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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 Twenty-six Weeks Ended March 30, 2003
[ ] 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 May 2, 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
September 1, 2003 and the 12.0% Subordinated Notes due July 15, 2004,
respectively, 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)
March 30, September 29,
2003 2002
------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 5,600 $ 8,035
Cash in escrow 5 -
Receivables, less allowances of $4,115 and $3,741 152,298 152,541
Inventories 216,460 219,427
Deferred income taxes 21,446 20,841
Assets held for sale 5,275 5,275
Other current assets 30,392 35,736
----------- ----------
Total current assets 431,476 441,855
Property, plant and equipment, net 244,892 252,491
Deferred income taxes 32,392 29,879
Spare parts 13,530 13,428
Goodwill 41,232 41,232
Due from SF Holdings 17,712 17,962
Other assets 23,226 23,996
----------- ----------
Total assets $ 804,460 $ 820,843
=========== ==========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 105,457 $ 102,986
Accrued payroll and related costs 39,382 38,009
Other current liabilities 38,290 44,000
Current portion of deferred gain on sale of assets 10,100 10,203
Current portion of long-term debt 26,688 119,853
----------- ----------
Total current liabilities 219,917 315,051
Commitments and contingencies (See Notes)
Long-term debt 406,054 317,448
Deferred gain on sale of assets 67,105 72,883
Other liabilities 65,923 65,948
----------- ----------
Total liabilities 758,999 771,330
----------- ----------
Minority interest in subsidiary 2,322 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
Class B Common Stock - Par value $.01 per share; 4,600,000 shares 10 10
authorized; 4,393,200 shares issued and outstanding 44 44
Additional paid-in capital 101,193 101,173
Accumulated deficit (42,584) (40,577)
Accumulated other comprehensive loss (15,524) (13,413)
----------- ----------
Total shareholder's equity 43,139 47,237
----------- ----------
Total liabilities and shareholder's equity $ 804,460 $ 820,843
=========== ==========
See accompanying Notes to Consolidated Financial Statements.
2
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
For the For the For the For the
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
March 30, March 31, March 30, March 31,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net sales $ 293,344 $ 296,371 $ 613,689 $ 617,246
Cost of sales 262,616 267,693 547,093 548,137
---------- ---------- ---------- ----------
Gross profit 30,728 28,678 66,596 69,109
Selling, general and administrative
expenses 28,001 28,598 54,197 57,660
Other (income) expense, net (1,035) 494 (3,230) (3,291)
---------- ---------- ---------- ----------
Operating income (loss) 3,762 (414) 15,629 14,740
Interest expense, net of interest income
of $40, $57, $77 and $89 9,433 9,594 18,897 18,780
Loss on debt extinguishment - 1,798 - 1,798
---------- ---------- ---------- ----------
Loss before income tax benefit
and minority interest (5,671) (11,806) (3,268) (5,838)
Income tax benefit (2,268) (4,711) (1,307) (2,304)
Minority interest in subsidiary 32 40 46 73
---------- ---------- ---------- ----------
Net loss $ (3,435) $ (7,135) $ (2,007) $ (3,607)
========== ========== ========== ==========
Other comprehensive loss:
Net loss $ (3,435) $ (7,135) $ (2,007) $ (3,607)
Foreign currency translation
adjustment (341) 159 (508) 20
Minimum pension liability
adjustment (net of income
taxes of $489, $813, $(1,069)
and $(748)) 734 1,220 (1,603) (1,122)
---------- ---------- ---------- ----------
Comprehensive loss $ (3,042) $ (5,756) $ (4,118) $ (4,709)
========== ========== ========== ==========
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
Twenty-six weeks Twenty-six weeks
ended March 30, ended March 31,
2003 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,007) $ (3,607)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 15,792 18,133
Amortization of deferred gain (5,093) (5,137)
Loss (gain) on sale of assets 606 (3,189)
Changes in operating assets and liabilities:
Receivables 243 13,708
Inventories 2,967 17,872
Other current assets 5,344 (1,885)
Other assets (1,783) (5,126)
Accounts payable 2,471 19,840
Accrued payroll and related costs 1,373 (4,299)
Other current liabilities (5,710) (5,203)
Other liabilities (2,696) (8,604)
Other, net (209) 150
---------- ----------
Net cash provided by operating activities 11,298 32,653
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (5,934) (13,783)
Due from SF Holdings 250 -
Proceeds from sale of property, plant and equipment 4 5,262
---------- ----------
Net cash used in investing activities (5,680) (8,521)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under credit facilities (1,520) 173,804
Repayment under credit facilities - (196,144)
Repayments of other debt (4,049) (3,050)
Debt issuance costs (2,479) -
Increase in cash in escrow (226) (5,253)
Decrease in cash in escrow 221 781
---------- ----------
Net cash used in financing activities (8,053) (29,862)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,435) (5,730)
CASH AND CASH EQUIVALENTS, beginning of period 8,035 11,616
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 5,600 $ 5,886
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 16,351 $ 17,958
========== ==========
Income taxes paid $ (2,703) $ 890
========== ==========
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").
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. 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. The
transitional goodwill impairment test was completed, as required, by March 30,
2003. The carrying value of goodwill did not exceed its fair value and; as a
result, no transitional impairment loss was required.
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 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
5
adopted SFAS No. 145 effective September 30, 2002 and has restated the financial
statements for all periods presented to no longer classify losses on
extinguishment of debt as an extraordinary item.
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 applied
prospectively to exit or disposal activities initiated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock
Based Compensation. SFAS No. 148 amends SFAS No. 123, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has implemented SFAS No. 148. Due to the
insignificant effect on the consolidated financial statements, interim
disclosure is not required.
(3) INVENTORIES
The components of inventories are as follows (in thousands):
(Unaudited)
March 30, September 29,
2003 2002
--------------- -----------------
Raw materials and supplies $ 56,975 $ 57,305
Finished products 149,040 150,925
Work in progress 10,445 11,197
--------- ---------
Total inventories $ 216,460 $ 219,427
========= =========
(4) GOODWILL
In accordance with SFAS No. 142, prior period losses were not restated.
A reconciliation of the previously reported net loss during the thirteen and
twenty-six weeks ended March 31, 2002 to the amounts adjusted for the reduction
of goodwill amortization expense, net of related income tax effect, is as
follows (in thousands):
For the For the For the For the
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
March 30, March 31, March 30, March 31,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net loss, as reported $ (3,435) $ (7,135) $ (2,007) $ (3,607)
Add back: goodwill amortization,
net of tax - 302 - 604
--------- --------- --------- ---------
Net loss, as adjusted $ (3,435) $ (6,833) $ (2,007) $ (3,003)
========= ========= ========= =========
As of March 30, 2003, the Company has unamortized goodwill of $41.2
million and intangible assets of $2.4 million. During the thirteen and
twenty-six weeks ended March 31, 2002, goodwill amortization was $0.5 million
and $1.0 million, respectively. During the thirteen weeks ended March 30, 2003
and March 31, 2002, amortization expense related to intangible assets was $0.2
million, respectively. During the twenty-six weeks ended March 30, 2003 and
March 31, 2002, amortization expense related to intangible assets was $0.4
million and $0.5 million, respectively. Amortization expense is expected to
range from approximately $0.2 million to $0.3 million each fiscal year for
Fiscal 2004 through Fiscal 2008.
6
Changes to goodwill and intangible assets during the twenty-six weeks
ended March 30, 2003, including the effects of adopting the new accounting
standard are as, follows (in thousands):
Intangible
Goodwill Assets
---------- ------------
Balance at September 30, 2002, net of accumulated
amortization $ 41,232 $ 2,812
Additions during the period - 33
Amortization expense - (436)
-------- --------
Balance at March 30, 2003, net of accumulated
amortization $ 41,232 $ 2,409
======== ========
(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 loan matures on the later of August 1, 2014 or
the date on which all amounts outstanding under the loan agreement have been
paid in full. The proceeds from the loan were received on January 2, 2003 and
the Company recorded a liability as of that date.
On April 8, 2003, Sweetheart Cup, consummated its offer to exchange
(the "Exchange Offer") its newly issued 12% Senior Notes due July 15, 2004 ("New
Notes") for all of its outstanding $110 million Senior Subordinated Notes and
solicitation of consents of holders of the $110 million Senior Subordinated
Notes to the proposed amendments to the indenture governing the $110 million
Senior Subordinated Notes (the "Consent Solicitation"). Sweetheart Cup,
Sweetheart Holdings, as guarantor, and Wells Fargo Bank Minnesota, N.A., as
trustee, executed the indenture governing the New Notes and $93.4 million in
aggregate principal amount of New Notes were issued under the indenture in
exchange for a like amount of $110 million Senior Subordinated Notes. Payment of
the consent payments to all holders of the $110 million Senior Subordinated
Notes who timely tendered was made in April 2003 to the trustee. As a result of
the Exchange Offer, $93.4 million of the $110 million Senior Subordinated Notes
is classified as long-term debt in the accompanying March 30, 2003 consolidated
balance sheet.
As of April 8, 2003, as a result of the Consent Solicitation, the
amendment to the indenture governing the $110 million Senior Subordinated Notes
became effective. The aggregate principal amount of $110 million Senior
Subordinated Notes that remain outstanding following the Exchange Offer is $16.6
million which is due September 1, 2003.
The Company's senior credit facility with Bank of America, N.A. (the
"Senior Credit Facility") was amended on February 28, 2003 to require, among
other things, the date by which the refinancing, repayment or extension of the
New Notes must occur shall be December 31, 2003. If the Company is unable to
refinance, repay or extend the New Notes prior to December 31, 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 25.0% interest and Mehiel Enterprises, Inc.,
a company owned by a director, Chris Mehiel, of the Company, has a 63.2%
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
Group, Inc. ("SF Holdings") is entitled to receive from the Company an aggregate
annual fee of $1.85 million, payable semi-annually, and is
7
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 March 31, 2002, the Company had a loan receivable from its Chief
Executive Officer of $0.3 million plus accrued interest at 5.06%. During the
quarter ended March 30, 2003, the Company's Chief Executive Officer repaid the
remaining balance of the outstanding loan receivable. During the twenty-six
weeks ended March 30, 2003 and March 31, 2002, the Company forgave $13,872 and
$16,021, respectively, of interest associated with the loan to its Chief
Executive Officer. At March 31, 2002, the Company had a loan receivable from its
Chief Operating Officer of $0.2 million plus accrued interest at 5.39%. On
February 28, 2003, the loan receivable was amended and the rate changed to the
federal funds rate. At March 30, 2003, the loan receivable is $0.1 million plus
accrued interest the federal funds rate.
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 March 30, 2003 and March 31, 2002, $0.7 million
and $1.1 million, respectively, is due to the Company.
During the twenty-six weeks ended March 30, 2003, the Company purchased
$6.1 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 twenty-six weeks
ended March 30, 2003, the Company purchased $0.7 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 March 30, 2003 is
$0.6 million due to Box USA. Other purchases from affiliates during the
twenty-six weeks ended March 30, 2003 were not significant.
During the twenty-six weeks ended March 30, 2003, the Company sold $4.3
million of scrap paper and plastic to Fibre Marketing. Included in accounts
receivable as of March 30, 2003 is $1.2 million due from Fibre Marketing. Other
sales to affiliates during the twenty-six weeks ended March 30, 2003 were not
significant.
During the twenty-six weeks ended March 31, 2002, the Company
purchased $4.9 million of corrugated containers from Box USA and $0.6 million of
travel services from Emerald Lady. Included in accounts payable as of March 31,
2002 is $0.9 million due to Box USA. Other purchases from affiliates during the
twenty-six weeks ended March 31, 2002 were not significant.
During the twenty-six weeks ended March 31, 2002, the Company sold $3.8
million of scrap paper and plastic to Fibre Marketing. Included in accounts
receivable as of March 31, 2002 is $0.8 million due from Fibre Marketing. Other
sales to affiliates during the twenty-six weeks ended March 31, 2002 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 twenty-six
weeks ended March 30, 2003 and March 31, 2002, rental payments under this lease
were $0.7 million and $0.8 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 twenty-six weeks ended March 30, 2003 and March 31, 2002, rental
payments under this lease were $1.9 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 25.0% ownership interest in
Fibre Marketing. On July 17, 2000, Box USA transferred 50.0% of its interest in
Fibre Marketing to Mehiel Enterprises, Inc. Mehiel Enterprises, Inc. owns a
63.2% 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.
8
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 not significant during the
twenty-six weeks ended March 30, 2003 and March 31, 2002, respectively.
(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 $20,000
and $49,000 for the twenty-six weeks ended March 30, 2003 and March 31, 2002,
respectively.
(8) ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows
(in thousands):
(Unaudited)
March 30, September 29,
2003 2002
------------- ---------------
Foreign currency translation adjustment $ (3,231) $ (2,723)
Minimum pension liability adjustment (12,293) (10,690)
---------- ----------
Accumulated other comprehensive loss $ (15,524) $ (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 of December 27, 2002, this amount had been received and recorded as
a reduction of cost of sales, net of $0.2 million of expenses.
(10) OTHER INCOME, NET
During the twenty-six weeks ended March 30, 2003, the Company realized
$5.1 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"). In addition, the Company realized $0.6 million from foreign
currency transactions gains. These gains were partially offset by $0.6 million
of losses from the sale of equipment, $0.7 million of costs associated with the
rationalization and consolidation of the Company's manufacturing facilities,
$0.7 million of costs associated with the opening of the mid-west distribution
center and $0.4 million of costs associated with facilities no longer
manufacturing products.
During the twenty-six weeks ended March 31, 2002, the Company realized
$5.1 million due to the
9
amortization of the deferred gain in conjunction with the Fiscal 2000
sale-leaseback transaction. Also, during the twenty-six weeks ended March 31,
2002, 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 $4.4 million in expenses reflecting certain costs incurred
with the rationalization and consolidation 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. 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 and of the New Notes. 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):
10
Consolidated Balance Sheet
March 30, 2003
------------------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
-------------- -------------- --------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 5,600 $ - $ - $ 5,600
Cash in escrow 5 - - 5
Receivables 200,756 - (48,458) 152,298
Raw materials inventory 56,975 - - 56,975
Work in progress inventory 10,445 - - 10,445
Finished goods inventory 149,040 - - 149,040
Assets held for sale - 5,275 - 5,275
Other current assets 52,178 2,282 (2,622) 51,838
----------- ---------- ------------ -----------
Total current assets 474,999 7,557 (51,080) 431,476
Property, plant and equipment, net 244,892 - - 244,892
Deferred income taxes 43,530 (20,875) 9,737 32,392
Other assets 95,700 108,581 (108,581) 95,700
----------- ---------- ------------ -----------
Total assets $ 859,121 $ 95,263 $ (149,924) $ 804,460
=========== ========== ============ ===========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 105,457 $ - $ - $ 105,457
Other current liabilities 90,390 - (2,618) 87,772
Current portion of long-term debt 26,688 - - 26,688
----------- ---------- ------------ -----------
Total current liabilities 222,535 - (2,618) 219,917
Long-term debt 406,054 48,458 (48,458) 406,054
Other liabilities 196,112 - (63,084) 133,028
----------- ---------- ------------ -----------
Total liabilities 824,701 48,458 (114,160) 758,999
----------- ---------- ------------ -----------
Minority interest 2,322 - - 2,322
----------- ---------- ------------ -----------
Shareholder's equity:
Class A Common Stock - 10 - 10
Class B Common Stock - 44 - 44
Additional paid-in capital 123,698 78,095 (100,600) 101,193
Accumulated deficit (76,076) (31,344) 64,836 (42,584)
Accumulated other comprehensive loss (15,524) - - (15,524)
----------- ---------- ------------ -----------
Total shareholder's equity 32,098 46,805 (35,764) 43,139
----------- ---------- ------------ -----------
Total liabilities and shareholder's equity $ 859,121 $ 95,263 $ (149,924) $ 804,460
=========== ========== ============ ===========
11
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
=========== ========== ============ ===========
12
Consolidated Statement of Operations
For the Thirteen Weeks Ended March 30, 2003
------------------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
-------------- -------------- --------------- ----------------
Net sales $ 293,344 $ - $ - $ 293,344
Cost of sales 262,616 - - 262,616
----------- ---------- ------------ -----------
Gross profit 30,728 - - 30,728
Selling, general and administrative expenses 28,001 - - 28,001
Other income, net (1,035) - - (1,035)
----------- ---------- ------------ -----------
Operating income 3,762 - - 3,762
Interest expense, net 9,779 (346) - 9,433
----------- ---------- ------------ -----------
Income (loss) before income tax expense
(benefit) and minority interest (6,017) 346 - (5,671)
Income tax (benefit) expense (2,406) 138 - (2,268)
Minority interest in subsidiary 32 - - 32
----------- ---------- ------------ -----------
Net income (loss) $ (3,643) $ 208 $ - $ (3,435)
=========== ========== ============ ===========
Other comprehensive income (loss):
Net income (loss) $ (3,643) $ 208 $ - $ (3,435)
Foreign currency translation
adjustment (341) - - (341)
Minimum pension liability
adjustment (net of income taxes of
$489) 734 - - 734
----------- ---------- ------------ -----------
Comprehensive income (loss) $ (3,250) $ 208 $ - $ (3,042)
=========== ========== ============ ===========
13
Consolidated Statement of Operations
For the Thirteen Weeks Ended March 31, 2002
------------------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
-------------- -------------- --------------- ----------------
Net sales $ 296,371 $ 58,589 $ ( 58,589) $ 296,371
Cost of sales 273,099 53,697 (59,103) 267,693
----------- ---------- ------------ -----------
Gross profit 23,272 4,892 514 28,678
Selling, general and administrative expenses 28,124 474 - 28,598
Other (income) expense, net (20) - 514 494
----------- ---------- ------------ -----------
Operating income (loss) (4,832) 4,418 - (414)
Interest expense, net 8,588 1,006 - 9,594
Loss on debt extinguishment 1,798 - - 1,798
----------- ---------- ------------ -----------
Income (loss) before income tax expense
(benefit) and minority interest (15,218) 3,412 - (11,806)
Income tax (benefit) expense (6,077) 1,366 - (4,711)
Minority interest in subsidiary 40 - - 40
----------- ---------- ------------ -----------
Net income (loss) $ (9,181) $ 2,046 $ - $ (7,135)
=========== ========== ============ ===========
Other comprehensive income (loss):
Net income (loss) $ (9,181) $ 2,046 $ - $ (7,135)
Foreign currency translation
adjustment 159 - - 159
Minimum pension liability
adjustment (net of income taxes of
$813) 1,220 - - 1,220
----------- ---------- ------------ -----------
Comprehensive income (loss) $ (7,802) $ 2,046 $ - $ (5,756)
=========== ========== ============ ===========
14
Consolidated Statement of Operations
For the Twenty-six Weeks Ended March 30, 2003
------------------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
-------------- -------------- --------------- ----------------
Net sales $ 613,689 $ - $ - $ 613,689
Cost of sales 547,093 - - 547,093
----------- ---------- ------------ -----------
Gross profit 66,596 - - 66,596
Selling, general and administrative expenses 54,197 - - 54,197
Other income, net (3,230) - - (3,230)
----------- ---------- ------------ -----------
Operating income 15,629 - - 15,629
Interest expense, net 19,608 (711) - 18,897
----------- ---------- ------------ -----------
Income (loss) before income tax expense
(benefit) and minority interest (3,979) 711 - (3,268)
Income tax (benefit) expense (1,591) 284 - (1,307)
Minority interest in subsidiary 46 - - 46
----------- ---------- ------------ -----------
Net income (loss) $ (2,434) $ 427 $ - $ (2,007)
=========== ========== ============ ===========
Other comprehensive income (loss):
Net income (loss) $ (2,434) $ 427 $ - $ (2,007)
Foreign currency translation
adjustment (508) - - (508)
Minimum pension liability
adjustment (net of income taxes
of $(1,069)) (1,603) - - (1,603)
----------- ---------- ------------ -----------
Comprehensive income (loss) $ (4,545) $ 427 $ - $ (4,118)
=========== ========== ============ ===========
15
Consolidated Statement of Operations
For the Twenty-six Weeks Ended March 31, 2002
------------------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
-------------- -------------- --------------- ----------------
Net sales $ 617,246 $ 116,485 $ (116,485) $ 617,246
Cost of sales 559,087 106,760 (117,710) 548,137
----------- ---------- ------------ -----------
Gross profit 58,159 9,725 1,225 69,109
Selling, general and administrative expenses 56,729 931 - 57,660
Other income, net (4,516) - 1,225 (3,291)
----------- ---------- ------------ -----------
Operating income 5,946 8,794 - 14,740
Interest expense, net 16,353 2,427 - 18,780
Loss on debt extinguishment 1,798 - - 1,798
----------- ---------- ------------ -----------
Income (loss) before income tax expense
(benefit) and minority interest (12,205) 6,367 - (5,838)
Income tax (benefit) expense (4,851) 2,547 - (2,304)
Minority interest in subsidiary 73 - - 73
----------- ---------- ------------ -----------
Net income (loss) $ (7,427) $ 3,820 $ - $ (3,607)
=========== ========== ============ ===========
Other comprehensive income (loss):
Net income (loss) $ (7,427) $ 3,820 $ - $ (3,607)
Foreign currency translation
adjustment 20 - - 20
Minimum pension liability
adjustment (net of income taxes
of $(748)) (1,122) - - (1,122)
----------- ---------- ------------ -----------
Comprehensive income (loss) $ (8,529) $ 3,820 $ - $ (4,709)
=========== ========== ============ ===========
16
Consolidated Statement of Cash Flows
For the Twenty-six Weeks Ended March 30, 2003
------------------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
-------------- -------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 11,298 $ - $ - $ 11,298
----------- ---------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (5,934) - - (5,934)
Due from SF Holdings 250 - - 250
Proceeds from sale of assets 4 - - 4
----------- ---------- ------------ -----------
Net cash used in investing activities (5,680) - - (5,680)
----------- ---------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under credit facilities (1,520) - - (1,520)
Repayments of other debt (4,049) - - (4,049)
Debt issuance costs (2,479) - - (2,479)
Increase in cash escrow (226) - - (226)
Decrease in cash escrow 221 - - 221
----------- ---------- ------------ -----------
Net cash used in financing activities (8,053) - - (8,053)
----------- ---------- ------------ -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (2,435) - - (2,435)
CASH AND CASH EQUIVALENTS, beginning of
period 8,035 - - 8,035
----------- ---------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 5,600 $ - $ - $ 5,600
=========== ========== ============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 16,351 $ - $ - $ 16,351
=========== ========== ============ ===========
Income taxes paid $ (2,703) $ - $ - $ (2,703)
=========== ========== ============ ===========
17
Consolidated Statement of Cash Flows
For the Twenty-six Weeks Ended March 31, 2002
------------------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
-------------- -------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 32,653 $ 88,148 $ (88,148) $ 32,653
----------- ---------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (13,783) - - (13,783)
Proceeds from sale of assets 5,262 - - 5,262
----------- ---------- ------------ -----------
Net cash used in investing activities (8,521) - - (8,521)
----------- ---------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 173,804 - - 173,804
Repayment under credit facilities (196,144) - - (196,144)
Repayments of other debt (3,050) - - (3,050)
Repayment of intercompany equipment
financing - (88,148) 88,148 -
Increase in cash escrow (5,253) - - (5,253)
Decrease in cash escrow 781 - - 781
----------- ---------- ------------ -----------
Net cash used in financing activities (29,862) (88,148) 88,148 (29,862)
----------- ---------- ------------ -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (5,730) - - (5,730)
CASH AND CASH EQUIVALENTS, beginning of
period 11,616 - - 11,616
----------- ---------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 5,886 $ - $ - $ 5,886
=========== ========== ============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 17,958 $ - $ - $ 17,958
=========== ========== ============ ===========
Income taxes paid $ 890 $ - $ - $ 890
=========== ========== ============ ===========
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.
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
18
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. The types of products that are
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.
Recent Developments
On April 8, 2003, Sweetheart Cup, consummated its offer to exchange
(the "Exchange Offer") its newly issued 12% Senior Notes due July 15, 2004 ("New
Notes") for all of its outstanding $110 million Senior Subordinated Notes and
solicitation of consents of holders of the $110 million Senior Subordinated
Notes to the proposed amendments to the indenture governing the $110 million
Senior Subordinated Notes (the "Consent Solicitation"). Sweetheart Cup,
Sweetheart Holdings, as guarantor, and Wells Fargo Bank Minnesota, N.A., as
trustee, executed the indenture governing the New Notes and $93.4 million in
aggregate principal amount of New Notes were issued under the indenture in
exchange for a like amount of $110 million Senior Subordinated Notes. Payment of
the consent payments to all holders of the $110 million Senior Subordinated
Notes who timely tendered was made in April 2003 to the trustee. As a result of
the Exchange Offer, $93.4 million of the $110 million Senior Subordinated Notes
is classified as long-term debt in the accompanying March 30, 2003 consolidated
balance sheet.
As of April 8, 2003, as a result of the Consent Solicitation, the
amendment to the indenture governing the $110 million Senior Subordinated Notes
became effective. The aggregate principal amount of $110 million Senior
Subordinated Notes that remain outstanding following the Exchange Offer is $16.6
million which is due September 1, 2003.
The Company's senior credit facility with Bank of America, N.A. (the
"Senior Credit Facility") was amended on February 28, 2003 to require, among
other things, the date by which the refinancing, repayment or extension of the
New Notes must occur shall be December 31, 2003. If the Company is unable to
refinance, repay or extend the New Notes prior to December 31, 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 its 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
19
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.
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.
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 - 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. The Company
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 twenty-six weeks ended March
30, 2003 in accordance with the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. The initial transitional goodwill impairment test was
completed, as required, by March 30, 2003. The carrying value of goodwill did
not exceed its fair value and; as a result, no transitional impairment loss was
required.
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
20
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.
Thirteen Weeks Ended March 30, 2003 Compared to Thirteen Weeks Ended
March 31, 2002 (Unaudited)
Net sales decreased $3.1 million, or 1.1%, to $293.3 million for the
thirteen weeks ended March 30, 2003 compared to $296.4 million for the thirteen
weeks ended March 31, 2002, reflecting a 1.6% decrease in sales volume and a
0.5% increase in average realized sales price. Sales volume decreased primarily
as a result of lower demand from consumer customers. Average realized sales
prices increased as a result of increased raw material costs and a change in
product mix.
Gross profit increased $2.0 million, or 7.0%, to $30.7 million for the
thirteen weeks ended March 30, 2003 compared to $28.7 million for the thirteen
weeks ended March 31, 2002. As a percentage of net sales, gross profit increased
to 10.5% for the thirteen weeks ended March 30, 2003 from 9.7% for the thirteen
weeks ended March 31, 2002. The increase in gross profit is primarily due to
better labor utilization resulting from the Company's initiatives to rationalize
and consolidate its manufacturing facilities. The benefits from improved
manufacturing efficiencies were partially offset by average selling prices
increasing at a slower rate than increasing raw material costs.
Selling, general and administrative expenses decreased $0.6 million, or
2.1%, to $28.0 million for the thirteen weeks ended March 30, 2003 compared to
$28.6 million for the thirteen weeks ended March 31, 2002. This decrease is
primarily due to a $0.8 million lower depreciation expense resulting from
certain computer equipment becoming fully depreciated and a $0.5 million
decrease in goodwill amortization due to the adoption of SFAS No. 142. These
favorable changes were partially offset by a $0.7 million increase in
promotional advertising expenses which are expected to increase future sales
volumes.
Other (income) expense, net changed $1.5 million, or 300.0%, to income
of $1.0 million for the thirteen weeks ended March 30, 2003 compared to an
expense of $0.5 million for the thirteen weeks ended March 31, 2002. During the
thirteen weeks ended March 30, 2003, the Company realized (i) $2.5 million due
to the amortization of the deferred gain in conjunction with a sale-leaseback
transaction, (ii) $0.3 million gains from foreign currency transactions, (iii)
$0.6 million of net losses from the sale of equipment, (iv) $0.4 million of
costs associated with the rationalization and consolidation of the Company's
manufacturing facilities, (v) $0.7 million of costs associated with the opening
of the mid-west distribution center and (vi) $0.2 million of costs associated
with facilities no longer manufacturing products. As compared to the thirteen
weeks ended March 31, 2002, the Company realized (i) $2.5 million due to the
amortization of the deferred gain in conjunction with a sale-leaseback
transaction (ii) $0.2 million of net gains from the sale of equipment, (iii)
$2.6 million of costs associated with the rationalization and consolidation of
the Company's manufacturing facilities (iv) $0.5 million of costs associated
with the write-off of a receivable relating to the management services agreement
between Sweetheart Holdings and SF Holdings, which had been assigned and assumed
by The Fonda Group, Inc. in 1998.
Operating income (loss) increased $4.2 million, or 1,050.0%, to income
of $3.8 million for the thirteen weeks ended March 30, 2003 compared to a loss
of $0.4 million for the thirteen weeks ended March 31, 2002, due to the reasons
stated above.
Interest expense, net decreased $0.2 million, or 2.1%, to $9.4 million
for the thirteen weeks ended March 30, 2003 compared to $9.6 million for the
thirteen weeks ended March 31, 2002. This decrease is attributable to lower
21
interest rates on the Senior Credit Facility which was partially offset by the
increase in coupon interest on the $110 Senior Subordinated Notes which was
effective March 1, 2002.
Loss on debt extinguishment was $1.8 million for the thirteen weeks
ended March 31, 2002 resulting from the write-off of the deferred financing
costs from the refinancing of the Company's Senior Credit Facility.
Income tax benefit decreased $2.4 million, or 51.1%, to $2.3 million
for the thirteen weeks ended March 30, 2003 compared to $4.7 million for the
thirteen weeks ended March 31, 2002 as a result of a lower pre-tax loss. The
effective rates for the thirteen weeks ended March 30, 2003 and the thirteen
weeks ended March 31, 2002 were 40%, respectively.
Minority interest in subsidiary decreased $8,000, or 20.0%, to $32,000
for the thirteen weeks ended March 30, 2003 compared to $40,000 for the thirteen
weeks ended March 31, 2002. This amount represents the 20% ownership of Global
Cup, S.A. De C.V. and its subsidiaries' ("Global Cup") income.
Net loss decreased $3.7 million, or 52.1%, to $3.4 million loss for the
thirteen weeks ended March 30, 2003 compared to $7.1 million for the thirteen
weeks ended March 31, 2002, due to the reasons stated above.
Twenty-six Weeks Ended March 30, 2003 Compared to Twenty-six Weeks Ended
March 31, 2002 (Unaudited)
Net sales decreased $3.5 million, or 0.6%, to $613.7 million for the
twenty-six weeks ended March 30, 2003 compared to $617.2 million for the
twenty-six weeks ended March 31, 2002, reflecting a 1.2% decrease in sales
volume and a 0.6% increase in average realized sales price. 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 $2.5 million, or 3.6%, to $66.6 million for the
twenty-six weeks ended March 30, 2003 compared to $69.1 million for the
twenty-six weeks ended March 31, 2002. As a percentage of net sales, gross
profit decreased to 10.9% for the twenty-six weeks ended March 30, 2003 from
11.2% for the twenty-six weeks ended March 31, 2002. This decrease primarily
resulted from average selling prices that did not increase at the same rate as
raw material costs. This decrease was partially offset during the quarter ended
March 30, 2003 due primarily from better labor utilization resulting from the
Company's initiatives to rationalize and consolidate its manufacturing
facilities.
Selling, general and administrative expenses decreased $3.5 million, or
6.1%, to $54.2 million for the twenty-six weeks ended March 30, 2003 compared to
$57.7 million for the twenty-six weeks ended March 31, 2002. This decrease is
primarily due to (i) $1.5 million lower depreciation expense resulting from
certain computer equipment becoming fully depreciated, (ii) $1.0 million
decrease in goodwill amortization due to the adoption of SFAS No. 142, (iii)
$1.2 million reduction in salaries and related fringe benefits which was
partially due to the elimination of 34 positions in Fiscal 2002 (iv) $0.7
million decrease due to customer bankruptcy filings in Fiscal 2002 and (v) $0.4
million decrease of supplies expense resulting from computers purchased for the
sales force in Fiscal 2002. These favorable changes were partially offset by
$1.4 million increase in promotional advertising expenses which are expected to
increase future sales volumes.
Other (income) expense, net decreased $0.1 million, or 3.0%, to income
of $3.2 million for the twenty-six weeks ended March 30, 2003 compared $3.3
million for the twenty-six weeks ended March 31, 2002. During the twenty-six
weeks ended March 30, 2003, the Company realized $5.1 million due to the
amortization of the deferred gain in conjunction with a sale-leaseback
transaction and $0.6 million of gains from foreign currency transactions. These
gains were partially offset by (i) $0.6 million of net losses from the sale of
equipment, (ii) $0.7 million of costs associated with the rationalization and
consolidation of the Company's manufacturing facilities, (iii) $0.7 million of
costs associated with the opening of the mid-west distribution center and (iv)
$0.4 million of costs associated with facilities no longer manufacturing
products. As compared to the twenty-six weeks ended March 31, 2002, the Company
realized $5.1 million due to the amortization of the deferred gain in
conjunction with the Fiscal 2000 sale-leaseback transaction and a $3.0 million
gain in association with the sale of a manufacturing facility in Manchester, New
Hampshire. These gains were partially offset by $4.4 million of costs associated
with the rationalization and consolidation of the Company's manufacturing
facilities.
22
Operating income (loss) increased $0.9 million, or 6.1%, to income of
$15.6 million for the twenty-six weeks ended March 30, 2003 compared to $14.7
million for the twenty-six weeks ended March 31, 2002, due to the reasons stated
above.
Interest expense, net increased $0.1 million, or 0.5%, to $18.9 million
for the twenty-six weeks ended March 30, 2003 compared to $18.8 million for the
twenty-six weeks ended March 31, 2002. This decrease is attributable to lower
interest rates on the Senior Credit Facility which was partially offset by the
increase in coupon interest on the $110 Senior Subordinated Notes which was
effective March 1, 2002.
Loss on debt extinguishment was $1.8 million for the twenty-six weeks
ended March 31, 2002 resulting from the write-off of the deferred financing
costs from the refinancing of the Company's Senior Credit Facility.
Income tax benefit decreased $1.0 million, or 43.5%, to a benefit of
$1.3 million for twenty-six weeks ended March 30, 2003 compared to $2.3 million
for the twenty-six weeks ended March 31, 2002 as a result of lower pre-tax loss.
The effective rates for the twenty-six weeks ended March 30, 2003 and the
twenty-six weeks ended March 31, 2002 were 40%, respectively.
Minority interest in subsidiary decreased $27,000, or 37.0%, to $46,000
for the twenty-six weeks ended March 30, 2003 compared to $73,000 for the
twenty-six weeks ended March 31, 2002. This amount represents the 20% ownership
of Global's income.
Net loss decreased $1.6 million, or 44.4%, to a loss of $2.0 million
for the twenty-six weeks ended March 30, 2003 compared to of $3.6 million for
the twenty-six weeks ended March 31, 2002, 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 twenty-six weeks ended March 30, 2003, 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.
On April 8, 2003, Sweetheart Cup, consummated its offer to exchange
(the "Exchange Offer") its newly issued 12% Senior Notes due July 15, 2004 ("New
Notes") for all of its outstanding $110 million Senior Subordinated Notes and
solicitation of consents of holders of the $110 million Senior Subordinated
Notes to the proposed amendments to the indenture governing the $110 million
Senior Subordinated Notes (the "Consent Solicitation"). Sweetheart Cup,
Sweetheart Holdings, as guarantor, and Wells Fargo Bank Minnesota, N.A., as
trustee, executed the indenture governing the New Notes and $93.4 million in
aggregate principal amount of New Notes were issued under the indenture in
exchange for a like amount of $110 million Senior Subordinated Notes. Payment of
the consent payments to all holders of the $110 million Senior Subordinated
Notes who timely tendered was made in April 2003 to the trustee. As a result of
the Exchange Offer, $93.4 million of the $110 million Senior Subordinated Notes
is classified as long-term debt in the accompanying March 30, 2003 consolidated
balance sheet.
As of April 8, 2003, as a result of the Consent Solicitation, the
amendment to the indenture governing the $110 million Senior Subordinated Notes
became effective. The aggregate principal amount of $110 million Senior
Subordinated Notes that remain outstanding following the Exchange Offer is $16.6
million which is due September 1, 2003.
The Company's senior credit facility with Bank of America, N.A. (the
"Senior Credit Facility") was amended on February 28, 2003 to require, among
other things, the date by which the refinancing, repayment or extension of the
New Notes must occur shall be December 31, 2003. If the Company is unable to
refinance, repay or extend the New Notes prior to December 31, 2003, its Senior
Credit Facility, unless otherwise amended, will become due and payable.
Net cash provided by operating activities for the twenty-six weeks
ended March 30, 2003 was $11.3 million compared to $32.7 million for the
twenty-six weeks ended March 31, 2002. This decrease is primarily due
23
to a smaller magnitude of change in receivables, inventories and accounts
payable balances as compared to the twenty-six weeks ended March 31, 2002.
Net cash used in investing activities for the twenty-six weeks ended
March 30, 2003 was $5.7 million compared to $8.5 million for the twenty-six
weeks ended March 31, 2002. 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 twenty-six weeks ended March 31, 2002.
Net cash used in financing activities for the twenty-six weeks ended
March 30, 2003 was $8.1 million compared to $29.9 million for the twenty-six
weeks ended March 31, 2002. This decrease is primarily due to lower borrowings
under the Senior Credit Facility.
Working capital increased $84.8 million to $211.6 million at March 30,
2003 from $126.8 million at September 29, 2002. This increase resulted from
current liabilities decreasing $95.2 million which was offset by current assets
decreasing $10.4 million. The decrease in current liabilities resulted primarily
from a reclassification of $93.4 million of the $110 million Senior Subordinated
Notes from current to long-term debt. The decrease in current assets resulted
primarily from a reduction in inventories and the collection of a tax
receivable.
Capital expenditures for the twenty-six weeks ended March 30, 2003 were
$5.9 million compared to $13.8 million for the twenty-six weeks ended March 31,
2002. Capital expenditures for the twenty-six weeks ended March 30, 2003
included $4.7 million for new production equipment; $0.8 million associated with
the implementation of the Company's consolidation program; and $0.4 million
primarily for routine capital improvements. Funding for the capital expenditures
for the twenty-six weeks ended March 30, 2003 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 loan matures on the later of August 1, 2014 or
the date on which all amounts outstanding under the loan agreement have been
paid in full. 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
March 30, 2003 and September 29, 2002, $1.7 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 New Notes prior to December 31, 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 March 30, 2003, the
weighted average annual interest rate for the Senior Credit Facility was 4.15%.
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 March 30, 2003, $35.0 million was available under the Senior
Credit Facility. As of March 30, 2003, LIBOR was 1.34% 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
24
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 March 30, 2003, the weighted average annual
interest rate for the Canadian Credit Facility was 4.58%. As of March 30, 2003,
Cdn $1.1 million (approximately US $0.7 million) was available under the
revolving facility and the term loan balance was Cdn $11.3 million
(approximately US $7.7 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. At March 30, 2003, $16.6 million of the $110 million Senior
Subordinated Notes were classified as current debt.
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor
with respect to the New Notes which are due July 15, 2004. Interest is payable
quarterly on January 15, April 15, July 15, and October 15 of each year,
beginning on July 15, 2003. The New Notes accrue interest at 12% per annum. The
New 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 New Notes are general unsecured obligations of the Sweetheart Cup and
are senior in right of payment to the Company's subordinated indebtedness,
including the $110 million Senior Subordinated Notes and the $120 million 9 1/2%
Senior Subordinated Notes due 2007. The New Notes are pari passu in right of
payment with the Company's existing and future senior indebtedness, including
borrowings under the Senior Credit Facility. 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 New 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 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
25
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 March
30, 2003, 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
---------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter
----------- ---------- ---------- ----------- ---------- ------------
Long-term debt $ 116,455 $ 4,295 $ 612 $ 288,549 $ 200 $ 1,000
Non-cancelable
operating leases 53,870 51,468 48,709 46,853 53,356 189,698
Capital leases 123 97 - - - -
--------- -------- -------- --------- -------- ---------
Total obligations $ 170,448 $ 55,860 $ 49,321 $ 335,402 $ 53,556 $ 190,698
========= ======== ======== ========= ======== =========
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 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
26
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 its 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.
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 March 30, 2003, the outstanding
indebtedness under the Senior Credit Facility was $179.7 million and the
Canadian Credit Facility was $15.3 million in U.S. dollars. As of March 30,
2003, $35.0 million was available under the Senior Credit Facility and Cdn $1.1
million (approximately US $0.7 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 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:
A report on Form 8-K was filed on March 3, 2003 under Item 5
and Item 7.
A report on Form 8-K was filed on April 4, 2003 under Item 5
and Item 7.
A report on Form 8-K was filed on April 9, 2003 under Item 5
and Item 7.
27
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: May 2, 2003 By: /s/ Hans H. Heinsen
------------ -------------------
Hans H. Heinsen
Senior Vice President - Finance and Chief Financial
Officer
(Principal Financial and Accounting Officer and Duly
Authorized Officer)
28
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: May 2, 2003 SWEETHEART HOLDINGS INC.
------------
(Registrant)
By: /s/ DENNIS MEHIEL
------------------
Dennis Mehiel
Chairman and Chief Executive Officer
29
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: May 2, 2003 SWEETHEART HOLDINGS INC.
------------
(Registrant)
By: /s/ HANS H. HEINSEN
--------------------
Hans H. Heinsen
Senior Vice President - Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
30