- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K\A
|X|Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee required)
For the fiscal year ended September 30, 1997
|_|Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No fee required)
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 29, 1997: 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 29, 1997:
Sweetheart Holdings Inc. Common Stock, $0.01 par value - 1,046,000 shares
* The Registrant is the guarantor of the 9 5/8% Senior Secured Notes due 2000
and the 10 1/2% Senior Subordinated Notes due 2003 (collectively, the "Notes")
of Sweetheart Cup Company Inc., a wholly owned subsidiary of the Registrant.
Page 1 of 59
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Sweetheart Holdings Inc., together with its wholly owned subsidiary
Sweetheart Cup Company Inc. (collectively with Sweetheart Holdings Inc. and its
other subsidiaries, the "Company"), is one of the largest producers of plastic
and paper disposable foodservice and food packaging products in North America.
In the year ended September 30, 1997, the Company had net sales of $886 million.
The Company's principal products include cups for both hot and cold drinks,
lids, food containers, bowls, plates, straws, cutlery, and containers for the
food and dairy industries. The brand names for the Company's principal products
include Sweetheart, Lily, Trophy, Jazz and Preference for cups and plates and
Silent Service, Centerpiece, Guildware, and Simple Elegance for foam dinnerware
and plastic cutlery. In addition, the Company designs, manufactures and leases
container filling 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 customers' plants.
The Company's business is the successor to the businesses of Maryland
Cup Corporation ("Maryland Cup"), which was founded in 1911 and was a major
supplier of paper and plastic disposable foodservice and food packaging
products, and Lily-Tulip, Inc. ("Lily-Tulip"), which began operations in the
early 1900s and was a major cup producer and manufacturer of food and dairy
packaging. Fort Howard Corporation ("Fort Howard") acquired Maryland Cup in 1983
and Lily-Tulip in 1986. Sweetheart Holdings Inc. was incorporated as a separate
company in 1989 on behalf of Morgan Stanley Group Inc. ("MSG"), Fort Howard and
other investors, including management, in connection with Sweetheart Holdings
Inc.'s acquisition in 1989 of all of the U.S. and Canadian disposable
foodservice and food packaging operations of Fort Howard, including the
operations of Maryland Cup and Lily-Tulip (the "Fort Howard acquisition"). The
Company's Canadian operations are conducted through Lily Cups, Inc. ("Lily
Canada"). On August 30, 1993, a group of investors (the "Investors") including
American Industrial Partners Capital Fund, L.P. ("AIP") acquired Sweetheart
Holdings Inc. (the "Acquisition"). For information with respect to an agreement
entered into on December 29, 1997 by AIP on behalf of itself and the other
stockholders with an affiliate of The Fonda Group, Inc., see Item 12.
FOODSERVICE AND FOOD PACKAGING PRODUCTS
The Company operates in two principal business lines: Foodservice and
food packaging. Foodservice products include disposable hot and cold drink cups,
lids, food containers, plates, bowls, cutlery and ice cream cones. These
products are sold directly and through distributors to fast food chains, full
service restaurants, hospitals, airlines, theaters and other institutional
customers. Food packaging products include paper and plastic containers for the
dairy and food processing industries. Food packaging also designs, manufactures
and leases filling and packaging machines that fill and seal the Company's
containers in customers' plants. Through Lily Canada, the Company manufactures
and markets its products in Canada to national accounts and distributors.
Foodservice Products. The Company's foodservice business consists of
three end-use categories: beverage service, tabletop service and carryout
service. Foodservice is the Company's largest product group, accounting for
approximately 80% of gross sales during the year ended September 30, 1997.
Management believes that this level of gross sales makes the Company the largest
manufacturer of disposable foodservice products in North America.
Beverage service products, which consist of paper and plastic cups,
lids and straws, represent the largest segment of the Company's United States
operations. The largest single product type within this category is cups, which
are offered in various sizes (ranging from 3 to 64 ounces) and for both hot and
cold
2
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beverages. Brand names of the Company's principal beverage service products
include Sweetheart, Lily, Trophy, Preference, Jazz, Gallery, Clarity and Lumina.
Tabletop service products include paper and plastic plates, bowls,
portion cups and cutlery. These products are sold primarily to fast-food and
mid-scale restaurants, health care institutions, airlines and educational and
institutional foodservices. The Company's tabletop products include its Silent
Service, Centerpiece, Basix, Guildware and Simple Elegance brands of foam
dinnerware and plastic cutlery.
The Company's carry-out service products consist of paper and plastic
tubs, containers and hinged plastic containers. The Company is one of the
largest manufacturers of paper tubs for chicken, popcorn and take-out foods in
North America.
The Company believes it is the largest producer in North America of ice
cream cones, which are marketed under the Eat-It-All and American Dream Cone
brand names. The Company produces ice cream cones in its bakery facilities and
offers several varieties of ice cream cones, including cake cones, sugar roll
cones and waffle cones, to national chains and wholesale distributors for its
foodservice business. The Company sold its bakery operations on November 30,
1997, as noted in Note 15 to the financial statements (Item 8).
Foodservice Customers. Foodservice products are sold directly to large
national accounts, such as fast-food chains and catering services, which
represented approximately 52% of foodservice sales for the year ended September
30, 1997. Foodservice products are also sold through distributors to other
end-users, such as independent restaurants, school systems and hospitals. The
Company's national accounts include ARAMARK, McDonald's, and Wendy's, and its
major distributor accounts include Alliant, ComSource, Network and Sysco.
Food Packaging Products. The Company's food packaging operations sell
paper and plastic containers and lids for ice cream, frozen novelty products,
cultured foods (including sour cream, yogurt, cottage cheese and snack dip) and
plastic containers for single-serving chilled juice products. Other products
include the Company's Flex-E-Form straight-wall paper manufacturing technology
and Flex-Guard, a spiral wound tamper-evident lid. Sales of food packaging
products accounted for approximately 11% of the Company's gross sales during the
year ended September 30, 1997. Management believes the Company is the second
largest supplier (in terms of sales) of containers to the frozen dessert and
cultured dairy products segments of the food packaging industry in North
America.
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 Company containers at their plants. The Company's filling
and lidding equipment is leased to customers under the trade names Auto-Pak,
Flex-E-Fill and Food-Pak. This equipment is manufactured in the Company's
machine shop and assembly plant located in Owings Mills, Maryland. Types of
products packaged in the Company's machines include ice cream, factory-filled
jacketed ice cream cones, cottage cheese, yogurt, squeeze-up desserts and ice
cream sandwiches.
Food Packaging Customers. Food packaging containers and filling
machines are marketed directly to national and regional dairies and food
companies. Major customers of the Company's food packaging products include Ben
& Jerry's Ice Cream, Blue Bell, Borden and Prairie Farms.
Canadian Operations. The Company operates in Canada through Lily
Canada, which has been manufacturing and marketing foodservice disposables since
1947. Lily Canada is one of the largest providers of foodservice disposable
products in the Canadian market, primarily as a consequence of its large
portfolio of national account customers. Sales by Lily Canada during the year
ended September 30, 1997 constituted approximately 6% of the Company's gross
sales.
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MARKETING AND SALES
The Company's marketing efforts are directed to maintaining firsthand
knowledge of customer needs and to structuring the Company's manufacturing and
sales efforts to provide superior products and services tailored to those needs.
The Company's sales force allows it to service a large distributor and broker
network that permits even small accounts to receive appropriate coverage.
Distribution facilities are maintained in close proximity to most major markets.
The Company's sales effort is divided into separate foodservice and
food packaging sales forces. The foodservice sales force targets the disposable
foodservice product market and is organized into distribution and national
account sales forces. The distribution sales force focuses on distributors and
smaller end users such as independent restaurants, schools and hospitals. The
national account sales force focuses on national foodservice accounts and major
bottlers, concessionaires, health care and contract food providers. The food
packaging sales force focuses on national and regional food processors.
PRODUCTION
The Company's plants operate on a variety of manufacturing schedules.
Paper operations generally run five days per week at 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 at 24 hours per day. Due to
customer demand, the Company's plant utilization is substantially higher during
late spring and summer than during fall and winter.
RAW MATERIALS
Raw materials are critical components of the Company's cost structure.
Principal raw materials for the Company's paper operations include solid
bleached sulfate paperboard obtained directly from major domestic manufacturers,
along with wax, adhesives, coating and inks. Paperboard is purchased in "jumbo"
rolls and then printed and converted into smaller rolls or blanks for processing
into final products. The principal raw material for the Company's plastic
operations is plastic resin (polystyrene, polypropylene, high density
polyethylene and polyethylene terphalate glycol modified) purchased directly
from major petrochemical companies and other resin suppliers. Resin is processed
and formed into cups, cutlery, meal service products, straws and containers. The
Company manufactures foam products by extruding sheets of plastic foam material
that are converted into cups and plates. Principal raw materials for the bakery
operations include flour, sugar and shortening.
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 substantially all of its raw materials and believes that
current sources of supply for its raw materials are adequate to meet its
requirements.
COMPETITION
All of the markets in which the Company sells its products are
extremely competitive. Because of the low barriers to entry for new competitors,
the level of competition has been and may continue to be intense as new entrants
attempt to gain market share. The Company's competitors include large
multinational companies as well as regional manufacturers, some of whom have
greater financial and other resources than the Company. The marketplace for the
Company's products is fragmented and includes competitors that compete across
the full line of the Company's products, as well as those that compete against a
limited number of the Company's products. A few of the Company's competitors are
also vertically integrated into the production of paper or plastic raw
materials.
The Company believes customers principally evaluate service, price,
product quality and graphics capability when considering the purchase of
products from the Company.
4
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CUSTOMERS
The Company markets its products primarily to customers in the United
States and Canada. During the year ended September 30, 1997, sales to the
Company's 10 largest customers accounted for approximately 50.3% of the
Company's revenues with one customer, McDonald's, accounting for 13.7% of net
sales. The loss of one of more large national customers could adversely affect
the Company's operating results. The Company has strong relationships with its
major national accounts which have been developed over many years.
TECHNOLOGY AND RESEARCH
The Company maintains facilities for the development of new products
and product line extensions in Owings Mills, Maryland. The Company maintains a
staff of engineers and technicians who are 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. The Company is continually striving to expand its proprietary
manufacturing technology, further automate its manufacturing operations, and
develop improved manufacturing processes and product designs.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, foreign and
local environmental laws and regulations. Although the Company believes it is in
substantial compliance with such laws and regulations, the Company may from time
to time not be in full compliance, and is from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. The Company has expended, and expects in the future to expend, funds
for compliance with those laws and regulations and penalties for noncompliance.
The Clean Air Act mandates the phase out of certain refrigerant
compounds, which will require the Company to upgrade or retrofit or air
conditioning and chilling systems during the next few years. The Company has
decided to replace units as they become inefficient or unserviceable. The
upgrade of existing systems would cost approximately $4 million. Approximately
$1 million has been spent on upgrading systems in the last five years, exclusive
of costs of $2.4 million to convert to a new foam blowing agent in 1993. The
Company anticipates that future levels of expenditures for environmental matters
(exclusive of costs relating to the blowing agent conversion and the
retrofitting of air conditioning and chilling systems described above) will be
comparable; however, there can be no assurance that expenditures will not be
higher.
As noted during the third quarter, the Company received a request for
information from the Environmental Protection Agency ("EPA") pursuant to Section
104 of the Comprehensive Environmental Response, Compensation, and Liability Act
and Section 3007 of the Resource Conservation and Recovery Act, concerning the
Lily-Tulip Brown Fields Site (the "Site") in Old Town, Maine. The Company also
received a demand from the City of Old Town for payment of the Company's alleged
share of the clean-up of the Site. The Company has agreed to settle these claims
by paying $40,000 in the first quarter of fiscal 1998.
Some of the Company's facilities contain asbestos. Although there is no
current legal requirement to remove such asbestos, the Company has an ongoing
monitoring and maintenance program to maintain and/or remove such asbestos as
appropriate to prevent the release of friable asbestos. The Company does not
believe the costs associated with such program will be material to its business
or financial condition.
5
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EMPLOYEES AND EMPLOYEE RELATIONS
At September 30, 1997, the Company employed approximately 8000 persons,
with approximately 94% of those employees located at facilities in the United
States. The Company currently has collective bargaining agreements in effect at
its facilities in Springfield, Missouri, Augusta, Georgia and Toronto, Canada
(collectively, the "Sweetheart CBAs"). The Sweetheart CBAs cover all production,
maintenance and distribution hourly-paid employees at each respective facility
and contain standard provisions relating to, among other things, management
rights, grievance, procedures, strikes and lockouts, seniority, and union
rights. Approximately 990 of the Company's United States hourly employees are
represented by a union. All hourly employees located in Canada are represented
by a union. The current expiration dates of the Springfield, Augusta and Toronto
CBAs are March 4, 2001, October 31, 1998 and November 30, 2000, respectively.
The Company anticipates that renewal negotiations regarding the Augusta CBA will
result in another three-year contact term. The Company believes its relationship
with its employees is good.
6
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ITEM 2. PROPERTIES
The Company has 13 manufacturing facilities in the United States and
two in Canada. The Company owns or leases manufacturing and warehouse facilities
at the locations shown in the following table:
<TABLE>
<CAPTION>
Size
Type of Owned/ (Approximate
Location Facility (1) Leased square feet)
-------- ------------ ------ ------------
<S> <C> <C> <C>
Atlanta, Georgia............................ M/W(2) O 106,000
Augusta, Georgia (2 facilities)............. M/W O 339,000
W(3) L 204,000
Conyers, Georgia............................ M/W O 350,000
W O 555,000
Chicago, Illinois (3 facilities)............ M/W O 902,000
M(2) O 120,000
W L 587,000
Dallas, Texas (2 facilities)................ M/W O 1,316,000
M(2) O 59,000
Manchester, New Hampshire................... M/W O 160,000
North Las Vegas, Nevada (2 facilities)...... M/W L 128,000
W L 12,000
Ontario, California......................... W(4) L 249,000
Owings Mills, Maryland (3 facilities)....... M/W(5) O 1,533,000
W O 267,000
W O 406,000
Riverside, California....................... M/W(6) O 164,000
Somerville, Massachusetts................... M/W O 193,000
Springfield, Missouri (2 facilities)........ M/W O 925,000
W L 415,000
Wilmington, Massachusetts................... W L 407,000
Scarborough, Ontario (2 facilities)......... M/W O 185,000
M/W O 207,000
</TABLE>
- --------
(1) M-Manufacturing; W-Warehouse; M/W-Manufacturing and Warehouse in same
facility.
(2) Facility is a bakery. The bakery operations were sold on November 30, 1997.
See Note 15 of the financial statements (Item 8) for details.
(3) Facility is closed. The Company is currently subleasing 100% of the property
on a short-term lease and is actively seeking to sublet the remaining space
through the lease termination date, March 31, 2008.
(4) Facility has been closed and returned to the lessor. The facility will be
replaced by a new 370,000 sq. foot warehousing facility which will also be
located in Ontario, CA.
(5) Facility includes a bakery which ceased operations on November 30, 1997.
(6) The Manufacturing operations ceased on September 2, 1997, and the Warehouse
operations will cease by May 31, 1998. The facility will be sold. The facility
was closed in order to eliminate anticipated losses resulting from projected
lower revenues in the region supplied by this facility.
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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 initially filed in state court in Georgia in April 1987 and is currently
pending against the Company in federal court. The remaining issue involved in
the case is a claim 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 ("ERISA"). The relief sought by
plaintiffs is to have the plan termination declared ineffective. In December
1994, the United States Court of Appeals for the Eleventh Circuit (the "Circuit
Court") ruled that the Plan was terminated on December 31, 1986. Following that
decision, the plaintiffs sought a rehearing which was denied, and subsequently
filed a petition for a writ of certiorari with the United States Supreme Court,
which was also denied. Following remand, in March 1996 the United States
District Court for the Southern District of Georgia entered a judgment in favor
of the Company. Following denial of a motion for reconsideration, the plaintiffs
in April 1997 filed an appeal with the Circuit Court. On May 21, 1998, the
Circuit Court affirmed the judgment entered in favor of the Company. On June 10,
1998, the plaintiffs petitioned the Circuit Court for a rehearing on its May 21,
1998 decision.
Management of the Company believes that it will ultimately prevail on
the remaining issues in the Aldridge litigation. Due to the complexity involved
in connection with the claims asserted in this case, the Company cannot
determine at present with any certainty the amount of damages it would be
required to pay should the plaintiffs prevail; accordingly, there can be no
assurance that such amounts would not have a material adverse effect on the
Company's financial position or results of operation. See Note 18 of the Notes
to Financial Statements.
Fort James Corporation. A patent infringement action entitled Fort
James Corporation v. Sweetheart Cup Company Inc., Civil Action No. 97-C-1221,
was filed in the United States District Court for the Eastern District of
Wisconsin on November 21, 1997. The Company has not yet filed an Answer to the
Complaint and is investigating the merits of the claim. In the opinion of
management, the ultimate liability, if any, will not materially affect the
Company's financial position or results of operations.
Other. The Company is also involved in a number of legal proceedings
arising in the ordinary course of business, none of which is expected to have a
material adverse effect on the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Each of the then current members of the Board of Directors was
reelected at the December 10, 1996 Shareholder Meeting. Jerry J. Jasinowski was
elected as Director of the Company commencing August 1, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Sweetheart Cup Company Inc. is a wholly-owned subsidiary of Sweetheart
Holdings Inc. Sweetheart Holdings Inc. is a privately-held corporation. No
equity securities of Sweetheart Holdings Inc. or Sweetheart Cup Company Inc. are
publicly traded or registered under the Securities Exchange Act of 1934.
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ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are selected historical consolidated and combined
financial and other data of the Company at the dates and for the periods shown.
The selected historical consolidated financial data at September 30,
1997 and 1996, and for the years ended September 30, 1997, 1996 and 1995 are
derived from the historical consolidated financial statements of the Company and
subsidiaries for such periods that have been audited by Arthur Andersen LLP,
independent public accountants, and have been included elsewhere herein. See
Item 8. The selected consolidated and combined historical financial data at
September 30, 1994, September 30, 1993 and August 29, 1993 and for the year
ended September 30, 1994, the period from August 30, 1993 to September 30, 1993
and the period from January 1, 1993 to August 29, 1993 have been derived from
the historical audited consolidated financial statements for such periods.
Certain prior period amounts have been reclassified to conform to
current presentation.
<TABLE>
<CAPTION>
Period from
August 30,
to Period from
Year ended September 30, September January 1, to
30, August 29,
1997 1996 1995 1994 1993 1993
(Successor) (Successor) (Successor) (Successor) (Successor) (Predecessor)
--------------- ------------- ----------- ----------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales $886,017 $959,818 $986,618 $898,528 $81,571 $591,258
Cost of sales 821,021 846,719 874,593 778,163 71,963 522,615
------- ------- ------- ------- ------ -------
Gross profit 64,996 113,099 112,025 120,365 9,608 68,643
Selling, general and 66,792 61,788 66,089 67,712 5,787 45,494
administrative
Loss on asset disposal and
impairment 24,550 - - - - -
Restructuring expense 9,680 - -
- - -
Other (income) expense, net (73) 4,271 (1,197) (411) 177 (48)
------------ --------- ---------- ---------- ---------- -----------
Operating income (loss) (35,953) 47,040 47,133 53,064 3,644 23,197
Interest expense, net 40,265 37,517 37,410 37,248 3,311 43,947
--------- --------- ---------- --------- --------- ---------
Income (loss) before taxes (76,218) 9,523 9,723 15,816 333 (20,750)
Income tax benefit (expense) 30,487 (3,809) (3,903) (6,462) (161) 6,641
Extraordinary loss 940 - - -
---------- ------------ ----------- ----------- ------------ ------------
- -
Net income (loss) (46,671) 5,714 5,820 9,354 172 (14,109)
Accrued dividends on Class B
Common Stock - - - 4,200
------------ ------------ ----------- ----------- ------------ -------
- -
Net income (loss) applicable
to common shareholders $(46,671) $5,714 $5,820 $9,354 $172 $(18,309)
========= ====== ====== ====== ==== =========
Dividends per share - - - - - -
Balance Sheet Data
(at end of period):
Fixed assets $382,491 $427,833 $417,563 $400,176 $393,918 $450,362
Total assets 719,530 762,610 741,906 728,442 692,772 753,531
Total long-term debt 430,499 385,579 369,181 369,749 354,032 587,501
Shareholders' equity 74,611 121,415 115,805 109,955 100,548 (121,883)
(deficit)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
Sweetheart Cup Company Inc. was formed as the result of the acquisition
by Fort Howard of Maryland Cup in 1983 and Lily-Tulip in 1986. Sweetheart
Holdings Inc. was incorporated as a separate company in 1989 on behalf of Fort
Howard, MSG and other investors, including management, to acquire all of the
U.S. and Canadian disposable foodservice and food packaging operations of Fort
Howard. As a result of the increase in leverage arising from the 1989
acquisition from Fort Howard and the increased operating costs relating to the
establishment of Sweetheart Holdings Inc. as an independent business, the
Company faced substantial capital constraints, which reduced the Company's
manufacturing and operating efficiencies.
On August 30, 1993, the Investors acquired Sweetheart Holdings Inc. In
connection with the Acquisition, Sweetheart Cup Company Inc. (i) issued
$190,000,000 aggregate principal amount of 9 5/8% Senior Secured Notes due 2000
(the "Senior Secured Notes") and $110,000,000 aggregate principal amount of 10
1/2% Senior Subordinated Notes due 2003 (the "Senior Subordinated Notes"), (ii)
incurred borrowings under a Credit Agreement dated as of August 30, 1993, among
Sweetheart Cup Company Inc., Sweetheart Holdings Inc., various banks and Bankers
Trust Company, as agent (the "Credit Agreement"), (iii) repaid existing
indebtedness of Sweetheart Holdings Inc. and Sweetheart Cup Company Inc., and
(iv) issued equity securities of Sweetheart Holdings Inc. to the Investors.
Pursuant to the Acquisition, the Company's outstanding indebtedness and interest
expense was substantially reduced, giving the Company greater financial
flexibility to pursue its operating strategy.
On October 6, 1993, the manufacturing assets and manufacturing
employees of Sweetheart Cup Company Inc. located in Illinois, Massachusetts,
Maryland, Missouri, and New Hampshire were transferred to Sweetheart Holdings
Inc. These assets were transferred subject to the mortgage and liens granted in
favor of the trustee under the Senior Secured Notes Indenture. Under such
Indenture, Sweetheart Cup Company Inc. and Sweetheart Holdings Inc. delivered to
such trustee a solvency letter and certain officers' certificates with respect
to the terms of the transfer. The transferred assets are pledged to such trustee
to secure Sweetheart Holdings Inc.'s obligations under its secured guarantee. In
connection with this transfer, Sweetheart Cup Company Inc. contracts with
Sweetheart Holdings Inc. to manufacture certain Sweetheart Cup Company Inc.'s
products. This transfer, as completed, has no effect on the holders of the
Senior Secured or Senior Subordinated Notes.
The Company operates in two principal business lines: Foodservice and
food packaging. Foodservice products include disposable hot and cold drink cups,
lids, food containers, plates, bowls, cutlery and ice cream cones. These
products are sold directly and through distributors to fast food chains, full
service restaurants, hospitals, airlines, theaters and other institutional
customers. During fiscal year 1995, the Company terminated its sales of products
to individuals through supermarkets and other retailers. The elimination of this
sales channel had no adverse effect on the Company's results of operations. Food
packaging products include paper and plastic containers for the dairy and food
processing industries. Food packaging also designs, manufactures and leases
filling and packaging machines that fill and seal the Company's containers in
customers' plants.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
Net sales decreased to $886.0 million for the year ended September 30,
1997 from $959.8 million for the same period in 1996, a decrease of $73.8
million or 7.7%. The decrease in net sales reflects a 2.9% decrease in domestic
sales volume and a 4.4% average decrease in domestic sales price. Foodservice
selling prices decreased 4.5% while food packaging selling prices decreased
3.5%. Price has
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been negatively impacted by falling raw material prices and by competition in
the marketplace. The benefits of lower raw material prices are generally passed
on to customers. Foodservice sales volume decreased 1.7% while food packaging
sales volume decreased 11.5%. Sales volume measures the dollar value of unit
sales, assuming constant prices between periods. The decrease in foodservice
sales volume is primarily attributable to decreases in the national and
clubstore market segments offset by higher foodservice distributor account
volume. The decrease in food packaging sales volume is primarily attributable to
decreases in demand experienced by key accounts in their customer base in both
the cultured and frozen segments. Canadian net sales decreased 2.1% from the
prior year.
Cost of sales decreased to $821.0 million for the year ended September
30, 1997 from $846.7 million for the same period in 1996, a decrease of $25.7
million or 3.0%. As a percentage of net sales, cost of sales increased to 92.7%
for the year ended September 30, 1997 from 88.2% for the same period in 1996.
The Company has implemented initiatives which have reduced variable
manufacturing costs to offset price conditions in the marketplace described
above. As a result, raw material and labor costs have been held constant as a
percentage of sales despite lower selling prices to customers. Although overhead
spending was contained at 1996 levels, this cost as a percentage of sales has
increased. In addition, year-to-date results have been impacted by changes in
overhead absorption relating to planned inventory reductions. Overhead costs are
allocated and absorbed into inventory when inventory is produced and expensed
when inventory is sold. As a result, profit comparisons can be materially
affected when a change in inventory levels during a period differs significantly
from the change in the prior year period. In 1996, inventory levels increased,
resulting in an absorption of fixed costs into inventory. In 1997, inventory
levels declined, and the fixed costs associated with inventories sold were
recognized. This has resulted in a year-to-year unfavorable impact on cost of
sales of $10.5 million.
Gross profit decreased to $65.0 million for the year ended September
30, 1997 from $113.1 million for the same period in 1996, a decrease of $48.1
million or 42.5%, due to the reasons described above.
Selling, general and administrative expenses increased to $66.8 million
for the year ended September 30, 1997 from $61.8 million for the same period in
1996, an increase of $5.0 million or 8.1%. As a percentage of net sales,
selling, general and administrative expenses increased to 7.5% for the year
ended September 30, 1997 from 6.4% for the same period in 1996. Approximately $3
million of the increase relates to expenditures on the new MIS system, while the
remainder reflects investment in the foodservice distribution selling activity
and normal inflation in the wage base. All other selling, general and
administrative expenses were held below prior year levels.
Loss on asset disposal and impairment of $24.6 million was recorded in
the fourth quarter of the year ended September 30, 1997 relating to the review
of the carrying value of the Company's long-lived assets. See Note 14 of the
accompanying financial statements (Item 8).
Restructuring expense of $9.7 million was recorded in the fourth
quarter relating to plant closures and other expenses as part of the Company's
strategic planning process. See Note 14 of the accompanying financial statements
(Item 8).
Other (income) expense, net increased to $0.1 million of income for the
year ended September 30, 1997 from $4.3 million of expense for the same period
in 1996, an increase of $4.4 million. Fiscal 1996 was unfavorably impacted by
one-time expenses incurred by the Company relating to an investigation of the
Company's strategic alternatives.
Operating loss was $36.0 million for the year ended September 30, 1997
compared to operating income of $47.0 million for the same period in 1996, a
change of $83.0 million or 176.4%, due to the reasons described above.
11
<PAGE>
Interest expense increased to $40.3 million for the year ended
September 30, 1997 from $37.5 million for the same period in 1996, an increase
of $2.8 million or 7.3%, due primarily to higher average usage of short-term
borrowings.
Income tax benefit (expense) $30.5 million of benefit for the year
ended September 30, 1997 compared to $3.8 million of expense for the same period
in 1996, a change of $34.3 million. The effective tax rate for the years ended
September 30, 1997 and 1996 was 40.0%.
Extraordinary loss of $0.9 million (net of $0.6 million in income
taxes) was recorded in the fourth quarter of 1997 relating to the write-off of
deferred financing fees associated with a portion of the Company's debt, which
was refinanced subsequent to September 30, 1997.
Net loss was $46.7 million for the year ended September 30, 1997
compared to net income of $5.7 million for the same period in 1996, a change of
$52.4 million, due to the reasons described above.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Net sales decreased to $959.8 million for the year ended September 30,
1996 from $986.6 million for the same period in 1995, a decrease of $26.8
million or 2.7%. The decrease in net sales reflects a 1.7% decrease in domestic
sales volume and a 1.0% decrease in domestic sales price. Foodservice selling
prices decreased 1.2% while food packaging selling prices decreased .5%.
Foodservice sales volume decreased 1.4 % while food packaging sales volume
decreased 3.9%. Sales volume measures the dollar value of unit sales, assuming
constant prices between periods. The decrease in foodservice sales volume is
primarily attributable to decreases in the distributor and clubstore market
segments offset by higher national account volume. The decrease in food
packaging sales volume is primarily due to the withdrawal of the Company's
Contour-Pak line from the food packaging market and a decrease in the cultured
products and frozen novelty market segments. Canadian sales increased 2.5% from
the prior year.
Cost of sales decreased to $846.7 million for the year ended September
30, 1996 from $874.6 million for the same period in 1995, a decrease of $27.9
million or 3.2%. As a percentage of net sales, cost of sales decreased to 88.2%
for the year ended September 30, 1996 from 88.6% for the same period in 1995.
The decrease in cost of sales as a percentage of net sales was due primarily to
significant changes between the periods in overhead costs absorbed into
inventory. Overhead costs are allocated and absorbed into inventory when
inventory is produced and expensed when inventory is sold. As a result, profit
comparisons can be affected when a change in inventory levels during a period
differs from the change in the prior year period. Finished goods inventory
levels increased to $137.7 million at September 30, 1996 from $104.6 million at
September 30, 1995, which resulted in a favorable impact on cost of sales of
$10.6 million relating to the absorption of fixed overhead costs. Additionally,
the Company realized a 10.4% decrease in material costs from the prior year,
offset by an unfavorable shift in product mix.
Gross profit increased to $113.1 million for the year ended September
30, 1996 from $112.0 million for the same period in 1995, an increase of $1.1
million or 1.0%, due to the reasons described above.
Selling, general and administrative expenses decreased to $61.8 million
for the year ended September 30, 1996 from $66.1 million for the same period in
1995, a decrease of $4.3 million or 6.5%. As a percentage of net sales, selling,
general and administrative expenses decreased to 6.4% for the year ended
September 30, 1996 from 6.7% for the same period in 1995.
12
<PAGE>
Other (income) expense, net decreased to $4.3 million of expense for
the year ended September 30, 1996 from $1.2 million of income for the same
period in 1995, a decrease of $5.5 million. This decrease was due primarily to
one-time expenses relating to the investigation of the Company's strategic
alternatives.
Operating income decreased to $47.0 million for the year ended
September 30, 1996 from $47.1 million for the same period in 1995, a decrease of
$0.1 million or 0.2%, due to the reasons described above.
Interest expense increased to $37.5 million for the year ended
September 30, 1996 from $37.4 million for the same period in 1995, an increase
of $0.1 million or 0.3%, due primarily to higher average usage of short-term
borrowings.
Income tax expense decreased to $3.8 million for the year ended
September 30, 1996 from $3.9 million for the same period in 1995, a decrease of
$0.1 million or 2.4%. The effective tax rate for the year ended September 30,
1996 was 40.0% compared to 40.1% for the same period in 1995.
Net income decreased to $5.7 million for the year ended September 30,
1996 from $5.8 million for the same period in 1995, a decrease of $0.1 million
or 1.8%, due to the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is highly seasonal with the majority of its net
cash inflows from operations realized in the second and third quarters of the
calendar year. The Company builds inventory throughout the year to satisfy the
high seasonal demands of the summer months when away-from-home consumption
increases. As a result, the Company requires access to working capital lines to
meet its production requirements during periods of reduced cash flow.
On September 28, 1996, the Company received $1.2 million of loans from
the State of Maryland and County of Baltimore Departments of Business and
Economic Development. The loans bear interest at 6.0% per annum with a ten year
life and require repayment in equal quarterly installments starting January 1,
1998. The loans may convert to interest-free grants if the Company meets certain
headcount and capital spending criteria in the Maryland facility. As of December
29, 1997, the Company has met the necessary criteria for the grant conversion.
For the year ended September 30, 1997, $44.2 million of domestic
revolving loan borrowings, $2.2 million of Canadian operating facility
borrowings, $17.8 million of proceeds from sale and leaseback of property,
plant, and equipment, and a $1.7 million decrease in cash balances were used to
fund $47.8 million of net capital additions, the payment of $0.1 million for
industrial revenue bond principal, $1.4 million of Canadian term loan
reductions, a $0.1 million increase in restricted cash, a $13.3 million increase
in cash in escrow, and $3.2 million of cash used by operations. At September 30,
1997, the Company had approximately $7.4 million of combined availability under
its domestic revolving loan and Canadian operating facilities. The maximum
combined month end outstanding balance of the domestic revolving loan and
Canadian operating facilities during the year ended September 30, 1997 was $65.4
million, while the average balance outstanding totaled approximately $53.0
million.
The Company's liquidity during the current year has been enhanced
because it has not been subject to current income taxes (other than the
Alternative Minimum Tax) due to the use of net operating loss carryforwards for
income tax purposes. At September 30, 1997, the Company's net operating loss
13
<PAGE>
carryforwards for tax purposes are approximately $170 million. These net
operating loss carryforwards will expire, if not used, beginning in 2004.
Prior to October 24, 1997, Sweetheart Receivables Corporation ("SRC"),
a wholly owned, limited purpose, finance subsidiary of the Company, had $60.0
million of Series 1994-1 A-V Trade Receivables Backed Notes (the "Notes")
outstanding under an accounts receivable securitization program. These amounts
were invested by the Trustee on behalf of SRC and were only available to the
Company under limited circumstances. The balance of cash in SRC was $29.0
million and $28.9 million at September 30, 1997 and 1996, respectively, and is
reported as restricted cash in the consolidated balance sheet. The balance of
restricted cash fluctuated throughout the year based on the level of receivables
available to collateralize the Notes.
In connection with the issuance of the Notes, certain terms and
conditions of the Credit Agreement were amended. The Revolving Loan Facility was
limited to 50% of eligible inventory of Sweetheart Cup Company Inc. (up to a
maximum of $150 million of eligible inventory). In addition, the combined
borrowing outstanding under the Revolver plus the Notes less the aggregate
amount of cash on deposit in certain SRC accounts could not exceed $115 million
in aggregate.
On October 24, 1997, the Company refinanced the Revolving Loan Facility
and the Notes with a new Loan and Security Agreement of $135 million. Under the
terms of the new loan, the need to hold restricted cash under the SRC indentures
was eliminated. As a result, $29 million of restricted cash on deposit at the
time of the refinancing was released. This cash was used to immediately pay down
the Notes. In addition, the terms of the new loan do not require the maintenance
of restricted cash, which significantly improves availability of the line into
the future. See Note 15 of the accompanying financial statements (Item 8).
In the fourth quarter of 1997, the Company completed negotiations of
its three-year contract renewal with its largest customer, McDonald's. Although
this agreement results in a lower selling price and less total volume, the
Company did retain a majority of the North American volume for cold cups and
lids at McDonald's. In addition, the Company committed to convert McDonald's
cold cup volume to a new raw material substrate (from wax to double-sided
polyethylene) over the life of the contract. This will cause the Company to
incur incremental capital expenditures.
The Company's principal uses of cash for the next several years will be
capital expenditures, working capital requirements, and debt service
requirements. The reduction in debt service requirements following the
Acquisition has provided the Company with increased flexibility to make
discretionary capital expenditures that management believes will provide an
attractive return on investment. During the year ended September 30, 1997, the
Company made capital expenditures of approximately $47.8 million. New product
development (including conversion from wax to double-sided polyethylene for cold
cups) and cost reduction accounted for approximately 21% and 37%, respectively,
of the total fiscal year 1997 expenditures. Non-discretionary expenditures
represented the balance of the current year spending. The Company anticipates
increased capital spending levels in the future for similar projects, of which
approximately $13 million has been committed for fiscal 1998 as of the filing
date. In addition, the Company may be required to fund various contingent
liabilities at any time, including amounts accrued for litigation, claims and
assessments reflected on the balance sheet as other current liabilities.
Management believes that cash generated by operations and funds
available from working capital borrowings under the new Loan and Security
Agreement will be sufficient to meet the Company's expected operating needs,
planned capital expenditures and debt service requirements.
14
<PAGE>
NET OPERATING LOSS CARRYFORWARDS
As of September 30, 1997 the Company had approximately $170 million of
net operating loss ("NOL") carryforwards for federal income tax purposes. The
Acquisition resulted in a significant limitation on the Company's ability to
utilize its NOL carryforwards. Although the Company has taken certain steps to
allow utilization of the NOL carryforwards and anticipates that a substantial
portion of its NOL carryforwards will be available to offset future taxable
income, there can be no assurance that its NOL carryforwards will become
available or that the Company will generate future taxable income. Accordingly,
all or a portion of its NOL carryforwards could expire unutilized, which could
adversely affect the Company's ability to satisfy its obligations as they become
due. The Company believes that future taxable income will be generated to
realize the unreserved portion, due primarily to management's commitment to
revenue enhancing and cost reduction strategies.
YEAR 2000
The Company utilizes software and related technologies throughout its
business that will be affected by the date change in the year 2000. System
modifications or replacements are underway or planned which will make all
computer systems in the Company compliant with the year 2000 requirement.
Anticipated spending for these modifications will be expensed as incurred and is
not expected to have a material impact on the Company's ongoing results of
operations.
EFFECT OF INFLATION
Inflation will increase the Company's costs, including the cost of
borrowing and raw materials. Depending upon business conditions, the Company
attempts to increase the sales price of its products to mitigate the effect of
such increases. There can be no assurance that the Company will be successful in
increasing the prices of its products to offset all, or any portion, of any cost
increases.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this filing, including those in the
footnotes to the 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, energy and other manufacturing costs,
fluctuations in demand for the Company's products, potential equipment
malfunctions and pending litigation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of
this report, beginning on page 29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
15
<PAGE>
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 Inc. and Sweetheart
Cup Company Inc. as of December 29, 1997. 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.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Burnell R. Roberts 70 Chairman of the Board and Director of Sweetheart Holdings Inc.
and Sweetheart Cup Company Inc.
William F. McLaughlin 49 President, Chief Executive Officer and Director of Sweetheart
Holdings Inc. and Sweetheart Cup Company Inc.
W. Richard Bingham 62 Director of Sweetheart Holdings Inc. and Sweetheart Cup Company
Inc.
Jerry J. Jasinowski 58 Director of Sweetheart Holdings Inc. and Sweetheart Cup Company
Inc.
Peter W. C. Mather 62 Director of Sweetheart Holdings Inc. and Sweetheart Cup Company
Inc.
Theodore C. Rogers 63 Director of Sweetheart Holdings Inc. and Sweetheart Cup Company
Inc.
William F. Spengler 43 Vice President, Finance and Chief Financial Officer of
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
Charles E. Busse 59 Vice President of Research and Engineering of Sweetheart
Holdings Inc. and Sweetheart Cup Company Inc.
Daniel M. Carson 52 Vice President, General Counsel and Corporate Secretary of
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
James R. Mullen 54 Vice President of Human Resources of Sweetheart Holdings Inc.
and Sweetheart Cup Company Inc.
Rickey Schneider 48 Vice President of Manufacturing of Sweetheart Holdings Inc. and
Sweetheart Cup Company Inc.
Roger A. Lindahl 40 Treasurer of Sweetheart Holdings Inc. and Sweetheart Cup
Company Inc.
Marguerite E. Davis 43 Vice President of Sweetheart Cup Company Inc.
William H. Haas 56 Vice President of Sweetheart Cup Company Inc.
Joseph A. Lucas 58 Vice President of Sweetheart Cup Company Inc.
Vincent J. Truant 50 Vice President of Sweetheart Cup Company Inc.
</TABLE>
16
<PAGE>
Mr. Roberts is the former Chairman and Chief Executive Officer of Mead
Corporation ("Mead"), a paper products and electronic publishing company. Mr.
Roberts joined Mead in 1966 and served in a variety of positions, including
Controller, Vice President of Finance and Executive Vice President. He was named
President of Mead in 1981 and served as Chairman and Chief Executive Officer
from 1982 until May 1992. From May 1992 until May 1993, Mr. Roberts served as a
director of Mead. Mr. Roberts has been a director of AIPM since he joined the
firm in January 1993, and is a limited partner of American Industrial Partners,
L.P. ("AIP-LP"), the general partner of AIP. Mr. Roberts is also a director of
Rayonier Inc., Armco Inc., Perkin Elmer Corporation, DPL Inc. and Universal
Protective Packaging Co.
Mr. McLaughlin has served as President and Chief Executive Officer of
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc. since May 1994. Prior
to joining the Company, he was Executive Vice President of Nestle Brands
Foodservice, a leading supplier of food and beverage products to the foodservice
industry. Prior to 1991, he spent eight years in several positions, including
President of L.J. Minor Corporation, a Nestle subsidiary and specialty producer
of flavors for the foodservice industry.
Mr. Bingham co-founded AIPM and has been a director and officer of the
firm since 1989. He is also a general partner of AIP-LP. Prior to co-founding
AIPM, Mr. Bingham was a Managing Director of Shearson Lehman Brothers from 1984
until late 1987. Prior to joining Shearson Lehman Brothers, Mr. Bingham was
Director of the Corporate Finance Department, a member of the Board, and head of
Mergers & Acquisitions at Lehman Brothers Kuhn Loeb Inc. Prior thereto, he
directed investment banking operations at Kuhn Loeb & Company where he was a
Partner and member of the Board and Executive Committee. He formerly served on
the Boards of Avis Inc., ITT Life Insurance Corporation and Valero Energy
Corporation.
Mr. Jasinowski was elected as director of the Company commencing August
1, 1997. He is the President and CEO of the National Association of
Manufacturers, the largest broad-based industrial trade association in the
United States. He became president in 1990 after serving as the association's
executive vice president and chief economist for ten years. Mr. Jasinowski has
also held several governmental positions, including assistant secretary for
policy at the U.S. Department of Commerce. Mr. Jasinowski is also a director of
Atwood Richards and Phoenix Home Life.
Mr. Mather is the former Vice President Management Information Services
(MIS) of Air Products and Chemicals Inc. (APCI), an industrial gases and
chemical company. Mr. Mather joined APCI in 1967, was appointed Vice President
MIS in 1982, and retired from the company in 1996. Mr. Mather is currently
serving as Assistant Secretary of Commerce for the state of Oklahoma.
Mr. Rogers co-founded AIPM and has been a director and officer of the
firm since 1989. He is also a general partner of AIP-LP. From 1980 to 1987, he
served as Chairman, President and Chief Executive Officer of NL Industries,
Inc., a petroleum service and chemical company. Prior to 1980, he served as an
executive of Armco Inc., a diversified steel company, where he managed numerous
manufacturing operations in the United States and Mexico. Mr. Rogers is a former
director of Allied Stores Corporation, Allied-Signal Inc., Parsons Corporation
and Southwest Bancshares. He is currently a director of MCorp. and Derby
International Corporation.
Mr. Spengler has served as Vice President of Finance and Chief
Financial Officer of Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
since March 14, 1997. He worked 13 years for Bristol-Myers Squibb in various
financial positions, including Director of Finance for a large segment of their
European business. Mr. Spengler also worked in senior planning and business
development roles at Bristol-Myers Squibb. Prior to joining Sweetheart, Mr.
Spengler worked at Black & Decker from 1993 to March of this year, where he was
the Vice President of Finance for three different divisions, serving most
recently as Vice President of Finance for the North American Power Tools group.
Mr. Busse has been employed by Sweetheart Cup Company Inc. and its
predecessors since 1963 and has served as Vice President of Research and
Engineering of Sweetheart Cup Company Inc. since 1983.
17
<PAGE>
Mr. Carson has served as Vice President, General Counsel and Corporate
Secretary of Sweetheart Holdings Inc. and Sweetheart Cup Company Inc. since
October 1993 and has served as Vice President, General Counsel, and Corporate
Secretary of Sweetheart Cup Company Inc. and as Corporate Secretary of
Sweetheart Holdings Inc. since February 1993. He served as Assistant General
Counsel and Director of U.S. Legal Affairs of Avon Products, Inc., a consumer
products company, from September 1991 to February 1993 and was Of Counsel to
Bell, Boyd & Lloyd (Chicago, Illinois) from June 1991 to August 1991. From May
1981 until June 1991, Mr. Carson was Associate General Counsel for Continental
Can Company, Inc., a packaging and paper products company.
Mr. Mullen has served as Vice President of Human Resources of
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc. since June 1994. From
October 1984 to October 1993, Mr. Mullen was employed in two divisions of Sara
Lee Corporation, a consumer products company, as Vice President of Human
Resources. Prior to October 1984, Mr. Mullen was employed by Frito-Lay, a food
company, Xerox Corporation, a document company, and General Dynamics, a defense
contractor.
Mr. Schneider has served as Vice President of Manufacturing since
October 1994. From October 1986 to September 1994, Mr. Schneider served in
various manufacturing capacities in Owings Mills including, Production Staff
Manager, Operations Manager, and Plant Manager. Prior to joining Sweetheart, Mr.
Schneider was employed for ten years by Boise Cascade Composite Can Division,
producing cans and plastic bottles for the food and oil industry. Mr. Schneider
held a number of manufacturing positions during his tenure.
Mr. Lindahl has served as Treasurer of Sweetheart Holdings Inc. and
Sweetheart Cup Company Inc. since October 1994. From November, 1989 to October,
1994, Mr. Lindahl served as Assistant Treasurer of Sweetheart Cup Company Inc.
Prior to 1989, Mr. Lindahl was employed by Fort Howard Corporation, a paper
company, and Bull Information Systems and its predecessors.
Ms. Davis has served as Vice President of National Accounts of
Sweetheart Cup Company Inc. since October, 1994. From 1990 to September, 1994,
Ms. Davis served as a Director of Marketing for Sweetheart Cup Company Inc.
Prior to joining the Company, Ms. Davis was employed for 15 years by the Quaker
Oats Company, a food company, in a number of marketing management, product
management, field sales and training program development positions.
Mr. Haas has served as Vice President of Foodservice Distribution of
Sweetheart Cup Company Inc. and its predecessors since 1985. Prior to joining
the Company, Mr. Haas was employed for more than 20 years by Carnation Co.,
Inc., a food products company, in various sales and sales management capacities
and by Nabisco, Inc., a food products company, as Director of National Account
Sales.
Mr. Lucas has served as Vice President of Packaging of Sweetheart Cup
Company Inc. since 1991. Prior to joining the Company, he was employed for
almost 28 years by Continental Can Company in various positions, including
President of Continental White Cap, Inc., a packaging company, and Vice
President of Sales and Marketing of Continental White Cap, Inc. and Continental
Bondware, Inc.
Mr. Truant has served as Vice President of McDonald's Sales of
Sweetheart Cup Company Inc. since October, 1994. From April, 1989 to September,
1994, Mr. Truant served as Vice President of National Accounts for Sweetheart
Cup Company. Prior to joining the Company in 1983, Mr. Truant served as Vice
President of Marketing for Century Importers Ltd., a Philip Morris affiliate.
Mr. Truant also held several sales and marketing positions at Miller Brewing
Co., a division of Philip Morris, and Eli Lilly & Co., a pharmaceutical
manufacturer.
18
<PAGE>
COMPENSATION OF DIRECTORS
Messrs. Mather and Jasinowski have agreements with the Company whereby
they are compensated on a quarterly basis in the amount of $4,500 per quarter,
and receive $500 plus expenses for each meeting attended. The remaining
directors of Sweetheart Holdings Inc. and Sweetheart Cup Company do not receive
any direct compensation from such companies for serving as a director. Certain
directors of Sweetheart Holdings Inc. and Sweetheart Cup Company Inc. are
employees of Sweetheart Holdings Inc. and Sweetheart Cup Company Inc. and
receive compensation as such, and others are employees of AIPM, to which
Sweetheart Cup Company Inc. pays fees for advisory and management services. See
Item 13 "Certain Relationships and Related Transactions". Directors are
reimbursed for expenses incurred while serving on the Board.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the
compensation for the years ended September 30, 1997, 1996 and 1995, of the chief
executive officer and the four most highly compensated officers and key
employees of Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
(collectively, the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Awards
- ---------------------------------------- ------------------------------------- ---------------- ---------------
# of Options All Other
Name and Principal Fiscal Salary Bonus Granted Compensation
Position Year ($) ($) (1) (2) ($)
- ---------------------------------------- ------------- ----------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
William F. McLaughlin
President and Chief Executive 1997 491,667 - 10,000 129,805 (3)
Officer of Sweetheart Holdings Inc. 1996 400,000 498,000 - 18,207 (4)
and Sweetheart Cup Company Inc. 1995 400,000 684,522 - 222,838 (5)
William H. Haas
Vice President of Foodservice 1997 180,000 - - 364,443 (6)
Distribution of Sweetheart Cup 1996 178,313 89,640 600 35,235 (7)
Company Inc. 1995 171,187 103,357 - 6,111 (8)
William F. Spengler (9)
Vice President and Chief Financial 1997 159,410 108,333 5,000 100,274 (10)
Officer of Sweetheart Holdings Inc.
and Sweetheart Cup Company Inc.
Daniel M. Carson
Vice President, General Counsel and 1997 172,500 - - 191,160 (11)
Corporate Secretary of Sweetheart 1996 170,625 60,133 - 49,214 (12)
Holdings Inc. and Sweetheart Cup 1995 162,500 94,476 - 5,721 (13)
Company Inc.
James R. Mullen
Vice President of Human Resources 1997 163,500 - - 150,685 (14)
of Sweetheart Holdings Inc. and 1996 162,000 56,996 - 7,445 (15)
Sweetheart Cup Company Inc. 1995 152,500 77,009 1,500 1,562 (16)
</TABLE>
19
<PAGE>
(1) Amounts shown were paid pursuant to the Company's Management Incentive
Plans.
(2) All such grants were made pursuant to the 1994 Stock Option and Purchase
Plan.
(3) Reflects $125,000 paid under the Special Incentive Agreement, $4,500
contributed under the 401(k) Plan and $305 of term life insurance premiums
paid by the Company.
(4) Reflects $10,989 paid for relocation expenses, $6,000 contributed under the
401(k) Plan and $1,218 of term life insurance premiums paid by the Company.
(5) Reflects $113,563 paid for relocation expenses, $101,963 for the payment of
taxes on relocation expense reimbursements, $6,000 contributed under the
Sweetheart 401(k) Retirement Plan (the "401(k) Plan") (to which the Company
contributes an amount equal to 50% of the participant's contributions not
in excess of 6% of the participant's eligible earnings) and $1,312 of term
life insurance premiums paid by the Company.
(6) Reflects $239,664 paid for relocation expenses, $120,000 paid under the
Special Incentive Agreement, $4,500 contributed under the 401(k) Plan and
$279 of term life insurance premiums paid by the Company.
(7) Reflects $30,000 paid for relocation expenses, $4,219 contributed under the
401(k) Plan and $1,016 of term life insurance premiums paid by the Company.
(8) Reflects $5,568 contributed under the 401(k) Plan and $543 of term life
insurance premiums paid by the Company.
(9) Mr. Spengler became Vice President, Finance and Chief Financial Officer on
March 14, 1997. Amounts shown here were paid during the remainder of fiscal
year 1997.
(10) Reflects $100,000 paid under an initial employment bonus, and $274 of term
life insurance premiums paid by the Company
(11) Reflects $128,994 paid for relocation expenses, $57,500 paid under the
Special Incentive Agreement $4,500 contributed under the 401(k) Plan and
$166 of term life insurance premiums paid by the Company.
(12) Reflects $44,176 paid for relocation expenses, $4,376 contributed under the
401(k) Plan and $662 of term life insurance premiums paid by the Company.
(13) Reflects $5,123 contributed under the 401(k) Plan and $598 of term life
insurance premiums paid by the Company.
(14) Reflects $96,029 paid for relocation expenses, $54,500 paid under the
Special Incentive Agreement, and $156 of term life insurance premiums paid
by the Company.
(15) Reflects $2,525 paid for relocation expenses, $4,309 contributed under the
401(k) Plan, and $611 of term life insurance premiums paid by the Company.
(16) Reflects $938 contributed under the 401(k) Plan and $624 of term life
insurance premiums paid by the Company.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUE TABLE
Name Unexercised Options (1)
September 30, 1997
Exercisable Unexercisable
- --------------------------------- -----------------------------------
William F. McLaughlin 4,265 16,700
William H. Haas 876 1,975
William F. Spengler 0 5,000
Daniel M. Carson 712 1,119
James R. Mullen 333 1,167
(1) There is no trading value for the Company's stock as it is not
publicly traded.
20
<PAGE>
MCLAUGHLIN EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with William F.
McLaughlin dated as of May 15, 1994 (the "McLaughlin Agreement") pursuant to
which the Company employed Mr. McLaughlin to serve as president and chief
executive officer of the Company. Pursuant to the McLaughlin Agreement, Mr.
McLaughlin is entitled to participate in, among other things, the Company
Management Incentive Plan, a Stock Option and Purchase Plan and certain other
employee benefit plans and programs made available to other employees of the
Company. Mr. McLaughlin also purchased 1,000 shares of Sweetheart Holdings Inc.
common stock for $100 per share and an additional 5,000 shares at the same price
in exchange for a 5-year promissory note at 6.43% interest per annum. Mr.
McLaughlin's employment is terminable by the Company at any time and by Mr.
McLaughlin upon 30 days prior notice. In the event of termination by the Company
for any reason other than cause, the Company will be obligated to pay Mr.
McLaughlin's base salary for a period of twelve months following the termination
of his employment or until he secures other employment, whichever comes first.
SPENGLER EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with William F.
Spengler on February 12, 1997 (the "Spengler Agreement") pursuant to which the
Company employed Mr. Spengler to serve as Vice President, Finance and Chief
Financial Officer of the Company. Pursuant to the Spengler Agreement, Mr.
Spengler is entitled to participate in, among other things, the Company
Management Incentive Plan ("MIP"), a Stock Option and Purchase Plan and certain
other employee benefit plans and programs made available to other employees of
the Company. In the event of termination of Mr. Spengler's employment by the
Company for any reason other than for cause, the Company will be obligated to
pay Mr. Spengler's base salary for one year following termination and a pro-rata
bonus under the MIP for the portion of the fiscal year completed prior to the
termination date.
EMPLOYMENT CONTRACTS
Messrs. McLaughlin, Haas, Spengler, Carson and Mullen each entered into
an executive retention agreement with the Company dated October 1, 1997 which
provides for an incentive payment to the executive if he remains employed by the
Company for a period of two years. Payment of the incentive is accelerated under
certain circumstances, including a change of control or a sale of more than
fifty percent of the equity value of the Company. The amount of the incentive
for Messrs. McLaughlin and Spengler is two year's base salary, and one year's
base salary for each of the other executives. Messrs. McLaughlin, Haas, Carson
and Mullen each entered into an relocation agreement with the Company dated
December 19, 1997 which provides for reimbursement of losses up to a specified
amount by individual in the event of a termination of their employment under
certain specified circumstances and for reasons other than cause, including a
change of control or a sale of more than fifty percent of the equity value of
the Company.
COMPENSATION COMMITTEE
The Sweetheart Holdings Inc. Compensation Committee of the Board of
Directors consisted of W. Richard Bingham, Burnell R. Roberts, and Theodore C.
Rogers, all of whom are Directors of the Company. Mr. Roberts is an officer but
not an employee of the Company. Neither Mr. Bingham nor Mr. Rogers is an officer
or employee of the Company.
21
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Sweetheart Holdings Inc. common stock as of December 29,
1997, by holders having beneficial ownership of more than five percent of
Sweetheart Holdings Inc. common stock and certain other principal holders, by
each of the directors of Sweetheart Holdings Inc., by each of the named
executive officers and by all directors and executive officers of Sweetheart
Holdings Inc. as a group.
<TABLE>
<CAPTION>
Common Stock
----------------------------------------
Number of Percent of Class
Name of Beneficial Owner Shares
- ------------------------ ---------------- -----------------
<S> <C> <C>
American Industrial Partners Capital Fund, L.P. ......................... 538,825 51.51%
One Maritime Plaza
Suite 2525
San Francisco, CA 94111
Mellon Bank, N.A., as Trustee for First Plaza Group Trust (1) ........... 350,000 33.46
One Mellon Bank Center
Pittsburgh, PA 15258
Leeway & Co., as nominee for the AT&T Master Pension Trust (2) .......... 150,000 14.34
c/o State Street Bank & Trust Co.
Master Trust Division - W6C
1 Enterprise Drive
North Quincy, MA 02171
W. Richard Bingham (3) .................................................. 538,825 51.51
Burnell R. Roberts (4) .................................................. - -
Theodore C. Rogers (3) .................................................. 538,825 51.51
Peter W.C. Mather........................................................ - -
Jerry J. Jasinowski...................................................... - -
William F. McLaughlin................................................... 6,000 0.57
William F. Spengler..................................................... - -
William H. Haas......................................................... - -
Daniel M. Carson......................................................... - -
James R. Mullen.......................................................... - -
Directors and executive officers as a group (16 persons) (5)............. 544,825 52.08
- ----------
</TABLE>
22
(1) Mellon Bank, N.A., acts as the trustee (the "Trustee") for First Plaza
Group Trust ("First Plaza"), a trust under and for the benefit of certain
employee benefit plans of General Motors Corporation ("GM") and its
subsidiaries. These shares may be deemed to be owned beneficially by
General Motors Investment Management Corporation ("GMIMCo"), a wholly-owned
subsidiary of GM. GMIMCo's principal business is providing investment
advice and investment management services with respect to the assets of
certain employee benefit plans of GM and its subsidiaries and with respect
to the assets of certain direct and indirect subsidiaries of GM and
associated entities. GMIMCo is serving as First Plaza's investment manager
with respect to these shares and in that capacity it has the sole power to
direct the Trustee as to the voting and disposition of these shares.
Because of the Trustee's limited role, beneficial ownership of the shares
by the Trustee is disclaimed.
(2) State Street Bank & Trust Co. acts as trustee for a trust under and for the
benefit of certain employee benefit plans of American Telephone & Telegraph
Co. ("AT&T") and its subsidiaries. These shares may be deemed to be owned
beneficially by the AT&T Master Pension Trust (the "Trust").
(3) All of such shares are held of record by AIP. Messrs. Bingham and Rogers
are general partners of the general partner of AIP and share investment and
voting power with respect to the securities owned by AIP. The business
address of Mr. Bingham is One Maritime Plaza, Suite 2525, San Francisco, CA
94111, and the business address of Mr. Rogers is 551 Fifth Avenue, Suite
3800, New York, NY 10176.
(4) Mr. Roberts is a limited partner of the general partner of AIP and a
director of AIPM, but does not share investment or voting discretion with
respect to the securities held by AIP.
(5) All of such shares are held of record by AIP, except for the 6,000 shares
held by Mr. McLaughlin.
All of the outstanding common stock of Sweetheart Cup Company Inc. is
owned by Sweetheart Holdings Inc.
On December 29, 1997, AIP, on behalf of itself and the other
stockholders of Sweetheart Holdings Inc. ("Holdings"), entered into an agreement
with Creative Expressions Group, Inc. ("CEG"), an affiliate of The Fonda Group,
Inc. ("Fonda"), a manufacturer of disposable beverage service and food service
products. Both CEG and Fonda are privately held companies controlled by Dennis
Mehiel ("Mehiel"). Pursuant to the agreement, SF Holdings, Inc. ("SFH"), a new
holding company formed by Mehiel, will acquire from Holdings' stockholders 48%
of Holdings outstanding common stock and all of a new class of non-voting common
stock, giving SFH 90% of the total number of outstanding Holdings shares. As
part of the consideration for these shares, SFH will issue its own preferred
stock to Holdings stockholders. Upon consummation of the transaction, Holdings'
Board of Directors will have five members, three of whom will be nominated by
Holdings' existing stockholders and two of whom will be nominated by SFH.
Significant actions by Holdings' Board will require the vote of four directors.
CEG will manage the day-to-day operations of Holdings and Sweetheart Cup Company
Inc. with a view to achieving cost savings and other synergies with the
operations of Fonda. In this connection, Mehiel and Tom Uleau, Fonda's
president, will assume executive roles. Consummation of the transaction is
expected to occurred on March 12, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS' AGREEMENT
In connection with the Acquisition, Sweetheart Holdings Inc. and the
Investors entered into a Stockholders' Agreement pursuant to which the Investors
were granted certain registration rights and participation rights. Pursuant to
the Stockholders' Agreement, each of First Plaza Group Trust and Leeway & Co.
has the right to elect an individual to serve on the Board of Directors of each
of Sweetheart Holdings
24
<PAGE>
Inc. and Sweetheart Cup Company Inc. so long as it holds any of the securities
issued to it pursuant to the Acquisition. AIP has the right to elect the
majority of the directors of Sweetheart Holdings Inc. and Sweetheart Cup Company
Inc. until the earlier of (i) the occurrence of certain events and (ii) such
time as AIP no longer holds any of the securities issued to it pursuant to the
Acquisition.
MANAGEMENT SERVICES AGREEMENT WITH AIPM
AIP, which is Sweetheart Holdings Inc.'s largest stockholder, is a
private investment partnership that makes equity investments, principally in
industrial and manufacturing companies in the United States. The firm was formed
in 1989. AIP is managed by AIPM, W. Richard Bingham and Theodore C. Rogers, each
general partners of AIP-LP.
AIPM receives an annual fee of $1.85 million for providing general
management, financial and other corporate advisory services to the Company,
payable semi-annually 45 days after the scheduled interest payment dates for the
Notes, and is reimbursed for out-of-pocket expenses. The fees are paid to AIPM
pursuant to a Management Services Agreement among AIPM, Sweetheart Holdings Inc.
and Sweetheart Cup Company Inc. AIPM, an affiliate of the controlling
shareholder of the Company, expects to provide substantial ongoing financial and
management services to the Company utilizing the extensive operating and
financial experience of the AIPM principals.
In addition, for the year ended September 30, 1996, the Company
reimbursed AIPM for $950,000 of expenses incurred in connection with an
investigation of the Company's strategic alternatives.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
1. The financial statements listed in the "Index to Financial Statements."
2. The financial statement schedule listed in the "Index to Financial
Statement Schedules."
3. Exhibits
3.1 Certificate of Incorporation of Sweetheart Holdings Inc.
(incorporated by reference from Exhibit 3.1 of the Company's
report on Form 10-K dated December 22, 1993 (the "1993 10-K")).
3.2 By-laws of Sweetheart Holdings Inc. (incorporated by reference
from Exhibit 3.3 of the 1993 10-K).
4.1 Indenture for the Senior Secured Notes between Sweetheart Cup
Company Inc. and United States Trust Company of New York, as
Trustee (incorporated by reference from Exhibit 4.1 of Sweetheart
Holdings Inc.'s Report on Form 8-K dated October 6, 1993 (the
"1993 8-K")).
24
<PAGE>
4.2 Indenture for the Senior Subordinated Notes between Sweetheart Cup
Company Inc. and U.S. Trust Company of Texas, N.A., as Trustee
(incorporated by reference from Exhibit 4.2 on the 1993 8-K).
10.1 Employment Agreement dated May 15, 1994 between Sweetheart
Holdings Inc. and William F. McLaughlin (incorporated by reference
from Exhibit 10.4 of the Company's report on Form 10-Q dated
August 12, 1994).
10.2 Receivables Purchase Agreement between Sweetheart Cup Company Inc.
and Sweetheart Receivables Corporation dated September 20, 1994
(incorporated by reference from Exhibit 10.5 of the Company's
report on Form 10-K dated December 9, 1994 (the "1994 10-K")).
10.3 Indenture and Security Agreement among Sweetheart Receivables
Corporation, Sweetheart Cup Company Inc. and Manufacturers and
Traders Trust Company dated September 20, 1994 (incorporated by
reference from Exhibit 10.6 of the 1994 10-K).
10.4 Supplemental Indenture for Series 1994-1 A-V Notes among
Sweetheart Receivables Corporation, Sweetheart Cup Company Inc.
and Manufacturers and Traders Trust Company dated September 20,
1994 (incorporated by reference from Exhibit 10.7 of the 1994
10-K).
10.5 Credit Agreement among Sweetheart Inc., Sweetheart Cup Company
Inc., various banks and Bankers Trust Company, as Agent (the
"Credit Agreement") (incorporated by reference from Exhibit 28.1
of the 1993 8-K).
10.6 First Amendment to the Credit Agreement dated July 22, 1994
(incorporated by reference from Exhibit 10.9 of the 1994 10-K).
10.7 Management Services Agreement dated as of August 30, 1993 among
the Sweetheart Holdings Inc., Sweetheart Cup Company Inc. and
American Industrial Partners Management Company, Inc. (the
"Management Services Agreement") (incorporated by reference from
Exhibit 28.2 of the 1993 8-K).
10.8 Restated Management Services Agreement dated August 31, 1993
(incorporated by reference from Exhibit 10.11 of the 1994 10-K).
10.9 $1,000,000 Rockdale County, Georgia Industrial Revenue Bonds,
Series 1976: Loan Agreement dated as of August 1, 1976 between
Development Authority of Rockdale County, Georgia and Maryland Cup
Corporation; and Trust Indenture dated as of August 1, 1976
between Development Authority of Rockdale County, Georgia and The
Citizens and Southern National Bank, as Trustee (incorporated by
reference from Exhibit 10.8 of the Registration Statement).
10.10 $1,000,000 City of Sparks, Nevada Industrial Revenue Bonds, Series
1977: Lease and Agreement dated as of February 1, 1977 between
City of Sparks, Nevada and Sweetheart Plastics, Inc.; Trust
Indenture dated as of February 1, 1977 between City of Sparks,
Nevada and First National Bank of Nevada, Reno, Nevada; and
Guaranty Agreement dated as of February 1, 1977 between Maryland
Cup Corporation and First National Bank of Nevada, Reno, Nevada
(incorporated by reference from Exhibit 10.9 of the Registration
Statement).
10.11 $2,500,000 Manchester, New Hampshire Industrial Revenue Bonds,
Series 1979: Loan Agreement and Assignment in Trust dated as of
June 1, 1979 between the Industrial
25
<PAGE>
Development Authority of the State of New Hampshire and Maryland
Cup Corporation and State Street Bank and Trust Company, Trustee;
and Assumption Agreement dated as of August 26, 1983 by MC
Acquisition Corp. (incorporated by reference from Exhibit 10.10 of
the Registration Statement).
10.12 Term and Revolving Credit Facilities Agreement, dated as of
December 20, 1989, among Lily Canada, BT Bank of Canada and The
Bank of Nova Scotia and Amendment Agreement, dated as of August
30, 1993 between Lily Canada and The Bank of Nova Scotia
(incorporated by reference from Exhibit 10.8 of the 1993 10-K).
10.13 Asset Sale Agreement dated as of October 6, 1993 between
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
(incorporated by reference from Exhibit 10.1 of the Company's
report on Form 10-Q dated February 11, 1994).
10.14 Bill of Sale, Assignment and Assumption Agreement dated as of
October 6, 1993 between Sweetheart Holdings Inc. and Sweetheart
Cup Company Inc. (incorporated by reference from Exhibit 10.2 of
the Company's report on Form 10-Q dated February 11, 1994).
10.15 Wraparound Note dated as of October 6, 1993 made by Sweetheart
Holdings Inc. to Sweetheart Cup Company Inc. (incorporated by
reference from Exhibit 10.3 of the Company's report on Form 10-Q
dated February 11, 1994).
10.16 Asset Distribution Agreement dated as of October 6, 1993 between
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
(incorporated by reference from Exhibit 10.4 of the Company's
report on Form 10-Q dated February 11, 1994).
10.17 Manufacturing Agreement dated as of October 6, 1993 between
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc. (the
"Manufacturing Agreement") (incorporated by reference from Exhibit
10.5 of the Company's report on Form 10-Q dated February 11,
1994).
10.18 First Amendment to Manufacturing Agreement dated February 25, 1994
(incorporated by reference from Exhibit 10.21 of the 1994 10-K).
10.19 Patent/Know-How License Agreement dated as of October 6, 1993
between Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
(incorporated by reference from Exhibit 10.6 of the Company's
report on Form 10-Q dated February 11, 1994).
10.20 Sweetheart Holdings Inc. Stock Option and Purchase Plan dated
December 17, 1993 (incorporated by reference from Exhibit 10.26 of
the 1994 10-K).
10.21 Sweetheart Holdings Inc. Management Incentive Plan dated as of
January 27, 1995 (incorporated by reference from Exhibit 10.1 of
the Company's report on Form 10-Q dated February 9, 1995).
10.22 Sweetheart Cup Company Inc. Severance Pay Plan (Effective July 1,
1994) (incorporated by reference from Exhibit 10.2 of the
Company's report on Form 10-Q dated February 9, 1995).
10.23 Sweetheart Cup Company Inc. Deferred Compensation Plan dated as of
January 27, 1995 (incorporated by reference from Exhibit 10.3 of
the Company's report on Form 10-Q dated February 9, 1995).
26
<PAGE>
10.24 Registration Statement on Form S-8 dated April 17, 1995 for the
Sweetheart Cup Company Inc. Deferred Compensation Plan
(incorporated by reference from Exhibit 10.1 of the Company's
report on Form 10-Q dated May 11, 1995).
10.25 Separation agreement between Sweetheart Cup Company Inc. and John
R. Icke dated May 26, 1995 (incorporated by reference from Exhibit
10.1 of the Company's report on Form 10-Q dated August 10, 1995).
10.26 Second Amendment to the Credit Agreement dated September 6, 1996
(incorporated by reference from Exhibit 10.26 of the Company's
report on Form 10-K dated December 20, 1996 (the "1996 10-K")).
10.27 Loan Agreement dated August 1, 1996 between Sweetheart Holdings
Inc. and the State of Maryland Department of Business and Economic
Development (incorporated by reference from Exhibit 10.27 of the
1996 10-K).
10.28 Special Incentive Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and William F.
McLaughlin dated December 9, 1996 (incorporated by reference from
Exhibit 10.28 of the 1996 10-K).
10.29 Special Incentive Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and Joseph A. Lucas
dated November 18, 1996 (incorporated by reference from Exhibit
10.29 of the 1996 10-K).
10.30 Special Incentive Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and William H. Haas
dated November 18, 1996 (incorporated by reference from Exhibit
10.30 of the 1996 10-K).
10.31 Special Incentive Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and Daniel M. Carson
dated November 18, 1996 (incorporated by reference from Exhibit
10.31 of the 1996 10-K).
10.32 Special Incentive Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and Charles E. Busse
dated November 18, 1996 (incorporated by reference from Exhibit
10.32 of the 1996 10-K).
10.33 Promissory Note dated September 24, 1996 between Sweetheart
Holdings Inc. and the State of Maryland Department of Business and
Economic Development (relating to the Loan Agreement filed as
exhibit 10.27 to the 1996 10-K, incorporated by reference from
Exhibit 10.33 of the Company's report on Form 10-Q dated February
11, 1997).
10.34 Third Amendment to Credit Agreement dated June 17, 1997
(incorporated by reference from Exhibit 10.34 of the Company's
report on Form 10-Q dated August 5, 1997).
10.35 Amended and Restated Loan and Security Agreement dated October 24,
1997 between Sweetheart Holdings Inc. as borrower and BankAmerica
Business Credit, Inc., as Agent (incorporated by reference from
Exhibit 10.35 of the Company's report on Form 10-K dated December
30, 1997 (the "1997 10-K")).
10.36 Special Incentive Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and James R. Mullen
dated November 18, 1996 (incorporated by reference from Exhibit
10.36 of the 1997 10-K).
27
<PAGE>
10.37 Employment Agreement dated March 1, 1997 between Sweetheart
Holdings Inc. and William F. Spengler (incorporated by reference
from Exhibit 10.37 of the 1997 10-K).
10.38 Executive Retention Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and William F.
McLaughlin dated October 1, 1997 (incorporated by reference from
Exhibit 10.38 of the 1997 10-K).
10.39 Executive Retention Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and William H. Haas
dated October 1, 1997 (incorporated by reference from Exhibit
10.39 of the 1997 10-K).
10.40 Executive Retention Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and William F.
Spengler dated October 1, 1997 (incorporated by reference from
Exhibit 10.40 of the 1997 10-K).
10.41 Executive Retention Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and Daniel M. Carson
dated October 1, 1997 (incorporated by reference from Exhibit
10.41 of the 1997 10-K).
10.42 Executive Retention Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and James R. Mullen
dated October 1, 1997 (incorporated by reference from Exhibit
10.42 of the 1997 10-K).
10.43 Employee Relocation Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and William F.
McLaughlin dated December 19, 1997 (incorporated by reference from
Exhibit 10.43 of the 1997 10-K).
10.44 Employee Relocation Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and James R. Mullen
dated December 19, 1997 (incorporated by reference from Exhibit
10.44 of the 1997 10-K).
10.45 Employee Relocation Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and Daniel M. Carson
dated December 19, 1997 (incorporated by reference from Exhibit
10.45 of the 1997 10-K).
10.46 Employee Relocation Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and William H. Haas
dated December 19, 1997 (incorporated by reference from Exhibit
10.46 of the 1997 10-K).
21.1 Subsidiaries of the Company (incorporated by reference from
Exhibit 21.1 of the 1994 10-K).
27.0 September 30, 1997 Financial Data Schedule
(b) Current Reports on Form 8-K
None.
28
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants 30
Consolidated Balance Sheets as of September 30, 1997
and September 30, 1996 31
Consolidated Statements of Operations for the years ended
September 30, 1997, 1996 and 1995 32
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995 33
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1997, 1996 and 1995 34
Notes to Consolidated Financial Statements 35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Sweetheart Holdings Inc.:
We have audited the accompanying consolidated balance sheets of SWEETHEART
HOLDINGS INC. (a Delaware corporation) AND SUBSIDIARIES as of September 30, 1997
and 1996 and the related consolidated statements of operations, shareholders'
equity and cash flows for the years ended September 30, 1997, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sweetheart Holdings Inc. and
Subsidiaries as of September 30, 1997 and 1996, and the consolidated results of
their operations and their cash flows for the years ended September 30, 1997,
1996 and 1995 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
December 8, 1997
(except with respect to
the matter discussed in
Note 20, as to which the
date is March 12, 1998)
30
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND 1996
(In thousands, except share data)
September 30,
1997 1996
---- ----
Assets
Current assets:
Cash and cash equivalents $ 2,650 $ 4,371
Restricted cash 29,016 28,870
Cash in escrow 13,323 --
Receivables, less allowances of $1,740
and $2,466, respectively 85,774 88,183
Inventories 148,845 172,838
Deferred income taxes 2,471 1,771
Assets held for sale, net 8,466 --
Other current assets 20,868 20,099
--------- ---------
Total current assets 311,413 316,132
--------- ---------
Property, plant and equipment 527,999 527,394
Less - Accumulated depreciation 145,508 99,561
--------- ---------
Net property, plant and equipment 382,491 427,833
--------- ---------
Deferred income taxes 12,471 --
Other assets 13,155 18,645
--------- ---------
Total assets $ 719,530 $ 762,610
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 58,933 $ 70,472
Accrued payroll and related costs 40,528 47,828
Other current liabilities 43,815 33,918
Current portion of long-term debt 1,369 1,535
--------- ---------
Total current liabilities 144,645 153,753
--------- ---------
Long-term debt 430,499 385,579
Deferred income taxes -- 17,803
Other non-current liabilities 69,775 84,060
Shareholders' equity:
Common stock-
Par value $.01 per share; 3,000,000 shares
authorized; 1,046,000 shares issued and
outstanding 101,100 101,100
Cumulative translation adjustment (507) (322)
Retained earnings (accumulated deficit) (25,611) 21,060
Note receivable related to purchase of common
stock (371) (423)
--------- ---------
Total shareholders' equity 74,611 121,415
--------- ---------
Total liabilities and shareholders' equity $ 719,530 $ 762,610
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(In thousands)
For the year ended September 30,
1997 1996 1995
-------------------------------------
Net sales $ 886,017 $ 959,818 $ 986,618
Cost of sales 821,021 846,719 874,593
--------- --------- ---------
Gross profit 64,996 113,099 112,025
Selling, general, and administrative 66,792 61,788 66,089
Loss on asset disposal and impairment 24,550 -- --
Restructuring charges 9,680 -- --
Other (income) expense, net (73) 4,271 (1,197)
--------- --------- ---------
Operating income (loss) (35,953) 47,040 47,133
Interest expense, net (40,265) (37,517) (37,410)
--------- --------- ---------
Income (loss) before income
taxes and extraordinary loss (76,218) 9,523 9,723
Income tax expense (benefit) (30,487) 3,809 3,903
--------- --------- ---------
Income (loss) before
extraordinary loss (45,731) 5,714 5,820
Extraordinary loss on debt
extinguishment (net of income taxes
of $627) 940 -- --
--------- --------- ---------
Net income (loss) $ (46,671) $ 5,714 $ 5,820
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(In thousands)
For the year ended September 30,
1997 1996 1995
----------------------------------
Cash flows from operating activities:
Net income (loss) $ (46,671) $ 5,714 $ 5,820
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 47,723 43,373 37,741
Asset impairment expense 24,550 -- --
Extraordinary loss, net of tax 940 -- --
Deferred income taxes (30,487) 2,645 3,144
Changes in operating assets and liabilities:
Receivables (1,341) 14,103 (17,863)
Inventories 23,993 (20,878) 21,055
Accounts payable (11,541) 5,259 4,852
Other, net (10,408) (6,708) (3,850)
--------- --------- ---------
Net cash provided by (used in)
operating activities (3,242) 43,508 50,899
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant, and
equipment (47,757) (50,236) (51,625)
Proceeds from sales of property,
plant, and equipment 17,843 -- 111
--------- --------- ---------
Net cash used in investing (29,914) (50,236) (51,514)
activities --------- --------- ---------
Cash flows from financing activities:
Proceeds from debt 331,216 194,160 103,852
Repayment of debt (286,364) (178,235) (103,535)
Payment received on common stock
note receivable 52 77 --
Increase in restricted cash (146) (12,904) (3,932)
Increase in cash in escrow (13,323) -- --
--------- --------- ---------
Net cash provided by (used in)
financing activities 31,435 3,098 (3,615)
--------- --------- ---------
Net decrease in cash and cash (1,721) (3,630) (4,230)
equivalents
Cash and cash equivalents, beginning
of year 4,371 8,001 12,231
--------- --------- ---------
Cash and cash equivalents, end of year $ 2,650 $ 4,371 $ 8,001
========= ========= =========
Supplemental cash flow disclosures:
Interest paid $ 38,818 $ 35,767 $ 35,748
========= ========= =========
Income taxes paid $ -- $ 2,226 $ 1,061
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Cumulative Total
Common Stock Translation Retained Note Shareholders'
Adjustment Earnings Receivable Equity
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1994 $101,100 $(171) $ 9,526 $(500) $ 109,955
Net income -- -- 5,820 -- 5,820
Translation adjustment -- 30 -- -- 30
-------- ----- -------- ----- ---------
Balance, September 30, 1995 101,100 (141) 15,346 (500) 115,805
Net income -- -- 5,714 -- 5,714
Payment received on note receivable -- -- -- 77 77
Translation adjustment -- (181) -- -- (181)
-------- ----- -------- ----- ---------
Balance, September 30, 1996 101,100 (322) 21,060 (423) 121,415
Net loss -- -- (46,671) -- (46,671)
Payment received on note receivable -- -- -- 52 52
Translation adjustment -- (185) -- -- (185)
-------- ----- -------- ----- ---------
Balance, September 30, 1997 $101,100 $(507) $(25,611) $(371) $ 74,611
======== ===== ======== ===== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
As used in these notes, unless the context otherwise requires, the
"Company" shall refer to Sweetheart Holdings Inc. and its subsidiaries,
including Sweetheart Cup Company Inc.
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation and Translation -
The financial statements include all of the accounts of the Company and
its subsidiaries on a consolidated basis as of September 30, 1997 and 1996 and
for the years ended September 30, 1997, 1996 and 1995. For all periods
presented, the consolidated financial statements include all of the accounts of
the Company's United States operations (Sweetheart Holdings Inc. and its
domestic subsidiaries, Sweetheart Cup Company Inc. and Sweetheart Receivables
Corporation) and Lily Cups Inc., a Canadian subsidiary. Assets and liabilities
of Lily Cups Inc. are translated at the rates of exchange in effect at the
balance sheet date. Income amounts are translated at the average of the monthly
exchange rates. The cumulative effect of translation adjustments is deferred and
classified as a cumulative translation adjustment. All significant intercompany
and intergroup accounts and transactions have been eliminated.
(b) Cash and Cash Equivalents -
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash overdrafts are
reclassified to accounts payable and accrued payroll and related costs. Cash
balances related to Sweetheart Receivables Corporation are restricted from
transfer to other entities within the Company. Restricted cash is shown
separately on the balance sheet. The balance of restricted cash was $29.0
million and $28.9 million at September 30, 1997 and 1996, respectively. Cash
received as proceeds from the sale of assets is restricted to qualified capital
expenditures under the Bond Indentures (see Note 10), and is held in escrow with
the trustee until utilized. The balance of cash in escrow was $13.3 million at
September 30, 1997.
(c) Inventories -
Inventories are carried at the lower of cost or market as described in
Note 2 Spare parts of $20.1 million at September 30, 1996 were reclassified from
inventories to other current assets.
(d) Assets held for sale -
Property, plant, and equipment for the Bakery division was reclassified
as held for sale at September 30, 1997. The Bakery division was sold on November
30, 1997, as discussed in Note 15.
(e) Property, Plant and Equipment -
Property, plant and equipment is recorded at cost, less accumulated
depreciation, and is depreciated on the straight-line method over the estimated
useful lives of the assets, with the exception of property, plant, and equipment
acquired prior to January 1, 1991, which is depreciated on the declining balance
method.
The asset lives of buildings and fixtures range between 12 and 50 years
and have an average useful life of 38 years. The asset lives of equipment range
between 5 and 18 years and have an average useful life of 13 years.
35
<PAGE>
(f) Revenue Recognition -
Sales of the Company's products are recorded based on shipment of
products.
(g) Income Taxes -
Deferred income taxes are provided to recognize temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. The principal differences relate to depreciation expense,
pension and postretirement benefits and LIFO inventory.
No deferred income taxes have been provided on the cumulative
undistributed earnings of the Canadian subsidiary of Sweetheart Cup Company Inc.
Those earnings (approximately $12.8 million) are considered permanently
reinvested under Accounting Principles Bulletin No. 23. The incremental U.S. tax
costs (deferred taxes) of repatriating these earnings would not be material.
(h) Employee Benefit Plans (also see Note 7) -
The Company has various defined benefit plans and a defined
contribution plan for substantially all employees who meet eligibility
requirements. Benefits under the defined benefit plans are based on years of
service, and funding is in accordance with actuarial requirements of the plans,
subject to provisions of the Employee Retirement Income Security Act. The
Company makes contributions to the defined contribution plan in accordance with
the plan's provisions.
(i) Postretirement Health Care Plans (also see Note 8) -
The Company sponsors various defined benefit postretirement health care
plans that cover substantially all employees who meet eligibility requirements.
These plans are not funded by the Company.
(j) Reclassifications -
Certain prior year balances have been reclassified to conform with
current presentation.
(k) Impact of Recently Issued Accounting Standards -
In October 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock Based Compensation, which
provides an alternative to APB Opinion No. 25, Accounting for Stock Issued to
Employees in accounting for stock based compensation issued to employees. The
Company has adopted only the disclosure provisions of Statement 123, and the
impact was not material.
In October 1996, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption of SFAS 121 did not
have a material impact on net income. In the fourth quarter of fiscal year 1997,
the Company recorded a loss on asset disposal and impairment. See Note 14.
During 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share, No. 129, Disclosure of Information about Capital
Structure, No. 130, Reporting Comprehensive Income, and No. 131, Disclosures
about Segments of an Enterprise and Related Information. These statements
address presentation and disclosure matters and will have no impact on the
Company's financial position or results of operations. These statements become
effective during the Company's fiscal years 1998 and 1999 and will be adopted as
applicable.
36
<PAGE>
On November 20, 1997, the Emerging Issues Task Force (EITF) reached a
consensus on Issue 97-13 regarding reengineering costs. This consensus provides
guidance about what activities constitute business process reengineering in
connection with the development and installation of software for internal use
and concludes that all reengineering costs, including those incurred in
connection with a software installation, should be expensed as incurred. The
Company has capitalized costs such as those described above through fiscal year
1997, and is required to expense these costs as a cumulative change in
accounting principle in the first quarter of fiscal year 1998. The Company has
not yet calculated the impact of this requirement.
(l) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(2) INVENTORIES
The components of inventories and their valuation methods are as
follows (in thousands):
September 30, September 30,
1997 1996
-------------- -------------
Components-
Raw materials and supplies $ 32,302 $ 35,166
Finished products 108,842 129,956
Work in progress 7,701 7,716
-------- --------
$148,845 $172,838
======== ========
Valued at lower of cost or market -
First in, first out ("FIFO") $ 15,300 $ 17,011
Last in, first out ("LIFO") 133,545 155,827
-------- --------
$148,845 $172,838
======== ========
Had inventories valued on the LIFO basis been stated on a FIFO basis,
inventories would have been $6,568,000 and $3,999,000 lower than reported at
September 30, 1997 and 1996, respectively. Cost of sales on a FIFO basis would
have been higher by $2,569,000 and $11,538,000 for the years ended September 30,
1997 and 1996, respectively, and lower by $21,022,000 for the year ended
September 30, 1995.
37
<PAGE>
(3) PROPERTY, PLANT AND EQUIPMENT
The Company's major classes of property, plant and equipment are as
follows (in thousands):
September 30, September 30,
1997 1996
----------------- --------------
Land $ 23,801 $ 26,008
Buildings 85,808 90,760
Machinery and equipment 394,754 375,404
Construction in progress 23,636 35,222
-------- --------
Total 527,999 527,394
-------- --------
Accumulated depreciation 145,508 99,561
-------- --------
Net property, plant and equipment $382,491 $427,833
======== ========
(4) OTHER ASSETS
The components of long term other assets are as follows (in thousands):
September 30, September 30,
1997 1996
------------ ---------------
Debt issuance costs, net of
accumulated amortization $ 8,159 $ 12,874
Intangible pension asset
(see Note 7) 860 2,484
Prepaid assets 2,423 1,299
Other 1,713 1,988
---------- ----------
Total long-term $ 13,155 $ 18,645
========== ==========
Amortization of the above debt issuance costs totaled approximately
$5.2 million, $3.6 million and $3.5 million for the years ended September 30,
1997, 1996 and 1995, respectively, of which $3.6 million of the 1997 costs are
included as interest expense in the accompanying statement of operations. During
the year ended September 30, 1997, the Company accelerated $1.6 million of
amortization for the debt issuance costs related to Sweetheart Receivables
Corporation and the 1993 Credit Agreement, both of which were refinanced
subsequent to year end (See Note 10). This charge is shown as an extraordinary
loss (net of $627,000 of income taxes) on the consolidated statement of
operations.
38
<PAGE>
(5) OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------------------- ---------------------
<S> <C> <C>
Sales allowances $ 7,052 $ 6,023
Restructuring costs 13,201 4,934
Taxes other than income taxes 2,841 2,288
Litigation, claims and assessments
(see Note 16) 15,445 15,196
Interest payable 2,806 2,798
Other 2,470 2,679
----------- -----------
Total $ 43,815 $ 33,918
=========== ===========
(6) OTHER NON CURRENT LIABILITIES
The components of other non-current liabilities are as follows (in
thousands):
September 30, September 30,
1997 1996
------------------------- ---------------------
Post retirement health care benefits
(see Note 8) $ 57,983 $ 58,725
Pensions 9,761 13,620
Other 2,031 11,715
----------- -----------
Total $ 69,775 $ 84,060
=========== ===========
</TABLE>
38
<PAGE>
(7) EMPLOYEE BENEFIT PLANS
A majority of the employees ("participants") are covered under a 401(k)
defined contribution plan. The Company's annual contributions to this defined
contribution plan represent a 50% match on participant contributions. The
Company's match is limited to participant contributions up to 6% of participant
salaries. In addition, the Company is allowed to make discretionary
contributions. Costs charged against operations for this defined contribution
plan were approximately $3,586,000, $3,715,000 and $3,681,000 for the years
ended September 30, 1997, 1996 and 1995, respectively. Certain employees are
covered under defined benefit plans. Benefits under the plans are generally
based on fixed amounts for each year of service.
The components of net pension expense for domestic defined benefit
plans are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 30, 1997 September 30, 1996 September 30, 1995
---------------------- --------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,111 $ 1,078 $ 952
Interest cost 3,720 3,545 3,230
Projected return
on assets (3,212) (2,874) (1,637)
Net amortization 262 188 16
---------- ---------- ----------
Net pension
expense $ 1,881 $ 1,937 $ 2,561
========== ========== ==========
</TABLE>
The status of defined benefit pension plans using data as of the most
recent actuarial valuation dates is as follows (in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
----------------------- ----------------------
<S> <C> <C>
Actuarial present value of
benefit obligations -
Vested benefits $ 41,616 $ 37,231
Nonvested benefits 11,094 10,741
---------- ----------
Accumulated and projected
benefit obligation 52,710 47,972
Plan assets at fair value 39,243 31,023
---------- ----------
Funded status (13,467) (16,949)
Unrecognized prior service cost 1,529 2,484
Unrecognized net gain 473 (626)
Adjustment required to recognize
minimum liability (860) (2,484)
----------- -----------
Net pension liability $ (12,325) $ (17,575)
=========== ===========
</TABLE>
40
<PAGE>
As required by SFAS No. 87, "Employers' Accounting for Pensions," the
Company recognized additional pension liabilities of $860,000 and $2,484,000 as
of September 30, 1997 and 1996, respectively, and equal amounts as other assets.
Actuarial assumptions used in calculating the above amounts include a
10% return on plan assets for the years ended September 30, 1997 and 1996, a
7.5% discount rate on benefit obligations as of September 30, 1997, a weighted
average discount rate of 7.5% for the year ended September 30, 1997, a 8.0%
discount rate on benefit obligations as of September 30, 1996, and a 7.75%
weighted average discount rate for the first six months and 8.0% for the second
six months of the year ended September 30, 1996.
Data with respect to the Lily Cups Inc., Canada defined benefit plan is
not material and is not included in the above data.
(8) POSTRETIREMENT HEALTH CARE PLANS
The Company sponsors various defined benefit postretirement health care
plans that cover substantially all full-time employees. The plans, in most
cases, pay stated percentages of most medical expenses incurred by retirees,
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants generally become eligible after reaching
age 60 with one year of participation. The majority of the Company's plans are
contributory, with retiree contributions adjusted annually. The accounting for
the plans anticipates future cost-sharing changes to the written plan that are
consistent with the Company's announced policies. The Company does not fund the
plans.
The following table analyzes the plans' unfunded, accrued
postretirement health care cost liability as reflected on the balance sheet (in
thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
----------------------- ----------------------
<S> <C> <C>
Accumulated Postretirement Benefit
Obligation:
Retirees $ 24,936 $ 25,596
Other fully eligible participants 5,731 6,472
Other active participants 12,166 17,577
----------- -----------
42,833 49,645
Unrecognized prior service cost 4,861 1,536
Unrecognized actuarial gain 13,389 10,644
----------- -----------
Accrued postretirement health care
cost liability $ 61,083 $ 61,825
=========== ===========
</TABLE>
41
<PAGE>
The components of net postretirement health care cost are as follows
(in thousands):
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 30, 1997 September 30, 1996 September 30, 1995
---------------------- --------------------------------------------
<S> <C> <C> <C>
Service cost-
benefits attributed
to service during
the period $ 859 $ 1,533 $ 1,497
Interest cost on
accumulated post-
retirement benefit
obligation 3,098 3,868 4,134
Net amortization
and deferral (1,326) (187) (118)
---------- ---------- ----------
Net postretirement
health care cost $ 2,631 $ 5,214 $ 5,513
========= ========= =========
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%, and 8.0% at September 30, 1997 and
1996, respectively. Net postretirement health care cost was computed using a
weighted average discount rate of 8.0% for the year ended September 30, 1997,
7.75% for the year ended September 30, 1996, and 8.5% for the year ended
September 30, 1995. For measuring the expected postretirement benefit
obligation, a 10% annual rate of increase in the per capita claims cost was
assumed for 1997. This rate is assumed to decrease by 1.0% per year to an
ultimate rate of 5.0%. The health care cost trend rate assumption has a
significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of September 30,
1997 and September 30, 1996 by approximately $2.2 million and $2.8 million,
respectively, and the aggregate of the service and interest cost components of
net postretirement health care cost by approximately $0.2 million for the year
ended September 30, 1997, and $0.4 million for each of the years ended September
30, 1996 and 1995.
42
<PAGE>
(9) INCOME TAXES
The income tax benefit (provision) includes the following components
(in thousands):
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 30, 1997 September 30, 1996 September 30, 1995
---------------------- --------------------------------------------
<S> <C> <C> <C>
Current-
Federal $ - $ - $ -
State - - -
Foreign - (1,164) (759)
--------- ---------- ----------
Total current - (1,164) (759)
--------- ---------- ----------
Deferred -
Federal 26,165 (2,315) (2,829)
State 3,738 (330) (315)
Foreign 584 - -
---------- ----------- ----------
Total deferred 30,487 (2,645) (3,144)
--------- ---------- ----------
$ 30,487 $ (3,809) $ (3,903)
========= ========== ==========
</TABLE>
The effective tax rate varied from the U.S. Federal tax rate of 35% for
the years ended September 30, 1997, 1996 and 1995 as a result of the following:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 30, September 30, September 30,
1997 1996 1995
-------------------- --------------------- ----------------------
<S> <C> <C> <C>
U.S. Federal tax rate 35% 35% 35%
State income taxes, net of
U.S. Federal tax impact 4 4 4
Other, net 1 1 1
------ ------ ------
Effective tax rate 40% 40% 40%
===== ===== ======
</TABLE>
At September 30, 1997, the Company had deferred tax liabilities of $167
million, of which $32 million are current in nature, and deferred tax assets of
$182 million, of which $35 million are current in nature. Deferred tax assets
and liabilities have been netted as a current asset and a non-current liability
in the accompanying Consolidated Balance Sheets. The principal temporary
differences included above are depreciation, a $75 million liability, LIFO
inventory, a $22 million liability, net operating loss carryforwards, a $67
million asset, postretirement health and pension benefits, a $28 million asset,
and $17 million of other net miscellaneous asset items.
The Company has net operating loss carryforwards for income tax
purposes of approximately $170 million, of which $5 million expire in 2004, $51
million expire in 2005, $25 million expire in 2006, $13 million expire in 2007,
$28 million expire in 2008, and $48 million expire in 2012.
43
<PAGE>
(10) LONG-TERM OBLIGATIONS
Long-term debt, including amounts payable within one year, is as
follows (in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------------- -----------------
<S> <C> <C>
(i) Sweetheart Cup Company Inc.
Senior Secured Notes, at 9.625%, interest payable semiannually on March 1 and
September 1 of each year, commencing March 1, 1994, due on September 1, 2000,
and are subject to redemption on or after September 1, 1997 at the option of
the Company, in whole or in part, at the redemption prices set forth below
(expressed as percentages of the principal amount), plus accrued interest to
the redemption date, for redemptions during the 12 month period beginning
September 1, of the
following years: $190,000 $190,000
1997 -- 103.208%, 1998 -- 101.604%, and
1999 -- 100.000%
Senior Subordinated Notes, at 10.50%, interest payable semiannually on March 1
and September 1 of each year, commencing March 1, 1994, due on September 1,
2003, and are subject to redemption on or after September 1, 1998 at the
option of the Company, in whole or in part, at the redemption prices set
forth below (expressed as percentages of the principal amount), plus accrued
interest to the redemption date, for redemption during the 12 month period
beginning September 1, of the following years:
1998 -- 103.938%, 1999 -- 102.625%, 110,000 110,000
2000 -- 101.313%, and 2001 and
thereafter -- 100.000%
Revolving Loan at Bankers Trust's prime rate plus 1.50%, or Bankers Trust's
Eurodollar rate plus 2.50%, subject to certain limitations as well as
downward adjustment for any interest period beginning after October 1, 1994
upon the satisfaction of certain financial criteria, due on August 30, 1998
(interest rates - 10.0% and 7.91%) 60,000 15,800
(ii) Sweetheart Receivables Corporation
Sweetheart Receivables Corporation Series 1994-1 A-V Trade Receivables-Backed
Notes, a private placement, at Telerate one month LIBOR plus .40%. Interest
payable monthly commencing on October 17, 1994 through the Scheduled Pay-Out
Period
44
<PAGE>
starting July 31, 1999 (interest rates-6.06% and 5.90% at September 30,
1997 and 1996). 60,000 60,000
(iii) Lily Cups Inc.
Term Facility, at Bank of Nova Scotia's prime rate plus 1.25% payable quarterly,
due in equal annual repayments commencing October 31, 1994 and ending October
31, 1998 (interest rates - 6.0% and 7.0% at September 30, 1997 and 1996) $ 2,737 $ 4,210
Operating Facility, at Bank of Nova Scotia's prime rate plus 1.25%, repaid and
reborrowed until October 31, 1998, subject to satisfaction of certain
conditions on the date of any such borrowing (interest rates - 6.0% and 7.0%
at September 30, 1997 and 1996) 5,431 3,304
----------- ------------
428,168 383,314
----------- ------------
Less - Current portion of long-term debt (1,369) (1,435)
------------ -------------
$426,799 $381,879
=========== ============
</TABLE>
The aggregate annual maturities of long-term debt at September 30, 1997
are as follows (in thousands):
1998 $ 1,369
1999 66,799
2000 250,000
2001 -
2002 -
2003 and thereafter 110,000
---------
$428,168
Long-term bonds consist of four industrial development bonds and a loan
from the State of Maryland with interest rates ranging from 6.0% to 6.75%, due
in varying amounts through 2006. The aggregate annual maturities of long-term
bonds at September 30, 1997 are as follows (in thousands):
1998 $ -
1999 2,500
2000 -
2001 -
2002 -
2003 and thereafter 1,200
-------
$3,700
45
<PAGE>
The maximum month-end balances outstanding, average amounts
outstanding, and the weighted average interest rates on the domestic Revolving
Loan Facility and Canadian Operating Facility during the years ended September
30 were as follows (in thousands, except for interest rates):
<TABLE>
<CAPTION>
Domestic Revolving Loan Facility Canadian Operating Facility
-------------------------------- ---------------------------
1997 1996 1997 1996
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Maximum month-end balances
outstanding $60,000 $23,000 $6,123 $4,321
======= ======= ====== ======
Average amounts outstanding $48,194 $8,660 $4,843 $3,564
======= ====== ====== ======
Weighted average interest rates
8.52% 8.63% 6.10% 8.16%
===== ===== ===== =====
</TABLE>
The 1993 Credit Agreement and the Sweetheart Receivables Corporation Series
1994-1 A-V Trade Receivables-Backed Notes were refinanced subsequent to
September 30, 1997. See Note 15 for details.
1993 Credit Agreement
On August 30, 1993, the Company entered into the 1993 Credit Agreement,
which provided for a $40 million Term Loan and a $75 million Revolving Loan
Facility. The Company prepaid the $40 million Term Loan on September 20, 1994 in
connection with the issuance of the Sweetheart Receivables Corporation 1994-1
A-V Trade Receivables-Backed Notes and it may not be reborrowed. Additionally,
certain terms and conditions of the Credit Agreement were amended. The Revolving
Loan Facility is limited to 50% of eligible inventory of Sweetheart Cup Company
Inc. (up to a maximum of $150 million of eligible inventory). In addition, the
combined borrowings outstanding under the Revolver plus the Sweetheart
Receivables Corporation 1994-1 A-V Trade Receivables-Backed Notes less the
aggregate amount of cash on deposit in certain Sweetheart Receivables
Corporation accounts may not exceed $115 million in aggregate. The Revolving
Loan borrowings were $60.0 million at September 30, 1997 and $15.8 million at
September 30, 1996.
The borrowings under the 1993 Credit Agreement bear interest, at
Sweetheart Cup Company Inc.'s option, at Bankers Trust Company's prime rate plus
1.50% or, subject to certain limitations, at Bankers Trust Company's Eurodollar
rate plus 2.50%. Interest rates may be reduced by 0.25% as of October 1, 1994,
and on the first day of any fiscal quarter thereafter, depending upon Sweetheart
Cup Company Inc.'s ratios of cash flow coverage to interest expense. Up to $15
million of the Revolving Loan Facility may be utilized to issue Letters of
Credit. Approximately $9.7 million in Letters of Credit were issued on behalf of
Sweetheart Cup Company Inc. as of September 30, 1997 and 1996. The 1993 Credit
Agreement also provides for the payment of a commitment fee of 0.5% per annum on
the daily average unused amount of the commitments under the Revolving Loan
Facility (approximately $104,600 and $299,600 for the years ended September 30,
1997 and 1996, respectively, as well as a 2.75% per annum fee on outstanding
Letters of Credit (approximately $254,000 and $272,400 for the years ended
September 30, 1997 and 1996, respectively).
Loans made pursuant to the Revolving Loan Facility can be borrowed,
repaid, and reborrowed from time to time until final maturity on August 30,
1998. The 1993 Credit Agreement provides for partial mandatory prepayments upon
the issuance of equity by Sweetheart Holdings Inc. or any of its subsidiaries,
and full repayment upon any change of control (as defined in the 1993 Credit
Agreement). The Revolving
46
<PAGE>
Loan Facility also requires a $20 million clear-down period between December 1
and January 31 of each year, commencing December 1, 1994, whereby the average
unused revolver during any consecutive 31-day period within the clear-down
period must average $20 million; failure to do so results in an immediate
reduction of the Revolving Loan Facility by $20 million effective immediately
succeeding February 1.
The indebtedness of Sweetheart Cup Company Inc. under the 1993 Credit
Agreement is guaranteed by Sweetheart Holdings Inc. and secured by a first
priority perfected security interest in inventory, spare parts and all proceeds
of the foregoing of Sweetheart Cup Company Inc., a first priority security
interest, shared with the holders of the Senior Secured Notes, in Shared
Collateral (as defined in the 1993 Credit Agreement to include primarily all
capital stock owned by Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
and of each of their respective present and future direct subsidiaries, all
intercompany indebtedness payable to Sweetheart Holdings Inc. or Sweetheart Cup
Company Inc. by Sweetheart Holdings Inc., Sweetheart Cup Company Inc. or their
respective present and future subsidiaries, and any proceeds from business
interruption insurance), and a second priority perfected security interest in
the Senior Secured Note collateral as described below.
Senior Secured Notes and Senior Subordinated Notes
Sweetheart Cup Company Inc. is the obligor with respect to $190 million
of Senior Secured Notes and $110 million of Senior Subordinated Notes. The
Senior Secured Notes were issued pursuant to an Indenture among Sweetheart Cup
Company Inc., Sweetheart Holdings Inc., as Guarantor, and United States Trust
Company of New York, as Trustee (the "Senior Secured Indenture"). The Senior
Secured Notes bear interest at 9.625% per annum, payable semi-annually in
arrears on March 1 and September 1 each year to holders of record on February 15
or August 15 next preceding the interest payment date. The Senior Secured Notes
mature on September 1, 2000 and were issued in denominations of $1,000 and
integral multiples thereof.
The Senior Secured Notes are secured by a first priority lien on the
Senior Secured Note collateral (which includes all material properties and
equipment and substantially all of the other assets of Sweetheart Cup Company
Inc., but excludes collateral under the 1993 Credit Agreement, the capital stock
of its subsidiaries, and intercompany indebtedness) and by a second lien on
collateral under the 1993 Credit Agreement (primarily accounts receivable,
inventory, and proceeds thereof as described above). The Senior Secured Notes
and borrowings under the 1993 Credit Agreement are also jointly secured by
Shared Collateral (comprised of pledges of the capital stock of Lily Canada, the
capital stock of any direct subsidiaries formed or acquired in the future,
future intercompany notes, and the proceeds of business interruption insurance).
The Senior Secured Indenture contains various covenants which prohibit,
or limit, among other things, asset sales, change of control, dividend payments,
equity repurchases or redemptions, the incurrence of additional indebtedness,
the issuance of disqualified stock, certain transactions with affiliates, the
creation of additional liens, and certain other business activities. The Senior
Secured Notes may be redeemed at the dates and prices indicated in the table
above.
The Senior Subordinated Notes were issued pursuant to an Indenture
among Sweetheart Cup Company Inc., Sweetheart Holdings Inc., as Guarantor, and
U.S. Trust Company of Texas, N.A., as Trustee (the "Senior Subordinated
Indenture"). The Senior Subordinated Notes bear interest at 10.50% per annum,
payable semi-annually in arrears on March 1 and September 1 each year to holders
of record on the February 15 or August 15 next preceding the interest payment
date. The Senior Subordinated Notes mature on September 1, 2003 and were issued
in denominations of $1,000 and integral multiples thereof.
47
<PAGE>
The Senior Subordinated Notes are subordinate in right of payment to
the prior payment in full of all Senior Secured Notes, all borrowings under the
1993 Credit Agreement, and all other indebtedness not otherwise prohibited. As a
result of the subordination provisions, and in the event of an insolvency or
liquidation proceeding, holders of the Senior Subordinated Notes may recover a
lesser percentage of their investment than other creditors of the Company.
The Senior Subordinated Indenture contains various covenants which
prohibit, or limit, among other things, asset sales, change of control, dividend
payments, equity repurchases or redemptions, the incurrence of additional
indebtedness, the issuance of disqualified stock, certain transactions with
affiliates, the creation of additional liens, and certain other business
activities. The Senior Subordinated Notes may be redeemed at the dates and
prices indicated in the table above.
Sweetheart Receivables Corporation Series 1994-1 A-V
Trade Receivables-Backed Notes
Sweetheart Cup Company Inc. securitizes its receivables through its
wholly owned limited purpose, bankruptcy-remote finance subsidiary, Sweetheart
Receivables Corporation ("SRC"). This structure is intended to segregate
receivables from Sweetheart Cup Company Inc.'s other assets or liabilities and
achieve a lower cost of funds based on the credit quality of the receivables.
On September 20, 1994, SRC issued and sold to Bankers Trust as
Placement Agent, $60 million of Series 1994-1 A-V Trade Receivables-Backed Notes
(the "Notes"), under an indenture and security agreement. The proceeds of the
notes were used to purchase substantially all of the receivables of Sweetheart
Cup Company Inc. on the closing date. SRC's share of the proceeds of collections
on those receivables will be used to purchase newly generated receivables from
Sweetheart Cup Company Inc. on an ongoing basis.
SRC's purchase of receivables from Sweetheart Cup Company Inc. is
intended to be a "true sale" for bankruptcy law purposes and without recourse to
Sweetheart Cup Company Inc., except that Sweetheart Cup Company Inc. will be
required to make payment to SRC for certain dilution of the receivables and will
remain liable for making payments in connection of certain customary
representations and covenants.
SRC grants the Trustee, Manufacturer's and Traders Trust, a first
perfected security interest in the receivables and certain other related assets,
subject to certain limited exceptions. The holders of the Notes have no recourse
to the assets of SRC in respect of obligations under the Notes. Noteholders are
protected by over-collateralization of receivables on the Notes requiring
certain amounts to be set aside in an equalization account and four months of
interest set aside in the carrying cost account by the Trustee. These amounts
may be invested by SRC in highly rated liquid investments such as A-1+
commercial paper and AAA moneymarket funds as rated by Standard & Poors
Corporation. These amounts are shown on the consolidated balance sheet as
restricted cash. Restricted cash totaled $29.0 million and $28.9 million at
September 30, 1997 and 1996, respectively. Sweetheart Cup Company Inc. retains a
promissory note which pays interest monthly at prime rate, subject to certain
limitations, on these and other balances due from SRC.
Sweetheart Cup Company Inc. acts as servicer of the receivables sold.
The interest rate is based on Telerate's one month LIBOR plus .40% and is paid
monthly. The Notes have a first scheduled principal payment date of July 31,
1999 and have a stated maturity date of September 30, 2000. There are certain
early voluntary and involuntary liquidation events. Noteholders are entitled to
certain breakage payments if the Notes are prepaid in part or whole prior to
July 31, 1998. The breakage payment is equal to the present value of the .40%
spread for the period from the prepayment date until the first scheduled
principal payment date, multiplied by the amount of principal prepayment.
48
<PAGE>
The SRC promissory note and equity held by Sweetheart Cup Company Inc.
constitute Shared Collateral which is a first priority interest shared under the
Credit Agreement and Senior Secured Notes.
Canadian Credit Agreement
On December 20, 1989, Lily Cups Inc. entered into a Term and Revolving
Credit Facilities Agreement (the "Canadian Credit Agreement"), consisting of CDN
$14.0 million of Term Advances and CDN $6.0 million of Operating Advances.
Effective August 30, 1993, the Canadian Credit Agreement was renegotiated and
extended to provide for equal annual repayments on the remaining CDN $9.5
million Term Facility of CDN $1.9 million beginning October 31, 1994 and ending
October 31, 1998 and to provide for an additional CDN $1.0 million of Operating
Advances in addition to the CDN $6.0 million Operating Facility previously
available. The renegotiated and extended Operating Facility provides for a final
repayment on October 31, 1998. Lily Cups Inc. has pledged substantially all its
assets as collateral for the Canadian Credit Agreement. The Company is charged a
0.5% fee with respect to any unused balance available under the Canadian Credit
Agreement as renegotiated and extended. At September 30, 1997 and 1996, the
available capacity under the Canadian Credit Agreement was CDN $1.4 million and
CDN $2.4 million, respectively (U.S. $1.0 million and U.S. $1.8 million,
respectively).
(11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments held by the Company:
Current assets and current liabilities - The carrying amount
approximates fair value because of the short maturity of those
instruments.
Long-term bonds - The carrying amount approximates fair value based on
the nature of the instrument.
Long-term debt - The fair value of the Company's Senior Secured Notes
and the Senior Subordinated Notes are based on the quoted market prices
at the end of the fiscal years. The other instruments have variable
interest rates that fluctuate along with current market conditions.
The estimated fair values of the Company's financial instruments at
September 30 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
------------------- ------------------ -------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,650 $ 2,650 $ 4,371 $ 4,371
Other current assets 308,763 308,763 311,761 311,761
Current portion of long-term debt
and bonds 1,369 1,369 1,535 1,535
Other current liabilities 163,276 163,276 152,218 152,218
Long-term bonds 3,700 3,700 3,700 3,700
Long-term debt 426,799 428,271 381,879 388,792
</TABLE>
The fair value of the Company's long-term debt is estimated to be
$1,472,000 higher than the carrying value at September 30, 1997 and $6,913,000
higher than the carrying value at September 30, 1996. The differences are
primarily the result of fluctuations in the interest rate market since the
issuance of the Company's Senior Secured Notes and Senior Subordinated Notes.
(12) LEASE COMMITMENTS
The Company leases certain transportation vehicles, warehouse and
office facilities, and machinery and equipment under both cancelable and
non-cancelable operating leases, most of which expire within ten years and may
be renewed by the Company. Rent expense under such arrangements totaled
$16,756,000, $15,636,000 and $12,417,000 for the years ended September 30, 1997,
1996 and 1995, respectively. Future minimum rental commitments under
non-cancelable operating leases in effect at September 30, 1997 are as follows
(in thousand of dollars):
1998 $12,116
1999 11,207
2000 9,083
2001 7,533
2002 6,767
2003 and thereafter 11,026
------
$57,732
Data with respect to Lily Cups Inc.'s rental commitments for the years
1998 and thereafter is not material and is not included in the above table.
(13) SHAREHOLDERS' EQUITY
Sweetheart Holdings Inc. has a single-class capital structure
consisting of 3,000,000 shares of common stock, par value $.01 per share. As of
August 30, 1993, 1,040,000 shares of single-class stock were issued to AIP,
First Plaza Group Trust (Mellon Bank, N.A., as Trustee) and AT&T Master Pension
Trust (Leeway and Company as nominee) for approximately $100.5 million. All
outstanding shares of single-class common stock are deemed fully paid and
nonassessable. The single-class common stock is neither redeemable nor
convertible, and the holders thereof have no preemptive or other subscription
rights to purchase any securities of Sweetheart Holdings Inc. There currently is
no public market for this common stock. During the third quarter of fiscal year
1994, the Company issued 6,000 authorized shares of common stock for $100 per
share. The Company received approximately $100,000 in cash and a $500,000
promissory note in consideration for the shares. The promissory note is
reflected as a reduction to shareholders' equity in the consolidated balance
sheet. There were 1,046,000 shares of single-class common stock outstanding as
of September 30, 1997 and 1996.
Subject to Delaware law and limitations in certain debt instruments
(Senior Secured Notes, Senior Subordinated Notes, and borrowings under the 1993
Credit Agreement), common shareholders are entitled to receive such dividends as
may be declared by Sweetheart Holdings Inc.'s Board of Directors out of funds
legally available thereof. In the event of a liquidation, dissolution or winding
up of Sweetheart Holdings, Inc., common shareholders are entitled to share
ratably in all assets remaining after payment or provision
50
<PAGE>
for payment of debts or other liabilities of Sweetheart Holdings Inc. Each
outstanding common share is entitled to one vote on any matter submitted to a
vote of stockholders. This single-class common stock has no cumulative voting
rights.
The Board of Directors of Sweetheart Holdings Inc. approved the Stock
Option and Purchase Plan (the "Plan") during fiscal year 1994 which provides for
the granting of nonqualified and incentive stock options as defined by the
Internal Revenue Code. The Plan is administered by the Compensation Committee
(the "Committee") of the Board of Directors. The Committee has the authority to
select participants, grant stock purchase options, and make all necessary
determinations for the administration of the Plan. The exercise price per share
of common stock under each option is fixed by the Committee at the time of the
grant of the option and is equal to at least 100% of the fair market value of a
share of common stock on the date of grant, but not less than $100 per share.
The Committee determines the term of each option which may not exceed ten years
from the date of grant of the option. Options are exercisable in equal
increments over fiscal years 1994, 1995, 1996, and 1997, depending on certain
operating results of the Company. Any options not exercisable within the above
years are exercisable on the ninth anniversary of the grant of the option. Under
the provisions of the Plan, the Committee may also grant participants the
short-term option to purchase shares of common stock at a price per share equal
to not less than the fair market value of the common stock on the date of grant.
Short-term options expire 30 days after the date of grant to the extent not
exercised.
The Plan provides for the issuance of up to 103,000 shares of common
stock in connection with the stock options granted under the Plan. Options that
are canceled or expire unexercised are available for future grants. All options
are granted via approval of the Board of Directors. The Company granted 30,135
and 10,400 options during 1997 and 1996, respectively. Options canceled totaled
11,035 and 6,140 during 1997 and 1996, respectively. At September 30, 1997,
31,827 shares were available for the granting of additional options. As the
Company's stock is privately held, the value of the common stock is assumed to
be $100 per share at all times during the year. Although no options were
exercised during fiscal year 1996, and 13,818 shares were exercisable at
September 30, 1997.
(14) NON-RECURRING CHARGES
The Company incurred non-recurring charges in 1997 attributable to
plant restructuring and an impairment of certain long-lived assets.
In the fourth quarter of fiscal 1997, the Company adopted a
restructuring plan designed to improve efficiency and enhance its
competitiveness. Restructuring charges consist of cash charges primarily related
to severance costs, as well as costs to close and exit the Riverside facility,
and cease paper operations at the Springfield facility, substantially all of
which will be paid in fiscal 1998. The Company anticipates substantial
completion of this restructuring in fiscal 1998.
As a result of market conditions experienced by the Company and the
decision to close facilities as described above, the Company reviewed the
carrying value of its long-lived assets. Certain assets were identified which
would be disposed of, abandoned or become obsolete prior to the end of their
accounting useful lives, and were written-down accordingly, resulting in a
pre-tax non-cash charge totaling $24.6 million.
The loss on asset disposal and impairment had no impact on the
Company's 1997 cash flow or its ability to generate cash flow in the future. As
a result of this charge, depreciation expense related to these assets will
decrease in future periods.
51
<PAGE>
(15) SUBSEQUENT EVENTS
1997 Amended and Restated Credit Agreement
On October 24, 1997, the Company entered into the 1997 Amended and
Restated Credit Agreement, which provides for a $135 million Revolving Credit
Facility with Bank of America Business Credit, as Agent and various other
Financial Institutions. At closing on October 24, 1997, Bank of America Business
Credit acquired the outstanding amount of loans from Bankers Trust Company, made
under the 1993 Credit Agreement, referred to in Note 10. The 1993 Credit
Agreement was Amended and Restated to increase the facility size to $135
million, and include receivables as collateral, which had previously been sold
to Sweetheart Receivables Corporation as described in Note 10. The Company then
reacquired the receivables at SRC with the proceeds of the 1997 Amended and
Restated Credit Agreement, enabling SRC repay the Sweetheart Receivables
Corporation 1994-1 A-V Trade Receivables-Backed Notes with those proceeds and
existing restricted cash. Additionally, certain other terms and conditions of
the Credit Agreement were amended.
Availability under the Amended and Restated Credit Agreement is limited to 60%
of eligible inventory constituting raw material and work-in-process, and 65% of
eligible inventory constituting finished goods, and 40% of eligible inventory
constituting in-transit inventory of Sweetheart Cup Company Inc. (up to a
maximum of $100 million of eligible inventory). Additionally, eligible accounts
from customers, subject to certain restrictions, are allowed to 85%. These
calculations are subject to an overall maximum 80% of account's not more than 60
days past due, plus 50% of book value of inventory.
The borrowings under the 1997 Amended and Restated Credit Agreement
bear interest, at Sweetheart Cup Company Inc.'s option, at Bank of America's
prime rate plus 1.00% or, subject to certain limitations, at Bank of America's
Eurodollar rate plus 2.25%. Additionally, the Company must pay certain other
annual and on-going expenses to Bank of America, as Agent. Up to $15 million of
the Facility may be utilized to issue Letters of Credit. The letter of Credit
Fee is 1.75% per annum, plus out of pocket fees and expense. The 1997 Amended
and Restated Credit Agreement also provides for the payment of a commitment fee
of 0.5% per annum on the daily average unused amount of the commitments under
the Facility.
Loans made pursuant to the Revolving Loan Facility can be borrowed,
repaid, and reborrowed from time to time until final maturity on August 1, 2000.
The 1997 Amended and Restated Credit Agreement provides for partial mandatory
prepayments upon the issuance of equity by Sweetheart Holdings Inc. or any of
its subsidiaries, and full repayment upon any change of control (as defined in
the Agreement).
The indebtedness of Sweetheart Cup Company Inc. under the 1997 Amended
and Restated Credit Agreement is guaranteed by Sweetheart Holdings Inc. and
secured by a first priority perfected security interest in inventory, spare
parts, accounts receivable and all proceeds of the foregoing of Sweetheart Cup
Company Inc., a first priority security interest, shared with the holders of the
Senior Secured Notes, in Shared Collateral (as defined in the 1993 Credit
Agreement to include primarily all capital stock owned by Sweetheart Holdings
Inc. and Sweetheart Cup Company Inc. and of each of their respective present and
future direct subsidiaries, all intercompany indebtedness payable to Sweetheart
Holdings Inc. or Sweetheart Cup Company Inc. by Sweetheart Holdings Inc.,
Sweetheart Cup Company Inc. or their respective present and future subsidiaries,
and any proceeds from business interruption insurance), and a second priority
perfected security interest in the Senior Secured Note collateral as described
below.
The 1997 Amended and Restated Credit Agreement contains various
covenants which limit, or restrict, among other things, indebtedness, dividends,
leases, capital expenditures, the use of proceeds from asset sales and certain
other business activities. Additionally, the Company must maintain on a
52
<PAGE>
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 1997 Amended and
Restated Credit Agreement.
Bakery Sale
On November 30, 1997, the Company entered into an agreement to sell
assets of its bakery operation to Ace Baking Company Limited Partnership. Assets
sold included property, plant, and equipment, which have been reclassified to
assets held for sale, and inventories. Consideration of $22.3 million was
received, including $20.3 million of cash, and a $2 million non-interest bearing
note. A gain of $4.5 million will be recognized in fiscal year 1998. Bakery
operations represented 3% of net sales in fiscal year 1997.
(16) RELATED-PARTY TRANSACTIONS
AIP, which is Sweetheart Holdings Inc.'s largest stockholder and is a
private investment partnership which makes equity investments, principally in
industrial and manufacturing companies in the United States, is managed by AIPM,
an affiliate of AIP. AIPM receives an annual fee of approximately $1.85 million
for providing general management, financial and other corporate advisory
services, and is reimbursed for certain out-of-pocket expenses. The fees are
paid to AIPM pursuant to a management services agreement among AIPM, Sweetheart
Holdings Inc. and Sweetheart Cup Company Inc.
In addition, for the year ended September 30, 1996, the Company
reimbursed AIPM for $950,000 of expenses incurred in connection with an
investigation of the Company's strategic alternatives.
(17) BUSINESS SEGMENT AND MAJOR CUSTOMERS
The Company operates in a single industry which is the manufacture and
distribution of paper and plastic related products in foodservice and food
packaging disposables. Sales to a major customer accounted for 13.7%, 13.6% and
13.0% for the years ended September 30, 1997, 1996 and 1995, respectively.
(18) CONTINGENCIES
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation was initially filed in state
court in Georgia in April 1987, and is currently pending against the Company in
federal court. The remaining issue involved in the case is a claim 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 ("ERISA"). In December 1994, the United States Circuit Court of Appeals
for the Eleventh Circuit (the "Circuit Court") ruled that the Plan was
terminated on December 31, 1986. Following that decision, the plaintiffs sought
a rehearing which was denied, and subsequently filed a petition for a writ of
certiorari with the United States Supreme Court, which was also denied.
Following remand, in March 1996 the United States District Court for the
Southern District of Georgia entered a judgment in favor of the Company.
Following denial of a motion for reconsideration, the plaintiffs in April 1997
filed an appeal with the Circuit Court.
Management believes that the Company will ultimately prevail on the
remaining issues in the Aldridge litigation. Due to the complexity involved in
connection with the claims asserted in this case, the
53
<PAGE>
Company cannot determine at present with any certainty the amount of damages it
would be required to pay should the plaintiffs prevail; accordingly, there can
be no assurance that such amount would not have a material adverse effect on the
Company's financial position or results of operations.
The Company is subject to a variety of environmental and pollution
control laws and regulations in all jurisdictions in which it operates. The
Company is also involved in various other claims and lawsuits incidental to its
business. In the opinion of management, the ultimate liabilities, if any, after
considering the reserves established relating to these matters, will not
materially affect the Company's financial position or results of operations.
(19) SUMMARIZED FINANCIAL INFORMATION FOR SWEETHEART CUP COMPANY INC.
The following tables provide summarized financial information for
Sweetheart Cup Company Inc. and subsidiaries (in thousands):
September 30, September 30,
1997 1996
------------------ ------------------
Current assets $562,731 $572,259
Noncurrent assets 176,382 174,006
Current liabilities 114,415 127,728
Noncurrent liabilities 563,065 519,635
Prior year amounts below have been reclassified as noted in Note 1,
item (j):
For the For the For the
year ended year ended year ended
September 30, September 30, September 30,
1997 1996 1995
------------------ ----------------------------------
Net sales $886,017 $959,818 $986,618
Gross profit 37,128 95,503 71,873
Income (loss) from
continuing operations
before extraordinary loss (36,143) 20,213 766
Net income (loss) (37,083) 20,213 766
(20) SUBSEQUENT EVENT
On March 12, 1998, the stockholders of the Company consummated an
agreement with SF Holdings Group, Inc. ("Buyer") and Creative Expressions Group,
Inc., an affiliate of Buyer. Pursuant to the agreement Buyer acquired from the
Company's stockholders 48% of the Company's outstanding common stock and all of
a new class of non-convertible, non-voting common stock, as a result of which
Buyer holds 90% of the total number of outstanding shares of both classes of the
Company's common stock. Upon
55
<PAGE>
consummation of the transaction, the Company's existing stockholders nominated
three of the Company's five directors and Buyer nominated two directors.
Significant actions by the Company's Board of Directors will require the vote of
four directors. Additionally, pursuant to the agreement, The Fonda Group, Inc.,
affiliate of Buyer, manages the day-to-day operations of the Company. The
Company incurred $2.6 million of severance expenses as a result of the
termination of certain officers of the Company pursuant to certain executive
separation agreements. The Company also incurred financial advisory and legal
expenses of approximately $4.4 million in connection with the transaction.
(21) UNAUDITED SUBSEQUENT EVENT
In the quarter ended March 31, 1998, the Company recognized certain
one-time charges, consisting primarily of $4.4 million of financial advisory and
legal fees associated with the investment by SF Holdings and $3.7 million of
severance expenses as a result of the termination of certain officers of the
Company pursuant to executive separation agreements and retention plans for
certain key executives.
In the quarter ended March 31, 1998, the Company reduced its salaried
workforce by approximately 15% and hourly workforce by less than 5%, and decided
to rationalize certain product lines, and in connection therewith, disposed of
the associated property and equipment. In connection with such plans, the
Company recognized $10.5 million of charges for severance and asset disposition
costs, of which $5.0 million of cash expenditures remain unpaid as of March 31,
1998. The Company anticipates substantial completion of this restructuring
within the next twelve months.
Subsequent to the close of the bakery business as described in Note 15,
the Company revised its estimate of the gain on such sale to $3.5 million, which
has been reflected in the Company's unaudited financial statements for the six
months ended March 31, 1998.
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
----
Report of Independent Public Accountants 57
Schedule II - Valuation and Qualifying Accounts 58
56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Sweetheart Holdings Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Sweetheart Holdings Inc. and Subsidiaries
included in this Form 10-K and have issued our reports thereon dated December 8,
1997 (except with respect to the matter discussed in Note 20, as to which the
date is March 12, 1998). Our audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
schedule listed in the accompanying index is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
December 8, 1997
(except with respect to
the matter discussed in
Note 20, as to which the
date is March 12, 1998)
57
<PAGE>
SCHEDULE II
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
------------------------------
Balance at Charged to Charged Balance at
beginning costs and to other end of
Classifications of period expenses (1) accounts (2) Deductions (3) period
------------- -------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended September 30, 1997 $ 2,466 $ 446 $ 51 $ 1,223 $ 1,740
Year ended September 30, 1996 2,524 369 46 473 2,466
Year ended September 30, 1995 2,468 556 9 509 2,524
</TABLE>
(1) Current year provision for doubtful accounts.
(2) Includes recoveries on accounts previously written off, translation
adjustments and reclassifications.
(3) Accounts written off.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Owings
Mills, State of Maryland, on July 10, 1998.
SWEETHEART HOLDINGS INC.
(Registrant)
By: /S/ DENNIS MEHIEL
-------------
Dennis Mehiel
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on July 10, 1998, by the following persons
in the capacities indicated:
SIGNATURE CAPACITY
/s/ DENNIS MEHIEL
------------------ Chief Executive Officer and Chairman
Dennis Mehiel of the Board
/s/ THOMAS ULEAU
----------------- President, Chief Operating Officer
Thomas Uleau and Director
/s/ W. RICHARD BINGHAM
----------------------- Director
W. Richard Bingham
/s/ THEODORE C. ROGERS Director
-----------------------
Theodore C. Rogers
/s/ LAWRENCE W. WARD Director
---------------------
Lawrence W. Ward
/s/ HANS H. HEINSEN
-------------------- Vice President-Finance and Chief
Hans H. Heinsen Financial Officer (Principal Financial
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 44,989
<SECURITIES> 0
<RECEIVABLES> 87,514
<ALLOWANCES> 1,740
<INVENTORY> 148,845
<CURRENT-ASSETS> 311,413
<PP&E> 527,999
<DEPRECIATION> 145,508
<TOTAL-ASSETS> 719,530
<CURRENT-LIABILITIES> 144,645
<BONDS> 430,499
0
0
<COMMON> 101,100
<OTHER-SE> (26,489)
<TOTAL-LIABILITY-AND-EQUITY> 719,530
<SALES> 886,017
<TOTAL-REVENUES> 886,017
<CGS> 821,021
<TOTAL-COSTS> 821,021
<OTHER-EXPENSES> 100,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,265
<INCOME-PRETAX> (76,218)
<INCOME-TAX> (30,487)
<INCOME-CONTINUING> (45,731)
<DISCONTINUED> 0
<EXTRAORDINARY> (940)
<CHANGES> 0
<NET-INCOME> (46,671)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
