UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 26, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from ______ to _____
Commission file number 33-91600
SWEETHEART HOLDINGS INC.*
(Exact name of registrant as specified in its charter)
Delaware 06-1281287
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10100 Reisterstown Road, Owings Mills, Maryland 21117
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 410/363-1111
Securities of the Registrant registered pursuant to Section 12(b) of the Act:
None
Securities of the Registrant registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the Registrant held
by non-affiliates of the Registrant as of November 24, 1999. 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 November
24, 1999:
Sweetheart Holdings Inc. Class A Common Stock, $0.01 par value - 1,046,000
shares
Sweetheart Holdings Inc. Class B Common Stock, $0.01 par value - 4,393,200
shares
* The Registrant is the guarantor of the 9 5/8% Senior Secured Notes due 2000
and the 10 1/2% Senior Subordinated Notes due 2003 (collectively, the
"Sweetheart Notes") of Sweetheart Cup Company Inc., a wholly owned subsidiary of
the Registrant.
Page 1 of 55
<PAGE>
PART I
Item 1. BUSINESS
General
Sweetheart Holdings Inc. ("Sweetheart Holdings"), together with its
wholly owned subsidiary Sweetheart Cup Company Inc. ("Sweetheart Cup," and
collectively with Sweetheart Holdings 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 Fiscal 1999, the
Company had net sales of approximately $864 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(R),
Lily(R), Trophy(R), Jazz(R) and Preference(TM) for cups and plates and Silent
Service(R), Centerpiece(R), Basix(R), Guildware(R) and Simple Elegance(R) 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.
On March 12, 1998, SF Holdings Group, Inc. ("SF Holdings") purchased
48% of the voting stock and 100% of the non-voting stock, or 90% of the
Company's total outstanding stock from the then existing shareholders (the "SF
Holdings Investment"). The Company's business is the successor to the businesses
of Maryland Cup Corporation, which was founded in 1911 and was a major supplier
of paper and plastic disposable foodservice and food packaging products, and
Lily-Tulip, Inc.
Products
The Company has historically sold its products to two principal
customer groups, institutional foodservice and food packaging. Institutional
foodservice customers primarily purchase disposable hot and cold drink cups,
lids, food containers, plates, bowls, cutlery and straws. Products are sold
directly and through distributors to quick service restaurant chains, full
service restaurants, convenience stores, hospitals, airlines, theaters, school
systems and other institutional customers. Food packaging customers primarily
purchase paper and plastic containers for the dairy and food processing
industries. Food packaging customers also lease filling and packaging machines
designed and manufactured by the Company that fill and seal the Company's
containers in customers' plants. The Company manufactures and markets its
products in Canada to national accounts and distributors. During Fiscal 1999,
the Company began selling consumer foodservice products primarily through
grocery stores, club stores and convenience stores.
The Company's institutional foodservice customer base focuses on two
major customer groups, national accounts and distribution. Institutional
foodservice is the Company's largest customer group, accounting for
approximately 82% of gross sales during Fiscal 1999. Management believes the
Company is the largest manufacturer of disposable foodservice products in North
America.
The Company manufactures a broad line of disposable products. Paper,
foam and plastic cups, lids and straws represent the largest part of the
Company's 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) for both hot and cold beverages. Brand names of the Company's principal
beverage service products include Sweetheart(R), Lily(R), Trophy(R),
Preference(TM), Jazz(R), Gallery(R), Clarity(R), Lumina(R), ClearLight(TM) and
Go Cup(TM).
The Company also offers a variety of other foodservice products, which
includes paper, foam, and plastic plates and bowls, portion cups and cutlery.
These products are sold to a broad array of commercial and on-site foodservice
operators.
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The Company also offers carry-out service products consisting of paper
and plastic tubs, containers, lids and hinged foam containers. The Company
believes it is one of the largest manufacturers of paper tubs for chicken,
popcorn and take-out foods in North America. Munchie Cup(R), Flexstyles(R),
Highlights(R) bowls, Maximizers(TM) and Scoop Cup are some of the Company's
carry-out service brands.
Other products include the Company's Flex-E-Form(R) straight-wall paper
manufacturing technology and Flex-Guard(R), a spiral wound tamper-evident lid.
In addition, the Company provides foodservice customers with retail packages
sold through retailers under various Sweetheart and private label brands.
To enhance product sales, the Company designs, manufactures and leases
container filling and lidding equipment to dairies and other food processors to
package food items in the Company's containers at their plants. The Company's
filling and lidding equipment is leased to customers under the trade names
Auto-Pak(TM), Flex-E-Fill(R) and FoodPac(R). 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 and squeeze-up
desserts.
Marketing and Sales
The Company's institutional and consumer foodservice products are
primarily sold to national accounts and through distributors to other end users.
Food packaging customers include national and regional dairies and food
companies.
The Company focuses its marketing efforts on both the distributor and
end-user customer. The Company tailors programs, consisting of products, price,
promotional and merchandising materials, training and sales/marketing coverage
to effectively meet the specific needs of target customers and markets. The
Company sells these programs through a direct sales organization. The Company
supports this process through the development of innovative new products,
materials and processes, while leveraging its strong brand recognition and
national network of manufacturing and distribution centers.
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 historically is substantially
higher during late spring and summer than during fall and winter. See "Item 2.
Properties".
Raw Materials and Suppliers
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 North American
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 and
high and low density polyethylene) purchased directly from major petrochemical
companies and other resin suppliers. Resin is processed and formed into cups,
cutlery, meal service products, straws, lids and containers. The Company
manufactures foam products by extruding sheets of plastic foam material that are
converted into cups and plates.
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
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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 who compete across the
full line of the Company's products, as well as those who 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
and have greater access to financial and other resources. The Company's primary
competitors in its institutional and consumer foodservice customer base include
Dart Container Corporation, Fort James, Solo Cup Co., International Paper Food
Service Group and Tenneco Inc. Major competitors in its food packaging customer
base include Cardinal Plastics, Inc., Landis Plastics, Inc., Norse Dairy
Systems, Inc., Polytainer, Ltd. and Sealright Co., Inc.
Customers
The Company markets its products primarily to customers in the United
States. During Fiscal 1999, sales to the Company's customers in Canada
constituted approximately 7% of its net sales. During Fiscal 1999, sales to the
Company's five largest customers represented approximately 32.3% of its net
sales. One national customer of the Company accounted for 11.7% of net sales.
The loss of one or more large national customers could adversely affect the
Company's operating results. The Company believes it has strong relationships
with its major national accounts which have been developed over many years.
Environmental Matters
The Company and its operations are subject to comprehensive and
frequently changing federal, state, foreign and local environmental and
occupational health and safety laws and regulations, including laws and
regulations governing emissions of air pollutants, discharges of waste and storm
water and the disposal of hazardous wastes. The Company is subject to liability
for the investigation and remediation of environmental contamination (including
contamination caused by other parties) at properties that it owns or operates
and at other properties where the Company or its predecessors have arranged for
the disposal of hazardous substances. As a result, the Company is involved from
time to time in administrative and judicial proceedings and inquiries relating
to environmental matters. The Company believes that, except as noted below,
there are currently no pending investigations at the Company's plants and sites
relating to environmental matters. However, there can be no assurance that the
Company will not be involved in any such proceeding in the future and that any
amount of future clean up costs and other environmental liabilities will not be
material.
The Company cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist. Enactment of more stringent laws or regulations or a more
strict interpretation of existing laws and regulations may require additional
expenditures by the Company, some of which could be material.
The Clean Air Act mandates the phase out of certain refrigerant
compounds which will require the Company to upgrade or retrofit air conditioning
and chilling systems during the next few years. The Company has decided to
replace units as they become inefficient or unserviceable.
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
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not believe the costs associated with such program will be material to its
business or financial condition.
On July 13, 1999, the Company received a letter from the Environmental
Protection Agency ("EPA") identifying the Company, among numerous others, as a
"potential responsible party" under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, at a site in Baltimore,
Maryland. The EPA letter states that it does not constitute a final
determination by EPA concerning the liability of the Company or any other
entity. The Company denies liability and has no reason to believe the final
outcome of this matter will have a material effect on the Company's financial
condition or results of operations. However, no assurance can be given about its
ultimate effect on the Company, if any, given the early stage of this
investigation.
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.
Employees
At September 26, 1999, the Company employed approximately 6,245
persons, of whom approximately 5,292 persons were hourly employees.
Approximately 93.5% of the employees are located at facilities in the United
States. The Company currently has collective bargaining agreements in effect at
its facilities in 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.
As of September 26, 1999, approximately 19.5% of the Company's hourly employees
were covered by the Sweetheart CBAs. The current expiration dates of the
Springfield, Augusta and Toronto CBAs are March 4, 2001, October 31, 2002 and
November 30, 2000, respectively. The Company considers its relationship with its
employees to be good.
5
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Item 2. PROPERTIES
The Company has manufacturing and distribution facilities located
throughout the United States and Canada. All of the Company's facilities are
well maintained, in good operating condition and suitable for the Company's
operations. The table below provides summary information regarding the
properties owned or leased by the Company.
<TABLE>
<CAPTION>
Size
Type of Owned/ (Approximate
Location Facility (1) Leased square feet)
-------- ------------ ------ ------------
<S> <C> <C> <C>
Augusta, Georgia ........................... M/W O 339,000
Baltimore, Maryland ........................ W L 194,000
Conyers, Georgia (2 facilities)............. M/W O 350,000
W O 555,000
Chicago, Illinois (2 facilities)............ M/W O 902,000
W L 587,000
Dallas, Texas .............................. M/W O 1,316,000
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 L 400,000
Owings Mills, Maryland (3 facilities)....... M/W O 1,533,000
M/W O 267,000
W(2) O 406,000
Somerville, Massachusetts................... M/W O 193,000
Springfield, Missouri (2 facilities)........ M/W O 925,000
W L 415,000
Wilmington, Massachusetts................... W(3) L 307,000
Toronto, Ontario ........................... M/W O 185,000
</TABLE>
- ---------------------
(1) M-Manufacturing; W-Warehouse; M/W-Manufacturing and Warehouse in same
facility.
(2) Under contract of sale.
(3) Leased space was reduced from 400,000 in prior year.
The Company also leases a warehouse in Augusta, Georgia which was
closed in the latter part of Fiscal 1997. The Company is currently subleasing
such property to a third party through March 31, 2001 and will continue to
actively seek to sublet the property through the lease termination date, March
31, 2008.
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Item 3. LEGAL PROCEEDINGS
Aldridge. A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary
Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil Action
No. CV 187-084, initially filed in state court in Georgia in April 1987, is
currently pending in federal court. The remaining plaintiffs claimed, among
other things, that the Company wrongfully terminated the Lily-Tulip, Inc. Salary
Retirement Plan (the "Plan") in violation of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The relief sought by plaintiffs was
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 lawfully 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 (the "District Court")
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 of their appeal which petition was denied on July 29, 1998. In
October 1998, plaintiffs filed a Petition for Writ of Certiorari to the United
States Supreme Court, which was denied in January 1999. The Company has begun
the process of paying out the termination liability. As of November 19, 1999,
the Company has disbursed $4.2 million in termination payments.
On April 27, 1999, the plaintiffs filed a motion in the District Court
for reconsideration of the court's dismissal without appropriate relief and a
motion for attorneys' fees with a request for delay in determination of
entitlement to such fees. On June 17, 1999, the District Court deferred these
motions and ordered discovery in connection therewith. Discovery is expected to
be completed by the end of December 1999. 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 operations.
Fort James Corporation. A patent infringement action seeking injunctive
relief and damages relating to the Company's production and sale of certain
paper plates 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. During the fourth
quarter of Fiscal 1999, mediation resulted in a settlement of this action
whereby the Company agreed to pay damages of $2.6 million. This amount has been
fully reserved by the Company, with the first of two payments, $1.6 million,
made on September 30, 1999. The second payment of $1.0 million is due July 1,
2000.
Environmental. On July 13, 1999, the Company received a letter from the
EPA identifying the Company, among numerous others, as a "potential responsible
party" under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, at a site in Baltimore, Maryland. The EPA
letter states that it does not constitute a final determination by EPA
concerning the liability of the Company or any other entity. The Company denies
liability and has no reason to believe the final outcome of this matter will
have a material effect on the Company's financial condition or results of
operations. However, no assurance can be given about its ultimate effect on the
Company, if any, given the early stage of this investigation.
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 financial position or results of
operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Sweetheart Cup is a wholly owned subsidiary of Sweetheart Holdings,
which is a privately-held corporation. No equity securities of Sweetheart
Holdings or Sweetheart Cup are publicly traded or registered under the
Securities Exchange Act of 1934, as amended, and there is no public trading
market for the stock.
Payment of cash dividends is restricted under the instruments governing
the Company's indebtedness. The Company has not paid cash dividends and does not
anticipate paying any cash dividends in the foreseeable future.
As of November 24, 1999, there were eleven holders of Sweetheart
Holdings' Class A Common Stock and one holder of Sweetheart Holdings' Class B
Common Stock.
Item 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are selected historical consolidated financial data of
the Company at the dates and for the fiscal years shown. The selected historical
consolidated financial data at September 26, 1999 and September 27, 1998 and for
Fiscal 1998 and 1999 is derived from historical consolidated financial
statements of the Company and subsidiaries for such periods that have been
audited by Deloitte & Touche, LLP, independent auditors and are included
elsewhere herein. The selected historical consolidated financial data at
September 30, 1997, September 30, 1996 and September 30, 1995 and for Fiscal
1997, 1996 and 1995 is 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. Fiscal 1997
Consolidated Statements of Operations and Other Comprehensive Income (Loss),
Consolidated Statements of Cash Flows and Consolidated Statements of
Shareholders' Equity are included elsewhere herein.
On June 1, 1998, the Company changed its method of accounting for
inventories from the last-in first-out (LIFO) method to the first-in first-out
(FIFO) method. Management believes that the FIFO method is preferable because it
more accurately presents the Company's financial position as it reflects more
recent costs at the balance sheet date and more accurately matches revenues with
costs reported during the period presented. The financial statements of prior
periods have been restated to apply the FIFO method of accounting for
inventories retroactively. Net income increased or (decreased) by $(0.1)
million, $(1.1) million, $(7.4) million and $12.6 million in Fiscal 1998, 1997,
1996 and 1995, respectively.
During Fiscal 1997, the Company accelerated $1.6 million of
amortization for unamortized debt issuance costs related to the early retirement
of debt. This charge is shown as an extraordinary loss (net of $0.6 million of
income taxes) on the Consolidated Statements of Operations and Other
Comprehensive Income (Loss). During the quarter ended December 31, 1997, the
Company recorded a $1.5 million expense as a cumulative effect of change in
accounting principle (net of $1.0 million of income taxes) relating to the
implementation of EITF 97-13, which requires companies to expense any previously
capitalized reengineering costs in connection with software installation.
8
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<TABLE>
<CAPTION>
Fiscal
------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997 1996 1995
-------------- --------------- --------------- --------------- ---------------
Operating Data:
<S> <C> <C> <C> <C> <C>
Net sales $863,781 $843,502 $886,017 $959,818 $986,618
Cost of sales 763,750 787,706 822,818 859,029 853,571
------- ------- ------- ------- -------
Gross profit 100,031 55,796 63,199 100,789 133,047
Selling, general and 67,406 68,818 66,792 61,788 66,089
administrative
Other (income) expense, net (1,180) 12,400 (73) 4,271 (1,197)
Asset impairment expense - 5,000 24,550 - -
Restructuring charge (credit) (512) 897 9,680 - -
-------- --------- -------- -------- -------
Operating income (loss) 34,317 (31,319) (37,750) 34,730 68,155
Interest expense, net 41,671 42,955 40,265 37,517 37,410
-------- -------- -------- -------- -------
Income (loss) before taxes (7,354) (74,274) (78,015) (2,787) 30,745
Income tax benefit (expense) 2,941 29,711 31,206 1,115 (12,312)
Cumulative effect of change in
accounting principle - 1,511 - - -
Extraordinary loss - - 940 - -
-------- -------- -------- ------- -------
Net income (loss) $(4,413) $(46,074) $(47,749) $(1,672) $18,433
======== ========= ========= ======== =======
Balance Sheet Data (at end of
period):
Property, plant and equipment,
net $331,676 $355,224 $382,491 $427,833 $417,563
Total assets 634,640 665,626 715,589 757,839 749,445
Long-term debt * 118,446 422,438 430,499 385,579 369,181
Shareholders' equity 18,274 18,983 70,670 118,552 120,328
* See Note 10 of the Notes to Consolidated Financial Statements.
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Forward-looking statements in this filing, including those in the Notes
to Consolidated Financial Statements, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties and actual
results could differ materially. Such risks and uncertainties include, but are
not limited to, general economic and business conditions, competitive market
pricing, increases in raw material costs, energy costs and other manufacturing
costs, fluctuations in demand for the Company's products, potential equipment
malfunctions, pending litigation and the ability to remedy Year 2000 related
issues.
General
On March 12, 1998, SF Holdings purchased 48% of the voting stock and
100% of the non-voting stock, or 90% of the Company's total outstanding stock
from the then existing shareholders. The Company's business is the successor to
the businesses of Maryland Cup Corporation, which was founded in 1911 and was a
major supplier of paper and plastic disposable foodservice and food packaging
products, and Lily-Tulip, Inc. In conjunction with the SF Holdings Investment,
American Industrial Partners Capital Fund, L.P. ("AIP") assigned the Management
Services Agreement, as amended, to SF Holdings which assigned its interest to
Fonda Group Inc. ("Fonda"), a wholly owned subsidiary of SF Holdings.
On October 22, 1998, the Company's Board of Directors approved a change
in the Company's fiscal year end from September 30 to the 52 or 53 week period
ending on the last Sunday in September. This change became effective for Fiscal
1998, which is the period from October 1, 1997 through September 27, 1998;
Fiscal 1999 is the period from September 28, 1998 through September 26, 1999.
The Fiscal 1997 period is shown as the historical period from October 1, 1996
through September 30, 1997.
The Company has historically sold its products to two principal
customer groups, institutional foodservice and food packaging. Institutional
foodservice customers primarily purchase disposable hot and cold drink cups,
lids, food containers, plates, bowls, cutlery and straws. Products are sold
directly and through distributors to quick service restaurant chains, full
service restaurants, convenience stores, hospitals, airlines, theaters, school
systems and other institutional customers. Food packaging customers primarily
purchase paper and plastic containers for the dairy and food processing
industries. Food packaging customers also lease filling and packaging machines
designed and manufactured by the Company that fill and seal the Company's
containers in customers' plants. The Company manufactures and markets its
products in Canada to national accounts and distributors. During Fiscal 1999,
the Company began selling consumer foodservice products primarily through
grocery stores, club stores and convenience stores. During Fiscal 1998, the
Company sold its bakery operations.
The Company's business is seasonal, as away from home consumption of
disposable products increases in the late spring and summer. This results in
disproportionately higher net income in the last six months of the fiscal year
as cost absorption improves resulting from a more profitable sales and
production mix.
Fiscal 1999 Compared to Fiscal 1998
Net sales increased $20.3 million, or 2.4%, to $863.8 million in Fiscal
1999 compared to $843.5 million in Fiscal 1998. Excluding the impact of the
December 1997 bakery business sale, which resulted in a $3.0 million decrease in
sales, net sales increased $23.3 million, or 2.8%, reflecting a 2.8% increase in
sales volume to domestic customers, partially offset by a 0.4% decrease in
average realized domestic sales price. The decrease in average realized sales
price reflects a shift in sales from higher priced food packaging customers
towards institutional foodservice customers. Sales volume to institutional
foodservice customers increased 3.9% primarily as a result of the Company's
focus on revenue growth
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with key customers. Sales volume to food packaging customers decreased 5.2%,
primarily resulting from decreases in demand by large accounts in the food
packaging customer base due to market conditions, such as consolidation of
customers and competition. Net sales to Canadian customers increased $4.4
million, or 8.0%, primarily due to increased sales volume from the introduction
of new products.
Gross profit increased $44.2 million, or 79.3%, to $100.0 million in
Fiscal 1999 compared to $55.8 million in Fiscal 1998. As a percentage of net
sales, gross profit increased to 11.6% in Fiscal 1999 from 6.6% in Fiscal 1998.
This improvement is attributable to a shift in sales to a more profitable
product mix and the cost reduction initiatives implemented by the Company in the
latter part of Fiscal 1998, including reductions in workforce, expense controls
and improved manufacturing efficiencies.
Selling, general and administrative expenses decreased $1.4 million, or
2.1%, to $67.4 million in Fiscal 1999 compared to $68.8 million in Fiscal 1998.
As a percentage of net sales, selling, general and administrative expenses
decreased to 7.8% in Fiscal 1999 from 8.2% in Fiscal 1998. This decrease is due
primarily to cost savings associated with headcount reductions made in the
second quarter of Fiscal 1998, which is partially offset by increased legal
expenses of $2.0 million related to the Fort James settlement. See "Item 3.
Legal Proceedings".
Restructuring charge (credit) was adjusted resulting in income of $0.5
million in Fiscal 1999 compared to an expense of $0.9 million in Fiscal 1998. In
March 1998, the Company established restructuring reserves primarily for
severance and related costs in connection with workforce reductions. This plan
has been completed, resulting in a reversal of $0.5 million.
Other (income) expense, net was $1.2 million of income in Fiscal 1999
compared to $12.4 million of expense in Fiscal 1998. In Fiscal 1999, the Company
recognized $1.2 million gain on the sale of property, plant and equipment.
Operating income (loss) increased $65.6 million to $34.3 million in
Fiscal 1999 compared to an operating loss of $31.3 million in Fiscal 1998 due to
the reasons described above.
Interest expense, net decreased $1.3 million, or 3.0%, to $41.7 million
in Fiscal 1999 compared to $43.0 million in Fiscal 1998. This decrease is
attributable to lower market interest rates on lower outstanding balances under
the Company's revolving credit facility, which was partially offset by a
reduction in interest income on escrow fund balances.
Income tax expense (benefit) decreased $26.8 million to $2.9 million in
Fiscal 1999 compared to $29.7 million in the Fiscal 1998. The effective rate for
Fiscal 1999 and 1998 was 40%.
Net income (loss) decreased $41.7 million, or 90.5%, to $4.4 million in
Fiscal 1999 compared to $46.1 million in Fiscal 1998 due to the reasons
described above.
Fiscal 1998 Compared to Fiscal 1997
Net sales decreased $42.5 million, or 4.8%, to $843.5 million in Fiscal
1998 compared to $886.0 million in Fiscal 1997. The December 1997 sale of the
bakery business resulted in a $27.9 million decrease in sales. Additionally, the
change in the Company's fiscal year end shortened the Company's 1998 fiscal
period by three days. The Company's net sales during such three day period
totaled $8.1 million. Excluding the impact of the bakery business sale and the
shortened reporting period, net sales decreased by $6.5 million, or 0.8%,
reflecting a 2.2% increase in domestic sales volume and a 3.1% average decrease
in domestic sales price. Price has been negatively impacted both by competition
in the
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<PAGE>
marketplace and by declining raw material prices. The benefit of lower raw
material prices is generally passed on to customers. Sales volume to
institutional foodservice customers increased 2.5% primarily as a result of the
Company's focus on revenue growth with key customers. Sales volume to food
packaging customers decreased 0.1%. Net sales to Canadian customers increased
$1.4 million, or 2.5%, primarily due to volume increases associated with
promotional programs offered by major customers in the second quarter of Fiscal
1998.
Gross profit decreased $7.4 million, or 11.7%, to $55.8 million in
Fiscal 1998 compared to $63.2 million in Fiscal 1997. As a percentage of net
sales, gross profit decreased to 6.6% in Fiscal 1998 from 7.1% in Fiscal 1997.
This decrease is partially attributable to charges relating to the Company's
initiative to eliminate certain slow-moving and low demand inventory items which
were recognized in the third quarter of Fiscal 1998. In addition, gross profit
was negatively impacted by the sale of the bakery business.
Selling, general and administrative expenses increased $2.0 million, or
3.0%, to $68.8 million in Fiscal 1998 compared to $66.8 million in Fiscal 1997.
As a percentage of net sales, selling, general and administrative expenses
increased to 8.2% in Fiscal 1998 from 7.5% in Fiscal 1997. The Company incurred
increased expenses primarily as a result of (i) increased sales and marketing
costs associated with the Company's focus on increasing sales volume with key
customers, (ii) costs associated with the Year 2000 readiness program, (iii)
maintenance and depreciation on the new MIS system and (iv) expenses associated
with employee relocation charges. These increased expenses were partially offset
in the third and fourth quarters of Fiscal 1998 by cost savings as a result of
headcount reductions and related spending as discussed below.
Restructuring charge (credit) decreased to $0.9 million in Fiscal 1998
compared to $9.7 million in Fiscal 1997. In March 1998, the Company reduced its
workforce and in connection therewith recognized charges of $5.1 million,
primarily for severance and related costs. This charge was offset by $4.2
million of the restructuring reserves as of September 30, 1997, which were
decreased due to a change in the restructuring plan as a result of a change in
senior management in connection with the SF Holdings Investment. See Note 15 of
the Notes to Consolidated Financial Statements.
Asset impairment expense decreased to $5.0 million in Fiscal 1998
compared to $24.5 million in Fiscal 1997. In March 1998, the Company decided to
rationalize certain product lines. As a result, the Company evaluated the
recoverability of the carrying value of the equipment and other assets utilized
for such product lines, which resulted in a $5.0 million charge to write down
the assets to their fair market value. The Company believes these product line
rationalizations will not have a material adverse effect on the Company's
results of operations or financial condition. See Note 15 of the Notes to
Consolidated Financial Statements.
Other (income) expense, net was $12.4 million of expense in Fiscal 1998
compared to $0.1 million of income in Fiscal 1997. In Fiscal 1998, the Company
recognized certain nonrecurring charges, consisting primarily of $4.4 million of
financial advisory and legal fees associated with the SF Holdings Investment,
$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, $3.4 million of expense based on
actuarial estimates associated with pending litigation and asset write- downs of
$1.8 million associated with the sale of the Riverside facility. These expenses
were offset in part by the $3.3 million gain on the sale of the bakery business.
Operating income (loss) decreased $6.5 million to $31.3 million in
Fiscal 1998 compared to $37.8 million in Fiscal 1997 due to the reasons
described above.
Interest expense, net increased $2.7 million, or 6.7%, to $43.0 million
in Fiscal 1998 compared
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<PAGE>
to $40.3 million in Fiscal 1997 due primarily to higher average use of revolving
credit borrowings and incremental interest paid on the portion of the revolving
credit facility used to refinance the SRC Series 1994-1 A-V Notes.
Income tax expense (benefit) decreased $1.5 million to $29.7 million in
Fiscal 1998 compared to $31.2 million in the Fiscal 1997. The effective rate for
the 1998 and 1997 Fiscal was 40%.
Cumulative effect of change in accounting principle was an expense
recorded to write-off previously capitalized costs as explained in Note 15 of
the Notes to Consolidated Financial Statements.
Net income (loss) decreased $1.6 million, or 3.5%, to $46.1 million in
Fiscal 1998 compared to $47.7 million in Fiscal 1997 due to the reasons
described above.
Liquidity And Capital Resources
Historically, the Company has relied on cash flow from operations and
revolving credit borrowings to finance its working capital requirements and
capital expenditures. In Fiscal 1999, the Company funded its capital
expenditures from the sale of assets and cash generated from operations. The
Company expects to continue this method of funding for its Fiscal 2000 capital
expenditures.
Net cash provided by operating activities in Fiscal 1999 was $49.8
million compared to net cash used in operating activities of $17.8 million in
Fiscal 1998. This is primarily due to the Company's improved operating
performance and a reduction in cash expended on non-recurring charges.
Working capital decreased $280.2 million to a deficit of $174.1 million
at September 26, 1999 from $106.1 million at September 27, 1998. This decrease
resulted primarily from the reclassification of the Senior Secured Notes which
mature on September 1, 2000 and the U.S. Credit Facility (as defined below)
which matures on August 1, 2000, totaling $274.5 million, from long-term to
current debt.
Capital expenditures for Fiscal 1999 were $30.8 million compared to
$37.5 million in Fiscal 1998. Capital expenditures in Fiscal 1999 included $13.8
million for new production equipment, $3.8 million for facility improvements and
$1.5 million for management information systems, with the remaining consisting
primarily of routine capital improvements. Funding for the Fiscal 1999 capital
expenditures was provided by cash generated from operations, $7.4 million from
the sale of machinery, including $2.4 million from the sale of paper plate
making equipment to an affiliated company, $1.7 million from the sale of a
manufacturing facility and $5.5 million from cash in escrow related to asset
sales in Fiscal 1998. During Fiscal 2000, the Company intends to continue to
rely on a combination of cash generated by operations and the sale of assets to
fund capital expenditures.
The Company's revolving credit facility allows up to $135.0 million in
borrowings, subject to borrowing base limitations (the "U.S. Credit Facility").
Borrowings under the U.S. Credit Facility mature on August 1, 2000 and as of
September 26, 1999, $42.3 million was available. Borrowings under the U.S.
Credit Facility bear interest, at the Company's election, at a rate equal to (i)
LIBOR plus 2.25% or (ii) a bank's base rate plus 1.00%, plus certain other fees.
The U.S. Credit Facility is secured by accounts receivable, inventory,
equipment, intellectual property, general intangibles and the net proceeds on
the sale of any of the foregoing. Although the Company intends to refinance this
debt, there can be no assurances that the Company will be able to obtain such
refinancing on terms and conditions acceptable to the Company.
The Company has a credit facility which provides for a term loan of up
to Cdn $10.0 million and revolving credit of up to Cdn $10.0 million (the
"Canadian Credit Facility"). Term loan borrowings
13
<PAGE>
under the Canadian Credit Facility are payable quarterly through May 2001 and
revolving credit borrowings and term loan borrowings have a final maturity date
of June 15, 2001. As of September 26, 1999, Cdn $4.3 million (approximately $2.9
million) was available under such facility. The Canadian Credit Facility is
secured by all the existing and thereafter acquired real and personal tangible
assets of Lily Cups Inc. ("Lily Cups"), a subsidiary of Sweetheart Cup, and the
net proceeds on the sale of any of the foregoing. Borrowings bear interest at an
index rate plus 2.25% with respect to the revolving credit borrowings and an
index rate plus 2.50% with respect to the term loan borrowings.
The Company's Senior Secured Notes mature on September 1, 2000. Prior
to that date, the Company may redeem these notes at a price equal to 100% of the
principal amount, plus accrued interest. Although the Company intends to
refinance this debt, there can be no assurances that the Company will be able to
obtain such refinancing on terms and conditions acceptable to the Company. The
Senior Secured Notes are secured by mortgages on the real property owned by the
Company. Payment of principal and interest of the Senior Subordinated Notes is
subordinate to the Senior Indebtedness (as defined therein), which includes the
U.S. Credit Facility and the Senior Secured Notes. The Company may, at its
election, redeem the Senior Subordinated Notes at any time at a redemption price
equal to a percentage (currently 102.625% and declining in annual increments to
100% after August 31, 2001) of the principal amount, plus accrued interest. The
Sweetheart Notes provide that upon the occurrence of a Change of Control (as
defined therein), the holders will have the option to require the redemption of
the Sweetheart Notes at a redemption price equal to 101% of the principal
amount, plus accrued interest.
The instruments governing the indebtedness of the Company contain
customary covenants and events of default, including without limitation,
restrictions on, subject to defined exceptions, the payment of dividends, the
incurrence of additional indebtedness, investment activities and transactions
with affiliates.
In January 1999, the United States Supreme Court denied plaintiffs'
Petition for Writ of Certiorari in the matter of Aldridge v. Lily-Tulip, Inc.
Salary Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil
Action No. CV 187-084. The court decided that the Plan was lawfully terminated.
On April 27, 1999, the Plaintiffs filed a motion in the District Court for
reconsideration of the court's dismissal without appropriate relief and a motion
for attorneys' fees with a request for delay in determination of entitlement to
such fees. On June 17, 1999, the District Court deferred these motions and
ordered discovery in connection therewith. Discovery is expected to be completed
by the end of December 1999. The Company has begun the process of paying out the
termination liability. As of the fiscal year ending September 26, 1999, the
Company had disbursed $3.7 million in termination payments. The initial estimate
of the total termination liability, less these payments, exceeds assets set
aside in the Plan by approximately $16.3 million, which amount has been fully
reserved by the Company. As of November 19, 1999, the Company has disbursed $4.2
million in termination payments. The remaining payments are expected to be paid
during Fiscal 2000. The Company's operating plan contemplates that cash
generated by operations and amounts available under the Company's credit
facilities will be sufficient to make the required payments under the Plan when
due. However, there can be no assurance that the Company will achieve its
operating plan and have the necessary cash to make these payments. Failure by
the Company to make such payments could have a material adverse effect on the
Company and its financial condition.
See "Item 3. Legal Proceedings".
A patent infringement action seeking injunctive relief and damages
relating to the Company's production and sale of certain paper plates 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. During the fourth quarter of Fiscal
1999, mediation resulted in a settlement of this action whereby the Company
agreed to pay damages of $2.6 million. This amount has been fully reserved by
the Company, with the first of two payments, $1.6 million, made on September
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30, 1999. The second payment of $1.0 million is due July 1, 2000.
Management believes that cash generated by operations, amounts
available under the Company's credit facilities and funds generated from asset
sales should be sufficient to meet the Company's expected operating needs,
including termination liabilities under the Plan, planned capital expenditures
and debt service requirements in the next twelve months.
Year 2000
Many of the Company's computer systems may be unable to process dates
beyond December 31, 1999. This could result in system failures or
miscalculations which could have material adverse effects on the Company's
business, financial condition or results of operations. The Company has
completed a Year 2000 readiness program intended to identify the programs and
infrastructures that could be affected by Year 2000 issues and resolve the
problems that were identified on a timely basis.
The Company has completed the hardware and operating systems conversion
phase. With respect to the application phase, the Company is Year 2000 ready in
all systems. The Company has also completed its internal assessment phase for
technology embedded within equipment and believes that a significant portion of
its manufacturing equipment will not be effected by Year 2000 issues due to its
operations use or it was Y2K ready when purchased. The Company has been in
contact with key vendors and business partners to ensure that key business
transactions will be Year 2000 ready. As of September 26, 1999, the Company has
received detailed business plans and commitments from the majority of these
vendors that they are or will be Year 2000 ready. The Company expects that its
business systems will be Year 2000 ready, but it may experience isolated
incidences of non-compliance and potential outages with respect to its
information technology infrastructure. The most likely "worst case scenario"
would be disruption of utility services. While such failures could affect
important operations of the Company, the Company cannot presently estimate
either the likelihood or the potential cost of such failures. The Company will
allocate internal resources, to be ready to take action, as a contingency plan,
should these events occur. Investors are cautioned, however, that the Company's
assessment of its readiness, the costs of performing the program and the risks
attendant thereto and the need for any additional contingency plans may change
materially in the future as the Year 2000 approaches.
As of September 26, 1999, $2.8 million had been spent, including $1.6
million in Fiscal 1999. The Company does not anticipate any further spending
under the Year 2000 readiness program. However, there can be no assurance that
the Company will identify all Year 2000 issues in advance of their occurrence or
that they will be able to successfully remedy all problems that are discovered.
Failure by the Company and/or its significant vendors and customers to complete
Year 2000 readiness programs in a timely manner could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the revenue stream and financial stability of existing customers
may be adversely impacted by Year 2000 problems which could cause fluctuations
in the Company's revenues and operating profitability.
Net Operating Loss Carryforwards
As of September 26, 1999, the Company had approximately $214 million of
net operating loss ("NOL") carryforwards for federal income tax purposes which
expire at various dates through 2019. Although the Company expects that
sufficient taxable income will be generated in the future to realize these NOLs,
there can be no assurance that future taxable income will be generated to
utilize such NOLs.
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Impact of Recently Issued Accounting Standards
The impact of recently issued accounting standards is discussed in Note
1 of the Notes to Consolidated Financial Statements.
Item7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
NONE
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
report, beginning on page 28.
Item 9. CHANGES IN AND DISAGREMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
16
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the directors,
executive officers and key employees of Sweetheart Holdings and Sweetheart Cup
as of November 24, 1999. 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.
Name Age Position
- ---- --- --------
Dennis Mehiel 57 Chairman and Chief Executive Officer of
Sweetheart Holdings and Sweetheart Cup
Thomas Uleau 55 President, Chief Operating Officer and
Director of Sweetheart Holdings and
Sweetheart Cup
W. Richard Bingham 63 Director of Sweetheart Holdings and
Sweetheart Cup
Kim A. Marvin 38 Director of Sweetheart Holdings and
Sweetheart Cup
Theodore C. Rogers 65 Director of Sweetheart Holdings and
Sweetheart Cup
Michael Hastings 52 Senior Vice President - Sales and Marketing
of Sweetheart Holdings and Sweetheart Cup
Hans H. Heinsen 46 Senior Vice President - Finance and Chief
Financial Officer of Sweetheart Holdings and
Sweetheart Cup
Charles E. Busse 61 Vice President - Research and Engineering of
Sweetheart Holdings and Sweetheart Cup
Daniel M. Carson 53 Vice President - General Counsel and
Corporate Secretary of Sweetheart Holdings
and Sweetheart Cup
William H. Haas 58 Vice President - Sales of Sweetheart
Holdings and Sweetheart Cup
Rick Schneider 50 Vice President - Manufacturing of Sweetheart
Holdings and Sweetheart Cup
Jeffrey Seidman 45 Vice President - Human Resources of
Sweetheart Holdings and Sweetheart Cup
Mr. Mehiel has been Chairman of the Board and Chief Executive Officer
of Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Mehiel is also
Chairman and Chief Executive Officer of SF Holdings and its subsidiary, Fonda.
Since 1966, he has been Chairman of Four M Corporation ("Four M"), a converter
and seller of interior packaging, corrugated sheets and corrugated containers
which he co-founded, and since 1977 (except during a leave of absence from April
1994 through July 1995) he has been the Chief Executive Officer of Four M. Mr.
Mehiel is also the Chairman of Box USA of New Jersey, Inc. ("Box USA"), a
manufacturer of corrugated containers, and Chairman and Chief Executive Officer
of Creative Expressions Group ("CEG"), an affiliate and seller of disposable
party goods products.
Mr. Uleau has been President, Chief Operating Officer and a Director of
Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Uleau is also
President, Chief Operating Officer and a Director of SF Holdings and Executive
Vice President of Fonda. He has been a director of Fonda since 1988. He has also
served in a variety of executive officer positions at Fonda since 1988. He has
been Executive Vice President of CEG since 1996. He served as Executive Vice
President and Chief Financial Officer of Four M from 1989 through 1993 and its
Chief Operating Officer in 1994. He is also currently a director of Four M, CEG
and Box USA.
Mr. Bingham has been a Director of Sweetheart Holdings and Sweetheart
Cup since August 1993. He co-founded American Industrial Partners Management
Company, Inc. ("AIPM") and has been a director and officer of the firm since
1989. He is also a general partner of AIP. Mr. Bingham also has served as a
17
<PAGE>
director of SF Holdings since March, 1998. Prior to joining AIPM, Mr. Bingham
was director of the Corporate Finance Department, a member of the Board and
director of Mergers & Acquisitions at Lehman Brothers Kuhn Loeb Inc. Mr. Bingham
is also currently a director of Bucyrus International, Great Lakes Carbon
Corporation, RBX Group, Inc., Standadyne Automotive Corporation and Deerfield
Associates.
Mr. Marvin has been a Director of Sweetheart Holdings and Sweetheart
Cup since May 12, 1999. He joined the San Francisco office of AIP as a managing
director in 1997 from the Mergers & Acquisition department at Goldman, Sachs &
Co where he was employed since 1994. Mr. Marvin is also currently a director of
Bucyrus International and Great Lakes Carbon Corporation.
Mr. Rogers has been a Director of Sweetheart Holdings and Sweetheart
Cup since August 1993. He co-founded AIPM and has been a director and officer of
the firm since 1989. He is also a general partner of AIP. From 1980 through
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, Southwest Bancshares and Mcorp. He is also currently a
director of Bucyrus International, Great Lakes Carbon Corporation, RBX Group,
Inc., Standadyne Automotive Corporation, Steele Heddle Group and Derby
International Corporation.
Mr. Hastings has served as Senior Vice President - Sales and Marketing
for Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Hastings is
also Senior Vice President of Fonda. Prior to joining the Company, Mr. Hastings
served as President of the Fonda Division of Fonda, which he joined in May 1995.
From December 1990 to April 1995, Mr. Hastings served as Vice President of Sales
and Marketing and as a member of the Board of Directors of Anchor Packaging
Company, a manufacturer of institutional films and thermoformed plastic
packaging. Prior to joining Anchor Packaging Company, Mr. Hastings was employed
for over 25 years in a variety of positions in the paper and plastic industries,
including sales, marketing and plant operations management at Scott Paper
Company and Thompson Industries.
Mr. Heinsen has served as Senior Vice President - Finance and Chief
Financial Officer of Sweetheart Holdings and Sweetheart Cup since March 1998.
Mr. Heinsen also serves as Senior Vice President, Chief Financial Officer and
Treasurer of SF Holdings since February 1998, Senior Vice President and
Treasurer of Fonda since February 1997, Chief Financial Officer of Fonda since
June 1996 and Chief Financial Officer of CEG since November 1998. Prior to
joining Fonda, Mr. Heinsen spent 21 years in a variety of corporate finance
positions with The Chase Manhattan Bank, N.A.
Mr. Busse has served as Vice President - Research and Engineering of
Sweetheart Holdings and Sweetheart Cup and their predecessors since 1983. Mr.
Busse has held several other positions with the Company and its predecessors
since 1963.
Mr. Carson has served as Vice President - General Counsel and Corporate
Secretary of Sweetheart Holdings since October 1993 and has served as Vice
President - General Counsel and Corporate Secretary of Sweetheart Cup and as
Corporate Secretary of Sweetheart Holdings 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. Haas has served as Vice President - Sales for Sweetheart Cup and
their predecessors since 1985 and as Vice President - Sales for Sweetheart
Holdings since October 1998. Prior to joining the Company, Mr. Haas was Vice
President of Sales with Carnation Co., Inc., a food products company, where he
served for 20 years. Prior to joining Carnation Mr. Haas was with Nabisco, Inc.,
a food products company, as Director of National Account Sales.
Mr. Schneider has served as Vice President - Manufacturing of
Sweetheart Holdings and Sweetheart Cup since October 1994. From October 1986 to
September 1994, Mr. Schneider served in
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various manufacturing capacities including, Production Staff Manager, Operations
Manager and Plant Manager. Prior to joining the Company, Mr. Schneider was
employed for ten years by Boise Cascade Composite Can Division in a variety of
manufacturing positions.
Mr. Seidman has served as Vice President - Human Resources of
Sweetheart Holdings and Sweetheart Cup since September 1998. Prior to joining
the Company, he was with Fonda from 1995 to 1998, where he held various
positions including, Vice President of Human Resources and Director of
Operations. Prior to Fonda, he was employed by Scott Paper in various human
resources positions since 1989.
Compensation of Directors
The Directors of Sweetheart Holdings and Sweetheart Cup do not receive
any direct compensation from such companies for serving as a Director. Certain
Directors of Sweetheart Holdings and Sweetheart Cup are employees of Sweetheart
Holdings and Sweetheart Cup and receive compensation as such and others are
employees of AIPM and Fonda, to which Sweetheart Cup 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 of Directors.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the
compensation, for Fiscal Years 1999, 1998 and 1997, of the chief executive
officer and the four most highly compensated officers and key employees of
Sweetheart Holdings and Sweetheart Cup (collectively, the "named executive
officers"). The Company has concluded that the aggregate amount of perquisites
and other personal benefits paid to each of the named executive officers did not
exceed the lesser of (i) 10% of such officer's total annual salary and bonus or
(ii) $50,000. Thus, such amounts are not reflected in the following table.
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<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
- ----------------------------------------- -------------------------------------------------- ------------------
All Other
Name and Principal Salary Bonus Compensation
Position Fiscal ($) ($) (1) ($)
- ----------------------------------------- ----------------- ---------------- --------------- ------------------
Dennis Mehiel
<S> <C> <C> <C> <C> <C>
Chairman and Chief Executive Officer 1999 349,650 340,000 1,743 (2)
of Sweetheart Holdings and 1998 (3) 188,775 - -
Sweetheart Cup 1997 - - -
Thomas Uleau
President, Chief Operating Officer 1999 298,654 445,000 78,037 (4)
and Director of Sweetheart Holdings 1998 (5) 144,414 - 34,451 (6)
and Sweetheart Cup 1997 - - -
William H. Haas
Vice President - Sales of 1999 179,308 123,147 128,264 (7)
Sweetheart Holdings and Sweetheart 1998 177,923 - 443,348 (8)
Cup 1997 180,000 - 364,443 (9)
Charles E. Busse
Vice President - Research and 1999 177,216 130,199 128,606 (10)
Engineering of Sweetheart Holdings 1998 175,848 - 352,642 (11)
and Sweetheart Cup 1997 177,900 - 123,375 (12)
Michael Hastings
Senior Vice President - Sales and 1999 124,231 255,000 49,722 (13)
Marketing of Sweetheart Holdings and 1998 (14) 56,664 - 54,387 (15)
Sweetheart Cup 1997 - - -
</TABLE>
(1) Amounts shown were paid based upon the Company's performance.
(2) Reflects $1,743 of life insurance premiums paid by the Company.
(3) Mr. Mehiel became Chairman and Chief Executive Officer effective March 12,
1998. Amounts shown here were paid during the remainder of Fiscal 1998.
(4) Reflects $67,604 paid for relocation expenses, $4,375 contributed under
the 401(k) Plan, $5,965 of life insurance premiums paid by the Company and
$93 of long-term disability insurance premiums paid by the Company.
(5) Mr. Uleau became President, Chief Operating Officer and Director effective
March 12, 1998. Amounts shown here were paid during the remainder of
Fiscal 1998.
(6) Reflects $29,167 paid for relocation expenses, $2,785 contributed under
the 401(k) Plan, $2,376 of life insurance premiums paid by the Company and
$123 of long-term disability insurance premiums paid by the Company.
(7) Reflects $120,000 paid under the Special Incentive Agreement, $5,000
contributed under the 401(k) Plan, $3,216 of life insurance premiums paid
by the Company and $48 of long-term disability insurance premiums paid by
the Company.
(8) Reflects $67,631 paid under the Employee Relocation Agreement, $120,000
paid under the Special Incentive Agreement, $4,750 contributed under the
401(k) Plan, $2,462 of life insurance premiums paid by the Company, $108
of long-term disability insurance premiums paid by the Company, $196,019
paid under the Executive Retention Agreement and $52,378 paid under the
Stock Option Repurchase Plan.
(9) Reflects $239,664 paid for relocation expenses, $120,000 paid under the
Special Incentive
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<PAGE>
Agreement, $4,500 contributed under the 401(k) Plan and $279 of life
insurance premiums paid by the Company.
(10) Reflects $118,600 paid under the Special Incentive Agreement, $5,000
contributed under the 401(k) Plan, $4,959 of life insurance premiums paid
by the Company and $47 of long-term disability premiums paid by the
Company.
(11) Reflects $190,077 paid under the Executive Retention Agreement, $118,600
paid under the Special Incentive Agreement, $35,458 paid under the Stock
Option Repurchase Plan, $4,750 contributed under the 401(k) Plan, $3,651
of life insurance premiums paid by the Company and $106 of long- term
disability premiums paid by the Company.
(12) Reflects $118,600 paid under the Special Incentive Agreement, $4,500
contributed under the 401(k) Plan and $275 of life insurance premiums paid
by the Company.
(13) Reflects $41,414 paid for relocation expenses, $6,000 contributed under
the 401(k) Plan, $2,255 of life insurance premiums paid by the Company and
$53 of long-term disability premiums paid by the Company.
(14) Mr. Hastings became Senior Vice President of Sales and Marketing effective
March 12, 1998. Amounts shown here were paid during the remainder of
Fiscal 1998.
(15) Reflects $50,249 paid for relocation expenses, $2,769 contributed under
the 401(k) Plan, $1,296 of life insurance premiums paid by the Company and
$73 of long-term disability premiums paid by the Company.
Stock Option Plan
On March 12, 1998, all outstanding options to purchase stock of the
Company were cashed out in full pursuant to the agreement governing the SF
Holdings Investment ("Stock Option Repurchase Plan"). There are currently no
options to purchase either Class A or Class B common stock outstanding.
Employee Benefit Plans
A majority of the Company's employees ("participants") are covered
under a 401(k) defined contribution plan. The Company's annual contributions to
this defined contribution plan currently represent a 50% match on participant
contributions. The Company's match is currently limited to participant
contributions up to 6% of participant salaries. Effective January 1, 2000, the
Company will provide a matching contribution of 100% on the first 2% of a
participant's salary and 50% on the next 4% of a participant's salary. In
addition, the Company is allowed to make discretionary contributions. Certain
Company employees are covered under defined benefit plans. Benefits under these
plans are generally based on fixed amounts for each year of service.
The Company sponsors various defined benefit post-retirement 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 ten years of service. The majority of the Company's plans are
contributory, with retiree contributions adjusted annually. The Company does not
fund the plans.
The executive officers of the Company are not covered under any of the
Company's defined benefit plans. Rather, such persons are covered under defined
contribution plans only.
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 common stock as of November 24,
1999, by holders having beneficial ownership of more than five percent of
Sweetheart Holdings common stock, by each of the directors of Sweetheart
Holdings, by each of the named executive officers and by all directors and
executive officers of Sweetheart Holdings as a group. All of the outstanding
common stock of Sweetheart Cup is owned by Sweetheart Holdings.
<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock
--------------------------- --------------------------
Name of Beneficial Owner Number of Percent Number of Percent
- ------------------------ Shares of Class Shares of Class
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
American Industrial Partners Capital Fund, L.P. 280,189 26.8% - -
One Maritime Plaza
Suite 2525
San Francisco, CA 94111
Mellon Bank, N.A., as Trustee for First Plaza Group
Trust (1)............................................. 182,000 17.4 - -
One Mellon Bank Center
Pittsburgh, PA 15258
Leeway & Co., as nominee for the Long Term Investment
Trust (2).......................................... 30,197 2.9 - -
c/o State Street Bank & Trust Co.
Master Trust Division - W6C
1 Enterprise Drive
North Quincy, MA 02171
Ell & Co., as nominee for the Lucent Technologies
Inc. Master Pension Trust (3)....................... 47,803 4.6 - -
c/o The Northern Trust Company
40 Broad Street
8th Floor
New York, NY 10004
SF Holdings Group, Inc............................. 502,080 48.0 4,393,200 100.0%
373 Park Avenue South
New York, NY 10016
W. Richard Bingham (4).............................. 280,189 26.8 - -
Theodore C. Rogers (4).............................. 280,189 26.8 - -
Dennis Mehiel (5)................................... 405,218 38.7 3,523,755 80.2
Directors and executive officers as a group
(12 persons)(6)..................................... 692,856 66.2 3,588,533 81.7
</TABLE>
22
<PAGE>
(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 Long Term Investment Trust.
(3) The Northern Trust Company acts as trustee for a trust under and for the
benefit of certain employee benefit plans of Lucent Technologies Inc.
These shares may deemed to be owned beneficially by the Lucent
Technologies Inc. Master Pension Trust.
(4) All of such shares are held of record by AIP. Messrs. Bingham and Rogers
are general partners 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.
(5) All of such shares are held of record by SF Holdings of which Mr. Mehiel
beneficially owns 80.2% of the outstanding common stock. The business
address of Mr. Mehiel is 373 Park Avenue South, New York, NY, 10016.
(6) All of such shares are held of record by either AIP or SF Holdings.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Shareholders' Agreement
Pursuant to the terms and conditions of the SF Holdings Investment, the
Company's Board of Directors consists of five members, three of whom are
nominated by the shareholders of the Company prior to the SF Holdings Investment
(the "Original Shareholders") and two of whom are nominated by SF Holdings.
Pursuant to the Company's by-laws, significant actions by the Company's Board
require the vote of four directors and include, among others: (i) a merger,
consolidation or other combination of the Company with or into another entity,
(ii) the sale of all or a material portion of the Company's assets, (iii)
entering into any new line of business, (iv) the issuance or repurchase of any
equity securities, (v) the incurrence of any indebtedness for money borrowed or
the refinancing of any existing indebtedness, (vi) approval of the annual
business plans and operating budgets, (vii) the termination indebtedness or
modification of any of the terms of the Management Services Agreement, (viii)
the amendment or modification of any provisions of the certificate of
incorporation, (ix) the selection of the Company's chief executive officer,
chief operating officer and chief financial officer, (x) any change of
accountants and (xi) the removal of any officers of the Company. Additionally,
pursuant to a certain Management Services Agreement, as amended, Fonda, an
affiliate of SF Holdings, manages the day-to-day operations of the Company
subject to the direction of the Board of Directors.
The Original Shareholders, after March 12, 2003, have the right to
exchange their shares of Class A Common Stock for warrants (the "Exchange
Warrants") to purchase, for nominal consideration, shares of
23
<PAGE>
Class C Common Stock of SF Holdings, representing 10% of the total outstanding
shares of common stock of SF Holdings at the consummation of the SF Holdings
Investment on a fully diluted basis. SF Holdings has the right to cause such
exchange and has the right thereafter to repurchase the Exchange Warrants, in
whole or in part, for an aggregate call price of $50.0 million, subject to
increase at 12.5% per annum beginning March 12, 1998 until March 12, 2003. Upon
occurrence of a merger, the Original Shareholders will be required to exchange
their shares of Class A Common Stock for the Exchange Warrants. In addition, in
the event SF Holdings proposes to sell shares of Class A or Class B Common Stock
in an amount greater than 30% of the outstanding shares of common stock, the
Original Shareholders will have the right to participate in such sale. In the
event SF Holdings proposes to sell shares of common stock in an amount greater
than 30% of the outstanding shares of common stock, SF Holdings will have the
right to require the Original Shareholders to sell all, but not less than all,
of their shares of common stock.
Management Services Agreement with SF Holdings
Pursuant to the Management Services Agreement, as amended, SF Holdings
and AIPM, which manages AIP, are entitled to receive an aggregate annual fee of
$1.85 million, payable semi-annually 45 days after the scheduled interest
payment dates for the Senior Secured Notes, and is reimbursed for out-of-pocket
expenses. Under this agreement, SF Holdings has the right, subject to the
direction of the Company's Board of Directors, to manage the day to day
operations of the Company. AIPM provides substantial ongoing financial and
management services to the Company. Fees were split between SF Holdings and AIPM
50/50 during Fiscal 1999. Fees will be split between SF Holdings and AIPM,
respectively, 60/40 during Fiscal 2000, 70/30 during Fiscal 2001 and paid 100%
to SF Holdings thereafter. SF Holdings has assigned substantially all of its
interests under this agreement to Fonda, but retains $200,000 per year of fees
for administrative services.
Transactions with Affiliates
During Fiscal 1999, the Company sold certain of its paper plate
manufacturing assets to Fonda for $2.4 million. In February 1999, the Company
entered into a five year operating lease with Fonda, whereby the Company leases
certain paper cup manufacturing assets from Fonda, resulting in equal monthly
payments totaling $0.2 million per year. Independent appraisals were obtained to
determine the fairness of both the purchase price and lease terms.
During Fiscal 1999, the Company sold $6.8 million of cups to Fonda,
$0.2 million of paper scrap to Fibre Marketing Group, LLC ("Fibre Marketing")
and $0.1 million of cups to CEG. Accounts receivable, as of September 26, 1999,
from these sales are $0.8 million due from Fonda and $0.1 million due from Fibre
Marketing. Sales to these affiliates in preceding fiscal years were not
material.
During Fiscal 1999, the Company purchased $6.1 million of corrugated
containers from Four M, $3.8 million of paper plates from Fonda and $0.4 million
of travel services from Emerald Lady, Inc. Accounts payable, as of September 26,
1999, from these purchases, are $0.5 million due to Four M and $0.7 million due
to Fonda. During Fiscal 1998, the Company purchased $1.8 million of corrugated
containers from Four M, of which $0.4 million was payable as of September 27,
1998. Purchases from Fonda and Emerald Lady, Inc. in preceding fiscal years were
not material.
All of the above referenced affiliates are under the common control of
the Company's Chief Executive Officer.
24
<PAGE>
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 Consolidated 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")).
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation of Sweetheart Holdings Inc. dated March 11, 1998
(incorporated by reference from Exhibit 3.3 of the Company's
report on Form 10-Q dated May 15, 1998).
3.4 Amended and Restated By-Laws of Sweetheart Holdings Inc. dated
March 12, 1998 (incorporated by reference from Exhibit 3.4 of
the Company's report on Form 10-Q dated May 15, 1998).
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")).
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).
10.11 $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 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).
10.13 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,
25
<PAGE>
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).
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).
10.27 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).
10.30 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).
10.32 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).
10.35 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")).
10.39 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).
10.46 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).
10.47 Second Restated Management Services Agreement dated March 12,
1998 (incorporated by reference from Exhibit 10.47 of the
Company's report on Form 10-Q dated May 15, 1998).
10.48 Amendment No. 1 to the Second Restated Management Services
Agreement dated March 12, 1998 (incorporated by reference from
Exhibit 10.48 of the Company's report on Form 10-Q dated May
15, 1998).
10.49 Amendment No. 2 to the Amended and Restated Loan and Security
Agreement dated March 10, 1998 (incorporated by reference from
Exhibit 10.49 of the Company's report on Form 10-Q dated May
15, 1998).
10.50 Amendment No. 3 to the Amended and Restated Loan and Security
Agreement dated May 12, 1998 (incorporated by reference from
Exhibit 10.50 of the Company's report on Form 10-Q dated May
15, 1998).
10.51 Credit Agreement dated as of June 15, 1998 between Lily Cups
Inc. as Borrower and General Electric Capital Canada Inc. as
Lender (incorporated by reference from Exhibit
26
<PAGE>
10.51 of the Company's report on Form 10-Q dated August 14,
1998).
10.52 Security Agreement made as of June 15, 1998 between Lily Cups
Inc. as Grantor and General Electric Capital Canada Inc. as
Lender (incorporated by reference from Exhibit 10.52 of the
Company's report on Form 10-Q dated August 14, 1998).
10.54 Consent and Amendment No. 4 to the Amended and Restated Loan
and Security Agreement dated November 1, 1998.
10.55 Executive Retention Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and Charles E.
Busse dated October 1, 1997.
16.0 Letter from Arthur Andersen LLP in accordance with Item 304
(a)(3) of Regulation S-K (incorporated by reference from
Exhibit 16.0 to the Company's report on Form 8-K dated April
29, 1998).
18.0 Preferability Letter (incorporated by reference from Exhibit
18.0 of the Company's report on Form 10-Q dated August 14,
1998).
21.1 Subsidiaries of the Company (incorporated by reference from
Exhibit 21.1 of the 1994 10-K).
27.0 Financial Data Schedule
(b) Current Reports on Form 8-K
No reports on Form 8-K were filed in the fiscal year ended September
26, 1999.
27
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 29
Report of Independent Public Accountants 30
Consolidated Balance Sheets as of September 26, 1999
and September 27, 1998 31
Consolidated Statements of Operations and Other
Comprehensive Income (Loss) for Fiscal Years
1999, 1998 and 1997 32
Consolidated Statements of Cash Flows for Fiscal Years
1999, 1998 and 1997 33
Consolidated Statements of Shareholders' Equity for Fiscal
Years 1999, 1998 and 1997 34
Notes to Consolidated Financial Statements 35
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Sweetheart Holdings Inc.:
We have audited the accompanying consolidated balance sheets of Sweetheart
Holdings Inc. and Subsidiaries (the "Company") as of September 26, 1999 and
September 27, 1998 and the related consolidated statements of operations and
comprehensive income (loss), shareholders' equity and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These 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 1999 and 1998 consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
September 26, 1999 and September 27, 1998 and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1998 the
Company changed its method for accounting for inventories from the last-in
first-out method to the first-in first-out method and retroactively restated the
1997 consolidated financial statements for the change. Also, as discussed in
Note 15 to the consolidated financial statements, the Company changed its method
for accounting for reengineering costs in connection with software installation.
/s/ DELOITTE & TOUCHE LLP
Baltimore, Maryland
November 19, 1999
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Sweetheart Holdings Inc.:
We have audited the accompanying consolidated balance sheet of SWEETHEART
HOLDINGS INC. (a Delaware corporation) AND SUBSIDIARIES as of September 30,
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
As explained in Note 1 to the financial statements, the Company has given
retroactive effect to the change in accounting for inventory valuation from the
last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO") method.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
December 8, 1997
(except with respect to
the matter discussed in
Note 1- Inventories, as
to which the date is
December 3, 1998)
30
<PAGE>
<TABLE>
<CAPTION>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 26, September 27,
1999 1998
------------- -------------
Assets
------
Current assets:
<S> <C> <C>
Cash and cash equivalents $2,965 $1,367
Cash in escrow - 5,464
Receivables, less allowances of $1,905 and $1,817, respectively 88,325 85,248
Inventories 129,473 133,065
Deferred income taxes 12,962 11,506
Spare parts 18,421 19,278
-------- -------
Total current assets 252,146 255,928
-------- -------
Property, plant and equipment, net 331,676 355,224
Deferred income taxes 41,055 41,395
Other assets 9,763 13,079
-------- --------
Total assets $634,640 $665,626
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $66,654 $66,205
Accrued payroll and related costs 45,089 39,324
Other current liabilities 39,045 40,866
Current portion of long-term debt 275,446 3,445
------- -------
Total current liabilities 426,234 149,840
------- -------
Long-term debt 118,446 422,438
Other liabilities 71,686 74,365
------- -------
Total liabilities 616,366 646,643
------- -------
Shareholders' equity:
Class A Common Stock - Par value $.01 per share; 1,100,000 shares
authorized; 1,046,000 shares issued and outstanding 10 10
Class B Common Stock - Par value $.01 per share; 4,600,000 shares
authorized; 4,393,200 shares issued and outstanding 44 44
Additional paid-in capital 101,090 101,090
Accumulated deficit (80,083) (75,670)
Accumulated other comprehensive income (loss) (2,787) (6,491)
-------- --------
Total shareholders' equity 18,274 18,983
-------- --------
Total liabilities and shareholders' equity $634,640 $665,626
======== ========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
31
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
Fiscal
-----------------------------------------------------
1999 1998 1997(a)
-------------------- ---------------- ---------------
<S> <C> <C> <C>
Net sales $863,781 $843,502 $886,017
Cost of sales 763,750 787,706 822,818
-------- -------- --------
Gross profit 100,031 55,796 63,199
Selling, general and administrative expenses 67,406 68,818 66,792
Other (income) expense, net (1,180) 12,400 (73)
Asset impairment expense - 5,000 24,550
Restructuring charge (credit) (512) 897 9,680
------ -------- --------
Operating income (loss) 34,317 (31,319) (37,750)
Interest expense, net of interest income of $122,
$755 and $1,547, respectively 41,671 42,955 40,265
------ -------- --------
Income (loss) before income tax expense
(benefit), cumulative effect of change
in accounting principle and
extraordinary loss (7,354) (74,274) (78,015)
Income tax expense (benefit) (2,941) (29,711) (31,206)
------- -------- ---------
Income (loss) before cumulative effect
of change in accounting principle and
extraordinary loss (4,413) (44,563) (46,809)
Cumulative effect of change in accounting
principle (net of income taxes of $1,007) - 1,511 -
Extraordinary loss on debt extinguishment (net of
income taxes of $627) - - 940
------- -------- --------
Net income (loss) $(4,413) $(46,074) $(47,749)
======== ========= =========
Other comprehensive income (loss), net of tax:
Foreign Currency translation adjustment 272 (1,062) (185)
Minimum pension liability adjustment
(net of income taxes of ($2,288) and
$3,281, respectively) 3,432 (4,922) -
------- -------- --------
Other Comprehensive income (loss) 3,704 (5,984) (185)
------- -------- --------
Comprehensive income (loss) $(709) $(52,058) $(47,934)
======== ========= =========
</TABLE>
(a) Prior period balances have been restated (see Note 1 of the Notes to
Consolidated Financial Statements).
See accompanying Notes to Consolidated Financial Statements.
32
<PAGE>
<TABLE>
<CAPTION>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal
-------------------------------------------
1999 1998 1997
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $(4,413) $(46,074) $(47,749)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 48,270 46,738 47,723
Deferred income tax credit (2,941) (29,711) (31,206)
Gain on sale of assets (1,301) (4,245) -
Cumulative effect of change in accounting principle, net - 1,511 -
Asset impairment expense - 5,000 24,550
Extraordinary loss, net of tax - - 940
Changes in operating assets and liabilities:
Receivables (3,077) 526 (1,341)
Inventories 3,592 9,212 25,790
Accounts payable 449 7,272 (11,541)
Other, net 9,193 (8,023) (10,408)
------- -------- --------
Net cash provided by (used in) operating activities 49,772 (17,794) (3,242)
------ -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (30,790) (37,534) (47,757)
Proceeds from sale of bakery - 14,718 -
Proceeds from sales of property, plant and equipment 9,058 7,719 17,843
-------- -------- --------
Net cash provided by (used in) investing activities (21,732) (15,097) (29,914)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit
facilities (28,619) 54,433 44,852
Repayment of debt (3,287) (58,562) -
(Increase)/decrease in restricted cash - 29,016 (146)
(Increase)/decrease in cash escrow 5,464 7,859 (13,323)
Payment of financing fees - (1,509) -
Other - 371 52
-------- -------- -------
Net cash provided by (used in) financing activities (26,442) 31,608 31,435
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,598 (1,283) (1,721)
CASH AND CASH EQUIVALENTS, beginning of period 1,367 2,650 4,371
-------- ------- -------
CASH AND CASH EQUIVALENTS, end of period $2,965 $1,367 $2,650
======== ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $39,828 $39,866 $38,818
======== ======= =======
Income taxes paid $ 80 $ 711 $ -
======== ======= =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Accumulated Retained
Class A Class B Additional Other Earnings/ Total
Common Stock Common Common Paid-In Comp-rehensive (Accumulated Note Shareholders'
Stock (par) Stock (par) Capital Income (Loss) Deficit) Receivable Equity
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 101,100 -- -- -- (322) 18,197 (423) 118,552
Net income (loss) -- -- -- -- -- (47,749) -- (47,749)
Payment received on note
receivable -- -- -- -- -- -- 52 52
Translation adjustment -- -- -- -- (185) -- -- (185)
---------- ---------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 1997 101,100 -- -- -- (507) (29,552) (371) 70,670
Net income (loss) -- -- -- -- -- (46,074) -- (46,074)
Stock dividend -- -- 44 -- -- (44) -- --
Common stock exchange (101,100) 10 -- 101,090 -- -- -- --
Payment received on note
receivable -- -- -- -- -- -- 371 371
Minimum pension liability
adjustment -- -- -- -- (4,922) -- -- (4,922)
Translation adjustment -- -- -- -- (1,062) -- -- (1,062)
---------- ---------- --------- --------- --------- --------- --------- ---------
Balance, September 27, 1998 -- 10 44 101,090 (6,491) (75,670) -- 18,983
Net income (loss) -- -- -- -- -- (4,413) -- (4,413)
Minimum pension liability
adjustment -- -- -- -- 3,432 -- -- 3,432
Translation adjustment -- -- -- -- 272 -- -- 272
---------- --------- --------- --------- --------- --------- --------- ---------
Balance, September 26, 1999 $ -- $ 10 $ 44 $ 101,090 $ (2,787) $ (80,083) $ -- $ 18,274
========== ========== ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As used in these notes, unless the context otherwise requires, the
"Company" shall refer to Sweetheart Holdings Inc. ("Sweetheart Holdings") and
its subsidiaries, including Sweetheart Cup Company Inc. ("Sweetheart Cup").
1. SIGNIFICANT ACCOUNTING POLICIES
Business Segments - The Company operates in a single segment. It is one
of the largest producers of plastic and paper disposable foodservice and food
packaging products in North America. In Fiscal 1999, the Company had net sales
of approximately $864 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(R), Lily(R), Trophy(R), Jazz(R)
and Preference(TM) for cups and plates and Silent Service(R), Centerpiece(R),
Basix(R), Guildware(R) and Simple Elegance(R) 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. Sales to a major customer accounted for 11.7%,
12.1% and 13.7% for Fiscal Years 1999, 1998 and 1997, respectively. In Fiscal
1999, domestic sales accounted for approximately 93% of the Company's net sales
while sales to Canadian customers totaled approximately 7%.
Fiscal year end - In Fiscal 1998, the Company's Board of Directors
approved a change in the Company's fiscal year from the year ended September 30
to the 52 or 53 week period ending on the last Sunday in September. Fiscal 1999
is the 52 week period ended September 26, 1999. Fiscal 1998 is the period from
October 1, 1997 through September 27, 1998. Fiscal 1997 is the year ended
September 30, 1997.
Principles of Consolidation and Translation - The financial statements
include the accounts of the Company and its subsidiaries on a consolidated basis
as of September 26, 1999, September 27, 1998 and September 30, 1997 and for
Fiscal Years 1999, 1998 and 1997. Assets and liabilities denominated in Canadian
dollars 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.
Cash, including Cash Equivalents, Restricted Cash and Cash in Escrow -
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash overdrafts are reclassified to
accounts payable and accrued payroll and related costs. Cash received as
proceeds from the sale of assets is restricted to qualified capital expenditures
under the indentures governing the Senior Secured Notes and the Senior
Subordinated Notes (See Note 10) and is held in escrow with the trustee until
utilized.
Inventories - Effective June 1, 1998, the Company changed its method of
accounting for inventories from the last-in first-out (LIFO) method to the
first-in first-out (FIFO) method. Management believes that the FIFO method is
preferable because it more accurately presents the Company's financial position
as it reflects more recent costs at the balance sheet date and more accurately
matches revenues with costs reported during the period presented. The financial
statements of prior periods have been restated to apply the FIFO method of
accounting for inventories retroactively. The effect of this restatement was to
decrease retained earnings as of September 30, 1996 by $2.9 million. Net income
decreased by $0.1 million and $1.1 million in Fiscal Years 1998 and 1997,
respectively.
35
<PAGE>
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.
Revenue Recognition - Revenue is recognized upon shipment of product.
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 and pension and post-retirement benefits.
No deferred income taxes have been provided on the cumulative
undistributed earnings of the Canadian subsidiary of Sweetheart Cup. Those
earnings (approximately $12.0 million) are considered permanently reinvested
under Accounting Principles Bulletin No. 23.
Reclassifications - Certain prior period balances have been
reclassified to conform with current presentation.
Impact of Recently Issued Accounting Standards - In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and requires that an entity recognize all derivatives at
fair value in the statement of financial position. The Company is in the process
of evaluating the new statement, which is effective for Fiscal 2001.
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 fiscal years. Actual results could differ from those
estimates.
2. INVENTORIES
The components of inventories are as follows (in thousands):
September 26, September 27,
1999 1998
------------ -------------
Raw materials and supplies $30,092 $27,661
Finished products 92,193 96,943
Work in progress 7,188 8,461
-------- --------
Total inventories $129,473 $133,065
======== ========
36
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT, NET
The Company's major classes of property, plant and equipment, net are
as follows (in thousands):
September 26, September 27,
1999 1998
-------------- -------------
Land $ 19,051 $ 19,111
Buildings and improvements 89,933 79,774
Machinery and equipment 444,302 414,273
Construction in progress 5,575 26,561
---------- ----------
Total property, plant and equipment 558,861 539,719
---------- ----------
Accumulated depreciation (227,185) (184,495)
----------- -----------
Property, plant and equipment, net $ 331,676 $ 355,224
========== ===========
Depreciation of property, plant and equipment totaled $45.9 million,
$43.9 million and $44.1 million in Fiscal 1999, 1998 and 1997, respectively.
4. OTHER ASSETS
The components of other assets are as follows (in thousands):
September 26, September 27,
1999 1998
------------------ -------------
Debt issuance costs, net of
accumulated amortization $ 4,077 $ 6,426
Intangible pension asset
(See Note 8) 2,217 2,256
Prepaid assets 989 2,016
Other 2,480 2,381
---------- ----------
Total other assets $ 9,763 $ 13,079
========== ==========
Amortization of debt issuance costs totaled $2.4 million, $2.8 million
and $3.6 million for Fiscal 1999, 1998 and 1997, respectively, and is included
in interest expense. In addition, during Fiscal 1997, the Company accelerated
$1.6 million of amortization for unamortized debt issuance costs related to the
early retirement of debt. This charge is shown as an extraordinary loss (net of
$0.6 million of income taxes) on the Consolidated Statements of operations and
Other Comprehensive Income (Loss).
37
<PAGE>
5. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in
thousands):
September 26, September 27,
1999 1998
------------- -------------
Sales allowances $ 8,980 $ 8,146
Restructuring charges - 1,637
Taxes, other than income taxes 4,434 3,591
Litigation, claims and assessments
(See Note 17) 20,004 18,903
Interest payable 3,616 3,925
Other 2,011 4,664
--------- ---------
Total other current liabilities $ 39,045 $ 40,866
========= =========
6. OTHER LIABILITIES
The components of other liabilities are as follows (in thousands):
September 26, September 27,
1999 1998
------------- -------------
Post-retirement health care benefits
(See Note 8) $ 59,401 $ 57,564
Pensions (See Note 8) 9,044 15,960
Prepaid vendor credits 1,500 -
Other 1,741 841
--------- ---------
Total other liabilities $ 71,686 $ 74,365
========= =========
7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The Company adopted the comprehensive income statement format required
by the Financial Accounting Standards Board SFAS No. 130, Reporting
Comprehensive Income effective with Fiscal 1999, and has restated all prior
periods presented. The components of accumulated other comprehensive income
(loss) are as follows (in thousands):
September 26, September 27,
1999 1998
------------- -------------
Foreign currency translation
adjustment $ (1,297) $ (1,569)
Minimum pension liability
adjustment (1,490) (4,922)
---------- ---------
Accumulated other comprehensive
income (loss) $ (2,787) $ (6,491)
========== =========
38
<PAGE>
8. EMPLOYEE BENEFIT AND POST-RETIREMENT HEALTH CARE PLANS
The Company sponsors various defined benefit post-retirement 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 ten years of service. The majority of the Company's plans are
contributory, with retiree contributions adjusted annually. The Company does not
fund the 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 for Fiscal
Years represented through 1999. 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 $3.2 million, $3.4 million and $3.6
million for Fiscal 1999, 1998 and 1997, respectively. Certain employees are
covered under defined benefit plans. Certain benefits under the plans are
generally based on fixed amounts for each period of service.
Net periodic cost for the Company's pension and other benefit plans
consists of the following (in thousands):
Fiscal
------------------------------------
1999 1998 1997
------------------------------------
Pension Benefits
Service Cost $ 1,019 $ 989 $ 1,111
Interest Cost 4,013 3,881 3,720
Return on plan assets (3,916) (3,883) (3,212)
Amortization of prior service cost 241 222 244
Recognized net actuarial cost 269 41 18
--------- --------- --------
Net periodic pension cost $ 1,626 $ 1,250 $ 1,881
--------- --------- --------
Other Benefits
Service Cost $ 1,027 $ 898 $ 859
Interest Cost 3,271 3,056 3,098
Amortization of prior service cost (299) (432) (416)
Recognized net actuarial cost (416) (978) (910)
--------- --------- --------
Net periodic benefit cost $ 3,583 $ 2,544 $ 2,631
--------- --------- --------
39
<PAGE>
The following table sets forth the change in benefit obligation for the
Company's benefit plans (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Change in benefit obligation:
<S> <C> <C> <C> <C>
Benefit obligation at beginning of period $ 58,653 $ 52,710 $ 48,771 $ 42,833
Service cost 1,019 989 1,027 898
Interest cost 4,013 3,881 3,271 3,056
Amendments 202 948 (3,520) 331
Actuarial (gain) or loss (3,469) 3,441 (4,962) 4,615
Benefits paid (3,544) (3,316) (2,181) (2,962)
-------- -------- -------- --------
Benefit obligation at end of period $ 56,874 $ 58,653 $ 42,406 $ 48,771
Change in plan assets:
Fair value of plan assets at beginning of
period $ 38,600 $ 39,243 -- --
Actual return on plan assets 5,737 (249) -- --
Employer contributions to plan 3,530 2,922 1,746 2,962
Participant contributions to plan -- -- 435 --
Benefits paid (3,544) (3,316) (2,181) (2,962)
-------- -------- -------- --------
Fair value of plan assets at end of period $ 44,323 $ 38,600 -- --
Funded status $(12,551) $(20,053) $(42,406) $(48,771)
Unrecognized prior service cost 2,217 2,256 (7,202) (4,098)
Unrecognized (gain) loss 2,444 8,004 (12,893) (7,796)
-------- -------- -------- --------
Net liability recognized $ (7,890) $ (9,793) $(62,051) $(60,665)
-------- -------- -------- --------
</TABLE>
The following sets forth the amounts recognized in the Consolidated
Balance Sheets:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Accrued benefit liability $ (12,551) $(20,053) $(62,501) $(60,665)
Intangible asset 2,217 2,256 -- --
Other (gain) loss (40) (199) -- --
Deferred income taxes 994 3,281 -- --
Accrued other comprehensive (income) loss 1,490 4,922 -- --
------- ------- ------- -------
Net liability recognized $ (7,890) $ (9,793) $(62,051) $(60,665)
------- ------- ------- -------
</TABLE>
The assumptions used in computing the preceding information are as
follows:
Fiscal
-------- --------- -------
1999 1998 1997
-------- --------- --------
Pension Benefits
Discount rate 7.75% 7.00% 7.50%
Rate of return on plan assets 10.00% 10.00% 10.00%
Other Benefits
Discount rate 7.75% 7.00% 7.50%
40
<PAGE>
For measurement purposes, an 8% annual rate of increase in health care
benefits was assumed for 1999. The rate is assumed to decrease gradually to 5%
for 2001 and will remain at that level thereafter.
A one percentage point change in the assumed health care cost trend rate
would have the following effects:
One Percentage One Percentage
Point Increase Point Decrease
-------------- --------------
Effect on accumulated post-
retirement benefit obligation $3,072 $(2,703)
Effect on net periodic post-
retirement benefit cost $210 $(177)
9. INCOME TAXES
The income tax benefit includes the following components (in
thousands):
Fiscal
-----------------------------
1999 1998 1997
-----------------------------
Current-
Federal $ -- $ -- $ --
State -- -- --
Foreign -- -- --
------- ------- -------
Total current -- -- --
------- ------- -------
Deferred -
Federal 2,549 25,588 26,794
State 364 3,656 3,828
Foreign 28 467 584
------- ------- -------
Total deferred 2,941 29,711 31,206
------- ------- -------
$ 2,941 $29,711 $31,206
======= ======= =======
The effective tax rate varied from the U.S. Federal tax rate of 35% for
Fiscal 1999, 1998 and 1997 as a result of the following:
Fiscal Years
---------------------------------------
1999 1998 1997
---------------------------------------
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%
=== === ===
At September 26, 1999, the Company has deferred tax liabilities of $139
million, of which $13 million are current in nature and deferred tax assets of
$193 million, of which $25 million are current in nature. Deferred tax assets
and liabilities have been netted as a current asset and non-current asset in the
41
<PAGE>
accompanying Consolidated Balance Sheets. The principal temporary differences
included above are depreciation, a $63 million liability, inventory adjustments,
an $11 million liability, net operating loss carry forwards, an $84 million
asset, post-retirement health and pension benefits, a $27 million asset, other
employee benefits, an $8 million asset and $9 million of other net miscellaneous
items.
At September 27, 1998, the Company had deferred tax liabilities of $137
million, of which $17 million were current in nature, and deferred tax assets of
$190 million, of which $28 million were current in nature. Deferred tax assets
and liabilities have been netted as a current asset and a non-current asset in
the accompanying Consolidated Balance Sheets. The principal temporary
differences included above are depreciation, a $64 million liability, inventory
adjustments, a $17 million liability, net operating loss carryforwards, a $79
million asset, post-retirement health and pension benefits, a $30 million asset,
other employee benefits, an $11 million asset and $14 million of other net
miscellaneous asset items.
The Company has net operating loss carryforwards for income tax
purposes of approximately $214 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, $46 million expire in 2012, $45 million expire in
2018 and $1 million expire in 2019.
Although future earnings cannot be predicted with certainty, management
currently believes that realization of the net deferred tax asset is more likely
than not.
42
<PAGE>
10. LONG-TERM OBLIGATIONS
Long-term debt, including amounts payable within one year, is as
follows (in thousands):
September 26, September 27,
1999 1998
--------------- ------------
9.625% Senior Secured Notes $190,000 $190,000
10.5% Senior Subordinated Notes 110,000 110,000
U.S. Credit Facility 84,476 113,708
Canadian Credit Facility 9,416 9,675
Industrial revenue bond - 2,500
--------- --------
Total debt 393,892 425,883
Less - Current portion of long-term debt (275,446) (3,445)
--------- ---------
Total long-term debt $118,446 $422,438
======== ========
The aggregate annual maturities of long-term debt at September 26, 1999 are as
follows (in thousands):
Fiscal 2000 $ 275,446
Fiscal 2001 8,446
Fiscal 2002 -
Fiscal 2003 110,000
Fiscal 2004 and thereafter -
--------
$393,892
========
U.S. Credit Facility - The Company's 1997 Amended and Restated Credit
Agreement, as amended, (the "U.S. Credit Facility") provides for a $135 million
revolving credit facility, which matures on August 1, 2000. Borrowings bear
interest, at the Company's election, at a rate equal to (i) LIBOR plus 2.25% or
(ii) a bank's base rate plus 1%, plus certain other fees. The average interest
rate in Fiscal 1999 was 7.8%. Availability is based on eligible inventory and
accounts receivable. As of September 26, 1999, there was $2.0 million of
outstanding standby letters of credit and $42.3 million available for additional
borrowings. The fee for outstanding letters of credit is 1.75% per annum and
there is a commitment fee of 0.5% per annum on the daily average unused amount
of the commitments.
The indebtedness of Sweetheart Cup under the U.S. Credit Facility is
guaranteed by Sweetheart Holdings and secured by a first priority perfected
security interest in inventory, accounts receivable and all proceeds of the
foregoing of Sweetheart Cup, a first priority security interest, shared with the
holders of the Senior Secured Notes, in Shared Collateral (as defined in the
U.S. Credit Facility to include primarily all capital stock owned by Sweetheart
Holdings and Sweetheart Cup and of each of their respective present and future
direct subsidiaries, all inter-company indebtedness payable to Sweetheart
Holdings or Sweetheart Cup by Sweetheart Holdings, Sweetheart Cup 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 U.S. Credit Facility contains various covenants that limit, or
restrict, among other things,
43
<PAGE>
indebtedness, dividends, leases, capital expenditures and the use of proceeds
from asset sales and certain other business activities. Additionally, the
Company must maintain on a consolidated basis, certain specified ratios at
specified times, including, without limitation, maintenance of minimum fixed
charge coverage ratio. The Company is currently in compliance with all covenants
under the U.S. Credit Facility. The U.S. Credit Facility provides for partial
mandatory prepayments upon the issuance of equity by Sweetheart Holdings or any
of its subsidiaries and full repayment upon any change of control (as defined in
the Agreement).
Senior Secured Notes and Senior Subordinated Notes - Sweetheart Cup is
the obligor and Sweetheart Holdings the guarantor with respect to $190 million
of Senior Secured Notes and $110 million of Senior Subordinated Notes.
The Senior Secured Notes bear interest at 9.625% per annum, payable
semi-annually in arrears on March 1 and September 1 and mature on September 1,
2000. The Senior Secured Notes are subject to redemption at the option of the
Company, in whole or in part, at 100% of face value, plus accrued interest to
the redemption date. The Senior Secured Notes are secured by a first priority
lien on substantially all of the assets of Sweetheart Cup, excluding collateral
under the U.S. Credit Facility, the capital stock of its subsidiaries, and
inter-company indebtedness. Such notes are also secured by a second lien on
collateral under the U.S. Credit Facility. The Senior Secured Notes and
borrowings under the U.S. Credit Facility are also jointly secured by Shared
Collateral.
The Senior Subordinated Notes bear interest at 10.50% per annum,
payable semi-annually in arrears on March 1 and September 1 and mature on
September 1, 2003. The Senior Subordinated Notes are subject to redemption at
the option of the Company, in whole or in part, at the redemption price
(expressed as percentages of the principal amount), plus accrued interest to the
redemption date, for redemptions during the twelve month period beginning
September 1 as follows: 1999 - 102.625%, 2000 - 101.313% and 2001 and thereafter
- - 100%. 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 U.S.
Credit Facility and all other indebtedness not otherwise prohibited.
The Sweetheart Notes contain 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.
Canadian Credit Facility - A Canadian subsidiary has a Credit Agreement
(the "Canadian Credit Facility"). which provides for a term loan facility of up
to Cdn $10 million and a revolving credit facility of up to Cdn $10 million.
Term loan borrowings under the Canadian Credit Facility are payable quarterly
through May 2001 and revolving credit and term loan borrowings have a final
maturity date of June 15, 2001. The Canadian Credit Facility is secured by all
existing and thereafter acquired real and personal tangible assets of Lily Cups,
a subsidiary of Sweetheart Cup, and net proceeds on the sale of any of the
foregoing. Borrowings under the Canadian Credit Facility bear interest at an
index rate plus 2.25% with respect to the revolving credit borrowings and an
index rate plus 2.50% with respect to the term loan borrowings. As of September
26, 1999, Cdn $4.3 million (approximately $2.9 million) was available under the
Canadian Credit Facility.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments included in current
assets and current liabilities
44
<PAGE>
approximate their estimated fair value because of the relatively short
maturities of these instruments. Long-term debt instruments, other than the
Company's Senior Secured Notes and Senior Subordinated Notes, have variable
interest rates that fluctuate along with current market conditions and thus the
carrying value approximates their fair value.
The fair value of the Company's Senior Secured Notes and Senior
Subordinated Notes is estimated to be $17.8 million lower than the carrying
value at September 26, 1999 and $40.0 million lower than the carrying value at
September 27, 1998.
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 $18.7
million, $16.6 million and $16.8 million for Fiscal Years 1999, 1998 and 1997,
respectively. Future minimum rental commitments under non-cancelable operating
leases in effect at September 26, 1999 are as follows (in thousands):
Fiscal 2000 $ 12,314
Fiscal 2001 9,515
Fiscal 2002 8,614
Fiscal 2003 6,648
Fiscal 2004 4,694
Fiscal 2005 and thereafter 23,303
---------
$ 65,088
=========
13. SHAREHOLDERS' EQUITY
Prior to March 12, 1998, Sweetheart Holdings had a single-class capital
structure consisting of 3,000,000 shares of common stock, par value $.01 per
share, of which 1,046,000 shares were issued and outstanding. Of the outstanding
shares, 1,040,000 were issued in conjunction with the acquisition of the Company
on August 30, 1993. In fiscal 1994, the Company sold an additional 6,000 shares
of stock, for which it received approximately $100,000 in cash and a $500,000
promissory note. The promissory note that was reflected as a reduction to
shareholders' equity in the consolidated balance sheet at September 30, 1997 was
paid in full on March 12, 1998.
On March 12, 1998, the shareholders of the Company consummated the SF
Holdings Investment. In connection with this transaction, the Board of Directors
of Sweetheart Holdings authorized two new classes of common stock: 1,100,000
shares of Class A Common Stock, $0.01 par value and 4,600,000 shares of Class B
Common Stock, $0.01 par value. On March 11, 1998, the shareholders of record
exchanged their shares of common stock for a new Class A Common Stock in a one
for one stock exchange. In addition, a stock dividend of 4.2 shares of a new
Class B Common Stock was declared to the shareholders of record on March 11,
1998. SF Holdings acquired from the Company's shareholders' 48% of the Company's
outstanding Class A Common Stock and all of the outstanding Class B Common
Stock. As a result, SF Holdings holds 90% of the total number of outstanding
shares of both classes of the Company's common stock.
45
<PAGE>
Pursuant to the terms and conditions of the SF Holdings Investment, the
Company's Board of Directors consists of five members, three of whom are
nominated by the Original Shareholders and two of whom are nominated by SF
Holdings. Pursuant to the Company's by-laws, significant actions by the
Company's Board of Directors require the vote of four directors and include,
among others: (i) a merger, consolidation or other combination of the Company
with or into another entity, (ii) the sale of all or a material portion of the
Company's assets, (iii) entering into any new line of business, (iv) the
issuance or repurchase of any equity securities, (v) the incurrence of any
indebtedness for money borrowed or the refinancing of any existing indebtedness,
(vi) approval of the annual business plans and operating budgets, (vii) the
termination indebtedness or modification of any of the terms of the Management
Services Agreement, (viii) the amendment or modification of any provisions of
the certificate of incorporation, (ix) the selection of the Company's chief
executive officer, chief operating officer and chief financial officer, (x) any
change of accountants and (xi) the removal of any officers of the Company.
Additionally, pursuant to a certain Management Services Agreement, as amended,
Fonda, an affiliate of SF Holdings, manages the day-to-day operations of the
Company subject to the direction of the Board of Directors.
The Class A and Class B Common Stock have the same powers, preferences
and rights, except that the Class B Common Stock has no voting rights. Class A
and Class B Common Stock share the profits and losses generated by the Company
on a pro-rata basis. Each outstanding Class A Common Share is entitled to one
vote on any matter submitted to a vote of shareholders and has no cumulative
voting rights. Subject to Delaware law and limitations in certain debt
instruments (Senior Secured Notes, Senior Subordinated Notes and borrowings
under the U.S. Credit Facility), common shareholders are entitled to receive
such dividends as may be declared by Sweetheart Holdings' Board of Directors out
of funds legally available thereof. In the event of a liquidation, dissolution
or winding up of Sweetheart Holdings, common shareholders are entitled to share
ratably in all assets remaining after payment or provision for payment of debts
or other liabilities of Sweetheart Holdings.
In addition, the Original Shareholders, after March 12, 2003, have the
right to exchange their shares of Class A Common Stock for warrants (the
"Exchange Warrants") to purchase, for nominal consideration, shares of Class C
Common Stock of SF Holdings representing 10% of the total outstanding shares of
common stock of SF Holdings at the consummation of the SF Holdings Investment on
a fully diluted basis. SF Holdings has the right to cause such exchange and has
the right thereafter to repurchase the Exchange Warrants, in whole or in part,
for an aggregate call price of $50.0 million, subject to increase at 12.5% per
annum beginning March 12, 1998 until March 12, 2003. Upon occurrence of a
merger, the Original Shareholders will be required to exchange their shares of
Class A Common Stock for the Exchange Warrants. In addition, in the event SF
Holdings proposes to sell shares of Class A or Class B Common Stock in an amount
greater than 30% of the outstanding shares of common stock, the Original
Shareholders will have the right to participate in such sale. In the event SF
Holdings proposes to sell shares of common stock in an amount greater than 30%
of the outstanding shares of common stock, SF Holdings will have the right to
require the Original Shareholders to sell all, but not less than all, of their
shares of common stock.
The Board of Directors of Sweetheart Holdings approved the Stock Option
and Purchase Plan (the "Option Plan") during fiscal year 1994 which provides for
the granting of nonqualified and incentive stock options as defined by the
Internal Revenue Code. The Option 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 Option 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 that may not
exceed ten years from the date of grant of the option. The Option Plan provides
for the issuance of up to 103,000 shares of common stock in connection with the
stock options
46
<PAGE>
granted under the Option Plan. Options that are canceled or expire unexercised
are available for future grants. All options are granted via approval of the
Board of Directors. In conjunction with the SF Holdings Investment, all options
outstanding as of March 12, 1998 were cashed out in full and canceled.
14. OTHER EXPENSE (INCOME)
In Fiscal 1999, the Company sold certain of its paper plate and paper
cup equipment at a net gain of $0.4 million and consolidated a facility in
Canada resulting in a $0.8 million gain on the sale of duplicate assets.
In Fiscal 1998, the Company recognized certain non-recurring charges,
consisting primarily of $4.4 million of financial advisory and legal fees
associated with the SF Holdings Investment, $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,
$3.4 million of expense based on actuarial estimates associated with pending
litigation and asset write-downs of $1.8 million associated with the sale of the
Riverside facility. These expenses were offset in part by the $3.3 million gain
on the sale of the bakery business.
15. NON-RECURRING CHARGES
In the quarter ended March 31, 1998, the Company reduced its salaried
workforce by approximately 15% and hourly workforce by less than 5%. In
connection with such plans, the Company recognized $5.1 million of charges for
severance and related costs, of which $1.4 million of cash expenditures remained
unpaid as of September 27, 1998. During Fiscal 1999, the Company paid $1.0
million of severance and related costs. In addition, $0.4 million of the
restructuring reserve was decreased as the restructuring plan was completed.
In the quarter ended March 31, 1998, the Company decided to rationalize
certain product lines. As a result, the Company evaluated the recoverability of
the carrying value of the equipment and other assets utilized for such product
lines, which resulted in a $5.0 million charge to write-down the assets to their
fair market value.
In the quarter ended September 30, 1997, the Company adopted a
restructuring plan designed to improve efficiency and enhance its
competitiveness. Restructuring charges of $9.7 million were recognized,
consisting of cash charges primarily related to severance costs, as well as
costs to close and exit the Riverside facility. Including the unspent portion of
these charges, the Company had total restructuring reserves of $13.2 million
classified as "Other current liabilities" as of September 30, 1997. During
Fiscal 1998, the Company paid $8.8 million of severance, plant closure and
related costs. In addition, $4.2 million of the restructuring reserve was
decreased due to a change in the restructuring plan as a result of a change in
senior management in connection with the SF Holdings Investment. During Fiscal
1999, the company paid $0.1 million of severance and related expenses. In
addition, $0.1 million of the restructuring reserve was decreased as the
restructuring plan was completed.
During the quarter ended December 31, 1997, the Company recorded a $1.5
million expense as a cumulative effect of change in accounting principle (net of
$1.0 million of income taxes) relating to the implementation of EITF 97-13,
which requires companies to expense any previously capitalized reengineering
costs in connection with software installation.
47
<PAGE>
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 in Fiscal 1997. 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 in Fiscal 1997.
The loss on asset disposal and impairment had no impact on the Company's cash
flow or its ability to generate cash flow in the future.
16. RELATED-PARTY TRANSACTIONS
Pursuant to the Management Services Agreement, as amended, SF Holdings
and AIPM, which manages AIP, are entitled to receive an aggregate annual fee of
$1.85 million, plus expenses, payable semi-annually. Under this agreement, SF
Holdings has the right, subject to the direction of the Company's Board of
Directors, to manage the day to day operations of the Company. AIPM provides
substantial ongoing financial and management services to the Company. Fees were
split between SF Holdings and AIPM 50/50 during Fiscal 1999. Fees will be split
between SF Holdings and AIPM, respectively, 60/40 during Fiscal 2000, 70/30
during Fiscal 2001 and paid 100% to SF Holdings thereafter. SF Holdings has
assigned substantially all of its interests under this agreement to Fonda, but
retains $200,000 per year of fees for administrative services.
During Fiscal 1999, the Company sold certain of its paper plate
manufacturing assets to Fonda for $2.4 million. In February 1999, the Company
entered into a five year operating lease with Fonda, whereby the Company leases
certain paper cup manufacturing assets from Fonda, resulting in equal monthly
payments totaling $0.2 million per year. Independent appraisals were obtained to
determine the fairness of both the purchase price and lease terms.
During Fiscal 1999, the Company sold $6.8 million of cups to Fonda,
$0.2 million of paper scrap to Fibre Marketing and $0.1 million of cups to CEG.
Accounts receivable, as of September 26, 1999 from these sales are $0.8 million
due from Fonda and $0.1 million due from Fibre Marketing. Sales to these
affiliates in preceding fiscal years were not material.
During Fiscal 1999, the Company purchased $6.1 million of corrugated
containers from Four M, $3.8 million of paper plates from Fonda and $0.4 million
of travel services from Emerald Lady, Inc. Accounts payable, as of September 26,
1999, from these purchases, are $0.5 million due to Four M and $0.7 million due
to Fonda. During Fiscal 1998, the Company purchased $1.8 million of corrugated
containers from Four M, of which $0.4 million was payable as of September 27,
1998. Purchases from Fonda and Emerald Lady, Inc. in preceding fiscal years were
not material.
All of the above referenced affiliates, except AIP and AIPM, are under
the common control of the Company's Chief Executive Officer.
17. CONTINGENCIES
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 in federal court. The remaining plaintiffs claimed, among other things,
that the Company wrongfully terminated the Lily-Tulip, Inc. Salary Retirement
Plan (the "Plan") in violation of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). The relief sought by plaintiffs was to have the plan
termination declared ineffective. In December 1994, the United
48
<PAGE>
States Court of Appeals for the Eleventh Circuit (the "Circuit Court") ruled
that the Plan was lawfully 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 (the "District Court")
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 of their appeal which petition was denied on July 29, 1998. In
October 1998, plaintiffs filed a Petition for Writ of Certiorari to the United
States Supreme Court, which was denied in January 1999. The Company has begun
the process of paying out the termination liability. As of November 19, 1999,
the Company has disbursed $4.2 million in termination payments.
On April 27, 1999, the plaintiffs filed a motion in the District Court
for reconsideration of the court's dismissal without appropriate relief and a
motion for attorneys' fees with a request for delay in determination of
entitlement to such fees. On June 17, 1999, the District Court deferred these
motions and ordered discovery in connection therewith. Discovery is expected to
be completed by the end of December 1999. 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 operations.
A patent infringement action seeking injunctive relief and damages
relating to the Company's production and sale of certain paper plates 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. During the fourth quarter of Fiscal
1999, mediation resulted in a settlement of this action whereby the Company
agreed to pay damages of $2.6 million. This amount has been fully reserved by
the Company, with the first of two payments, $1.6 million, made on September 30,
1999. The second payment of $1.0 million is due July 1, 2000.
On July 13, 1999, the Company received a letter from the EPA
identifying the Company, among numerous others, as a "potential responsible
party" under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, at a site in Baltimore, Maryland. The EPA
letter states that it does not constitute a final determination by EPA
concerning the liability of the Company or any other entity. The Company denies
liability and has no reason to believe the final outcome of this matter will
have a material effect on the Company's financial condition or results of
operations. However, no assurance can be given about its ultimate effect on the
Company, if any, given the early stage of this investigation.
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 financial position or results of operations.
18. SUBSEQUENT EVENTS
The Company is currently under contract to sell a 400,000 square foot
warehouse facility located in Owings Mills, Maryland. The Company does not
expect to incur a loss from the sale.
49
<PAGE>
19. SUMMARIZED FINANCIAL INFORMATION FOR SWEETHEART CUP COMPANY INC.
The following tables provide summarized financial information for
Sweetheart Cup and subsidiaries (in thousands):
September 26, September 27,
1999 1998
------------- -------------
Current assets $253,651 $257,399
Other assets 392,037 437,264
Current liabilities 402,037 122,516
Other liabilities 247,868 562,828
Prior year amounts below have been reclassified as noted in Note 1:
Fiscal
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
Net sales $863,781 $843,502 $886,017
Gross profit 77,897 32,664 35,331
Income (loss) from
continuing operations
before cumulative effect
of change in accounting
principle and extraordinary
loss (5,267) (41,593) (37,221)
Net income (loss) (5,267) (42,999) (38,161)
50
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
----
Independent Auditors' Report 52
Report of Independent Public Accountants 53
Schedule II - Valuation and Qualifying Accounts 54
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Sweetheart Holdings Inc.:
We have audited the consolidated financial statements of Sweetheart Holdings
Inc. and Subsidiaries (the "Company") as of September 26, 1999 and September 27,
1998 and years then ended, and have issued our report thereon dated November 19,
1999; such consolidated financial statements and report are included in this
Form 10-K. The schedule listed in the accompanying index is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/DELOITTE & TOUCHE LLP
Baltimore, Maryland
November 19, 1999
52
<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 balance sheet as of September 30, 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended of Sweetheart Holdings Inc. and Subsidiaries included in this Form 10-K
and have issued our report thereon dated December 8, 1997 (except with respect
to the matter discussed in Note 1 - Inventories, as to which the date is
December 3, 1998). Our audit was 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 audit 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 1 -
Inventories, as to which the
date is December 3, 1998)
53
<PAGE>
SCHEDULE II
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(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
--------------- --------- ------------ ------------ -------------- ------
Allowance for Doubtful Accounts:
<S> <C> <C> <C> <C> <C>
Fiscal 1999 $1,817 $ 341 $ 11 $ 264 $ 1,905
Fiscal 1998 1,740 769 (4) 688 1,817
Fiscal 1997 2,466 446 51 1,223 1,740
</TABLE>
(1) Provision for doubtful accounts.
(2) Includes recoveries on accounts previously written-off, translation
adjustments and reclassifications.
(3) Accounts written-off.
54
<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 November 24, 1999.
SWEETHEART HOLDINGS INC.
(Registrant)
By: /s/ DENNIS MEHIEL
--------------------------------
Dennis Mehiel
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on November 24, 1999, by the following
persons in the capacities indicated:
Signature Capacity
--------- --------
/s/ DENNIS MEHIEL Chief Executive Officer and Chairman
----------------------- of the Board
Dennis Mehiel
/s/ THOMAS ULEAU President, Chief Operating Officer
----------------------- and Director
Thomas Uleau
/s/ W. RICHARD BINGHAM Director
-----------------------
W. Richard Bingham
/s/ THEODORE C. ROGERS Director
-----------------------
Theodore C. Rogers
/s/ KIM A. MARVIN Director
-----------------------
Kim A. Marvin
/s/ HANS H. HEINSEN Senior Vice President - Finance
----------------------- and Chief Financial Officer
Hans H. Heinsen (Principal Financial Officer and
Principal Accounting Officer)
55
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> SEP-26-1999
<CASH> 2,965
<SECURITIES> 0
<RECEIVABLES> 90,230
<ALLOWANCES> 1,905
<INVENTORY> 129,473
<CURRENT-ASSETS> 252,146
<PP&E> 558,861
<DEPRECIATION> 227,185
<TOTAL-ASSETS> 634,640
<CURRENT-LIABILITIES> 426,234
<BONDS> 118,446
0
0
<COMMON> 54
<OTHER-SE> 18,220
<TOTAL-LIABILITY-AND-EQUITY> 634,640
<SALES> 863,781
<TOTAL-REVENUES> 863,781
<CGS> 763,750
<TOTAL-COSTS> 763,750
<OTHER-EXPENSES> 65,714
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,671
<INCOME-PRETAX> (7,354)
<INCOME-TAX> (2,941)
<INCOME-CONTINUING> (4,413)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,413)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
