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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Thirteen Weeks Ended December 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 (IRS Employer
incorporation or organization) Identification No.)
10100 Reisterstown Road, Owings Mills, Maryland 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 410/363-1111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock
as of February 10, 2003:
Sweetheart Holdings Inc. Class A Common Stock, $0.01 par value- 1,046,000 shares
Sweetheart Holdings Inc. Class B Common Stock, $0.01 par value- 4,393,200 shares
* The Registrant is the guarantor of the 12.0% Senior Subordinated Notes due
2003 of Sweetheart Cup Company Inc., a wholly owned subsidiary of the
Registrant.
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
December 29, September 29,
2002 2002
---------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 9,695 $ 8,035
Cash in escrow 7 -
Receivables, less allowances of $3,731 and $3,741 142,141 152,541
Inventories 199,001 219,427
Deferred income taxes 20,873 20,841
Assets held for sale 5,275 5,275
Other current assets 34,688 35,736
------------ -------------
Total current assets 411,680 441,855
Property, plant and equipment, net 248,123 252,491
Deferred income taxes 31,602 29,879
Spare parts 13,525 13,428
Goodwill 41,232 41,232
Due from SF Holdings 17,962 17,962
Other assets 22,802 23,996
------------ -------------
Total assets $ 786,926 $ 820,843
============ =============
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 72,615 $ 102,986
Accrued payroll and related costs 36,466 38,009
Other current liabilities 50,463 44,000
Current portion of deferred gain on sale of assets 10,203 10,203
Current portion of long-term debt 119,866 119,853
------------ -------------
Total current liabilities 289,613 315,051
Commitments and contingencies (See Notes)
Long-term debt 309,529 317,448
Deferred gain on sale of assets 70,332 72,883
Other liabilities 68,991 65,948
------------ -------------
Total liabilities 738,465 771,330
------------ -------------
Minority interest in subsidiary 2,290 2,276
------------ -------------
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 101,183 101,173
Accumulated deficit (39,149) (40,577)
Accumulated other comprehensive loss (15,917) (13,413)
------------ -------------
Total shareholder's equity 46,171 47,237
------------ -------------
Total liabilities and shareholder's equity $ 786,926 $ 820,843
============ =============
See accompanying Notes to Consolidated Financial Statements.
2
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND OTHER COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
For the For the
Thirteen Thirteen
weeks ended weeks ended
December 29, December 30,
2002 2001
---------------- -----------------
Net sales $ 320,345 $ 320,875
Cost of sales 284,477 280,444
------------ -------------
Gross profit 35,868 40,431
Selling, general and administrative expenses 26,196 29,062
Other income, net (2,195) (3,785)
------------ -------------
Operating income 11,867 15,154
Interest expense, net of interest income of $37
and $32 9,464 9,186
------------ -------------
Income before income tax and minority interest 2,403 5,968
Income tax expense 961 2,407
Minority interest in subsidiary 14 33
------------ -------------
Net income $ 1,428 $ 3,528
============ =============
Other comprehensive income (loss):
Net income $ 1,428 $ 3,528
Foreign currency translation adjustment (167) (139)
Minimum pension liability adjustment (net
of income tax of ($1,558) and ($1,561)) (2,337) (2,342)
------------ -------------
Comprehensive income (loss) $ (1,076) $ 1,047
============ =============
See accompanying Notes to Consolidated Financial Statements.
3
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the For the
Thirteen weeks ended Thirteen weeks ended
December 29, December 30,
2002 2001
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,428 $ 3,528
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,841 8,679
Amortization of deferred gain (2,551) (2,568)
Gain on sale of assets - (3,045)
Changes in operating assets and liabilities:
Receivables 10,400 4,320
Inventories 20,426 12,947
Other current assets 1,048 (221)
Other assets 87 31
Accounts payable (30,371) (19,804)
Accrued payroll and related costs (1,543) (3,744)
Other current liabilities 6,463 5,363
Other liabilities (1,263) (3,774)
Other, net 462 (50)
------------ -----------
Net cash provided by operating activities 12,427 1,662
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (2,492) (7,912)
Proceeds from sale of property, plant and equipment - 5,233
------------ -----------
Net cash used in investing activities (2,492) (2,679)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under credit facilities (5,965) 3,307
Repayments of other debt (2,026) (1,527)
Debt issuance costs (277) -
Increase in cash in escrow (94) (5,998)
Decrease in cash in escrow 87 765
------------ -----------
Net cash used in financing activities (8,275) (3,453)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,660 (4,470)
CASH AND CASH EQUIVALENTS, beginning of period 8,035 11,616
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 9,695 $ 7,146
============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 3,367 $ 3,179
============ ===========
Income taxes paid $ 13 $ 893
============ ===========
See accompanying Notes to Consolidated Financial Statements.
4
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
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 for the
thirteen weeks ended December 30, 2001 have been restated.
The information included in the foregoing interim financial statements
of the Company is unaudited but, in the opinion of management, includes all
adjustments (consisting only of normal recurring adjustments and accruals) which
the Company considers necessary for a fair presentation of the operating results
for these periods. Results for the interim periods are not necessarily
indicative of results for the entire year. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the fiscal year ended September 29, 2002.
(2) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. 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. 142
effective September 30, 2002 and has ceased amortization of goodwill as of that
date.
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 adopted SFAS No. 143 effective September 30, 2002. The adoption of
SFAS No. 143 did not have an impact on the 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
5
Company has adopted SFAS No. 144 effective September 30, 2002. The adoption of
SFAS No. 144 did not have an impact on the 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. The adoption of
SFAS No. 145 did not have an impact on the 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.
(3) INVENTORIES
The components of inventories are as follows (in thousands):
(Unaudited)
December 29, September 29,
2002 2002
---------------- -----------------
Raw materials and supplies $ 54,306 $ 57,305
Finished products 133,591 150,925
Work in progress 11,104 11,197
----------- ------------
Total inventories $ 199,001 $ 219,427
=========== ============
(4) GOODWILL
In accordance with SFAS No. 142, prior period earnings were not
restated. A reconciliation of the previously reported net income during the
thirteen weeks ended December 30, 2001 to the amounts adjusted for the reduction
of goodwill amortization expense, net of related income tax effect, is as
follows (in thousands):
For the Thirteen For the Thirteen
weeks ended weeks ended
December 29, December 30,
2002 2001
-------------------- --------------------
Net income, as reported $ 1,428 $ 3,528
Add back: goodwill amortization,
net of tax - 302
--------- --------
Net income, adjusted $ 1,428 $ 3,830
========= ========
The Company has adopted SFAS No. 142 effective September 30, 2002. SFAS
No. 142 requires the discontinuance of amortization of goodwill and intangible
assets with indefinite useful lives, but requires instead that they be tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. In addition, SFAS No. 142 includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. SFAS No. 142 also requires the Company to complete a transitional
goodwill impairment test as of September 30, 2002 no later than March 30, 2003.
Any transitional impairment loss would be recognized as a cumulative effect of a
change in accounting principle in the statement of income in the thirteen weeks
ended March 30, 2003.
6
As of December 29, 2002, the Company has unamortized goodwill of $41.2
million and intangible assets of $2.6 million. Goodwill amortization was $0.5
million during the thirteen weeks ended December 30, 2001. Amortization expense
related to intangible assets was $0.2 million during the thirteen weeks ended
December 29, 2002 and $0.3 million during the thirteen weeks ended December 30,
2001 and is expected to range from approximately $0.2 million to $0.3 million
each year between Fiscal 2004 to Fiscal 2008.
Changes to goodwill and intangible assets during the thirteen weeks
ended December 29, 2002, including the effects of adopting the new accounting
standard, follow (in thousands):
Intangible
Goodwill Assets
---------------- ----------------
Balance at September 30, 2002,
net of accumulated amortization $ 41,232 $ 2,812
Additions during the period - 13
Amortization expense - (218)
---------- ---------
Balance at December 29, 2002,
net of accumulated amortization $ 41,232 $ 2,607
========== =========
(5) DEBT
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. The proceeds from the loan were received on January
2, 2003 and the Company recorded a liability as of that date.
On November 21, 2002, as amended on January 16, 2003 and further
amended on January 27, 2003, 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 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.
(6) RELATED PARTY TRANSACTIONS
All of the affiliates (other than Fibre Marketing Group, LLC ("Fibre
Marketing"), the successor of Fibre 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 December 29, 2002 and December 30, 2001, the Company has a loan
receivable from its Chief Executive Officer of $0.3 million plus accrued
interest at 5.06%. During the thirteen weeks ended December 29, 2002, the
Company forgave $13,872 of interest associated with the loan to its Chief
Executive Officer. This loan is payable upon demand. At December 29, 2002 and
December 30, 2001, the Company has a loan receivable from its
7
Chief Operating Officer of $0.1 million and $0.2 million, respectively, plus
accrued interest at 5.39%.
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 December 29, 2002 and December 30, 2001, $0.8
million and $1.2 million, respectively, is due to the Company.
During the thirteen weeks ended December 29, 2002, the Company
purchased $2.9 million of corrugated containers from Box USA Holdings, Inc.
("Box USA"), a converter and seller of interior packaging, corrugated sheets and
corrugated containers, in which the Company's Chief Executive Officer
beneficially owns more than 10% of its outstanding capital stock. During the
thirteen weeks ended December 29, 2002, the Company purchased $0.2 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
December 29, 2002 is $0.3 million due to Box USA. Other purchases from
affiliates during the thirteen weeks ended December 29, 2002 were not
significant.
During the thirteen weeks ended December 29, 2002, the Company sold
$2.0 million of scrap paper and plastic to Fibre Marketing. Included in accounts
receivable as of December 29, 2002 is $1.1 million due from Fibre Marketing.
Other sales to affiliates during the thirteen weeks ended December 29, 2002 were
not significant.
During the thirteen weeks ended December 30, 2001, the Company
purchased $2.6 million of corrugated containers from Box USA and $0.3 million of
travel services from Emerald Lady. Included in accounts payable as of December
30, 2001 is $0.5 million due to Box USA. Other purchases from affiliates during
the thirteen weeks ended December 30, 2001 were not significant.
During the thirteen weeks ended December 30, 2001, the Company sold
$1.8 million of scrap paper and plastic to Fibre Marketing. Included in accounts
receivable as of December 30, 2001 is $0.9 million due from Fibre Marketing.
Other sales to affiliates during the thirteen weeks ended December 30, 2001 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 the thirteen weeks
ended December 29, 2002 and December 30, 2001, rental payments under this lease
were $0.4 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 the thirteen weeks ended December 29, 2002 and December 30, 2001, rental
payments under this lease were $0.9 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.
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 insignificant and $0.1 million during the thirteen weeks
ended December 29, 2002 and December 30, 2001, respectively.
8
(7) 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 $10,000
and $24,000 for the thirteen weeks ended December 29, 2002 and December 30,
2001, respectively.
(8) ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows
(in thousands):
(Unaudited)
December 29, September 29,
2002 2002
-------------- ---------------
Foreign currency translation adjustment $ (2,890) $ (2,723)
Minimum pension liability adjustment (13,027) (10,690)
--------- ---------
Accumulated other comprehensive loss $(15,917) $(13,413)
========= =========
(9) BUSINESS INTERRUPTION CLAIM
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 agreed to a final settlement of this claim whereby
the Company would receive an additional $3.8 million of business interruption
proceeds. As December 27, 2002, this amount was received and recorded as a
reduction of cost of sales, net of $0.2 million of expenses.
(10) OTHER INCOME, NET
During the thirteen weeks ended December 29, 2002, the Company
realized $2.6 million due to the amortization of the deferred gain in
conjunction with a sale-leaseback transaction. In Fiscal 2000, the Company sold
certain production equipment in connection with a sale-leaseback transaction
(the "Sale-Leaseback Transaction"). This gain were partially offset by $0.3
million of costs associated with the rationalization, consolidation and process
improvement of the Company's manufacturing facilities.
During the thirteen weeks ended December 30, 2001, the Company realized
$2.6 million due to the amortization of the deferred gain in conjunction with a
sale-leaseback transaction. Also, during the thirteen weeks ended December 30,
2001, the Company recognized a $3.0 million gain in association with the sale of
a manufacturing facility in Manchester, New Hampshire. These gains were
partially offset by $1.5 million of costs associated with the rationalization,
consolidation and process improvement of the Company's manufacturing facilities.
(11) CONTINGENCIES
The Company is subject to legal proceedings and other claims arising in
the ordinary course of its business.
9
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.
(12) 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):
Consolidated Balance Sheet
December 29, 2002
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 9,695 $ - $ - $ 9,695
Cash in escrow 7 - - 7
Receivables 189,851 - (47,710) 142,141
Raw materials inventory 54,306 - - 54,306
Work in progress inventory 133,591 - - 133,591
Finished goods inventory 11,104 - - 11,104
Assets held for sale - 5,275 - 5,275
Other current assets 55,561 2,584 (2,584) 55,561
----------- ----------- ------------ -------------
Total current assets 454,115 7,859 (50,294) 411,680
Property, plant and equipment, net 248,123 - - 248,123
Deferred income taxes 42,938 (21,073) 9,737 31,602
Other assets 95,521 107,521 (107,521) 95,521
----------- ----------- ------------ -------------
Total assets $ 840,697 $ 94,307 $ (148,078) $ 786,926
=========== =========== ============ =============
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 72,615 $ - $ - $ 72,615
Other current liabilities 99,716 - (2,584) 97,132
Current portion of long-term debt 119,866 - - 119,866
----------- ----------- ------------ -------------
Total current liabilities 292,197 - (2,584) 289,613
Long-term debt 309,529 47,710 (47,710) 309,529
Other liabilities 201,343 - (62,020) 139,323
----------- ----------- ------------ -------------
Total liabilities 803,069 47,710 (112,314) 738,465
----------- ----------- ------------ -------------
Minority interest 2,290 - - 2,290
----------- ----------- ------------ -------------
Shareholder's equity:
Class A Common Stock - 10 - 10
Class B Common Stock - 44 - 44
Additional paid-in capital 123,688 78,095 (100,600) 101,183
Accumulated deficit (72,433) (31,552) 64,836 (39,149)
Accumulated other comprehensive loss (15,917) - - (15,917)
----------- ----------- ------------ -------------
Total shareholder's equity 35,338 46,597 (35,764) 46,171
----------- ----------- ------------ -------------
Total liabilities and shareholder's equity $ 840,697 $ 94,307 $ (148,078) $ 786,926
=========== =========== ============ =============
10
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
=========== =========== ============ =============
11
Consolidated Statement of Income
For the Thirteen Weeks Ended December 29, 2002
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
Net sales $ 320,345 $ - $ - $ 320,345
Cost of sales 284,477 - - 284,477
----------- ----------- ------------ -------------
Gross profit 35,868 - - 35,868
Selling, general and administrative expenses 26,196 - - 26,196
Other income, net (2,195) - - (2,195)
----------- ----------- ------------ -------------
Operating income 11,867 - - 11,867
Interest expense (income), net 9,829 (365) - 9,464
----------- ----------- ------------ -------------
Income before income tax and
minority interest 2,038 365 - 2,403
Income tax expense 815 146 - 961
Minority interest in subsidiary 14 - - 14
----------- ----------- ------------ -------------
Net income $ 1,209 $ 219 $ - $ 1,428
=========== =========== ============ =============
Other comprehensive income (loss):
Net income $ 1,209 $ 219 $ - $ 1,428
Foreign currency translation
adjustment (167) - - (167)
Minimum pension liability
adjustment (net of income tax of
($1,558)) (2,337) - - (2,337)
----------- ----------- ------------ -------------
Comprehensive income (loss) $ (1,295) $ 219 $ - $ (1,076)
=========== =========== ============ =============
12
Consolidated Statement of Income
For the Thirteen Weeks Ended December 30, 2001
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
Net sales $ 320,875 $ 57,896 $ (57,896) $ 320,875
Cost of sales 285,988 53,063 (58,607) 280,444
----------- ----------- ------------ -------------
Gross profit 34,887 4,833 711 40,431
Selling, general and administrative expenses 28,605 457 - 29,062
Other income, net (4,496) - 711 (3,785)
----------- ----------- ------------ -------------
Operating income 10,778 4,376 - 15,154
Interest expense, net 7,765 1,421 - 9,186
----------- ----------- ------------ -------------
Income before income tax and
minority interest 3,013 2,955 - 5,968
Income tax expense 1,226 1,181 - 2,407
Minority interest in subsidiary 33 - - 33
----------- ----------- ------------ -------------
Net income $ 1,754 $ 1,774 $ - $ 3,528
=========== =========== ============ =============
Other comprehensive income (loss):
Net income $ 1,754 $ 1,774 $ - $ 3,528
Foreign currency translation
adjustment (139) - - (139)
Minimum pension liability
adjustment (net of income tax
of $(1,561)) (2,342) - - (2,342)
----------- ----------- ------------ -------------
Comprehensive income (loss) $ (727) $ 1,774 $ - $ 1,047
=========== =========== ============ =============
13
Consolidated Statement of Cash Flows
For the Thirteen Weeks Ended December 29, 2002
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 12,427 $ - $ - $ 12,427
----------- ----------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (2,492) - - (2,492)
----------- ----------- ------------ -------------
Net cash used in investing activities (2,492) - - (2,492)
----------- ----------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under credit facilities (5,965) - - (5,965)
Repayment of other debt (2,026) - - (2,026)
Debt issuance costs (277) - - (277)
Increase in cash escrow (94) - - (94)
Decrease in cash escrow 87 - - 87
----------- ----------- ------------ -------------
Net cash used in financing activities (8,275) - - (8,275)
----------- ----------- ------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,660 - - 1,660
CASH AND CASH EQUIVALENTS, beginning of period 8,035 - - 8,035
----------- ----------- ------------ -------------
CASH AND CASH EQUIVALENTS, end of period $ 9,695 $ - $ - $ 9,695
=========== =========== ============ =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 3,367 $ - $ - $ 3,367
=========== =========== ============ =============
Income taxes paid $ 13 $ - $ - $ 13
=========== =========== ============ =============
14
Consolidated Statement of Cash Flows
For the Thirteen Weeks Ended December 30, 2001
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 1,662 $ 1,170 $ (1,170) $ 1,662
----------- ----------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment ( 7,912) - - ( 7,912)
Proceeds from sale of property, plant
and equipment 5,233 - - 5,233
----------- ----------- ------------ -------------
Net cash used in investing activities (2,679) - - (2,679)
----------- ----------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 3,307 - - 3,307
Repayment of intercompany equipment financing - (1,170) 1,170 -
Repayments of other debt (1,527) - - (1,527)
Increase in cash escrow (5,998) - - (5,998)
Decrease in cash escrow 765 - - 765
----------- ----------- ------------ -------------
Net cash used in financing activities (3,453) (1,170) 1,170 (3,453)
----------- ----------- ------------ -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,470) - - (4,470)
CASH AND CASH EQUIVALENTS, beginning of period 11,616 - - 11,616
----------- ----------- ------------ -------------
CASH AND CASH EQUIVALENTS, end of period $ 7,146 $ - $ - $ 7,146
=========== =========== ============ =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 3,179 $ - $ - $ 3,179
=========== =========== ============ =============
Income taxes paid $ 893 $ - $ - $ 893
=========== =========== ============ =============
(13) SUBSEQUENT EVENT
On January 16, 2003, the Company entered into an agreement for the sale
of the Somerville, Massachusetts facility for a purchase price of approximately
$10.1 million. This facility is classified as an asset held for sale. The
closing is expected to occur on or before January 16, 2004. There can be no
assurance that the sale will be consummated.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Forward-looking statements in this filing, including those in the Notes
to Consolidated Financial Statements, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties and actual
results could differ materially. Such risks and uncertainties include, but are
not limited to, general economic and business conditions, competitive market
pricing, increases in raw material costs, energy costs and other manufacturing
costs, fluctuations in demand 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.
15
The Company's product offerings cover a broad range within the
industry, including (i) paper, plastic and foam foodservice products, primarily
cups, lids, plates, bowls, plastic cutlery, food trays and food containers; (ii)
tissue and specialty foodservice products, primarily napkins, table covers,
placemats and lunch bags; and (iii) food packaging products, primarily
containers for the dairy and food processing industries. To enhance product
sales, the Company designs, manufactures and leases container filling and
lidding equipment to dairies and other food processors to package food items in
the Company's containers at customers' plants. Types of products packaged in the
Company's machines include: ice cream, factory-filled jacketed ice cream cones,
cottage cheese, yogurt and squeeze-up desserts. The Company also sells paper
converting equipment used primarily in the manufacture of paper cups and food
containers.
The Company sells its products to institutional foodservice and
consumer customers, including large national accounts, located throughout the
United States, Canada and Mexico. The Company has developed and maintained
long-term relationships with many of its customers. The Company's institutional
foodservice customers include (i) major foodservice distributors, (ii) national
accounts, including quick service restaurants and catering services, and (iii)
schools, hospitals and (iv) other major institutions. The Company's consumer
customers include (i) supermarkets, (ii) mass merchandisers, (iii) warehouse
clubs, (iv) party good stores and (v) other retailers. The Company's food
packaging customers include (i) national and regional dairy and (ii) food
companies.
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 were under
common control, and therefore, the transaction has been accounted for in a
manner similar to a pooling-of-interests. The accompanying financial information
for the thirteen weeks ended December 30, 2001 has been restated.
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.
16
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.
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.
Goodwill is not being amortized commencing with the thirteen weeks ended
December 29, 2002 in accordance with the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets. The initial transitional goodwill impairment test
will be completed, as required, by March 30, 2003 and any transitional
impairment loss reflected as a cumulative effect of a change in accounting
principle in the thirteen weeks ended March 30, 2003.
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 income.
Contingencies - The Company is subject to litigation in the ordinary
course of business and also to certain other contingencies. 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 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. The proceeds from the loan were received on January
2, 2003 and the Company recorded a liability as of that date.
On November 21, 2002, as amended on January 16, 2003 and further
amended on January 27, 2003, 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 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
17
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 evaluating various strategic options which may include a
restructuring of its debt and capital structure, including, among other things,
the public sale or private placement of debt or equity securities, joint venture
transactions, sales of assets or the business, 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.
In this regard, the Company is considering the sale of the business or
the sale of certain brands and related assets. These brands and related assets
generated net sales and earning before interest, taxes and deprecation for the
fiscal year ended September 29, 2002 of approximately $220 million and $25
million, respectively. There can be no assurances that the Company will receive
acceptable offers or that the Company will proceed with any such sale.
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 agreed to a final settlement of this claim whereby
the Company would receive an additional $3.8 million of business interruption
proceeds. As December 27, 2002, this amount was received and recorded as a
reduction of cost of sales, net of $0.2 million of expenses.
On January 16, 2003, the Company has entered into an agreement for the
sale of the Somerville, Massachusetts facility for a purchase price of
approximately $10.1 million. This facility is classified as an asset held for
sale. The closing is expected to occur on or before January 16, 2004. There can
be no assurance that the sale will be consummated.
Thirteen Weeks Ended December 29, 2002 Compared to Thirteen Weeks Ended
December 30, 2001 (Unaudited)
Net sales decreased $0.6 million, or 0.2%, to $320.3 million for the
thirteen weeks ended December 29, 2002 compared to $320.9 million for the
thirteen weeks ended December 30, 2001, reflecting a 0.9% decrease in sales
volume and a 0.7% increase in average realized sales prices. Sales volume
decreased as a result of lower demand from consumer customers which was
partially offset by increased demand from institutional customers. Average
realized sales prices increased as a result of increased raw material costs and
a change in product mix.
Gross profit decreased $4.5 million, or 11.1%, to $35.9 million for the
thirteen weeks ended December 29, 2002 compared to $40.4 million for the
thirteen weeks ended December 30, 2001. As a percentage of net sales, gross
profit decreased to 11.2% for the thirteen weeks ended December 29, 2002 from
12.6% for the thirteen weeks ended December 30, 2001. Gross profit decreased as
a result of raw materials' costs increasing at faster rates than average
realized selling prices combined with a shift towards a lower margin product
mix.
Selling, general and administrative expenses decreased $2.9 million, or
10.0%, to $26.2 million for the thirteen weeks ended December 29, 2002 compared
to $29.1 million for the thirteen weeks ended December 30, 2001. This decrease
resulted primarily from (i) a $1.3 million reduction in salaries and related
fringe benefits which was partially due to the elimination of 34 positions in
Fiscal 2002, (ii) $0.8 million lower deprecation, (iii) $0.6 million lower bad
debt expense, (iv) $0.5 million decrease in goodwill amortization due to the
adoption of SFAS No. 142.
Other income, net decreased $1.6 million, or 42.1%, to $2.2 million for
the thirteen weeks ended December 29, 2002 compared to $3.8 million for the
thirteen weeks ended December 30, 2001. This decrease is primarily attributable
to the $3.0 million gain recognized in the thirteen weeks ended December 30,
2001 associated with the sale of the Company's manufacturing facility in
Manchester, New Hampshire. During the thirteen weeks ended
18
December 29, 2002, the Company incurred $1.6 million in lower costs in
connection with the rationalization, consolidation and improvement of the
Company's manufacturing facilities.
Operating income decreased $3.3 million, or 21.7%, to $11.9 million for
the thirteen weeks ended December 29, 2002 compared to income of $15.2 million
for the thirteen weeks ended December 30, 2001, due to the reasons stated above.
Interest expense, net increased $0.3 million, or 3.3%, to $9.5 million
for the thirteen weeks ended December 29, 2002 compared to $9.2 million for the
thirteen weeks ended December 30, 2001. This increase is attributed to increased
amortization expense associated with the amortization of debt issuance costs and
the increase in interest on the $110 Senior Subordinated Notes from 10.5% to
12.0% which was effective March 1, 2002. These increases were partially offset
by lower interest rates and lower average balances under the credit facilities.
Income tax expense decreased $1.4 million, or 58.3%, to $1.0 million
for the thirteen weeks ended December 29, 2002 compared to an expense of $2.4
million for the thirteen weeks ended December 30, 2001 as a result of a lower
pre-tax income. The effective rates for the thirteen weeks ended December 29,
2002 and December 30, 2001 were 40%, respectively.
Minority interest in subsidiary decreased $19,000, or 57.6%, to $14,000
for the thirteen weeks ended December 29, 2002 compared to $33,000 for the
thirteen weeks ended December 30, 2001. This amount represents the Company's 20%
ownership of Global Cup, S.A. De C.V. and its subsidiaries' ("Global Cup")
income.
Net income decreased $2.1 million, or 60.0%, to $1.4 million for the
thirteen weeks ended December 29, 2002 compared to $3.5 million for the thirteen
weeks ended December 30, 2001, due to the reasons stated 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 the thirteen weeks ended December 29, 2002, the Company
funded its capital expenditures from a combination of cash generated from
operations and revolving credit borrowings. During the remainder of Fiscal 2003,
the Company intends to continue to rely on this combination of funding and asset
sales for its 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, as amended on January 16, 2003 and further
amended on January 27, 2003, 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 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.
19
Net cash provided by operating activities for the thirteen weeks ended
December 29, 2002 was $12.4 million compared to $1.7 million for the thirteen
weeks ended December 30, 2001. This increase is primarily due to a reduction in
inventories and decreased account receivable balances which resulted from lower
sales. These increases were partially offset by a reduction in accounts payable.
Net cash used in investing activities for the thirteen weeks ended
December 29, 2002 was $2.5 million compared to $2.7 million for the thirteen
weeks ended December 30, 2001. This decrease is primarily due to lower capital
spending and the receipt of net proceeds from the sale of the Manchester, New
Hampshire facility in the thirteen weeks ended December 30, 2001.
Net cash used in financing activities for the thirteen weeks ended
December 29, 2002 was $8.3 million compared to $3.5 million for the thirteen
weeks ended December 30, 2001. This increase is primarily due to lower
borrowings under the Senior Credit Facility.
Working capital decreased $4.7 million to $122.1 million at December
29, 2002 from $126.8 million at September 29, 2002. This decrease resulted from
current assets decreasing $30.2 million and the current liabilities decreasing
$25.5 million. The decrease in current assets resulted primarily from a
reduction in accounts receivables due to lower sales and a reduction in
inventories due to a decrease in production. The decrease in current liabilities
resulted primarily from a reduction in accounts payables due to lower
inventories.
Capital expenditures for the thirteen weeks ended December 29, 2002
were $2.5 million compared to $7.9 million for the thirteen weeks ended December
30, 2001. Capital expenditures for the thirteen weeks ended December 29, 2002
included $1.7 million for new production equipment; $0.6 million associated with
the implementation of the Company's consolidation program; and $0.2 million
primarily for routine capital improvements. Funding for the capital expenditures
for the thirteen weeks ended December 29, 2002 was primarily provided by cash
generated from operations and revolving credit borrowings. During the remainder
of Fiscal 2003, the Company intends to continue to rely on this combination of
funding and asset sales for its capital expenditures.
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. The proceeds from the loan were received on January
2, 2003 and the Company recorded a liability as of that date.
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
December 29, 2002 and September 29, 2002, $1.8 million and $1.9 million was
outstanding at an annual interest rate of 3.0%, respectively. During the term of
the loan, the rate is subject to a review by the Department of Business and
Economic Development by January 31 of each year.
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
December 29, 2002, the weighted average annual interest rate for the Senior
Credit Facility was 4.21%. 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 December 29, 2002, $29.6
million was available under the Senior Credit Facility. As of December 29, 2002,
LIBOR was 1.36% and the bank's base rate was 4.75%.
The Senior Credit Facility contains various covenants that limit, or
restrict, among other things,
20
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 $19.1 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 December 29, 2002, the weighted average annual
interest rate for the Canadian Credit Facility was 4.39%. As of December 29,
2002, Cdn $3.5 million (approximately US $2.2 million) was available under the
revolving facility and the term loan balance was Cdn $11.8 million
(approximately US $7.5 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, including borrowings under the Senior Credit
Facility, and are pari passu with the $120 million 9 1/2% 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 9 1/2% 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 9 1/2% 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 9 1/2%
Senior Subordinated Notes provide that
21
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 9 1/2% 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 9 1/2% 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.
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 agreed to a final settlement of this claim whereby
the Company would receive an additional $3.8 million of business interruption
proceeds. As December 27, 2002, this amount was received and recorded as a
reduction of cost of sales, net of $0.2 million of expenses.
On January 16, 2003, the Company has entered into an agreement for the
sale of the Somerville, Massachusetts facility for a purchase price of
approximately $10.1 million. This facility is classified as an asset held for
sale. The closing is expected to occur on or before January 16, 2004. There can
be no assurance that the sale will be consummated.
The Company is subject to legal proceedings and other claims arising in
the ordinary course of its business. The Company maintains insurance coverage of
types and in amounts which it believes to be adequate and believes that it is
not presently a party to any litigation, the outcome of which could reasonably
be expected to have a material adverse effect on its financial condition or
results of operations.
Management believes that cash generated by operations, 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.
The Company is evaluating various strategic options which may include
a restructuring of its debt and capital structure, including, among other
things, the public sale or private placement of debt or equity securities, joint
venture transactions, sales of assets or the business, 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.
In this regard, the Company is considering the sale of the business or
the sale of certain brands and related assets. These brands and related assets
generated net sales and earning before interest, taxes and deprecation for the
fiscal year ended September 29, 2002 of approximately $220 million and $25
million, respectively. There can be no assurances that the Company will receive
acceptable offers or that the Company will proceed with any such sale.
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.
22
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk in the ordinary course of
business, which consists primarily of interest rate risk associated with its
variable rate debt. All borrowing under the Senior Credit Facility and Canadian
Credit Facility, each of which contains a revolving and term credit facility,
bear interest at a variable rate. Borrowings under the Senior Credit Facility,
at the Company's election, bear interest at either (i) a bank's base rate
revolving loan reference rate plus 0.5% or (ii) LIBOR plus 2.5%. Borrowings
under the Canadian Credit Facility bear interest at an index rate plus 1.75%
with respect to the revolving credit borrowings and an index rate plus 2.00%
with respect to the term loan borrowings. As of December 29, 2002, the
outstanding indebtedness under the Senior Credit Facility was $179.5 million and
the Canadian Credit Facility was $14.2 million in U.S. dollars. As of December
29, 2002, $29.6 million was available under the Senior Credit Facility and Cdn
$3.5 million (approximately US $2.2 million) was available under Canadian Credit
Facility. Based upon these amounts, the annual net income would change by
approximately $1.2 million for each one percentage point change in the interest
rates applicable to the variable rate debt. The level of the exposure to
interest rate movements may fluctuate significantly as a result of changes in
the amount of indebtedness outstanding under the revolving credit facilities.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Financial Officer
(b) Reports on Form 8-K:
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its duly authorized officer and principal financial officer.
SWEETHEART HOLDINGS INC.
(registrant)
Date: February 10, 2003 By: /s/ Hans H. Heinsen
----------------- -------------------
Hans H. Heinsen
Senior Vice President - Finance,
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
24
SECTION 302 10-Q CERTIFICATION
I, Dennis Mehiel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sweetheart
Holdings Inc;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the consolidated financial statements, and
other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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 quarterly 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: February 10, 2003 SWEETHEART HOLDINGS INC.
-----------------
(Registrant)
By: /s/ DENNIS MEHIEL
------------------
Dennis Mehiel
Chairman and Chief Executive Officer
25
SECTION 302 10-Q CERTIFICATION
I, Hans H. Heinsen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sweetheart
Holdings Inc;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the consolidated financial statements, and
other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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 quarterly 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: February 10, 2003 SWEETHEART HOLDINGS INC.
-----------------
(Registrant)
By: /s/ HANS H. HEINSEN
--------------------
Hans H. Heinsen
Senior Vice President - Finance,
Chief Financial Officer
(Principal Financial and Accounting Officer)
26