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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 30, 2001
|_|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 December 6, 2001. Not Applicable.
There is no market for the Common Stock of the Registrant.
The number of shares outstanding of the Registrant's common stock
as of December 6, 2001:
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 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 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 2001, the Company had net sales of
approximately $981 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 and lidding equipment for use by dairies and other
food processors. This equipment is specifically designed by the Company to fill
and seal the Company's containers in its customers' plants. The Company also
sells paper converting equipment used primarily in the manufacture of paper cups
and food containers.
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"). In connection therewith, the then existing shareholders
continued to hold approximately 52% of the voting stock of the Company of which
American Industrial Partners Capital Fund L.P. ("AIP") holds approximately 27%.
In addition, on March 12, 1998, The Fonda Group, Inc. ("Fonda") became a wholly
owned subsidiary of SF Holdings. 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., a subsidiary of Sweetheart Cup. ("Lily").
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 as well as
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 its
customers' plants. The Company manufactures and markets its products in Canada
and Mexico 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 78.5% of net sales during Fiscal 2001. 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(R), and Go Cups(TM).
2
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 carry-out service products consisting of paper
and plastic tubs, containers, lids, and hinged foam containers. The Company
believes it is one of the largest manufacturers of paper tubs for chicken,
popcorn and take-out foods in North America. Munchie Cup(R), Flexstyle(R),
Highlights(R), Maximizers(TM), and Scoop Cup are some of the Company's carry-out
service brands.
Other products include the Company's Flex-E-Form(TM) straight-wall
paper manufacturing technology which is a process used to package food products
and Flex-Guard(TM), a paper spiral wound tamper-evident lid. In addition, the
Company provides foodservice customers with retail packages sold through
retailers under various Sweetheart and private label brands.
To enhance product sales, the Company designs, manufactures and leases
container filling and lidding equipment to dairies and other food processors to
package food items in the Company's containers at customers' plants. The
Company's filling and lidding equipment is leased to customers under the trade
names Auto-Pak, Flex-E-Fill(R) and FoodPac(R). Types of products packaged in the
Company's machines include ice cream, factory-filled jacketed ice cream cones,
cottage cheese, yogurt and squeeze-up desserts. The Company also 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.
Operations
As part of the Company's ongoing cost reduction and profit improvement
initiatives, the Company began a program to rationalize, consolidate and improve
its manufacturing facilities. The Company believes the consolidation program
will improve the efficiency of its manufacturing sites without any adverse
impact on customer service levels.
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
the seasonality of customer demand, production is generally greater during late
spring and summer than during fall and winter. See "Item 2. Properties".
3
Raw Materials and Suppliers
Raw materials are a critical component 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. In addition, the
Company manufactures foam products by melting polystyrene plastic and adding a
blowing agent that is then passed through a die and extruded into sheets of
plastic foam material. The foam is then formed into cups, bowls and plates.
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:
Dixie Foodservice Corp. (a division of the Georgia Pacific Corp.), Solo Cup Co.,
International Paper Food Service Business (a division of International Paper
Co.), Dart Container Corporation, and Pactiv Corporation. Major competitors in
its food packaging customer base include: Hutamaki, Inc., Landis Plastics Inc.,
Norse Dairy Systems Inc., and Berry Plastics, Inc.
Customers
The Company markets its products primarily to customers in the United
States. During Fiscal 2001, sales to the Company's customers in Canada and
Mexico constituted approximately 7.5% and 0.6% of its net sales, respectively.
During Fiscal 2001, net sales to the Company's five largest customers
represented approximately 32.8% of its total net sales. Of these five customers,
only one customer represents more than 10% of net sales, Perseco NA Inc., which
accounted for 12.1% of net sales. The Company has no written contract with this
customer. Sales are made to Perseco pursuant to a purchase order, the terms of
which are dependent on market conditions 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.
The Company sells to a diversified customer base consisting of
primarily of (i) major food service distributors such as Sysco Corporation and
Alliant Foodservice Inc., (ii) quick service chains, such as McDonald's
Corporation and Burger King Corporation, and convenience stores, such as 7
Eleven, Inc., (iii) national catering services, such as ARAMARK Corporation and
Sodexho Marriott Services. Our food packaging containers and lids are sold to
national and regional dairy and food companies such as Ben & Jerry's Homemade,
Inc., Blue Bell Creameries, L.P., Suiza foods Corporation and Prairie Farms
Dairy, Inc.
4
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 spent less than $200,000 for environmental
compliance in Fiscal 2001 and anticipates spending less than $200,000 for
environmental compliance in Fiscal 2002.
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. The
Company expects to complete the replacement of all such units within the next
five to ten years, at an estimated total cost of less than $800,000.
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.
Certain of the Company's facilities are located in states that have
regulations governing emissions of nitrogen oxide. While the Company believes
that these regulations do not apply to its operations, the Company will continue
to monitor its operations for compliance.
On July 13, 1999, the Company received a letter from the 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. The Company responded to the EPA that upon review of its files it had no
information with respect to any dealings with that site. On December 20, 1999,
the Company received an information request letter from the EPA, pursuant to
CERCLA, regarding a Container Recycling Superfund Site in Kansas City, Kansas
and in January 2000 the Company responded to such inquiry. In both instances,
the Company has received no further communication from the EPA. The Company
denies liability and has no reason to believe the final outcomes will have a
material adverse effect on the Company's financial condition or results of
operations. However, no assurance can be given about the ultimate effect on the
Company.
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,
5
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
continually reviews concepts and ideas to expand its proprietary manufacturing
technology, further automate its manufacturing operations and develop improved
manufacturing processes, equipment, and products. During Fiscal 2001, the
Company initiated a program to automate certain of its manufacturing operations
which the Company expects to be completed in Fiscal 2002. These initiatives
include the implementation of a robotic transfer and sorting system for finished
goods; automatic packaging; information systems upgrades; and enhancements to
printing processes. The Company believes that these initiatives will further
streamline its manufacturing operations. Also, the Company initiated new
products and new production capabilities which will enable its plastics
operations to address existing and emerging market opportunities.
Employees
At September 30, 2001, the Company employed 6,370 persons, of whom
5,265 persons were hourly employees. Approximately 92.1% 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; Toronto, Canada and Cuautitlan,
Mexico. The collective bargaining agreements 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 30, 2001, approximately 25.5% of the Company's hourly employees were
covered by these collective bargaining agreements. The current expiration dates
of the Springfield, Augusta, Kensington, Toronto and Cuautitlan collective
bargaining agreements are February 24, 2004, October 31, 2002, September 30,
2004, November 30, 2003 and December 31, 2001, 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, Canada and Mexico. 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.
6
Size
Type of (Approximate Owned/
Location Facility (1) square feet) Leased Lease Expiration
-------- -------------- --------------- -------- ------------------
Augusta, Georgia (2 facilities)............. M/W 339,000 O
W 202,500 L March 31,2023
Chicago, Illinois (2 facilities)............ M/W 902,000 O
W 735,500 L February 28, 2003
Conyers, Georgia (2 facilities)............. M/W 350,000 O
W 555,000 O
Cuautitlan, Mexico (3 facilities)........... M 24,200 L September 3, 2009
W 25,800 L September 3, 2009
W 28,800 L April 1, 2010
Dallas, Texas .............................. M/W 1,304,000 O
Hampstead, Maryland......................... W 1,034,000 L May 30, 2020
Kensington, Connecticut (4 facilities)...... M/W 96,000 L(2) May 15, 2010
M/W 112,000 L(2) May 15, 2010
W 30,000 L(2) May 15, 2010
W 34,100 L(2) June 1, 2002
Lafayette, Georgia.......................... M/W 147,000 L(3) April 30, 2003
Manchester, New Hampshire................... M/W 160,000 O(4)
North Andover, Massachusetts................ M/W 248,500 L October 31, 2020
North Las Vegas, Nevada (2 facilities)...... M/W 99,100 L August 31, 2010
96,000 L August 31, 2010
Ontario, California......................... W 396,000 L May 1, 2014
Owings Mills, Maryland (2 facilities)....... M/W 1,533,000 O
M/W 267,000 O
Scarborough, Ontario, Canada ............... M/W 400,000 O
W 125,000 L March 31, 2003
Somerville, Massachusetts................... M/W 193,000 O(5)
Springfield, Missouri (2 facilities)........ M/W 925,000 O
W 415,000 L March 25, 2003
(1) M-Manufacturing; W-Warehouse; M/W-Manufacturing and Warehouse in same
facility.
(2) Subject to a purchase option which expires May 15, 2005.
(3) Subject to a purchase option which expires April 30, 2002.
(4) On September 25, 2001, the Company entered into a purchase and sale
agreement pursuant to which it has agreed to sell this facility. The
Company expects to consummate this sale by the end of December 2001.
(5) On February 20, 2001, the Company's Board of Directors approved plans for
the closure and sale of the Somerville, Massachusetts facility. The Company
has reclassified this facility to assets held for sale.
Item 3. LEGAL PROCEEDINGS
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084,
was filed in state court in Georgia in April 1987
7
and later removed to federal court. The Plaintiffs claimed, among other things,
that the Company wrongfully terminated the Lily Tulip, Inc. Salary Retirement
Plan (the "Plan") in violation of the Employee Retirement Income Security Act of
1974, as amended. The relief sought by Plaintiffs was to have the Plan
termination declared ineffective. The United States Court of Appeals for the
Eleventh Circuit (the "Circuit Court") ruled that the Plan was lawfully
terminated on December 31, 1986, and judgment was entered dismissing the case in
March 1996. The Circuit Court affirmed the judgment entered in favor of the
Company. Plaintiffs filed a petition for writ of certiorari to the United States
Supreme Court, which was denied in January 1999. The Company expects to complete
paying out the termination liability and associated expenses in connection with
the Plan termination by December 31, 2001. As of September 30, 2001, the Company
disbursed $19.6 million in termination payments. The estimate of the total
termination liability and associated expenses, less payments, exceeds the assets
set aside in the Plan by $0.4 million, which amount has been fully reserved by
the Company.
Counsel for the Liquidating Trustee of Ace Baking Company Limited
Partnership, debtor in possession, has advised the Company that the Trustee
intends to pursue a claim, pursuant to the Uniform Fraudulent Transfer Act,
against the Company, in connection with the sale by the Company of its bakery
business to Ace Baking Company in November 1997. The Company believes that the
claim is without merit and the Company intends to vigorously defend any action
taken by the Trustee. In addition, the Company has no reason to believe that the
final outcome of this matter will have a material adverse effect on its
financial condition or results of operation. However, the Company cannot give
any assurances as to the ultimate effect on the Company, if any, given the early
stage of this matter.
The Company is subject to legal proceedings and other claims arising
in the ordinary course of its business. The Company maintains insurance coverage
of types and in amounts which it believes to be adequate and believes that it is
not presently a party to any litigation, the outcome of which could reasonably
be expected to have a material adverse effect on its financial condition 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 December 6, 2001, 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
8
for the fiscal years shown. The selected historical consolidated financial data
at September 30, 2001 and September 24, 2000 and for Fiscal 2001, 2000 and 1999
is derived from historical consolidated financial statements of the Company and
subsidiaries for such periods that have been audited by Deloitte & Touche LLP,
independent auditors and are included elsewhere herein. The selected historical
consolidated financial data at September 26, 1999, September 27, 1998 and
September 30, 1997 and for Fiscal 1998 and 1997 is derived from the audited
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) in the Consolidated Statements of Operations and Other
Comprehensive Income (Loss). During Fiscal 1998, 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. (See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations").
Fiscal
-----------------------------------------------------------
(In thousands) 2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Operating Data:
Net sales $ 981,348 $ 952,728 $ 863,781 $ 843,502 $ 886,017
Cost of sales 879,905 833,959 763,750 787,706 822,818
---------- ---------- ---------- ---------- ----------
Gross profit 101,443 118,769 100,031 55,796 63,199
Selling, general and administrative expenses 65,943 64,852 67,406 68,818 66,792
Restructuring charge (credit) - 503 (512) 897 9,680
Asset impairment expense 2,244 - - 5,000 24,550
Other (income) expense, net (9,167) (4,688) (1,180) 12,400 (73)
---------- ---------- ---------- ---------- ----------
Operating income (loss) 42,423 58,102 34,317 (31,319) (37,750)
Interest expense, net 23,519 36,825 41,671 42,955 40,265
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes, minority
interest, cumulative effect of change in
accounting principle and extraordinary loss 18,904 21,277 (7,354) (74,274) (78,015)
Income tax expense (benefit) 7,561 8,492 (2,941) (29,711) (31,206)
Minority interest in subsidiary 68 - - - -
Cumulative effect of change in accounting
principle - - - 1,511 -
Extraordinary loss, net - 313 - - 940
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 11,275 $ 12,472 $ (4,413) $ (46,074) $ (47,749)
========== ========== ========== ========== ==========
Balance Sheet Data (at end of year):
Property, plant and equipment, net $ 206,640 $ 205,787 $ 322,967 $ 355,224 $ 382,491
Total assets 604,062 582,833 634,640 665,626 715,589
Long-term debt * 242,176 210,269 118,446 422,438 430,499
Shareholders' equity 36,333 30,413 18,274 18,983 70,670
* - See Note 11 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
9
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 then existing shareholders continue to
hold 52% of the voting stock of the Company of which AIP holds approximately
27%. 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. In
addition, on March 12, 1998, Fonda became a wholly owned subsidiary of SF
Holdings and in conjunction with the SF Holdings Investment AIP assigned
substantially all of the Management Services Agreement, as amended, to SF
Holdings which assigned substantially all of its interest to Fonda. See "Item
13. Management Services Agreement with SF Holdings."
The Company has historically sold its products to two principal
customer groups, institutional foodservice and food packaging. Institutional
foodservice customers primarily purchase disposable hot and cold drink cups,
lids, food containers, plates, bowls, cutlery and straws. Products are sold
directly and through distributors to quick service restaurant chains, full
service restaurants, convenience stores, hospitals, airlines, theaters, school
systems and other institutional customers. Food packaging customers primarily
purchase paper and plastic containers for the dairy and food processing
industries. Food packaging customers also lease filling and packaging machines
designed and manufactured by the Company that fill and seal the Company's
containers in customers' plants. The Company manufactures and markets its
products in Canada to national accounts and distributors. During Fiscal 1999,
the Company began selling consumer foodservice products primarily through
grocery stores, club stores and convenience stores.
The Company's 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 2001 Compared to Fiscal 2000
Net sales increased $28.6 million, or 3.0%, to $981.3 million in Fiscal
2001 compared to $952.7 million in Fiscal 2000 reflecting a 0.5% increase in
sales volume and a 2.5% increase in average realized sales price. Realized
selling prices increased as a result of a shift in product mix. Sales volume
increased as a result of the incremental sales obtained from the Company's
acquisition of an 80% interest in Global Cup, S.A. De C.V. and its subsidiaries
("Global Cup") in April 2001. Net sales to Canadian customers increased $4.6
million, or 6.7%, primarily due to increased sales volume of existing products
to national accounts, while prices remained flat.
Gross profit decreased $17.4 million, or 14.6%, to $101.4 million in
Fiscal 2001 compared to $118.8 million in Fiscal 2000. As a percentage of net
sales, gross profit decreased to 10.3% in Fiscal 2001 from 12.5% in Fiscal 2000.
The decrease in gross profit is primarily attributable to the effects of the
Sale-Leaseback Transaction whereby, in Fiscal 2000, the Company sold certain of
its production equipment and is leasing back this equipment under an operating
lease. Consequently, cost of sales increased due to higher rent expense which
has been partially offset by lower depreciation expense. Specifically, rent
expense increased by $12.0 million net of a reduction in depreciation.
Additionally, gross profit declined due to an increase in energy costs of $4.4
million and transportation costs of $4.9 million.
10
Selling, general and administrative expense increased $1.0 million, or
1.5%, to $65.9 million in Fiscal 2001 compared to $64.9 million in Fiscal 2000.
However, as a percentage of net sales, selling, general and administrative
expense decreased to 6.7% in Fiscal 2001 from 6.8% in Fiscal 2000. This increase
resulted from an increase in wages of $2.5 million, an increase in brokerage
fees of $0.8 million and $0.7 million of on going operational expenses as a
result of the Fiscal 2001 Global Cup acquisition. These increases were partially
offset by a $2.3 million reduction in bad debt expense and a reduction in legal
fees of $0.7 million.
Asset impairment expense was $2.2 million in Fiscal 2001 as a result of
the Company's evaluation of the usefulness of certain equipment in connection
with the proposed consolidation of the Manchester, New Hampshire and
Springfield, Missouri facilities with other existing facilities.
Other (income) expense, net was $9.2 million of income in Fiscal 2001
compared to $4.7 million of income in Fiscal 2000. In Fiscal 2001, the Company
recognized $10.3 million due to the amortization of the deferred gain in
conjunction with the Sale-Leaseback Transaction. This gain was partially offset
by $1.6 million in expenses related to the relocation of the Somerville,
Massachusetts facility to North Andover, Massachusetts.
Operating income decreased $15.7 million, or 27.0% to $42.4 million in
Fiscal 2001 compared to $58.1 million in Fiscal 2000 due to the reasons
described above.
Interest expense, net decreased $13.3 million, or 36.1%, to $23.5
million in Fiscal 2001 compared to $36.8 million in Fiscal 2000. This decrease
is attributed to lower interest rates on higher outstanding revolving credit
balances and the June 2000 redemption of the Senior Secured Notes.
Income tax expense (benefit) decreased $0.9 million to an expense of
$7.6 million in Fiscal 2001 compared to an expense of $8.5 million in Fiscal
2000 as a result of lower pre-tax earnings. The effective rate for Fiscal 2001
and 2000 was 40%.
Minority interest was $0.1 million in Fiscal 2001 resulting from the
acquisition of Global Cup.
Net income decreased $1.2 million, or 9.6%, to $11.3 million income in
Fiscal 2001 compared to $12.5 million income in Fiscal 2000 due to the reasons
described above.
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.
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
11
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 expense 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 and is partially offset by an increase in executive compensation
resulting from improved operating results.
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 19 of the Notes to Consolidated Financial Statements.
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.
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
as a result of increased pre-tax earnings. The effective rate for Fiscal 2000
and 1999 was 40%.
Extraordinary loss on debt extinguishment was $0.3 million net of the
income tax benefit in Fiscal 2000 resulting from the redemption of the 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.
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 2001, the Company funded its capital
expenditures from the combination of cash generated from operations and the sale
of assets. The Company expects to continue this method of funding for its Fiscal
2002 capital expenditures.
12
Net cash provided by operating activities in Fiscal 2001 was $1.8
million compared to net cash used in operating activities of $4.2 million in
Fiscal 2000. The increase in operating cash flow in Fiscal 2001 is primarily a
result of the Company's improved management of its receivables and inventory
levels. Significant factors in the use of operating cash flow in Fiscal 2000
were increased receivables and inventory levels.
Net cash used in investing activities in Fiscal 2001 was $38.7 million
compared to net cash provided by investing activities of $185.0 million in
Fiscal 2000. This decrease is due primarily to the receipt of proceeds from the
Sale-Leaseback Transaction on June 15, 2000 whereby Sweetheart Cup and the
Company sold certain production equipment located in Owings Mills, Maryland,
Chicago, Illinois and Dallas, Texas to several owner participants for a fair
market value of $212.3 million. The decrease is partially offset by the
acquisition of Sherwood Industries Inc. for $16.8 million of which $12.1 million
was paid in cash.
Net cash provided by financing activities in Fiscal 2001 was $43.1
million compared to net cash used in financing activities of $180.3 million in
Fiscal 2000. This decrease is primarily due to the redemption of the $190.0
million principal amount of the Senior Secured Notes in Fiscal 2000. The net
proceeds generated from the Sale-Leaseback Transaction were used in part to
redeem these notes, repay debt in connection with the acquisition of Sherwood
and repay a portion of the outstanding balance under the U.S. Credit Facility.
Working capital increased $30.7 million to $160.8 million at September
30, 2001 from $130.1 million at September 24, 2000. This increase resulted from
current assets increasing $18.6 million and the current liabilities decreasing
$12.1 million. These changes resulted primarily from reduced payroll expenses
and the settlement of the Aldridge litigation liability.
Capital expenditures for Fiscal 2001 were $26.5 million compared to
$23.5 million in Fiscal 2000. Capital expenditures in Fiscal 2001 included $7.4
million for new production equipment, $14.4 million for facility improvements
and $0.8 million for management information systems, with the remaining
consisting primarily of routine capital improvements. Funding for the Fiscal
2001 capital expenditures was primarily provided by cash generated from
operations and the sale of assets. During Fiscal 2002, the Company intends to
continue to rely on this combination of funding.
On April 5, 2001, the Company purchased an 80% interest in Global Cup.
Global Cup manufactures, distributes and sells paper cups and lids throughout
Mexico and exports to other Latin American countries. The Company assumed the
liabilities and obligations of Global Cup arising under contracts or leases that
are either assets purchased by the Company or a part of the accounts payable.
The aggregate purchase price for the assets and working capital was $12.2
million which was paid in cash, subject to a post-closing working capital
adjustment. The Global Cup acquisition has resulted in goodwill of $3.9 million.
As a result of the potential post closing working capital adjustment, the final
calculation of which the Company expects to be completed within one year,
amounts and allocations of costs recorded may require adjustment based upon
information coming to the attention of the Company that is not currently
available.
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 $16.8 million of which $12.1 million was paid in cash. As part
of the purchase price, Sweetheart Cup issued to the stockholders of Sherwood
non-interest bearing promissory notes due May 2005 for $4.7 million and a
present value of $2.7 million (assuming an interest rate of 10.85%
13
per annum). Sweetheart Cup also assumed $9.3 million of Sherwood debt, which was
paid in full on June 15, 2000. The Sherwood Acquisition resulted in recognition
of goodwill of $10.7 million.
The Company has a revolving credit facility as amended (the "U.S.
Credit Facility") that, subject to borrowing base limitations, allows for a
maximum revolving credit borrowing of $145 million through June 15, 2005 and 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. In Fiscal 2001, the
weighted average annual interest rate for the U.S. Credit Facility was 7.58%.
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 30, 2001, $31.6
million was available under the revolving credit facility and the term loan
balance was $12.9 million. The fee for outstanding letters of credit is 2.00%
per annum and there is a commitment fee of 0.375% per annum on the daily average
unused amount of the commitments. As of September 30, 2001, LIBOR was 2.64% and
the bank's base rate was 6.00%.
On June 19, 2001, the Company's Canadian subsidiary refinanced its
credit agreement (the "Canadian Credit Facility") which provides for a term loan
facility of Cdn $15 million (approximately US $9.5 million) and a revolving
credit facility of up to Cdn $15 million (approximately US $9.5 million). The
term borrowings are payable quarterly through May 2004. Both the revolving
credit and term loan borrowings have a final maturity date of June 15, 2004. The
Canadian Credit Facility is secured by all existing and thereafter acquired real
and personal tangible assets of Lily and net proceeds on the sale of any of the
foregoing. Borrowings under the Canadian Credit Facility bear interest at an
index rate plus 1.75% with respect to the revolving credit facility and an index
rate plus 2.00% with respect to the term loan borrowings. As of September 30,
2001, Cdn $1.0 million (approximately US $0.6 million) was available under the
revolving facility and the term loan balance was Cdn $14.5 million
(approximately US $9.2 million) under the Canadian Credit Facility.
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.
14
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
Carryforwards".
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 100%. 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.
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.
The Company is subject to legal proceedings and other claims arising in
the ordinary course of its business. The Company maintains insurance coverage of
types and in amounts which it believes to be adequate and believes that it is
not presently a party to any litigation, the outcome of which could reasonably
be expected to have a material adverse effect on its financial condition or
results of operations.
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,
planned capital expenditures, payments in conjunction with the Company's lease
commitments and debt service requirements in the next twelve months.
The Company is contemplating various strategic options which may
include a restructuring of its business debt and capital structure, including,
among other things, the public sale or private placement of debt or equity
securities of the Company or its subsidiaries, joint venture transactions, new
borrowings, the refinancing of the Company's existing debt agreements, open
market purchases, tender offers or exchange offers of the Company's outstanding
securities. There can be no assurances that any of these strategic options will
be consummated.
During Fiscal 2001, the Company experienced a casualty loss at its
Somerville, Massachusetts facility. The Company carries business interruption
insurance and has filed a claim with the insurance company. Settlement of the
recovery amount is to be determined.
Net Operating Loss Carryforwards
As of September 30, 2001, the Company had approximately $28 million of
net operating loss ("NOL") carryforwards 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
15
no assurance that future taxable income will be generated to utilize such NOLs.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standard ("SFAS") No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 prohibits the use of the pooling-of-interest method for
business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001 and applies to all goodwill and other intangible assets
recognized in an entity's balance sheet. The Company has adopted SFAS No. 141
and is currently evaluating the impact of SFAS No. 142 on its consolidated
financial statements.
In October 2001, the FASB issued pronouncement SFAS No. 144 Impairment
or Disposal of Long-Lived Assets. This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of Accounting Principals Board Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business (as
previously defined in that Opinion). This Statement also amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The Company is currently evaluating the impact of SFAS No. 144 on its
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS No. 137 and SFAS No. 138.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and requires that an entity recognize all derivatives at fair value
in the balance sheet. The Company adopted SFAS No. 133 effective September 25,
2000. The adoption of SFAS No. 133 did not have an impact on the consolidated
financial statements.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company is exposed to market risk in the ordinary course of
business, which consists primarily of interest rate risk associated with our
variable rate debt. All borrowing under the US Credit Facility and Canadian
Credit Facility, each of which contains a revolving and term credit facility,
bear interest at a variable rate. Borrowings under the revolving credit facility
bear interest, at the Company's election, at a rate equal (i) LIBOR plus 2.00%
or (ii) a bank's base rate plus 0.25%, plus certain 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.
Borrowings under the Canadian Credit Facility bear interest at an index rate
plus 1.75% with respect to the revolving credit borrowings and an index rate
plus 2.00% with respect to the term loan borrowings. As of September 30, 2001,
the outstanding indebtedness under the US Credit Facility was $126.2 million and
the Canadian Credit Facility was $16.6 million in US dollars. Based upon these
amounts, the annual net income would change by approximately $0.9 million for
each one percentage point change in the interest rates applicable to our
variable debt. The level of the exposure to interest rate movements may
fluctuate significantly as a result of changes in the amount of indebtedness
outstanding under the revolving credit facilities.
16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements and Schedule attached hereto and listed in
Item 14 (a)(1) and (a)(2) hereof.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the directors,
executive officers and key employees of Sweetheart Holdings and Sweetheart Cup
as of December 6, 2001. 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 59 Chairman and Chief Executive Officer of Sweetheart Holdings
and Sweetheart Cup
Thomas Uleau 57 Executive Vice President and Director of Sweetheart Holdings
and Sweetheart Cup
W. Richard Bingham 65 Director of Sweetheart Holdings and Sweetheart Cup
Kim A. Marvin 40 Director of Sweetheart Holdings and Sweetheart Cup
Theodore C. Rogers 67 Director of Sweetheart Holdings and Sweetheart Cup
Michael Hastings 54 President of Sweetheart Holdings and Sweetheart Cup
Hans H. Heinsen 48 Senior Vice President - Finance and Chief Financial Officer of
Sweetheart Holdings and Sweetheart Cup
Thomas Pasqualini 44 Senior Vice President - Manufacturing and Logistics of
Sweetheart Holdings and Sweetheart Cup
Harvey L. Friedman 59 Senior Vice President, General Counsel and Corporate Secretary
of Sweetheart Holdings and Sweetheart Cup
Charles E. Busse 63 Vice President - Research and Engineering of Sweetheart
Holdings and Sweetheart Cup
Daniel M Carson 54 Vice President - Chief Administrative Officer for Sweetheart
Holdings and Sweetheart Cup
William H. Haas 60 Vice President - Sales of Sweetheart Holdings and Sweetheart
Cup
Mark B. Kirkwood 42 Vice President - Sales and Marketing for Sweetheart Holdings
and Sweetheart Cup
Rick Schneider 52 Vice President - Manufacturing of Sweetheart Holdings and
Sweetheart Cup
17
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 July 2000, he has been a director
of Box USA Holdings, Inc. ("Box USA"), formerly Four M Corporation ("Four M"), a
converter and seller of interior packaging, corrugated sheets and corrugated
containers, which he co-founded. From 1966 until July 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 Chief Executive Officer and director of Mannkraft Corporation
(formerly, Box USA of New Jersey), a manufacturer of corrugated containers.
Mr. Uleau has been Executive Vice President and a Director of
Sweetheart Holdings and Sweetheart Cup since March 1, 2001 and prior thereto was
President, Chief Operating Officer and a director since March 1998. Mr. Uleau
also has been Vice Chairman and Senior Vice President of SF Holdings since March
1, 2001 and prior thereto was President, Chief Operating Officer and a Director
of SF Holdings. He has been Executive Vice President of Fonda since March 1998
and has been a director of Fonda since 1988. He has also served in a variety of
executive officer positions at Fonda since 1989. He has been Executive Vice
President of CEG since 1996. He is also currently a director of CEG. He served
as Executive Vice President and Chief Financial Officer of Four M from 1989
through 1993 and as its Chief Operating Officer in 1994.
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"), a firm which manages a private equity firm that invests
in private and public companies, 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 been President of Sweetheart Holdings and Sweetheart
Cup since March 1, 2001 and prior thereto was Senior Vice President - Sales and
Marketing for Sweetheart Holdings and Sweetheart Cup since March 1998. Mr.
Hastings was 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 director 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
18
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. Friedman has served as Senior Vice President, General Counsel and
Secretary of Sweetheart Holdings and Sweetheart Cup since March 1, 2001. He has
served as General Counsel and Secretary of SF Holdings since February 1998, and
as Secretary and General Counsel of Fonda since May 1996. He was also a Director
of Fonda from 1985 to January 1997. Mr. Friedman is also Secretary and General
Counsel of CEG and Mannkraft Corporation, (formerly, Box USA of New Jersey) and
is a director of CEG and Box USA (formerly Four M). He was formerly a partner of
Kramer Levin Naftalis & Frankel LLP, a New York city law firm.
Mr. Busse has served as Vice President - Research and Engineering of
Sweetheart Holdings and Sweetheart Cup and their predecessors since 1983. Mr.
Busse has held several other positions with the Company and its predecessors
since 1963.
Mr. Carson has served as Vice President - Chief Administrative Officer
for Sweetheart Holdings and Sweetheart Cup since March 1, 2001. Mr. Carson
served as Vice President - General Counsel and Corporate Secretary of Sweetheart
Holdings from October 1993 until March 1, 2001 and served as Vice President -
General Counsel and Corporate Secretary of Sweetheart Cup from February 1993
until March 1, 2001. He served as Assistant General Counsel and Director of U.S.
Legal Affairs of Avon Products, Inc., a consumer products company, from
September 1991 to February 1993 and was Of Counsel to Bell, Boyd & Lloyd
(Chicago, Illinois) from June 1991 to August 1991. From May 1981 until June
1991, Mr. Carson was Associate General Counsel for Continental Can Company,
Inc., a packaging and paper products company.
Mr. Haas has served as Vice President - Sales for Sweetheart Cup and
their predecessors since 1985 and as Vice President - Sales for Sweetheart
Holdings since October 1998. Prior to joining the Company, Mr. Haas was Vice
President of Sales with Carnation Co., Inc., a food products company, where he
served for 20 years. Prior to joining Carnation Mr. Haas was with Nabisco, Inc.,
a food products company, as Director of National Account Sales.
Mr. Kirkwood has served as Vice President - Sales and Marketing for
Sweetheart Holdings and Sweetheart Cup since March 2001. Mr. Kirkwood served as
Vice President & General Manager of Sweetheart Packaging since November 1998,
Vice President - Sales of Sweetheart Packaging since April 1997, as well as
several other sales positions with the Company since 1992. From January 1989 to
May 1992, Mr. Kirkwood served as President of Grid Corporation, a marketing and
sales consulting company. Prior to joining Grid Corporation, Mr. Kirkwood held a
variety of marketing and strategic planning management positions with
Continental Can Company, Inc. at its Continental White Cap Inc. Division.
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.
19
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 2001, 2000, and 1999, 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 2001 560,576 140,000 412,540 (2)
of Sweetheart Holdings and 2000 771,280 400,000 1,507 (3)
Sweetheart Cup 1999 349,650 340,000 1,743 (4)
Thomas Uleau
Executive Vice President and 2001 383,173 86,411 12,724 (5)
Director of Sweetheart Holdings and 2000 370,129 500,000 18,201 (6)
Sweetheart Cup 1999 298,654 445,000 78,037 (7)
Harvey L. Friedman
Senior Vice President, General 2001 151,050 35,000 -
Counsel and Corporate Secretary of 2000 58,900 100,000 -
Sweetheart Holdings and Sweetheart 1999 - - -
Cup
Hans H. Heinsen
Senior Vice President - Finance and 2001 145,288 106,411 -
Chief Financial Officer of 2000 140,962 235,000 -
Sweetheart Holdings and Sweetheart 1999 125,000 217,000 -
Cup
Michael Hastings
President of Sweetheart Holdings and 2001 191,602 100,000 11,232 (8)
Sweetheart Cup 2000 170,512 235,000 23,182 (9)
1999 124,231 255,000 49,722 (10)
(1) Amounts shown were paid based upon the Company's performance.
(2) Reflects $2,580 of life insurance premiums paid by the Company and $409,960
for personal expenses paid by the Company.
20
(3) Reflects $1,507 of life insurance premiums paid by the Company.
(4) Reflects $1,743 of life insurance premiums paid by the Company.
(5) Reflects $5,724 of life insurance premiums paid by the Company and $7,000
contributed under the 401(K) Plan.
(6) 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.
(7) 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.
(8) Reflects $2,032 of life insurance premiums paid by the Company, $7,000
contributed under the 401(k) Plan, and $2,200 paid for car allowances.
(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.
SF Holdings Stock Option Plan
During Fiscal 2001, SF Holdings granted options to purchase shares of
its common stock to certain employees of the Company. The options vest over a
period of three years. Certain of the exercise prices of the options were below
the fair market value of SF Holding's common stock at the date of the grant.
During the vesting period, these discounts of $0.2 million are being amortized
as compensation expense and credited to additional paid-in capital by the
Company. Amortization expense relating to SF Holding's stock options was $0.1
million for Fiscal 2001.
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.
21
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 December 6, 2001,
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).................................... 362,734 34.7 3,154,318 71.8
Directors and named executive officers as a
group (7 persons) (6)............................... 660,606 63.1 3,308,080 75.3
(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
22
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 71.8% 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, SF Holdings and
Fonda, a wholly owned subsidiary of SF Holdings, manage 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 March 12, 1998, the consummation date of the SF Holdings
Investment, on a fully diluted
23
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 Subordinated 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, 60/40 during Fiscal 2000 and 70/30 during Fiscal 2001.
During Fiscal 2002 and thereafter, SF Holdings will be entitled to 100% of the
fees. 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 referenced affiliates are under the common ownership
of the Company's Chief Executive Officer, except AIP and AIPM which are
affiliates of a shareholder. The Company believes that transactions entered into
with related parties were negotiated on terms which are at least as favorable as
it could have obtained from unrelated third parties and were negotiated on an
arm's length basis.
During Fiscal 2001, the Company sold (i) $21.7 million of cups to
Fonda, and (ii) $3.1 million of scrap paper to Fibre Marketing Group, LLC, a
waste paper recovery business in which Fonda has a 25% interest ("Fibre
Marketing"). Included in accounts receivable, as of September 30, 2001, is $2.1
million due from Fonda and $1.2 million due from Fibre Marketing.
During Fiscal 2001, the Company purchased (i) $7.1 million of
corrugated containers other services from Box USA, a company in which the
Company's Chief Executive Officer, owns in excess of 10% of its outstanding
capital stock, (ii) $9.9 million of paper plates and $0.2 million of equipment
rental from Fonda and (iii) $0.5 million of travel services from Emerald Lady,
Inc., a company wholly owned by the Company's Chief Executive Officer. Included
in accounts payable, as of September 30, 2001, are $0.6 million due to Box USA
and $0.8 million due to Fonda. Other purchases from and sales to affiliates
during Fiscal 2001 were not significant.
During Fiscal 2000, the Company sold (i) $16.7 million of cups to
Fonda, and (ii) $0.8 million of scrap paper to 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 Box USA (ii) $11.4
million of paper plates, $0.2 million of equipment
24
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 Box USA and $0.9 million due to
Fonda. Other purchases from and sales to affiliates 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 2000, the Company entered into a lease agreement with D&L
Development, LLC, an entity in which the Company's Chief Executive Officer
indirectly owns 47%, to lease a warehouse facility in Hampstead, Maryland. In
Fiscal 2001 and 2000, rental payments under this lease were $3.6 million and
$0.7 million, respectively. Annual rental payments under the 20 year lease are
$3.7 million for the first 10 years of the lease and $3.8 million annually,
thereafter.
In November 2000, the Company began leasing a facility in North
Andover, Massachusetts from D&L Andover Property, LLC, an entity in which the
Company's Chief Executive Officer indirectly owns 50%. In Fiscal 2001, rental
payments under this lease were $1.4 million. 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.
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, a company in which the Chief Executive Officer owned more than 50%
of the common stock. 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 Box USA, (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
Box USA and $0.7 million due to Fonda.
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:
25
1. The financial statements listed in the "Index to Consolidated Financial
Statements."
2. The financial statement schedule listed in the "Index to Financial
Statement Schedules."
3. Exhibits
3.1 Certificate of Incorporation of Sweetheart Holdings Inc.
(incorporated by reference from Exhibit 3.1 of the Company's
report on Form 10-K dated December 22,1993 (the "1993 10-K")).
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation of Sweetheart Holdings Inc. dated March 11, 1998
(incorporated by reference from Exhibit 3.3 of the Company's
report on Form 10-Q dated May 15, 1998).
3.4 Amended and Restated By-Laws of Sweetheart Holdings Inc. dated
March 12, 1998 (incorporated by reference from Exhibit 3.4 of
the Company's report on Form 10-Q dated May 15, 1998).
4.1 Indenture for the Senior Secured Notes between Sweetheart Cup
Company Inc. and United States Trust Company of New York, as
Trustee (incorporated by reference from Exhibit 4.1 of
Sweetheart Holdings Inc.'s Report on Form 8-K dated October 6,
1993 (the "1993 8-K")).
4.2 Indenture for the Senior Subordinated Notes between Sweetheart
Cup Company Inc. and U.S. Trust Company of Texas, N.A., as
Trustee (incorporated by reference from Exhibit 4.2 on the
1993 8-K).
10.13 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).
26
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 Sweetheart 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 Sweetheart 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).
10.63 Third Amendment to Credit Agreement dated as of June 19, 2001
between Lily Cups, Inc. as Borrower and General Electric
Capital Canada Inc. as Lender
10.64 Amendment to Second Amended and Restated Loan and Security
Agreement, dated as of July 31, 2001, among Sweetheart Cup
Company, Inc.,Sweetheart Holdings Inc., Bank of America, N.A.,
Congress Financial Corp., Transamerica Business Credit Corp.,
GMAC Commercial Credit,LLC, PNC Bank, N.A.
10.65 Fourth Amendment To Credit Agreement, dated as of August 15,
2001, between Lily Cups Inc. and General Electric Capital
Canada Inc.
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 report on Form 8-K was filed on March 15, 2001 under Item 5.
A report on Form 8-K was filed on September 17, 2001 under Item 9.
A report on Form 8-K was filed on September 19, 2001 under Item 9.
27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 29
Consolidated Balance Sheets as of September 30, 2001
and September 24, 2000 30
Consolidated Statements of Operations and Other Comprehensive Income (Loss)
for Fiscal Years 2001, 2000 and 1999 31
Consolidated Statements of Cash Flows for Fiscal Years 2001, 2000, and 1999 32
Consolidated Statements of Shareholders' Equity for Fiscal
Years 2001, 2000, and 1999 33
Notes to Consolidated Financial Statements 34
28
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 30,
2001 and September 24, 2000, 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 30, 2001.
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, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of September
30, 2001 and September 24, 2000, and the results of their operations and their
cash flows for each of the three fiscal years in the period ended September 30,
2001 in conformity with accounting principles generally accepted in the United
States of America.
/s/ DELOITTE & TOUCHE LLP
Baltimore, Maryland
November 19, 2001
29
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, September 24,
2001 2000
--------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 9,593 $ 3,415
Cash in escrow 8 300
Receivables, less allowances of $2,445 and $2,072 114,893 110,077
Inventories 161,803 162,339
Deferred income taxes 17,089 16,303
Assets held for sale 7,368 -
Other current assets 21,836 21,543
---------- ----------
Total current assets 332,590 313,977
Property, plant and equipment, net 206,640 205,787
Deferred income taxes 30,349 34,183
Spare parts 12,077 8,313
Goodwill, net 13,803 10,969
Other assets 8,603 9,604
---------- ----------
Total assets $ 604,062 $ 582,833
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 82,944 $ 76,317
Accrued payroll and related costs 34,147 45,017
Other current liabilities 30,611 36,400
Current portion of deferred gain on sale of assets 10,275 10,275
Current portion of long-term debt 13,829 15,841
---------- ----------
Total current liabilities 171,806 183,850
Commitments and contingencies (See Notes)
Long-term debt 242,176 210,269
Deferred gain on sale of assets 83,672 93,948
Other liabilities 67,945 64,353
---------- ----------
Total liabilities 565,599 552,420
---------- ----------
Minority interest 2,130 -
---------- ----------
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 100,176 100,070
Accumulated deficit (56,336) (67,611)
Accumulated other comprehensive loss (7,561) (2,100)
---------- ----------
Total shareholders' equity 36,333 30,413
---------- ----------
Total liabilities and shareholders' equity $ 604,062 $ 582,833
========== ==========
See accompanying Notes to Consolidated Financial Statements.
30
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands)
Fiscal
-------------------------------------
2001 2000 1999
----------- ----------- -----------
Net sales $ 981,348 $ 952,728 $ 863,781
Cost of sales 879,905 833,959 763,750
---------- ---------- ----------
Gross profit 101,443 118,769 100,031
Selling, general and administrative expenses 65,943 64,852 67,406
Restructuring charge (credit) - 503 (512)
Asset impairment expense 2,244 - -
Other income, net (9,167) (4,688) (1,180)
---------- ---------- ----------
Operating income 42,423 58,102 34,317
Interest expense, net of interest income of
$70, $1,071 and $122 23,519 36,825 41,671
---------- ---------- ----------
Income (loss) before income tax expense
(benefit), minority interest and
extraordinary loss 18,904 21,277 (7,354)
Income tax expense (benefit) 7,561 8,492 (2,941)
Minority interest in subsidiary 68 - -
---------- ---------- ----------
Income (loss) before extraordinary loss 11,275 12,785 (4,413)
Extraordinary loss on debt extinguishment (net of
income tax benefit of $209) - (313) -
---------- ---------- ----------
Net income (loss) $ 11,275 $ 12,472 $ (4,413)
========== ========== ==========
Other comprehensive income (loss):
Net income (loss) $ 11,275 $ 12,472 $ (4,413)
Foreign currency translation adjustment (393) (122) 272
Minimum pension liability adjustment (net
of income taxes of ($3,379), $539 and
$2,288) (5,068) 809 3,432
---------- ---------- ----------
Comprehensive income (loss) $ 5,814 $ 13,159 $ (709)
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
31
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal
------------------------------------
2001 2000 1999
----------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 11,275 $ 12,472 $ (4,413)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 23,653 40,231 48,270
Amortization of deferred gain (10,276) (2,813) -
Asset impairment expense 2,244 - -
Deferred income tax expense (benefit) 7,191 4,597 (2,941)
Loss (gain) on sale of assets 107 (4,439) (1,301)
Changes in operating assets and liabilities (net of
business acquisitions):
Receivables (3,218) (21,119) (3,077)
Inventories 4,023 (27,070) 3,592
Spare parts (2,795) (757) 857
Accounts payable (7,348) 6,464 449
Pension termination liability (7,600) (8,316) (792)
Restructuring reserve (68) 68 (2,736)
Accrued payroll and related costs (10,870) (843) 5,764
Litigation reserve - (2,650) 1,908
Pensions (2,499) (3,662) (2,711)
Other, net (2,030) 3,603 6,903
---------- ---------- ---------
Net cash provided by (used in) operating activities 1,789 (4,234) 49,772
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (26,488) (23,474) (30,790)
Payments for business acquisitions (12,198) (12,411) -
Proceeds from sale of property, plant and equipment 8 220,912 9,058
---------- ---------- ---------
Net cash provided by (used in) investing activities (38,678) 185,027 (21,732)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under credit facilities 42,775 9,957 (31,906)
Repayments of other debt - (190,000) -
Increase in cash escrow (17) (206,318) (10,821)
Decrease in cash escrow 309 206,018 16,285
---------- ---------- ---------
Net cash provided by (used in) financing activities 43,067 (180,343) (26,442)
---------- ---------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 6,178 450 1,598
CASH AND CASH EQUIVALENTS, beginning of year 3,415 2,965 1,367
---------- ---------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 9,593 $ 3,415 $ 2,965
========== ========== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 21,932 $ 37,048 $ 39,828
========== ========== =========
Income taxes paid $ 431 $ 2,972 $ 80
========== ========== =========
SUPPLEMENTAL NON-CASH FINANCING ACTIVITY:
Note payable associated with business acquisition $ - $ 2,914 $ -
========== ========== =========
See accompanying Notes to Consolidated Financial Statements.
32
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Class A Class B Additional Other Total
Common Common Paid-In Accumulated Comprehensive Shareholders'
Stock Stock Capital Deficit Income (Loss) Equity
--------- --------- ------------ ------------- --------------- ---------------
Balance, September 28, 1998 $ 10 $ 44 $ 101,090 $ (75,670) $ (6,491) $ 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 (80,083) (2,787) 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 (67,611) (2,100) 30,413
Net income - - - 11,275 - 11,275
Equity based compensation - - 106 - - 106
Minimum pension liability
adjustment - - - - (5,068) (5,068)
Translation adjustment - - - - (393) (393)
------ ------ ---------- ---------- --------- ---------
Balance, September 30, 2001 $ 10 $ 44 $ 100,176 $ (56,336) $ (7,561) $ 36,333
====== ====== ========== ========== ========= =========
See accompanying Notes to Consolidated Financial Statements.
33
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
2001, the Company had net sales of approximately $981 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 12.1%, 11.1% and 11.7% of its net
sales in Fiscal 2001, Fiscal 2000, and Fiscal 1999, respectively.
1. SIGNIFICANT ACCOUNTING POLICIES
Business Segments - The Company operates within one business segment
and accordingly does not report multiple business segments. Included within our
reported sales is $1.6 million of lease revenue. Further identification of net
sales by product and service or group of similar products and services is not
available.
Fiscal year end - The Company's fiscal year end is the 52 or 53 week
period ending on the last Sunday in September. Fiscal 2001 is the 53 week period
ended September 30, 2001. Fiscal 2000 is the 52 week period ended September 24,
2000. Fiscal 1999 is the 52 week period ended September 26, 1999.
Principles of Consolidation and Translation - The consolidated
financial statements include the accounts of Sweetheart Holdings and its
subsidiaries. Assets and liabilities denominated in foreign currencies are
translated at the rates of exchange in effect at the balance sheet date.
Revenues and expenses 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 in shareholders' equity and
comprehensive income. All inter-company accounts and transactions have been
eliminated.
The accounts of the Company's Mexican subsidiary, Global Cup, are
consolidated as of and for the period ended August 31, 2001 due to the time
needed to consolidate this subsidiary. No events occurred related to this
subsidiary in September 2001 that materially affected the Company's consolidated
financial position or results of operations.
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 10).
Inventories - Inventories are stated at the lower of cost or market,
using the first-in first-out method.
Property, Plant and Equipment - Property, plant and equipment is
recorded at cost, less
34
accumulated depreciation, or fair market value for business acquisitions 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 improvements range between 2 and 50
years and have an average useful life of 22 years. The asset lives of machinery
and equipment range between 5 and 13 years and have an average useful life of
12.5 years.
Costs related to construction in progress are accumulated as incurred
and transferred to property, plant and equipment when put into service, at which
time, the asset is depreciated over its useful life.
Revenue Recognition - Revenue is recognized upon shipment of product
and when collectability is reasonably assured. Also, the Company rents filling
equipment to certain of its customers and recognizes this income over the life
of the lease. The Company's sales are evidenced and the sales price fixed based
upon either a purchase order, contract or buying agreement with the customer.
The Company's freight terms are either FOB shipping point or freight prepaid by
the customer. The customer may also be eligible for promotional incentives or
rebates. The Company at the time of sale records a reserve for promotional
allowances, rebates and other discounts based on historical experience, which
are charged to net sales.
Shipping and Handling Costs - Amounts billed to customers in sales
transactions related to shipping and handling, if any, are included in net
sales. Shipping and handling costs incurred by the Company are included in cost
of sales.
Goodwill - Goodwill represents the excess of the purchase price over
the fair value of tangible and identifiable intangible net assets acquired and
is amortized on a straight-line basis over twenty years. The carrying value of
goodwill is reviewed when facts and circumstances suggest that it may be
impaired. The Company assesses its recoverability by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted projected future cash flows. Should the review indicate
that goodwill is not recoverable, the Company's carrying value of the goodwill
would be reduced by the estimated shortfall of the cash flows.
Environmental Cleanup Costs - The Company expenses environmental
expenditures related to existing conditions resulting from past or current
operations and from which no current or future benefit is discernible. The
Company determines its liability on a site by site basis and records a liability
at the time when it is probable and can be reasonably estimated.
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.
Reclassifications - Certain prior year balances have been reclassified
to conform with the current presentation.
Concentration of Credit Risk - Financial instruments, which potentially
subject the Company to credit risk, consist principally of receivables.
Concentration of credit risk with respect to receivables is considered to be
limited due to the Company's customer base and the diversity of its geographic
sales areas. The Company performs ongoing credit evaluations of its customers'
financial condition. The Company maintains a provision for potential credit
losses based upon expected collectibility of all receivables.
Impact of Recently Issued Accounting Standards - In June 2001, the
Financial Accounting Standards Board ("FASB") issued two new pronouncements:
Statement of Financial Accounting Standard ("SFAS") No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 prohibits the use of the pooling-of-interest method for business
combinations initiated after June 30, 2001 and also applies to all business
combinations accounted for by the purchase method that are completed after June
30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001 and applies to all goodwill and other intangible assets
35
recognized in an entity's balance sheet. The Company has adopted SFAS No. 141
and is currently evaluating the impact of SFAS No. 142 on its consolidated
financial statements.
In October 2001, the FASB issued pronouncement SFAS No. 144 Impairment
or Disposal of Long-Lived Assets. This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of Accounting Principals Board Opinion
("APB") No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business
(as previously defined in that Opinion). This Statement also amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The Company is currently evaluating the impact of SFAS No. 144 on its
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS No. 137 and SFAS No. 138.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and requires that an entity recognize all derivatives at fair value
in the balance sheet. The Company adopted SFAS No. 133 effective September 25,
2000. The adoption of SFAS No. 133 did not have an impact on the consolidated
financial statements.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the U.S. 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 30, September 24,
2001 2000
--------------- ---------------
Raw materials and supplies $ 38,007 $ 47,218
Finished products 113,639 104,326
Work in progress 10,157 10,795
--------- ----------
Total inventories $ 161,803 $ 162,339
========= ==========
36
3. INCOME TAXES
The income tax provision includes the following components (in
thousands):
Fiscal
--------------------------------
2001 2000 1999
--------- --------- ----------
Current:
Federal $ 150 $ 2,825 $ -
State 220 800 -
Foreign - 270 -
-------- -------- ---------
Total current 370 3,895 -
-------- -------- ---------
Deferred:
Federal 6,841 4,369 (2,549)
State 779 228 (364)
Foreign (429) - (28)
-------- -------- ---------
Total deferred 7,191 4,597 (2,941)
-------- -------- ---------
Total income tax provision (benefit) $ 7,561 $ 8,492 $ (2,941)
======== ======== =========
The effective tax rate varied from the U.S. Federal tax rate of 35% for
Fiscal 2001, 2000 and 1999 as a result of the following:
Fiscal
-------------------------------
2001 2000 1999
-------- --------- ----------
U.S. Federal tax rate 35% 35% 35%
State income taxes, net of
U.S. Federal tax impact 4 4 4
Permanent difference, meals and
entertainment 1 1 1
--- --- ---
Effective tax rate 40% 40% 40%
=== === ===
Deferred income taxes reflect the net tax effects of net operating loss
carryforwards, tax credit carryforwards, 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 (in thousands):
September 30, September 24,
2001 2000
--------------- ---------------
Assets:
Post-retirement health and pension benefits $ 23,551 $ 25,437
Employee benefits 5,285 7,165
Net operating loss carryforwards 9,980 11,627
Deferred gain on sale-leaseback transaction 37,766 41,689
Alternative minimum tax credit carryforward 3,329 3,179
Deferred rent 1,606 345
Inventory adjustments 3,496 340
Other 5,117 1,403
--------- ----------
90,130 91,185
Liabilities:
Depreciation (42,692) (40,699)
--------- ----------
Net deferred tax assets $ 47,438 $ 50,486
========= ==========
37
The Company has net operating loss carryforwards for income tax
purposes of approximately $28 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.
No provision has been made for U.S. federal deferred income taxes on
approximately $12 million of accumulated and undistributed earnings of the
Foreign subsidiaries at September 30, 2001 since it is the present intention of
management to reinvest the undistributed earnings in foreign operations
indefinitely. In addition, the determination of the amount of unrecognized U.S.
federal deferred income tax liability for unremitted earnings related to the
investments in the Foreign subsidiaries is not practicable.
4. ASSETS HELD FOR SALE
On February 20, 2001 and August 3, 2001, the Company's Board of
Directors approved plans for the closure and sale of the Somerville,
Massachusetts facility and the Manchester, New Hampshire facility, respectively.
These facilities are being consolidated into one location in North Andover,
Massachusetts. The Company anticipates the sale of both facilities and has
reclassified the facilities to assets held for sale. On September 25, 2001, the
Company entered into a contract to sell the Manchester, New Hampshire facility.
The Company expects to consummate the sale by the end of December 2001. The sale
is expected to result in a net gain.
5. OTHER CURRENT ASSETS
The components of other current assets are as follows (in thousands):
September 30, September 24,
2001 2000
--------------- ---------------
Spare parts $ 20,574 $ 21,543
Other 1,262 -
-------- ---------
Total other current assets $ 21,836 $ 21,543
======== =========
6. PROPERTY, PLANT AND EQUIPMENT, NET
The Company's major classes of property, plant and equipment, net are
as follows (in thousands):
September 30, September 24,
2001 2000
-------------- --------------
Land $ 13,333 $ 16,780
Buildings and improvements 85,145 88,577
Machinery and equipment 255,463 242,746
Construction in progress 13,084 7,858
--------- ---------
Total property, plant and equipment 367,025 355,961
Less - accumulated depreciation 160,385 150,174
--------- ---------
Property, plant and equipment, net $ 206,640 $ 205,787
========= =========
38
Depreciation of property, plant and equipment was $22.0 million, $37.8
million and $45.9 million in Fiscal 2001, 2000 and 1999, respectively.
7. ACQUISITIONS
On April 5, 2001, the Company purchased an 80% interest in Global Cup,
S.A. De C.V. and its subsidiaries ("Global Cup"). Global Cup manufactures,
distributes and sells paper cups and lids throughout Mexico and exports to other
Latin American countries. The Company has assumed the liabilities and
obligations of Global Cup arising under contracts or leases that are either
assets purchased by the Company or a part of the accounts payable. The aggregate
purchase price for the assets and working capital was $12.2 million which was
paid in cash, subject to a post-closing working capital adjustment. The Global
Cup acquisition has resulted in goodwill of $3.9 million. As a result of the
potential post closing working capital adjustment, the final calculation of
which the Company expects to be completed within one year, amounts and
allocations of costs recorded may require adjustment based upon information
coming to the attention of the Company that is not currently available.
On May 15, 2000, the Company 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 $16.8 million of which $12.1 million was paid in cash. As part of the
purchase price, Sweetheart Cup issued to the stockholders of Sherwood
non-interest bearing promissory notes due May 2005 for $4.7 million and a
present value of $2.7 million (assuming an interest rate of 10.85% per annum).
Sweetheart Cup also assumed $9.3 million of Sherwood debt, which was paid in
full on June 15, 2000. The Sherwood acquisition has resulted in goodwill of
$10.7 million.
The above acquisitions have been accounted for under the purchase
method and their results have been included in the consolidated statements of
operations since the respective dates of acquisition. Goodwill amortization of
the above acquisitions was $0.6 million in Fiscal 2001 and $0.2 million in
Fiscal 2000. Accumulated amortization was $0.8 million and $0.2 million at
September 30, 2001 and September 24, 2000, respectively. The inclusion of these
acquisitions within the consolidated financial statements presented had an
immaterial impact on the Company's pro forma results.
8. OTHER ASSETS
The components of other assets are as follows (in thousands):
September 30, September 24,
2001 2000
--------------- ---------------
Debt issuance costs, net of
accumulated amortization $ 3,673 $ 3,988
Intangible pension asset
(See Note 22) 1,660 884
Deposits 1,461 2,166
Other 1,809 2,566
--------- ---------
Total other assets $ 8,603 $ 9,604
========= =========
Amortization of debt issuance costs was $1.2 million, $2.0 million and
$2.4 million for Fiscal 2001,
39
2000 and 1999, respectively, and is included in interest expense.
9. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in
thousands):
September 30, September 24,
2001 2000
--------------- ---------------
Sales allowances $ 13,068 $ 10,875
Restructuring charges - 68
Taxes, other than income taxes 3,084 3,295
Litigation, claims and assessments
(See Note 24) 1,426 9,288
Deferred rent payable 8,169 8,631
Interest payable 2,134 1,741
Other 2,730 2,502
--------- ---------
Total other current liabilities $ 30,611 $ 36,400
========= =========
10. 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 using the
straight line method over 125 months which is the term of the Lease. Annual
rental payments under the Lease will be approximately $31.5 million.
11. LONG-TERM OBLIGATIONS
Long-term debt, including amounts payable within one year, is as
follows (in thousands):
September 30, September 24,
2001 2000
------------- -------------
U.S. Credit Facility $ 126,222 $ 102,249
Canadian Credit Facility 16,630 10,320
10.5% Senior Subordinated Notes 110,000 110,000
Sherwood Industries Notes 3,153 3,541
--------- ---------
Total debt 256,005 226,110
Less - Current portion of long-term debt 13,829 15,841
--------- ---------
Total long-term debt $ 242,176 $ 210,269
========= =========
40
The aggregate annual maturities of long-term debt at September 30, 2001
are as follows (in thousands):
Fiscal 2002 $ 13,829
Fiscal 2003 116,357
Fiscal 2004 9,386
Fiscal 2005 116,433
---------
$ 256,005
=========
U.S. Credit Facility - The Company has a revolving credit facility as
amended (the "U.S. Credit Facility") that, subject to borrowing base
limitations, allows for a maximum revolving credit borrowing of $145 million
through June 15, 2005 and 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.
In Fiscal 2001, the weighted average annual interest rate for the U.S. Credit
Facility was 7.58%. 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 30,
2001, $31.6 million was available under such facility and the term loan balance
was approximately $12.9 million. The fee for outstanding letters of credit is
2.00% per annum and there is a commitment fee of 0.375% per annum on the daily
average unused amount of the commitments. As of September 30, 2001, LIBOR was
2.64% and the bank's base rate was 6.00%.
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 - On June 19, 2001, the Company's Canadian
subsidiary refinanced its credit agreement (the "Canadian Credit Facility")
which provides for a term loan facility of Cdn $15 million (approximately US
$9.5 million) and a revolving credit facility of up to Cdn $15 million
(approximately US $9.5 million). The term borrowings are payable quarterly
through May 2004. Both the revolving credit and term loan borrowings have a
final maturity date of June 15, 2004. The Canadian
41
Credit Facility is secured by all existing and thereafter acquired real and
personal tangible assets of Lily, a subsidiary of Sweetheart Cup, ("Lily") and
net proceeds on the sale of any of the foregoing. Borrowings under the Canadian
Credit Facility bear interest at an index rate plus 1.75% with respect to the
revolving credit facility and an index rate plus 2.00% with respect to the term
loan borrowings. As of September 30, 2001, Cdn $1.0 million (approximately US
$0.6 million) was available under the revolving facility and the term loan
balance was Cdn $14.5 million (approximately US $9.2 million) under the Canadian
Credit Facility.
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 100%. 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.
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 the principal amount of $5.0 million and a present value of $2.9
million. On March 19, 2001, the principal amount was reduced by $0.3 million as
a result of the working capital adjustment to $4.7 million and present value of
$2.7 million.
12. 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 $2.2 million lower than the carrying value at September 30, 2001 and $7.7
million lower than the carrying value at September 24, 2000, based upon
independent third party information.
42
13. OTHER LIABILITIES
The components of other liabilities are as follows (in thousands):
September 30, September 24,
2001 2000
------------- -------------
Post-retirement health care benefits
(See Note 22) $ 56,968 $ 59,318
Pensions (See Note 22) 8,894 2,349
Other 2,083 2,686
--------- ---------
Total other liabilities $ 67,945 $ 64,353
========= =========
14. SHAREHOLDERS' EQUITY
SF Holdings, Inc. ("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,
SF Holdings and The Fonda Group, Inc. ("Fonda"), a wholly owned subsidiary of SF
Holdings, manage 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
43
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.
15. SF HOLDINGS STOCK OPTION PLAN
During Fiscal 2001, SF Holdings granted options to purchase shares of
its common stock to certain employees of the Company. The options vest over a
period of three years. Certain of the exercise prices of the options were below
the fair market value of SF Holding's common stock at the date of the grant.
During the vesting period, these discounts of $0.2 million are being amortized
as compensation expense and credited to additional paid-in capital by the
Company. Amortization expense relating to SF Holding's stock options was $0.1
million for Fiscal 2001.
A summary of SF Holdings stock option transactions involving employees
of the Company are as follows:
SF Holdings Weighted Average
Stock Options Exercised Price
------------- ----------------
Outstanding, September 25, 2000 - $ -
Granted 8,732 118.22
Forfeited (700) 117.38
------ ---------
Outstanding, September 30, 2001 8,032 $ 118.29
====== =========
The following table summarizes information about SF Holdings stock
options granted to employees of the Company, outstanding at September 30, 2001:
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------
Weighted Weighted
Number Average Weighted Number Average
Range of Exercise Outstanding as Remaining Life Average Exercisable Exercise
Prices of 09/30/01 (Years) Exercise Price as of 9/30/01 Price
- ------------------- ---------------- ---------------- ---------------- -------------- -------------
$ 93.75 3,872 2.1 $ 93.75 - $ -
141.14 4,160 2.1 141.14 - -
----- --- ------- -- ---
8,032 2.1 $118.29 - $ -
===== === ======= == ===
The Company applies APB No. 25 and related interpretations in
accounting for SF Holdings stock options granted to employees of the Company.
Had compensation costs for SF Holdings stock options been determined based on
fair value at the option grant dates, in accordance with the provisions of SFAS
No. 123, the Company's net income for Fiscal 2001 would have been reduced to the
pro forma amount indicated below (in thousands):
44
Net income:
As reported $ 11,275
Pro forma $ 11,254
The weighted average fair value of the SF Holdings stock options, was
$0.3 million in Fiscal 2001 estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions: dividend yield of zero, risk-free interest rate of 2.75%, and
expected life of option grants of 3 years. The effects of applying SFAS No. 123
in this pro forma disclosure are not indicative of future pro forma effects.
16. 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. The Company believes that transactions entered into
with related parties were negotiated on terms which are at least as favorable as
it could have obtained from unrelated third parties and were negotiated on an
arm's length basis.
During Fiscal 2001, the Company sold (i) $21.7 million of cups to
Fonda, and (ii) $3.1 million of scrap paper to Fibre Marketing Group, LLC, a
waste paper recovery business in which Fonda has a 25% interest ("Fibre
Marketing"). Included in accounts receivable, as of September 30, 2001, is $2.1
million due from Fonda and $1.2 million due from Fibre Marketing.
During Fiscal 2001, the Company purchased (i) $7.1 million of
corrugated containers and other services from Box USA Holdings, Inc. ("Box
USA"), formerly Four M Corporation ("Four M"), a company in which the Company's
Chief Executive Officer, owns in excess of 10% of its outstanding capital stock,
(ii) $9.9 million of paper plates and $0.2 million of equipment rental from
Fonda and (iii) $0.5 million of travel services from Emerald Lady, Inc., a
company wholly owned by the Company's Chief Executive Officer. Included in
accounts payable, as of September 30, 2001, are $0.6 million due to Box USA and
$0.8 million due to Fonda. Other purchases from and sales to affiliates during
Fiscal 2001 were not significant.
During Fiscal 2000, the Company sold (i) $16.7 million of cups to
Fonda, and (ii) $0.8 million of scrap paper to 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 Box USA (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 Box USA and $0.9 million due to Fonda. Other purchases from and
sales to affiliates 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 2000, the Company entered into a lease agreement with D&L
Development, LLC, an entity in which the Company's Chief Executive Officer
indirectly owns 47%, to lease a warehouse
45
facility in Hampstead, Maryland. In Fiscal 2001 and 2000, rental payments under
this lease were $3.6 million and $0.7 million, respectively. Annual rental
payments under the 20 year lease are $3.7 million for the first 10 years of the
lease and $3.8 million annually, thereafter.
During Fiscal 2000, the Company began leasing a facility in North
Andover, Massachusetts from D&L Andover Property, LLC, an entity in which the
Company's Chief Executive Officer indirectly owns 50%. In Fiscal 2001, rental
payments under this lease were $1.4 million. 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.
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, a company in which the Chief Executive Officer owned more than 50%
of the common stock. 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 Box USA, (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
Box USA and $0.7 million due to Fonda.
17. 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. The full amount of lease rental payments are charged
to expense using the straight line method over the term of the lease. Rent
expense under such arrangements was $54.8 million, $28.2 million and $18.7
million for Fiscal Years 2001, 2000 and 1999, respectively. Future minimum
rental commitments under non-cancelable operating leases in effect at September
30, 2001 are as follows (in thousands):
Fiscal 2002 $ 51,761
Fiscal 2003 48,962
Fiscal 2004 46,781
Fiscal 2005 44,315
Fiscal 2006 42,446
Thereafter 233,166
----------
$ 467,431
==========
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,
46
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 $31.5 million annual rental payments and removing the property,
plant and equipment sold from its balance sheet. A deferred gain of $107.0
million was realized from this sale and is being amortized over 125 months,
which is the term of the Lease.
18. ASSET IMPAIRMENT EXPENSE
In the quarter ended September 30, 2001, the Company approved plans to
consolidate its Manchester, New Hampshire and Springfield, Missouri operations
into other existing facilities throughout the Company. As a result, the Company
evaluated the usefulness of certain equipment at these facilities and wrote-off
the remaining book value of $2.2 million to operations.
19. RESTRUCTURING CHARGE (CREDIT)
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. The plan was completed and approved by management
on January 10, 2000 and announced to employees on March 7, 2000. Severance
payments of $0.2 million, were paid in both the third and fourth quarters of
Fiscal 2000. Also, during the fourth quarter of Fiscal 2000, the Company
reversed $0.2 million of this reserve as a result of 12 employees being placed
into open positions within the Company. The balance of this reserve is included
within the "Other current liabilities" on the balance sheet. The balance of this
reserve was $0.7 million at the end of the quarter ended March, 26, 2000; $0.5
million at the end of the quarter ended June 25, 2000; and $0.1 million at the
end of the fiscal year ended September 24, 2000. The Company utilized the
remaining $0.1 million of the restructuring reserve in the first quarter of
Fiscal 2001.
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 remained unpaid as of
September 27, 1998 and was included within the "Other current liabilities" on
the balance sheet. Severance payments of $0.6 million, $0.3 million, $0.06
million, and $0.02 million were paid during the quarters ending December 27,
1998, March 28, 1999, June 27, 1999, and September 26, 1999, respectively. Also,
during the quarter ending September 26, 1999, the Company reversed $0.5 million
of this reserve as the plan was completed and fringe and benefit expenses
associated with such severed employees severed were lower than planned.
20. OTHER INCOME, NET
In Fiscal 2001, the Company realized $10.3 million due to the
amortization of the deferred gain in
47
conjunction with the sale-leaseback transaction. This amortization of the
deferred gain was partially offset by $1.6 million in expenses in associated
with the relocation of a manufacturing facility from Somerville, Massachusetts
to North Andover, Massachusetts.
In Fiscal 2000, the Company realized a $4.1 million gain on the sale of
a warehouse facility in Owings Mills, Maryland and $2.8 million due to the
amortization of the deferred gain in conjunction with the sale-leaseback
transaction. The amortization of the deferred gain was 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 expenses
associated with the Aldridge Liability (See Note 24).
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.
21. 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 and redemption fees pertaining to such debt.
22. 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. 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 $4.8 million, $4.4 million
and $3.2 million for Fiscal 2001, 2000 and 1999 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. During Fiscal 2001,
the valuation date for the plan assets and the contributions was changed from
September to June and resulted in no significant effect.
48
Net periodic cost for the Company's pension and other benefit plans
consists of the following (in thousands):
Fiscal
----------------------------
2001 2000 1999
-------- -------- --------
Pension Benefits
Service cost $ 682 $ 726 $ 1,019
Interest cost 4,245 4,173 4,013
Return on plan assets (4,833) (4,459) (3,916)
Amortization of prior service cost 161 178 241
Recognized net actuarial cost 92 73 269
-------- -------- --------
Net periodic pension cost $ 347 $ 691 $ 1,626
======== ======== ========
Other Benefits
Service cost $ 747 $ 830 $ 1,027
Interest cost 3,094 3,136 3,271
Amortization of prior service cost (799) (799) (416)
Recognized net actuarial cost (1,051) (838) (299)
-------- -------- --------
Net periodic benefit cost $ 1,991 $ 2,329 $ 3,583
======== ======== ========
The following table sets forth the change in benefit obligation for the
Company's benefit plans (in thousands):
Pension Benefits Other Benefits
------------------------------- --------------------------------
September 30, September 24, September 30, September 24,
2001 2000 2001 2000
--------------- --------------- --------------- ----------------
Change in benefit obligation:
Benefit obligation at beginning of period $ 54,998 $ 56,874 $ 41,318 $ 42,406
Service cost 512 726 561 830
Interest cost 3,184 4,173 2,320 3,136
Amendments 363 - - -
Actuarial (gain) or loss 5,063 (3,161) 1,885 (2,641)
Benefits paid (2,897) (3,614) (3,232) (2,413)
----------- ----------- ----------- -----------
Benefit obligation at end of period $ 61,223 $ 54,998 $ 42,852 $ 41,318
=========== =========== =========== ===========
Change in plan assets:
Fair value of plan assets at beginning of
period $ 48,564 $ 44,323 $ - $ -
Actual return on plan assets gain or (loss) (372) 3,500 - -
Employer contributions to plan 2,196 4,355 2,839 1,921
Participant contributions to plan - - 393 492
Benefits paid (2,896) (3,614) (3,232) (2,413)
----------- ----------- ----------- -----------
Fair value of plan assets at end of period $ 47,492 $ 48,564 $ - $ -
=========== =========== =========== ===========
Funded status $ (13,731) $ (6,434) $ (42,852) $ (41,318)
Unrecognized prior service cost 1,660 1,474 (5,604) (6,403)
Unrecognized (gain) loss 9,130 170 (12,721) (14,697)
----------- ----------- ----------- -----------
Net liability recognized $ (2,941) $ (4,790) $ (61,177) $ (62,418)
=========== =========== =========== ===========
49
The following sets forth the amounts recognized in the Consolidated
Balance Sheets (in thousands):
Pension Benefits
--------------------------------
September 30, September 24,
2001 2000
--------------- ---------------
Funded status $ (13,731) $ (6,434)
Intangible asset 1,660 884
Other gain (452) (375)
Deferred income taxes 3,832 453
Accrued other comprehensive loss 5,750 682
---------- ----------
Net liability recognized $ (2,941) $ (4,790)
========== ==========
The assumptions used in computing the preceding information are as
follows:
Fiscal
----------------------------------
2001 2000 1999
---------- ---------- ----------
Pension Benefits
Discount rate 7.38% 8.00% 7.75%
Rate of return on plan assets 10.00% 10.00% 10.00%
Other Benefits
Discount rate 7.38% 8.00% 7.75%
For measurement purposes, a 6% annual rate of increase in health care
benefits was assumed for 2001. 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 (in thousands):
One Percentage One Percentage
Point Increase Point Decrease
---------------- ----------------
Effect on accumulated post-
retirement benefit obligation $2,010 $(1,855)
Effect on net periodic post-
retirement benefit cost $286 $(256)
23. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive income (loss) are as
follows (in thousands):
September 30, September 24,
2001 2000
--------------- ---------------
Foreign currency translation
adjustment $ (1,811) $ (1,418)
Minimum pension liability
adjustment (5,750) (682)
--------- ---------
Accumulated other comprehensive loss $ (7,561) $ (2,100)
========= =========
50
24. CONTINGENCIES
During Fiscal 2001, the Company experienced a casualty loss at its
Somerville, Massachusetts facility. The Company carries business interruption
insurance and has filed a claim with the insurance company. Settlement of the
recovery amount is to be determined.
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084,
was filed in state court in Georgia in April 1987 and later removed to federal
court. The Plaintiffs claimed, among other things, that the Company wrongfully
terminated the Lily Tulip, Inc. Salary Retirement Plan (the "Plan") in violation
of the Employee Retirement Income Security Act of 1974, as amended. The relief
sought by Plaintiffs was to have the Plan termination declared ineffective. The
United States Court of Appeals for the Eleventh Circuit (the "Circuit Court")
ruled that the Plan was lawfully terminated on December 31, 1986, and judgment
was entered dismissing the case in March 1996. The Circuit Court affirmed the
judgment entered in favor of the Company. Plaintiffs filed a petition for writ
of certiorari to the United States Supreme Court, which was denied in January
1999. The Company expects to complete paying out the termination liability and
associated expenses in connection with the Plan termination by December 31,
2001. As of September 30, 2001, the Company disbursed $19.6 million in
termination payments. The estimate of the total termination liability and
associated expenses, less payments, exceeds the assets set aside in the Plan by
$0.4 million, which amount has been fully reserved by the Company.
Counsel for the Liquidating Trustee of Ace Baking Company Limited
Partnership, debtor in possession, has advised the Company that the Trustee
intends to pursue a claim, pursuant of the Uniform Fraudulent Transfer Act,
against the Company, in connection with the sale by the Company of it bakery
business to Ace Baking Company in November 1997. The Company believes that the
claim is without merit and the Company intends to vigorously defend any action
taken by the Trustee. In addition, the Company has no reason to believe that the
final outcome of this matter will have a material adverse effect on its
financial condition or results of operation. However, the Company cannot give
any assurances as to the ultimate effect on the Company, if any, given the early
stage of this matter.
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. The Company responded to the EPA that upon review of its files it had no
information with respect to any dealings with that site. On December 20, 1999,
the Company received an information request letter from the EPA, pursuant to
CERCLA, regarding a Container Recycling Superfund Site in Kansas City, Kansas
and in January 2000 the Company responded to such inquiry. In both instances,
the Company has received no further communication from the EPA. The Company
denies liability and has no reason to believe the final outcomes will have a
material adverse effect on the Company's financial condition or results of
operations. However, no assurance can be given about the ultimate effect on the
Company.
The Company is subject to legal proceedings and other claims arising
in the ordinary course of its business. The Company maintains insurance coverage
of types and in amounts which it believes to be adequate and believes that it is
not presently a party to any litigation, the outcome of which could reasonably
be expected to have a material adverse effect on its financial condition or
results of operations.
25. SWEETHEART CUP COMPANY INC.
All of the outstanding stock of Sweetheart Cup is owned by Sweetheart
Holdings and thereby
51
Sweetheart Holdings is the full and unconditional guarantor of the 10 1/2%
Senior Subordinated Notes of Sweetheart Cup. No other entity or subsidiary of
Sweetheart Holdings guarantees these notes. Sweetheart Holdings has no
independent assets or operations other than Sweetheart Cup and its subsidiaries
and there are no significant restrictions on the ability of Sweetheart Holdings
to obtain funds from Sweetheart Cup and its subsidiaries. In addition,
Sweetheart Cup is restricted from paying dividends to Sweetheart Holdings.
52
INDEX TO FINANCIAL STATEMENT SCHEDULE
Page
Independent Auditors' Report 54
Schedule II - Valuation and Qualifying Accounts 55
53
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 30, 2001 and
September 24, 2000, and for each of the three fiscal years in the period ended
September 30, 2001, and have issued our report thereon dated November 19, 2001;
such consolidated financial statements and report are included in this Form
10-K. Our audits also included the financial statement schedule listed in the
accompanying index. This financial statement 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 19, 2001
54
SCHEDULE II
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
---------------------------
Balance at
beginning Charged to Charged Balance at
of costs and to other end of
Classifications period expenses accounts (1) Deductions (2) period
--------------- ------------ ------------ -------------- ---------------- -------------
Allowance for Doubtful Accounts:
Fiscal 2001 $ 2,072 $ 449 $ 11 $ 87 $ 2,445
Fiscal 2000 1,905 2,442 24 2,299 2,072
Fiscal 1999 1,817 341 11 264 1,905
(1) Includes recoveries on accounts previously written-off, translation
adjustments and
reclassifications.
(2) Accounts written-off.
Balance at
beginning Additions Balance
of Charged (credited) to at end of
Classifications period costs and expenses Deductions (3) period
--------------- ------------ ----------------------- ---------------- -----------
Inventory Allowances:
Fiscal 2001 $ 11,625 $ - $ 4,552 $ 7,073
Fiscal 2000 8,574 3,587 536 11,625
Fiscal 1999 6,243 4,577 2,246 8,574
(3) Inventory written-off.
55
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 December 6, 2001.
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 December 6, 2001, 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 Executive Vice President 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)
56