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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X|Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 29, 2002
|_|Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from ______ to _____
Commission file number 33-91600
SWEETHEART HOLDINGS INC.*
(Exact name of registrant as specified in its charter)
Delaware 06-1281287
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10100 Reisterstown Road, Owings Mills, Maryland 21117
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 410/363-1111
Securities of the Registrant registered pursuant to Section 12(b)of the Act:None
Securities of the Registrant registered pursuant to Section 12(g)of the Act:None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock of the Registrant held
by non-affiliates of the Registrant as of December 9, 2002. Not Applicable.
There is no market for the Common Stock of the Registrant.
The number of shares outstanding of the Registrant's common stock as of
December 9, 2002:
Sweetheart Holdings Inc. Class A Common Stock, $0.01 par value- 1,046,000 shares
Sweetheart Holdings Inc. Class B Common Stock, $0.01 par value- 4,393,200 shares
* The Registrant is the guarantor of the 12.0% Senior Subordinated Notes due
2003 of Sweetheart Cup Company Inc., a wholly owned subsidiary of the
Registrant.
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PART I
Item 1. BUSINESS
General
Sweetheart Holdings Inc. ("Sweetheart Holdings"), together with its
wholly owned subsidiary Sweetheart Cup Company Inc. ("Sweetheart Cup"), and its
subsidiaries, (the "Company"), believes it is one of the largest producers and
marketers of disposable foodservice and food packaging products in North
America. In Fiscal 2002, the Company had net sales of approximately $1.3
billion. The Company sells a broad line of disposable paper, plastic and foam
foodservice and food packaging products, consisting primarily of cups, lids,
plates, bowls, napkins and containers. The Company markets its products
primarily to leading foodservice distributors, national quick service chains and
catering companies, and retailers. The Company markets its products under both
private label brands and the Company's well-recognized Sweetheart(R), Trophy(R),
Sensations(R), Hoffmaster(R) and Lily(R) brands.
In addition, the Company designs, manufactures and leases container
filling and lidding equipment for use by dairies and other food processors. This
equipment is specifically designed by the Company to fill and seal the Company's
containers in its customers' plants. The Company also sells paper converting
equipment used primarily in the manufacture of paper cups and food containers.
With over 90 years of operating history, the Company has a diversified
customer base of over 5,000 customers, consisting primarily of (i) major
foodservice distributors, such as Sysco Corporation and U.S. Foodservice Inc.,
who serve national and regional institutional foodservice customers, (ii) quick
service chains, such as McDonald's Corporation and Burger King Corporation, and
convenience stores, such as 7 Eleven, Inc., (iii) national catering services,
such as ARAMARK Corporation and Sodexho Marriott Services, and (iv)
supermarkets, mass merchants, warehouse clubs and other retailers, such as The
Great Atlantic & Pacific Tea Company, Inc., The Kroger Co., Target Stores (a
division of Dayton Hudson Corp.), Wal-Mart Stores, Inc. and Price-Costco, Inc.
The Company's food packaging containers and lids are sold to national and
regional dairy and food companies such as Ben & Jerry's Homemade, Inc., Blue
Bell Creameries, L.P., Dean Foods Co. and Prairie Farms Dairy, Inc.
Following the terrorist attacks of September 11, 2001, the Company
experienced a decline in sales prices and volumes due to a number of factors,
including a significant reduction in business and leisure travel and a reduction
in foodservice and away-from-home dining. In addition to these factors affecting
our sales, our implementation of certain consolidation initiatives caused
temporary inefficiencies within our manufacturing operations, which increased
our cost structure and reduced our gross margin during recent periods.
As a result of these factors, together with difficult market
conditions, the Company has been unable to refinance its $110 million of 12.0%
senior subordinated notes due 2003 (the "$110 million Senior Subordinated
Notes") on terms acceptable to the Company. Unless current market conditions
change significantly, the Company may not have sufficient capital to refinance
the $110 million Senior Subordinated Notes when they mature on September 1,
2003. Moreover, if the Company is unable to complete the exchange offer and
consent solicitation or refinance, repay or extend the $110 million Senior
Subordinated Notes prior to March 1, 2003, its senior revolving credit facility
with Bank of America, N.A., as agent (the "Senior Credit Facility"), unless
otherwise amended, will become due and payable.
On November 21, 2002, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 relating to a proposed
offer to exchange newly issued $110 million
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senior subordinated notes due 2007 for all of the $110 million Senior
Subordinated Notes and a consent solicitation to eliminate and/or amend certain
restrictive covenants and other provisions governing the $110 million Senior
Subordinated Notes. The Company also intends to solicit consent to eliminate
and/or amend certain restrictive covenants and other provisions governing the
Company's $120 million of 9 1/2% Senior Subordinated Notes due 2007 (the "$120
million Senior Subordinated Notes"). The Company believes that the exchange
offer and consent solicitations will provide it with the necessary time to
execute its business plan and to further evaluate its strategic alternatives.
The Company is also evaluating various strategic options which may
include a restructuring of its business debt and capital structure, including,
among other things, the public sale or private placement of debt or equity
securities, joint venture transactions, sale of assets, new borrowings, the
refinancing of the Company's existing debt agreements, open market purchases,
tender offers or exchange offers and consent solicitations of the Company's
outstanding securities. There can be no assurances that any of these strategic
options will be consummated.
Pursuant to an agreement, dated as of March 22, 2002 by and among
Dennis Mehiel, the Company's Chairman and Chief Executive Officer, SF Holdings
Group, Inc. ("SF Holdings"), American Industrial Partners Management Company,
Inc., American Industrial Partners Capital Fund L.P. ("AIP") and the other
stockholders of the Company signatory to that certain Stockholders' Agreement,
dated as of March 12, 1998, (together with AIP and any permitted transferee of
shares of Class A common stock or Class B common stock of the Company ("the
Shares"), the "Original Stockholders"), all of the outstanding Shares not held
by SF Holdings (which consisted of 52% of the voting stock of the Company) were
delivered to SF Holdings and exchanged for 96,000 shares of Class C common stock
of SF Holdings. As a result, SF Holdings became the sole beneficial owner of
100% of the issued and outstanding capital stock of the Company. In addition and
in connection therewith, the Stockholders Agreement and related stockholders'
right agreement were terminated.
On March 25, 2002, pursuant to an Agreement and Plan of Merger, The
Fonda Group, Inc., a company under common control, ("Fonda") was merged (the
"Merger") with and into Sweetheart Cup, with Sweetheart Cup as the surviving
entity. In connection with the Merger, all of the assets and operations of Fonda
were assigned to, and all liabilities of Fonda were assumed by, Sweetheart Cup
by operation of law and all of the outstanding shares of Fonda were cancelled.
Manufacturing and Sales
The Company has historically sold its Sweetheart products under the
Sweetheart(R) brands as well as private labels to two principal customer groups,
institutional foodservice and food packaging customers. The Company has
historically sold its Fonda products under the Fonda(R) brand and private labels
to consumer and institutional foodservice customers. The Company also
manufactures and distributes disposable party goods products directly to the
specialty (party) channel of the Company's consumer market. Institutional
foodservice customers primarily purchase disposable hot and cold drink cups,
lids, food containers, plates, bowls, cutlery, straws, napkins, placemats, food
trays and tablecovers. The Company sells these products directly and through
distributors and national accounts. Consumer customers primarily purchase
disposable hot and cold drink cups, paper plates, bowls, napkins and
tablecovers. The Company sells these consumer products primarily to
supermarkets, mass merchants, warehouse clubs, discount chains and other
retailers. Food packaging customers primarily directly purchase paper and
plastic containers for the dairy and food processing industries. Food packaging
customers also lease filling and packaging machines designed and manufactured by
the Company that fill and seal the Company's containers in their plants. The
Company's specialty (party) channel customers purchase disposable plates,
napkins, cups, tablecovers and a variety of accessory decor items sold in
ensembles or separately to party goods retailers, mass merchants, drugstores and
supermarkets. The Company also manufactures and markets its products in Canada
and Mexico principally to institutional national accounts.
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The Company markets to both the distributor and end-use customer,
tailoring programs to meet the specific needs of the Company's target customers
and markets. The Company sells these programs, which include products, price,
promotional and merchandising materials, and training and sales/marketing
coverage, through a direct sales organization. The Company supports this process
by developing innovative new products, materials and processes, while leveraging
the Company's strong brand recognition and national network of manufacturing and
distribution centers. The Company focuses on two major customer groups, national
account quick service restaurants and distributors.
Products
The Company manufactures a broad line of disposable products. Paper,
foam and plastic cups, lids and straws represent the largest part of the
Company's North American operations. The largest single product type within this
category is cups, which the Company offers in various sizes (ranging from 3 to
64 ounces) for both hot and cold beverages. Brand names of the Company's
principal beverage service products include Sweetheart(R), Lily(R), Trophy(R),
PreferenceTM, Jazz(R), Gallery(R), Clarity(R), Lumina(R), Sherri(R),
ClearLight(R) and GoCupsTM.
The Company also offers a variety of other disposable foodservice
products, including paper, foam, and plastic plates, paper and plastic bowls,
portion cups, food containers, food trays, paper and plastic tubs, containers
and hinged foam containers. The Company believes it is one of the largest
manufacturers of paper tubs for chicken, popcorn and take-out foods in North
America. Munchie(R), Flexstyle(R), Highlights(R), MaximizersTM and Scoop Cup are
some of the Company's carry-out service brands.
The Company sells paper plates and bowls to both the consumer and
institutional markets. These products include coated and uncoated white plates,
decorated plates and bowls and are offered in a range of sizes. Uncoated and
coated paper plates are considered commodity items and are generally purchased
by cost-conscious consumers for everyday use. Printed and decorated plates and
bowls, which are typically sold in lower count packages, are purchased for
everyday use as well as for parties and seasonal celebrations such as Halloween
and Christmas. The Company also sells, under its Sensations(R) brand, party
packages which include solid color paper plates with coordinating napkins, cups,
cutlery and tablecovers.
Napkins are sold under the Company's Hoffmaster(R), Fonda(R) and
Sensations(R) brands, as well as under national distributor private labels.
Napkin products range from decorated-colored, multi-ply napkins and simple
custom printed napkins featuring an end-user's name or logo to fully printed,
graphic-intensive napkins for the premium paper goods sector. Tablecovers,
ranging from economy to premium product lines, are sold in various prints and
colors under the Hoffmaster(R), Linen-Like(R), Windsor(R) and Sensations(R)
brands. The Company also sells placemats, traycovers, paper doilies, lunch bags,
paper portion cups and fluted products in a variety of shapes and sizes. The
Company manufactures unique decorated placemats in a variety of shapes. In
addition, the Company uses a proprietary technology to produce non-skid
traycovers that serve the particular needs of the airline and healthcare
industries.
The Company also manufactures paperboard and tissue party goods
products under the Company's Paper Art(R), Party Creations(R) ,Touch of Color(R)
and Creative Expressions(R) brand names.
The Company's other products include Flex-E-FormTM straight-wall paper
manufacturing technology and Flex-GuardTM, a spiral wound tamper-evident lid. In
addition, the Company provides foodservice customers with retail packages sold
through retailers under various Sweetheart(R) and private label brands.
4
To enhance product sales, the Company designs, manufactures and leases
container filling and lidding equipment to dairies and other food processors to
package food items in the Company's containers at their plants. The Company
leases its filling and lidding equipment to customers under the trade names
Auto-Pak, Flex-E-Fill(R) and FoodPac(R). The Company manufactures this equipment
in the Company's machine shop and assembly plants located in Owings Mills,
Maryland and Kensington, Connecticut. Products packaged in the Company's
machines include ice cream, factory-filled jacketed ice cream cones, cottage
cheese, yogurt and squeeze-up desserts.
The Company also sells paper converting equipment used primarily in the
manufacture of paper cups and food containers. The Company's product line
includes four sizes of cup formers, insulated paper cup machinery, paper lid
machines, high speed blanking machines, flat rim machinery and other related
equipment. The Company also sells spare parts, engineering services and machine
rehabilitation services and stamped sheet metal parts used for protective covers
and assemblies.
Production
The Company manufactures its products at 23 plants located throughout
North America. See "--Properties." The Company's manufacturing processes consist
of converting processed paperboard, paper, tissue and resin into finished
disposable foodservice products through the use of four principal technologies:
paper forming, thermoforming, injection molding, and foam extrusion and forming.
The Company provides its customers with a wide variety of printing (flexography,
letter press, paper lithography and plastic dry offset) options across these
various technologies. The Company operates approximately 300 printing presses
capable of producing high quality, customized graphics to meet its customers'
requirements. The Company believes that its ability to manufacture a broad line
of products enables it to provide its customers with numerous choices to meet
their needs. The Company's plants operate on a variety of manufacturing
schedules. Paper operations generally run five days per week, 24 hours per day,
with Saturday scheduled as an overtime day when needed to meet customer demand.
Plastic operations generally run seven days per week, 24 hours per day. Due to
the seasonality of customer demand, the Company's production is generally
greater during late spring and summer than during fall and winter.
The Company initiated its consolidation program in June 2001 which
included the rationalization, consolidation and process improvement of its
manufacturing facilities. The Company believes the consolidation program has
improved the efficiency of its manufacturing sites without any adverse impact on
customer service levels.
Raw Materials and Suppliers
Raw materials are a critical part of the Company's cost structure.
Principal raw materials for the Company's paper operations include solid
bleached sulfate paperboard, napkin tissue, bond paper and waxed bond paper
obtained directly from major North American manufacturers, along with wax
adhesives, coating and inks. The Company purchases paperboard, napkin tissue,
bond paper and waxed bond paper in "jumbo" rolls and then prints and converts
them into smaller rolls, or blanks, for processing into final products. The main
raw material for the Company's plastic operations is plastic resin (polystyrene,
polypropylene and high and low density polyethylene) purchased directly from
major petrochemical companies and other resin suppliers. The Company processes
and forms resin into cups, cutlery, meal service products, straws, lids and
containers. The Company manufactures foam products by melting polystyrene
plastic and adding a blowing agent that is then passed through a die and
extruded into sheets of plastic foam material. The foam is then formed into
cups, bowls and plates.
5
The Company purchases a substantial portion of its requirements for
paperboard and resin from several suppliers. The Company has a number of
potential suppliers for most of its raw materials and believes that current
sources of supply are sufficient to meet the Company's requirements.
Competition
The Company sells its products in extremely competitive markets.
Because of the low barriers to entry for new competitors, competition has been,
and may continue to be, intense as new entrants try to gain market share. The
Company's competitors include large multinational companies as well as regional
manufacturers. Some of the Company's competitors have greater financial and
other resources than the Company. The marketplace for the Company's products is
fragmented. The Company has competitors who compete across the full line of its
products, as well as those who compete against only some of the Company's
products. A few of the Company's competitors also produce paper or plastic raw
materials and have greater access to financial and other resources. The
Company's primary competitors in the institutional and consumer foodservice
markets include Dart Container Corporation, Dixie Foodservice Corp. (a division
of Georgia Pacific Corp.), Solo Cup Co., International Paper Food Service
Business (a division of International Paper Co.), AJM Packaging Corp., Dopaco,
Inc. ("Dopaco"), Genpak LLC and Pactiv Corporation. Major competitors in the
food packaging market include Landis Plastics, Inc., Interbake Foods Inc.,
Polytainer, Ltd. and Hutamaki, Inc. The Company's competitors in the disposable
tissue and other specialty products and party goods accessory products
categories include Duni Corp., Erving Paper Products Inc., American Tissue and
Wisconsin Tissue Mills Inc. (a subsidiary of SCA).
Customers
The Company believes that it holds leading market positions in the
institutional and consumer foodservice and food packaging markets for each of
the Company's major product categories. The Company has a diverse and extensive
customer base of over 5,000 customers located throughout North America, in both
the institutional and consumer markets. In the institutional market, the Company
sells to many major foodservice distributors and chain accounts, such as Sysco
Corporation, U.S. Foodservice Inc., Bunzl USA, Inc., McDonald's Corporation,
Burger King Corporation, ARAMARK Corporation and Sodexho Marriott Services. In
the consumer market the Company sells to supermarkets, mass merchants, warehouse
clubs and other retail stores, such as The Kroger Co., The Stop & Shop
Supermarket Co., Topco Associates Inc., The Great Atlantic & Pacific Tea
Company, Inc., Publix Supermarkets Inc., Target Stores (a division of Dayton
Hudson Corp.), Wal-Mart Stores, Inc., Price-Costco, Inc. and Staples Inc. The
Company has developed long-term relationships with many of the Company's
customers.
The Company markets its products primarily to customers in the United
States. During Fiscal 2002, approximately 7.0% of net sales were derived from
sales to customers in Mexico, Canada and Latin America. During Fiscal 2002,
sales to the Company's five largest customers represented approximately 26.7% of
net sales with no one customer accounting for more than 10%. The Company's
operating results could be adversely affected if the Company were to lose one or
more of its large national customers. The Company believes it has strong
relationships with its major national accounts which have been developed over
many years.
Environmental Matters
The Company and its operations are subject to comprehensive and
frequently changing federal, state, foreign and local environmental and
occupational health and safety laws and regulations, including
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laws and regulations governing emissions of air pollutants, discharge of waste
and storm water and the disposal of hazardous wastes. The Company is subject to
liability for the investigation and remediation of environmental contamination
(including contamination caused by other parties) at properties that it owns or
operates and at other properties where the Company or its predecessors have
arranged for the disposal of hazardous substances. As a result, the Company is
involved from time to time in administrative and judicial proceedings and
inquiries relating to environmental matters. The Company believes that, except
as noted below, there are currently no material pending environmental
investigations at the Company's plants or sites. However, there can be no
assurance that the Company will not be involved in any such proceeding in the
future and that any amount of future clean up costs and other environmental
liabilities will not be material. The Company spent less than $200,000 for
environmental compliance in Fiscal 2002 and anticipates spending less than
$200,000 for environmental compliance in Fiscal 2003.
The Company cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist at the Company's facilities. Enactment of stricter laws or
regulations or a stricter interpretation of existing laws and regulations may
require the Company to make additional expenditures by the Company, some of
which could be material.
The Clean Air Act mandates the phase out of certain refrigerant
compounds; therefore, the Company must upgrade or retrofit air conditioning and
chilling systems during the next few years. The Company has decided to replace
units as they become inefficient or unserviceable. The Company expects to
complete the replacement of all such units within the next five to ten years, at
an estimated total cost of less than $1.3 million.
Some of the Company's facilities contain asbestos. Although there is no
current legal requirement to remove such asbestos, the Company monitors such
asbestos on an ongoing basis and/or removes such asbestos as appropriate to
prevent the release of friable asbestos. The Company believes the costs
associated with such program will not be material to its business or financial
condition.
Certain of the Company's facilities are located in states that have
regulations governing emissions of nitrogen oxide. While the Company believes
that these regulations do not apply to its operations, the Company will continue
to monitor its operations for compliance.
On July 13, 1999, the Company received a letter from the U.S.
Environmental Protection Agency ("EPA") identifying the Company, among numerous
others, as a "potential responsible party" under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), at a
site in Baltimore, Maryland. The EPA letter is not a final determination by the
EPA concerning the liability of the Company or the liability of any other
entity. The Company responded to the EPA that upon review of its files it had no
information with respect to any dealings with that site. On December 20, 1999,
the Company received an information request letter from the EPA, pursuant to
CERCLA, regarding a Container Recycling Superfund Site in Kansas City, Kansas
and in January 2000 the Company responded to such inquiry. In both instances,
the Company has received no further communication from the EPA. The Company
denies liability and has no reason to believe the final outcomes of these
matters will have a material adverse effect on the Company's financial condition
or results of operations. However, no assurance can be given about the ultimate
effect on the Company, if any.
Technology and Research
The Company maintains facilities for the development of new products
and product line extensions in Owings Mills, Maryland and facilities for
machinery design in Kensington, Connecticut. A
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staff of engineers and technicians is responsible for product quality, process
control, improvement of existing products, development of new products and
processes, and technical assistance in adhering to environmental rules and
regulations.
During Fiscal 2001, the Company initiated a program to automate certain
of its manufacturing operations which were completed in Fiscal 2002. These
initiatives include the implementation of a robotic transfer and sorting system
for finished goods; automatic packaging; information systems upgrades; and
enhancements to printing processes. Also, the Company initiated new products and
production capabilities which will enable its plastics operations to address
existing and emerging market opportunities.
The Company tests new product concepts at facilities located in
Oshkosh, Wisconsin; Appleton, Wisconsin and St. Albans, Vermont. Management,
supervisors and experienced operators are responsible for plant safety, product
quality, process control, improvement of existing products, development of new
products and processes and technical assistance in adhering to environmental
rules and regulations.
The Company strives to expand its proprietary manufacturing technology,
further automate and streamline its manufacturing operations, improve upon
safety and performance, and develop improved manufacturing processes, equipment,
and product designs.
Employees
At September 29, 2002, the Company employed 7,777 persons, of whom
6,416 persons were hourly employees. Approximately 92.5% of the employees are
located at facilities in the United States. The Company currently has collective
bargaining agreements in effect at its facilities in Appleton, Wisconsin;
Augusta, Georgia; Indianapolis, Indiana; Kensington, Connecticut; Oshkosh,
Wisconsin; St. Albans, Vermont; Springfield, Missouri; Williamsburg,
Pennsylvania; Scarborough, Ontario, Canada and Cuautitlan, Mexico. The
collective bargaining agreements cover all production, maintenance and
distribution hourly-paid employees at each facility and contain standard
provisions relating to, among other things, management rights, grievance,
procedures, strikes and lockouts, seniority and union rights. As of September
29, 2002, approximately 33.6% of the Company's hourly employees were covered by
these collective bargaining agreements. The current expiration dates of the
Appleton; Augusta; Indianapolis; Kensington; Oshkosh; St. Albans; Springfield;
Williamsburg; Scarborough, Ontario; and Cuautitlan collective bargaining
agreements are March 31, 2006, October 30, 2005, December 1, 2007, September 30,
2004, June 2, 2007, January 31, 2005, February 29, 2004, June 11, 2004, November
30, 2003 and December 31, 2002, respectively. The Company considers its
relationship with its employees to be good.
Item 2. PROPERTIES
The Company operates 41 manufacturing and distribution facilities
located throughout North America. All of the Company's facilities are well
maintained, in good operating condition and suitable for the Company's
operations. The table below provides summary information regarding the
properties owned or leased by the Company.
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Size
Type of (Approximate Owned/
Location Facility (1) square feet) Leased Lease Expiration
-------- ------------ ------------ ------ ----------------
Appleton, Wisconsin (2 facilities)............... M/W 271,000 O
W 132,000 L May 30, 2003
Augusta, Georgia (2 facilities).................. M/W 339,000 O
M/W 75,000 O
Chicago, Illinois (2 facilities)................. M/W 874,000 O
W 786,000 L February 28, 2003
Conyers, Georgia (2 facilities).................. M/W 350,000 O
W 555,000 O
Cuautitlan, Mexico (3 facilities)................ M 24,000 L September 3, 2009
W 26,000 L September 3, 2009
W 29,000 L April 1, 2010
Dallas, Texas ................................... M/W 1,304,000 O
El Cajon, California (2 facilities).............. M/W 101,000 L June 30, 2011
W 82,000 L July 31, 2010
Glens Falls, New York............................ M/W 59,000 O
Goshen, Indiana.................................. M/W 63,000 O
Hampstead, Maryland.............................. W 1,035,000 L May 30, 2020
Indianapolis, Indiana............................ W 735,000 L June 30, 2007
Kensington, Connecticut (4 facilities)........... M/W 96,000 L(2) May 15, 2010
M/W 112,000 L(2) May 15, 2010
W 30,000 L(2) May 15, 2010
W 34,000 L May 31, 2003
Lafayette, Georgia............................... M/W 197,000 L(3) April 30, 2003
Lakeland, Florida................................ M/W 45,000 L January 31, 2004
North Andover, Massachusetts..................... M/W 249,000 L October 31, 2020
North Las Vegas, Nevada (2 facilities)........... M/W 99,000 L August 31, 2010
W 96,000 L(4) August 31, 2010
Ontario, California.............................. W 396,000 L May 1, 2014
Oshkosh, Wisconsin............................... M/W 486,000 O
Owings Mills, Maryland (2 facilities)............ M/W 1,495,000 O
M/W 258,000 O
St. Albans, Vermont (3 facilities)............... M 115,000 O
W 186,000 L March 31, 2007
W 28,000 L August 31, 2003
Scarborough, Ontario, Canada M/W 400,000 O
(2 facilities)................................... W 125,000 L March 31, 2003
Somerville, Massachusetts........................ M/W 193,000 O(5)
Springfield, Missouri (2 facilities)............. M/W 924,000 O
W 415,000 L(6) March 25, 2003
Williamsburg, Pennsylvania (2 facilities)........ M 130,000 L(7) June 26, 2005
W 8,000 L June 26, 2005
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(1) M-Manufacturing; W-Warehouse; M/W-Manufacturing and Warehouse in same
facility. (2) Subject to a purchase option which expires May 15, 2005.
(3) Although operations at this facility ceased as of December 1, 2002, the
Company will continue to occupy this facility until April 30, 2003.
(4) The Company is subleasing 46,485 square feet to a third party from
September 1, 2000 until September 20, 2004. (5) On February 20, 2001, the
Company's Board of Directors approved plans for the closure and sale of the
Somerville,
Massachusetts facility. The Company has reclassified this facility to
assets held for sale and is in the process of selling this facility.
(6) The Company is subleasing 127,104 square feet to a third party from November
1, 2001 until March 25, 2003. (7) Subject to capital lease. (See Note 18 of the
Notes to the Financial Statements)
The Company leases a warehouse in Augusta, Georgia which was closed in
the latter part of Fiscal 1997. The Company is currently subleasing such
property to a third party and plans to sublet the property through the lease
termination date of March 31, 2008. The Company also leases a manufacturing
facility from its Chairman and Chief Executive Officer in Jacksonville, Florida
which was closed in Fiscal 1998. The Company is currently subleasing such
property to a third party and plans to sublet the property through the lease
termination date of December 31, 2014. See "--Certain Relationships and Related
Transactions".
The Company also occupies several retail and storage facilities located
in Indiana and Pennsylvania in connection with its party goods consumer
business. These facilities are comprised of outlet stores and local storage
facilities maintained for marketing purposes.
Item 3. LEGAL PROCEEDINGS
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084,
was filed in state court in Georgia in April 1987 and later removed to federal
court. The Plaintiffs claimed, among other things, that the Company wrongfully
terminated the Lily Tulip, Inc. Salary Retirement Plan (the "Plan") in violation
of the Employee Retirement Income Security Act of 1974, as amended. The relief
sought by Plaintiffs was to have the Plan termination declared ineffective. The
United States Court of Appeals for the Eleventh Circuit (the "Circuit Court")
ruled that the Plan was lawfully terminated on December 31, 1986, and judgment
was entered dismissing the case in March 1996. The Circuit Court affirmed the
judgment entered in favor of the Company. Plaintiffs filed a petition for writ
of certiorari to the United States Supreme Court, which was denied in January
1999. The Company has completed paying out the termination liability and
associated expenses in connection with the Plan termination.
On July 13, 1999, the Company received a letter from the EPA
identifying the Company, among numerous others, as a "potential responsible
party" under CERCLA, at a site in Baltimore, Maryland. The EPA letter is not a
final determination by the EPA concerning the liability of the Company or the
liability of any other entity. The Company responded to the EPA that upon review
of its files it had no information with respect to any dealings with that site.
On December 20, 1999, the Company received an information request letter from
the EPA, pursuant to CERCLA, regarding a Container Recycling Superfund Site in
Kansas City, Kansas and in January 2000 the Company responded to such inquiry.
In both instances, the Company has received no further communication from the
EPA. The Company denies liability and has no reason to believe the final outcome
of these matters will have a material adverse effect on the Company's financial
condition or results of operations. However, no assurance can be given about the
ultimate effect on the Company, if any.
The Company is subject to legal proceedings and other claims arising in
the ordinary course of its business. The Company maintains insurance coverage of
types and in amounts which it believes to be adequate. The Company believes that
it is not presently a party to any litigation, the outcome of which could
reasonably be expected to have a material adverse effect on its financial
condition or results of operations.
10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Sweetheart Cup is a wholly owned subsidiary of Sweetheart Holdings,
which is a privately held corporation. No equity securities of Sweetheart
Holdings or Sweetheart Cup are publicly traded or registered under the
Securities Exchange Act of 1934, as amended, and there is no public trading
market for the stock.
Payment of cash dividends is restricted under the instruments governing
the Company's indebtedness. The Company has not paid cash dividends and does not
anticipate paying any cash dividends in the foreseeable future.
As of December 9, 2002, there was one holder of Sweetheart Holdings'
Class A Common Stock and Sweetheart Holdings' Class B Common Stock.
Item 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are selected historical consolidated financial data of
the Company at the dates and for the fiscal years shown. In June 2000, the
Company completed a sale-leaseback transaction, the proceeds of which were used
to retire certain existing indebtedness. Consequently, operating results for
Fiscal 2002, 2001 and 2000, as presented in the table below, are not comparable
to prior periods. The selected historical consolidated financial data at
September 29, 2002 and September 30, 2001 and for Fiscal 2002, 2001 and 2000 are
derived from historical consolidated financial statements of the Company for
such periods that have been audited by Deloitte & Touche LLP, independent
auditors and are included elsewhere herein. The selected historical consolidated
financial data at September 24, 2000, September 26, 1999 and September 27, 1998
and for Fiscal 1999 and 1998 is derived from the audited historical consolidated
financial statements of the Company for such periods which are not included
herein.
11
Fiscal(1)
--------------------------------------------------------------------
(In thousands) 2002 2001 2000 1999 1998 (2)
------------ ------------ ------------ ------------ ------------
Statement of Operations Data (3):
Net sales $ 1,283,547 $ 1,316,672 $ 1,276,617 $ 1,182,004 $ 1,184,168
Cost of sales 1,130,264 1,143,806 1,090,286 1,022,800 1,057,100
------------ ------------ ------------ ------------ ------------
Gross profit 153,283 172,866 186,331 159,204 127,068
Selling, general and administrative expenses 114,823 113,231 112,559 118,479 122,918
Restructuring charge (credit) (4) 1,893 504 1,153 (512) 897
Asset impairment expense(5) 593 2,244 - - 6,828
Other expense (income), net(6) (7) 2,102 (9,836) (4,943) (1,563) (2,966)
------------ ------------ ------------ ------------ ------------
Operating income (loss) 33,872 66,723 77,562 42,800 (609)
Interest expense, net 37,079 38,919 52,608 58,413 58,656
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes, minority
interest, cumulative effect of change in
accounting principle and extraordinary loss (3,207) 27,804 24,954 (15,613) (59,265)
Income tax (benefit) expense (1,283) 11,220 10,096 (5,527) (23,537)
Minority interest in subsidiary 145 68 - - -
Cumulative effect of change in accounting
principle(8) - - - - 1,511
Extraordinary loss, net(9) 1,079 - 313 - -
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (3,148) $ 16,516 $ 14,545 $ (10,086) $ (37,239)
============ ============ ============ ============ ============
Balance Sheet Data (at end of year):
Cash and cash equivalents $ 8,035 $ 11,616 $ 4,828 $ 3,589 $ 18,572
Cash in escrow - 8 300 - 5,464
Working capital (deficiency) 126,804 249,450 173,299 (96,045) 187,127
Property, plant and equipment, net 252,491 260,666 254,844 374,666 403,375
Total assets 820,843 855,173 805,273 842,975 878,198
Total debt (10) 437,301 440,820 387,988 527,335 548,245
Shareholder's equity 47,237 56,130 45,074 29,946 36,196
(1) On March 25, 2002, Sweetheart Cup and Fonda entered into a merger
transaction that has been accounted for in a manner similar to
pooling-of-interests and, accordingly, the consolidated financials
statements have been restated for all periods presented.
(2) Prior to Fiscal 1999, Sweetheart's and Fonda's fiscal year ends were
September 30 and the last Sunday in July, respectively. In October 1998,
both Sweetheart and Fonda changed their fiscal year ends to the last Sunday
in September, effective for Fiscal 1999. The data as of and for the fiscal
year ended September 27, 1998 represents the consolidated results of
Sweetheart and Fonda for their respective year ends.
(3) The selected historical consolidated financial and operating data include
the operations of the Company and each of its acquisitions since the
respective dates of such acquisitions. See Note 7 of the Notes to the
Consolidated Financial Statements of the Company.
(4) During Fiscal 2002, the Company established a restructuring reserve of $0.3
million in conjunction with the planned closure of its Lafayette, Georgia
facility from which 101 primarily manufacturing positions were eliminated
and a restructuring reserve of $1.6 million in conjunction with planned
consolidation initiatives from which 475 primarily manufacturing positions
were eliminated. In Fiscal 2001, the Company recorded a restructuring
reserve in conjunction with the consolidation of the former administrative
offices of Creative Expressions Group, Inc. ("CEG"), an affiliate of the
Company, with its Oshkosh administrative offices. In Fiscal 2000, the
Company established a restructuring reserve for severance and related costs
for the elimination of its centralized machine shop and for the closure of
its Maspeth, New York facility. In Fiscal 1998, the Company established a
restructuring reserve for severance and related costs for a workforce
reduction which was adjusted in 1999 and for the closure of its
Jacksonville, Florida and Indianapolis, Indiana facilities and the St.
Albans, Vermont administrative offices.
(5) In Fiscal 2002, 2001 and 1998, the Company recorded an asset impairment
expense as a result of a review of the carrying value of certain of its
long-lived assets.
(6) Other (income) expense, net in Fiscal 2002, Fiscal 2001 and Fiscal 2000
includes $10.2 million, $10.3 million and $2.8 million, respectively, of
amortization of the deferred gain in connection with the Sale-Leaseback
Transaction which occurred on June 15, 2000. Other (income) expense, net in
Fiscal 2002, also includes (i) a $5.4 million write-off of the management
services agreement between Sweetheart Holdings and SF Holdings, which had
been assigned and assumed by Fonda in 1998 (ii) a $2.6 million write-off of
assets related to business initiatives which were abandoned subsequent to
the merger of Sweetheart Cup and Fonda, (iii) $6.9 million of costs
incurred in connection with the rationalization, consolidation and process
improvement of the Company's manufacturing facilities and (iv) additional
costs of $0.5 million associated with the Lily-Tulip, Inc. Salary
Retirement Plan
12
(7) Fiscal 1998 includes a $15.9 million net gain on the sale of substantially
all of the fixed assets and certain related working capital of the
Company's tissue mill in Gouverneur, New York and settlement in connection
with the termination by the owner of the co-generation facility of its
obligation to supply steam to the mill. This was partially offset by $1.8
million of asset write-down charges associated with the sale of the
Company's Riverside facility in Fiscal 1998. Additionally, the Company
recognized $3.4 million of expense based on actuarial estimates associated
with pending litigation. Also, the Company recognized certain charges,
consisting primarily of $4.4 million of financial advisory and legal fees
associated with the Company's sale to SF Holdings and $3.7 million of
severance expenses as a result of the termination of certain officers
pursuant to executive separation agreements and retention plans for certain
key executive. These expenses were partially offset by a gain of $3.3
million associated with the sale of the Company's bakery operations.
(8) In Fiscal 1998, the Company recorded a $1.5 million expense, net of $1.0
million of income tax benefit, in connection with the implementation of
EITF 97-13, which requires companies to expense any previously capitalized
reengineering costs in connection with software installation.
(9) In Fiscal 2002 and Fiscal 2000, the Company incurred an extraordinary loss
of $1.8 million and $0.5 million, respectively, (net of $0.7 million and
$0.2 million income tax benefit, respectively) in the connection with the
early retirement of debt.
(10) Total debt includes short-term and long-term borrowings, and current
maturities of long-term debt.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Forward-looking statements in this filing, including those in the Notes
to Consolidated Financial Statements, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties and actual
results could differ materially. Such risks and uncertainties include, but are
not limited to, general economic and business conditions, competitive market
pricing, increases in raw material costs, energy costs and other manufacturing
costs, fluctuations in demand the Company's products, potential equipment
malfunctions and pending litigation.
General
The Company believes that it is one of the largest producers and
marketers of disposable foodservice and food packaging products in North
America. The Company sells a broad line of disposable paper, plastic and foam
foodservice and food packaging products at all major price points under both
branded and private labels to institutional foodservice, consumer foodservice
and food packaging customers. The Company markets its products under its
Sweetheart(R), Lily(R), Trophy(R), Jazz(R), Preference(TM), Go Cup(R), Silent
Service(R), Centerpiece(R), Basix(R), Guildware(R), Simple Elegance(R),
Sensations(R), Hoffmaster(R), Paper Art(R), and Touch of Color(R) brands.
The Company's product offerings cover a broad range within the
industry, including (i) paper, plastic and foam foodservice products, primarily
cups, lids, plates, bowls, plastic cutlery, food trays and food containers; (ii)
tissue and specialty foodservice products, primarily napkins, table covers,
placemats and lunch bags; and (iii) food packaging products, primarily
containers for the dairy and food processing industries. To enhance product
sales, the Company designs, manufactures and leases container filling and
lidding equipment to dairies and other food processors to package food items in
the Company's containers at customers' plants. Types of products packaged in the
Company's machines include: ice cream, factory-filled jacketed ice cream cones,
cottage cheese, yogurt and squeeze-up desserts. The Company also sells paper
converting equipment used primarily in the manufacture of paper cups and food
containers.
The Company sells its products to institutional foodservice and
consumer customers, including large national accounts, located throughout the
United States, Canada and Mexico. The Company has developed and maintained
long-term relationships with many of its customers. The Company's institutional
foodservice customers include (i) major foodservice distributors, (ii) national
accounts,
13
including quick service restaurants and catering services, and (iii) schools,
hospitals and (iv) other major institutions. The Company's consumer customers
include (i) supermarkets, (ii) mass merchandisers, (iii) warehouse clubs, (iv)
party good stores and (v) other retailers. The Company's food packaging
customers include (i) national and regional dairy and (ii) food companies.
The Company's business is seasonal with a majority of its net cash
flows from operations realized during the last six months of the fiscal year.
Sales for such periods reflect the high seasonal demands of the summer months
when outdoor and away-from-home consumption increases. In the event that the
Company's cash flows from operations is insufficient to provide working capital
necessary to fund its requirements, the Company will need to borrow under its
credit facility or seek other sources of capital. The Company believes that
funds available under such credit facility together with cash generated from
operations, will be adequate to provide for cash requirements for the next
twelve months.
On March 25, 2002, pursuant to an Agreement and Plan of Merger, Fonda
was merged with and into Sweetheart Cup, with Sweetheart Cup as the surviving
entity. In connection with the Merger, all of the assets and operations of Fonda
were assigned to, and all liabilities of Fonda were assumed by, Sweetheart Cup
by operation of law and all of the outstanding shares of Fonda were cancelled.
Sweetheart Cup is a wholly owned subsidiary of Sweetheart Holdings which is a
wholly owned subsidiary of SF Holdings. Sweetheart Holdings and Fonda are under
common control, and therefore, the transaction has been accounted for in a
manner similar to a pooling-of-interests. The accompanying financial information
has been restated for all periods presented.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. On an on-going basis,
management evaluates its estimates and judgments, including those related to
revenue recognition, receivables reserves, inventory reserves, goodwill, income
taxes and contingencies. Management bases its estimates and judgment on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue recognition / receivable reserves - Revenue is recognized upon
shipment of product and when collectability is reasonably assured. Also, the
Company rents filling equipment to certain of its customers and recognizes this
income over the life of the lease. The Company's sales are evidenced and the
sales price fixed based upon either a purchase order, contract or buying
agreement with the customer. The Company's freight terms are either FOB shipping
point or freight prepaid by the customer. The customer may also be eligible for
promotional incentives or rebates. The Company at the time of sale records a
reserve for promotional allowances, rebates and other discounts based on
historical experience, which are charged to net sales.
Raw materials are critical components of the Company's cost structure.
The prices for these raw materials may fluctuate. When raw material prices
decrease, selling prices have historically decreased. The actual impact from raw
material price changes is affected by a number of factors including the level of
inventories at the time of a price change, the specific timing and frequency of
price changes, and the lead and lag time that generally accompanies the
implementation of both raw materials and subsequent selling price changes. In
the event that raw material prices decrease over a period of several months, the
Company may suffer margin erosion on the sale of such inventory.
14
Inventory reserves - The Company establishes reserves for its inventory
to reflect those conditions when the cost of the inventory is not expected to be
recovered. The Company reviews such circumstances when products are not expected
to be saleable based on standards established by the Company's quality assurance
standards. The reserve for these products is equal to all or a portion of the
cost of the inventory based on the specific facts and circumstances. We monitor
inventory levels on a regular basis and record changes in inventory reserves as
part of costs of goods sold.
Goodwill - Goodwill represents the excess of the purchase price over
the fair value of tangible and identifiable intangible net assets acquired and
is amortized on a straight-line basis over twenty years. The carrying value of
goodwill is reviewed when facts and circumstances suggest that it may be
impaired. The Company assesses its recoverability by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted projected future cash flows. Should the review indicate
that goodwill is not recoverable, the Company's carrying value of the goodwill
would be reduced by the estimated shortfall of the cash flows. See "--Impact of
Recently Issued Accounting Standards, SFAS No. 142".
Income taxes - The Company applies an asset and liability approach to
accounting for income taxes. Deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The recoverability of deferred tax assets is dependent upon the Company's
assessment of whether it is more likely than not that sufficient future taxable
income will be generated in the relevant tax jurisdiction to utilize the
deferred tax asset. The Company reviews its internal forecasted sales and
pre-tax earnings estimates to make its assessment about the utilization of
deferred tax assets. In the event, the Company determines that the future
taxable income will not be sufficient to utilize the deferred tax asset, a
valuation allowance is recorded. If that assessment changes, a charge or a
benefit would be recorded on the statement of operations.
Contingencies - The Company is subject to litigation in the ordinary
course of business and also to certain other contingencies. See Note 25 to the
consolidated financial statements. The Company records legal fees and other
expenses related to litigation and contingencies as incurred. Additionally, the
Company assesses, in consultation with its counsel, the need to record a
liability for litigation and contingencies on a case-by-case basis. Reserves are
recorded when the Company, in consultation with counsel, determine that a loss
related to a matter is both probable and reasonably estimable.
Selling, general and administrative expenses consist primarily of
salaries, benefits, promotional and advertising costs, rent, depreciation of
equipment and broker fees.
Recent Developments
On November 21, 2002, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 relating to a proposed
offer to exchange newly issued $110 million senior subordinated notes due 2007
for all of the $110 million Senior Subordinated Notes and a consent solicitation
to eliminate and/or amend certain restrictive covenants and other provisions
governing the $110 million Senior Subordinated Notes. The Company also intends
to solicit consent to eliminate and/or amend certain restrictive covenants and
other provisions governing the $120 million Senior Subordinated Notes. The
Company believes that the exchange offer and consent solicitations will provide
it with the necessary time to execute its business plan and to further evaluate
its strategic alternatives. If the Company is unable to complete the exchange
offer and consent solicitation or refinance, repay or extend the $110 million
Senior Subordinated Notes prior to March 1, 2003, its Senior Credit Facility,
unless otherwise amended, will become due and payable.
15
The Company is also evaluating various strategic options which may
include a restructuring of its business debt and capital structure, including,
among other things, the public sale or private placement of debt or equity
securities, joint venture transactions, sale of assets, new borrowings, the
refinancing of the Company's existing debt agreements, open market purchases,
tender offers or exchange offers and consent solicitations of the Company's
outstanding securities. There can be no assurances that any of these strategic
options will be consummated.
On October 1, 2002, the Company entered into a loan agreement with the
City of Chicago, to borrow $2.0 million. The loan bears no interest and is
payable in equal installments of $100,000 commencing on February 1, 2004 and
every six months thereafter. As of December 2, 2002, the proceeds from the loan
have not been received by the Company.
Fiscal 2002 Compared to Fiscal 2001
Net sales decreased $33.2 million, or 2.5%, to $1,283.5 million in
Fiscal 2002 compared to $1,316.7 million in Fiscal 2001 reflecting a 2.5%
decrease in average realized selling prices resulting from lower raw material
costs and competitive pressures while sales volumes remained constant. Sales
volumes declined domestically due to a reduction in the business and leisure
travel industries and a reduction in foodservice and away-from-home dining which
resulted from the events of September 11, 2001 and the fact that Fiscal 2002
consisted of 52 weeks as compared with 53 weeks for Fiscal 2001. This decrease
was offset by increased sales volume due to the incremental sales obtained from
the acquisitions of Global Cup, S.A. De C.V. and its subsidiaries ("Global Cup")
in April 2001 and the consumer division of Dopaco in August 2001. Net sales
excluding Global Cup and the consumer division of Dopaco decreased $72.2
million, or 5.5%, to $1,235.4 million in Fiscal 2002 compared to $1,307.6
million in Fiscal 2001 reflecting a 2.5% decrease in average realized sales
price and a 3.2% decrease in sales volume.
Gross profit decreased $19.6 million, or 11.3%, to $153.3 million in
Fiscal 2002 compared to $172.9 million in Fiscal 2001. As a percentage of net
sales, gross profit decreased to 11.9% in Fiscal 2002 from 13.1% in Fiscal 2001.
The $19.6 million decline in gross profit was due (i) 66.7% to the manufacturing
inefficiencies related to the Company's consolidation initiatives and lower
fixed cost absorption as Fiscal 2002 consisted of 52 weeks as compared with 53
weeks for Fiscal 2001, (ii) 22.2% to the impact of lower average realized
selling prices and (iii) 11.1% to a decrease from a mix shift to lower margin
volumes as a result of the acquisition of the consumer division of Dopaco.
Selling, general and administrative expenses increased $1.6 million, or
1.4%, to $114.8 million in Fiscal 2002 compared to $113.2 million in Fiscal
2001. This increase resulted primarily from $2.2 million of increased
promotional and advertising expenses, $1.5 million of increased bad debt expense
due to a customer bankruptcy filing and $1.0 million and $1.4 million of
increased expenses due to the acquisitions of both Global Cup and the consumer
division of Dopaco, respectively. These increases were partially offset by (i)
lower expenses as a result of Fiscal 2002 consisting of 52 weeks as compared to
53 weeks in Fiscal 2001, (ii)$3.7 million in reduced salaries and benefits and
(iii)$1.3 million in lower depreciation expense.
Restructuring charge increased $1.4 million, or 280.0%, to $1.9 million
in Fiscal 2002 compared to $0.5 million in Fiscal 2001. During Fiscal 2002, the
Company established a restructuring reserve of $0.3 million in conjunction with
the planned closure of the Company's Lafayette, Georgia facility from which 101
primarily manufacturing positions were eliminated. The plan was approved by
management on September 24, 2002 and announced to employees on September 29,
2002. Severance payments of $0.1 million and $0.2 million of vacated rent
expense will be paid in Fiscal 2003. Also, during Fiscal 2002, the Company
established a restructuring reserve of $1.6 million in conjunction with planned
consolidation initiatives from which 475 primarily manufacturing positions were
eliminated. The plan was approved by management on June 19, 2002 and announced
to employees on June 28, 2002. A portion of the severance
16
payments of $1.6 million were paid in the fourth quarter of Fiscal 2002 with the
remaining payments to be paid in the first three quarters of Fiscal 2003. During
Fiscal 2001, the Company established a restructuring reserve of $0.5 million in
conjunction with the consolidation of the former administrative offices of CEG
in Indianapolis, Indiana into the Company's administrative offices in Oshkosh,
Wisconsin. This consolidation included the elimination of approximately 40
positions. The plan was approved by management on October 30, 2000 and announced
to employees on May 1, 2001. The effective date of the consolidation and
elimination of positions was delayed until the fourth quarter of Fiscal 2001.
Severance payments of $0.1 million were paid during the fourth quarter of Fiscal
2001.
Asset impairment expense was $0.6 million in Fiscal 2002 as a result of
the Company's evaluation of the usefulness of certain equipment no longer in use
in connection with the closure of its Lafayette, Georgia facility.
Other expense (income), net changed $11.9 million, or 121.4%, to $2.1
million of expense in Fiscal 2002 compared to $9.8 million of income in Fiscal
2001. During Fiscal 2002, the Company realized $10.2 million due to the
amortization of the deferred gain in conjunction with the Fiscal 2000
sale-leaseback transaction. Also, during Fiscal 2002, the Company recognized a
$3.0 million gain associated with the sale of the Company's manufacturing
facility in Manchester, New Hampshire. These gains were offset by (i) a $5.4
million write-off of the management services agreement between Sweetheart
Holdings and SF Holdings, which had been assigned and assumed by Fonda in 1998,
(ii) a $2.6 million write-off of assets related to business initiatives which
were abandoned subsequent to the Merger, (iii) $6.9 million of costs in
connection with the rationalization, consolidation and process improvement of
the Company's manufacturing facilities and (iv) $0.5 million of additional costs
associated with the termination of the Lily-Tulip, Inc. Salary Retirement Plan.
In Fiscal 2001, the Company realized $10.3 million due to the amortization of
the deferred gain in conjunction with the sale-leaseback transaction. This
amortization of the deferred gain was partially offset by $1.6 million in
expenses associated with the relocation of the Company's Somerville,
Massachusetts, manufacturing facility to North Andover, Massachusetts.
Operating income decreased $32.8 million, or 49.2% to $33.9 million in
Fiscal 2002 compared to $66.7 million in Fiscal 2001 due to the reasons
described above.
Interest expense, net decreased $1.8 million, or 4.6%, to $37.1 million
in Fiscal 2002 compared to $38.9 million in Fiscal 2001. This decrease is
attributable to lower interest rates on higher average balances under the
Company's Senior Credit Facility which was partially offset by the increase in
interest rate on the $110 million Senior Subordinated Notes from 10.5% to 12.0%
which was effective March 1, 2002.
Income tax expense (benefit) changed $12.5 million, or 111.6% to a
benefit of $1.3 million in Fiscal 2002 compared to an expense of $11.2 million
in Fiscal 2001 as a result of a pre-tax loss. The effective rate for Fiscal 2002
and 2001 was 40%.
Minority interest in subsidiary was $0.1 million in Fiscal 2002 and in
Fiscal 2001. This amount represents the 20% ownership of Global Cup's income.
Extraordinary loss on debt extinguishment was $1.1 million net of the
income tax benefit in Fiscal 2002 resulting from the refinancing of the
Company's Senior Credit Facility.
Net income decreased $19.6 million, or 118.8%, to a $3.1 million loss
in Fiscal 2002 compared to $16.5 million of income in Fiscal 2001 due to the
reasons described above.
17
Fiscal 2001 Compared to Fiscal 2000
Net sales increased $40.1 million, or 3.1%, to $1,316.7 million in
Fiscal 2001 compared to $1,276.6 million in Fiscal 2000 reflecting a 3.2%
increase in average realized selling prices and a 0.1% decrease in sales volume.
Realized selling prices increased as a result of a shift in product mix. Sales
volumes decreased due to more competitive market conditions and the Company's
decision to reduce sales to certain customers experiencing deteriorating credit
conditions. This decrease in sales volume was partially offset by the
incremental sales obtained from the Company's acquisition of an 80% interest in
Global Cup in April 2001 and the acquisition of Springprint Medallion, a
division of Marcal Paper Mills, Inc. ("Springprint") in September 2000.
Gross profit decreased $13.4 million, or 7.2%, to $172.9 million in
Fiscal 2001 compared to $186.3 million in Fiscal 2000. As a percentage of net
sales, gross profit decreased to 13.1% in Fiscal 2001 from 14.6% in Fiscal 2000.
The decrease in gross profit is primarily attributable to the effects of the
Sale-Leaseback Transaction whereby, in Fiscal 2000, Sweetheart Cup sold certain
of its production equipment and is leasing back this equipment under an
operating lease. Consequently, cost of sales increased due to higher rent
expense which has been partially offset by lower depreciation expense.
Specifically, rent expense increased by $12.0 million net of a reduction in
depreciation. Additionally, gross profit declined due to increased energy and
transportation costs.
Selling, general and administrative expense increased $0.6 million, or
0.5%, to $113.2 million in Fiscal 2001 compared to $112.6 million in Fiscal
2000. However, as a percentage of net sales, selling, general and administrative
expenses decreased to 8.6% in Fiscal 2001 from 8.8% in Fiscal 2000. This
increase resulted from the Company's increase in wages of $2.5 million, increase
in brokerage fees of $0.8 million and $0.7 million of on going operational
expenses as a result of the Fiscal 2001 Global Cup acquisition. These increases
were partially offset by a $2.3 million reduction in bad debt expense and a
reduction in legal fees of $0.7 million from the Company.
Restructuring charge decreased $0.7 million, or 58.3%, to a charge of
$0.5 million in Fiscal 2001 compared to $1.2 million in Fiscal 2000. During
Fiscal 2001, the Company established a restructuring reserve of $0.5 million in
conjunction with the consolidation of former CEG administrative offices in
Indianapolis, Indiana into the Company's administrative offices in Oshkosh,
Wisconsin. This consolidation included the elimination of 40 positions. The plan
was approved by management on October 30, 2000 and announced to employees on May
1, 2001. The effective date of the consolidation and elimination of positions
was delayed until the fourth quarter of Fiscal 2001. Severance payments of $0.1
million were paid during the fourth quarter of Fiscal 2001. During Fiscal 2000,
the Company established a restructuring reserve of $0.7 million in conjunction
with the planned elimination of the Company's centralized machine shop operation
from which 53 positions would be eliminated. The plan was completed and approved
by management on January 10, 2000 and announced to employees on March 7, 2000.
Severance payments of $0.2 million, were paid in both the third and fourth
quarters of Fiscal 2000. Also, during the fourth quarter of Fiscal 2000, the
Company reversed $0.2 million of this reserve as a result of 12 employees being
placed into open positions within the Company. During Fiscal 2000, the Company
announced that it intended to close its Maspeth, New York facility in the first
quarter of Fiscal 2001 which resulted in the elimination of 130 positions. In
connection with such plans in Fiscal 2000, the Company recognized $0.7 million
of charges for severance and related costs.
Asset impairment expense was $2.2 million in Fiscal 2001 as a result of
the Company's evaluation of the usefulness of certain equipment no longer in use
in connection with the consolidation of the Manchester, New Hampshire and
Springfield, Missouri facilities with other existing facilities.
Other (income) expense, net increased $4.9 million, or 100.0%, to $9.8
million of income in Fiscal 2001 compared to $4.9 million in Fiscal 2000. The
Company recognized $10.3 million due to the amortization of the deferred gain in
conjunction with the Sale-Leaseback Transaction. This gain was partially offset
by $1.6 million in expenses related to the relocation of the Company's
Somerville,
18
Massachusetts facility to North Andover, Massachusetts and the Company's $0.2
million loss on the sale of a building in St. Albans, Vermont.
Operating income decreased $10.9 million, or 14.0%, to $66.7 million in
Fiscal 2001 compared to $77.6 million in Fiscal 2000 due to the reasons
described above.
Interest expense, net decreased $13.7 million, or 26.0%, to $38.9
million in Fiscal 2001 compared to $52.6 million in Fiscal 2000. This decrease
is attributed to lower interest rates on higher outstanding revolving credit
balances and the June 2000 redemption of the $190.0 million 9 1/2% Senior
Secured Notes due 2000.
Income tax expense (benefit) increased $1.1 million, or 10.9%, to an
expense of $11.2 million in Fiscal 2001 compared to $10.1 million in Fiscal 2000
as a result of higher pre-tax earnings. The effective rate for Fiscal 2001 and
2000 was 40%.
Minority interest in subsidiary was $68,000 in Fiscal 2001. This amount
represents the 20% ownership of Global Cup's income.
Net income increased $2.0 million, or 13.8%, to $16.5 million income in
Fiscal 2001 compared to $14.5 million income in Fiscal 2000 due to the reasons
described above.
Liquidity And Capital Resources
Historically, the Company has relied on cash flows from operations and
revolving credit borrowings to finance its working capital requirements and
capital expenditures. In Fiscal 2002, the Company funded its capital
expenditures from a combination of cash generated from operations, funds
generated from asset sales and revolving credit borrowings. The Company expects
to continue this method of funding for its Fiscal 2003 capital expenditures.
Following the terrorist attacks of September 11, 2001, the Company
experienced a decline in sales prices and volumes due to a number of factors,
including a significant reduction in business and leisure travel and a reduction
in foodservice and away-from-home dining. In addition to these factors affecting
our sales, our implementation of certain consolidation initiatives caused
temporary inefficiencies within our manufacturing operations, which increased
our cost structure and reduced our gross margin during recent periods.
As a result of these factors, together with difficult market
conditions, the Company has been unable to refinance the $110 million Senior
Subordinated Notes on terms acceptable to the Company. Unless current market
conditions change significantly, the Company may not have sufficient capital to
refinance the $110 million Senior Subordinated Notes when they mature on
September 1, 2003. Moreover, if the Company is unable to complete the exchange
offer and consent solicitation or refinance, repay or extend the $110 million
Senior Subordinated Notes prior to March 1, 2003, its Senior Credit Facility,
unless otherwise amended, will become due and payable.
On November 21, 2002, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 relating to a proposed
offer to exchange newly issued $110 million senior subordinated notes due 2007
for all of the $110 million Senior Subordinated Notes and a consent solicitation
to eliminate and/or amend certain restrictive covenants and other provisions
governing the $110 million Senior Subordinated Notes. The Company also intends
to solicit consent to eliminate and/or amend certain restrictive covenants and
other provisions governing the $120 million Senior Subordinated Notes. The
Company believes that the exchange offer and consent solicitations will provide
it with the necessary time to execute its business plan and to further evaluate
its strategic alternatives.
19
Net cash provided by operating activities in Fiscal 2002 was $28.5
million compared to $13.8 million in Fiscal 2001. This increase is primarily due
to a reduction in inventories and decreased account receivable balances which
resulted from lower raw material price levels combined with higher account
payable balances due to longer terms.
Net cash used in investing activities in Fiscal 2002 was $16.0 million
compared to $71.7 million in Fiscal 2001. This decrease is primarily due to the
receipt of net proceeds from the sale of the Manchester, New Hampshire facility
in Fiscal 2002. During Fiscal 2001, the Company purchased substantially all of
the property, plant and equipment, intangibles and net working capital of
Springprint, Global Cup and the consumer division of Dopaco.
Net cash used in financing activities in Fiscal 2002 was $16.1 million
compared to net cash provided by financing activities of $64.7 million in Fiscal
2001. This change is primarily due to the payment of debt issuance costs in
Fiscal 2002 in connection with the refinancing of the Company's debt as compared
to Fiscal 2001 which had additional borrowings under the Senior Credit Facility
for business acquisitions and higher capital spending.
Working capital decreased $122.7 million to $126.8 million at September
29, 2002 from $249.5 million at September 30, 2001. This decrease resulted from
current assets decreasing $28.1 million and the current liabilities increasing
$94.6 million. These changes resulted primarily from (i) a reduction in accounts
receivables and inventories as a result of lower raw material price level and
(ii) the reclassification of the $110 million Senior Subordinated Notes from
long-term debt to current debt as such debt matures in September 2003.
Capital expenditures for Fiscal 2002 were $21.2 million compared to
$31.7 million in Fiscal 2001. Capital expenditures in Fiscal 2002 included $10.0
million for new production equipment; $6.3 million associated with the
implementation of the Company's consolidation program; $3.0 million for facility
improvements; and $1.9 million primarily for routine capital improvements.
Funding for the Fiscal 2002 capital expenditures was primarily provided by cash
generated from operations, the sale of assets and revolving credit borrowings.
During Fiscal 2003, the Company intends to continue to rely on this combination
of funding for its capital expenditures.
On June 10, 2002, the Company entered into a loan agreement with the
Department of Business and Economic Development, a principal department of the
State of Maryland, to borrow $2.0 million (the "Maryland Loan"). The Maryland
Loan bears interest at a rate ranging from 3.0% to 8.0% per annum depending on
certain employment rates at the Company's Owings Mills, Maryland facility. The
Maryland Loan is payable in quarterly installments through March 1, 2007. As of
September 29, 2002, $1.9 million was outstanding at an annual interest rate of
3.0%.
The Company has a Senior Credit Facility with Bank of America, N.A., as
agent. The Senior Credit Facility has a maturity date of March 25, 2007;
however, in the event that the Company has not refinanced, repaid or extended
the $110 million Senior Subordinated Notes prior to March 1, 2003, the Senior
Credit Facility will become due on that date. The Senior Credit Facility allows
for a maximum credit borrowing of $235 million subject to borrowing base
limitations and satisfaction of other conditions of borrowing. The revolving
borrowings have a maximum of $215 million. The term loans have a maximum of $25
million and are payable monthly through March 2005. Borrowings under the Senior
Credit Facility, at the Company's election, bear interest at either (i) a bank's
base rate revolving loan reference rate plus 0.5% or (ii) LIBOR plus 2.5%. For
Fiscal 2002, the weighted average annual interest rate for the Senior Credit
Facility was 4.88%. The indebtness of Sweetheart Cup under the Senior Credit
Facility is guaranteed by Sweetheart Holdings and secured by a first priority
perfect security interest in accounts receivable, inventory, general intangibles
and certain other assets. The fee for outstanding letters of credit is 2.00% per
annum and there is a commitment fee of 0.375% per annum on the daily average
unused amount of the commitments. As of September 29, 2002, $31.0 million was
20
available under the Senior Credit Facility. As of September 29, 2002, LIBOR was
1.81% and the bank's base rate was 4.75%.
The Senior Credit Facility contains various covenants that limit, or
restrict, among other things, indebtedness, dividends, leases, capital
expenditures and the use of proceeds from asset sales and certain other business
activities. Additionally, the Company must maintain on a consolidated basis,
certain specified ratios at specified times, including, without limitation,
maintenance of minimum fixed charge coverage ratio. The Company is currently in
compliance with all covenants under the Senior Credit Facility. The Senior
Credit Facility provides for partial mandatory prepayments upon the sale of
equipment collateral unless net proceeds are used to purchase replacement
collateral and full repayment upon any change of control (as defined in the loan
agreement governing the Senior Credit Facility).
The Company's Canadian subsidiary has a credit agreement (the "Canadian
Credit Facility") which provides for a term loan and a credit facility with a
maximum credit borrowing of Cdn $30 million (approximately US $19.0 million)
subject to borrowing base limitations and satisfaction of other conditions of
borrowing. The term borrowings are payable quarterly through May 2004. Both the
revolving credit and term loan borrowings have a final maturity date of June 15,
2004. The Canadian Credit Facility is secured by all existing and thereafter
acquired real and personal tangible assets of the Company's Canadian subsidiary
and net proceeds on the sale of any of the foregoing. Borrowings under the
Canadian Credit Facility bear interest at an index rate plus 1.75% with respect
to the revolving credit facility and an index rate plus 2.00% with respect to
the term loan borrowings. For Fiscal 2002, the weighted average annual interest
rate for the Canadian Credit Facility was 4.41%. As of September 29, 2002, Cdn
$1.3 million (approximately US $0.8 million) was available under the revolving
facility and the term loan balance was Cdn $12.3 million (approximately US $7.8
million) under the Canadian Credit Facility.
In connection with a sale-leaseback transaction, on June 15, 2000, the
Company sold certain production equipment located in Owings Mills, Maryland,
Chicago, Illinois and Dallas, Texas to several owner participants for a fair
market value of $212.3 million. Pursuant to a lease dated as of June 1, 2000
(the "Lease") between Sweetheart Cup and State Street Bank and Trust Company of
Connecticut, National Association ("State Street"), as trustee, Sweetheart Cup
leases the production equipment sold in connection with the sales lease-back
transaction from State Street as owner trustee for several owner participants,
through November 9, 2010. Sweetheart Cup has the option to renew the Lease for
up to four consecutive renewal terms of two years each. Sweetheart Cup also has
the option to purchase such equipment for fair market value either at the
conclusion of the Lease term or November 21, 2006. The Company's obligations
under the Lease are collateralized by substantially all of the property, plant
and equipment owned by the Company as of June 15, 2000. The Lease contains
various covenants, which prohibit, or limit, among other things, dividend
payments, equity repurchases or redemption, the incurrence of additional
indebtedness and certain other business activities. The Company is accounting
for the sale-leaseback transaction as an operating lease, expensing $31.5
million annual rental payments and removing the property, plant and equipment
sold from its balance sheet. A deferred gain of $107.0 million was realized from
this sale and will be amortized over 125 months, which is the term of the Lease.
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor
with respect to the $110 million Senior Subordinated Notes which are due
September 1, 2003. Interest on the $110 million Senior Subordinated Notes is
payable semi-annually in arrears on March 1 and September 1. The $110 million
Senior Subordinated Notes began to accrue interest at 12% per annum as of March
1, 2002. The $110 million Senior Subordinated Notes are subject to redemption at
the option of the Company, in whole or in part, at the redemption price
(expressed as percentages of the principal amount), plus accrued interest to the
redemption date, at a call premium of 100%. The $110 million Senior Subordinated
Notes are subordinated in right of payment to the prior payment in full of all
of the Company's senior debt,
21
including borrowings under the Senior Credit Facility, and are pari passu with
the $120 million Senior Subordinated Notes due 2007. In addition, the
obligations under the June 1, 2000 lease between Sweetheart Cup and State Street
Bank and Trust Company of Connecticut are secured by a significant portion of
the Company's existing property, plant and equipment. The $110 million Senior
Subordinated Notes contain various covenants which prohibit, or limit, among
other things, asset sales, change of control, dividend payments, equity
repurchases or redemption, the incurrence of additional indebtedness, the
issuance of disqualified stock, certain transactions with affiliates, the
creation of additional liens and certain other business activities.
In Fiscal 1997, the Company issued the $120 million Senior Subordinated
Notes with interest payable semi-annually. Payment of the principal and interest
is subordinate in right to payment of all of the Company's senior debt,
including borrowings under the Senior Credit Facility. The Company may, at its
election, redeem the $120 million Senior Subordinated Notes at any time after
March 1, 2002 at a redemption price equal to a percentage (104.750% after March
1, 2002 and declining in annual steps to 100% after March 1, 2005) of the
principal amount thereof plus accrued interest. The $120 million Senior
Subordinated Notes provide that upon the occurrence of a change of control (as
defined therein), the holders thereof will have the option to require the
redemption of the notes at a redemption price equal to 101% of the principal
amount thereof plus accrued interest. The $120 million Senior Subordinated Notes
are subordinated in right of payment to the prior payment in full of all of the
Company's senior debt, including borrowings under the Senior Credit Facility and
are pari passu with the $110 million Senior Subordinated Notes. In addition, the
obligations under the June 1, 2000 lease between Sweetheart Cup and State Street
Bank and Trust Company of Connecticut are secured by a significant portion of
the Company's existing property, plant and equipment. The $120 million Senior
Subordinated Notes contain various covenants which prohibit, or limit, among
other things, asset sales, change of control, dividend payments, equity
repurchases or redemption, the incurrence of additional indebtedness, the
issuance of disqualified stock, certain transaction with affiliates, the
creation of additional liens and certain other business activities.
The following summarizes the Company's contractual obligations at
September 29, 2002, and the effect such obligations are expected to have on its
liquidity and cash flows in future periods (in 000's):
Payments Due In Fiscal
-------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter
---------- --------- --------- --------- ---------- ----------
Long-term debt $ 119,735 $ 22,483 $ 5,589 $ 412 $ 168,743 $ 120,000
Non-cancelable
operating leases 54,179 50,848 48,283 45,177 43,283 192,537
Capital leases 118 124 97 - - -
---------- --------- --------- --------- ---------- ----------
Total obligations $ 174,032 $ 73,455 $ 53,969 $ 45,589 $ 212,026 $ 312,537
========== ========= ========= ========= ========== ==========
During Fiscal 2001, the Company experienced a casualty loss at its
Somerville, Massachusetts facility. Since January 2001 through September 29,
2002 the Company incurred $11.6 million of expenses associated with this
casualty loss. As of September 29, 2002, the Company received $12.5 million
reimbursement under the casualty and business interruption claim. The $0.9
million of proceeds in excess of the expenses, represents the net proceeds from
the business interruption claim, which were recorded as a reduction to cost of
sales during the fourth quarter of Fiscal 2002. During October 2002, the Company
and its insurance provider have agreed to a final settlement of this claim
whereby the Company will receive an additional $3.8 million of business
interruption proceeds. This amount will be recorded upon receipt, net of any
expenses, which is expected to occur during the first six months of Fiscal 2003.
The Company is subject to legal proceedings and other claims arising in
the ordinary course of its business. The Company maintains insurance coverage of
types and in amounts which it believes to be adequate and believes that it is
not presently a party to any litigation, the outcome of which could
22
reasonably be expected to have a material adverse effect on its financial
condition or results of operations.
Management believes that cash generated by operations, funds generated
from asset sales and amounts available under the Company's credit facilities
should be sufficient to meet the Company's expected operating needs, planned
capital expenditures, payments in conjunction with the Company's lease
commitments and debt service requirements in the next twelve months.
Following the terrorist attacks of September 11, 2001, the Company
experienced a decline in sales prices and volumes due to a number of factors,
including a significant reduction in business and leisure travel and a reduction
in foodservice and away-from-home dining. In addition to these factors affecting
our sales, our implementation of certain consolidation initiatives caused
temporary inefficiencies within our manufacturing operations, which increased
our cost structure and reduced our gross margin during recent periods.
As a result of these factors, together with difficult market
conditions, the Company has been unable to refinance the $110 million Senior
Subordinated Notes on terms acceptable to the Company. Unless current market
conditions change significantly, the Company may not have sufficient capital to
refinance the $110 million Senior Subordinated Notes when they mature on
September 1, 2003. Moreover, if the Company is unable to complete the exchange
offer and consent solicitation or refinance, repay or extend the $110 million
Senior Subordinated Notes prior to March 1, 2003, its Senior Credit Facility,
unless otherwise amended, will become due and payable.
On November 21, 2002, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 relating to a proposed
offer to exchange newly issued $110 million senior subordinated notes due 2007
for all of the $110 million Senior Subordinated Notes and a consent solicitation
to eliminate and/or amend certain restrictive covenants and other provisions
governing the $110 million Senior Subordinated Notes. The Company also intends
to solicit consent to eliminate and/or amend certain restrictive covenants and
other provisions governing the $120 million Senior Subordinated Notes. The
Company believes that the exchange offer and consent solicitations will provide
it with the necessary time to execute its business plan and to further evaluate
its strategic alternatives.
The Company is also evaluating various strategic options which may
include a restructuring of its business debt and capital structure, including,
among other things, the public sale or private placement of debt or equity
securities, joint venture transactions, sale of assets, new borrowings, the
refinancing of the Company's existing debt agreements, open market purchases,
tender offers or exchange offers and consent solicitations of the Company's
outstanding securities. There can be no assurances that any of these strategic
options will be consummated.
Net Operating Loss Carryforwards
As of September 29, 2002, the Company had approximately $56 million of
net operating loss carryforwards for federal income tax purposes of which $25
million will expire in 2018 and the remaining $31 million will expire in 2022.
Although future earnings cannot be predicted with certainty, management
currently believes that realization of the net deferred tax asset is more likely
than not.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 prohibits the use of the pooling-of-interest method for
business combinations initiated after June 30, 2001 and also
23
applies to all business combinations accounted for by the purchase method that
are completed after June 30, 2001. There are also transition provisions that
apply to business combinations completed before July 1, 2001 that were accounted
for by the purchase method. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001 and applies to all goodwill and other intangible assets
recognized in an entity's balance sheet regardless of when these assets were
originally recognized. SFAS No. 142 requires that goodwill and certain
intangibles with an indefinite life not be amortized, but subject to an
impairment test on an annual basis. The Company has adopted SFAS No. 141 during
Fiscal 2001. The Company has adopted SFAS No. 142 effective September 30, 2002
and is currently evaluating the impact of SFAS No. 142 on its consolidated
financial statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of leases. This statement
amends SFAS. No. 19, Financial Accounting and Reporting by Oil and Gas Producing
Companies. SFAS No. 143 is effective for years beginning after June 15, 2002.
The Company has adopted SFAS No. 143 effective September 30, 2002 and is
currently evaluating the impact of SFAS No. 143 on its consolidated financial
statements.
In October 2001, the FASB issued SFAS No. 144, Impairment or Disposal
of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of Accounting Principals Board Opinion No. 30, Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that Opinion).
This statement also amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company has
adopted SFAS No. 144 effective September 30, 2002 and is currently evaluating
the impact of SFAS No. 144 on its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Recission of FASB No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This
statement addresses, among other items, the classification of gains and losses
from extinguishment of debt. In accordance with the statement, any gain or loss
on extinguishment of debt that does not meet the criteria in APB No. 30 will no
longer be classified as an extraordinary item for all periods presented. This
statement is effective for fiscal years beginning after May 15, 2002. The
Company has adopted SFAS No. 145 effective September 30, 2002 and is currently
evaluating the impact of SFAS No. 145 on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces Emerging
Issues Task Force Issue 94-3, requiring a company to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company is exposed to market risk in the ordinary course of
business, which consists primarily of interest rate risk associated with its
variable rate debt. All borrowing under the Senior Credit Facility and Canadian
Credit Facility, each of which contains a revolving and term credit facility,
24
bear interest at a variable rate. Borrowings under the Senior Credit Facility,
at the Company's election, bear interest at either (i) a bank's base rate
revolving loan reference rate plus 0.5% or (ii) LIBOR plus 2.5%. Borrowings
under the Canadian Credit Facility bear interest at an index rate plus 1.75%
with respect to the revolving credit borrowings and an index rate plus 2.00%
with respect to the term loan borrowings. As of September 29, 2002, the
outstanding indebtedness under the Senior Credit Facility was $186.1 million and
the Canadian Credit Facility was $15.5 million in U.S. dollars. As of September
30, 2002, $31.0 million was available under the Senior Credit Facility and Cdn
$1.3 million (approximately US $0.8 million) was available under Canadian Credit
Facility. Based upon these amounts, the annual net income would change by
approximately $1.2 million for each one percentage point change in the interest
rates applicable to the variable rate debt. The level of the exposure to
interest rate movements may fluctuate significantly as a result of changes in
the amount of indebtedness outstanding under the revolving credit facilities.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements and Financial Statement Schedule attached
hereto and listed in Item 15 (a)(1) and (a)(2) hereof.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NONE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the directors,
executive officers and key employees of Sweetheart Holdings and Sweetheart Cup
as of December 9, 2002. All directors hold office until the next annual meeting
of shareholders and until their successors are duly elected and qualified.
Officers serve at the discretion of the Board of Directors.
25
Name Age Position
- -------------------- --- ----------------------------------------------------
Dennis Mehiel 60 Chairman and Chief Executive Officer
Thomas Uleau 58 Chief Operating Officer and Vice Chairman
Hans H. Heinsen 49 Senior Vice President - Finance and
Chief Financial Officer
Michael T. Hastings 55 President - Sweetheart Brand
Robert M. Korzenski 48 President - Hoffmaster Brand
Dennis Dorian Mehiel 34 President - Fonda Brand
Harvey L. Friedman 60 Senior Vice President, General Counsel and Secretary
Ingrid Santiago 50 Senior Vice President - Materials Management
Thomas Pasqualini 45 Senior Vice President - Manufacturing and Logistics
Gail Blanke 54 Director
John A. Catsimatidis 53 Director
Alfred B. DelBello 68 Director
Chris Mehiel 63 Director
Edith V. Mehiel 56 Director
Alan D. Scheinkman 52 Director
G. William Seawright 61 Director
Dennis Mehiel has been Chairman and Chief Executive Officer of
Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Mehiel has been
Chairman and Chief Executive Officer of SF Holdings since February 1998 and has
been Chairman and Chief Executive Officer of Fonda since 1988. Since July 2000,
he has been a director of Box USA Holdings, Inc. ("Box USA") (formerly Four M
Corporation, a converter and seller of interior packaging, corrugated sheets and
corrugated containers which Mr. Mehiel cofounded ("Four M")). From 1966 until
July 2000, he was Chairman of Four M. From 1977 until July 2000 (except during a
leave of absence from April 1994 through July 1995) he served as the Chief
Executive Officer of Four M. Mr. Mehiel is also Chief Executive Officer and a
director of Mannkraft Corporation (formerly Box USA of New Jersey, Inc.), a
manufacturer of corrugated containers, and Chairman and Chief Executive Officer
of CEG.
Thomas Uleau has been Chief Operating Officer and Vice Chairman of
Sweetheart Holdings and Sweetheart Cup since May 2002. Prior thereto, Mr. Uleau
was Executive Vice President and a director of Sweetheart Holdings and
Sweetheart Cup since March 1, 2001 and prior thereto was President, Chief
Operating Officer and a director since March 1998. Mr. Uleau also has been Vice
Chairman and Senior Vice President of SF Holdings since March 1, 2001 and prior
thereto was also President, Chief Operating Officer and a director of SF
Holdings. He has been Executive Vice President of Fonda since March 1998 and has
been a director of Fonda since 1988. He has also served in a variety of
executive officer positions at Fonda since 1989. He has been Executive Vice
President of CEG since 1996 and is currently a director of CEG. Prior to July
2000 he was a director of Box USA (formerly Four M). He served as Executive Vice
President and Chief Financial Officer of Four M from 1989 through 1993 and as
its Chief Operating Officer in 1994.
Hans H. Heinsen has been Senior Vice President - Finance and Chief
Financial Officer of Sweetheart Holdings and Sweetheart Cup since March 1998.
Mr. Heinsen also has been Senior Vice President, Chief Financial Officer and
Treasurer of SF Holdings since February 1998, Senior Vice President and
Treasurer of Fonda since February 1997, Chief Financial Officer of Fonda since
June 1996 and Chief Financial Officer of CEG since November 1998. Prior to
joining Fonda, Mr. Heinsen spent
26
21 years in a variety of corporate finance positions with The Chase Manhattan
Bank, N.A.
Michael T. Hastings has been President of the Sweetheart Brand of
Sweetheart Holdings and Sweetheart Cup since March 2002. Prior thereto, Mr.
Hastings was President of Sweetheart Holdings and Sweetheart Cup from March 2001
to March 2002, and prior thereto he was Senior Vice President-Sales and
Marketing for Sweetheart Holdings and Sweetheart Cup from March 1998 to March
2002. Mr. Hastings was also Senior Vice President of Fonda from March 1998 to
March 2002. Mr. Hastings was Senior Vice President of SF Holdings from December
2001 until May 2002. Prior to joining Sweetheart, Mr. Hastings served as
President of the Fonda Division of Fonda, which he joined in May 1995. From
December 1990 to April 1995, Mr. Hastings served as Vice President of Sales and
Marketing and as a member of the Board of Directors of Anchor Packaging Company,
a manufacturer of institutional films and thermoformed plastic packaging. Prior
to joining Anchor Packaging Company, Mr. Hastings was employed for over 25 years
in a variety of positions in the paper and plastic industries, including sales,
marketing and plant operations management at Scott Paper Company and Thompson
Industries.
Robert M. Korzenski has been President of the Hoffmaster Brand of
Sweetheart Holdings and Sweetheart Cup since March 2002. Mr. Korzenski has been
Senior Vice President of SF Holdings from December 2001 to May 2002 and was
President and Chief Operating Officer of Fonda from March 1998 to March 2002.
Prior to that, he was Senior Vice President of Fonda since January 1997 and
President of the Hoffmaster division since its acquisition by Fonda in March
1995. Mr. Korzenski served as Senior Vice President of SF Holdings from December
2001 until May 2002. From October 1988 to March 1995, he served as Vice
President of Operations and Vice President of Sales of Scott Institutional, a
division of Scott Paper Company. Prior to that, he was director of National
Sales at Thompson Industries.
Dennis Dorian Mehiel, the son of Dennis Mehiel, has been President of
the Fonda Brand of Sweetheart Holdings and Sweetheart Cup since May 2002. Mr.
Mehiel has also been President and Chief Operating Officer of Mannkraft
Corporation (formerly Box USA of New Jersey, Inc.), a manufacturer of corrugated
containers, since June 2000, and a member of Frontage Road Realty, LLC, the
parent of Mannkraft Corporation since January 2002. Mr. Mehiel was Vice
President- Operations of Fonda from August 2001 until May 2002. From 1996 to
July 2000, he served in various management positions with Four M.
Harvey L. Friedman has been Senior Vice President, General Counsel and
Secretary of Sweetheart Holdings and Sweetheart Cup since March 2001. He has
been General Counsel and Secretary of SF Holdings since February 1998. He served
as Secretary and General Counsel of Fonda from May 1996 until the Merger in
March 2002. He was also a director of Fonda from 1985 to January 1997. Mr.
Friedman is also Secretary and General Counsel of CEG, is a director of CEG and
Box USA (formerly Four M) and is a director and Senior Vice President of
Mannkraft Corporation (formerly Box USA of New Jersey, Inc.). He was formerly a
partner of Kramer Levin Naftalis & Frankel LLP, a New York City law firm.
Ingrid Santiago has been Senior Vice President - Materials Management
of Sweetheart Holdings and Sweetheart Cup since May 2002. She was Vice President
of Sweetheart Cup from March 1998 to May 2002. She was also Vice President of
Materials Management for Fonda from 1996 until May 2002 and also served as Vice
President of Materials Management for Four M for over 10 years until July 2000.
Thomas Pasqualini has been Senior Vice President - Manufacturing and
Logistics of Sweetheart Holdings and Sweetheart Cup since August 2000. He has
also been Vice President of Logistics and Distribution and director of
Distribution for the past five years and has held several other positions with
the Company since 1981.
27
Gail Blanke has been a director of Sweetheart Holdings and Sweetheart
Cup since May 2002. Ms. Blanke also served as a director of Fonda from January
1997 to March 2002. She also has been a director of SF Holdings since February
1998. She has been President and Chief Executive Officer of Gail Blanke's
Lifedesigns, LLC since March 1995. Lifedesigns was founded in March 1995 as a
division of Avon Products, Inc. ("Avon") and was spun off from Avon in March
1997. Prior thereto, she held the position of Corporate Senior Vice President of
Avon since August 1991. She also held a number of management positions at CBS,
Inc., including the position of Manager of Player Promotion for the New York
Yankees. Ms. Blanke will be serving her second consecutive term as President of
the New York Women's Forum.
John A. Catsimatidis has been a director of Sweetheart Holdings and
Sweetheart Cup since May 2002. Mr. Catsimatidis also served as a director of
Fonda from January 1997 to March 2002. He also has been a director of SF
Holdings since February 1998. He has been Chairman and Chief Executive Officer
of the Red Apple Group, Inc., a company with diversified holdings that include
oil refining, supermarkets, real estate, aviation and newspapers, since 1969.
Mr. Catsimatidis serves as a director of Sloan's Supermarket, Inc. and New's
Communications, Inc. He also serves on the board of trustees of New York
Hospital, St. Vincent Home for Children, New York University Business School,
Athens College, Independent Refiners Coalition and New York State Food
Merchant's Association.
Alfred B. DelBello has been a director of Sweetheart Holdings and
Sweetheart Cup since May 2002. Mr. DelBello also served as Vice Chairman of
Fonda from January 1997 to March 2002 and a director of Fonda from 1990 to March
2002. He also has been Vice Chairman of SF Holdings since February 1993. Since
July 1995, Mr. DelBello has been a partner in the law firm of DelBello Donnellan
Weingarten Tartaglia Wise & Wiederkehr, LLP, a White Plains, New York firm. From
September 1992 to July 1995 he was a partner in the law firm of Worby DelBello
Donnellan & Weingarten. Prior thereto, he had been President of DelBello
Associates, a consulting firm, since 1985. Mr. DelBello served as Lieutenant
Governor of New York State from 1983 to 1985.
Chris Mehiel, the brother of Dennis Mehiel, has been a director of
Sweetheart Holdings and Sweetheart Cup since May 2002. Chris Mehiel also served
as a director of Fonda from January 1997 to March 2002. He also has been a
director of SF Holdings since February 1998. Mr. Mehiel was a cofounder of Four
M. He was Executive Vice President, Chief Operating Officer and a director of
Four M from September 1995 to July 2000 and Chief Financial Officer of Four M
from August 1997 to July 2000. Since July 2000, he has been an executive officer
of the managing member of Fibre Marketing Group, LLC ("Fibre Marketing"), the
successor of Marketing Group, Inc., a waste paper recovery business which he
cofounded, and was President from 1994 to January 1996. From 1993 to 1994, Mr.
Mehiel served as President and Chief Operating Officer of Mannkraft Corporation
(formerly Box USA of New Jersey, Inc.), formerly Box USA of New Jersey. From
1982 to 1992, Mr. Mehiel served as the President and Chief Operating Officer of
Specialty Industries, Inc., a waste paper processing and container manufacturing
company.
Edith V. Mehiel, the former spouse of Dennis Mehiel, is a director. She
has been a private investor for the previous five years and has been a director
of SF Holdings since March 2001 and was a director of Fonda from March 2001 to
March 2002.
Alan D. Scheinkman has served a director of Sweetheart Cup and
Sweetheart Holdings since April 2000. Mr. Scheinkman has been a director of SF
Holdings since April 2000 and was a director of Fonda from April 2000 to March
2002. Since October 2002, Mr. Scheinkman has been a member of DelBello Donnellan
Weingarten Tartaglia Wise & Wiederkehr, LLP, a White Plains, New York firm.
Previously, he was a member of the law firm of Epstein, Becker and Green P.C.
From January 1998 to December 2000, he was County Attorney of Westchester
County, New York, counsel to the County Executive and Board of Legislators.
Prior thereto, Mr. Scheinkman was in private practice with Scheinkman, Fredm