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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Thirty-nine Weeks Ended June 29, 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 August 5, 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 $16.2 million 12.0% Senior Subordinated
Notes due September 1, 2003 and $93.8 million 12.0% Senior 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)
June 29, September 29,
2003 2002
----------- -------------
Assets
Current assets:
Cash and cash equivalents $ 10,119 $ 8,035
Cash in escrow 71 -
Receivables, less allowances of $4,496 and $3,741 153,023 152,541
Inventories 234,730 219,427
Deferred income taxes 21,446 20,841
Assets held for sale 5,275 5,275
Other current assets 30,068 35,736
----------- -----------
Total current assets 454,732 441,855
Property, plant and equipment, net 243,672 252,491
Deferred income taxes 28,203 29,879
Spare parts 13,493 13,428
Goodwill 41,232 41,232
Due from SF Holdings 17,712 17,962
Other assets 23,966 23,996
----------- -----------
Total assets $ 823,010 $ 820,843
=========== ===========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 104,761 $ 102,986
Accrued payroll and related costs 40,403 38,009
Other current liabilities 46,128 44,000
Current portion of deferred gain on sale of assets 10,100 10,203
Current portion of long-term debt 41,439 119,853
----------- -----------
Total current liabilities 242,831 315,051
Long-term debt 392,166 317,448
Deferred gain on sale of assets 64,579 72,883
Other liabilities 69,153 65,948
----------- -----------
Total liabilities 768,729 771,330
----------- -----------
Minority interest in subsidiary 2,357 2,276
----------- -----------
Commitments and contingencies (See Notes)
Shareholder's equity:
Class A Common Stock - Par value $.01 per share; 1,100,000 shares
authorized; 1,046,000 shares issued and outstanding 10 10
Class B Common Stock - Par value $.01 per share; 4,600,000 shares
authorized; 4,393,200 shares issued and outstanding 44 44
Additional paid-in capital 100,954 101,173
Accumulated deficit (33,656) (40,577)
Accumulated other comprehensive loss (15,428) (13,413)
----------- -----------
Total shareholder's equity 51,924 47,237
----------- -----------
Total liabilities and shareholder's equity $ 823,010 $ 820,843
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
2
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
For the For the For the For the
Thirteen Thirteen Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 345,850 $ 340,245 $ 959,539 $ 957,491
Cost of sales 294,493 299,635 841,586 847,772
---------- ---------- ---------- ----------
Gross profit 51,357 40,610 117,953 109,719
Selling, general and administrative
expenses 28,092 28,082 82,289 86,005
Other (income) expense, net (2,446) 8,877 (5,676) 5,323
---------- ---------- ---------- ----------
Operating income 25,711 3,651 41,340 18,391
Interest expense, net of interest income
of $30, $61, $107 and $151 10,296 9,454 29,193 28,234
Loss on debt extinguishment 475 - 475 1,798
---------- ---------- ---------- ----------
Income (loss) before income
tax and minority interest 14,940 (5,803) 11,672 (11,641)
Income tax expense (benefit) 5,977 (2,320) 4,670 (4,624)
Minority interest in subsidiary 35 40 81 113
---------- ---------- ---------- ----------
Net income (loss ) $ 8,928 $ (3,523) $ 6,921 $ (7,130)
========== ========== ========== ==========
Other comprehensive income (loss):
Net income (loss ) $ 8,928 $ (3,523) $ 6,921 $ (7,130)
Foreign currency translation
adjustment 1,397 (196) 889 (176)
Minimum pension liability
adjustment (net of income
taxes of $(867), $(146),
$(1,936) and $(894)) (1,301) (219) (2,904) (1,341)
---------- ---------- ---------- ----------
Comprehensive income (loss ) $ 9,024 $ (3,938) $ 4,906 $ (8,647)
========== ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
3
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the For the
Thirty-nine weeks Thirty-nine weeks
ended June 29, ended June 30,
2003 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 6,921 $ (7,130)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 24,400 26,723
Amortization of deferred gain (7,618) (7,689)
Loss (gain) on sale of assets 443 (3,107)
Changes in operating assets and liabilities:
Receivables (482) 8,030
Inventories (15,303) 18,450
Other current assets 5,668 (1,326)
Other assets 3,727 (6,765)
Accounts payable 1,775 8,689
Accrued payroll and related costs 2,394 (4,898)
Other current liabilities 2,128 (2,744)
Other liabilities (1,634) (10,421)
Other, net 781 1,046
------------ ------------
Net cash provided by operating activities 23,200 18,858
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (9,300) (17,589)
Due from / to SF Holdings 250 (64)
Proceeds from sale of investment 329 -
Proceeds from sale of property, plant and equipment 35 5,280
------------ ------------
Net cash used in investing activities (8,686) (12,373)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under credit facilities (85) 191,522
Repayment under credit facilities - (196,144)
Repayments of other debt (6,079) (5,336)
Debt issuance costs (6,195) -
Increase in cash in escrow (379) (4,581)
Decrease in cash in escrow 308 4,458
------------ ------------
Net cash used in financing activities (12,430) (10,081)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,084 (3,596)
CASH AND CASH EQUIVALENTS, beginning of period 8,035 11,616
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 10,119 $ 8,020
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 18,702 $ 19,890
============ ============
Income taxes (received) paid $ (2,692) $ 808
============ ============
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
Company is a wholly owned subsidiary of SF Holdings Group, Inc. ("SF Holdings").
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 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 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. 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. 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 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.
5
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):
June 29, September 29,
2003 2002
---------- -------------
Raw materials and supplies $ 67,126 $ 57,305
Finished products 157,240 150,925
Work in progress 10,364 11,197
---------- ----------
Total inventories $ 234,730 $ 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
thirty-nine weeks ended June 30, 2002 to the amounts adjusted for the cessation
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 Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss), as reported $ 8,928 $ (3,523) $ 6,921 $ (7,130)
Add back: goodwill amortization,
net of tax - 302 - 906
-------- --------- -------- ---------
Net income(loss), as adjusted $ 8,928 $ (3,221) $ 6,921 $ (6,224)
======== ========= ======== =========
As of June 29, 2003, the Company has unamortized goodwill of $41.2
million and intangible assets of $2.2 million. During the thirteen and
thirty-nine weeks ended June 30, 2002, goodwill amortization was $0.5 million
and $1.5 million, respectively. During the thirteen weeks ended June 29, 2003
and June 30, 2002, amortization expense related to intangible assets was $0.3
million, respectively. During the thirty-nine weeks ended June 29, 2003 and June
30, 2002, amortization expense related to intangible assets was $0.7 million and
$0.8 million, respectively. Amortization expense is expected to range from
approximately $0.9 million to $1.0 million each fiscal year for Fiscal 2004
through Fiscal 2008.
6
Changes to goodwill and intangible assets during the thirty-nine weeks
ended June 29, 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 - 63
Amortization expense - (655)
-------- ---------
Balance at June 29, 2003, net
of accumulated amortization $ 41,232 $ 2,220
======== =========
(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.
On April 8, 2003, Sweetheart Cup consummated its offer to exchange (the
"Exchange Offer") its newly issued 12.0% Senior Notes due July 15, 2004 ("New
Notes") for all of its outstanding 12.0% Senior Subordinated Notes ("the Senior
Subordinated Notes") and solicitation of consents of holders of the Senior
Subordinated Notes to the proposed amendments to the indenture governing the
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 $93.8 million in
aggregate principal amount of New Notes were issued under the indenture in
exchange for a like amount of the Senior Subordinated Notes. Payment of the
consent payments to all holders of the Senior Subordinated Notes who timely
tendered was made in April 2003 to the trustee. As a result of the Exchange
Offer, $93.8 million of the Senior Subordinated Notes is classified as long-term
debt in the accompanying June 29, 2003 consolidated balance sheet. During the
thirteen weeks ended June 29, 2003, the Company recorded a $0.5 million loss on
debt extinguishment in connection with the Exchange Offer which consisted of the
write-off of deferred financing costs incurred.
As a result of the Consent Solicitation, the amendment to the indenture
governing the Senior Subordinated Notes became effective as of April 8, 2003.
The amendment primarily eliminated substantially all of the restrictive
covenants other than the change of control covenant. The aggregate principal
amount of the Senior Subordinated Notes that remains outstanding following the
Exchange Offer is $16.2 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, the 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) referenced below are directly or indirectly under the common ownership
of the Company's Chairman and Chief Executive Officer, Dennis Mehiel. The
Company believes that the transactions entered into with related parties were
negotiated on terms which are at least as favorable as it could have obtained
from unrelated third parties and were negotiated on an arm's length basis.
Pursuant to a Management Services Agreement, as amended, SF Holdings is
entitled to receive from the Company an aggregate annual fee of $1.85 million,
payable semi-annually, and is reimbursed for out-of-pocket expenses. Under the
agreement, SF Holdings has the right, subject to the direction of the Company's
Board of
7
Directors, to manage the Company's day to day operations.
At June 30, 2002, the Company had a loan receivable from its Chief
Executive Officer of $0.3 million plus accrued interest at 5.06%. During the
thirty-nine weeks ended June 29, 2003, the Company's Chief Executive Officer
repaid the outstanding loan receivable. During the thirty-nine weeks ended June
29, 2003 and June 30, 2002, the Company forgave $13,872 and $16,021,
respectively, of interest associated with the loan to its Chief Executive
Officer. At June 30, 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 June 29, 2003, the loan receivable is $0.1 million plus accrued
interest.
During Fiscal 1998, the Company purchased a 38.2% ownership interest in
Fibre Marketing from a director of the Company. During Fiscal 2000, the Company
sold a 13.2% interest in Fibre Marketing to Mehiel Enterprises, Inc., retaining
a 25.0% ownership interest in Fibre Marketing. On July 17, 2000, 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, 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 accounted for its ownership interest in Fibre Marketing
using the equity method. During the thirteen weeks ended June 29, 2003, the
Company sold its 25% interest in Fibre Marketing to an unrelated third party for
$0.3 million which generated a gain of $0.2 million.
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 June 30, 2002, $1.0 million was due to the
Company. During the thirty-nine weeks ended June 29, 2003, Fibre Marketing
repaid the remaining balance of the outstanding promissory notes.
During the thirty-nine weeks ended June 29, 2003, the Company purchased
$9.7 million of corrugated containers from Box USA. During the thirty-nine weeks
ended June 29, 2003, the Company purchased $1.0 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 June 29, 2003 is
$0.5 million due to Box USA. Other purchases from affiliates during the
thirty-nine weeks ended June 29, 2003 were not significant.
During the thirty-nine weeks ended June 29, 2003, the Company sold $6.6
million of scrap paper and plastic to Fibre Marketing. Included in accounts
receivable as of June 29, 2003 is $0.9 million due from Fibre Marketing. Other
sales to affiliates during the thirty-nine weeks ended June 29, 2003 were not
significant.
During the thirty-nine weeks ended June 30, 2002, the Company purchased
$8.2 million of corrugated containers from Box USA and $0.8 million of travel
services from Emerald Lady. Included in accounts payable as of June 30, 2002 is
$1.2 million due to Box USA. Other purchases from affiliates during the
thirty-nine weeks ended June 30, 2002 were not significant.
During the thirty-nine weeks ended June 30, 2002, the Company sold $5.5
million of scrap paper and plastic to Fibre Marketing. Included in accounts
receivable as of June 30, 2002 is $1.2 million due from Fibre Marketing. Other
sales to affiliates during the thirty-nine weeks ended June 30, 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 thirty-nine
weeks ended June 29, 2003 and June 30, 2002, rental payments under this lease
were $1.2 million and $1.1 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 thirty-nine weeks ended June 29, 2003 and June 30, 2002, rental
payments under this lease were $2.8 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.
The Company leases a building in Jacksonville, Florida from the
Company's Chief Executive Officer. Annual payments under the lease are $0.2
million plus annual increases based on changes in the Consumer Price
8
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 thirty-nine weeks ended June
29, 2003 and was $0.1 million during the thirty-nine weeks ended June 30, 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 $29,000
and $47,000 for the thirty-nine weeks ended June 29, 2003 and June 30, 2002,
respectively.
(8) ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows
(in thousands):
June 29, September 29,
2003 2002
----------- ---------------
Foreign currency translation adjustment $ (1,834) $ (2,723)
Minimum pension liability adjustment (13,594) (10,690)
---------- ----------
Accumulated other comprehensive loss $ (15,428) $ (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 thirty-nine weeks ended June 29, 2003, the Company realized
$7.6 million due to the amortization of the deferred gain in conjunction with a
sale-leaseback transaction. In Fiscal 2000, the Company sold certain production
equipment in connection with a sale-leaseback transaction (the "Sale-Leaseback
Transaction"). In addition, the Company realized $1.1 million from foreign
currency transactions gains and $0.2 million from the sale of its 25% interest
in Fibre Marketing. These gains were partially offset by (i) $0.8 million of net
losses from the sale of obsolete equipment, (ii) $0.8 million of costs
associated with the opening of a mid-west distribution center, (iii) $0.7
million of costs associated with the rationalization, consolidation and
improvement of the Company's manufacturing facilities, (iv) $0.6 million of
costs associated with the maintenance of non-operational facilities and (v) $0.4
million of costs associated with the establishment of new information systems.
During the thirty-nine weeks ended June 30, 2002, the Company realized
$7.7 million due to the
9
amortization of the deferred gain in conjunction with the Sale-Leaseback
Transaction. Also, during the thirty-nine weeks ended June 30, 2002, the Company
recognized a $3.0 million gain associated with the sale of the Company's
manufacturing facility in Manchester, New Hampshire. These gains were offset by
a $5.4 million write-off of the management services agreement between Sweetheart
Holdings and SF Holdings, which had been assigned and assumed by The Fonda
Group, Inc., a company formerly under the common control of the Chief Executive
Officer, in 1998 and the Company's write-off of $2.6 million of assets related
to business initiatives which were abandoned subsequent to the Merger.
Additionally, the Company incurred $7.6 million of costs in connection with the
rationalization, consolidation and improvement of the Company's manufacturing
facilities. Included in the $7.6 million of costs is a $1.6 million
restructuring reserve which the Company established in conjunction with a
workforce reduction program as a result of the Company's consolidation
initiatives. The workforce reduction program was approved by management on June
19, 2002 and announced to employees on June 28, 2002. Severance payments of $1.6
million were paid in the fourth quarter of Fiscal 2002 and the first three
quarters of Fiscal 2003.
(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 Senior
Subordinated Notes, as amended, and 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
June 29, 2003
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 10,119 $ - $ - $ 10,119
Cash in escrow 71 - - 71
Receivables 201,989 - (48,966) 153,023
Raw materials inventory 67,126 - - 67,126
Work in progress inventory 10,364 - - 10,364
Finished goods inventory 157,240 - - 157,240
Assets held for sale - 5,275 - 5,275
Other current assets 51,514 2,653 (2,653) 51,514
---------- --------- ----------- ----------
Total current assets 498,423 7,928 (51,619) 454,732
Property, plant and equipment, net 243,672 - - 243,672
Deferred income taxes 39,909 (21,443) 9,737 28,203
Other assets 96,403 109,634 (109,634) 96,403
---------- --------- ----------- ----------
Total assets $ 878,407 $ 96,119 $ (151,516) $ 823,010
========== ========= =========== ==========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 104,761 $ - $ - $ 104,761
Other current liabilities 99,284 - (2,653) 96,631
Current portion of long-term debt 41,439 - - 41,439
---------- --------- ----------- ----------
Total current liabilities 245,484 - (2,653) 242,831
Long-term debt 392,166 48,966 (48,966) 392,166
Other liabilities 197,865 - (64,133) 133,732
---------- --------- ----------- ----------
Total liabilities 835,515 48,966 (115,752) 768,729
---------- --------- ----------- ----------
Minority interest in subsidiary 2,357 - - 2,357
---------- --------- ----------- ----------
Shareholder's equity:
Class A Common Stock - 10 - 10
Class B Common Stock - 44 - 44
Additional paid-in capital 123,458 78,096 (100,600) 100,954
Accumulated deficit (67,495) (30,997) 64,836 (33,656)
Accumulated other comprehensive loss (15,428) - - (15,428)
---------- --------- ----------- ----------
Total shareholder's equity 40,535 47,153 (35,764) 51,924
---------- --------- ----------- ----------
Total liabilities and shareholder's equity $ 878,407 $ 96,119 $ (151,516) $ 823,010
========== ========= =========== ==========
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 in subsidiary 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 June 29, 2003
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
Net sales $ 345,850 $ - $ - $ 345,850
Cost of sales 294,493 - - 294,493
---------- --------- ----------- ----------
Gross profit 51,357 - - 51,357
Selling, general and administrative expenses 28,092 - - 28,092
Other income, net (2,446) - - (2,446)
---------- --------- ----------- ----------
Operating income 25,711 - - 25,711
Interest expense, net 10,876 (580) - 10,296
Loss on debt extinguishment 475 - - 475
---------- --------- ----------- ----------
Income before income tax and
minority interest 14,360 580 - 14,940
Income tax expense 5,744 233 - 5,977
Minority interest in subsidiary 35 - - 35
---------- --------- ----------- ----------
Net income $ 8,581 $ 347 $ - $ 8,928
========== ========= =========== ==========
Other comprehensive income:
Net income $ 8,581 $ 347 $ - $ 8,928
Foreign currency translation
adjustment 1,397 - - 1,397
Minimum pension liability
adjustment (net of income taxes of
$(867)) (1,301) - - (1,301)
---------- --------- ----------- ----------
Comprehensive income $ 8,677 $ 347 $ - $ 9,024
========== ========= =========== ==========
13
Consolidated Statement of Operations
For the Thirteen Weeks Ended June 30, 2002
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------- ------------ ------------- --------------
Net sales $ 340,245 $ - $ - $ 340,245
Cost of sales 299,635 - - 299,635
---------- --------- ----------- ----------
Gross profit 40,610 - - 40,610
Selling, general and administrative expenses 28,081 1 - 28,082
Other expense, net 8,877 - - 8,877
---------- --------- ----------- ----------
Operating income (loss) 3,652 (1) - 3,651
Interest expense (income), net 9,482 (28) - 9,454
---------- --------- ----------- ----------
Income (loss) before income tax
expense (benefit) and minority interest (5,830) 27 - (5,803)
Income tax (benefit) expense (2,331) 11 - (2,320)
Minority interest in subsidiary 40 - - 40
---------- --------- ----------- ----------
Net income (loss) $ (3,539) $ 16 $ - $ (3,523)
========== ========= =========== ==========
Other comprehensive income (loss):
Net income (loss) $ (3,539) $ 16 $ - $ (3,523)
Foreign currency translation
adjustment (196) - - (196)
Minimum pension liability
adjustment(net of income taxes of
$(146)) (219) - - (219)
---------- --------- ----------- ----------
Comprehensive income (loss) $ (3,954) $ 16 $ - $ (3,938)
========== ========= =========== ==========
14
Consolidated Statement of Operations
For the Thirty-nine Weeks Ended June 29, 2003
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
Net sales $ 959,539 $ - $ - $ 959,539
Cost of sales 841,586 - - 841,586
---------- --------- ----------- ----------
Gross profit 117,953 - - 117,953
Selling, general and administrative expenses 82,289 - - 82,289
Other income, net (5,676) - - (5,676)
---------- --------- ----------- ----------
Operating income 41,340 - - 41,340
Interest expense, net 30,484 (1,291) - 29,193
Loss on debt extinguishment 475 - 475 -
---------- --------- ----------- ----------
Income before income tax and
minority interest 10,381 1,291 - 11,672
Income tax expense 4,153 517 - 4,670
Minority interest in subsidiary 81 - - 81
---------- --------- ----------- ----------
Net income $ 6,147 $ 774 $ - $ 6,921
========== ========= =========== ==========
Other comprehensive income:
Net income $ 6,147 $ 774 $ - $ 6,921
Foreign currency translation
adjustment 889 - - 889
Minimum pension liability
adjustment (net of income taxes
of $(1,936)) (2,904) - - (2,904)
---------- --------- ----------- ----------
Comprehensive income $ 4,132 $ 774 $ - $ 4,906
========== ========= =========== ==========
15
Consolidated Statement of Operations
For the Thirty-nine Weeks Ended June 30, 2002
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
Net sales $ 957,491 $ 116,485 $ (116,485) $ 957,491
Cost of sales 858,722 106,760 (117,710) 847,772
---------- --------- ----------- ----------
Gross profit 98,769 9,725 1,225 109,719
Selling, general and administrative expenses 85,073 932 - 86,005
Other expense, net 4,098 - 1,225 5,323
---------- --------- ----------- ----------
Operating income 9,598 8,793 - 18,391
Interest expense, net 25,835 2,399 - 28,234
Loss on debt extinguishment 1,798 - - 1,798
---------- --------- ----------- ----------
Income (loss) before income tax expense
(benefit) and minority interest (18,035) 6,394 - (11,641)
Income tax (benefit) expense (7,182) 2,558 - (4,624)
Minority interest in subsidiary 113 - - 113
---------- --------- ----------- ----------
Net income (loss) $ (10,966) $ 3,836 $ - $ (7,130)
========== ========= =========== ==========
Other comprehensive income (loss):
Net income (loss) $ (10,966) $ 3,836 $ - $ (7,130)
Foreign currency translation
adjustment (176) - - (176)
Minimum pension liability
adjustment (net of income taxes
of $(894)) (1,341) - - (1,341)
---------- --------- ----------- ----------
Comprehensive income (loss) $ (12,483) $ 3,836 $ - $ (8,647)
========== ========= =========== ==========
16
Consolidated Statement of Cash Flows
For the Thirty-nine Weeks Ended June 29, 2003
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 23,200 $ - $ - $ 23,200
---------- --------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (9,300) - - (9,300)
Due from / to SF Holdings 250 - - 250
Proceeds from sale of investment 329 - - 329
Proceeds from sale of property, plant and
equipment 35 - - 35
---------- --------- ----------- ----------
Net cash used in investing activities (8,686) - - (8,686)
---------- --------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under credit facilities (85) - - (85)
Repayments of other debt (6,079) - - (6,079)
Debt issuance costs (6,195) - - (6,195)
Increase in cash escrow (379) - - (379)
Decrease in cash escrow 308 - - 308
---------- --------- ----------- ----------
Net cash used in financing activities (12,430) - - (12,430)
---------- --------- ----------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 2,084 - - 2,084
CASH AND CASH EQUIVALENTS, beginning of
period 8,035 - - 8,035
---------- --------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 10,119 $ - $ - $ 10,119
========== ========= =========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 18,702 $ - $ - $ 18,702
========== ========= =========== ==========
Income taxes received $ (2,692) $ - $ - $ (2,692)
========== ========= =========== ==========
17
Consolidated Statement of Cash Flows
For the Thirty-nine Weeks Ended June 30, 2002
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 18,858 $ 88,148 $ (88,148) $ 18,858
---------- --------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (17,589) - - (17,589)
Due from / to SF Holdings (64) - - (64)
Proceeds from sale of property, plant and
equipment 5,280 - - 5,280
---------- --------- ----------- ----------
Net cash used in investing activities (12,373) - - (12,373)
---------- --------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 191,522 - - 191,522
Repayment under credit facilities (196,144) - - (196,144)
Repayments of other debt (5,336) - - (5,336)
Repayment of intercompany equipment
financing - (88,148) 88,148 -
Increase in cash escrow (4,581) - - (4,581)
Decrease in cash escrow 4,458 - - 4,458
---------- --------- ----------- ----------
Net cash used in financing activities (10,081) (88,148) 88,148 (10,081)
---------- --------- ----------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (3,596) - - (3,596)
CASH AND CASH EQUIVALENTS, beginning of
period 11,616 - - 11,616
---------- --------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 8,020 $ - $ - $ 8,020
========== ========= =========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 19,890 $ - $ - $ 19,890
========== ========= =========== ==========
Income taxes paid $ 808 $ - $ - $ 808
========== ========= =========== ==========
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;
18
(ii) tissue and specialty foodservice products, primarily napkins, table covers,
placemats and lunch bags; and (iii) food packaging products, primarily
containers for the dairy and food processing industries. To enhance product
sales, the Company designs, manufactures and leases container filling and
lidding equipment to dairies and other food processors to package food items in
the Company's containers at customers' plants. 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.
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
19
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 thirty-nine weeks ended June
29, 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 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 June 29, 2003 Compared to Thirteen Weeks Ended
June 30, 2002
Net sales increased $5.7 million, or 1.7%, to $345.9 million for the
thirteen weeks ended June 29, 2003 compared to $340.2 million for the thirteen
weeks ended June 30, 2002, reflecting a 2.3% decrease in sales volume and a 4.0%
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 pricing increases associated with higher raw material
costs and a change in product mix.
Gross profit increased $10.8 million, or 26.6%, to $51.4 million for
the thirteen weeks ended June 29, 2003 compared to $40.6 million for the
thirteen weeks ended June 30, 2002. As a percentage of net sales, gross profit
increased to 14.9% for the thirteen weeks ended June 29, 2003 from 11.9% for the
thirteen weeks ended June 30, 2002. The increase in gross profit is primarily
due to improved labor utilization resulting from the Company's rationalization,
consolidation and improvement of 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 was $28.1 million for the
thirteen weeks ended June 29, 2003 and June 30, 2002, respectively. In general,
these expenses remained constant due to a (i) $0.6 million decrease in salaries
and related fringe benefits which was partially due to a workforce reduction
program initiated in Fiscal 2002, (ii) $0.5 million decrease in depreciation
expense resulting from the full depreciation of certain computer equipment and
(iii) $0.5 million decrease in goodwill amortization due to the adoption of SFAS
No. 142. These favorable changes were partially offset by a $1.2 million
increase in promotional and advertising expenses.
Other (income) expense, net changed $11.3 million, or 127.0%, to income
of $2.4 million for the thirteen weeks ended June 29, 2003 compared to an
expense of $8.9 million for the thirteen weeks ended June 30, 2002. During the
thirteen weeks ended June 29, 2003, the Company realized (i) $2.5 million due to
the amortization of the deferred gain in conjunction with the Fiscal 2000
sale-leaseback transaction (the "Sale-Leaseback Transaction"), (ii)
20
$0.7 million of gains from foreign currency transactions, (iii) $0.4 million of
costs associated with the establishment of new information systems, (iv) $0.2
million of costs associated with the maintenance of non-operational facilities,
(v) $0.1 million of costs associated with the opening of the mid-west
distribution center and (vi) $0.1 million of net losses from the sale of
obsolete equipment. As compared to the thirteen weeks ended June 30, 2002, the
Company realized (i) $2.5 million due to the amortization of the deferred gain
in conjunction with the Sale-Leaseback Transaction, (ii) a $4.6 million
write-off of the management services agreement between Sweetheart Holdings Inc.
("Sweetheart Holdings") and SF Holdings Group, Inc. ("SF Holdings"), which had
been assigned and assumed by The Fonda Group, Inc. ("Fonda") in 1998, (iii) $3.3
million of costs incurred in connection with the rationalization, consolidation
and improvement of the Company's manufacturing facilities, (iv) a $2.6 million
write-off of assets related to certain business initiatives which were abandoned
subsequent to the merger of Sweetheart Cup Company Inc. ("Sweetheart Cup") and
Fonda and (v) a $0.5 million expense related to the purchase of the final
insurance annuity associated with a lawsuit entitled Aldridge v. Lily-Tulip,
Inc. Salary Retirement Plan Benefits Committee and Fort Howard Cup Corporation,
Civil Action No. CV 187-084.
Operating income increased $22.0 million, or 594.6%, to income of $25.7
million for the thirteen weeks ended June 29, 2003 compared to $3.7 million for
the thirteen weeks ended June 30, 2002, due to the reasons stated above.
Interest expense, net increased $0.8 million, or 8.4%, to $10.3 million
for the thirteen weeks ended June 29, 2003 compared to $9.5 million for the
thirteen weeks ended June 30, 2002. This increase is primarily due to the
amortization of fees associated with the Company's exchange offer of its Senior
Subordinated Notes due September 2003 which was partially offset by lower
interest rates on the Senior Credit Facility.
Loss on debt extinguishment was $0.5 million for the thirteen weeks
ended June 29, 2003 resulting from the write-off of deferred financing costs
associated with the April 8, 2003 debt exchange offering.
Income tax expense (benefit) changed $8.3 million, to an expense of
$6.0 million for the thirteen weeks ended June 29, 2003 compared to a benefit of
$2.3 million for the thirteen weeks ended June 30, 2002 as a result of a pre-tax
profit for the thirteen weeks ended June 29, 2003 as compared to a pretax loss
for the thirteen weeks ended June 30, 2002. The effective rates for the thirteen
weeks ended June 29, 2003 and the thirteen weeks ended June 30, 2002 were 40%,
respectively.
Minority interest in subsidiary decreased $5,000, or 13.0%, to $35,000
for the thirteen weeks ended June 29, 2003 compared to $40,000 for the thirteen
weeks ended June 30, 2002. This amount represents the 20% ownership of Global
Cup, S.A. De C.V. and its subsidiaries' ("Global Cup") income.
Net income (loss) increased $12.4 million, or 354.3%, to income of $8.9
million for the thirteen weeks ended June 29, 2003 compared to a loss of $3.5
million for the thirteen weeks ended June 30, 2002, due to the reasons stated
above.
Thirty-nine Weeks Ended June 29, 2003 Compared to Thirty-nine Weeks Ended
June 30, 2002
Net sales increased $2.0 million, or 0.2%, to $959.5 million for the
thirty-nine weeks ended June 29, 2003 compared to $957.5 million for the
thirty-nine weeks ended June 30, 2002, reflecting a 1.6% decrease in sales
volume and a 1.8% 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 pricing increases associated with
higher raw material costs and a change in product mix.
Gross profit increased $8.3 million, or 7.6%, to $118.0 million for the
thirty-nine weeks ended June 29, 2003 compared to $109.7 million for the
thirty-nine weeks ended June 30, 2002. As a percentage of net sales, gross
profit increased to 12.3% for the thirty-nine weeks ended June 29, 2003 from
11.5% for the thirty-nine weeks ended June 30, 2002. This increase in gross
profit is primarily due to improved labor utilization and manufacturing
efficiencies resulting from the Company's rationalization, consolidation and
improvement of its manufacturing facilities.
Selling, general and administrative expenses decreased $3.7 million, or
4.3%, to $82.3 million for the
21
thirty-nine weeks ended June 29, 2003 compared to $86.0 million for the
thirty-nine weeks ended June 30, 2002. This decrease is primarily due to a (i)
$2.1 million decrease in depreciation expense resulting from the full
depreciation of certain computer equipment, (ii) $1.5 million decrease in
goodwill amortization due to the adoption of SFAS No. 142, (iii) $1.5 million
decrease in salaries and related fringe benefits due to a workforce reduction
program initiated in Fiscal 2002, (iv) $0.7 million decrease in supply expenses,
(v) $0.5 million decrease due to customer bankruptcy filings in Fiscal 2002.
These favorable changes were partially offset by a $2.6 million increase in
promotional and advertising expenses.
Other (income) expense, net changed $11.0 million, or 207.6%, to income
of $5.7 million for the thirty-nine weeks ended June 29, 2003 compared to an
expense of $5.3 million for the thirty-nine weeks ended June 30, 2002. During
the thirty-nine weeks ended June 29, 2003, the Company realized (i) $7.6 million
due to the amortization of the deferred gain in conjunction with the
Sale-Leaseback Transaction, (ii) $1.1 million of gains from foreign currency
transactions and (iii) $0.2 million from a gain on the sale of its 25% interest
in Fibre Marketing Group, LLC. These gains were partially offset by (i) $0.8
million of net losses from the sale of obsolete equipment (ii) $0.8 million of
costs associated with the opening of the mid-west distribution center, (iii)
$0.7 million of costs associated with the rationalization, consolidation and
improvement of the Company's manufacturing facilities, (iv) $0.6 million of
costs associated with the maintenance of non-operational facilities and (v) $0.4
million of costs associated with the establishment of new information systems.
As compared to the thirty-nine weeks ended June 30, 2002, the Company realized
$7.7 million due to the amortization of the deferred gain in conjunction with
the Sale-Leaseback Transaction and $3.0 million from a gain associated with the
sale of a manufacturing facility in Manchester, New Hampshire. These gains were
partially offset by (i) a $5.4 million write off of the management services
agreement between Sweetheart Holdings and SF Holdings, which had been assigned
and assumed by Fonda in Fiscal 1998, (ii) a write-off of $2.6 million of assets
related to business initiatives which were abandoned subsequent to the Merger,
(iii) $7.6 million of costs in connection with the rationalization,
consolidation and improvement of the Company's manufacturing facilities.
Operating income increased $22.9 million, or 124.5%, to income of $41.3
million for the thirty-nine weeks ended June 29, 2003 compared to $18.4 million
for the thirty-nine weeks ended June 30, 2002, due to the reasons stated above.
Interest expense, net increased $1.0 million, or 3.6%, to $29.2 million
for the thirty-nine weeks ended June 29, 2003 compared to $28.2 million for the
thirty-nine weeks ended June 30, 2002. This increase is primarily due to the
amortization of fees associated with the Company's exchange offer and increase
in coupon interest effective March 1, 2002 of the Senior Subordinated Notes due
September 2003. These increases were partially offset by lower interest rates on
the Senior Credit Facility.
Loss on debt extinguishment decreased $1.3 million, or 72.2%, to $0.5
million for the thirty-nine weeks ended June 29, 2003 resulting from the
write-off of deferred financing costs associated with the April 8, 2003 debt
exchange offering compared to $1.8 million for the thirty-nine weeks ended June
30, 2002 resulting from the write-off of the deferred financing costs from the
refinancing of the Company's Senior Credit Facility.
Income tax expense (benefit) changed $9.3 million, to an expense of
$4.7 million for thirty-nine weeks ended June 29, 2003 compared to a benefit of
$4.6 million for the thirty-nine weeks ended June 30, 2002 as a result of a
pre-tax profit for the thirty-nine weeks ended June 29, 2003 as compared to a
pretax loss for the thirty-nine weeks ended June 30, 2002. The effective rates
for the thirty-nine weeks ended June 29, 2003 and the thirty-nine weeks ended
June 30, 2002 were 40%, respectively.
Minority interest in subsidiary was $0.1 million for the thirty-nine
weeks ended June 29, 2003 and June 30, 2002, respectively. This amount
represents the 20% ownership of Global Cup's income.
Net income (loss) increased $14.0 million, or 197.2%, to income of $6.9
million for the thirty-nine weeks ended June 29, 2003 compared to a loss of $7.1
million for the thirty-nine weeks ended June 30, 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
22
finance its working capital requirements and capital expenditures. In the
thirty-nine weeks ended June 29, 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.
Net cash provided by operating activities for the thirty-nine weeks
ended June 29, 2003 was $23.2 million compared to $18.9 million for the
thirty-nine weeks ended June 30, 2002. This increase is primarily due to
improved earnings during the thirty-nine weeks ended June 29, 2003 compared to
the thirty-nine weeks ended June 30, 2002. This increase was partially offset by
an increase in inventories.
Net cash used in investing activities for the thirty-nine weeks ended
June 29, 2003 was $8.7 million compared to $12.4 million for the thirty-nine
weeks ended June 30, 2002. This decrease is primarily due to lower capital
spending which is offset in part by the receipt of net proceeds from the sale of
the Manchester, New Hampshire facility during the thirty-nine weeks ended June
30, 2002.
Net cash used in financing activities for the thirty-nine weeks ended
June 29, 2003 was $12.4 million compared to $10.1 million for the thirty-nine
weeks ended June 30, 2002. This increase is primarily due to lower borrowings
under the Senior Credit Facility and increased debt issuance costs.
Working capital increased $85.1 million to $211.9 million at June 29,
2003 from $126.8 million at September 29, 2002. This increase resulted from
current liabilities decreasing $72.2 million and current assets increasing $12.9
million. The decrease in current liabilities resulted primarily from a
reclassification of $93.8 million of New Notes from current to long-term debt.
The increase in current assets resulted primarily from an increase in
inventories which was offset by the collection of a tax receivable.
Capital expenditures for the thirty-nine weeks ended June 29, 2003 were
$9.3 million compared to $17.6 million for the thirty-nine weeks ended June 30,
2002. Capital expenditures for the thirty-nine weeks ended June 29, 2003
included $7.3 million for new production equipment; $0.9 million associated with
the implementation of the Company's consolidation program; and $1.1 million
primarily for routine capital improvements. Funding for the capital expenditures
for the thirty-nine weeks ended June 29, 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.
On June 10, 2002, the Company entered into a loan agreement with the
Department of Business and Economic Development, a principal department of the
State of Maryland, to borrow $2.0 million (the "Maryland Loan"). The Maryland
Loan bears interest at a rate ranging from 3.0% to 8.0% per annum depending on
certain employment rates at the Company's Owings Mills, Maryland facility. The
Maryland Loan is payable in quarterly installments through March 1, 2007. As of
June 29, 2003 and September 29, 2002, $1.6 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"). 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, unless otherwise amended, will become due and payable 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 June 29, 2003, the
weighted average annual interest rate for the Senior Credit Facility was 4.07%.
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
23
commitment fee of 0.375% per annum on the daily average unused amount of the
commitments. As of June 29, 2003, $45.4 million was available under the Senior
Credit Facility. As of June 29, 2003, LIBOR was 1.32% and the bank's base rate
was 4.50%.
The Senior Credit Facility contains various covenants that limit, or
restrict, among other things, indebtedness, dividends, leases, capital
expenditures and the use of proceeds from asset sales and certain other business
activities. Additionally, the Company must maintain on a consolidated basis,
certain specified ratios at specified times, including, without limitation,
maintenance of minimum fixed charge coverage ratio. The Company is currently in
compliance with all covenants under the Senior Credit Facility. The Senior
Credit Facility provides for partial mandatory prepayments upon the sale of
equipment collateral unless net proceeds are used to purchase replacement
collateral and full repayment upon any change of control (as defined in the loan
agreement governing the Senior Credit Facility).
The Company's Canadian subsidiary has a credit agreement (the "Canadian
Credit Facility") which provides for a term loan and a credit facility with a
maximum credit borrowing of Cdn $30 million (approximately US $22.2 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 June 29, 2003, the weighted average annual
interest rate for the Canadian Credit Facility was 4.80%. As of June 29, 2003,
Cdn $1.8 million (approximately US $1.3 million) was available under the
revolving facility and the term loan balance was Cdn $10.7 million
(approximately US $7.9 million) under the Canadian Credit Facility.
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor
with respect to the 12.0% Senior Subordinated Notes (the "Senior Subordinated
Notes") which are due September 1, 2003. Interest on the Senior Subordinated
Notes is payable semi-annually in arrears on March 1 and September 1. The Senior
Subordinated Notes began to accrue interest at 12.0% per annum as of March 1,
2002. The 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 Senior Subordinated Notes are general
unsecured obligations of Sweetheart Cup and 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 the New Notes, and are pari
passu with the $120 million 9 1/2% Senior Subordinated Notes due 2007.
On April 8, 2003, Sweetheart Cup consummated its offer to exchange
(the "Exchange Offer") its newly issued 12.0% Senior Notes due July 15, 2004
(the "New Notes") for all of its outstanding Senior Subordinated Notes and
solicitation of consents of holders of the Senior Subordinated Notes to the
proposed amendments to the indenture governing the 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 $93.8 million in aggregate principal amount of New
Notes were issued under the indenture in exchange for a like amount of the
Senior Subordinated Notes. Payment of the consent payments to all holders of the
Senior Subordinated Notes who timely tendered was made in April 2003 to the
trustee. As a result of the Exchange Offer, $93.8 million of the Senior
Subordinated Notes is classified as long-term debt in the accompanying June 29,
2003 consolidated balance sheet.
As a result of the Consent Solicitation, the amendment to the indenture
governing the Senior Subordinated Notes became effective as of April 8, 2003.
The amendment primarily eliminated substantially all of the restrictive
covenants other than the change of control covenant. At June 29, 2003, the
aggregate principal amount of the Senior Subordinated Notes that remain
outstanding following the Exchange Offer is $16.2 million which is due September
1, 2003.
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor
with respect to the $93.8 million of 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 12.0%
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 Sweetheart
Cup and are senior in right of payment to the
24
Company's subordinated indebtedness, including the 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. 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 $120 million of 9 1/2% Senior
Subordinated Notes which are due February 27, 2007. Interest is payable
semi-annually. Payment of the principal and interest is subordinate in right to
payment of all of the Company's senior debt, including the New Notes and
borrowings under the Senior Credit Facility and is pari passu with the Senior
Subordinated Notes.. 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 contain various
covenants which prohibit, or limit, among other things, asset sales, change of
control, dividend payments, equity repurchases or redemption, the incurrence of
additional indebtedness, the issuance of disqualified stock, certain transaction
with affiliates, the creation of additional liens and certain other business
activities.
In connection with the 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 Sale-Leaseback
Transaction from State Street as owner trustee for several owner participants,
through November 9, 2010. Sweetheart Cup has the option to renew the Lease for
up to four consecutive renewal terms of two years each. Sweetheart Cup also has
the option to purchase such equipment for fair market value either at the
conclusion of the Lease term or November 21, 2006. The Company's obligations
under the Lease are collateralized by substantially all of the 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.
The following summarizes the Company's contractual obligations at June
29, 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 $ 114,760 $ 4,397 $ 612 $ 290,115 $ 200 $ 1,000
Non-cancelable
operating leases 54,042 51,640 48,843 46,984 53,436 189,737
Capital leases 124 97 - - - -
--------- -------- -------- --------- -------- ----------
Total obligations $ 168,926 $ 56,134 $ 49,455 $ 337,099 $ 53,636 $ 190,737
========= ======== ======== ========= ======== ==========
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
25
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 service requirements (other than the payment of principal
under the New Notes) in the next twelve months. The Company will need to
refinance, repay or extend the New Notes by July 15, 2004 and, the Senior Credit
Facility, unless otherwise amended, will become due and payable if the Company
is unable to refinance, repay or extend the New Notes by December 31,2003.
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 June 29, 2003, the outstanding
indebtedness under the Senior Credit Facility was $179.3 million and the
Canadian Credit Facility was $16.7 million in U.S. dollars. As of June 29, 2003,
$45.4 million was available under the Senior Credit Facility and Cdn $1.8
million (approximately US $1.3 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.
26
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Financial Officer
(b) Reports on Form 8-K:
None.
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: August 5, 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end
of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's
internal controls over financial reporting that
occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: August 5, 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end
of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's
internal controls over financial reporting that
occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: August 5, 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