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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Thirteen Weeks Ended December 28, 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 February 10, 2004:
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 $100 million of 9 1/2% Senior Secured Notes
due 2007 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)
December 28, September 28,
2003 2003
---------------- ----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 10,064 $ 10,447
Cash in escrow 96 77
Receivables, less allowances of $3,973 and $3,881 149,035 158,491
Inventories 216,803 220,433
Deferred income taxes 24,168 24,207
Assets held for sale 5,275 5,275
Other current assets 30,885 31,665
----------- -----------
Total current assets 436,326 450,595
Property, plant and equipment, net 240,151 240,975
Deferred income taxes 21,323 22,022
Spare parts 13,789 13,310
Goodwill 41,232 41,232
Due from SF Holdings 17,960 17,960
Other assets 23,078 22,152
------------ -----------
Total assets $ 793,859 $ 808,246
=========== ===========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 101,000 $ 121,619
Accrued payroll and related costs 40,948 44,192
Other current liabilities 39,566 39,855
Current portion of deferred gain on sale of assets 10,100 10,100
Current portion of long-term debt 16,649 116,948
----------- -----------
Total current liabilities 208,263 332,714
Long-term debt 399,630 286,931
Deferred gain on sale of assets 59,529 62,054
Other liabilities 67,250 69,772
----------- -----------
Total liabilities 734,672 751,471
----------- -----------
Minority interest in subsidiary 2,442 2,403
----------- -----------
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 101,212 101,212
Accumulated deficit (24,816) (25,532)
Accumulated other comprehensive loss (19,705) (21,362)
----------- -----------
Total shareholder's equity 56,745 54,372
----------- -----------
Total liabilities and shareholder's equity $ 793,859 $ 808,246
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
2
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
For the Thirteen For the Thirteen
weeks ended weeks ended
December 28, December 29,
2003 2002
---------------- ----------------
Net sales $ 321,561 $ 320,345
Cost of sales 279,859 284,477
----------- -----------
Gross profit 41,702 35,868
Selling, general and administrative expenses 28,981 26,196
Other income, net (1,270) (2,195)
----------- -----------
Operating income 13,991 11,867
Loss on debt extinguishment 2,354 -
Interest expense, net of interest income of
$91 and $37 10,380 9,464
----------- -----------
Income before income tax and minority interest 1,257 2,403
Income tax expense 502 961
Minority interest in subsidiary 39 14
----------- -----------
Net income $ 716 $ 1,428
=========== ===========
Other comprehensive income (loss):
Net income $ 716 $ 1,428
Foreign currency translation adjustment 68 (167)
Minimum pension liability adjustment (net
of income tax of $1,059 and ($1,558)) 1,589 (2,337)
----------- -----------
Comprehensive income (loss) $ 2,373 $ (1,076)
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
3
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Thirteen For the Thirteen
weeks ended weeks ended
December 28, December 29,
2003 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 716 $ 1,428
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 8,439 7,841
Amortization of deferred gain (2,525) (2,551)
Gain on sale of property, plant and equipment (16) -
Loss on debt extinguishment 2,354 -
Changes in operating assets and liabilities:
Receivables 9,456 10,400
Inventories 3,630 20,426
Other current assets 780 1,048
Other assets (1,232) 87
Accounts payable (20,619) (30,371)
Accrued payroll and related costs (3,244) (1,543)
Other current liabilities (287) 6,463
Other liabilities 128 (1,263)
Other, net (169) 462
----------- -----------
Net cash (used in) provided by operating activities (2,589) 12,427
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (4,907) (2,492)
Proceeds from sale of property, plant and equipment 17 -
----------- -----------
Net cash used in investing activities (4,890) (2,492)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under revolving credit facilities (6,195) (5,965)
Repayments of 12.0% Senior Notes (93,825) -
Repayments of other debt (8,120) (2,026)
Borrowings under the 91/2% Senior Secured Notes 100,000 -
Borrowings under the 91/2% Junior Subordinated Note 20,000 -
Debt issuance costs (4,745) (277)
Increase in cash escrow (239) (94)
Decrease in cash escrow 220 87
----------- -----------
Net cash provided by (used in) financing activities 7,096 (8,275)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (383) 1,660
CASH AND CASH EQUIVALENTS, beginning of period 10,447 8,035
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 10,064 $ 9,695
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 7,904 $ 3,367
=========== ===========
Income taxes (received) paid $ (18) $ 13
=========== ===========
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 28, 2003.
On December 22, 2003, SF Holdings executed a definitive agreement for
its acquisition by Solo Cup Company of Highland Park, Illinois ("Solo"). The
consummation of the transaction is subject to customary conditions and
regulatory approvals, including, but not limited to, Solo's receipt of
financing. In connection with the transaction, all of the outstanding
indebteness of the Company will be repurchased or redeemed.
(2) EQUITY BASED COMPENSATION
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. Amortization
expense relating to SF Holdings' stock options was $10,000 for the thirteen
weeks ended December 29, 2002.
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for SF Holdings stock options granted to
employees of the Company. Had compensation costs for SF Holdings stock options
been determined based on fair value at the option grant dates, in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS") No.
123, the Company's net income during the thirteen weeks ended December 28, 2003
and December 29, 2002, respectively, would have changed to the pro forma amount
indicated below (in thousands):
For the For the
Thirteen weeks ended Thirteen weeks ended
December 28, December 29,
Net income (loss): 2003 2002
-------------------- ---------------------
As reported $ 716 $ 1,428
Pro forma $ 716 $ 1,426
The weighted average fair value of the SF Holdings stock options was
$0.4 million in Fiscal 2001 estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions: dividend yield of zero, risk-free interest rate of 2.75% and
expected life of option grants of three years. The effects of applying SFAS No.
123 in this pro forma disclosure are not indicative of future pro forma effects.
5
(3) INVENTORIES
The components of inventories are as follows (in thousands):
December 28, September 28,
2003 2003
---------------- -------------------
Raw materials and supplies $ 57,477 $ 63,048
Finished products 149,694 147,075
Work in progress 9,632 10,310
---------- ----------
Total inventories $ 216,803 $ 220,433
========== ==========
(4) DEBT
On December 8, 2003 and December 16, 2003, Sweetheart Cup consummated
in aggregate a $120 million debt refinancing, comprised of the issuance of a $20
million 9 1/2% junior subordinated note due 2008 to International Paper Company
(the "9 1/2% Junior Subordinated Note") and $100 million of 9 1/2% senior
secured notes due 2007 to institutional investors (the "9 1/2% Senior Secured
Notes"), respectively. The proceeds from these offerings were used to repay a
portion of the senior credit facility with Bank of America, N.A. (the "Senior
Credit Facility"), and the balance has been used to redeem all of the
outstanding $93.8 million of 12.0% Senior Notes due July 15, 2004 (the "12.0%
Senior Notes") and to pay related fees and expenses, and for general corporate
purposes. On December 16, 2003, the 12.0% Senior Notes were redeemed. During the
thirteen weeks ended December 28, 2003, the Company recorded a $2.4 million loss
on debt extinguishment which consisted of the write-off of unamortized deferred
financing costs incurred in connection with the redemption of the 12.0% Senior
Notes.
Sweetheart Cup is the obligor with respect to the 9 1/2% Junior
Subordinated Note. Interest on the 9 1/2% Junior Subordinated Note is payable
semi-annually on November 15 and May 15 of each year, commencing on May 15,
2004. Sweetheart Cup may defer interest due on any interest payment date and
such deferred interest shall become part of the principal amount due under such
note; provided, however, that Sweetheart Cup may not defer such interest
occurring on or after November 15, 2004 if payment in cash on such interest
payment date is not prohibited under any of Sweetheart Cup's existing
indebtedness and the payment to be made pursuant to a certain warrant agreement
with New Cup, LLC has bee paid in cash. Sweetheart Cup may redeem all or any of
the 9 1/2% Junior Subordinated Note, in whole or in part, at any time on or
after December 8, 2003, upon notice of at least 10 days but not more than 20
days before a redemption date, at a redemption price of 100% of principal amount
plus accrued and unpaid interest. The 9 1/2% Junior Subordinated Note is
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.
The 9 1/2% Junior Subordinated Note contains various covenants which prohibit,
or limit, among other things, change of control, asset sales, dividend payments,
equity repurchases or redemption, the incurrence of additional indebtedness,
make any restrictive investments, the issuance of disqualified stock, the
creation of additional liens, certain transactions with affiliates, and certain
other business activities.
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor
with respect to the 9 1/2% Senior Secured Notes. Interest on the 9 1/2% Senior
Secured Notes is payable quarterly on January 15, April 15, July 15, and October
15, commencing on April 15, 2004. Sweetheart Cup may redeem, at any time, all or
a part of the 9 1/2% Senior Secured Notes upon notice not less than 30 days not
more than 60 days prior to the redemption date, at a redemption price of 102% of
principal amount plus accrued and unpaid interest on the 9 1/2% Senior Secured
Notes redeemed to the applicable redemption date, declining to 100% six months
prior to the maturity of the notes. The 9 1/2% Senior Secured Notes are senior
secured obligations of Sweetheart Cup and rank equally with its existing and
future senior debt, and senior to its existing and future subordinated debt. The
9 1/2% Senior Secured Notes and related guarantees are secured by a first
priority lien on certain of Sweetheart Cup's property, plant and equipment,
subject to certain permitted liens, located in Appleton Wisconsin, Augusta,
Georgia, Glens Falls, New York, Goshen, Indiana, Oshkosh, Wisconsin, St. Albans,
Vermont, El Cajon, California, Indianapolis, Indiana, Lakeland, Florida, and
Williamsburg, Pennsylvania. The 9 1/2% Senior Secured Notes contain various
covenants which prohibit, or limit, among other things, change of control, asset
sales, dividend payments, equity repurchases or redemption, the incurrence of
additional indebtedness, make any restrictive investments, the issuance of
disqualified
6
stock, the creation of additional liens, certain transactions with affiliates,
and certain other business activities.
The Senior Credit Facility was amended on December 16, 2003, to, among
other things, change the maturity date to August 1, 2006 and permanently reduce
the maximum revolving credit borrowings to $205.0 million.
(5) 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 and which is no longer an affiliate of the Company) 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 this
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. The
outstanding balance due to SF Holdings was $3.1 million at December 28, 2003 and
$1.2 million at December 29, 2002, respectively.
At December 29, 2002, the Company had a loan receivable from its Chief
Executive Officer of $0.3 million plus accrued interest at 5.06%. In Fiscal
2003, the Company's Chief Executive Officer repaid the outstanding loan
receivable. During the thirteen weeks ended December 29, 2002, the Company
forgave $13,872 of interest associated with the loan to its Chief Executive
Officer. At December 29, 2002, the Company had a loan receivable from its Chief
Operating Officer of $0.1 million plus accrued interest at 5.39%. On February
28, 2003, the loan receivable was amended and the interest rate changed to the
federal funds rate. At December 28, 2003, the loan receivable is $0.1 million
plus accrued interest.
On November 1, 2001, Fibre Marketing issued promissory notes to the
Company for $1.2 million in the aggregate, in exchange for outstanding accounts
receivable from Fibre Marketing, at an annual interest rate of 7.0% payable in
36 monthly installments. As of September 29, 2002, $0.9 million was due to the
Company. In Fiscal 2003, Fibre Marketing repaid the remaining balance of the
outstanding promissory notes.
During the thirteen weeks ended December 28, 2003, the Company
purchased $3.5 million of corrugated containers from Box USA Holdings, Inc.
("Box USA"), a converter and seller of interior packaging, corrugated sheets and
corrugated containers, in which the Company's Chief Executive Officer
beneficially owns more than 10% of its outstanding capital stock. During the
thirteen weeks ended December 28, 2003, the Company purchased $0.4 million of
travel services from Emerald Lady, Inc, a company wholly owned by the Company's
Chief Executive Officer ("Emerald Lady"). Included in accounts payable as of
December 28, 2003 is $0.1 million due to Box USA.
During the thirteen weeks ended December 28, 2003, the Company sold
$2.1 million of scrap paper and plastic to Fibre Marketing. Included in accounts
receivable as of December 28, 2003 is $0.5 million due from Fibre Marketing. In
Fiscal 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.
During the thirteen weeks ended December 29, 2002, the Company
purchased $2.9 million of corrugated containers from Box USA. During the
thirteen weeks ended December 29, 2002, the Company purchased $0.2 million of
travel services from Emerald Lady. Included in accounts payable as of December
29, 2002 is $0.3 million due to Box USA.
During the thirteen weeks ended December 29, 2002, the Company sold
$2.0 million of scrap paper and plastic to Fibre Marketing. Included in accounts
receivable as of December 29, 2002 is $1.1 million due from Fibre Marketing.
7
In Fiscal 2001, the Company began leasing a facility in North Andover,
Massachusetts from D&L Andover Property, LLC, an entity in which the Company's
Chief Executive Officer indirectly owns 50%. During the thirteen weeks ended
December 28, 2003 and December 29, 2002, rental payments under this lease were
$0.4 million, respectively. Annual rental payments under the 20-year lease are
$1.5 million in the first year, escalating at a rate of 2% each year thereafter.
In Fiscal 2000, the Company entered into a lease agreement with D&L
Development, LLC, an entity in which the Company's Chief Executive Officer
indirectly owns 47%, to lease a warehouse facility in Hampstead, Maryland.
During the thirteen weeks ended December 28, 2003 and December 29, 2002, rental
payments under this lease were $0.9 million, respectively. Annual rental
payments under the 20-year lease are $3.7 million for the first 10 years of the
lease and $3.8 million annually, thereafter.
The Company leases a building in Jacksonville, Florida from the
Company's Chief Executive Officer. Annual payments under the lease are $0.2
million plus annual increases based on changes in the Consumer Price Index
("CPI") through December 31, 2014. In addition, the Company's 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 $5,000 and $10,000 during the thirteen weeks ended
December 28, 2003 and December 29, 2002, respectively.
(6) ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows
(in thousands):
December 28, September 28,
2003 2003
---------------- -----------------
Foreign currency translation
adjustment $ (2,460) $ (2,528)
Minimum pension liability
adjustment (17,245) (18,834)
----------- ----------
Accumulated other comprehensive loss $ (19,705) $ (21,362)
========== ==========
(7) OTHER INCOME, NET
During the thirteen weeks ended December 28, 2003, the Company realized
$2.5 million due to the amortization of the deferred gain in conjunction with a
sale-leaseback transaction. In addition, the Company realized $0.1 million from
foreign currency transactions gains. These gains were partially offset by (i)
$0.8 million of costs associated with the Company's evaluation of strategic
options, including, among other things, the sale of assets or the business, (ii)
$0.4 million of costs associated with the settlement of a disputed lease, (iii)
$0.1 million of costs associated with the maintenance of non-operational
facilities.
During the thirteen weeks ended December 29, 2002, the Company realized
$2.6 million due to the amortization of the deferred gain in conjunction with a
sale-leaseback transaction. This gain was partially offset by $0.3 million of
costs associated with the rationalization, consolidation and improvement of the
Company's manufacturing facilities.
(8) 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.
8
(9) 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 9 1/2%
Senior Secured 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):
Consolidated Balance Sheet
December 28, 2003
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 10,064 $ - $ - $ 10,064
Cash in escrow 96 - - 96
Receivables 199,546 - (50,511) 149,035
Raw materials inventory 57,477 - - 57,477
Work in progress inventory 9,632 - - 9,632
Finished goods inventory 149,694 - - 149,694
Assets held for sale - 5,275 - 5,275
Other current assets 55,053 2,723 (2,723) 55,053
----------- ----------- ------------ -------------
Total current assets 481,562 7,998 (53,234) 436,326
Property, plant and equipment, net 240,151 - - 240,151
Deferred income taxes 33,272 (21,685) 9,736 21,323
Other assets 96,059 111,712 (111,712) 96,059
----------- ----------- ------------ -------------
Total assets $ 851,044 $ 98,025 $ (155,210) $ 793,859
=========== =========== ============ =============
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 101,000 $ - $ - $ 101,000
Other current liabilities 93,337 - (2,723) 90,614
Current portion of long-term debt 16,649 - - 16,649
----------- ----------- ------------ -------------
Total current liabilities 210,986 - (2,723) 208,263
Long-term debt 399,630 50,511 (50,511) 399,630
Other liabilities 192,991 - (66,212) 126,779
----------- ----------- ------------ -------------
Total liabilities 803,607 50,511 (119,446) 734,672
----------- ----------- ------------ -------------
Minority interest 2,442 - - 2,442
----------- ----------- ------------ -------------
Shareholder's equity:
Class A Common Stock - 10 - 10
Class B Common Stock - 44 - 44
Additional paid-in capital 123,717 78,095 (100,600) 101,212
Accumulated deficit (59,017) (30,635) 64,836 (24,816)
Accumulated other comprehensive loss (19,705) - - (19,705)
----------- ----------- ------------ -------------
Total shareholder's equity 44,995 47,514 (35,764) 56,745
----------- ----------- ------------ -------------
Total liabilities and shareholder's equity $ 851,044 $ 98,025 $ (155,210) $ 793,859
=========== =========== ============ =============
9
Consolidated Balance Sheet
September 28, 2003
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 10,447 $ - $ - $ 10,447
Cash in escrow 77 - - 77
Receivables 208,229 - (49,738) 158,491
Raw materials inventory 63,048 - - 63,048
Work in progress inventory 10,310 - - 10,310
Finished goods inventory 147,075 - - 147,075
Assets held for sale - 5,275 - 5,275
Other current assets 55,872 2,688 (2,688) 55,872
----------- ----------- ------------ -------------
Total current assets 495,058 7,963 (52,426) 450,595
Property, plant and equipment, net 240,975 - - 240,975
Deferred income taxes 33,852 (21,566) 9,736 22,022
Other assets 94,654 110,677 (110,677) 94,654
----------- ----------- ------------ -------------
Total assets $ 864,539 $ 97,074 $ (153,367) $ 808,246
=========== =========== ============ =============
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 121,619 $ - $ - $ 121,619
Other current liabilities 96,835 - (2,688) 94,147
Current portion of long-term debt 116,948 - - 116,948
----------- ----------- ------------ -------------
Total current liabilities 335,402 - (2,688) 332,714
Long-term debt 286,931 49,738 (49,738) 286,931
Other liabilities 197,003 - (65,177) 131,826
----------- ----------- ------------ -------------
Total liabilities 819,336 49,738 (117,603) 751,471
----------- ----------- ------------ -------------
Minority interest 2,403 - - 2,403
----------- ----------- ------------ -------------
Shareholder's equity:
Class A Common Stock - 10 - 10
Class B Common Stock - 44 - 44
Additional paid-in capital 123,717 78,095 (100,600) 101,212
Accumulated deficit (59,555) (30,813) 64,836 (25,532)
Accumulated other comprehensive loss (21,362) - - (21,362)
----------- ----------- ------------ -------------
Total shareholder's equity 42,800 47,336 (35,764) 54,372
----------- ----------- ------------ -------------
Total liabilities and shareholder's equity $ 864,539 $ 97,074 $ (153,367) $ 808,246
=========== =========== ============ =============
10
Consolidated Statement of Income
For the Thirteen Weeks Ended December 28, 2003
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
Net sales $ 321,561 $ - $ - $ 321,561
Cost of sales 279,859 - - 279,859
----------- ----------- ------------ -------------
Gross profit 41,702 - - 41,702
Selling, general and administrative expenses 28,981 - - 28,981
Other income, net (1,270) - - (1,270)
----------- ----------- ------------ -------------
Operating income 13,991 - - 13,991
Loss on debt extinguishment 2,354 - - 2,354
Interest expense (income), net 10,677 (297) - 10,380
----------- ----------- ------------ -------------
Income before income tax and
minority interest 960 297 - 1,257
Income tax expense 383 119 - 502
Minority interest in subsidiary 39 - - 39
----------- ----------- ------------ -------------
Net income $ 538 $ 178 $ - $ 716
=========== =========== ============ =============
Other comprehensive income:
Net income $ 538 $ 178 $ - $ 716
Foreign currency translation
adjustment 68 - - 68
Minimum pension liability
adjustment (net of income
tax of $1,059) 1,589 - - 1,589
----------- ----------- ------------ -------------
Comprehensive income $ 2,195 $ 178 $ - $ 2,373
=========== =========== ============ =============
11
Consolidated Statement of Income
For the Thirteen Weeks Ended December 29, 2002
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
Net sales $ 320,345 $ - $ - $ 320,345
Cost of sales 284,477 - - 284,477
----------- ----------- ------------ --------------
Gross profit 35,868 - - 35,868
Selling, general and administrative expenses 26,196 - - 26,196
Other income, net (2,195) - - (2,195)
----------- ----------- ------------ -------------
Operating income 11,867 - - 11,867
Interest expense (income), net 9,829 (365) - 9,464
----------- ----------- ------------ -------------
Income before income tax and
minority interest 2,038 365 - 2,403
Income tax expense 815 146 - 961
Minority interest in subsidiary 14 - - 14
----------- ----------- ------------ -------------
Net income $ 1,209 $ 219 $ - $ 1,428
=========== =========== ============ =============
Other comprehensive income (loss):
Net income $ 1,209 $ 219 $ - $ 1,428
Foreign currency translation
adjustment (167) - - (167)
Minimum pension liability
adjustment (net of income
tax of ($1,558)) (2,337) - - (2,337)
----------- ----------- ------------ -------------
Comprehensive income (loss) $ (1,295) $ 219 $ - $ (1,076)
=========== =========== ============ =============
12
Consolidated Statement of Cash Flows
For the Thirteen Weeks Ended December 28, 2003
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operating activities $ (2,589) $ - $ - $ (2,589)
----------- ----------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (4,907) - - (4,907)
Proceeds from sale of property, plant
and equipment 17 - - 17
----------- ----------- ------------ -------------
Net cash used in investing activities (4,890) - - (4,890)
----------- ----------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under revolving
credit facilities (6,195) - - (6,195)
Repayment of 12.0% Senior Notes (93,825) - - (93,825)
Repayment of other debt (8,120) - - (8,120)
Borrowings under the 9 1/2% Senior
Secured Notes 100,000 - - 100,000
Borrowings under the 9 1/2% Junior
Subordinated Note 20,000 - - 20,000
Debt issuance costs (4,745) - - (4,745)
Increase in cash escrow (239) - - (239)
Decrease in cash escrow 220 - - 220
----------- ----------- ------------ -------------
Net cash provided by financing activities 7,096 - - 7,096
----------- ----------- ------------ -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (383) - - (383)
CASH AND CASH EQUIVALENTS, beginning of period 10,447 - - 10,447
----------- ----------- ------------ -------------
CASH AND CASH EQUIVALENTS, end of period $ 10,064 $ - $ - $ 10,064
=========== =========== ============ =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 7,904 $ - $ - $ 7,904
=========== =========== ============ =============
Income taxes received $ (18) $ - $ - $ (18)
=========== =========== ============ =============
13
Consolidated Statement of Cash Flows
For the Thirteen Weeks Ended December 29, 2002
---------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 12,427 $ - $ - $ 12,427
----------- ----------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (2,492) - - (2,492)
----------- ----------- ------------ -------------
Net cash used in investing activities (2,492) - - (2,492)
----------- ----------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under revolving
credit facilities (5,965) - - (5,965)
Repayment of other debt (2,026) - - (2,026)
Debt issuance costs (277) - - (277)
Increase in cash escrow (94) - - (94)
Decrease in cash escrow 87 - - 87
----------- ----------- ------------ -------------
Net cash used in financing activities (8,275) - - (8,275)
----------- ----------- ------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,660 - - 1,660
CASH AND CASH EQUIVALENTS, beginning of period 8,035 - - 8,035
CASH AND CASH EQUIVALENTS, end of period $ 9,695 $ - $ - $ 9,695
=========== =========== ============ =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 3,367 $ - $ - $ 3,367
=========== =========== ============ =============
Income taxes paid $ 13 $ - $ - $ 13
=========== =========== ============ =============
(10) SUBSEQUENT EVENT
On January 15, 2004, the agreement for the sale of the Company's
Somerville, Massachusetts facility was amended to, among other things, adjust
the purchase price to $9.5 million. The closing of this sale occurred on
February 3, 2004.
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 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(TM), Basix(R), Guildware(R), Simple Elegance(R), Sensations(R),
Hoffmaster(R), Paper Art(R), and Touch of Color(R) brands.
14
The Company's product offerings cover a broad range within the
industry, including (i) paper, plastic and foam foodservice products, primarily
cups, lids, plates, bowls, plastic cutlery, food trays and food containers; (ii)
tissue and specialty foodservice products, primarily napkins, table covers,
placemats and lunch bags; and (iii) food packaging products, primarily
containers for the dairy and food processing industries. To enhance product
sales, the Company designs, manufactures and leases container filling and
lidding equipment to dairies and other food processors to package food items in
the Company's containers at customers' plants. Types of products packaged in the
Company's machines include: ice cream, factory-filled jacketed ice cream cones,
cottage cheese, yogurt, sour cream 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 maintains
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 restaurant chains and catering companies, 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 dairies 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
reserves 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.
15
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
monitors 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. The
carrying value of goodwill is subject to an impairment test on an annual basis
or when facts and circumstances suggest that it may be impaired.
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 income statement.
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, determines that a loss related to a matter is both probable and
reasonably estimable.
Selling, general and administrative expenses - Selling, general and
administrative expenses consist primarily of salaries, benefits, promotional and
advertising costs, rent, depreciation of equipment and broker fees.
Recent Developments
On January 15, 2004, the agreement for the sale of the Company's
Somerville, Massachusetts facility was amended to, among other things, adjust
the purchase price to $9.5 million. The closing of this sale occurred on
February 3, 2004.
On December 22, 2003, SF Holdings Group, Inc., the parent company of
the Company, executed a definitive agreement for its acquisition by Solo Cup
Company of Highland Park, Illinois ("Solo"). The consummation of the transaction
is subject to customary conditions and regulatory approvals, including, but not
limited to, Solo's receipt of financing. In connection with the transaction, all
of the outstanding indebteness of the Company will be repurchased or redeemed.
On December 8, 2003 and December 16, 2003, Sweetheart Cup consummated
in aggregate a $120 million debt refinancing, comprised of the issuance of a $20
million 9 1/2% junior subordinated note due 2008 to International Paper Company
(the "9 1/2% Junior Subordinated Note") and $100 million of 9 1/2% Senior
Secured Notes due 2007 to institutional investors (the "9 1/2% Senior Secured
Notes") , respectively. The proceeds from these offerings were used to repay a
portion of the senior credit facility with Bank of America, N.A. (the "Senior
Credit Facility"), and the balance has been used to redeem all of the
outstanding $93.8 million of 12.0% Senior Notes due July 15, 2004 (the "12.0%
Senior Notes") and to pay related fees and expenses, and for general corporate
purposes. On December 16, 2003, the 12.0% Senior Notes were redeemed. During the
thirteen weeks ended December 28, 2003, the Company recorded a $2.4 million loss
on debt extinguishment which consisted of the write-off of unamortized deferred
financing incurred costs in connection with the early redemption of the 12.0%
Senior Notes.
16
Sweetheart Cup is the obligor with respect to the 9 1/2% Junior
Subordinated Note. Interest on the 9 1/2% Junior Subordinated Note is payable
semi-annually on November 15 and May 15 of each year, commencing on May 15,
2004. Sweetheart Cup may defer interest due on any interest payment date and
such deferred interest shall become part of the principal amount due under such
note; provided, however, that Sweetheart Cup may not defer such interest
occurring on or after November 15, 2004 if payment in cash on such interest
payment date is not prohibited under any of Sweetheart Cup's existing
indebtedness and the payment to be made pursuant to a certain warrant agreement
with New Cup, LLC has bee paid in cash. Sweetheart Cup may redeem all or any of
the 9 1/2% Junior Subordinated Note, in whole or in part, at any time on or
after December 8, 2003, upon notice of at least 10 days but not more than 20
days before a redemption date, at a redemption price of 100% of principal amount
plus accrued and unpaid interest. The 9 1/2% Junior Subordinated Note is
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.
The 9 1/2% Junior Subordinated Note contains various covenants which prohibit,
or limit, among other things, change of control, asset sales, dividend payments,
equity repurchases or redemption, the incurrence of additional indebtedness,
make any restrictive investments, the issuance of disqualified stock, the
creation of additional liens, certain transactions with affiliates, and certain
other business activities.
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor
with respect to the 9 1/2% Senior Secured Notes. Interest on the 9 1/2% Senior
Secured Notes is payable quarterly on January 15, April 15, July 15, and October
15, commencing on April 15, 2004. Sweetheart Cup may redeem, at any time, all or
a part of the 9 1/2% Senior Secured Notes upon notice not less than 30 days not
more than 60 days prior to the redemption date, at a redemption price of 102% of
principal amount plus accrued and unpaid interest on the 9 1/2% Senior Secured
Notes redeemed to the applicable redemption date, declining to 100% six months
prior to the maturity of the notes. The 9 1/2% Senior Secured Notes are senior
secured obligations of Sweetheart Cup and rank equally with its existing and
future senior debt, and senior to its existing and future subordinated debt. The
9 1/2% Senior Secured Notes and related guarantees are secured by a first
priority lien on certain of Sweetheart Cup's property, plant and equipment,
subject to certain permitted liens, located in Appleton Wisconsin, Augusta,
Georgia, Glens Falls, New York, Goshen, Indiana, Oshkosh, Wisconsin, St. Albans,
Vermont, El Cajon, California, Indianapolis, Indiana, Lakeland, Florida, and
Williamsburg, Pennsylvania. The 9 1/2% Senior Secured Notes contain various
covenants which prohibit, or limit, among other things, change of control, asset
sales, dividend payments, equity repurchases or redemption, the incurrence of
additional indebtedness, make any restrictive investments, the issuance of
disqualified stock, the creation of additional liens, certain transactions with
affiliates, and certain other business activities.
The Senior Credit Facility was amended on December 16, 2003, to, among
other things, change the maturity date to August 1, 2006 and permanently reduce
the maximum revolving credit borrowings to $205.0 million.
Thirteen Weeks Ended December 28, 2003 Compared to Thirteen Weeks Ended
December 29, 2002
Net sales increased $1.2 million, or 0.4%, to $321.5 million for the
thirteen weeks ended December 28, 2003 compared to $320.3 million for the
thirteen weeks ended December 29, 2002, reflecting a 3.5% increase in average
realized sales prices and a 3.1% decrease in sales volume. In Fiscal 2003, the
Company announced several price increases to food service customers which have
resulted in higher average sales prices during the thirteen weeks ended December
28, 2003. As a direct consequence of the implementation of such price increases,
the Company has experience a slight decrease in sales volume.
Gross profit increased $5.8 million, or 16.2%, to $41.7 million for the
thirteen weeks ended December 28, 2003 compared to $35.9 million for the
thirteen weeks ended December 29, 2002. As a percentage of net sales, gross
profit increased to 13.0% for the thirteen weeks ended December 28, 2003 from
11.2% for the thirteen weeks ended December 29, 2002. Gross profit increased as
a result of an increase in average realized sales prices and lower raw material
costs.
Selling, general and administrative expenses increased $2.8 million, or
10.7%, to $29.0 million for the thirteen weeks ended December 28, 2003 compared
to $26.2 million for the thirteen weeks ended December 29, 2002. This increase
resulted primarily from (i) a $1.5 million increase in salaries, fringe benefits
and other administrative costs, (ii) a $0.5 million increase in legal expenses
and (iii) a $0.7 million increase in selling, broker, and promotional costs.
These increases were partially offset by a $0.4 million decrease in depreciation
expense.
17
Other income, net decreased $0.9 million, or 40.9%, to $1.3 million for
the thirteen weeks ended December 28, 2003 compared to $2.2 million for the
thirteen weeks ended December 29, 2002. During the thirteen weeks ended December
28, 2003, the Company realized $2.5 million due to the amortization of the
deferred gain in conjunction with a sale-leaseback transaction. In addition, the
Company realized $0.1 million from foreign currency transactions gains. These
gains were partially offset by (i) $0.8 million of costs associated with the
Company's evaluation of strategic options, including, among other things, the
sale of assets or the business, (ii) $0.4 million of costs associated with the
settlement of a disputed lease and (iii) $0.1 million of costs associated with
the maintenance of non-operational facilities. During the thirteen weeks ended
December 29, 2002, the Company realized $2.6 million due to the amortization of
the deferred gain in conjunction with a sale-leaseback transaction. This gain
was partially offset by $0.3 million of costs associated with the
rationalization, consolidation and improvement of the Company's manufacturing
facilities.
Operating income increased $2.1 million, or 17.6%, to $14.0 million for
the thirteen weeks ended December 28, 2003 compared to income of to $11.9
million for the thirteen weeks ended December 29, 2002, due to the reasons
stated above.
Loss on debt extinguishment was $2.4 million for the thirteen weeks
ended December 28, 2003 due to the write-off of unamortized deferred financing
fees associated with the redemption of the 12.0% Senior Notes.
Interest expense, net increased $0.9 million, or 9.5%, to $10.4 million
for the thirteen weeks ended December 28, 2003 compared to $9.5 million for the
thirteen weeks ended December 29, 2002. This increase is primarily attributed to
increased amortization expense associated with the amortization of debt issuance
costs.
Income tax expense decreased $0.5 million, or 50.0%, to $0.5 million
for the thirteen weeks ended December 28, 2003 compared to $1.0 million for the
thirteen weeks ended December 29, 2002 as a result of a lower pre-tax income.
The effective rates for the thirteen weeks ended December 28, 2003 and December
29, 2002 were 40%.
Minority interest in subsidiary increased $25,000, to $39,000 for the
thirteen weeks ended December 28, 2003 compared to $14,000 for the thirteen
weeks ended December 29, 2002. This amount represents the Company's 20%
ownership of Global Cup, S.A. De C.V. 's income.
Net income decreased $0.7 million, or 50.0%, to $0.7 million for the
thirteen weeks ended December 28, 2003 compared to $1.4 million for the thirteen
weeks ended December 29, 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. During the thirteen weeks ended December 28, 2003, the
Company funded its capital expenditures primarily from borrowings under its
revolving credit facility. The Company expects to fund its capital expenditures
for the remainder of Fiscal 2004 from a combination of cash generated from
operations, funds generated from asset sales and revolving credit borrowings.
Net cash used in operating activities during the thirteen weeks ended
December 28, 2003 was $2.6 million compared to net cash provided by operating
activities of $12.4 million during the thirteen weeks ended December 29, 2002.
This decrease primarily resulted from inventories remaining relatively constant
during the thirteen weeks ended December 28, 2003 as compared to a significant
decrease in inventories during the thirteen weeks ended December 29, 2002.
Net cash used in investing activities during the thirteen weeks ended
December 28, 2003 was $4.9 million compared to $2.5 million during the thirteen
weeks ended December 29, 2002. This increase is primarily due to increased
capital expenditures during the thirteen weeks ended December 28, 2003.
Net cash provided by financing activities during the thirteen weeks
ended December 28, 2003 was $7.1 million compared to net cash used in financing
activities of $8.3 million during the thirteen weeks ended December 29, 2002.
This increase resulted primarily from net proceeds received from the issuance of
the 9 1/2% Senior
18
Secured Notes and the 9 1/2% Junior Subordinated Note which was partially offset
by the repayment of the 12.0% Senior Notes and a portion of the Senior Credit
Facility and higher debt issuance costs.
Working capital increased $110.2 million to $228.1 million at December
28, 2003 from $117.9 million at September 28, 2003. This increase resulted from
current liabilities decreasing $124.5 million which was offset by current assets
decreasing $14.3 million. The decrease in current liabilities resulted primarily
from a decrease in accounts payable and a decrease in the current portion of
long-term debt due to the refinancing of the 12.0% Senior Notes.
Capital expenditures during the thirteen weeks ended December 28, 2003
were $4.9 million compared to $2.5 million during the thirteen weeks ended
December 29, 2002. Capital expenditures during the thirteen weeks ended December
28, 2003 included $3.3 million for new production equipment and $1.6 million for
primarily routine capital improvements. Funding during the thirteen weeks ended
December 28, 2003 for capital expenditures was primarily provided by cash from
revolving credit borrowings. For the remainder of Fiscal 2004, the Company
intends to rely on cash provided by operations, the sale of assets and revolving
credit borrowings for its capital expenditures.
Sweetheart Cup is the obligor with respect to the 9 1/2% Junior
Subordinated Note. Interest on the 9 1/2% Junior Subordinated Note is payable
semi-annually on November 15 and May 15 of each year, commencing on May 15,
2004. Sweetheart Cup may defer interest due on any interest payment date and
such deferred interest shall become part of the principal amount due under such
note; provided, however, that Sweetheart Cup may not defer such interest
occurring on or after November 15, 2004 if payment in cash on such interest
payment date is not prohibited under any of Sweetheart Cup's existing
indebtedness and the payment to be made pursuant to a certain warrant agreement
with New Cup, LLC has bee paid in cash. Sweetheart Cup may redeem all or any of
the 9 1/2% Junior Subordinated Note, in whole or in part, at any time on or
after December 8, 2003, upon notice of at least 10 days but not more than 20
days before a redemption date, at a redemption price of 100% of principal amount
plus accrued and unpaid interest. The 9 1/2% Junior Subordinated Note is
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.
The 9 1/2% Junior Subordinated Note contains various covenants which prohibit,
or limit, among other things, change of control, asset sales, dividend payments,
equity repurchases or redemption, the incurrence of additional indebtedness,
make any restrictive investments, the issuance of disqualified stock, the
creation of additional liens, certain transactions with affiliates, and certain
other business activities.
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor
with respect to the 9 1/2% Senior Secured Notes. Interest on the 9 1/2% Senior
Secured Notes is payable quarterly on January 15, April 15, July 15, and October
15, commencing on April 15, 2004. Sweetheart Cup may redeem, at any time, all or
a part of the 9 1/2% Senior Secured Notes upon notice not less than 30 days not
more than 60 days prior to the redemption date, at a redemption price of 102% of
principal amount plus accrued and unpaid interest on the 9 1/2% Senior Secured
Notes redeemed to the applicable redemption date, declining to 100% six months
prior to the maturity of the notes. The 9 1/2% Senior Secured Notes are senior
secured obligations of Sweetheart Cup and will rank equally with its existing
and future senior debt, and senior to its existing and future subordinated debt.
The 9 1/2% Senior Secured Notes and related guarantees are secured by a first
priority lien on certain of Sweetheart Cup's property, plant and equipment,
subject to certain permitted liens, located in Appleton Wisconsin, Augusta,
Georgia, Glens Falls, New York, Goshen, Indiana, Oshkosh, Wisconsin, St. Albans,
Vermont, El Cajon, California, Indianapolis, Indiana, Lakeland, Florida, and
Williamsburg, Pennsylvania. The 9 1/2% Senior Secured Notes contain various
covenants which prohibit, or limit, among other things, change of control, asset
sales, dividend payments, equity repurchases or redemption, the incurrence of
additional indebtedness, make any restrictive investments, the issuance of
disqualified stock, the creation of additional liens, certain transactions with
affiliates, and certain other business activities.
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
19
employment rates at the Company's Owings Mills, Maryland facility. The Maryland
Loan is payable in quarterly installments through March 1, 2007.
The Senior Credit Facility was amended on December 16, 2003 to, among
other things, change the maturity date to August 1, 2006 and permanently reduce
the maximum revolving credit borrowings to $205.0 million. 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%. During the thirteen weeks ended December 28, 2003, the weighted average
annual interest rate for the Senior Credit Facility was 3.64%. The indebtness of
Sweetheart Cup under the Senior Credit Facility is guaranteed by Sweetheart
Holdings and secured by a first priority perfect security interest in accounts
receivable, inventory, general intangibles and certain other assets. The fee for
outstanding letters of credit is 2.00% per annum and there is a commitment fee
of 0.375% per annum on the daily average unused amount of the commitments. As of
December 28, 2003, $46.7 million was available under the Senior Credit Facility.
As of December 28, 2003, LIBOR was 1.12% 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 $23.0 million)
subject to borrowing base limitations and satisfaction of other conditions of
borrowing. The term borrowings are payable quarterly through May 2004. Both the
revolving credit and term loan borrowings have a final maturity date of June 15,
2004. The Canadian Credit Facility is secured by all existing and thereafter
acquired real and personal tangible assets of the Company's Canadian subsidiary
and net proceeds on the sale of any of the foregoing. Borrowings under the
Canadian Credit Facility bear interest at an index rate plus 1.75% with respect
to the revolving credit facility and an index rate plus 2.00% with respect to
the term loan borrowings. During the thirteen weeks ended December 28, 2003, the
weighted average annual interest rate for the Canadian Credit Facility was
4.85%. As of December 28, 2003, Cdn $1.0 million (approximately US $0.8 million)
was available under the revolving facility and the term loan balance was Cdn
$9.6 million (approximately US $7.4 million) under the Canadian Credit Facility.
In Fiscal 1997, the Company issued $120.0 million 9 1/2% Senior
Subordinated Notes due March 1, 2007 with interest payable semi-annually (the "9
1/2% Senior Subordinated Notes"). 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 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 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 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. In addition, the
obligations under the June 1, 2000 lease between the Company and State Street
are secured by a significant portion of the Company's existing property, plant
and equipment. The 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 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, 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
20
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
December 28, 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
------------------------------------------------------------------------------------
Total 2004 2005 2006 2007 2008 2009 Thereafter
--------- -------- --------- -------- --------- -------- -------- ----------
Non-cancelable
operating
leases $ 437,672 $ 43,274 $ 52,979 $ 49,975 $ 47,677 $ 46,170 $ 45,198 $ 152,399
Long-term debt 416,089 16,426 124,611 612 253,240 20,200 200 800
Capital leases 190 93 97 - - - - -
--------- -------- --------- -------- --------- -------- -------- ----------
Total obligations $ 853,951 $ 59,793 $ 177,687 $ 50,587 $ 300,917 $ 66,370 $ 45,398 $ 153,199
========= ======== ========= ======== ========= ======== ======== ==========
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 the Company believes to be adequate and believes that
the Company 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 and amounts
available under the Company's credit facilities and funds generated from asset
sales should be sufficient to meet the Company's expected operating needs,
planned capital expenditures, payments in conjunction with the Company's lease
commitments and debt service requirements in the next twelve months.
Net Operating Loss Carryforwards
As of September 28, 2003, the Company had approximately $43 million of
net operating loss carryforwards for federal income tax purposes of which $20
million will expire in 2018 and the remaining $23 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 December 28, 2003, the
outstanding indebtedness under the Senior Credit Facility was $152.7 million and
Canadian Credit Facility was $15.9 million in U.S. dollars. As of December 28,
2003, $46.7 million was available under the Senior Credit Facility and Cdn $1.0
million (approximately US $0.8 million) was available under the Canadian Credit
Facility. Based upon these amounts, the annual net income would change by
approximately $1.0 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.
21
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures:
The Company carried out an evaluation, under the supervision and the
participation of its management, of the effectiveness of its disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
the end the period covered by this report. Based on this evaluation, the
Company's chief executive officer and chief financial officer have concluded
that its disclosure controls and procedures were effective at the end of the
period covered by this report.
(b) Change in internal control over financial reporting:
There were no significant changes in the Company's internal controls
over financial reporting that occurred during the period covered by this report
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Financial Officer
(b) Reports on Form 8-K:
A report on Form 8-K was filed on December 5, 2003 under Item 5
and Item 12.
A report on Form 8-K was filed on December 24, 2003 under Item 5.
A report on Form 8-K was filed on February 6, 2004 under Item 5
and Item 12.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its duly authorized officer and principal financial officer.
SWEETHEART HOLDINGS INC.
(registrant)
Date: February 10, 2004 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)
23
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
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 quarter 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: February 10, 2004 SWEETHEART HOLDINGS INC.
-----------------
(Registrant)
By: /s/ DENNIS MEHIEL
------------------
Dennis Mehiel
Chairman and Chief Executive Officer
24
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
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 quarter 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: February 10, 2004 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)
25