Maspeth, New York facility. In Fiscal 1998, the Company established a
restructuring reserve for severance and related costs for a workforce
reduction which was adjusted in 1999 and for the closure of its
Jacksonville, Florida and Indianapolis, Indiana facilities and the St.
Albans, Vermont administrative offices.
(5) In Fiscal 2002, 2001 and 1998, the Company recorded an asset impairment
expense as a result of a review of the carrying value of certain of its
long-lived assets.
(6) Other (income) expense, net in Fiscal 2002, Fiscal 2001 and Fiscal 2000
includes $10.2 million, $10.3 million and $2.8 million, respectively, of
amortization of the deferred gain in connection with the Sale-Leaseback
Transaction which occurred on June 15, 2000. Other (income) expense, net in
Fiscal 2002, also includes (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 of Sweetheart Cup and Fonda, (iii) $6.9 million of costs
incurred in connection with the rationalization, consolidation and process
improvement of the Company's manufacturing facilities and (iv) additional
costs of $0.5 million associated with the Lily-Tulip, Inc. Salary
Retirement Plan
12
(7) Fiscal 1998 includes a $15.9 million net gain on the sale of substantially
all of the fixed assets and certain related working capital of the
Company's tissue mill in Gouverneur, New York and settlement in connection
with the termination by the owner of the co-generation facility of its
obligation to supply steam to the mill. This was partially offset by $1.8
million of asset write-down charges associated with the sale of the
Company's Riverside facility in Fiscal 1998. Additionally, the Company
recognized $3.4 million of expense based on actuarial estimates associated
with pending litigation. Also, the Company recognized certain charges,
consisting primarily of $4.4 million of financial advisory and legal fees
associated with the Company's sale to SF Holdings and $3.7 million of
severance expenses as a result of the termination of certain officers
pursuant to executive separation agreements and retention plans for certain
key executive. These expenses were partially offset by a gain of $3.3
million associated with the sale of the Company's bakery operations.
(8) In Fiscal 1998, the Company recorded a $1.5 million expense, net of $1.0
million of income tax benefit, in connection with the implementation of
EITF 97-13, which requires companies to expense any previously capitalized
reengineering costs in connection with software installation.
(9) In Fiscal 2002 and Fiscal 2000, the Company incurred an extraordinary loss
of $1.8 million and $0.5 million, respectively, (net of $0.7 million and
$0.2 million income tax benefit, respectively) in the connection with the
early retirement of debt.
(10) Total debt includes short-term and long-term borrowings, and current
maturities of long-term debt.
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 the Company's products, potential equipment
malfunctions and pending litigation.
General
The Company believes that 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
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,
13
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.
The Company's business is seasonal with a majority of its net cash
flows 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 flows 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 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.
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 States 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
revenue recognition, receivables reserves, inventory reserves, goodwill, 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.
Revenue recognition / receivable reserves - 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. The actual impact from raw
material 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 material prices decrease over a period of several months, the
Company may suffer margin erosion on the sale of such inventory.
14
Inventory reserves - The Company establishes reserves for its inventory
to reflect those conditions when the cost of the inventory is not expected to be
recovered. The Company reviews such circumstances when products are not expected
to be saleable based on standards established by the Company's quality assurance
standards. The reserve for these products is equal to all or a portion of the
cost of the inventory based on the specific facts and circumstances. We monitor
inventory levels on a regular basis and record changes in inventory reserves as
part of costs of goods sold.
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. See "--Impact of
Recently Issued Accounting Standards, SFAS No. 142".
Income taxes - The Company applies an asset and liability approach to
accounting for income taxes. Deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The recoverability of deferred tax assets is dependent upon the Company's
assessment of whether it is more likely than not that sufficient future taxable
income will be generated in the relevant tax jurisdiction to utilize the
deferred tax asset. The Company reviews its internal forecasted sales and
pre-tax earnings estimates to make its assessment about the utilization of
deferred tax assets. In the event, the Company determines that the future
taxable income will not be sufficient to utilize the deferred tax asset, a
valuation allowance is recorded. If that assessment changes, a charge or a
benefit would be recorded on the statement of operations.
Contingencies - The Company is subject to litigation in the ordinary
course of business and also to certain other contingencies. See Note 25 to the
consolidated financial statements. The Company records legal fees and other
expenses related to litigation and contingencies as incurred. Additionally, the
Company assesses, in consultation with its counsel, the need to record a
liability for litigation and contingencies on a case-by-case basis. Reserves are
recorded when the Company, in consultation with counsel, determine that a loss
related to a matter is both probable and reasonably estimable.
Selling, general and administrative expenses consist primarily of
salaries, benefits, promotional and advertising costs, rent, depreciation of
equipment and broker fees.
Recent Developments
On November 21, 2002, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 relating to a proposed
offer to exchange newly issued $110 million senior subordinated notes due 2007
for all of the $110 million Senior Subordinated Notes and a consent solicitation
to eliminate and/or amend certain restrictive covenants and other provisions
governing the $110 million Senior Subordinated Notes. The Company also intends
to solicit consent to eliminate and/or amend certain restrictive covenants and
other provisions governing the $120 million Senior Subordinated Notes. The
Company believes that the exchange offer and consent solicitations will provide
it with the necessary time to execute its business plan and to further evaluate
its strategic alternatives. If the Company is unable to complete the exchange
offer and consent solicitation or refinance, repay or extend the $110 million
Senior Subordinated Notes prior to March 1, 2003, its Senior Credit Facility,
unless otherwise amended, will become due and payable.
15
The Company is also 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, 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 and consent solicitations of the Company's
outstanding securities. There can be no assurances that any of these strategic
options will be consummated.
On October 1, 2002, the Company entered into a loan agreement with the
City of Chicago, to borrow $2.0 million. The loan bears no interest and is
payable in equal installments of $100,000 commencing on February 1, 2004 and
every six months thereafter. As of December 2, 2002, the proceeds from the loan
have not been received by the Company.
Fiscal 2002 Compared to Fiscal 2001
Net sales decreased $33.2 million, or 2.5%, to $1,283.5 million in
Fiscal 2002 compared to $1,316.7 million in Fiscal 2001 reflecting a 2.5%
decrease in average realized selling prices resulting from lower raw material
costs and competitive pressures while sales volumes remained constant. Sales
volumes declined domestically due to a reduction in the business and leisure
travel industries and a reduction in foodservice and away-from-home dining which
resulted from the events of September 11, 2001 and the fact that Fiscal 2002
consisted of 52 weeks as compared with 53 weeks for Fiscal 2001. This decrease
was offset by increased sales volume due to the incremental sales obtained from
the acquisitions of Global Cup, S.A. De C.V. and its subsidiaries ("Global Cup")
in April 2001 and the consumer division of Dopaco in August 2001. Net sales
excluding Global Cup and the consumer division of Dopaco decreased $72.2
million, or 5.5%, to $1,235.4 million in Fiscal 2002 compared to $1,307.6
million in Fiscal 2001 reflecting a 2.5% decrease in average realized sales
price and a 3.2% decrease in sales volume.
Gross profit decreased $19.6 million, or 11.3%, to $153.3 million in
Fiscal 2002 compared to $172.9 million in Fiscal 2001. As a percentage of net
sales, gross profit decreased to 11.9% in Fiscal 2002 from 13.1% in Fiscal 2001.
The $19.6 million decline in gross profit was due (i) 66.7% to the manufacturing
inefficiencies related to the Company's consolidation initiatives and lower
fixed cost absorption as Fiscal 2002 consisted of 52 weeks as compared with 53
weeks for Fiscal 2001, (ii) 22.2% to the impact of lower average realized
selling prices and (iii) 11.1% to a decrease from a mix shift to lower margin
volumes as a result of the acquisition of the consumer division of Dopaco.
Selling, general and administrative expenses increased $1.6 million, or
1.4%, to $114.8 million in Fiscal 2002 compared to $113.2 million in Fiscal
2001. This increase resulted primarily from $2.2 million of increased
promotional and advertising expenses, $1.5 million of increased bad debt expense
due to a customer bankruptcy filing and $1.0 million and $1.4 million of
increased expenses due to the acquisitions of both Global Cup and the consumer
division of Dopaco, respectively. These increases were partially offset by (i)
lower expenses as a result of Fiscal 2002 consisting of 52 weeks as compared to
53 weeks in Fiscal 2001, (ii)$3.7 million in reduced salaries and benefits and
(iii)$1.3 million in lower depreciation expense.
Restructuring charge increased $1.4 million, or 280.0%, to $1.9 million
in Fiscal 2002 compared to $0.5 million in Fiscal 2001. During Fiscal 2002, the
Company established a restructuring reserve of $0.3 million in conjunction with
the planned closure of the Company's Lafayette, Georgia facility from which 101
primarily manufacturing positions were eliminated. The plan was approved by
management on September 24, 2002 and announced to employees on September 29,
2002. Severance payments of $0.1 million and $0.2 million of vacated rent
expense will be paid in Fiscal 2003. Also, during Fiscal 2002, the Company
established a restructuring reserve of $1.6 million in conjunction with planned
consolidation initiatives from which 475 primarily manufacturing positions were
eliminated. The plan was approved by management on June 19, 2002 and announced
to employees on June 28, 2002. A portion of the severance
16
payments of $1.6 million were paid in the fourth quarter of Fiscal 2002 with the
remaining payments to be paid in the first three quarters of Fiscal 2003. During
Fiscal 2001, the Company established a restructuring reserve of $0.5 million in
conjunction with the consolidation of the former administrative offices of CEG
in Indianapolis, Indiana into the Company'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.
Asset impairment expense was $0.6 million in Fiscal 2002 as a result of
the Company's evaluation of the usefulness of certain equipment no longer in use
in connection with the closure of its Lafayette, Georgia facility.
Other expense (income), net changed $11.9 million, or 121.4%, to $2.1
million of expense in Fiscal 2002 compared to $9.8 million of income in Fiscal
2001. During Fiscal 2002, the Company realized $10.2 million due to the
amortization of the deferred gain in conjunction with the Fiscal 2000
sale-leaseback transaction. Also, during Fiscal 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 (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, (iii) $6.9 million of costs in
connection with the rationalization, consolidation and process improvement of
the Company's manufacturing facilities and (iv) $0.5 million of additional costs
associated with the termination of the Lily-Tulip, Inc. Salary Retirement Plan.
In Fiscal 2001, the Company 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 associated with the relocation of the Company's Somerville,
Massachusetts, manufacturing facility to North Andover, Massachusetts.
Operating income decreased $32.8 million, or 49.2% to $33.9 million in
Fiscal 2002 compared to $66.7 million in Fiscal 2001 due to the reasons
described above.
Interest expense, net decreased $1.8 million, or 4.6%, to $37.1 million
in Fiscal 2002 compared to $38.9 million in Fiscal 2001. This decrease is
attributable to lower interest rates on higher average balances under the
Company's Senior Credit Facility which was partially offset by the increase in
interest rate on the $110 million Senior Subordinated Notes from 10.5% to 12.0%
which was effective March 1, 2002.
Income tax expense (benefit) changed $12.5 million, or 111.6% to a
benefit of $1.3 million in Fiscal 2002 compared to an expense of $11.2 million
in Fiscal 2001 as a result of a pre-tax loss. The effective rate for Fiscal 2002
and 2001 was 40%.
Minority interest in subsidiary was $0.1 million in Fiscal 2002 and in
Fiscal 2001. This amount represents the 20% ownership of Global Cup's income.
Extraordinary loss on debt extinguishment was $1.1 million net of the
income tax benefit in Fiscal 2002 resulting from the refinancing of the
Company's Senior Credit Facility.
Net income decreased $19.6 million, or 118.8%, to a $3.1 million loss
in Fiscal 2002 compared to $16.5 million of income in Fiscal 2001 due to the
reasons described above.
17
Fiscal 2001 Compared to Fiscal 2000
Net sales increased $40.1 million, or 3.1%, to $1,316.7 million in
Fiscal 2001 compared to $1,276.6 million in Fiscal 2000 reflecting a 3.2%
increase in average realized selling prices and a 0.1% decrease in sales volume.
Realized selling prices increased as a result of a shift in product mix. Sales
volumes decreased due to more competitive market conditions and the Company's
decision to reduce sales to certain customers experiencing deteriorating credit
conditions. This decrease in sales volume was partially offset by the
incremental sales obtained from the Company's acquisition of an 80% interest in
Global Cup in April 2001 and the acquisition of Springprint Medallion, a
division of Marcal Paper Mills, Inc. ("Springprint") in September 2000.
Gross profit decreased $13.4 million, or 7.2%, to $172.9 million in
Fiscal 2001 compared to $186.3 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.
The decrease in gross profit is primarily attributable to the effects of the
Sale-Leaseback Transaction whereby, in Fiscal 2000, Sweetheart Cup 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 increased energy and
transportation costs.
Selling, general and administrative expense increased $0.6 million, or
0.5%, to $113.2 million in Fiscal 2001 compared to $112.6 million in Fiscal
2000. However, as a percentage of net sales, selling, general and administrative
expenses decreased to 8.6% in Fiscal 2001 from 8.8% in Fiscal 2000. This
increase resulted from the Company'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 the Company.
Restructuring charge decreased $0.7 million, or 58.3%, to a charge of
$0.5 million in Fiscal 2001 compared to $1.2 million in Fiscal 2000. During
Fiscal 2001, the Company established a restructuring reserve of $0.5 million in
conjunction with the consolidation of former CEG administrative offices in
Indianapolis, Indiana into the Company's administrative offices in Oshkosh,
Wisconsin. This consolidation included the elimination of 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,
the Company established a restructuring reserve of $0.7 million in conjunction
with the planned elimination of the Company'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, the
Company reversed $0.2 million of this reserve as a result of 12 employees being
placed into open positions within the Company. During Fiscal 2000, the Company
announced that it intended to close its Maspeth, New York facility in the first
quarter of Fiscal 2001 which resulted in the elimination of 130 positions. In
connection with such plans in Fiscal 2000, the Company 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
the Company's evaluation of the usefulness of certain equipment no longer in use
in connection with the consolidation of the Manchester, New Hampshire and
Springfield, Missouri facilities with other existing facilities.
Other (income) expense, net increased $4.9 million, or 100.0%, to $9.8
million of income in Fiscal 2001 compared to $4.9 million in Fiscal 2000. The
Company 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 the Company's
Somerville,
18
Massachusetts facility to North Andover, Massachusetts and the Company's $0.2
million loss on the sale of a building in St. Albans, Vermont.
Operating income decreased $10.9 million, or 14.0%, to $66.7 million in
Fiscal 2001 compared to $77.6 million in Fiscal 2000 due to the reasons
described above.
Interest expense, net decreased $13.7 million, or 26.0%, to $38.9
million in Fiscal 2001 compared to $52.6 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 $190.0 million 9 1/2% Senior
Secured Notes due 2000.
Income tax expense (benefit) increased $1.1 million, or 10.9%, to an
expense of $11.2 million in Fiscal 2001 compared to $10.1 million in Fiscal 2000
as a result of higher pre-tax earnings. The effective rate for Fiscal 2001 and
2000 was 40%.
Minority interest in subsidiary was $68,000 in Fiscal 2001. This amount
represents the 20% ownership of Global Cup's income.
Net income increased $2.0 million, or 13.8%, to $16.5 million income in
Fiscal 2001 compared to $14.5 million income in Fiscal 2000 due to the reasons
described above.
Liquidity And Capital Resources
Historically, the Company has relied on cash flows from operations and
revolving credit borrowings to finance its working capital requirements and
capital expenditures. In Fiscal 2002, the Company funded its capital
expenditures from a combination of cash generated from operations, funds
generated from asset sales and revolving credit borrowings. The Company expects
to continue this method of funding for its Fiscal 2003 capital expenditures.
Following the terrorist attacks of September 11, 2001, the Company
experienced a decline in sales prices and volumes due to a number of factors,
including a significant reduction in business and leisure travel and a reduction
in foodservice and away-from-home dining. In addition to these factors affecting
our sales, our implementation of certain consolidation initiatives caused
temporary inefficiencies within our manufacturing operations, which increased
our cost structure and reduced our gross margin during recent periods.
As a result of these factors, together with difficult market
conditions, the Company has been unable to refinance the $110 million Senior
Subordinated Notes on terms acceptable to the Company. Unless current market
conditions change significantly, the Company may not have sufficient capital to
refinance the $110 million Senior Subordinated Notes when they mature on
September 1, 2003. Moreover, if the Company is unable to complete the exchange
offer and consent solicitation or refinance, repay or extend the $110 million
Senior Subordinated Notes prior to March 1, 2003, its Senior Credit Facility,
unless otherwise amended, will become due and payable.
On November 21, 2002, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 relating to a proposed
offer to exchange newly issued $110 million senior subordinated notes due 2007
for all of the $110 million Senior Subordinated Notes and a consent solicitation
to eliminate and/or amend certain restrictive covenants and other provisions
governing the $110 million Senior Subordinated Notes. The Company also intends
to solicit consent to eliminate and/or amend certain restrictive covenants and
other provisions governing the $120 million Senior Subordinated Notes. The
Company believes that the exchange offer and consent solicitations will provide
it with the necessary time to execute its business plan and to further evaluate
its strategic alternatives.
19
Net cash provided by operating activities in Fiscal 2002 was $28.5
million compared to $13.8 million in Fiscal 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 in Fiscal 2002 was $16.0 million
compared to $71.7 million in Fiscal 2001. This decrease is primarily due to the
receipt of net proceeds from the sale of the Manchester, New Hampshire facility
in Fiscal 2002. During Fiscal 2001, the Company purchased substantially all of
the property, plant and equipment, intangibles and net working capital of
Springprint, Global Cup and the consumer division of Dopaco.
Net cash used in financing activities in Fiscal 2002 was $16.1 million
compared to net cash provided by financing activities of $64.7 million in Fiscal
2001. This change is primarily due to the payment of debt issuance costs in
Fiscal 2002 in connection with the refinancing of the Company's debt as compared
to Fiscal 2001 which had additional borrowings under the Senior Credit Facility
for business acquisitions and higher capital spending.
Working capital decreased $122.7 million to $126.8 million at September
29, 2002 from $249.5 million at September 30, 2001. This decrease resulted from
current assets decreasing $28.1 million and the current liabilities increasing
$94.6 million. These changes resulted primarily from (i) a reduction in accounts
receivables and inventories as a result of lower raw material price level and
(ii) the reclassification of the $110 million Senior Subordinated Notes from
long-term debt to current debt as such debt matures in September 2003.
Capital expenditures for Fiscal 2002 were $21.2 million compared to
$31.7 million in Fiscal 2001. Capital expenditures in Fiscal 2002 included $10.0
million for new production equipment; $6.3 million associated with the
implementation of the Company's consolidation program; $3.0 million for facility
improvements; and $1.9 million primarily for routine capital improvements.
Funding for the Fiscal 2002 capital expenditures was primarily provided by cash
generated from operations, the sale of assets and revolving credit borrowings.
During Fiscal 2003, the Company intends to continue to rely on this combination
of funding for its capital expenditures.
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
September 29, 2002, $1.9 million was outstanding at an annual interest rate of
3.0%.
The Company has a Senior Credit Facility with Bank of America, N.A., as
agent. 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 million Senior Subordinated Notes prior to March 1, 2003, the Senior
Credit Facility will become due 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 $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
Fiscal 2002, the weighted average annual interest rate for the Senior Credit
Facility was 4.88%. The indebtness of Sweetheart Cup under the Senior Credit
Facility is guaranteed by Sweetheart Holdings and secured by a first priority
perfect security interest in accounts receivable, 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 September 29, 2002, $31.0 million was
20
available under the Senior Credit Facility. As of September 29, 2002, LIBOR was
1.81% and the bank's base rate was 4.75%.
The Senior 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, the Company must maintain on a consolidated basis,
certain specified ratios at specified times, including, without limitation,
maintenance of minimum fixed charge coverage ratio. The Company is currently in
compliance with all covenants under the Senior Credit Facility. The Senior
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 loan
agreement governing 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 $19.0 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 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 Fiscal 2002, the weighted average annual interest
rate for the Canadian Credit Facility was 4.41%. As of September 29, 2002, Cdn
$1.3 million (approximately US $0.8 million) was available under the revolving
facility and the term loan balance was Cdn $12.3 million (approximately US $7.8
million) under the Canadian Credit Facility.
In connection with a sale-leaseback transaction, on June 15, 2000, the
Company 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 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. The Company's obligations
under the Lease are collateralized by substantially all of the property, plant
and equipment owned by the Company 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 $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 will be amortized over 125 months, which is the term of the Lease.
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor
with respect to the $110 million Senior Subordinated Notes which are due
September 1, 2003. Interest on the $110 million Senior Subordinated Notes is
payable semi-annually in arrears on March 1 and September 1. The $110 million
Senior Subordinated Notes began to accrue interest at 12% per annum as of March
1, 2002. The $110 million 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 million Senior Subordinated
Notes are subordinated in right of payment to the prior payment in full of all
of the Company's senior debt,
21
including borrowings under the Senior Credit Facility, and are pari passu with
the $120 million Senior Subordinated Notes due 2007. In addition, the
obligations under the June 1, 2000 lease between Sweetheart Cup and State Street
Bank and Trust Company of Connecticut are secured by a significant portion of
the Company's existing property, plant and equipment. The $110 million 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 the $120 million Senior Subordinated
Notes with interest payable semi-annually. Payment of the principal and interest
is subordinate in right to payment of all of the Company's senior debt,
including borrowings under the Senior Credit Facility. The Company may, at its
election, redeem the $120 million 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 million 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 notes at a redemption price equal to 101% of the principal
amount thereof plus accrued interest. The $120 million Senior Subordinated Notes
are subordinated in right of payment to the prior payment in full of all of the
Company's senior debt, including borrowings under the Senior Credit Facility and
are pari passu with the $110 million Senior Subordinated Notes. In addition, the
obligations under the June 1, 2000 lease between Sweetheart Cup and State Street
Bank and Trust Company of Connecticut are secured by a significant portion of
the Company's existing property, plant and equipment. The $120 million 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 transaction with affiliates, the
creation of additional liens and certain other business activities.
The following summarizes the Company's contractual obligations at
September 29, 2002, and the effect such obligations are expected to have on its
liquidity and cash flows in future periods (in 000's):
Payments Due In Fiscal
-------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter
---------- --------- --------- --------- ---------- ----------
Long-term debt $ 119,735 $ 22,483 $ 5,589 $ 412 $ 168,743 $ 120,000
Non-cancelable
operating leases 54,179 50,848 48,283 45,177 43,283 192,537
Capital leases 118 124 97 - - -
---------- --------- --------- --------- ---------- ----------
Total obligations $ 174,032 $ 73,455 $ 53,969 $ 45,589 $ 212,026 $ 312,537
========== ========= ========= ========= ========== ==========
During Fiscal 2001, the Company experienced a casualty loss at its
Somerville, Massachusetts facility. Since January 2001 through September 29,
2002 the Company incurred $11.6 million of expenses associated with this
casualty loss. As of September 29, 2002, the Company received $12.5 million
reimbursement under the casualty and business interruption claim. The $0.9
million of proceeds in excess of the expenses, represents the net proceeds from
the business interruption claim, which were recorded as a reduction to cost of
sales during the fourth quarter of Fiscal 2002. During October 2002, the Company
and its insurance provider have agreed to a final settlement of this claim
whereby the Company will receive an additional $3.8 million of business
interruption proceeds. This amount will be recorded upon receipt, net of any
expenses, which is expected to occur during the first six months of Fiscal 2003.
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
22
reasonably be expected to have a material adverse effect on its financial
condition or results of operations.
Management believes that cash generated by operations, funds generated
from asset sales and amounts available under the Company's credit facilities
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.
Following the terrorist attacks of September 11, 2001, the Company
experienced a decline in sales prices and volumes due to a number of factors,
including a significant reduction in business and leisure travel and a reduction
in foodservice and away-from-home dining. In addition to these factors affecting
our sales, our implementation of certain consolidation initiatives caused
temporary inefficiencies within our manufacturing operations, which increased
our cost structure and reduced our gross margin during recent periods.
As a result of these factors, together with difficult market
conditions, the Company has been unable to refinance the $110 million Senior
Subordinated Notes on terms acceptable to the Company. Unless current market
conditions change significantly, the Company may not have sufficient capital to
refinance the $110 million Senior Subordinated Notes when they mature on
September 1, 2003. Moreover, if the Company is unable to complete the exchange
offer and consent solicitation or refinance, repay or extend the $110 million
Senior Subordinated Notes prior to March 1, 2003, its Senior Credit Facility,
unless otherwise amended, will become due and payable.
On November 21, 2002, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 relating to a proposed
offer to exchange newly issued $110 million senior subordinated notes due 2007
for all of the $110 million Senior Subordinated Notes and a consent solicitation
to eliminate and/or amend certain restrictive covenants and other provisions
governing the $110 million Senior Subordinated Notes. The Company also intends
to solicit consent to eliminate and/or amend certain restrictive covenants and
other provisions governing the $120 million Senior Subordinated Notes. The
Company believes that the exchange offer and consent solicitations will provide
it with the necessary time to execute its business plan and to further evaluate
its strategic alternatives.
The Company is also 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, 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 and consent solicitations 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 29, 2002, the Company had approximately $56 million of
net operating loss carryforwards for federal income tax purposes of which $25
million will expire in 2018 and the remaining $31 million will expire in 2022.
Although future earnings cannot be predicted with certainty, management
currently believes that realization of the net deferred tax asset is more likely
than not.
Impact of 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
23
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 during
Fiscal 2001. The Company has adopted SFAS No. 142 effective September 30, 2002
and is currently evaluating the impact of SFAS No. 142 on its consolidated
financial statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of leases. This statement
amends SFAS. No. 19, Financial Accounting and Reporting by Oil and Gas Producing
Companies. SFAS No. 143 is effective for years beginning after June 15, 2002.
The Company has adopted SFAS No. 143 effective September 30, 2002 and is
currently evaluating the impact of SFAS No. 143 on its consolidated financial
statements.
In October 2001, the FASB issued 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 SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of Accounting Principals Board Opinion No. 30, Reporting the Results
of 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 has
adopted SFAS No. 144 effective September 30, 2002 and is currently evaluating
the impact of SFAS No. 144 on its consolidated financial statements.
In April 2002, the FASB issued 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 has adopted SFAS No. 145 effective September 30, 2002 and is currently
evaluating the impact of SFAS No. 145 on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces Emerging
Issues Task Force Issue 94-3, requiring a company to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF 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,
24
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 September 29, 2002, the
outstanding indebtedness under the Senior Credit Facility was $186.1 million and
the Canadian Credit Facility was $15.5 million in U.S. dollars. As of September
30, 2002, $31.0 million was available under the Senior Credit Facility and Cdn
$1.3 million (approximately US $0.8 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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements and Financial Statement Schedule attached
hereto and listed in Item 15 (a)(1) and (a)(2) hereof.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NONE
PART III
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 Sweetheart Holdings and Sweetheart Cup
as of December 9, 2002. 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.
25
Name Age Position
- -------------------- --- ----------------------------------------------------
Dennis Mehiel 60 Chairman and Chief Executive Officer
Thomas Uleau 58 Chief Operating Officer and Vice Chairman
Hans H. Heinsen 49 Senior Vice President - Finance and
Chief Financial Officer
Michael T. Hastings 55 President - Sweetheart Brand
Robert M. Korzenski 48 President - Hoffmaster Brand
Dennis Dorian Mehiel 34 President - Fonda Brand
Harvey L. Friedman 60 Senior Vice President, General Counsel and Secretary
Ingrid Santiago 50 Senior Vice President - Materials Management
Thomas Pasqualini 45 Senior Vice President - Manufacturing and Logistics
Gail Blanke 54 Director
John A. Catsimatidis 53 Director
Alfred B. DelBello 68 Director
Chris Mehiel 63 Director
Edith V. Mehiel 56 Director
Alan D. Scheinkman 52 Director
G. William Seawright 61 Director
Dennis Mehiel has been Chairman and Chief Executive Officer of
Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Mehiel has been
Chairman and Chief Executive Officer of SF Holdings since February 1998 and has
been Chairman and Chief Executive Officer of Fonda since 1988. Since July 2000,
he has been a director of Box USA Holdings, Inc. ("Box USA") (formerly Four M
Corporation, a converter and seller of interior packaging, corrugated sheets and
corrugated containers which Mr. Mehiel cofounded ("Four M")). From 1966 until
July 2000, he was Chairman of Four M. From 1977 until July 2000 (except during a
leave of absence from April 1994 through July 1995) he served as the Chief
Executive Officer of Four M. Mr. Mehiel is also Chief Executive Officer and a
director of Mannkraft Corporation (formerly Box USA of New Jersey, Inc.), a
manufacturer of corrugated containers, and Chairman and Chief Executive Officer
of CEG.
Thomas Uleau has been Chief Operating Officer and Vice Chairman of
Sweetheart Holdings and Sweetheart Cup since May 2002. Prior thereto, Mr. Uleau
was Executive Vice President and a director of Sweetheart Holdings and
Sweetheart Cup since March 1, 2001 and prior thereto was President, Chief
Operating Officer and a director since March 1998. Mr. Uleau also has been Vice
Chairman and Senior Vice President of SF Holdings since March 1, 2001 and prior
thereto was also President, Chief Operating Officer and a director of SF
Holdings. He has been Executive Vice President of Fonda since March 1998 and has
been a director of Fonda since 1988. He has also served in a variety of
executive officer positions at Fonda since 1989. He has been Executive Vice
President of CEG since 1996 and is currently a director of CEG. Prior to July
2000 he was a director of Box USA (formerly Four M). He served as Executive Vice
President and Chief Financial Officer of Four M from 1989 through 1993 and as
its Chief Operating Officer in 1994.
Hans H. Heinsen has been Senior Vice President - Finance and Chief
Financial Officer of Sweetheart Holdings and Sweetheart Cup since March 1998.
Mr. Heinsen also has been Senior Vice President, Chief Financial Officer and
Treasurer of SF Holdings since February 1998, 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
26
21 years in a variety of corporate finance positions with The Chase Manhattan
Bank, N.A.
Michael T. Hastings has been President of the Sweetheart Brand of
Sweetheart Holdings and Sweetheart Cup since March 2002. Prior thereto, Mr.
Hastings was President of Sweetheart Holdings and Sweetheart Cup from March 2001
to March 2002, and prior thereto he was Senior Vice President-Sales and
Marketing for Sweetheart Holdings and Sweetheart Cup from March 1998 to March
2002. Mr. Hastings was also Senior Vice President of Fonda from March 1998 to
March 2002. Mr. Hastings was Senior Vice President of SF Holdings from December
2001 until May 2002. Prior to joining 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 member of the Board of Directors 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.
Robert M. Korzenski has been President of the Hoffmaster Brand of
Sweetheart Holdings and Sweetheart Cup since March 2002. Mr. Korzenski has been
Senior Vice President of SF Holdings from December 2001 to May 2002 and was
President and Chief Operating Officer of Fonda from March 1998 to March 2002.
Prior to that, he was Senior Vice President of Fonda since January 1997 and
President of the Hoffmaster division since its acquisition by Fonda in March
1995. Mr. Korzenski served as Senior Vice President of SF Holdings from December
2001 until May 2002. 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. Prior to that, he was director of National
Sales at Thompson Industries.
Dennis Dorian Mehiel, the son of Dennis Mehiel, has been President of
the Fonda Brand of Sweetheart Holdings and Sweetheart Cup since May 2002. Mr.
Mehiel has also been President and Chief Operating Officer of Mannkraft
Corporation (formerly Box USA of New Jersey, Inc.), a manufacturer of corrugated
containers, since June 2000, and a member of Frontage Road Realty, LLC, the
parent of Mannkraft Corporation since January 2002. Mr. Mehiel was Vice
President- Operations of Fonda from August 2001 until May 2002. From 1996 to
July 2000, he served in various management positions with Four M.
Harvey L. Friedman has been Senior Vice President, General Counsel and
Secretary of Sweetheart Holdings and Sweetheart Cup since March 2001. He has
been General Counsel and Secretary of SF Holdings since February 1998. He served
as Secretary and General Counsel of Fonda from May 1996 until the Merger in
March 2002. He was also a director of Fonda from 1985 to January 1997. Mr.
Friedman is also Secretary and General Counsel of CEG, is a director of CEG and
Box USA (formerly Four M) and is a director and Senior Vice President of
Mannkraft Corporation (formerly Box USA of New Jersey, Inc.). He was formerly a
partner of Kramer Levin Naftalis & Frankel LLP, a New York City law firm.
Ingrid Santiago has been Senior Vice President - Materials Management
of Sweetheart Holdings and Sweetheart Cup since May 2002. She was Vice President
of Sweetheart Cup from March 1998 to May 2002. She was also Vice President of
Materials Management for Fonda from 1996 until May 2002 and also served as Vice
President of Materials Management for Four M for over 10 years until July 2000.
Thomas Pasqualini has been Senior Vice President - Manufacturing and
Logistics of Sweetheart Holdings and Sweetheart Cup since August 2000. He has
also been Vice President of Logistics and Distribution and director of
Distribution for the past five years and has held several other positions with
the Company since 1981.
27
Gail Blanke has been a director of Sweetheart Holdings and Sweetheart
Cup since May 2002. Ms. Blanke also served as a director of Fonda from January
1997 to March 2002. She also has been a director of SF Holdings since February
1998. 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.
John A. Catsimatidis has been a director of Sweetheart Holdings and
Sweetheart Cup since May 2002. Mr. Catsimatidis also served as a director of
Fonda from January 1997 to March 2002. He also has been a director of SF
Holdings since February 1998. 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 New's
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
Merchant's Association.
Alfred B. DelBello has been a director of Sweetheart Holdings and
Sweetheart Cup since May 2002. Mr. DelBello also served as Vice Chairman of
Fonda from January 1997 to March 2002 and a director of Fonda from 1990 to March
2002. He also has been Vice Chairman of SF Holdings since February 1993. Since
July 1995, Mr. DelBello has been a partner in the law firm of DelBello Donnellan
Weingarten Tartaglia Wise & Wiederkehr, LLP, a White Plains, New York firm. 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.
Chris Mehiel, the brother of Dennis Mehiel, has been a director of
Sweetheart Holdings and Sweetheart Cup since May 2002. Chris Mehiel also served
as a director of Fonda from January 1997 to March 2002. He also has been a
director of SF Holdings since February 1998. Mr. Mehiel was a cofounder of Four
M. He was Executive Vice President, Chief Operating Officer and a director of
Four M from September 1995 to July 2000 and Chief Financial Officer of Four M
from August 1997 to July 2000. Since July 2000, he has been an executive officer
of the managing member of Fibre Marketing Group, LLC ("Fibre Marketing"), the
successor of Marketing Group, Inc., a waste paper recovery business which he
cofounded, and was President from 1994 to January 1996. From 1993 to 1994, Mr.
Mehiel served as President and Chief Operating Officer of Mannkraft Corporation
(formerly Box USA of New Jersey, Inc.), formerly Box USA of New Jersey. From
1982 to 1992, Mr. Mehiel served as the President and Chief Operating Officer of
Specialty Industries, Inc., a waste paper processing and container manufacturing
company.
Edith V. Mehiel, the former spouse of Dennis Mehiel, is a director. She
has been a private investor for the previous five years and has been a director
of SF Holdings since March 2001 and was a director of Fonda from March 2001 to
March 2002.
Alan D. Scheinkman has served a director of Sweetheart Cup and
Sweetheart Holdings since April 2000. Mr. Scheinkman has been a director of SF
Holdings since April 2000 and was a director of Fonda from April 2000 to March
2002. Since October 2002, Mr. Scheinkman has been a member of DelBello Donnellan
Weingarten Tartaglia Wise & Wiederkehr, LLP, a White Plains, New York firm.
Previously, he was 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 was also Associate Minority Counsel to the New
28
York State Senate. Mr. Scheinkman also serves as a director of NCO Portfolio
Management, Inc.
G. William Seawright has been a director of Sweetheart Holdings and
Sweetheart Cup since May 2002. Mr. Seawright also served as a director of Fonda
from January 1997 to March 2002. He also has been a director of SF Holdings
since February 1998. 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.
Compensation of Directors
The Company's directors who are not employees 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. Our directors who are employees do not receive any
compensation or fees for service on the Board of Directors or any committee
thereof.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the
compensation, for Fiscal Years 2002, 2001 and 2000 of the chief executive
officer and the four most highly compensated officers and key employees of
Sweetheart Holdings and Sweetheart Cup (collectively, the "named executive
officers"). 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) $50,000. Thus, such amounts are not reflected in the following table.
29
Summary Compensation Table
Annual Compensation
- --------------------------------- -------------------------------- ---------------------------
All Other
Name and Principal Bonus ($) Compensation
Position Fiscal Salary ($) (1) SARs (2) ($) (3)
- --------------------------------- ------ ----------- ----------- ----------- --------------
Dennis Mehiel
Chairman and Chief Executive 2002 722,212 170,000 - 551,135 (4)
Officer 2001 735,570 340,000 - 396,725 (5)
2000 648,657 600,000 - 352,618 (6)
Thomas Uleau
Chief Operating Officer and 2002 423,366 100,000 - 15,588
Vice Chairman 2001 433,173 116,411 - 12,724
2000 420,129 500,000 126,516 18,201 (7)
Hans H. Heinsen
Senior Vice President - 2002 281,848 70,000 - 19,915
Finance and Chief Financial 2001 255,428 176,411 - 17,534
Officer 2000 251,102 235,000 40,178 8,065
Michael Hastings
President - Sweetheart Brand 2002 298,846 - - 24,244
2001 266,602 100,000 - 11,232
2000 245,512 235,000 126,516 23,182 (8)
Robert Korzenski
President - Fonda Brand 2002 277,269 90,000 - 8,494
2001 244,543 140,000 - 11,480
2000 239,578 235,000 126,516 20,998 (9)
Harvey L. Friedman
Senior Vice President, 2002 283,904 55,000 - 841
General Counsel and Secretary 2001 287,850 115,000 - -
2000 195,700 200,000 - -
(1) Amounts shown were paid based upon the Company's performance.
(2) The SAR Plan was terminated on September 14, 2000, effective as of October
1, 1999. No SARs were issued during Fiscal 2000. All vested SARs were
redeemed on September 20, 2000.
(3) Reflects matching contributions under 401(k) plans, long-term disability
and life insurance premiums paid. (4) Reflects $4,192 of life insurance
premiums and $546,943 for personal expenses. (5) Reflects $2,580 of life
insurance premiums, $378,124 for personal expenses, $16,021 interest
forgiveness. (6) Reflects $1,507 of life insurance premiums, $299,474 for
personal expenses, $51,637 interest forgiveness. (7) Included in other
compensation is $5,282 paid for relocation expenses.
(8) Included in other compensation is $14,119 paid for relocation expenses.
(9) Included in other compensation is $11,726 paid for relocation expenses.
At September 29, 2002 and September 30, 2001, the Company has a loan
receivable from its Chief Executive Officer of $0.3 million plus accrued
interest at 5.06%. During Fiscal 2001 and 2000, the
30
Company forgave $16,021 and $51,637, respectively, of interest associated with
loans to its Chief Executive Officer. At September 29, 2002 and September 30,
2001, the Company has a loan receivable from its Chief Operating Officer of $0.1
million and $0.2 million, respectively, plus accrued interest at 5.39%. The
loans are payable upon demand.
Stock Options
The Company's Chief Executive Officer hold 71,515 currently exercisable
options to purchase Class A Common Stock of SF Holdings.
During Fiscal 2001, SF Holdings adopted the SF Holdings Group, Inc.
Share Incentive Plan in which SF Holdings may grant options to its employees and
to the Company's employees up to 95,995 shares of SF Holdings Class D Common
Stock.
During Fiscal 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 $0.1
million and $0.2 million for Fiscal 2002 and Fiscal 2001, respectively.
The weighted average fair value of the SF Holdings stock options, was
$0.4 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 3 years. The effects of applying SFAS No. 123
in this pro forma disclosure are not indicative of future pro forma effects.
Employee Benefit Plans
The Company 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. The Company does not fund the
plans.
The Company provides certain union and non-union employees with
retirement and disability income benefits under defined pension plans. Pension
costs are based upon the actuarially normal costs plus interest on and
amortization of the unfunded liabilities. The benefit for participants in
certain of the Company's non-union pension plans are frozen. In Fiscal 1999, the
assets and obligations of a pension plan for a number of the Company's union
employees were transferred to a multi-employer pension plan resulting in a $0.2
million to income. The Company's policy has been to fund annually 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. Effective January 1, 2000, the Company
provides a matching contribution of 100% on
31
the first 2% of a participant's salary and 50% on the next 4% of a participant's
salary. The Company's match is currently limited to participant contributions up
to 6% of the participant's salaries. In addition, the Company is allowed to make
discretionary contributions. Certain employees are covered under defined benefit
plans. On December 31, 2001 the Fonda defined contribution plan was merged with
and into the Sweetheart 401(k) plan. Costs charged against operations for this
defined contribution plan were $6.4 million, $6.8 million and $6.3 million for
Fiscal 2002, Fiscal 2001, and Fiscal 2000 respectively.
The Company 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 $1.4 million in Fiscal 2002, $1.0 million
in Fiscal 2001 and $1.8 million in Fiscal 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the Company's common stock is held of record by SF Holdings.
Therefore, the following table as of December 9, 2002 sets forth certain
information regarding the beneficial ownership of the common stock of SF
Holdings with respect to (i) holders having beneficial ownership of more than
five percent of the common stock, (ii) each of our directors, (iii) the Named
Officers and (iv) all of our directors and executive officers as a group. Unless
otherwise indicated below, the Company's directors and executive officers do not
beneficially own any common stock of SF Holdings.
Number Percent
Name of Beneficial Owner of Shares Ownership
- ------------------------ ---------- ---------
Dennis Mehiel................................................................... 701,463(1) 62.3%
373 Park Avenue South
New York, NY 10016
Thomas Uleau.................................................................... 18,033(2) 1.6%
10100 Reisterstown Road
Owings Mills, MD 21117
Hans H. Heinsen................................................................. 5,000(3) *
373 Park Avenue South
New York, NY 10016
Michael T. Hastings............................................................. 5,000(3) *
10100 Reisterstown Road
Owings Mills, MD 21117
Robert M. Korzenski............................................................. 5,000(3) *
2920 North Main Street
Oshkosh, WI 54901
Harvey L. Friedman.............................................................. 14,535(4) 1.3%
115 Stevens Avenue
Valhalla, NY 10595
Gail Blanke(5).................................................................. 166(3) *
John A. Catsimatidis(5)......................................................... 166(3) *
Chris Mehiel (5)................................................................ 0 *
Edith Mehiel (5)................................................................ 0 *
Alfred B. DelBello(5)........................................................... 166(3) *
Alan D. Scheinkman(5)........................................................... 166(3) *
G. William Seawright(5)......................................................... 166(3) *
Directors and executive officers as a group (13 persons)........................ 749,861(6) 66.6%
32
- ---------
* Less than one (1) percent.
(1) Includes 378,385 shares of SF Holdings Class A common stock, 116,647
shares of SF Holdings Class A common stock that would be issuable upon
conversion of SF Holdings Class B Series 2 preferred stock, 71,515
shares underlying options to purchase SF Holdings Class A common stock
which are currently exercisable, 778 shares of SF Holdings Class C
common stock, and 134,138 shares of SF Holdings Class A common stock
which Mr. Mehiel has the power to vote pursuant to a voting trust
agreement with Edith Mehiel.
(2) Includes 3,498 Shares of SF Holdings Class A common stock that would be
issuable upon conversion of SF Holdings Class B Series 2 preferred
stock and 5,000 shares underlying options to purchase SF Holdings Class
D common stock which are currently exercisable.
(3) Represents shares underlying options to purchase SF Holdings Class D
common stock which are currently exercisable. (4) Includes shares held
in trust for the benefit of Mr. Friedman's children. Beneficial
ownership of these shares is
disclaimed by Mr. Friedman. Includes shares underlying options to
purchase SF Holdings Class D Common stock which are currently
exercisable.
(5) Business address is c/o Sweetheart Cup Company Inc., 373 Park Avenue
South, New York, NY 10016.
(6) Includes an aggregate of 20,830 shares underlying options to purchase
SF Holdings Class D common stock which are currently exercisable.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Affiliates
All of the affiliates (other than Fibre Marketing, a waste recovery
business in which the Company has a 25% interest and Mehiel Enterprises, Inc., a
company owned by a director, Chris Mehiel, of the Company, has a 75% interest)
referenced below are directly or indirectly under the common ownership of the
Company's Chairman and Chief Executive Officer, Dennis Mehiel. The Company
believes that the 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.
Pursuant to a Management Services Agreement, as amended, SF Holdings is
entitled to receive from the Company an aggregate annual fee of $1.85 million,
payable semi-annually, and is reimbursed for out-of-pocket expenses. Under the
agreement, SF Holdings has the right, subject to the direction of the Company's
Board of Directors, to manage the Company's day to day operations.
At September 29, 2002 and September 30, 2001, the Company has a loan
receivable from its Chief Executive Officer of $0.3 million plus accrued
interest at 5.06%. During Fiscal 2001 and 2000, the Company forgave $16,021 and
$51,637, respectively, of interest associated with loans to its Chief Executive
Officer. At September 29, 2002 and September 30, 2001, the Company has a loan
receivable from its Chief Operating Officer of $0.1 million and $0.2 million,
respectively, plus accrued interest at 5.39%. The loans are payable upon demand.
During Fiscal 2002, the Company purchased $11.8 million of corrugated
containers from Box USA, a company in which the Company's Chief Executive
Officer owns in excess of 10% of its outstanding capital stock, and $1.1 million
of travel services from Emerald Lady, Inc, a company wholly owned by the
Company's Chief Executive Officer ("Emerald Lady"). Included in accounts payable
as of September 29, 2002 is $1.0 million due to Box USA. Other purchases from
affiliates during Fiscal 2002 were not significant.
On November 1, 2001, Fibre Marketing issued promissory notes to the
Company for $1.2 million in the aggregate, in exchange for outstanding accounts
receivable from Fibre Marketing, at an
33
annual interest rate of 7.0% payable in 36 monthly installments. As of September
29, 2002, $0.9 million is due to the Company.
During Fiscal 2002, the Company sold $8.9 million of scrap paper and
plastic to Fibre Marketing. Included in accounts receivable as of September 29,
2002 is $1.3 million due from Fibre Marketing. Other sales to affiliates during
Fiscal 2002 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.
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.
During Fiscal 2001, the Company sold $7.7 million of scrap paper and
plastic to Fibre Marketing. 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 2000, the Company purchased $9.7 million of corrugated
containers and $0.2 million of services from Box USA 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 2000, the Company sold $7.6 million of scrap paper and
plastic 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 2001, 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 Fiscal 2002 and
Fiscal 2001, rental payments under this lease were $1.5 million and $1.4
million, respectively. Annual rental payments under the 20-year lease are $1.5
million in the first year, escalating at a rate of 2% each year thereafter.
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 Fiscal 2002, Fiscal 2001 and Fiscal 2000, rental payments under this
lease were $3.7 million, $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 1998, the Company purchased a 38.2% ownership interest in
Fibre Marketing from a director of the Company for $0.2 million. During Fiscal
2000, the Company sold a 13.2% interest in Fibre Marketing to Mehiel
Enterprises, Inc. for $0.1 million, retaining a 25% ownership interest in Fibre
Marketing. On July 17, 2000, Box USA transferred 50% of its interest in Fibre
Marketing to Mehiel Enterprises, Inc. Mehiel Enterprises, Inc. owns a 75%
interest in Fibre Marketing. The Company accounts for its ownership interest in
Fibre Marketing using the equity method. During Fiscal 2002, 2001 and 2000, the
Company recorded a loss of $204,000, a loss of $67,000 and income of $241,000,
respectively.
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
34
subleasing the entire facility. Rent expense, net of sublease income on the
portion of the premises subleased was $0.1 million, $0.2 million and $0.2
million during Fiscal 2002, Fiscal 2001 and Fiscal 2000, respectively.
Item 14. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Exchange Act
reports are recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure based closely on the
definition of "disclosure controls and procedures" in Rule 13a-14(c). In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgement in
evaluating the cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the foregoing, the Company's Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective.
There have been no significant changes in our internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART IV
Item 15. 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 Financial
Statement Schedule."
3. Exhibits
3.1 Certificate of Incorporation of Sweetheart Holdings Inc.
(incorporated by reference from Exhibit 3.1 of the
Company's report on Form 10-K dated December 22, 1993 (the
"1993 10-K")).
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation of Sweetheart Holdings Inc. dated March 11,
1998 (incorporated by reference from Exhibit 3.3 of the
Company's report on Form 10-Q dated May 15, 1998).
3.4 Amended and Restated By-Laws of Sweetheart Holdings Inc. dated
March 12, 1998 (incorporated by reference from Exhibit 3.4 of
the Company's report on Form 10-Q dated May 15, 1998).
3.5 Certification of Restated Certificate of Incorporation of
Sweetheart Cup Company Inc. date
35
August 30, 1993 (incorporated by reference to Exhibit 3.4
of Sweetheart Cup Company Inc.'s report on Form S-4 filed
November 21, 2002).
3.6 Certification of Amendment to the Restated Certificate of
Incorporation of Sweetheart Cup Company Inc. date March 11,
1998 (incorporated by reference to Exhibit 3.5 of Sweetheart
Cup Company Inc.'s report on Form S-4 filed November 21,
2002).
3.7 Amended and Restated By-Laws of Sweetheart Cup Company, Inc.
dated March 12, 1998 (incorporated by reference to Exhibit 3.6
of Sweetheart Cup Company Inc.'s report on Form S-4 filed
November 21, 2002).
4.2 Indenture, dated as of August 30, 1993, between Sweetheart Cup
Company Inc., Sweetheart Holdings Inc. and U.S. Trust Company
of Texas, N.A., as Trustee (the "Sweetheart Indenture")
(incorporated by reference to Exhibit 4.2 of Sweetheart
Holdings Inc.'s report on Form 8-k filed October 21, 1993).
4.3 First Supplemental Indenture, dated as of August 30, 1993,
between Sweetheart Cup Company Inc., Sweetheart Holdings Inc.
and U.S. Trust Company of Texas, N.A., as Trustee to the
Sweetheart Indenture.(incorporated by reference to Exhibit 4.2
of Sweetheart Cu p Company Inc.'s report on Form S-4 filed
November 21, 2002).
4.4 Second Supplemental Indenture, dated as of March 22, 2002,
between Sweetheart Cup Company Inc., Sweetheart Holdings Inc.
and The Bank of New York, as Trustee to the Sweetheart
Indenture (incorporated by reference to Exhibit 4.1 of
Sweetheart Holding Inc.'s r eport on Form 8-K dated April 9,
2002).
4.5 Indenture, dated as of February 27, 1997, between The Fonda
Group, Inc. and the Trustee in respect of $120 million in
aggregate principal amount of 9 1/2% Senior Subordinated Notes
due 2007 (the "Fonda Indenture")(incorporated by reference to
Exhibit 4.1 filed as a part of The Fonda Group Inc.'s
Registration Statement on Form S-4, as amended (File No.
333-24939).
4.6 First Supplemental Indenture, dated as of March 25, 2002,
between Sweetheart Cup Company Inc., as successor to The Fonda
Group, Inc., and the Trustee to the Fonda Indenture
(incorporated by reference to Exhibit 4.3 of Sweetheart
Holdings Inc.'s report on Form 8-K dated April 9, 2002).
10.13 Asset Sale Agreement dated as of October 6, 1993 between
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
(incorporated by reference from Exhibit 10.1 of the Company's
report on Form 10-Q dated February 11, 1994).
10.14 Bill of Sale, Assignment and Assumption Agreement dated as of
October 6, 1993 between Sweetheart Holdings Inc. and
Sweetheart Cup Company Inc. (incorporated by reference from
Exhibit 10.2 of the Company's report on Form 10-Q dated
February 11, 1994).
10.15 Wraparound Note dated as of October 6, 1993 made by Sweetheart
Holdings Inc. to Sweetheart Cup Company Inc. (incorporated by
reference from Exhibit 10.3 of the Company's report on Form
10-Q dated February 11, 1994).
10.16 Asset Distribution Agreement dated as of October 6, 1993
between Sweetheart Holdings Inc. and Sweetheart Cup Company
Inc. (incorporated by reference from Exhibit 10.4 of the
Company's report on Form 10-Q dated February 11, 1994).
10.21 Sweetheart Holdings Inc. Management Incentive Plan dated as
of January 27, 1995 (incorporated by reference from Exhibit
10.1 of the Company's report on Form 10-Q dated February 9,
1995).
10.47 Second Restated Management Services Agreement dated March 12,
1998 (incorporated by reference from Exhibit 10.47 of the
Company's report on Form 10-Q dated May 15, 1998).
10.48 Amendment No. 1 to the Second Restated Management Services
Agreement dated March 12, 1998 (incorporated by reference
from Exhibit 10.48 of the Company's report on Form 10-Q dated
May 15, 1998).
10.51 Credit Agreement dated as of June 15, 1998 between Lily Cups
Inc. as Borrower and General Electric Capital Canada Inc. as
Lender (incorporated by reference from Exhibit 10.51 of the
Company's report on Form 10-Q dated August 14, 1998).
36
10.52 Security Agreement made as of June 15, 1998 between Lily Cups
Inc. as Grantor and General Electric Capital Canada Inc. as
Lender (incorporated by reference from Exhibit 10.52 of the
Company's report on Form 10-Q dated August 14, 1998).
10.58 Intercreditor Agreement dated as of June 15, 2000 among Bank
of America, N.A., as Agent, and State Street, solely in its
capacity as Owner Trustee and Lessor (incorporated by
reference from Exhibit 10.58 of the Company's report on Form
10-Q dated June 25, 2000).
10.59 Lease Agreement dated as of June 1, 2000 between State Street,
solely in its capacity as Owner Trustee and Lessor, and
Sweetheart Cup, as Lessee (incorporated by reference from
Exhibit 10. 59 of the Company's report on Form 10-Q dated June
25, 2000).
10.60 Lease Supplement dated as of June 1, 2000 between State
Street, solely in its capacity as Owner Trustee and Lessor,
and Sweetheart Cup, as Lessee(incorporated by reference from
Exhibit 10.60 of the Company's report on Form 10-Q dated June
25, 2000).
10.61 Participation Agreement dated as of June 1, 2000 among
Sweetheart Cup, as Lessee, the Company, as Guarantor, State
Street, solely in its capacity as Owner Trustee, and several
Owner Participants (incorporated by reference from Exhibit
10.61 of the Company's report on Form 10-Q dated June 25,
2000).
10.62 Definitions and Rules of Usage dated as of June 1, 2000
executed in conjunction with the Participation Agreement
(incorporated by reference from Exhibit 10.62 of the Company's
report on Form 10-Q dated June 25, 2000).
10.63 Third Amendment to Credit Agreement dated as of June 19, 2001
between Lily Cups, Inc. as Borrower and General Electric
Capital Canada Inc. as Lender (incorporated by reference to
Exhibit 10.63 of Sweetheart Holdings Inc.'s report on Form
10-K/A dated December 20, 2001).
10.64 Fourth Amendment To Credit Agreement, dated as of August 15,
2001, between Lily Cups Inc. and General Electric Capital
Canada Inc. (incorporated by reference to Exhibit 10.65 of
Sweetheart Holdings Inc.'s report on Form 10-K/A dated
December 20, 2001).
10.65 Third Amended and Restated Loan and Security Agreement dated
as of March 25, 2002 among the financial institutions named
herein as the lenders and Bank of America, N.A. as the agent
and Sweetheart Cup Company, Inc. Company Inc., as the borrower
and Sweetheart Holdings Inc.,as the parent and Bank of America
Securities LLC., as sole arranger and sole book manager
(incorporated by reference to Exhibit 10.66 of Sweetheart
Holdings Inc.'s report on Form 10-Q dated April 30,2002).
10.66 Loan Agreement, dated June 10, 2002, between Sweetheart Cup
Company, Inc. and the Department of Business and Economic
Development, a principal department of the State of Maryland
(incorporated by reference to Exhibit 10.67 of Sweetheart
Holdings Inc.'s report on Form 10-Q dated August 6, 2002).
10.67 Assignment and Assumption Agreement, dated as of March 25,
2002, by and between SF Holdings Group, Inc. and The Fonda
Group, Inc. (incorporated by reference to Exhibit 10.18 of
Sweetheart Cup Company Inc.'s report on Form S-4 filed
November 21, 2002).
21.1 Subsidiaries of th e Company (incorporated by reference to
Exhibit 21.1 of Sweetheart Cup Company Inc.'s report on
Form S-4 filed November 21, 2002).
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) Current Reports on Form 8-K
A report on Form 8-K was filed on February 14, 2002 under Item 5, Item
7 and Item 9.
A report on Form 8-K was filed on March 6,2002 under Item 5 and
Item 7.
A report on Form 8-K was filed on April 9, 2002 under Item 1, Item 5
and Item 7.
37
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 39
Consolidated Balance Sheets as of September 29, 2002
and September 30, 2001 40
Consolidated Statements of Operations and
Other Comprehensive Income (Loss)for
Fiscal Years 2002, 2001 and 2000 41
Consolidated Statements of Cash Flows for
Fiscal Years 2002, 2001, and 2000 42
Consolidated Statements of Shareholder's Equity for
Fiscal Years 2002, 2001, and 2000 43
Notes to Consolidated Financial Statements 44
38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Sweetheart Holdings Inc.
We have audited the accompanying consolidated balance sheets of
Sweetheart Holdings Inc. and subsidiaries (the "Company") as of September 29,
2002 and September 30, 2001, and the related consolidated statements of
operations and other comprehensive income (loss), cash flows, and shareholder's
equity for each of the three fiscal years in the period ended September 29,
2002. 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
29, 2002 and September 30, 2001, and the results of its operations and its cash
flows for each of the three fiscal years in the period ended September 29, 2002
in conformity with accounting principles generally accepted in the United States
of America.
/s/ DELOITTE & TOUCHE LLP
Baltimore, Maryland
December 2, 2002
39
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 29, September 30,
2002 2001
----------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 8,035 $ 11,616
Cash in escrow - 8
Receivables, less allowances of $3,741 and $3,395 152,541 170,122
Inventories 219,427 225,021
Deferred income taxes 20,841 24,185
Assets held for sale 5,275 7,368
Other current assets 35,736 31,568
---------- ----------
Total current assets 441,855 469,888
Property, plant and equipment, net 252,491 260,666
Deferred income taxes 29,879 26,015
Spare parts 13,428 12,077
Goodwill, net 41,232 43,593
Due from SF Holdings 17,962 17,898
Other assets 23,996 25,036
---------- ----------
Total assets $ 820,843 $ 855,173
========== ==========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 102,986 $ 96,072
Accrued payroll and related costs 38,009 46,892
Other current liabilities 44,000 50,257
Current portion of deferred gain on sale of assets 10,203 10,275
Current portion of long-term debt 119,853 16,942
---------- ----------
Total current liabilities 315,051 220,438
Commitments and contingencies (See Notes)
Long-term debt 317,448 423,878
Deferred gain on sale of assets 72,883 83,672
Other liabilities 65,948 68,925
---------- ----------
Total liabilities 771,330 796,913
---------- ----------
Minority interest in subsidiary 2,276 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 101,173 101,257
Accumulated deficit (40,577) (37,429)
Accumulated other comprehensive loss (13,413) (7,752)
---------- ----------
Total shareholder's equity 47,237 56,130
---------- ----------
Total liabilities and shareholder's equity $ 820,843 $ 855,173
========== ==========
See accompanying Notes to Consolidated Financial Statements.
40
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands)
Fiscal
----------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
Net sales $ 1,283,547 $ 1,316,672 $ 1,276,617
Cost of sales 1,130,264 1,143,806 1,090,286
------------ ------------ ------------
Gross profit 153,283 172,866 186,331
Selling, general and administrative expenses 114,823 113,231 112,559
Restructuring charge 1,893 504 1,153
Asset impairment expense 593 2,244 -
Other expense (income), net 2,102 (9,836) (4,943)
------------ ------------ ------------
Operating income 33,872 66,723 77,562
Interest expense, net of interest income of
$211, $100 and $1,346 37,079 38,919 52,608
------------ ------------ ------------
Income (loss) before income tax, minority
interest and extraordinary loss (3,207) 27,804 24,954
Income tax (benefit) expense (1,283) 11,220 10,096
Minority interest in subsidiary 145 68 -
------------ ------------ ------------
Income (loss) before extraordinary loss (2,069) 16,516 14,858
Extraordinary loss on debt extinguishment (net of
income tax benefit of $719 and $209) 1,079 - 313
------------ ------------ ------------
Net income (loss) $ (3,148) $ 16,516 $ 14,545
============ ============ ============
Other comprehensive income (loss):
Net income (loss) $ (3,148) $ 16,516 $ 14,545
Foreign currency translation adjustment (912) (393) (122)
Minimum pension liability adjustment (net
of income tax of $(2,971), $(3,489) and
$470) (4,749) (5,234) 705
------------ ------------ ------------
Comprehensive income (loss) $ (8,809) $ 10,889 $ 15,128
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
41
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal
----------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,148) $ 16,516 $ 14,545
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 34,498 32,003 47,605
Amortization of deferred gain (10,239) (10,276) (2,813)
Asset impairment expense 593 2,244 -
Deferred income tax expense 1,785 8,263 4,789
Loss (gain) on sale of assets (3,069) 143 (4,237)
Write-off of assets 7,996 - -
Changes in operating assets and liabilities (net of
business acquisitions):
Receivables 17,581 (7,279) (24,550)
Inventories 5,594 11,147 (31,145)
Other current assets (4,168) (2,958) (181)
Other assets 444 (3,703) 2,519
Accounts payable 6,914 (12,241) 6,422
Accrued payroll and related costs (8,883) (8,861) 136
Other current liabilities (6,550) 1,445 8,550
Other liabilities (10,617) (12,690) (20,027)
Other, net (262) 21 339
------------ ------------ ------------
Net cash provided by operating activities 28,469 13,774 1,952
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (21,206) (31,701) (26,915)
Payments for business acquisitions - (40,665) (12,411)
Due to/from SF Holdings (64) 543 (30,449)
Proceeds from sale of property, plant and equipment 5,284 120 221,474
------------ ------------ ------------
Net cash (used in) provided by investing activities (15,986) (71,703) 151,699
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 200,254 66,427 38,957
Repayments under credit facilities (196,144) - -
Repayments of other debt (9,633) (715) (190,565)
Borrowings 2,000 - -
Redemption of stock appreciation rights - - (504)
Debt issuance costs (12,549) (1,287) -
Increase in cash escrow (4,589) (17) (206,318)
Decrease in cash escrow 4,597 309 206,018
------------ ------------ ------------
Net cash (used in) provided by financing activities (16,064) 64,717 (152,412)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (3,581) 6,788 1,239
CASH AND CASH EQUIVALENTS, beginning of year 11,616 4,828 3,589
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 8,035 $ 11,616 $ 4,828
============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 34,426 $ 37,070 $ 52,147
============ ============ ============
Income taxes paid $ 880 $ 2,484 $ 3,673
============ ============ ============
SUPPLEMENTAL NON-CASH FINANCING ACTIVITY:
Note payable associated with business acquisition $ - $ - $ 2,914
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
42
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(In thousands)
Accumulated
Other Comp-
Class A Class B Additional rehensive Total
Common Common Paid-In Accumulated Income Shareholder's
Stock Stock Capital Deficit (Loss) Equity
--------- --------- ------------ ------------- ------------- ---------------
Balance, September 27, 1999 $ 10 $ 44 $ 101,090 $ (68,490) $ (2,708) $ 29,946
Net income - - - 14,545 - 14,545
Minimum pension liability
adjustment - - - - 705 705
Translation adjustment - - - - (122) (122)
-------- -------- ----------- ----------- ----------- ----------
Balance, September 24, 2000 10 44 101,090 (53,945) (2,125) 45,074
Net income - - - 16,516 - 16,516
Equity based compensation - - 167 - - 167
Minimum pension liability
adjustment - - - - (5,234) (5,234)
Translation adjustment - - - - (393) (393)
-------- -------- ----------- ----------- ----------- ----------
Balance, September 30, 2001 10 44 101,257 (37,429) (7,752) 56,130
Net loss - - - (3,148) - (3,148)
Elimination of gain on
equipment purchased from
related party - - (183) - - (183)
Equity based compensation - - 99 - - 99
Minimum pension liability
adjustment - - - - (4,749) (4,749)
Translation adjustment - - - - (912) (912)
-------- -------- ----------- ----------- ----------- ----------
Balance, September 29, 2002 $ 10 $ 44 $ 101,173 $ (40,577) $ (13,413) $ 47,237
======== ======== =========== =========== =========== ==========
See accompanying Notes to Consolidated Financial Statements.
43
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As used in these notes, unless the context otherwise requires, the
"Company" shall refer to Sweetheart Holdings Inc. ("Sweetheart Holdings") and
its subsidiaries, including Sweetheart Cup Company Inc. ("Sweetheart Cup").
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, 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 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 the
Company have been restated for all periods presented.
The Company believes it is one of the largest producers and marketers
of disposable foodservice and food packaging products in North America. In
Fiscal 2002, 2001 and 2000, the Company had net sales of approximately $1.3
billion, respectively. 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 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. In addition, the Company designs, manufactures and leases container
filling equipment for use by dairies and other food processors. This equipment
is specifically designed by the Company to fill and seal containers in
customers' plants. During Fiscal 2002, 2001 and 2000, no one customer accounted
for more than 10% of the Company's net sales.
1. SIGNIFICANT ACCOUNTING POLICIES
Business Segments - The Company operates within one business segment
and accordingly does not report multiple business segments. Included within net
sales for Fiscal 2002, 2001 and 2000 is $1.4 million, $1.6 million and $1.9
million of lease revenue, respectively. Further identification of net sales by
product and service or group of similar products and services is not available.
Fiscal year end - The Company's fiscal year end is the 52 or 53 week
period ending on the last Sunday in September. Fiscal 2002 is the 52 week period
ended September 29, 2002. Fiscal 2001 is the 53 week period ended September 30,
2001. Fiscal 2000 is the 52 week period ended September 24, 2000.
Principles of Consolidation and Translation - The consolidated
financial statements include the accounts of Sweetheart Holdings 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 shareholder's equity and
other comprehensive income (loss). All inter-company accounts and transactions
have been eliminated.
The accounts of the Company's Mexican subsidiary, Global Cup, S.A. De
C.V. and its subsidiaries ("Global Cup"), are consolidated as of and for the
period ended August 25, 2002 due to the time needed to consolidate this
subsidiary. No events occurred related to this subsidiary in September 2002 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
44
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 (See Note 10).
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 some 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 21.7 years. The asset lives of
machinery and equipment range between 5 and 13 years and have an average useful
life of 11.9 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. See "--Impact of
Recently Issued Accounting Standards, SFAS No. 142".
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.
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
the Company'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 29, 2002 and September 30, 2001, $0.2 million and $0.3
million, respectively, of unamortized catalog costs were included in other
current assets. Advertising expense was $0.3 million in
45
Fiscal 2002, $0.2 million in Fiscal 2001 and in Fiscal 2000. Catalog expense was
$0.7 million in Fiscal 2002, $0.4 million in Fiscal 2001 and $0.6 million in
Fiscal 2000.
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 29, 2002 and September 30, 2001, the Company had
$47,000 and $0.5 million in minimum license guarantees and advance royalties,
net of reserves, respectively. Future minimum royalty payments are $0.6 million
in 2003 and $0.1 million thereafter.
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 potential credit
losses based upon expected collectibility of all receivables.
Debt issuance costs - Costs associated with obtaining financing are
capitalized and are included in other assets. These costs are being amortized
over the terms of the respective financing.
Impact of 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 during
Fiscal 2001. The Company has adopted SFAS No. 142 effective September 30, 2002
and is currently evaluating the impact of SFAS No. 142 on its consolidated
financial statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of leases. This statement
amends SFAS. No. 19, Financial Accounting and Reporting by Oil and Gas Producing
Companies. SFAS No. 143 is effective for years beginning after June 15, 2002.
The Company has adopted SFAS No. 143 effective September 30, 2002 and is
currently evaluating the impact of SFAS No. 143 on its consolidated financial
statements.
In October 2001, the FASB issued 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 SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of Accounting Principals Board Opinion No. 30, Reporting the Results
of Operations-Reporting the Effects of Disposal
46
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 has adopted SFAS No. 144 effective September 30, 2002 and
is currently evaluating the impact of SFAS No. 144 on its consolidated financial
statements.
In April 2002, the FASB issued 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 has adopted SFAS No. 145 effective September 30, 2002 and is currently
evaluating the impact of SFAS No. 145 on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces Emerging
Issues Task Force Issue 94-3, requiring a company to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
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.
2. INVENTORIES
The components of inventories are as follows (in thousands):
September 29, September 30,
2002 2001
--------------- ---------------
Raw materials and supplies $ 57,305 $ 55,955
Finished products 150,925 158,297
Work in progress 11,197 10,769
--------- ---------
Total inventories $ 219,427 $ 225,021
========= =========
47
3. INCOME TAXES
The income tax (benefit) expense includes the following components (in
thousands):
Fiscal
----------------------------------
2002 2001 2000
---------- ---------- ----------
Current:
Federal $ (3,068) $ 2,471 $ 3,891
State - 486 1,146
Foreign - - 270
--------- --------- ---------
Total current (3,068) 2,957 5,307
--------- --------- ---------
Deferred:
Federal 2,221 7,745 4,536
State (121) 947 253
Foreign (315) (429)
--------- --------- ---------
Total deferred 1,785 8,263 4,789
--------- --------- ---------
Total income tax (benefit) expense $ (1,283) $ 11,220 $ 10,096
========= ========= =========
The effective tax rate varied from the U.S. Federal tax rate of 35% for
Fiscal 2002, 2001 and 2000 as a result of the following:
Fiscal
----------------------------------
2002 2001 2000
---------- ---------- ----------
U.S. Federal tax rate 35% 35% 35%
State income taxes, net of
U.S. Federal tax impact 4 4 4
Permanent difference, meals and
entertainment 1 1 1
---- ---- ----
Effective tax rate 40% 40% 40%
==== ==== ====
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):
48
September 29, September 30,
2002 2001
--------------- ---------------
Assets:
Post-retirement health and pension benefits $ 19,755 $ 23,985
Employee benefits 7,651 7,602
Net operating loss carryforwards 20,700 9,980
Deferred gain on sale-leaseback transaction 33,670 37,766
Alternative minimum tax credit carryforward 354 3,329
Deferred rent 2,867 1,606
Inventory adjustments 3,600 7,964
Allowance for doubtful accounts and related reserves 6,628 1,957
Charitable contributions carryforwards 184 184
Other 5,020 4,433
---------- ----------
100,429 98,806
Liabilities:
Depreciation (49,709) (48,606)
---------- ----------
Net deferred tax assets $ 50,720 $ 50,200
========== ==========
As of September 29, 2002, the Company had approximately $56 million of
net operating loss carryforwards for federal income tax purposes of which $25
million will expire in 2018 and the remaining $31 million will expire in 2022.
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 $11 million of accumulated and undistributed earnings of the
Foreign subsidiaries at September 29, 2002 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 August 3, 2001, the Company's Board of Directors approved plans for
the closure and sale of its Manchester, New Hampshire facility. This facility
was consolidated into the North Andover, Massachusetts facility. The Company
consummated the sale in Fiscal 2002 which resulted in a net gain of $3.0
million.
On February 20, 2001, the Company's Board of Directors approved plans
for the closure and sale of the Somerville, Massachusetts facility. This
facility was consolidated into the North Andover, Massachusetts facility and is
not being used in operations as of September 29, 2002. The Company anticipates
the sale of the facility within the next twelve months and has classified it as
available for sale on the consolidated balance sheet.
49
5. OTHER CURRENT ASSETS
The components of other current assets are as follows (in thousands):
September 29, September 30,
2002 2001
-------------- --------------
Spare parts $ 22,652 $ 23,273
Vendor receivables 4,343 3,141
Income taxes receivable 3,068 -
Prepaid expenses 5,673 5,154
--------- ---------
Total other current assets $ 35,736 $ 31,568
========= =========
6. PROPERTY, PLANT AND EQUIPMENT, NET
The Company's major classes of property, plant and equipment, net are
as follows (in thousands):
September 29, September 30,
2002 2001
--------------- ---------------
Land $ 14,571 $ 14,630
Buildings and improvements 117,772 108,571
Machinery and equipment 328,529 311,713
Construction in progress 8,043 16,587
--------- ---------
Total property, plant and equipment 468,915 451,501
Less - accumulated depreciation 216,424 190,835
--------- ---------
Property, plant and equipment, net $ 252,491 $ 260,666
========= =========
Depreciation of property, plant and equipment was $27.6 million, $27.8
million and $43.0 million in Fiscal 2002, 2001 and 2000, 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 $1.4 million and $1.5 million
at September 29, 2002 and September 30, 2001, respectively.
7. ACQUISITIONS
On August 28, 2001, the Company 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, the Company assumed the liabilities and obligations of the
consumer division of Dopaco arising under purchased contracts and leases. The
consumer division of Dopaco 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 which was funded through a bank financing. The Dopaco
Acquisition resulted in goodwill of $9.1 million which is fully tax deductible
and intangible assets of $3.2 million with a weighted average useful life of
approximately 4.4 years. These intangible assets consisted of a non-compete
agreement of $2.2 million with an estimated useful life of 5 years, employment
contracts of $0.8 million with estimated useful lives of 3 years and other
assets of $0.2 million with estimated useful lives of 11 months.
50
On April 5, 2001, the Company 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. The Company has assumed
the liabilities and obligations of Global Cup arising under contracts or leases
that are either assets purchased by the Company or a part of the accounts
payable. The aggregate purchase price for the assets and working capital was
$12.2 million which was paid in cash. The Global Cup acquisition has resulted in
goodwill of $3.9 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
$2.0 million in Fiscal 2002, $1.9 million in Fiscal 2001 and $1.2 million in
Fiscal 2000. Accumulated amortization was $8.1 million and $6.1 million at
September 29, 2002 and September 30, 2001, 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 29, September 30,
2002 2001
--------------- ---------------
Debt issuance costs, net of
accumulated amortization $ 14,664 $ 6,744
SF Holdings management agreement - 5,201
Intangible assets 2,812 3,111
Investment - 2,221
Intangible pension asset
(See Note 23) 1,813 2,737
Deposits 1,307 2,432
Other 3,400 2,590
--------- ---------
Total other assets $ 23,996 $ 25,036
========= =========
Amortization of debt issuance costs was $3.3 million, $1.7 million and
$2.6 million for Fiscal 2002, 2001 and 2000, respectively, and is included in
interest expense.
9. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in
thousands):
September 29, September 30,
2002 2001
--------------- ---------------
Sales allowances $ 17,583 $ 21,641
Restructuring charges 816 365
Taxes, other than income taxes 3,220 5,136
Litigation, claims and assessments
(See Note 25) 1,642 1,426
Deferred rent payable 7,708 8,169
Interest payable 2,801 3,337
Freight payable 2,175 1,481
Other 8,055 8,702
--------- ---------
Total other current liabilities $ 44,000 $ 50,257
========= =========
51
10. DEFERRED GAIN ON SALE OF ASSETS
In connection with a sale-leaseback transaction, on June 15, 2000, the
Company 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 expense under the Lease will be approximately $31.5
million. The Sweetheart Cup may renew the Lease at its option for up to four
consecutive renewal terms of two years. The rent for each renewal term will be
determined at 105% of the fair market rental value of the production equipment
at the date of renewal. The Lease does not contain bargain lease terms and no
penalties or other disincentives if the Sweetheart Cup elects not to renew the
Lease. If at the end of the lease term, the Sweetheart Cup elects not to
exercise its option to renew the Lease or purchase the equipment, the Sweetheart
Cup is obligated to return the equipment to the lessor in good working order
with all manuals, and to de-install the equipment, crate it and deliver it to
the nearest railhead.
11. LONG-TERM OBLIGATIONS
Long-term debt, including amounts payable within one year, is as
follows (in thousands):
September 29, September 30,
2002 2001
--------------- ---------------
Senior Credit Facility $ 186,117 $ 190,584
Canadian Credit Facility 15,452 16,630
$110 million Senior Subordinated Notes 110,000 110,000
$120 million Senior Subordinated Notes 120,000 120,000
Sherwood Industries Notes 3,498 3,153
Maryland Loan 1,895 -
Other 339 453
--------- ---------
Total debt 437,301 440,820
Less - Current portion of long-term debt 119,853 16,942
--------- ---------
Total long-term debt $ 317,448 $ 423,878
========= =========
The aggregate annual maturities of long-term debt at September 29, 2002
are as follows (in thousands):
Fiscal 2003 $ 119,853
Fiscal 2004 22,607
Fiscal 2005 5,686
Fiscal 2006 412
Fiscal 2007 168,743
Fiscal 2008 120,000
---------
$ 437,301
=========
52
Senior Credit Facility - On March 25, 2002, the Company refinanced its
existing Senior Credit Facility with Bank of America, N.A., as agent (the
"Senior Credit Facility"). (see Note 22). 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 its $110 million Senior Subordinated Notes prior
to March 1, 2003, the Senior Credit Facility will become due 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 $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 Fiscal 2002, the weighted average annual
interest rate for the Senior Credit Facility was 4.88%. The indebtness of
Sweetheart Cup under the Senior Credit Facility is guaranteed by Sweetheart
Holdings and secured by a first priority perfect security interest in accounts
receivable, 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
September 29, 2002, $31.0 million was available under the Senior Credit
Facility. As of September 29, 2002, LIBOR was 1.81% and the bank's base rate was
4.75%.
The Senior 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, the Company must maintain on a consolidated basis,
certain specified ratios at specified times, including, without limitation,
maintenance of minimum fixed charge coverage ratio. The Company is currently in
compliance with all covenants under the Senior Credit Facility. The Senior
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 loan
agreement governing the Senior Credit Facility).
Canadian 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 $19.0 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 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 Fiscal 2002,
the weighted average annual interest rate for the Canadian Credit Facility was
4.41%. As of September 29, 2002, Cdn $1.3 million (approximately US $0.8
million) was available under the revolving facility and the term loan balance
was Cdn $12.3 million (approximately US $7.8 million) under the Canadian Credit
Facility.
$110 million Senior Subordinated Notes - 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 September 1,
2003 (the "$110 million 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.
53
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor
with respect to $110 million Senior Subordinated Notes. Interest on the $110
million Senior Subordinated Notes is payable semi-annually in arrears on March 1
and September 1. The $110 million 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 million Senior
Subordinated Notes are subordinated in right of payment to the prior payment in
full of all of the Company's senior debt, including borrowings under the Senior
Credit Facility, and are pari passu with the $120 million Senior Subordinated
Notes due 2007 (the "$120 million Senior Subordinated Notes"). In addition, the
obligations under the June 1, 2000 lease between Sweetheart Cup and State Street
Bank and Trust Company of Connecticut are secured by a significant portion of
the Company's existing property, plant and equipment. The $110 million 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.
$120 million Senior Subordinated Notes - In Fiscal 1997, the Company
issued the $120 million Senior Subordinated Notes with interest payable
semi-annually. Payment of the principal and interest is subordinate in right to
payment of all of the Company's senior debt, including borrowings under the
Senior Credit Facility. The Company may, at its election, redeem the $120
million 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 million 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 notes
at a redemption price equal to 101% of the principal amount thereof plus accrued
interest. The $120 million Senior Subordinated Notes are subordinated in right
of payment to the prior payment in full of all of the Company's senior debt,
including borrowings under the Senior Credit Facility and are pari passu with
the $110 million Senior Subordinated Notes. In addition, the obligations under
the June 1, 2000 lease between Sweetheart Cup and State Street Bank and Trust
Company of Connecticut are secured by a significant portion of the Company's
existing property, plant and equipment. The $120 million 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 transaction with affiliates, the creation of
additional liens and certain other business activities.
Sherwood Industries Notes - As part of a prior acquisition on May 15,
2000, the Company issued to the sellers 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.
Maryland Loan - 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 September 29, 2002, $1.9 million was outstanding at
an annual interest rate of 3.0%.
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. All
54
borrowing under the Senior Credit Facility and the Canadian Credit Facility have
variable interest rates that fluctuate along with current market conditions and
thus the carrying value approximates their fair value.
The fair value of the $110 million Senior Subordinated Notes are
estimated to be $13.2 million lower than the carrying value at September 29,
2002 and $2.2 million lower than the carrying value at September 30, 2001, based
upon independent third party information.
The fair value of the $120 million Senior Subordinated Notes are
estimated to be $30 million lower than the carrying value at September 29, 2002
and $3.6 million lower than the carrying value at September 30, 2001, based upon
independent third party information.
13. OTHER LIABILITIES
The components of other liabilities are as follows (in thousands):
September 29, September 30,
2002 2001
--------------- ---------------
Post-retirement health care benefits
(See Note 23) $ 49,321 $ 56,968
Pensions (See Note 23) 14,426 9,652
Other 2,201 2,305
--------- ---------
Total other liabilities $ 65,948 $ 68,925
========= =========
14. MINORITY INTEREST IN SUBSIDIARY
Minority interest represents 20% of the total common stock interest in
Global Cup, not owned by the Company.
15. SHAREHOLDER'S EQUITY
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 Class A and Class B Common Stock have the same powers, preferences
and rights, except that the Class B Common Stock has no voting rights. Class A
and Class B Common Stock share the profits and losses generated by the Company
on a pro-rata basis. Each outstanding Class A Common Share is entitled to one
vote on any matter submitted to a vote of shareholders and has no cumulative
voting rights. Subject to Delaware law and limitations in certain debt
instruments ($110 million Senior Subordinated Notes, $120 million Senior
Subordinated Notes, and borrowings under the Senior Credit Facility), common
shareholders are entitled to receive such dividends as may be declared by the
Company's Board of Directors out of funds legally available thereof. In the
event of a liquidation,
55
dissolution or winding up of the Company, common shareholders are entitled to
share ratably in all assets remaining after payment or provision for payment of
debts or other liabilities of the Company.
16. SF HOLDINGS STOCK OPTION PLAN
During Fiscal 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 $0.1
million and $0.2 million for Fiscal 2002 and Fiscal 2001, respectively.
A summary of SF Holdings stock option transactions involving employees
of the Company are as follows:
SF Holdings Weighted Average
Stock Options Exercised Price
------------- ----------------
Outstanding, September 25, 2000 - $ -
Granted 13,635 118.30
Forfeited (700) 117.38
-------- ---------
Outstanding, September 30, 2001 12,935 118.35
Forfeited (1,119) 117.38
-------- ---------
Outstanding, September 29, 2002 11,816 $ 118.44
======== =========
Exercisable, September 30, 2001 -
========
Exercisable, September 29, 2002 3,938
========
The following table summarizes information about SF Holdings stock
options granted to employees of the Company, outstanding at September 29, 2002:
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------
Weighted Weighted
Number Average Weighted Number Average
Range of Exercise Outstanding as Remaining Life Average Exercisable Exercise
Prices of 09/29/02 (Years) Exercise Price as of 9/29/02 Price
- ------------------- ---------------- ---------------- ---------------- -------------- -----------
$ 93.75 5,659 8.0 $ 93.75 1,886 $ 93.75
141.14 6,157 8.0 141.14 2,052 141.14
------ --- -------- -----
11,816 8.0 $ 118.44 3,938 $ 118.44
====== === ======== ===== ========
The Company applies APB No. 25 and related interpretations in
accounting for SF Holdings stock options granted to employees of the Company.
Had compensation costs for SF Holdings 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 (loss) for Fiscal 2002 and Fiscal 2001 would
have changed to the pro forma amount indicated below (in thousands):
Net income (loss): Fiscal Fiscal
2002 2001
--------- ---------
As reported $ (3,148) $ 16,516
Pro forma $ (3,169) $ 16,480
The weighted average fair value of the SF Holdings stock options, was
$0.4 million in Fiscal 2001
56
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 3 years.
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future pro forma effects.
17. RELATED-PARTY TRANSACTIONS
All of the affiliates (other than Fibre Marketing Group, LLC ("Fibre
Marketing"), the successor of Marketing Group, Inc., a waste recovery business
in which the Company has a 25% interest and Mehiel Enterprises, Inc., a company
owned by a director, Chris Mehiel, of the Company, has a 75% interest)
referenced below are directly or indirectly under the common ownership of the
Company's Chairman and Chief Executive Officer, Dennis Mehiel. The Company
believes that the 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.
Pursuant to a Management Services Agreement, as amended, SF Holdings is
entitled to receive from the Company an aggregate annual fee of $1.85 million,
payable semi-annually, and is reimbursed for out-of-pocket expenses. Under the
agreement, SF Holdings has the right, subject to the direction of the Company's
Board of Directors, to manage the Company's day to day operations.
At September 29, 2002 and September 30, 2001, the Company has a loan
receivable from its Chief Executive Officer of $0.3 million plus accrued
interest at 5.06%. During Fiscal 2001 and 2000, the Company foregav $16,021 and
$51,637 of interest, respectively, associated with loans to its Chief Executive
Officer. At September 29, 2002 and September 30, 2001, the Company has a loan
receivable from its Chief Operating Officer of $0.1 million and $0.2 million,
respectively, plus accrued interest at 5.39%. The loans are payable upon demand.
During Fiscal 2002, the Company purchased $11.8 million of corrugated
containers from Box USA, a company in which the Company's Chief Executive
Officer owns in excess of 10% of its outstanding capital stock, and $1.1 million
of travel services from Emerald Lady, Inc, a company wholly owned by the
Company's Chief Executive Officer ("Emerald Lady"). Included in accounts payable
as of September 29, 2002 is $1.0 million due to Box USA. Other purchases from
affiliates during Fiscal 2002 were not significant.
On November 1, 2001, Fibre Marketing issued promissory notes to the
Company for $1.2 million in the aggregate, in exchange for outstanding accounts
receivable from Fibre Marketing, at an annual interest rate of 7.0% payable in
36 monthly installments. As of September 29, 2002, $0.9 million is due to the
Company.
During Fiscal 2002, the Company sold $8.9 million of scrap paper and
plastic to Fibre Marketing. Included in accounts receivable as of September 29,
2002 is $1.3 million due from Fibre Marketing. Other sales to affiliates during
Fiscal 2002 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.
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.
During Fiscal 2001, the Company sold $7.7 million of scrap paper and
plastic to Fibre Marketing. 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.
57
During Fiscal 2000, the Company purchased $9.7 million of corrugated
containers and $0.2 million of services from Box USA 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 2000, the Company sold $7.6 million of scrap paper and
plastic 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 2001, 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 Fiscal 2002 and
Fiscal 2001, rental payments under this lease were $1.5 million and $1.4
million, respectively. Annual rental payments under the 20-year lease are $1.5
million in the first year, escalating at a rate of 2% each year thereafter.
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 Fiscal 2002, Fiscal 2001 and Fiscal 2000, rental payments under this
lease were $3.7 million, $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 1998, the Company purchased a 38.2% ownership interest in
Fibre Marketing from a director of the Company for $0.2 million. During Fiscal
2000, the Company sold a 13.2% interest in Fibre Marketing to Mehiel
Enterprises, Inc. for $0.1 million, retaining a 25% ownership interest in Fibre
Marketing. On July 17, 2000, Box USA transferred 50% of its interest in Fibre
Marketing to Mehiel Enterprises, Inc. Mehiel Enterprises, Inc. owns a 75%
interest in Fibre Marketing. The Company accounts for its ownership interest in
Fibre Marketing using the equity method. During Fiscal 2002, 2001 and 2000, the
Company recorded a loss of $204,000, a loss of $67,000 and income of $241,000,
respectively.
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 was $0.1 million, $0.2 million and $0.2 million during Fiscal
2002, Fiscal 2001 and Fiscal 2000, respectively.
18. 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. The full amount of lease rental payments are charged
to expense using the straight line method over the term of the lease. Rent
expense under such arrangements was $61.3 million, $60.7 million and $34.8
million for Fiscal Years 2002, 2001 and 2000, respectively. Future minimum
rental commitments under non-cancelable operating leases in effect at September
29, 2002 are as follows (in thousands):
58
Fiscal 2003 $ 54,179
Fiscal 2004 50,848
Fiscal 2005 48,283
Fiscal 2006 45,177
Fiscal 2007 43,283
Thereafter 192,537
----------
$ 434,307
==========
In connection with a sale-leaseback transaction, on June 15, 2000, the
Company 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 Cup may also purchase
such equipment for fair market value either at the conclusion of the Lease term
or November 21, 2006, at its option. The Company's obligations in connection
with the Lease are collateralized by substantially all of the Company's
property, plant and equipment owned as of June 15, 2000. This lease contains
various covenants, which prohibit, or limit, among other things dividend
payments, equity repurchases or redemption, the incurrence of additional
indebtedness and certain other business activities.
The Company 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.
The Company 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 2003, Fiscal 2004
and Fiscal 2005. The present value of the future minimum lease payments is $0.2
million.
19. RESTRUCTURING CHARGE
During the quarter ended September 29, 2002, the Company established a
restructuring reserve of $0.3 million in conjunction with the planned closure of
the Company's Lafayette, Georgia facility from which 101 primarily manufacturing
positions were eliminated. The plan was approved by management on September 24,
2002 and announced to employees on September 29, 2002. Severance payments of
$0.1 million and $0.2 million of vacated building rent expense will be paid in
Fiscal 2003. The $0.3 million reserve has been included in the "Other current
liabilities" on the consolidated balance sheet as of September 29, 2002.
During the quarter ended June 30, 2002, the Company established a
restructuring reserve of $1.6 million in conjunction with planned consolidation
initiatives from which 475 primarily manufacturing positions were eliminated.
The plan was approved by management on June 19, 2002 and announced to employees
on June 28, 2002. During the fourth quarter of Fiscal 2002, the Company paid
$1.0 million in severance payments. The remaining $0.6 million of severance
payments will be paid in the first three quarters of Fiscal 2003. The $0.6
million reserve has been included in the "Other current liabilities" on the
consolidated balance sheet as of September 29, 2002.
59
During the quarter ended June 24, 2001, the Company established a
restructuring reserve of $0.5 million in conjunction with the planned
consolidation of the former administrative offices of CEG in Indianapolis,
Indiana into the Company'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 consolidated balance sheet and was utilized during Fiscal
2002.
During the quarter ended March 26, 2000, the Company established a
restructuring reserve of $0.7 million in conjunction with the planned
elimination of the Company'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, the Company
reversed $0.2 million of this reserve as a result of 12 employees being placed
into open positions within the Company. The balance of this reserve is included
within the "Other current liabilities" on the consolidated 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. The Company
utilized the remaining $0.1 million of the restructuring reserve in the first
quarter of Fiscal 2001.
During the quarter ended June 25, 2000, the Company 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, The Company 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
consolidated 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.
20. ASSET IMPAIRMENT EXPENSE
During the quarter ended September 29, 2002, the Company approved plans
to close its Lafayette, Georgia facility. As a result, the Company evaluated the
usefulness of certain equipment no longer in use at this facility and wrote-off
the remaining book value of $0.6 million to operations.
During the quarter ended September 30, 2001, the Company approved plans
to consolidate its Manchester, New Hampshire and Springfield, Missouri
operations into other existing facilities throughout the Company. As a result,
the Company evaluated the usefulness of certain equipment no longer in use at
these facilities and wrote-off the remaining book value of $2.2 million to
operations.
21. OTHER INCOME, NET
During Fiscal 2002, the Company realized $10.2 million due to the
amortization of the deferred gain in conjunction with the Fiscal 2000
sale-leaseback transaction. Also, during Fiscal 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 (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, (iii) $6.9 million of costs in
connection with the
60
rationalization, consolidation and process improvement of the Company's
manufacturing facilities and (iv) $0.5 million of additional costs of associated
with the termination of the Lily-Tulip, Inc. Salary Retirement Plan.
In Fiscal 2001, the Company 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, the Company 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. The Company also incurred $1.4 million of expenses
associated with the Aldridge Liability.
22. EXTRAORDINARY LOSS
During Fiscal 2002, in conjunction with the refinancing of the
Company's Senior Credit Facility, the Company charged $1.8 million, or $1.1
million net of income tax benefit, to results of operations as an extraordinary
item, which amount represents the unamortized deferred financing fees and
redemption fees pertaining to such debt.
During Fiscal 2000, in conjunction with the redemption of the Company's
Senior Secured Notes and the refinancing of the U.S. Credit Facility, the
Company charged $0.5 million, or $0.3 million net of income tax benefit, to
results of operations as an extraordinary item, which amount represents the
unamortized deferred financing fees and redemption fees pertaining to such debt.
23. EMPLOYEE BENEFIT AND POST-RETIREMENT HEALTH CARE PLANS
The Company 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. The Company does not fund the
plans.
The Company provides certain union and non-union employees with
retirement and disability income benefits under defined pension plans. Pension
costs are based upon the actuarially normal costs plus interest on and
amortization of the unfunded liabilities. The benefit for participants in
certain of the Company's non-union pension plans are frozen. In Fiscal 1999, the
assets and obligations of a pension plan for a number of the Company's union
employees were transferred to a multi-employer pension plan resulting in a $0.2
million to income. The Company's policy has been to fund annually 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. Effective January 1, 2000, the Company
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. The Company's
61
match is currently limited to participant contributions up to 6% of the
participant's salaries. In addition, the Company is allowed to make
discretionary contributions. Certain employees are covered under defined benefit
plans. On December 31, 2001 the Fonda defined contribution plan was merged with
and into the Sweetheart 401(k) plan. Costs charged against operations for this
defined contribution plan were $6.4 million, $6.8 million and $6.3 million for
Fiscal 2002, Fiscal 2001, and Fiscal 2000 respectively.
The Company also participates in a multi-employer pension plan for
certain of its union employees. Contributions to this plan, at a defined rate
per hour worked were $1.4 million in Fiscal 2002, $1.0 million in Fiscal 2001
and $1.8 million in Fiscal 2000.
Net periodic cost for the Company's pension and other benefit plans
consists of the following (in thousands):
Fiscal
-------------------------------------
2002 2001 2000
----------- ----------- -----------
Pension Benefits
Service cost $ 1,277 $ 1,449 $ 971
Interest cost 5,403 5,122 4,481
Return on plan assets (6,081) (5,988) (4,819)
Net amortization and deferrals 175 (111) 228
Amortization of transitional obligation (172) (174) -
Additional amounts recognized 635 66 73
Curtailment charge 734 - -
-------- -------- --------
Net periodic pension cost $ 1,971 $ 364 $ 934
======== ======== ========
Other Benefits
Service cost $ 826 $ 818 $ 874
Interest cost 2,770 3,220 3,212
Net amortization and deferrals (799) (799) (799)
Amortization of transitional obligation 39 40 -
Net actuarial costs (1,368) (1,051) (838)
-------- -------- --------
Net periodic benefit cost $ 1,468 $ 2,228 $ 2,449
======== ======== ========
The Company incurred a $0.7 million curtailment charge in Fiscal 2002
due to a reduction in workforce at the Springfield facility.
62
The following table sets forth the change in benefit obligation for the
Company's benefit plans (in thousands):
Pension Benefits Other Benefits
-------------------------------- ---------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
--------------- --------------- --------------- ----------------
Change in benefit obligation:
Benefit obligation at beginning of period $ 75,940 $ 67,881 $ 43,938 $ 42,222
Service cost 1,277 1,278 822 632
Interest cost 5,403 4,061 2,762 2,446
Amendments - 1,211 - -
Actuarial (gain) or loss 795 4,871 (82) 1,885
Participant contributions to the plan 188 151 - -
Benefits paid (4,585) (3,506) (9,132) (3,247)
Other 1 (7) - -
---------- ---------- ---------- ----------
Benefit obligation at end of period $ 79,019 $ 75,940 $ 38,308 $ 43,938
========== ========== ========== ==========
Change in plan assets:
Fair value of plan assets at beginning of
period $ 61,572 $ 63,878 $ - $ -
Actual return on plan assets (1,398) (1,363) - -
Employer contributions to plan 4,737 2,402 9,132 2,854
Participant contributions to plan 188 151 - 393
Benefits paid (4,585) (3,505) (9,132) (3,247)
Other 1 9 - -
---------- ---------- ---------- ----------
Fair value of plan assets at end of period $ 60,515 $ 61,572 $ - $ -
========== ========== ========== ==========
Funded status $ (18,504) $ (14,368) $ (38,308) $ (43,938)
Unrecognized prior service cost 1,836 2,737 (4,805) (5,604)
Unrecognized transition obligation (1,716) (1,888) - 469
Unrecognized (gain) loss 18,499 10,872 (11,450) (12,736)
---------- ---------- ---------- ----------
Net amount recognized $ 115 $ (2,647) $ (54,563) $ (61,809)
========== ========== ========== ==========
The following sets forth the amounts recognized in the Consolidated
Balance Sheets (in thousands):
Pension Benefits
---------------------------------
September 29, September 30,
2002 2001
---------------- ----------------
Accrued benefit liability $ (19,514) $ (15,285)
Intangible asset 1,813 2,737
Deferred income taxes 7,126 3,960
Accrued other comprehensive loss 10,690 5,941
---------- ----------
Net amount recognized $ 115 $ (2,647)
========== ==========
The assumptions used in computing the preceding information are as
follows:
Fiscal
--------------------------------------------------
2002 2001 2000
----------------- --------------- ---------------
Pension Benefits
Discount rate 7.25% 7.38% 7.75% to 8.00%
Rate of return on plan assets 8.00% to 10.00% 8.00% to 10.00% 8.00% to 10.00%
Other Benefits
Discount rate 7.00% to 8.00% 7.38% to 8.00% 8.00%
63
For measurement purposes, a 5% annual rate of increase in health care
benefits was assumed for 2002. The rate is assumed to remain at 5% for 2003 and
thereafter.
A one percentage point change in the assumed health care cost trend
rate would have the following effects (in thousands):
One Percentage One Percentage
Point Increase Point Decrease
-------------- --------------
Effect on accumulated post-
retirement benefit obligation $ 2,284 $ (1,972)
Effect on net periodic post-
retirement benefit cost $233 $(210)
24. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive income (loss) are as
follows (in thousands):
September 29, September 30,
2002 2001
------------- -------------
Foreign currency translation
adjustment $ (2,723) $ (1,811)
Minimum pension liability
adjustment (10,690) (5,941)
---------- ----------
Accumulated other comprehensive loss $ (13,413) $ (7,752)
========== ==========
25. CONTINGENCIES
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084,
was 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 has completed paying out the termination liability and
associated expenses in connection with the Plan termination.
On July 13, 1999, the Company received a letter from the U.S.
Environmental Protection Agency ("EPA") identifying the Company, 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 is not a final determination by the
EPA concerning the liability of the Company or the liability of any other
entity. The Company 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,
the Company 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 the Company responded to such inquiry. In both instances,
the Company has received no further communication from the EPA. The Company
denies liability and has no reason to believe the final outcome of these matters
will have a material adverse effect on the Company's financial condition or
64
results of operations. However, no assurance can be given about the ultimate
effect on the Company, if any.
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. The Company 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.
26. 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
million 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):
65
Consolidated Balance Sheet
September 29, 2002
----------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ---------- ----------- ------------
Assets
Current assets:
Cash and cash equivalents $ 8,035 $ - $ - $ 8,035
Cash in escrow - - - -
Receivables 199,512 - (46,971) 152,541
Raw materials inventory 57,305 - - 57,305
Work in progress inventory 11,197 - - 11,197
Finished goods inventory 150,925 - - 150,925
Assets held for sale - 5,275 - 5,275
Other current assets 56,577 2,551 (2,551) 56,577
------------ ---------- ----------- ------------
Total current assets 483,551 7,826 (49,522) 441,855
Property, plant and equipment, net 252,491 - - 252,491
Deferred income taxes 41,070 (20,927) 9,736 29,879
Other assets 96,618 106,450 (106,450) 96,618
------------ ---------- ----------- ------------
Total assets $ 873,730 $ 93,349 $ (146,236) $ 820,843
============ ========== =========== ============
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 102,986 $ - $ - $ 102,986
Other current liabilities 94,763 - (2,551) 92,212
Current portion of long-term debt 119,853 - - 119,853
------------ ---------- ----------- ------------
Total current liabilities 317,602 - (2,551) 315,051
Long-term debt 317,448 46,971 (46,971) 317,448
Other liabilities 199,781 - (60,950) 138,831
------------ ---------- ----------- ------------
Total liabilities 834,831 46,971 (110,472) 771,330
------------ ---------- ----------- ------------
Minority interest 2,276 - - 2,276
------------ ---------- ----------- ------------
Shareholder's equity:
Class A Common Stock - 10 - 10
Class B Common Stock - 44 - 44
Additional paid-in capital 123,678 78,095 (100,600) 101,173
Accumulated deficit (73,642) (31,771) 64,836 (40,577)
Accumulated other comprehensive loss (13,413) - - (13,413)
------------ ---------- ----------- ------------
Total shareholder's equity 36,623 46,378 (35,764) 47,237
------------ ---------- ----------- ------------
Total liabilities and shareholder's equity $ 873,730 $ 93,349 $ (146,236) $ 820,843
============ ========== =========== ============
66
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 55,753 - - 55,753
------------ ---------- ----------- ------------
Total current assets 509,086 7,377 (46,575) 469,888
Property, plant and equipment, net 182,117 102,768 (24,219) 260,666
Other assets 139,863 21,496 (36,740) 124,619
------------ ---------- ----------- ------------
Total assets $ 831,066 $ 131,641 $ (107,534) $ 855,173
============ ========== =========== ============
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 89,840 $ 6,232 $ - $ 96,072
Other current liabilities 93,897 14,769 (1,242) 107,424
Current portion of long-term debt 16,942 - - 16,942
------------ ---------- ----------- ------------
Total current liabilities 200,679 21,001 (1,242) 220,438
Long-term debt 423,878 45,333 (45,333) 423,878
Other liabilities 177,792 - (25,195) 152,597
------------ ---------- ----------- ------------
Total liabilities 802,349 66,334 (71,770) 796,913
------------ ---------- ----------- ------------
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 100,767 101,090 (100,600) 101,257
Accumulated deficit (66,428) (35,837) 64,836 (37,429)
Accumulated other comprehensive loss (7,752) - - (7,752)
------------ ---------- ----------- ------------
Total shareholder's equity 26,587 65,307 (35,764) 56,130
------------ ---------- ----------- ------------
Total liabilities and shareholder's equity $ 831,066 $ 131,641 $ (107,534) $ 855,173
============ ========== =========== ============
67
Consolidated Statement of Operations
Fiscal 2002
----------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ---------- ----------- ------------
Net sales $ 1,283,547 $ 116,485 $ (116,485) $ 1,283,547
Cost of sales 1,141,214 106,760 (117,710) 1,130,264
------------ ---------- ----------- ------------
Gross profit 142,333 9,725 1,225 153,283
Selling, general and administrative expenses 113,893 930 - 114,823
Restructuring charge 1,893 - - 1,893
Asset impairment expense 593 - - 593
Other expense, net 877 - 1,225 2,102
------------ ---------- ----------- ------------
Operating income 25,077 8,795 - 33,872
Interest expense, net 35,061 2,018 - 37,079
------------ ---------- ----------- ------------
Income (loss) before income tax,
minority interest and extraordinary
loss (9,984) 6,777 - (3,207)
Income tax (benefit) expense (3,994) 2,711 - (1,283)
Minority interest in subsidiary 145 - - 145
------------ ---------- ----------- ------------
Income (loss) before extraordinary
loss (6,135) 4,066 - (2,069)
Extraordinary loss on debt extinguishment 1,079 - - 1,079
------------ ---------- ----------- ------------
Net income (loss) $ (7,214) $ 4,066 $ - $ (3,148)
============ ========== =========== ============
Other comprehensive income (loss):
Net income (loss) $ (7,214) $ 4,066 $ - $ (3,148)
Foreign currency translation
adjustment (912) - - (912)
Minimum pension liability
adjustment (net of income
taxes of ($2,971)) (4,749) - - (4,749)
------------ ---------- ----------- ------------
Comprehensive income (loss) $ (12,875) $ 4,066 $ - $ (8,809)
============ ========== =========== ============
68
Consolidated Statement of Operations
Fiscal 2001
----------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ---------- ----------- ------------
Net sales $ 1,316,672 $ 237,595 $ (237,595) $ 1,316,672
Cost of sales 1,166,458 217,788 (240,440) 1,143,806
------------ ---------- ----------- ------------
Gross profit 150,214 19,807 2,845 172,866
Selling, general and administrative expenses 111,277 1,954 - 113,231
Restructuring charge 504 - - 504
Asset impairment expense 2,244 - - 2,244
Other income, net (12,681) - 2,845 (9,836)
------------ ---------- ----------- ------------
Operating income 48,870 17,853 - 66,723
Interest expense, net 34,806 4,113 - 38,919
------------ ---------- ----------- ------------
Income before income tax and
minority interest 14,064 13,740 - 27,804
Income tax expense 5,724 5,496 - 11,220
Minority interest in subsidiary 68 - - 68
------------ ---------- ----------- ------------
Net income $ 8,272 $ 8,244 $ - $ 16,516
============ ========== =========== ============
Other comprehensive income:
Net income $ 8,272 $ 8,244 $ - $ 16,516
Foreign currency translation
adjustment (393) - - (393)
Minimum pension liability
adjustment (net of income
taxes of $(3,489)) (5,234) - - (5,234)
------------ ---------- ----------- ------------
Comprehensive income $ 2,645 $ 8,244 $ - $ 10,889
============ ========= =========== ============
69
Consolidated Statement of Operations
Fiscal 2000
----------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ---------- ----------- ------------
Net sales $ 1,276,617 $ 234,386 $ (234,386) $ 1,276,617
Cost of sales 1,112,617 214,900 (237,231) 1,090,286
------------ ---------- ----------- ------------
Gross profit 164,000 19,486 2,845 186,331
Selling, general and administrative expenses 110,709 1,850 - 112,559
Restructuring credit 1,153 - - 1,153
Other income, net (24,850) - 19,907 (4,943)
------------ ---------- ----------- ------------
Operating income
76,988 17,636 (17,062) 77,562
Interest expense, net 42,901 9,707 - 52,608
------------ ---------- ----------- ------------
Income before income tax and
extraordinary loss 34,087 7,929 (17,062) 24,954
Income tax expense 13,750 3,171 (6,825) 10,096
------------ ---------- ----------- ------------
Income before extraordinary loss 20,337 4,758 (10,237) 14,858
Extraordinary loss on debt extinguishment
(net of income tax benefit of $209) 313 - - 313
------------ ---------- ----------- ------------
Net income $ 20,024 $ 4,758 $ (10,237) $ 14,545
============ ========== =========== ============
Other comprehensive income:
Net income $ 20,024 $ 4,758 $ (10,237) $ 14,545
Foreign currency translation
adjustment (122) - - (122)
Minimum pension liability
adjustment (net of income taxes of
$470) 705 - - 705
------------ ---------- ----------- ------------
Comprehensive income $ 20,607 $ 4,758 $ (10,237) $ 15,128
============ ========== =========== ============
70
Consolidated Statement of Cash Flows
Fiscal 2002
----------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ---------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 28,469 $ 88,148 $ (88,148) $ 28,469
------------ ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (21,206) - - (21,206)
Due to/from SF Holdings (64) - - (64)
Proceeds from sale of property,
plant and equipment 5,284 - - 5,284
------------ ---------- ----------- ------------
Net cash used in investing activities (15,986) - - (15,986)
------------ ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 200,254 - - 200,254
Repayments under credit facilities (196,144) - - (196,144)
Repayment of intercompany
equipment financing - (88,148) 88,148 -
Repayment of other debt (9,633) - - (9,633)
Borrowings 2,000 - - 2,000
Debt issuance costs (12,549) - - (12,549)
Increase in cash escrow (4,589) - - (4,589)
Decrease in cash escrow 4,597 - - 4,597
------------ ---------- ----------- ------------
Net cash used in financing activities (16,064) (88,148) 88,148 (16,064)
------------ ---------- ----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,581) - - (3,581)
CASH AND CASH EQUIVALENTS, beginning of year 11,616 - - 11,616
------------ ---------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 8,035 $ - $ - $ 8,035
============ ========== =========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 34,426 $ - $ - $ 34,426
============ ========== =========== ============
Income taxes paid $ 880 $ - $ - $ 880
============ ========== =========== ============
71
Consolidated Statement of Cash Flows
Fiscal 2001
----------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ---------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 13,774 $ 17,130 $ (17,130) $ 13,774
------------ ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (31,701) - - (31,701)
Payment for business acquisition (40,665) - - (40,665)
Due to/from SF Holdings 543 - - 543
Proceeds from sale of property,
plant and equipment 120 - - 120
------------ ---------- ----------- ------------
Net cash used in investing activities (71,703) - - (71,703)
------------ ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 66,427 - - 66,427
Repayment of intercompany
equipment financing - (17,130) 17,130 -
Repayments of other debt (715) - - (715)
Debt issuance costs (1,287) - - (1,287)
Increase in cash escrow (17) - - (17)
Decrease in cash escrow 309 - - 309
------------ ---------- ----------- ------------
Net cash provided by (used in)
financing activities 64,717 (17,130) 17,130 64,717
------------ ---------- ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,788 - - 6,788
CASH AND CASH EQUIVALENTS, beginning of year 4,828 - - 4,828
------------ ---------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 11,616 $ - $ - $ 11,616
============ ========== =========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 37,070 $ - $ - $ 37,070
============ ========== =========== ============
Income taxes paid $ 2,484 $ - $ - $ 2,484
============ ========== =========== ============
72
Consolidated Statement of Cash Flows
Fiscal 2000
----------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ---------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 1,952 $ 173,930 $ (173,930) $ 1,952
------------ ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (26,915) - - (26,915)
Payment for business acquisition (12,411) - - (12,411)
Due to/from SF Holdings (30,449) - - (30,449)
Proceeds from sale of property,
plant and equipment 221,474 - - 221,474
------------ ---------- ----------- ------------
Net cash provided by investing activities 151,699 - - 151,699
------------ ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 38,957 - - 38,957
Repayment of intercompany
equipment financing - (173,930) 173,930 -
Repayment of other debt (190,565) - - (190,565)
Redemption of stock appreciation rights (504) - - (504)
Increase in cash escrow (206,318) - - (206,318)
Decrease in cash escrow 206,018 - - 206,018
------------ ---------- ----------- ------------
Net cash used in financing activities (152,412) (173,930) 173,930 (152,412)
------------ ---------- ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,239 - - 1,239
CASH AND CASH EQUIVALENTS, beginning of year 3,589 - - 3,589
------------ ---------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 4,828 $ - $ - $ 4,828
============ ========== =========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 52,147 $ - $ - $ 52,147
============ ========== =========== ============
Income taxes paid $ 3,673 $ - $ - $ 3,673
============ ========== =========== ============
SUPPLEMENTAL NON-CASH INVESTING ACTIVITY:
Note payable associated with
business acquisition $ 2,914 $ - $ - $ 2,914
============ ========== =========== ============
73
27. SUBSEQUENT EVENTS
On October 1, 2002, the Company entered into a loan agreement with the
City of Chicago, to borrow $2.0 million. The loan bears no interest and is
payable in equal installments of $100,000 commencing on February 1, 2004 and
every six months thereafter. As of December 2, 2002, the proceeds from the loan
have not been received by the Company.
On November 21, 2002, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 relating to a proposed
offer to exchange newly issued $110 million senior subordinated notes due 2007
for all of the $110 million Senior Subordinated Notes and a consent solicitation
to eliminate and/or amend certain restrictive covenants and other provisions
governing the $110 million Senior Subordinated Notes. The Company also intends
to solicit consent to eliminate and/or amend certain restrictive covenants and
other provisions governing the $120 million Senior Subordinated Notes. The
Company believes that the exchange offer and consent solicitation will provide
it with the necessary time to execute its business plan and to further evaluate
its strategic alternatives. If the Company is unable to complete the exchange
offer and consent solicitation or refinance, repay or extend the $110 million
Senior Subordinated Notes prior to March 1, 2003, its Senior Credit Facility,
unless otherwise amended, will become due and payable.
The Company is also 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, 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 and consent solicitations of the Company's
outstanding securities. There can be no assurances that any of these strategic
options will be consummated.
During Fiscal 2001, the Company experienced a casualty loss at its
Somerville, Massachusetts facility. Since January 2001 through September 29,
2002 the Company incurred $11.6 million of expenses associated with this
casualty loss. As of September 29, 2002, the Company received $12.5 million
reimbursement under the casualty and business interruption claim. The $0.9
million of proceeds in excess of the expenses, represents the net proceeds from
the business interruption claim, which were recorded as a reduction to cost of
sales during the fourth quarter of Fiscal 2002. During October 2002, the Company
and its insurance provider have agreed to a final settlement of this claim
whereby the Company will receive an additional $3.8 million of business
interruption proceeds. This amount will be recorded upon receipt, net of any
expenses, which is expected to occur during the first six months of Fiscal 2003.
74
INDEX TO FINANCIAL STATEMENT SCHEDULE
Page
Independent Auditors' Report 76
Schedule II - Valuation and Qualifying Accounts 77
75
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Sweetheart Holdings Inc.
We have audited the consolidated financial statements of Sweetheart
Holdings Inc. and Subsidiaries (the "Company") as of September 29, 2002 and
September 30, 2001, and for each of the three fiscal years in the period ended
September 29, 2002, and have issued our report thereon dated December 2, 2002;
such consolidated financial statements and report are included in this Form
10-K. Our audits also included the financial statement schedule listed in the
accompanying index. This 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 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 2, 2002
76
SCHEDULE II
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
-----------------------------
Balance at
beginning Charged to Charged Balance at
of costs and to other end of
Classifications period expenses accounts (1) Deductions (2) period
- -------------------------------- ---------- ------------ --------------- -------------- ----------
Allowance for Doubtful Accounts:
Fiscal 2002 $ 3,395 $ 3,708 $ (3,308) $ (54) $ 3,741
Fiscal 2001 3,531 1,930 (1,077) (989) 3,395
Fiscal 2000 3,954 4,138 (373) (4,188) 3,531
(1) Includes recoveries on accounts previously written-off, translation
adjustments and reclassifications.
(2) Accounts written-off.
Balance at
beginning Balance at
of Additions end of
Classifications period Charged to costs and expenses Deductions (3) period
- -------------------------------- ---------- ----------------------------- -------------- ----------
Inventory Allowances:
Fiscal 2002 $ 12,744 $ 2,506 $ (4,474) $ 10,776
Fiscal 2001 18,994 5,731 (11,981) 12,744
Fiscal 2000 16,110 9,959 (7,075) 18,994
(3) Inventory written-off.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 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, thereunto duly authorized, in the City of Owings
Mills, State of Maryland, on December 9, 2002.
SWEETHEART HOLDINGS INC.
(Registrant)
By: /s/ DENNIS MEHIEL
------------------
Dennis Mehiel
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on December 9, 2002, by the following persons in the
capacities indicated:
Signature Title(s)
------------------------ ------------------------------------
/s/ Dennis Mehiel Chairman and Chief Executive Officer
----------------- (Principal Executive Officer)
Dennis Mehiel
/s/ Thomas Uleau Chief Operating Officer and
---------------- Vice Chairman
Thomas Uleau
/s/ Hans H. Heinsen Senior Vice President - Finance,
------------------- Chief Financial Officer
Hans H. Heinsen (Principal Financial and
Accounting Officer)
/s/ Gail Blanke Director
---------------
Gail Blanke
/s/ John A. Catsimatidis Director
------------------------
John A. Catsimatidis
/s/ Alfred B. DelBello Director
----------------------
Alfred B. DelBello
/s/ Chris Mehiel Director
----------------
Chris Mehiel
/s/ Edith V. Mehiel Director
-------------------
Edith V. Mehiel
/s/ Alan D. Scheinckman Director
-----------------------
Alan D. Scheinckman
/s/ G. William Seawright Director
------------------------
G. William Seawright
78
SECTION 302 10-K CERTIFICATION
I, Dennis Mehiel, certify that:
1. I have reviewed this annual report on Form 10-K of Sweetheart
Holdings Inc;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusion about the
effectiveness of the disclosure controls and procedures base on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditor
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regards to
significant deficiencies and material weakness.
Date: December 9, 2002 SWEETHEART HOLDINGS INC.
----------------
(Registrant)
By: /s/ DENNIS MEHIEL
----------------------
Dennis Mehiel
Chairman and Chief Executive Officer
79
SECTION 302 10-K CERTIFICATION
I, Hans H. Heinsen, certify that:
1. I have reviewed this annual report on Form 10-K of Sweetheart
Holdings Inc;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusion about the
effectiveness of the disclosure controls and procedures base on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditor
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regards to
significant deficiencies and material weakness.
Date: December 9, 2002 SWEETHEART HOLDINGS INC.
----------------
(Registrant)
By: /s/ Hans H. Heinsen
-------------------
Senior Vice President - Finance,
Chief Financial Officer (Principal
Financial and Accounting Officer)
80