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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X|Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 24, 2000
|_|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 12b of the Act: None
Securities of the Registrant registered pursuant to Section 12g 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 27, 2000. 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 27, 2000:
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 10 1/2% Senior Subordinated Notes due
2003 (the "Sweetheart Notes") of Sweetheart Cup Company Inc., a wholly owned
subsidiary of the Registrant.
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PART I
Item 1. BUSINESS
General
Sweetheart Holdings Inc. ("Sweetheart Holdings"), together with its
wholly owned subsidiary Sweetheart Cup Company Inc. ("Sweetheart Cup", and
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 2000, the
Company had net sales of approximately $953 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), Preference(TM) and Go Cup(R) 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. During
the third quarter of Fiscal 2000, the Company acquired Sherwood Industries, Inc.
("Sherwood") which designs and produces cup making equipment, paper cups and
other disposable food service products.
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. The Company's
institutional foodservice customer base focuses on two major customer groups,
national accounts and distributors. 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. The Company also sells consumer foodservice products primarily
through grocery stores, club stores and convenience stores.
Institutional foodservice is the Company's largest customer group,
accounting for approximately 87.9% of gross sales during Fiscal 2000. Management
believes the Company is one of the largest manufacturers of disposable
foodservice products in North America.
Paper, foam and plastic cups, lids and straws represent the largest
part of the Company's United States disposable foodservice 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(R).
The Company 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.
The Company also offers carryout 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
carryout 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(R) 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). The Company also designs and
manufactures cup-making equipment. This equipment is manufactured in the
Company's machine shop and assembly plants located in Owings Mills, Maryland and
Kensington, Connecticut. 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. Consumer products are sold to grocery, convenience and club stores.
The Company focuses its marketing efforts on both the distributor and
the 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 both a direct sales organization and
brokers. 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 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, Dixie Foodservice (a division of Fort James Corp.),
Solo Cup Co., International Paper Food Service Group and Pactiv. Major
competitors in its food packaging customer base include Berry Plastics, Inc.,
Landis Plastics, Inc., Interbake Foods Inc., Polytainer, Ltd. and Sealright Co.,
Inc.
Customers
The Company markets its products primarily to customers in the United
States. During Fiscal 2000, sales to the Company's customers in Canada
constituted approximately 7.1% of its net sales. During Fiscal 2000, sales to
the Company's five largest customers represented approximately 35.2% of its net
sales. One national customer of the Company accounted for 11.1% of its net sales
in Fiscal 2000. 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, discharge of waste and storm
water and the disposal of hazardous wastes. The Company is subject to liability
for the investigation and remediation of environmental contamination (including
contamination caused by other parties) at properties that it owns or operates
and at other properties where the Company or its predecessors have arranged for
the disposal of hazardous substances. As a result, the Company is involved from
time to time in administrative and judicial proceedings and inquiries relating
to environmental matters. The Company believes that, except as noted below,
there are currently no material pending 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 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 ("CERCLA"), 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. On December 20, 1999, the Company received an information request letter
from the EPA, pursuant to CERCLA, regarding a Container Recycling Superfund Site
in Kansas City, Kansas. The Company denies liability and has no reason to
believe the final outcomes will have a material effect on the Company's
financial condition or results of operations. However, no assurance can be given
about the ultimate effect on the Company, if any, given the early stage of the
investigations.
Technology and Research
The Company maintains a facility for the development of new products
and product line extensions in Owings Mills, Maryland and a facility for
machinery design & building in Kensington, Connecticut. 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,
equipment, and processes and technical assistance in adhering to environmental
rules and regulations. The Company strives to expand its proprietary
manufacturing technology, further automate its manufacturing operations and
develop improved manufacturing processes, equipment, and products.
Employees
At September 24, 2000, the Company employed approximately 6,384
persons, of whom approximately 5,385 persons were hourly employees.
Approximately 93.3% 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, Kensington,
Connecticut, 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 24, 2000, approximately
24.7% of the Company's hourly employees were covered by the Sweetheart CBAs. The
current expiration dates of the Springfield, Augusta, Kensington and Toronto
CBAs are March 4, 2001, October 31, 2002, September 30, 2001 and November 30,
2003, respectively. The Company considers its relationship with its employees to
be good.
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.
Size
Type of Owned/ (Approximate
Location Facility (1) Leased square feet)
-------- ------------ ------ ------------
Augusta, Georgia............................ M/W O 339,000
Conyers, Georgia (2 facilities)............. M/W O 350,000
W O 555,000
Chicago, Illinois (2 facilities)............ M/W O 902,000
W L 741,000
Dallas, Texas .............................. M/W O 1,316,000
Hampstead, Maryland......................... W L 1,034,000
Kensington, Connecticut (4 facilities)...... M/W L 96,000
M/W L 112,000
W L 40,000
W L 30,000
Lafayette, Georgia.......................... M/W L 147,000
Manchester, New Hampshire................... M/W O 160,000
North Las Vegas, Nevada (2 facilities)...... M/W L 195,100
W L 58,450
Ontario, California......................... W L 396,000
Owings Mills, Maryland (2 facilities)....... M/W O 1,533,000
M/W O 267,000
Somerville, Massachusetts................... M/W O 193,000
Springfield, Missouri (2 facilities)........ M/W O 925,000
W L 415,000
Wilmington, Massachusetts................... W L 119,000
Scarborough, Ontario, Canada ............... M/W O 400,000
- --------
(1) M-Manufacturing; W-Warehouse; M/W-Manufacturing and Warehouse in same facility.
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, 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
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 with the United
States Supreme Court, which was denied in January 1999. The Company has been in
the process of paying out the termination liability and associated expenses and
as of November 27, 2000, the Company has disbursed $12.3 million in termination
payments. The estimate of the total termination liability and associated
expenses, less payments, exceeds assets set aside in the Plan by approximately
$8.0 million, which amount has been fully reserved by the Company.
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 has been
completed and the Company is awaiting further action by the plaintiffs. 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. As of June 29, 2000,
all payments in conjunction with this settlement had been paid.
Other. 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 ("CERCLA"), 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. On December 20, 1999, the Company received an information request letter
from the EPA, pursuant to CERCLA, regarding a Container Recycling Superfund Site
in Kansas City, Kansas. The Company denies liability and has no reason to
believe the final outcomes will have a material effect on the Company's
financial condition or results of operations. However, no assurance can be given
about the ultimate effect on the Company, if any, given the early stage of the
investigations.
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
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 27, 2000, 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 24, 2000 September 26, 1999 and
September 27, 1998 and for Fiscal 2000, 1999 and 1998 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 and September 30, 1996 and for Fiscal 1997
and 1996 is derived from the historical consolidated financial statements of the
Company and subsidiaries for such periods.
During Fiscal 2000 and Fiscal 1997, the Company accelerated $0.5
million and $1.6 million, respectively, of amortization for unamortized debt
issuance costs related to the early retirement of debt. These charges are shown
as an extraordinary loss (net of $0.2 million and $0.6 million of income taxes,
respectively) 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.
Fiscal
------------------------------------------------------------------------------------
(In thousands) 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Operating Data:
Net sales $952,728 $863,781 $843,502 $886,017 $959,818
Cost of sales 833,959 763,750 787,706 822,818 859,029
--------- ------- ------- ------- ---------
Gross profit 118,769 100,031 55,796 63,199 100,789
Selling,general and administrative 64,852 67,406 68,818 66,792 61,788
Other (income) expense, net (4,688) (1,180) 12,400 (73) 4,271
Asset impairment expense - - 5,000 24,550 -
Restructuring charge (credit) 503 (512) 897 9,680 -
--------- --------- --------- --------- ---------
Operating income (loss) 58,102 34,317 (31,319) (37,750) 34,730
Interest expense, net 36,825 41,671 42,955 40,265 37,517
--------- --------- --------- --------- ---------
Income (loss) before taxes,
cumulative effect of change in
accounting principle and
extraordinary loss 21,277 (7,354) (74,274) (78,015) (2,787)
Income tax benefit (expense) (8,492) 2,941 29,711 31,206 1,115
Cumulative effect of change in
accounting principle - - 1,511 - -
Extraordinary loss 313 - - 940 -
--------- --------- --------- --------- ---------
Net income (loss) $12,472 $(4,413) $(46,074) $(47,749) $(1,672)
========= ========= ========= ========= =========
Balance Sheet Data (at end of
period):
Property,plant and equipment,net $205,787 $322,967 $355,224 $382,491 $427,833
Total assets 582,833 634,640 665,626 715,589 757,839
Long-term debt* 210,269 118,446 422,438 430,499 385,579
Shareholders' equity 30,413 18,274 18,983 70,670 118,552
* See Note 9 of the Notes to Consolidated Financial Statements.
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 and pending litigation.
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;
Fiscal 2000 is the period from September 27, 1999 through September 24, 2000.
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 2000 Compared to Fiscal 1999
Net sales increased $88.9 million, or 10.3%, to $952.7 million in
Fiscal 2000 compared to $863.8 million in Fiscal 1999 reflecting a 7.1% increase
in sales volume and a 2.9% increase in average sales prices to domestic
customers. During Fiscal 2000, the Company experienced an increase in sales
volume of those products with higher average selling prices. The increase in
average realized sales price reflects a successful effort by the Company to
raise prices to institutional foodservice customers and to sell a mix of units
with higher average selling prices. Sales volumes to institutional foodservice
customers increased 6.4% primarily as a result of the Company's focus on revenue
growth with key customers. Sales volumes to food packaging customers increased
0.5% while average realized sales price increased 1.3%, primarily as a result of
increased pricing resulting from raw material cost increases. Net sales to
Canadian customers increased $8.4 million, or 14.1%, primarily due to increased
sales volume of existing products to national accounts and the introduction of
several new products.
Gross profit increased $18.8 million, or 18.8%, to $118.8 million in
Fiscal 2000 compared to $100.0 million in Fiscal 1999. As a percentage of net
sales, gross profit increased to 12.5% in Fiscal 2000 from 11.6% in Fiscal 1999.
This improvement is attributable to a shift in sales towards a more profitable
product mix in combination with increased sales volume, improved manufacturing
efficiencies and higher average selling prices, partially offset by increased
raw material costs.
Selling, general and administrative expenses decreased $2.5 million, or
3.7%, to $64.9 million in Fiscal 2000 compared to $67.4 million in Fiscal 1999.
As a percentage of net sales, selling, general and administrative expenses
decreased to 6.8% in Fiscal 2000 from 7.8% in Fiscal 1999. This decrease is due
primarily to lower spending in the areas of legal and outside consulting
services.
Other (income) expense, net was $4.7 million of income in Fiscal 2000
compared to $1.2 million of income in Fiscal 1999. In Fiscal 2000, the Company
recognized $4.1 million gain on the sale of property, plant and equipment and
$2.8 million due to the amortization of the deferred gain in conjunction with
the sale-leaseback transaction (see "--Liquidity and Capital Resources"). These
gains were partially offset by a one-time write-off of a $1.0 million unsecured
note receivable issued in connection with the
Fiscal 1998 sale of the bakery business due to the bankruptcy of the borrower.
The Company also incurred $1.4 million of expense in connection with the
Aldridge litigation.
Restructuring charge (credit) increased to a charge of $0.5 million in
Fiscal 2000 compared to a credit of $0.5 million in Fiscal 1999. During the
quarter ended March 2000, the Company established a restructuring reserve in
conjunction with the planned elimination of the Company's centralized machine
shop, primarily for severance and related costs in connection with workforce
reductions. See Note 16 of the Notes to Consolidated Financial Statements.
Operating income (loss) increased $23.8 million to $58.1 million in
Fiscal 2000 compared to $34.3 million in Fiscal 1999 due to the reasons
described above.
Interest expense, net decreased $4.9 million, or 11.8%, to $36.8
million in Fiscal 2000 compared to $41.7 million in Fiscal 1999. This decrease
is attributable to lower interest rates on lower outstanding balances under the
Company's revolving credit facility and the June 2000 redemption of the Senior
Secured Notes.
Income tax expense (benefit) increased $11.4 million to an expense of
$8.5 million in Fiscal 2000 compared to a benefit of $2.9 million in Fiscal
1999. The effective rate for Fiscal 2000 and 1999 was 40%.
Extraordinary loss on the early extinguishment of debt was $0.3 million
net of the income tax benefit in Fiscal 2000 resulting from the redemption of
the Company's Senior Secured Notes.
Net income (loss) increased $16.9 million, or 384.1%, to $12.5 million
income in Fiscal 2000 compared to $4.4 million loss in Fiscal 1999 due to the
reasons described above.
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 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) increased $26.8 million to a $2.9 million
benefit in Fiscal 1999 compared to a $29.7 million benefit in the Fiscal 1998.
The effective rate for Fiscal 1999 and 1998 was 40%.
Net income (loss) increased $41.7 million, or 90.5%, to a loss of $4.4
million in Fiscal 1999 compared to a loss of $46.1 million in Fiscal 1998 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 2000, 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 2001 capital
expenditures.
Net cash used in operating activities in Fiscal 2000 was $4.2 million
compared to net cash provided by operating activities of $49.8 million in Fiscal
1999. This is due primarily to an increase in receivables resulting from
increased sales and management's decision to build inventory in support of
anticipated market expansion. These increases were partially offset by more
favorable income from operating activities.
Working capital increased $306.3 million to $130.1 million at September
24, 2000 from a deficit of $176.2 million at September 26, 1999. This increase
resulted primarily from the redemption of the Senior Secured Notes and the
refinancing of the U.S. Credit Facility.
Capital expenditures for Fiscal 2000 were $23.5 million compared to
$30.8 million in Fiscal 1999. Capital expenditures in Fiscal 2000 included $13.6
million for new production equipment, $3.5 million for facility improvements and
$1.0 million for management information systems, with the remaining consisting
primarily of routine capital improvements. Funding for the Fiscal 2000 capital
expenditures was provided by cash generated from operations, $7.9 million from
the sale of a distribution facility and $0.6 million from the sale of machinery.
During Fiscal 2001, the Company
intends to continue to rely on a combination of cash generated by operations and
the sale of assets to fund capital expenditures.
On May 15, 2000, Sweetheart Cup acquired all of the issued and
outstanding capital stock of Sherwood and its subsidiaries pursuant to a Stock
Purchase Agreement among Sweetheart Cup and the stockholders of Sherwood (the
"Sherwood Agreement") for an aggregate purchase price of $17.4 million of which
$12.4 million was paid in cash, subject to post closing adjustments. As part of
the purchase price, Sweetheart Cup issued to the stockholders of Sherwood
non-interest bearing promissory notes due May 2005 in an aggregate principal
amount of $5.0 million and a present value of $2.9 million. Sweetheart Cup also
assumed $9.3 million of Sherwood's debt, which was paid in full on June 15,
2000.
In connection with a sale-leaseback transaction, on June 15, 2000,
Sweetheart Cup and Sweetheart Holdings sold certain production equipment located
in Owings Mills, Maryland, Chicago, Illinois and Dallas, Texas to several owner
participants for a fair market value of $212.3 million. The proceeds from this
sale were used in part to redeem the Senior Secured Notes, repay debt in
connection with the acquisition of Sherwood and repay a portion of the
outstanding balance under the U.S. Credit Facility.
Pursuant to a lease dated as of June 1, 2000 ("the Lease") between
Sweetheart Cup and State Street Bank and Trust Company of Connecticut, National
Association ("State Street"), as trustee, Sweetheart Cup leases the production
equipment sold in connection with the sales lease-back transaction from State
Street as owner trustee for several owner participants, through November 9,
2010. Sweetheart Cup has the option to renew the Lease for up to four
consecutive renewal terms of two years each. Sweetheart Cup also has the option
to purchase such equipment for fair market value either at the conclusion of the
Lease term or November 21, 2006. The Company's obligations under the Lease are
collateralized by substantially all of the Company's property, plant and
equipment owned as of June 15, 2000. The Lease contains various covenants, which
prohibit, or limit, among other things, dividend payments, equity repurchases or
redemption, the incurrence of additional indebtedness and certain other business
activities.
The Company is accounting for the sale-leaseback transaction as an
operating lease, expensing the $32.0 million annualized rental payments and
removing the property, plant and equipment sold from its balance sheet. A
deferred gain of $107.0 million was realized from this sale and will be
amortized over 125 months, which is the term of the Lease. The taxable gain in
the amount of $147.8 million has allowed the Company to utilize a substantial
portion of its net operating loss carry-forward. See "--Net Operating Loss
Carry-forwards".
On June 15, 2000, the Company refinanced its revolving credit facility
(the "U.S. Credit Facility") to extend the maturity of the $135 million
revolving credit facility, subject to borrowing base limitations, through June
15, 2005 and to add a term loan of $25 million that requires equal monthly
principal payments of $0.4 million through June 2005. Both the term loan and the
revolving credit facility have an accelerated maturity date of July 1, 2003 if
the Company's Senior Subordinated Notes due September 1, 2003 are not refinanced
before June 1, 2003. Borrowings under the revolving credit facility bear
interest, at the Company's election, at a rate equal to (i) LIBOR plus 2.00% or
(ii) a bank's base rate plus 0.25%, plus certain other fees. Borrowings under
the term loan bear interest, at the Company's election, at a rate equal to (i)
LIBOR plus 2.50% or (ii) a bank's base rate plus 0.50%, plus certain other fees.
The credit facility is collateralized by the Company's inventories and
receivables with the term loan portion of the credit facility further
collateralized by certain production equipment. As of September 24, 2000, $56.1
million was available under such facility. The fee for outstanding letters of
credit is 2.00% per annum and there is a commitment fee of 0.375% per annum on
the daily average unused amount of the commitments.
The Company's 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 24, 2000,
Cdn $1.8 million (approximately $1.2 million) was available under the Canadian
Credit Facility. The Company intends to refinance this debt prior to its
maturity however, there can be no assurances that it will be able to obtain such
refinancing on terms and conditions acceptable to the Company.
On June 15, 2000, the Company issued a redemption notice to the holders
of its Senior Secured Notes due September 1, 2000. In connection therewith, the
Company paid $190.0 million plus accrued interest to the U.S. Trust Company of
New York in settlement of the Senior Secured Notes.
These transactions set forth above are expected to increase annual net
income by approximately $8.0 million. This increase will be comprised of (i)
decreased interest expense and (ii) increased other income, as the gain from the
asset sale in conjunction with the sale-leaseback transaction is amortized over
the lease term, partially offset by (iii) decreased gross profit, as increased
rent expense will exceed depreciation expense, and (iv) increased income tax
expenses.
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.
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 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 with the United
States Supreme Court, which was denied in January 1999. The Company has been in
the process of paying out the termination liability and associated expenses and
as of November 27, 2000, the Company has disbursed $12.3 million in termination
payments. The estimate of the total termination liability and associated
expenses, less payments, exceeds assets set aside in the Plan by approximately
$8.0 million, which amount has been fully reserved by the Company.
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 has been
completed and the Company is
awaiting further action by the plaintiffs. 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. As of June 29, 2000, all payments in
conjunction with this settlement had been paid.
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 ("CERCLA"), 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. On December 20, 1999, the Company received an information request letter
from the EPA, pursuant to CERCLA, regarding a Container Recycling Superfund Site
in Kansas City, Kansas. The Company denies liability and has no reason to
believe the final outcomes will have a material effect on the Company's
financial condition or results of operations. However, no assurance can be given
about the ultimate effect on the Company, if any, given the early stage of the
investigations.
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,
payments in conjunction with the Company's lease commitments and debt service
requirements in the next twelve months.
Net Operating Loss Carry-forwards
As of September 24, 2000, the Company had approximately $32 million of
net operating loss ("NOL") carry-forwards for federal income tax purposes, which
expire in 2018. 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.
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 has evaluated this standard which is effective for Fiscal 2001 and
has concluded that SFAS No.133 will not have a significant impact on the
financial statement presentation.
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 establishes accounting and reporting standards for
revenue recognition and requires that an entity not recognize revenue until it
is realized or realizable and earned. The Company has evaluated this bulletin
which is effective for Fiscal 2001 and has concluded that SAB No.101 will not
have a significant impact on the financial statement
presentation.
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 29.
Item 9. CHANGES IN AND DISAGREMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the directors,
executive officers and key employees of Sweetheart Holdings and Sweetheart Cup
as of November 27, 2000. 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 58 Chairman and Chief Executive Officer of Sweetheart Holdings
and Sweetheart Cup
Thomas Uleau 56 President, Chief Operating Officer and Director of Sweetheart
Holdings and Sweetheart Cup
W. Richard Bingham 64 Director of Sweetheart Holdings and Sweetheart Cup
Kim A. Marvin 39 Director of Sweetheart Holdings and Sweetheart Cup
Theodore C. Rogers 66 Director of Sweetheart Holdings and Sweetheart Cup
Michael Hastings 53 Senior Vice President - Sales and Marketing of Sweetheart
Holdings and Sweetheart Cup
Hans H. Heinsen 47 Senior Vice President - Finance and Chief Financial Officer of
Sweetheart Holdings and Sweetheart Cup
Thomas Pasqualini 43 Senior Vice President - Manufacturing and Logistics of
Sweetheart Holdings and Sweetheart Cup
Daniel M. Carson 54 Vice President - Chief Administrative Officer, General
Counsel and Corporate Secretary of Sweetheart Holdings and
Sweetheart Cup
Charles E. Busse 62 Vice President - Research and Engineering of Sweetheart
Holdings and Sweetheart Cup
William H. Haas 59 Vice President - Sales of Sweetheart Holdings and Sweetheart
Cup
Rick Schneider 51 Vice President - Manufacturing of Sweetheart Holdings and
Sweetheart Cup
Jeffrey Seidman 46 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 subsidiaries, Fonda
and Creative Expressions Group ("CEG"). Since August 2000, he has been a
director of Four M Corporation ("Four M"), a converter and seller of interior
packaging, corrugated sheets and corrugated containers, which he co-founded.
From 1966 until August 2000, he was Chairman of Four M, and since 1977 (except
during a leave of absence from April 1994 through July 1995) he was the Chief
Executive Officer of Four M. Mr. Mehiel is also currently a director of Box USA
Holdings, Inc ("BoxUSA").
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
served as Executive Vice President and Chief Financial Officer of Four M from
1989 through 1993 and its Chief Operating Officer in 1994.
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
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. Pasqualini has served as Senior Vice President - Manufacturing
and Logistics of Sweetheart Holdings and Sweetheart Cup since August 2000. Mr.
Pasqualini served as Vice President of Logistics and Distribution and Director
of Distribution over the past five years, as well as several other positions
with the Company and its predecessors since 1981. Prior to joining Sweetheart
Cup, Mr. Pasqualini held a variety of manufacturing management positions with
Ampat.
Mr. Carson has served as Vice President - Chief Administrative Officer
and General Counsel and Corporate Secretary of Sweetheart Holdings and
Sweetheart Cup since August 2000. Mr. Carson served as Vice President - General
Counsel and Corporate Secretary of Sweetheart Holdings since October 1993 and
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. 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. 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 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 joining 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 2000, 1999, and 1998, 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) $50,000. Thus, such amounts are not reflected in the following table.
Summary Compensation Table
Annual Compensation
- ----------------------------------------- -------------------------------------------------- ------------------
All Other
Name and Principal Salary Bonus Compensation
Position Fiscal ($) ($) (1) ($)
- ----------------------------------------- ----------------- ---------------- --------------- ------------------
Dennis Mehiel
Chairman and Chief Executive Officer 2000 771,280 400,000 1,507 (2)
of Sweetheart Holdings and 1999 349,650 340,000 1,743 (3)
Sweetheart Cup 1998 (4) 188,775 - -
Thomas Uleau
President, Chief Operating Officer 2000 370,129 500,000 18,201 (5)
and Director of Sweetheart Holdings 1999 298,654 445,000 78,037 (6)
and Sweetheart Cup 1998 (7) 144,414 - 34,451 (8)
Michael Hastings
Senior Vice President - Sales and 2000 170,512 235,000 23,182 (9)
Marketing of Sweetheart Holdings and 1999 124,231 255,000 49,722 (10)
Sweetheart Cup 1998 (11) 56,664 - 54,387 (12)
Hans H. Heinsen
Senior Vice President - Finance and 2000 140,962 235,000 -
Chief Financial Officer of 1999 (13) 125,000 217,000 -
Sweetheart Holdings and Sweetheart 1998 - - -
Cup
Charles E. Busse
Vice President - Research and 2000 188,299 147,954 10,399 (14)
Engineering of Sweetheart Holdings 1999 177,216 130,199 128,606 (15)
and Sweetheart Cup 1998 175,848 - 352,642 (16)
(1) Amounts shown were paid based upon the Company's performance.
(2) Reflects $1,507 of life insurance premiums paid by the Company.
(3) Reflects $1,743 of life insurance premiums paid by the Company.
(4) Mr. Mehiel became Chairman and Chief Executive Officer effective March
12, 1998. Amounts shown here were paid during the remainder of Fiscal 1998.
(5) Reflects $5,282 paid for relocation expenses, $7,625 contributed under the
401(k) Plan, and $5,294 of life insurance premiums paid by the Company.
(6) 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.
(7) Mr. Uleau became President, Chief Operating Officer and Director effective
March 12, 1998. Amounts shown here were paid during the remainder of Fiscal
1998.
(8) 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.
(9) Reflects $14,119 paid for relocation expenses, $7,500 contributed under the
401(k) Plan, $1,563 of life insurance premiums paid by the Company.
(10) 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.
(11) 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.
(12) 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.
(13) Mr. Heinsen became Vice President of Finance and Chief Financial Officer
effective March 12, 1998; however, it was not until Fiscal 1999 that the
Company began to pay his salary and bonus.
(14) Reflects $6,673 contributed under the 401(k) Plan and $3,726 of life
insurance premiums paid by the Company.
(15) 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 insurance premiums paid by
the Company. (16) Reflects $190, 077 paid under the Executive Retention
Pan, $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, $106 of
long-term disability insurance 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 (the "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. Effective January 1, 2000, the Company
provides 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. The Company's match is
currently limited to participant contributions up to 6% of participant salaries.
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 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.
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 27,
2000, 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.
Class A Common Stock Class B Common Stock
----------------------------- ---------------------------
Number of Percent Number of Percent
Name of Beneficial Owner Shares of Class Shares of Class
- ------------------------ ------------- ----------- ------------ -----------
American Industrial Partners Capital Fund, L.P. 280,189 26.8% - -
One Maritime Plaza
Suite 2525
San Francisco, CA 94111
Kane & Co., as nominee for First Plaza Group Trust
(1)................................................ 182,000 17.4 - -
c/o Chase Manhattan Bank
4 New York Plaza - 11th floor
New York, NY 10004
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............................. 505,200 48.3 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)................................... 370,059 35.4 3,218,019 73.3
Directors and executive officers as a group
(4 persons)(6)..................................... 657,220 62.8 3,278,645 74.6
(1) Chase Manhattan Bank, 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 by SF Holdings of which 502,080 are held
directly and 3,120 are held indirectly through Fonda, which is wholly owned
by SF Holdings. Mr. Mehiel beneficially owns 73.3% 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 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
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 Subordinate 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, and 60/40 during Fiscal 2000. Fees will be split 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
All of the below and above referenced affiliates are under the common
ownership of the Company's Chief Executive Officer, except AIP and AIPM which
are affiliates of a shareholder.
During Fiscal 2000, the Company sold (i) $16.7 million of cups to Fonda
(a wholly owned subsidiary of SF Holdings), and (ii) $0.8 million of scrap paper
to Fibre Marketing Group, LLC ("Fibre Marketing"). Included in accounts
receivable, as of September 24, 2000, is $2.2 million due from Fonda and $0.2
million due from Fibre Marketing.
During Fiscal 2000, the Company purchased (i) $8.0 million of
corrugated containers and $0.2 million of other services from Four M, (ii) $11.4
million of paper plates, $0.2 million of equipment rental and $1.0 million of
other services from Fonda and (iii) $0.4 million of travel services from Emerald
Lady, Inc. Included in accounts payable, as of September 24, 2000, are $0.1
million due to Four M and $0.9 million due to Fonda. Other purchases from and
sales to affiliates during Fiscal 2000 were not material.
During Fiscal 2000, the Company purchased certain paper cup machines
from Fonda at a fair market value of $1.3 million. The equipment was recorded in
property, plant and equipment at Fonda's net book value, resulting in a charge
to equity of $1.0 million. Independent appraisals were obtained to determine the
fairness of the purchase price.
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 (i) $6.8 million of cups to Fonda,
(ii) $0.2 million of paper scrap to Fibre Marketing and (iii) $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 (i) $6.1 million of
corrugated containers from Four M, (ii) $3.8 million of paper plates from Fonda
and (iii) $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.
During the fourth quarter of Fiscal 2000, the Company entered into a
lease agreement with D&L Development, LLC, an entity in which the Company's CEO
has an interest, to lease a warehouse facility in Hampstead, Maryland. In Fiscal
2000, rental payments under this lease were $0.7 million. Annual rental payments
under the 20 year lease are $3.7 million for the first 10 years of the lease and
$3.8 million annually, thereafter.
In November 2000, the Company began leasing a facility from D&L Andover
Property, LLC, an entity in which the CEO has an interest. Annual rental
payments under the 20 year lease are $1.5 million in the first year, which
escalates at a rate of 2% each year thereafter.
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 Incorp
oration of Sweetheart Holdings Inc. dated March 11, 1998 (inco
rporated 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).
10.13 Asset Sale Agreement dated as of October 6, 1993 between
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
(incorporated by reference from Exhibit 10.1 of the Company's
report on Form 10-Q dated February 11, 1994).
10.14 Bill of Sale, Assignment and Assumption Agreement dated as of
October 6,1993 between Sweetheart Holdings Inc. and Sweetheart
Cup Company Inc. (incorporated by reference from Exhibit 10.2
of the Company's report on Form 10-Q dated February 11, 1994).
10.15 Wraparound Note dated as of October 6, 1993 made by Sweetheart
Holdings Inc. to Sweetheart Cup Company Inc. (incorporated
by reference from Exhibit 10.3 of the Company's report on Form
10-Q dated February 11, 1994).
10.16 Asset Distribution Agreement dated as of October 6, 1993
between Sweetheart Holdings Inc. and Sweetheart Cup Company
Inc. (incorporated by reference from Exhibit 10.4 of the
Company's report on Form 10-Q dated February 11, 1994).
10.17 Manufacturing Agreement dated as of October 6, 1993 between
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc. (the
"Manufacturing Agreement") (incorporated by reference from
Exhibit 10.5 of the Company's report on Form 10-Q dated
February 11, 1994).
10.18 First Amendment to Manufacturing Agreement dated February 25,
1994 (incorporated by reference from Exhibit 10.21 of the 1994
10-K).
10.19 Patent/Know-How License Agreement dated as of October 6, 1993
between Sweetheart Holdings Inc. and Sweetheart Cup Company
Inc. (incorporated by reference from Exhibit 10.6 of the
Company's report on Form 10-Q dated February 11, 1994).
10.21 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).
10.47 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).
10.51 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 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).
10.57 Second Amended and Restated Loan and Security Agreement dated
as of June 15, 2000 among Sweetheart Cup , as Borrower,
Sweetheart Holdings, as Parent, Bank of America, N.A., as
Agent, and several Financial Institutions, named therein as
Lenders (incorporated by reference from Exhibit 10.57 of the
Company's report on Form 10-Q dated June 25, 2000).
10.58 Intercreditor Agreement dated as of June 15, 2000 among Bank
of America, N.A., as Agent, and State Street, solely in its
capacity as Owner Trustee and Lessor (incorporated by
reference from Exhibit 10.58 of the Company's report on Form
10-Q dated June 25, 2000).
10.59 Lease Agreement dated as of June 1, 2000 between State Street,
solely in its capacity as Owner Trustee and Lessor, and Sweet-
heart Cup, as Lessee (incorporated by reference from Exhibit
10.59 of the Company's report on Form 10-Q dated June 25,
2000).
10.60 Lease Supplement dated as of June 1,2000 between State Street,
solely in its capacity as Owner Trustee and Lessor, and Sweet-
heart Cup, as Lessee (incorporated by reference from Exhibit
10.60 of the Company's report on Form 10-Q dated June 25,2000)
10.61 Participation Agreement dated as of June 1, 2000 among
Sweetheart Cup, as Lessee, the Company, as Guarantor, State
Street, solely in its capacity as Owner Trustee, and several
Owner Participants (incorporated by reference from Exhibit
10.61 of the Company's report on Form 10-Q dated June 25,
2000).
10.62 Definitions and Rules of Usage dated as of June 1, 2000
executed in conjunction with the Participation Agreement
(incorporated by reference from Exhibit 10.62 of the Company's
report on Form 10-Q dated June 25, 2000).
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
A sale-leaseback transaction, accounted for as an operating lease, was
filed as an Item 2 disclosure on Form 8-K on June 27, 2000.
A redemption notice to the holders of the Company's Senior Secured
Notes was filed as an Item 5 disclosure on Form 8-K on June 27, 2000.
An amended and restated U.S. Credit Facility agreement was filed as an
Item 5 disclosure on Form 8-K on June 27, 2000.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 29
Consolidated Balance Sheets as of September 24, 2000
and September 26, 1999 30
Consolidated Statements of Operations and Other Comprehensive
Income (Loss)for Fiscal Years 2000, 1999 and 1998 31
Consolidated Statements of Cash Flows for Fiscal Years 2000,
1999, and 1998 32
Consolidated Statements of Shareholders' Equity for Fiscal
Years 2000, 1999, and 1998 33
Notes to Consolidated Financial Statements 34
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 24,
2000 and September 26, 1999, and the related consolidated statements of
operations and other comprehensive income (loss), shareholders' equity, and cash
flows for each of the three fiscal years in the period ended September 24, 2000.
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 auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of September 24, 2000 and September 26, 1999, and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended September 24, 2000 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 16 to the consolidated financial statements,
during 1998, the Company changed its method for accounting for reengineering
costs in connection with software installation.
/s/ DELOITTE & TOUCHE LLP
Baltimore, Maryland
November 15, 2000
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 24, September 26,
2000 1999
--------------- --------------
Assets
------
Current assets:
Cash and cash equivalents $ 3,415 $ 2,965
Cash in escrow 300 -
Receivables,less allowances of $2,072 and $1,905,respectively 110,077 88,325
Inventories 162,339 129,473
Deferred income taxes 16,303 12,962
Spare parts - current 21,543 16,278
-------- --------
Total current assets 313,977 250,003
-------- --------
Property, plant and equipment, net 205,787 322,967
Deferred income taxes 34,183 41,055
Spare parts 8,313 10,852
Goodwill, net 10,969 -
Other assets 9,604 9,763
-------- --------
Total assets $582,833 $634,640
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 76,317 $ 66,654
Accrued payroll and related costs 45,017 45,089
Other current liabilities 36,400 39,045
Current portion of deferred gain on sale of assets 10,275 -
Current portion of long-term debt 15,841 275,446
-------- --------
Total current liabilities 183,850 426,234
-------- --------
Commitments and contingencies (See Note 20) - -
Long-term debt 210,269 118,446
Deferred gain on sale of assets 93,948 -
Other liabilities 64,353 71,686
-------- --------
Total liabilities 552,420 616,366
-------- --------
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 100,070 101,090
Accumulated deficit (67,611) (80,083)
Accumulated other comprehensive income (loss) (2,100) (2,787)
--------- ---------
Total shareholders' equity 30,413 18,274
--------- ---------
Total liabilities and shareholders' equity $582,833 $634,640
======== ========
See accompanying Notes to Consolidated Financial Statements.
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands)
Fiscal
--------------- --------------- ---------------
2000 1999 1998
--------------- --------------- ---------------
Net sales $ 952,728 $ 863,781 $ 843,502
Cost of sales 833,959 763,750 787,706
----------- ----------- -----------
Gross profit 118,769 100,031 55,796
Selling, general and administrative expenses 64,852 67,406 68,818
Other (income) expense, net (4,688) (1,180) 12,400
Asset impairment expense - - 5,000
Restructuring charge (credit) 503 (512) 897
----------- ----------- -----------
Operating income (loss) 58,102 34,317 (31,319)
Interest expense, net of interest income of
$1,071, $122 and $755, respectively 36,825 41,671 42,955
----------- ----------- -----------
Income (loss) before income tax expense
(benefit), cumulative effect of change
in accounting principle and
extraordinary loss 21,277 (7,354) (74,274)
Income tax expense (benefit) 8,492 (2,941) (29,711)
----------- ----------- -----------
Income (loss) before cumulative effect
of change in accounting principle and
extraordinary loss 12,785 (4,413) (44,563)
Cumulative effect of change in accounting
principle (net of income taxes of $1,007) - - 1,511
Extraordinary (loss) on early extinguishment of
debt (net of income tax benefit of $209) (313) - -
----------- ----------- -----------
Net income (loss) $ 12,472 $ (4,413) $ (46,074)
=========== =========== ===========
Other comprehensive income (loss), net of tax:
Foreign Currency translation adjustment (122) 272 (1,062)
Minimum pension liability adjustment
(net of income taxes of ($539),($2,288)
and $3,281, respectively) 809 3,432 (4,922)
----------- ----------- -----------
Other comprehensive income (loss) 687 3,704 (5,984)
----------- ----------- -----------
Comprehensive income (loss) $ 13,159 $ (709) $ (52,058)
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal
----------------------------------------
2000 1999 1998
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 12,472 $ (4,413) $(46,074)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 40,231 48,270 46,738
Amortization of deferred gain (2,813) - -
Deferred income tax expense (benefit) 8,492 (2,941) (29,711)
Gain on sale of assets (4,439) (1,301) (4,245)
Cumulative effect of change in accounting principle, net - - 1,511
Asset impairment expense - - 5,000
Changes in operating assets and liabilities:
Receivables (21,119) (3,077) 526
Inventories (27,070) 3,592 9,212
Accounts payable 6,464 449 7,272
Pension termination liability (8,316) (792) 3,326
Other, net (8,136) 9,985 (11,349)
--------- --------- ---------
Net cash provided by (used in) operating activities (4,234) 49,772 (17,794)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (23,474) (30,790) (37,534)
Acquisition of a business (12,411) - -
Proceeds from sale of bakery - - 14,718
Proceeds from sale of property, plant and equipment 220,912 9,058 7,719
- --------- --------- ---------
Net cash provided by (used in) investing activities 185,027 (21,732) (15,097)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under credit facilities 9,957 (31,906) (4,129)
(Repayments) of other debt (190,000) - -
Decrease in restricted cash - - 29,016
(Increase)/decrease in cash escrow (300) 5,464 7,859
Payment of financing fees - - (1,509)
Other - - 371
--------- --------- ---------
Net cash provided by (used in) financing activities (180,343) (26,442) 31,608
---------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 450 1,598 (1,283)
CASH AND CASH EQUIVALENTS, beginning of period 2,965 1,367 2,650
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 3,415 $ 2,965 $ 1,367
========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 37,048 $ 39,828 $ 39,866
========= ========= =========
Income taxes paid $ 2,972 $ 80 $ 711
========= ========= =========
SUPPLEMENTAL NON-CASH INVESTING ACTIVITY:
Note payable associated with business acquisition $ 2,914 $ - $ -
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Accumulated Retained
Class A Class B Additional Other Earnings/ Total
Common Common Common Paid-In Comprehensive (Accumulated Note Shareholders'
Stock Stock (par) Stock (par) Capital Income (Loss) Deficit) Receivable Equity
-----------------------------------------------------------------------------------------------------
Balance, September 30, 1997 $101,100 $ - $ - $ - $ (507) $ (29,552) $ (371) $ 70,670
Net (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 (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
Net income - - - - - 12,472 - 12,472
Elimination of gain on
equipment purchased
from related party - - - (1,020) - - - (1,020)
Minimum pension liability
adjustment - - - - 809 - - 809
Translation adjustment - - - - (122) - - (122)
--------- ------- -------- --------- -------- ---------- --------- ---------
Balance, September 24, 2000 $ - $ 10 $ 44 $100,070 $(2,100) $ (67,611) $ - $ 30,413
==================================================================================================
See accompanying Notes to Consolidated Financial Statements.
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").
The Company is one of the largest producers of plastic and paper
disposable foodservice and food packaging products in North America. In Fiscal
2000, the Company had net sales of approximately $953 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), Preference(TM) and Go Cup(R) 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. One
national customer of the Company accounted for 11.1% of its net sales in Fiscal
2000.
1. SIGNIFICANT ACCOUNTING POLICIES
Business Segments - Sweetheart operates within one business segment and
accordingly does not report multiple business segments.
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 2000
is the 52 week period ended September 24, 2000. Fiscal 1999 is the 52 week
period ended September 26, 1999. Fiscal 1998 is the period from October 1, 1997
through September 27, 1998.
Principles of Consolidation and Translation - The financial statements
include the accounts of the Company and its subsidiaries on a consolidated basis
as of September 24, 2000, September 26, 1999 and September 27, 1998 and for
Fiscal Years 2000, 1999 and 1998. 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 inter-company 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 terms of a lease agreement and is held in escrow with the trustee
until utilized. (See Note 8)
Inventories - The Company accounts for inventories using the first-in
first-out (FIFO) method. Management believes that the FIFO method is preferable
because it 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.
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 37.4 years. The asset lives of equipment
range between 5 and 18 years and have an average useful life of 9.6 years.
Revenue Recognition - Revenue is recognized upon shipment of product.
Also, the Company rents filling equipment to certain of its customers and
recognizes this income over the life of the lease.
Goodwill - Goodwill represents the excess of the purchase price over
the fair value of tangible and identifiable intangible net assets acquired and
is amortized on a straight-line basis over twenty years. The carrying value of
goodwill is reviewed when facts and circumstances suggest that it may be
impaired. The Company assesses its recoverability by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted projected future cash flows.
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.
No deferred income taxes have been provided on the cumulative
undistributed earnings of the Canadian subsidiary of Sweetheart Cup. Those
earnings (approximately $12.5 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 has evaluated
this process which is effective for Fiscal 2001 and has concluded that SFAS No.
133 has no significant impact on the financial statement presentation.
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 establishes accounting and reporting standards for
revenue recognition and requires that an entity not recognize revenue until it
is realized or realizable and earned. The Company has evaluated this bulletin
which is effective for Fiscal 2001 and has concluded that SAB No.101 will not
have a significant impact on the financial statement presentation.
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 24, September 26,
2000 1999
-------------- --------------
Raw materials and supplies $ 47,218 $ 30,092
Finished products 104,326 92,193
Work in progress 10,795 7,188
--------- ---------
Total inventories $ 162,339 $ 129,473
========= =========
3. INCOME TAXES
The income tax provision includes the following components (in
thousands):
Fiscal
-----------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------
Current-
Federal $ (2,825) $ - $ -
State (800) - -
Foreign (270) - -
---------- --------- ---------
Total current (3,895) - -
---------- --------- ---------
Deferred -
Federal (4,369) 2,549 25,588
State (228) 364 3,656
Foreign - 28 467
--------- --------- ----------
Total deferred (4,597) 2,941 29,711
---------- --------- ---------
$ (8,492) $ 2,941 $ 29,711
========== ========= =========
The effective tax rate varied from the U.S. Federal tax rate of 35% for
Fiscal 2000, 1999 and 1998 as a result of the following:
Fiscal Years
-------------------------------------------------
2000 1999 1998
-------------------------------------------------
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%
====== ====== ======
Deferred income taxes reflect the net tax effects of net operating loss
carry-forwards, tax credit carry-forwards, and temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The significant components of the
Company's net deferred tax assets and liabilities are as follows:
September 24, September 26,
2000 1999
-------------- --------------
Assets
Post-retirement health and pension benefits $ 25,437 $ 26,947
Employee benefits 7,165 7,987
Net operating loss carry-forwards 11,627 84,410
Deferred gain on sale-leaseback transaction 41,689 -
Alternative minimum tax credit carry-forward 3,179 354
Other 7,617 8,810
--------- ---------
96,714 128,508
Liabilities
Depreciation (40,699) (63,433)
Inventory adjustments (5,529) (11,058)
--------- ---------
(46,228) (74,491)
--------- ---------
Net deferred tax assets $ 50,486 $ 54,017
========= =========
The Company has net operating loss carry-forwards for income tax
purposes of approximately $32 million, which will expire in 2018. Although
future earnings cannot be predicted with certainty, management currently
believes that realization of the net deferred tax asset is more likely than not.
4. PROPERTY, PLANT AND EQUIPMENT, NET
The Company's major classes of property, plant and equipment, net are
as follows (in thousands):
September 24, September 26,
2000 1999
---------------- ----------------
Land $ 16,780 $ 19,051
Buildings and improvements 88,577 89,933
Machinery and equipment 242,746 435,593
Construction in progress 7,858 5,575
------------- -------------
Total property, plant and equipment 355,961 550,152
------------- -------------
Accumulated depreciation (150,174) (227,185)
------------- -------------
Property, plant and equipment, net $ 205,787 $ 322,967
============= =============
Depreciation of property, plant and equipment totaled $37.8 million,
$45.9 million and $43.9 million in Fiscal 2000, 1999 and 1998, respectively.
5. ACQUISITION
On May 15, 2000, Sweetheart Cup acquired Sherwood, a manufacturer of
paper cups, containers and cup making equipment. Pursuant to a certain Stock
Purchase Agreement among Sweetheart Cup and the stockholders of Sherwood,
Sweetheart Cup acquired all of the issued and outstanding capital stock
(the "Sherwood Acquisition") of Sherwood and its subsidiaries for an aggregate
purchase price of $17.4 million of which $12.4 million was paid in cash, subject
to post closing adjustments. As part of the purchase price, Sweetheart Cup
issued to the stockholders of Sherwood promissory notes due May 2005 in an
aggregate principal amount of $5.0 million and a present value of $2.9 million.
Sweetheart Cup also assumed $9.3 million of Sherwood debt, which was paid in
full on June 15, 2000. The Sherwood Acquisition has preliminarily resulted in
goodwill as of September 24, 2000 of $11.2 million, which is being amortized
over 20 years. The acquisition has been accounted for using the purchase method
of accounting. Amounts and allocations of costs recorded may require adjustment
based upon information coming to the attention of the Company that is not
currently available. The consolidated financial statements of the Company
include the activity for Sherwood from May 15, 2000 to September 24, 2000. The
inclusion of this acquisition within the financial statements presented had a
minimal impact on the Company's results.
6. OTHER ASSETS
The components of other assets are as follows (in thousands):
September 24, September 26,
2000 1999
-------------- --------------
Debt issuance costs, net of
accumulated amortization $ 3,988 $ 4,077
Intangible pension asset
(See Note 18) 884 2,217
Prepaid assets 3,076 989
Other 1,656 2,480
---------- ----------
Total other assets $ 9,604 $ 9,763
========== ==========
Amortization of debt issuance costs totaled $2.0 million, $2.4 million
and $2.8 million for Fiscal 2000, 1999 and 1998, respectively, and is included
in interest expense.
7. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in
thousands):
September 24, September 26,
2000 1999
---------------- ---------------
Sales allowances $ 10,875 $ 8,980
Restructuring charges 68 -
Taxes, other than income taxes 3,295 4,434
Litigation, claims and assessments
(See Note 20) 9,288 20,004
Deferred rent payable 8,631 -
Interest payable 1,741 3,616
Other 2,502 2,011
----------- -----------
Total other current liabilities $ 36,400 $ 39,045
=========== ===========
8. DEFERRED GAIN ON SALE OF ASSETS
In connection with a sale-leaseback transaction, on June 15, 2000,
Sweetheart Cup and Sweetheart Holdings Inc. sold certain production equipment
located in Owings Mills, Maryland, Chicago, Illinois and Dallas, Texas for a
fair market value of $212.3 million to several owner participants. Pursuant to a
lease dated as of June 1, 2000 ("the Lease") between Sweetheart Cup and State
Street Bank and Trust Company of Connecticut, National Association ("State
Street"), Sweetheart Cup will lease such production equipment from State Street,
as owner trustee for several owner participants, through November 9, 2010. The
associated property, plant and equipment was removed from the balance sheet and
a deferred gain of $107.0 million was recorded and will be amortized over 125
months which is the term of the Lease. Annual rental payments under the Lease
will be approximately $32.0 million.
9. LONG-TERM OBLIGATIONS
Long-term debt, including amounts payable within one year, is as
follows (in thousands):
September 24, September 26,
2000 1999
-------------- --------------
U.S. Credit Facility $ 102,249 $ 84,476
Canadian Credit Facility 10,320 9,416
10.5% Senior Subordinated Notes 110,000 110,000
Sherwood Industries Notes 3,541 -
9.625% Senior Secured Notes - 190,000
----------- ----------
Total debt 226,110 393,892
Less - Current portion of long-term debt (15,841) (275,446)
----------- ----------
Total long-term debt $ 210,269 $ 118,446
=========== ==========
The aggregate annual maturities of long-term debt at September 24, 2000
are as follows (in thousands):
Fiscal 2001 $15,841
Fiscal 2002 5,007
Fiscal 2003 115,004
Fiscal 2004 5,004
Fiscal 2005 and thereafter 85,254
--------
$226,110
========
U.S. Credit Facility - On June 15, 2000, the Company's revolving credit
facility (the "U.S. Credit Facility") was amended and restated to extend the
maturity of the $135 million revolving credit facility, subject to borrowing
base limitations, through June 15, 2005 and to add a term loan of $25 million
that requires equal monthly principal payments of $0.4 million through June
2005. Both the term loan and the revolving credit facility have an accelerated
maturity date of July 1, 2003 if the Company's Senior Subordinated Notes due
September 1, 2003 are not refinanced before June 1, 2003. Borrowings under the
revolving credit facility will now bear interest, at the Company's election, at
a rate equal to (i) LIBOR plus 2.00% or (ii) a bank's base rate plus 0.25%, plus
certain other fees. Borrowings under the term loan will
bear interest, at the Company's election, at a rate equal to (i) LIBOR plus
2.50% or (ii) a bank's base rate plus 0.50%, plus certain other fees. In Fiscal
2000, the weighted average annual interest rate for the U.S. Credit Facility was
9.57%. The credit facility is collateralized by the Company's inventories and
receivable with the term loan portion of the credit facility further
collateralized by certain production equipment. As of September 24, 2000, $56.1
million was available under such facility. The fee for outstanding letters of
credit is 2.00% per annum and there is a commitment fee of 0.375% per annum on
the daily average unused amount of the commitments.
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
sale-leaseback owner participants, 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 first priority perfected security interest in
certain equipment.
The U.S. Credit Facility contains various covenants that limit, or
restrict, among other things, indebtedness, dividends, leases, capital
expenditures and the use of proceeds from asset sales and certain other business
activities. Additionally, the Company must maintain on a consolidated basis,
certain specified ratios at specified times, including, without limitation,
maintenance of minimum fixed charge coverage ratio. The Company is currently in
compliance with all covenants under the U.S. Credit Facility. The U.S. Credit
Facility provides for partial mandatory prepayments upon the sale of equipment
collateral unless net proceeds are used to purchase replacement collateral and
full repayment upon any change of control (as defined in the Agreement).
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
24, 2000, Cdn $1.8 million (approximately $1.2 million) was available under the
Canadian Credit Facility. The Company intends to refinance this debt prior to
its maturity however, there can be no assurances that it will be able to obtain
such refinancing on terms and conditions acceptable to the Company.
Senior Subordinated Notes - Sweetheart Cup is the obligor and
Sweetheart Holdings the guarantor with respect to $110 million of Senior
Subordinated Notes.
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, at a call premium of 101.313% until September 1, 2001 and 100%
thereafter. The Senior Subordinated Notes are subordinate in right of payment to
the prior payment in full of all borrowings under the U.S. Credit Facility, all
obligations under the Lease, and all other indebtedness not otherwise
prohibited.
The Senior Subordinated Notes contain various covenants which prohibit,
or limit, among other
things, asset sales, change of control, dividend payments, equity repurchases or
redemption, the incurrence of additional indebtedness, the issuance of
disqualified stock, certain transactions with affiliates, the creation of
additional liens and certain other business activities.
Senior Secured Notes - On June 15, 2000, the Company issued a
redemption notice to the holders of its Senior Secured Notes due September 1,
2000. In connection therewith, the Company paid $190.0 million plus accrued
interest with the U.S. Trust Company of New York in settlement of the Senior
Secured Notes.
Sherwood Industries Notes - As part of the Sherwood Acquisition on May
15, 2000, Sweetheart Cup issued to the stockholders of Sherwood promissory notes
due May 2005 in an aggregate principal amount of $5.0 million and a present
value of $2.9 million.
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments included in current
assets and current liabilities approximate their estimated fair value because of
the relatively short maturities of these instruments. Long-term debt
instruments, other than the Company's 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 Subordinated Notes are estimated
to be $7.7 million lower than the carrying value at September 24, 2000 and $12.1
million lower than the carrying value at September 26, 1999.
11. OTHER LIABILITIES
The components of other liabilities are as follows (in thousands):
September 24, September 26,
2000 1999
-------------- --------------
Post-retirement health care benefits
(See Note 18) $ 59,318 $ 59,401
Pensions (See Note 18) 2,349 9,044
Prepaid vendor credits 750 1,500
Other 1,936 1,741
----------- ----------
Total other liabilities $ 64,353 $ 71,686
=========== ==========
12. 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.
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 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 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.
13. RELATED-PARTY TRANSACTIONS
All of the below referenced affiliates are under the common ownership
of the Company's Chief Executive Officer, except AIP and AIPM which are
affiliates of a shareholder.
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 Subordinate Notes, and are 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, and 60/40 during Fiscal 2000. Fees will be split 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 2000, the Company sold (i) $16.7 million of cups to The
Fonda Group, Inc. ("Fonda", a wholly owned subsidiary of SF Holdings), and (ii)
$0.8 million of scrap paper to Fibre Marketing Group, LLC ("Fibre Marketing").
Included in accounts receivable, as of September 24, 2000, is $2.2 million due
from Fonda and $0.2 million due from Fibre Marketing.
During Fiscal 2000, the Company purchased (i) $8.0 million of
corrugated containers and $0.2 million of other services from Four M Corporation
("Four M"), (ii) $11.4 million of paper plates, $0.2 million of equipment rental
and $1.0 million of other services from Fonda and (iii) $0.4 million of travel
services from Emerald Lady, Inc. Included in accounts payable, as of September
24, 2000, are $0.1 million due to Four M and $0.9 million due to Fonda. Other
purchases from and sales to affiliates, if any, during Fiscal 2000 were not
significant.
During Fiscal 2000, the Company purchased certain paper cup machines
from Fonda at a fair market value of $1.3 million. The equipment was recorded in
property, plant and equipment at Fonda's net book value, resulting in a charge
to equity of $1.0 million. Independent appraisals were obtained to determine the
fairness of the purchase price.
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 (i) $6.8 million of cups to Fonda,
(ii) $0.2 million of
paper scrap to Fibre Marketing and (iii) $0.1 million of cups to Creative
Expressions Group ("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, if any, were not
material.
During Fiscal 1999, the Company purchased (i) $6.1 million of
corrugated containers from Four M, (ii) $3.8 million of paper plates from Fonda
and (iii)$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.
During the fourth quarter of Fiscal 2000, the Company entered into a
lease agreement with D&L Development, LLC, an entity in which the Company's CEO
has an interest, to lease a warehouse facility in Hampstead, Maryland. In Fiscal
2000, rental payments under this lease were $0.7 million. Annual rental payments
under the 20 year lease are $3.7 million for the first 10 years of the lease and
$3.8 million annually, thereafter.
In November 2000, the Company began leasing a facility from D&L Andover
Property, LLC, an entity in which the CEO has an interest. Annual rental
payments under the 20 year lease are $1.5 million in the first year, which
escalates at a rate of 2% each year thereafter.
14. 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 $28.2
million, $18.7 million and $16.6 million for Fiscal Years 2000, 1999 and 1998,
respectively. Future minimum rental commitments under non-cancelable operating
leases in effect at September 24, 2000 are as follows (in thousands):
Fiscal 2001 $ 48,949
Fiscal 2002 47,571
Fiscal 2003 45,461
Fiscal 2004 43,195
Fiscal 2005 40,935
Fiscal 2006 and thereafter 235,418
---------
$ 461,529
=========
In connection with a sale-leaseback transaction, on June 15, 2000,
Sweetheart Cup and Sweetheart Holdings sold certain production equipment located
in Owings Mills, Maryland; Chicago, Illinois; and Dallas, Texas for a fair
market value of $212.3 million to several owner participants.
Pursuant to the Lease dated as of June 1, 2000 between Sweetheart Cup
and State Street, Sweetheart Cup will lease such production equipment from State
Street, as owner trustee for several owner participants through November 9,
2010. Sweetheart Cup may renew the Lease at its option for up to four
consecutive renewal terms of two years each. Sweetheart may also purchase such
equipment for fair market value either at the conclusion of the Lease term or
November 21, 2006, at its option. The Company's
obligations in connection with the Lease are collateralized by substantially all
of the Company's property, plan and equipment owned as of June 15, 2000. This
lease contains various covenants, which prohibit, or limit, among other things
dividend payments, equity repurchases or redemption, the incurrence of
additional indebtedness and certain other business activities.
The company is accounting for this transaction as an operating lease,
expensing the $32.0 million annualized rental payments and removing the
property, plant and equipment sold from its balance sheet. A deferred gain of
$107.0 million was realized from this sale and will be amortized over 125
months, which is the term of the Lease.
15. OTHER EXPENSE (INCOME)
In Fiscal 2000, the Company realized a $4.1 million gain on the sale of
a warehouse facility in Owings Mills, Maryland and a $2.8 million due to the
amortization of the deferred gain in conjunction with the sale-leaseback
transaction. These gains were partially offset by a one-time write-off of a $1.0
million unsecured note receivable issued in connection with the Fiscal 1998 sale
of the bakery business due to the bankruptcy of the borrower. The Company also
incurred $1.4 million of expense in connection with the Aldridge liability.
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, California facility. These expenses were offset in part by the $3.3
million gain on the sale of the bakery business.
16. NON-RECURRING CHARGES
During the quarter ended March 26, 2000, the Company established a
restructuring reserve of $0.7 million in conjunction with the planned
elimination of the Company's centralized machine shop operation from which 53
positions would be eliminated. During the quarter ended, September 24, 2000, the
Company reversed $0.2 million of this reserve as a result of 12 employees being
placed into open positions within the Company. Approximately $0.1 million of the
restructuring reserve remained at September 24, 2000, which the Company expects
to utilize through December 2000.
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.
17. EXTRAORDINARY LOSS
During Fiscal 2000, in conjunction with the redemption of the Company's
Senior Secured Notes and the refinancing of the U.S. Credit Facility, the
Company charged $0.5 million, or $0.3 million net of income tax benefit, to
results of operations as an extraordinary item, which amount represents the
unamortized deferred financing fees, prepaid interest and redemption fees
pertaining to such debt.
18. 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 Company's employees ("Participants") are covered
under a 401(k) defined contribution plan. Effective January 1, 2000, the Company
provides 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. The Company's match is
currently 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 $4.4 million,
$3.2 million and $3.4 million for Fiscal 2000, 1999 and 1998 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
-------------- -------------- --------------
2000 1999 1998
-------------- -------------- --------------
Pension Benefits
Service Cost $ 726 $ 1,019 $ 989
Interest Cost 4,173 4,013 3,881
Return on plan assets (4,459) (3,916) (3,883)
Amortization of prior service cost 178 241 222
Recognized net actuarial cost 73 269 41
--------- --------- ---------
Net periodic pension cost $ 691 $ 1,626 $ 1,250
--------- --------- ---------
Other Benefits
Service Cost $ 830 $ 1,027 $ 898
Interest Cost 3,136 3,271 3,056
Amortization of prior service cost (799) (416) (432)
Recognized net actuarial cost (838) (299) (978)
--------- --------- ---------
Net periodic benefit cost $ 2,329 $ 3,583 $ 2,544
--------- --------- ---------
The following table sets forth the change in benefit obligation for
the Company's benefit plans (in thousands):
Pension Benefits Other Benefits
---------------- --------------
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
--------------- ---------------- ---------------- ---------------
Change in benefit obligation:
Benefit obligation at beginning of period $ 56,874 $ 58,653 $ 42,406 $ 48,771
Service cost 726 1,019 830 1,027
Interest cost 4,173 4,013 3,136 3,271
Amendments - 202 - (3,520)
Actuarial (gain) or loss (3,161) (3,469) (2,641) (4,962)
Benefits paid (3,614) (3,544) (2,413) (2,181)
---------- ---------- ---------- ----------
Benefit obligation at end of period $ 54,998 $ 56,874 $ 41,318 $ 42,406
Change in plan assets:
Fair value of plan assets at beginning of
period $ 44,323 $ 38,600 $ - $ -
Actual return on plan assets 3,500 5,737 - -
Employer contributions to plan 4,355 3,530 1,921 1,746
Participant contributions to plan - - 492 435
Benefits paid (3,614) (3,544) (2,413) (2,181)
---------- ---------- ---------- ----------
Fair value of plan assets at end of period $ 48,564 $ 44,323 $ - $ -
Funded status $ (6,434) $ (12,551) $ (41,318) $ (42,406)
Unrecognized prior service cost 1,474 2,217 (6,403) (7,202)
Unrecognized (gain) loss 170 2,444 (14,697) (12,893)
---------- ---------- ---------- ----------
Net liability recognized $ (4,790) $ (7,890) $(62,418) $(62,501)
---------- ---------- ---------- ----------
The following sets forth the amounts recognized in the Consolidated
Balance Sheets:
Pension Benefits
----------------
September 24, September 26,
2000 1999
-------------- --------------
Funded status $ (6,434) $ (12,551)
Intangible asset 884 2,217
Other (gain) loss (375) (40)
Deferred income taxes 454 994
Accrued other comprehensive (income) loss 681 1,490
---------- ----------
Net liability recognized $ (4,790) $ (7,890)
---------- ----------
The assumptions used in computing the preceding information are as
follows:
Fiscal
------------ ------------ ------------
2000 1999 1998
------------ ------------ ------------
Pension Benefits
Discount rate 8.00% 7.75% 7.00%
Rate of return on plan assets 10.00% 10.00% 10.00%
Other Benefits
Discount rate 8.00% 7.75% 7.00%
For measurement purposes, a 7% annual rate of increase in health care
benefits was assumed for 2000. The rate is assumed to decrease gradually to 5%
for 2002 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 $2,994 $(2,633)
Effect on net periodic post-
retirement benefit cost $193 $(163)
19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as
follows (in thousands):
September 24, September 26,
2000 1999
--------------- -------------
Foreign currency translation
adjustment $(1,418) $(1,297)
Minimum pension liability
adjustment (682) (1,490)
-------- --------
Accumulated other comprehensive
income (loss) $(2,100) $(2,787)
======== ========
20. 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 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 been in
the process of paying out the termination liability and associated expenses and
as of September 24, 2000, the Company has disbursed $12.3 million in termination
payments. The estimate of the total termination liability and associated
expenses, less payments, exceeds assets set aside in the Plan by approximately
$8.0 million, which amount has been fully reserved by the Company.
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 has been
completed and the Company is awaiting further action by the plaintiffs. 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. As of June 29, 2000, all payments in
conjunction with this settlement had been paid.
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 ("CERCLA"), 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. On December 20, 1999, the Company received an information request letter
from the EPA, pursuant to CERCLA, regarding a Container Recycling Superfund Site
in Kansas City, Kansas. The Company denies liability and has no reason to
believe the final outcomes will have a material effect on the Company's
financial condition or results of operations. However, no assurance can be given
about the ultimate effect on the Company, if any, given the early stage of the
investigations.
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.
21. SUBSEQUENT EVENTS
On October 30, 2000, the Company entered into a 20 year lease
obligation for a manufacturing facility located in North Andover, Massachusetts.
In the first year, the annual rent payment is $1.5 million. Beginning with the
second year and each succeeding lease year, the rental will be an amount equal
to the sum of the base rent in effect as of the last day of the immediately
preceding lease year plus an amount equal to 2% of the amount determined
pursuant to the foregoing year's base rent.
22. SUMMARIZED FINANCIAL INFORMATION FOR SWEETHEART CUP COMPANY INC.
All of the outstanding stock of Sweetheart Cup is owned by Sweetheart
Holdings and thereby Sweetheart Holdings is the guarantor of the 10 1/2% Senior
Subordinated Notes of Sweetheart Cup. The following financial information for
Sweetheart Cup and subsidiaries, Sweetheart Holdings and the Company is
presented in accordance with Rule 3-10 of Regulation S-K.
(In thousands)
Fiscal 2000
---------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
---------- ----------- ------------- -------------
Current assets $ 309,108 $ 16 $ 4,853 $ 313,977
Other assets 179,161 68,526 21,169 268,856
Current liabilities 161,446 23,646 (1,242) 183,850
Other liabilities 321,874 (6,096) 52,792 368,570
Fiscal 1999
---------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
---------- ----------- ------------- -------------
Current assets $ 483,984 $ 25 $(234,006) $ 250,003
Other assets 158,071 315,095 (88,529) 384,637
Current liabilities 402,268 25,208 (1,242) 426,234
Other liabilities 247,868 232,763 (290,499) 190,132
Fiscal 2000
---------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
---------- ----------- ------------- -------------
Net sales $ 952,728 $234,386 $(234,386) $ 952,728
Gross profit 96,438 19,486 2,845 118,769
Income (loss) before
cumulative effect of
change in accounting
principle and
extraordinary loss 13,677 (892) - 12,785
Net income (loss) $ 13,364 $ (892) $ - $ 12,472
Fiscal 1999
---------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
---------- ----------- ------------- -------------
Net sales $ 863,781 $234,431 $(234,431) $ 863,781
Gross profit 77,897 19,289 2,845 100,031
Income (loss) before
cumulative effect of
change in accounting
principle and
extraordinary loss (5,267) 854 - (4,413)
Net income (loss) $ (5,267) $ 854 $ - $ (4,413)
Fiscal 1998
---------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
---------- ----------- ------------- -------------
Net sales $ 843,502 $245,297 $(245,297) $ 843,502
Gross profit 32,665 20,235 2,896 55,796
Income (loss) before
cumulative effect of
change in accounting
principle and
extraordinary loss (45,874) 1,311 - (44,563)
Net income (loss) $ (47,385) $ 1,311 $ - $ (46,074)
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
Independent Auditors' Report 54
Schedule II - Valuation and Qualifying Accounts 55
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 24, 2000 and
September 26, 1999, and for each of the three fiscal years in the period ended
September 24, 2000, and have issued our report thereon dated November 15, 2000;
such consolidated financial statements and report are included in this Form
10-K. Our audits also included the financial statements schedule listed in the
accompanying index. This schedule 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 consolidated financial statements taken as a whole, presents fairly in
all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Baltimore, Maryland
November 15, 2000
SCHEDULE II
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
----------------------------
Balance at Charged to Charged
beginning of costs and to other Balance at
Classifications period expenses (1) accounts (2) Deductions (3) end of period
--------------- ------------- -------------- -------------- ---------------- --------------
Allowance for Doubtful Accounts:
Fiscal 2000 $ 1,905 $ 342 $ 24 $ 199 $ 2,072
Fiscal 1999 1,817 341 11 264 1,905
Fiscal 1998 1,740 769 (4) 688 1,817
(1) Provision for doubtful accounts includes $20K as a result of the Sherwood
Acquisition.
(2) Includes recoveries on accounts previously written-off, translation
adjustments and reclassifications.
(3) Accounts written-off.
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 27, 2000.
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 27, 2000, 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 (Principal
Hans H. Heinsen Financial Officer and Principal
Accounting Officer)