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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 27, 1998
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from ______ to _____
Commission file number 33-91600
SWEETHEART HOLDINGS INC.*
(Exact name of registrant as specified in its charter)
Delaware 06-1281287
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10100 Reisterstown Road, Owings Mills, Maryland 21117
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 410/363-1111
Securities of the Registrant registered pursuant to
Section 12(b) of the Act: None
Securities of the Registrant registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the Registrant held
by non-affiliates of the Registrant as of December 18, 1998: 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 18, 1998:
Sweetheart Holdings Inc. Class A Common Stock, $0.01 par value -
1,046,000 shares
Sweetheart Holdings Inc. Class B Common Stock, $0.01 par value -
4,393,200 shares
* The Registrant is the guarantor of the 9 5/8% Senior Secured Notes due 2000
and the 10 1/2% Senior Subordinated Notes due 2003 (collectively, the "Notes")
of Sweetheart Cup Company Inc., a wholly owned subsidiary of the Registrant.
Page 1 of 58
PART I
Item 1. BUSINESS
General
Sweetheart Holdings Inc. ("Sweetheart Holdings"), together with its
wholly owned subsidiary Sweetheart Cup Company Inc. ("Sweetheart Cup", and
collectively with Sweetheart Holdings and its other subsidiaries, the
"Company"), is one of the largest producers of plastic and paper disposable
foodservice and food packaging products in North America. In Fiscal Year 1998,
the Company had net sales of approximately $844 million. The Company's principal
products include cups for both hot and cold drinks, lids, food containers,
bowls, plates, straws, cutlery and containers for the food and dairy industries.
The brand names for the Company's principal products include Sweetheart(R),
Lily(R), Trophy(R), Jazz(R) and Preference(TM) for cups and plates and Silent
Service(R), Centerpiece(R), Guildware(R), and Simple Elegance(R) for foam
dinnerware and plastic cutlery. In addition, the Company designs, manufactures
and leases container filling equipment for use by dairies and other food
processors. This equipment is specifically designed by the Company to fill and
seal the Company's containers in customers' plants.
On August 30, 1993, a group of investors (the "Investors") including
American Industrial Partners Capital Fund, L.P. ("AIP") acquired Sweetheart
Holdings (the "Acquisition"). 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., which had been acquired and merged by Fort James
Corporation (formerly Fort Howard Corporation) ("Fort James"). On March 12,
1998, the then existing shareholders (the "Original Shareholders") sold 48% of
their voting stock and 100% of their non-voting stock, or 90% of the Company's
total outstanding stock, to SF Holdings Group, Inc. ("SF Holdings"). In
conjunction with this transaction (the "SF Holdings Investment"), AIP assigned
the Management Services Agreement, as amended, to SF Holdings which assigned its
interest to The Fonda Group, Inc. ("Fonda"), a wholly owned subsidiary of SF
Holdings. See "Certain Relationships and Related Transactions". The Company's
Canadian operations are conducted through Lily Cups, Inc. ("Lily Canada").
On October 22, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year from September 30 to the 52 or 53 week period ending on
the last Sunday in September. This change is effective for the Fiscal Year
ending in September 1998. Therefore, the fiscal 1998 period from October 1, 1997
through September 27, 1998 is herinafter defined as "Fiscal Year 1998". Fiscal
years 1997, 1996, 1995, 1994 and prior are shown as the historical periods from
October 1 through September 30 of the respective fiscal years, and are
herinafter defined as "Fiscal Year 1997, "Fiscal Year 1996", "Fiscal Year 1995",
and "Fiscal Year 1994", respectively.
Products
The Company sells its products to two principal customer groups:
foodservice and food packaging. Foodservice customers primarily purchase
disposable hot and cold drink cups, lids, food containers, plates, bowls and
cutlery. Products are sold directly and through distributors to fast food
chains, full service restaurants, 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. Through Lily Canada, the Company manufactures and markets its
products in Canada to national accounts and distributors.
2
Foodservice. The Company's foodservice business consists of three
categories: beverage service, tabletop service and carryout service. Foodservice
is the Company's largest customer group, accounting for approximately 82% of
gross sales during Fiscal Year 1998. Management believes the Company is the
largest manufacturer of disposable foodservice products in North America.
Beverage service products, which consist of paper and plastic cups,
lids and straws, represent the largest part of the Company's United States
operations. The largest single product type within this category is cups, which
are offered in various sizes (ranging from 3 to 64 ounces) and 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) and Lumina(R).
Tabletop service products include paper and plastic plates, bowls,
portion cups and cutlery. These products are sold primarily to fast-food and
mid-scale restaurants, health care institutions, airlines and educational and
institutional foodservices. The Company's tabletop products include its Silent
Service(R), Centerpiece(R), Basix(R), Guildware(R) and Simple Elegance(R) brands
of foam dinnerware and plastic cutlery.
The Company's carry-out service products consist of paper and plastic
tubs, containers, lids and hinged plastic containers. The Company believes it is
one of the largest manufacturers of paper tubs for chicken, popcorn and take-out
foods in North America.
Foodservice customers include large national accounts, such as
fast-food chains and catering services, which represented approximately 49% of
foodservice sales in Fiscal Year 1998. Other customers include distributors, who
sell to other end-users, such as independent restaurants, school systems and
hospitals. The Company's national accounts include ARAMARK Corporation,
McDonald's, and Wendy's International Inc., and its major distributor accounts
include Alliant, Bunzl and SYSCO Corporation.
Food Packaging. The Company's food packaging customers purchase paper
and plastic containers and lids for ice cream, frozen novelty products, cultured
foods (including sour cream, yogurt, cottage cheese and snack dip) and plastic
containers for single-serving chilled juice products. Other products include the
Company's Flex-E-Form(R) straight-wall paper manufacturing technology and
Flex-Guard(R), a spiral wound tamper-evident lid. Sales to food packaging
customers accounted for approximately 11% of the Company's gross sales during
Fiscal Year 1998. Management believes the Company is the second largest supplier
(in terms of sales) of containers for frozen dessert and cultured dairy products
in the food packaging industry in North America.
To enhance product sales, the Company designs, manufactures and leases
container filling and lidding equipment to dairies and other food processors to
package food items in the Company's containers at their plants. The Company's
filling and lidding equipment is leased to customers under the trade names
Auto-Pak(TM), Flex-E-Fill(R) and FoodPac(R). This equipment is manufactured in
the Company's machine shop and assembly plant located in Owings Mills, Maryland.
Types of products packaged in the Company's machines include ice cream,
factory-filled jacketed ice cream cones, cottage cheese, yogurt, and squeeze-up
desserts.
Food packaging customers include national and regional dairies and food
companies, including Ben & Jerry's Homemade, Inc., Blue Bell Creameries, L.P.,
The Kroger Co., and Prairie Farms Diary, Inc.
Canadian Operations. The Company operates in Canada through Lily
Canada, which has been manufacturing and marketing foodservice disposable
products since 1947. Lily Canada is one of the largest providers of foodservice
disposable products in the Canadian market, primarily as a consequence of its
large portfolio of national account customers. Sales by Lily Canada during
Fiscal Year 1998 constituted approximately 7% of the Company's gross sales.
Marketing and Sales
The Company focuses its marketing efforts on both the distributor and
end-user customer. The Company tailors programs, consisting of products, price,
promotional and merchandising materials, training
3
and sales/marketing coverage to effectively meet the specific needs of target
customers and markets. The Company sells these programs through a direct sales
organization. The Company supports this process through the development of
innovative new products, materials and processes, while leveraging its strong
brand recognition and national network of manufacturing and distribution
centers.
Production
The Company's plants operate on a variety of manufacturing schedules.
Paper operations generally run five days per week at 24 hours per day, with
Saturday scheduled as an overtime day when needed to meet customer demand.
Plastic operations generally run seven days per week at 24 hours per day. Due to
customer demand, the Company's plant utilization is substantially higher during
late spring and summer than during fall and winter.
See "Properties".
Raw Materials and Suppliers
Raw materials are critical components of the Company's cost structure.
Principal raw materials for the Company's paper operations include solid
bleached sulfate paperboard obtained directly from major North American
manufacturers, along with wax, adhesives, coating and inks. Paperboard is
purchased in "jumbo" rolls and then printed and converted into smaller rolls or
blanks for processing into final products. The principal raw material for the
Company's plastic operations is plastic resin (polystyrene, polypropylene, and
high and low density polyethylene) purchased directly from major petrochemical
companies and other resin suppliers. Resin is processed and formed into cups,
cutlery, meal service products, straws, lids and containers. The Company
manufactures foam products by extruding sheets of plastic foam material that are
converted into cups and plates.
The Company purchases a substantial portion of its requirements for
paperboard and resin from several suppliers. The Company has a number of
potential suppliers for substantially all of its raw materials and believes that
current sources of supply for its raw materials are adequate to meet its
requirements.
Competition
All of the markets in which the Company sells its products are
extremely competitive. Because of the low barriers to entry for new competitors,
the level of competition has been and may continue to be intense as new entrants
attempt to gain market share. The Company's competitors include large
multinational companies as well as regional manufacturers, some of whom have
greater financial and other resources than the Company. The marketplace for the
Company's products is fragmented and includes competitors that compete across
the full line of the Company's products, as well as those that compete against a
limited number of the Company's products. A few of the Company's competitors are
also vertically integrated into the production of paper or plastic raw materials
and have greater access to financial and other resources. The Company's primary
competitors in its foodservice customer base include Dart Container Corporation,
Fort James, Solo Cup Co., International Paper Food Service Group, and Tenneco
Inc. Major competitors in its food packaging customer base include Cardinal
Plastics, Inc., Landis Plastics, Inc., Norse Dairy Systems, Inc., Polytainer,
Ltd. and Sealright Co., Inc.
The Company believes customers principally evaluate service, price,
product quality and graphics capability when considering the purchase of
products.
Customers
The Company markets its products primarily to customers in the United
States and Canada. During Fiscal Year 1998, sales to the Company's five largest
customers represented approximately 31.3 % of its net sales. One customer of the
Company, McDonald's, accounted for 12.1% of net sales. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital
4
Resources". The loss of one or more large national customers could adversely
affect the Company's operating results. The Company has strong relationships
with its major national accounts which have been developed over many years.
Environmental Matters
The Company and its operations are subject to comprehensive and
frequently changing Federal, state, foreign and local environmental and
occupational health and safety laws and regulations, including laws and
regulations governing emissions of air pollutants, discharges of waste and storm
water, and the disposal of hazardous wastes. The Company is subject to liability
for the investigation and remediation of environmental contamination (including
contamination caused by other parties) at properties that it owns or operates
and at other properties where the Company or its predecessors have arranged for
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 there are currently no pending
investigations at the Company's plants and sites relating to environmental
matters. However, there can be no assurance that the Company will not be
involved in any such proceeding in the future and that any amount of future
clean up costs and other environmental liabilities will not be material.
The Company cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist. Enactment of more stringent laws or regulations or 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 anticipates the cost of upgrading such systems to be approximately $1.5
million.
Some of the Company's facilities contain asbestos. Although there is no
current legal requirement to remove such asbestos, the Company has an ongoing
monitoring and maintenance program to maintain and/or remove such asbestos as
appropriate to prevent the release of friable asbestos. The Company does not
believe the costs associated with such program will be material to its business
or financial condition.
On September 14, 1998, the Company received a request for information
from the United States Environmental Protection Agency ("EPA") pursuant to
Section 114 of the federal Clean Air Act, as amended. The EPA notice requests
certain information from the Company concerning air emissions and the issuance
of construction permits for equipment operating at the Company's Kostner Avenue
facility in Chicago, Illinois. The Company is currently cooperating with the EPA
and reviewing its potential liability, if any. While the Company has no reason
to believe the final outcome of this matter will have a material adverse effect
on the Company's financial condition or results of operations, given the early
stage of this matter, no assurance can be given about its ultimate effect, if
any, on the Company.
Technology and Research
The Company maintains facilities for the development of new products
and product line extensions in Owings Mills, Maryland. The Company maintains a
staff of engineers and technicians who are responsible for product quality,
process control, improvement of existing products, development of new products
and processes and technical assistance in adhering to environmental rules and
regulations. The Company is continually striving to expand its proprietary
manufacturing technology, further automate its manufacturing operations, and
develop improved manufacturing processes and product designs.
5
Employees
At September 27, 1998, the Company employed approximately 6,700
persons, of whom approximately 5,700 persons were hourly employees.
Approximately 93% of the employees are located at facilities in the United
States. The Company currently has collective bargaining agreements in effect at
its facilities in Springfield, Missouri, Augusta, Georgia and Toronto, Canada
(collectively, the "Sweetheart CBAs"). The Sweetheart CBAs cover all production,
maintenance and distribution hourly-paid employees at each respective facility
and contain standard provisions relating to, among other things, management
rights, grievance, procedures, strikes and lockouts, seniority, and union
rights. As of September 27, 1998, approximately 17% of the Company's hourly
employees were covered by the Sweetheart CBAs. The current expiration dates of
the Springfield, Augusta and Toronto CBAs are March 4, 2001, October 31, 1999
and November 30, 2000, respectively. The Company considers its relationship with
its employees to be good.
6
Item 2. PROPERTIES
The Company has manufacturing and distribution facilities located
throughout the United States and Canada. All of the Company's facilities are
well maintained, in good operating condition and suitable for the Company's
operations. The table below provides summary information regarding the
properties owned or leased by the Company.
Size
Type of Owned/ (Approximate
Location Facility (1) Leased square feet)
-------- ------------ ------ ------------
Augusta, Georgia ........................... M/W O 339,000
Conyers, Georgia (2 facilities)............. M/W O 350,000
W O 555,000
Chicago, Illinois (2 facilities)............ M/W O 902,000
W L 587,000
Dallas, Texas .............................. M/W O 1,316,000
Manchester, New Hampshire................... M/W O 160,000
North Las Vegas, Nevada (2 facilities)...... M/W L 128,000
W L 12,000
Ontario, California......................... W(2) L 400,000
Owings Mills, Maryland (3 facilities)....... M/W O 1,533,000
W O 267,000
W O 406,000
Somerville, Massachusetts................... M/W O 193,000
Springfield, Missouri (2 facilities)........ M/W O 925,000
W L 415,000
Wilmington, Massachusetts................... W L 407,000
Toronto, Ontario (2 facilities)............. M/W O 185,000
M/W O 207,000
- --------
(1) M-Manufacturing; W-Warehouse; M/W-Manufacturing and Warehouse in same
facility.
(2) Leased as of September 1998, replacing a 249,000 square foot facility also
located in Ontario, CA.
The Company also leases a warehouse in Augusta, Georgia which was
closed in the latter part of Fiscal Year 1997. The Company is currently
subleasing such property to a third party through March 31, 2001 and will
continue to actively seek to sublet the property through the lease termination
date, March 31, 2008. The Company's Riverside California facility was closed in
the latter part of Fiscal Year 1997 and was sold in August 1998.
7
Item 3. LEGAL PROCEEDINGS
Aldridge. A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary
Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil Action
No. CV 187-084, was initially filed in state court in Georgia in April 1987 and
is currently pending against the Company in federal court. The remaining issue
involved in the case is a claim that the Company wrongfully terminated the
Lily-Tulip, Inc. Salary Retirement Plan (the "Plan") in violation of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The
relief sought by plaintiffs is to have the plan termination declared
ineffective. In December 1994, the United States Court of Appeals for the
Eleventh Circuit (the "Circuit Court") ruled that the Plan was terminated on
December 31, 1986. Following that decision, the plaintiffs sought a rehearing
which was denied, and subsequently filed a petition for a writ of certiorari
with the United States Supreme Court, which was also denied. Following remand,
in March 1996 the United States District Court for the Southern District of
Georgia (the "District Court") entered a judgment in favor of the Company.
Following denial of a motion for reconsideration, the plaintiffs in April 1997
filed an appeal with the Circuit Court. On May 21, 1998, the Circuit Court
affirmed the judgment entered in favor of the Company. On June 10, 1998, the
plaintiffs petitioned the Circuit Court for a rehearing of their appeal which
petition was denied on July 29, 1998. Plaintiffs have filed a motion in the
District Court for attorney's fees. No amount has been specified in such motion.
In October 1998, plaintiffs filed a Petition for Writ of Certiorari to the
United States Supreme Court.
Management of the Company believes that it will ultimately prevail on
the remaining material issues in the Aldridge litigation. Due to the complexity
involved in connection with the claims asserted in this case, the Company cannot
determine at present with any certainty the amount of damages it would be
required to pay should the plaintiffs prevail; accordingly, there can be no
assurance that such amounts would not have a material adverse effect on the
Company's financial position or results of operation. See Note 17 of the Notes
to Consolidated Financial Statements.
Fort James Corporation. A patent infringement action seeking injunctive
relief and damages relating to the Company's production and sale of certain
paper plates entitled Fort James Corporation v. Sweetheart Cup Company Inc.,
Civil Action No. 97-C-1221, was filed in the United States District Court for
the Eastern District of Wisconsin on November 21, 1997. The Company filed an
Answer to the Complaint denying liability and asserting various defenses to the
claims. Discovery proceedings are in progress. In the opinion of management, the
ultimate liability, if any, should not have a material adverse effect on the
Company's financial position or results of operations.
Other. The Company is also involved in a number of legal proceedings
arising in the ordinary course of business, none of which is expected to have a
material adverse effect on the Company's business or financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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. On March 12, 1998, the Original Shareholders sold 48% of
their voting stock and 100% of their non-voting stock, or 90% of the Company's
total outstanding stock, to SF Holdings. On December 12, 1998, Mr. McLaughlin,
the Company's former Chief Executive Officer, sold his remaining 3,120 shares of
Class A Common stock to Fonda.
8
Payment of cash dividends is restricted under the instruments governing
the Company's indebtedness. The Company has not paid cash dividends since the
date of the Acquisition in 1993, and does not anticipate paying any cash
dividends in the foreseeable future.
As of December 18, 1998, there were ten 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 and
other data of the Company at the dates and for the Fiscal Years shown. The
selected historical consolidated financial data at September 27, 1998 and for
Fiscal Year 1998 is are derived from this historical consolidated financial
statements of the Company and subsidiaries for such periods that have been
audited by Deloitte & Touche, LLP, independent auditors, and have been included
elsewhere herein. The selected historical consolidated financial data at
September 30, 1997 and for the Fiscal Years 1997 and 1996 are derived from this
historical consolidated financial statements of the Company and subsidiaries for
such periods that have been audited by Arthur Andersen, LLP, independent public
accountants, and have been included elsewhere herein. See Item 8. The
consolidated historical financial data at September 30, 1996, September 30, 1995
and September 30, 1994 and for the Fiscal Years 1995 and 1994 have been derived
from the historical audited consolidated financial statements for such periods.
On June 1, 1998, the Company changed its method of accounting for
inventories from the last-in first-out (LIFO) method to the first-in first-out
(FIFO) method. Management believes that the FIFO method is preferable because it
more accurately presents the Company's financial position as it reflects more
recent costs at the balance sheet date and more accurately matches revenues with
costs reported during the period presented. The financial statements of prior
periods have been restated to apply the FIFO method of accounting for
inventories retroactively. This restatement had no impact on retained earnings
as of September 30, 1993. Net income increased or (decreased) by $(0.1) million,
$(1.1) million, $(7.4) million, $12.6 million and $(8.1) million in Fiscal Years
1998, 1997, 1996, 1995 and 1994, respectively.
Fiscal Years
------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
-------------- --------------- --------------- --------------- ---------------
Operating Data:
Net sales $843,502 $886,017 $959,818 $986,618 $898,528
Cost of sales 787,706 822,818 859,029 853,571 791,646
------- ------- ------- ------- -------
Gross profit 55,796 63,199 100,789 133,047 106,882
Selling, general and 68,818 66,792 61,788 66,089 67,712
administrative
Loss on asset disposal and
impairment 5,000 24,550 -- -- --
Restructuring expense 897 9,680 -- -- --
Other (income) expense, net 12,400 (73) 4,271 (1,197) (411)
--------- ------------ --------- ---------- ----------
Operating income (loss) (31,319) (37,750) 34,730 68,155 39,581
Interest expense, net 42,955 40,265 37,517 37,410 37,248
--------- --------- --------- ---------- ---------
Income (loss) before taxes (74,274) (78,015) (2,787) 30,745 2,333
Income tax benefit (expense) 29,711 31,206 1,115 (12,312) (1,069)
Cumulative effect of an
accounting 1,511 -- -- -- --
change
Extraordinary loss -- 940 -- -- --
----------- ---------- ------------ ------------ ------------
Net income (loss) $(46,074) $(47,749) $(1,672) $18,433 $1,264
========= ========= ======== ======= ======
Dividends per share -- -- -- -- --
Balance Sheet Data (at end of
period):
Fixed assets $355,224 $382,491 $427,833 $417,563 $400,176
Total assets 665,626 715,589 757,839 749,445 714,959
Total long-term debt 422,438 430,499 385,579 369,181 369,749
Shareholders' equity 18,983 70,670 118,552 120,328 101,865
9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Forward-looking statements in this filing, including those in the
footnotes to the financial statements, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties and actual
results could differ materially. Such risks and uncertainties include, but are
not limited to, general economic and business conditions, competitive market
pricing, increases in raw material, energy and other manufacturing costs,
fluctuations in demand for the Company's products, potential equipment
malfunctions and pending litigation.
General
Sweetheart Cup was formed as the result of the acquisition by Fort
James of Maryland Cup Corporation in 1983 and Lily-Tulip, Inc. in 1986.
Sweetheart Holdings was incorporated as a separate company in 1989 on behalf of
Fort Howard and other investors, including management, to acquire all of the
U.S. and Canadian disposable foodservice and food packaging operations of Fort
James. As a result of the increase in leverage arising from the 1989 acquisition
from Fort James and the increased operating costs relating to the establishment
of Sweetheart Holdings as an independent business, the Company faced substantial
capital constraints, which reduced the Company's manufacturing and operating
efficiencies.
On August 30, 1993, the Investors acquired Sweetheart Holdings. In
connection with the Acquisition, Sweetheart Cup (i) issued $190.0 million
aggregate principal amount of 9 5/8% Senior Secured Notes due 2000 (the "Senior
Secured Notes") and $110.0 million aggregate principal amount of 10 1/2% Senior
Subordinated Notes due 2003 (the "Senior Subordinated Notes" and with the Senior
Secured Notes, the "Sweetheart Notes"), (ii) incurred borrowings under a Credit
Agreement dated as of August 30, 1993, among Sweetheart Cup, Sweetheart
Holdings, various banks and Bankers Trust Company, as agent, (iii) repaid
existing indebtedness of Sweetheart Holdings and Sweetheart Cup, and (iv) issued
equity securities of Sweetheart Holdings to the Investors. Pursuant to the
Acquisition, the Company's outstanding indebtedness and interest expense was
substantially reduced, giving the Company greater financial flexibility to
pursue its operating strategy.
On October 6, 1993, the manufacturing assets and manufacturing
employees of Sweetheart Cup located in Illinois, Massachusetts, Maryland,
Missouri, and New Hampshire were transferred to Sweetheart Holdings. These
assets were transferred subject to the mortgage and liens granted in favor of
the trustee under the Senior Secured Notes Indenture and were pledged to such
trustee to secure Sweetheart Holdings' obligations under its secured guarantee.
This transfer had no effect on the holders of the Senior Secured or Senior
Subordinated Notes.
On March 12, 1998, the Original Shareholders sold 48% of their voting
stock and 100% of their non-voting stock, or 90% of the Company's total
outstanding stock, to SF Holdings. In conjunction with the SF Holdings
Investment, AIP assigned the Management Services Agreement, as amended, to SF
Holdings which assigned its interest to Fonda, a wholly owned subsidiary of SF
Holdings.
On October 22, 1998, the Company's Board of Directors approved a change
in the Company's fiscal year end from September 30 to the 52 or 53 week period
ending on the last Sunday in September. This change is effective for Fiscal Year
1998 which is from October 1, 1997 through September 27, 1998. The Fiscal Years
1997 and 1996 are shown as the historical periods from October 1 through
September 30 of the respective fiscal years.
10
The Company markets its products to two major customer groups:
Foodservice and food packaging. Foodservice customers purchase products such as
disposable hot and cold drink cups, lids, food containers, plates, bowls and
cutlery. Foodservice customers include fast food chains, full service
restaurants, hospitals, airlines, theaters and other institutional customers.
During Fiscal Year 1998, the Company sold its bakery operations, which impact on
operations and earnings is discussed below. Food packaging customers purchase
paper and plastic containers for the dairy and food processing industries. Food
packaging also designs, manufactures and leases filling and packaging machines
that fill and seal the Company's containers in customers' plants.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net sales decreased $42.5 million, or 4.8%, to $843.5 million in Fiscal
Year 1998 compared to $886.0 million in Fiscal Year 1997. The December 1997 sale
of the bakery business resulted in a $27.9 million decrease in sales.
Additionally, the change in the Company's fiscal year end shortened the
Company's 1998 fiscal period by three days. The Company's net sales during such
three day period totaled $8.1 million. Excluding the impact of the bakery
business sale and the shortened reporting period, net sales decreased by $6.5
million, or 0.8%, reflecting a 2.2% increase in domestic sales volume and a 3.1%
average decrease in domestic sales price. Price has been negatively impacted
both by competition in the marketplace and by declining raw material prices. The
benefit of lower raw material prices is generally passed on to customers.
Foodservice sales volume increased 2.5% primarily as a result of the Company's
focus on revenue growth with key customers. Food packaging volume decreased
0.1%. Canadian net sales increased $1.4 million, or 2.5%, primarily due to
volume increases associated with promotional programs offered by major customers
in the second quarter of Fiscal Year 1998.
Gross profit decreased $7.4 million, or 11.7%, to $55.8 million in
Fiscal Year 1998 compared to $63.2 million in Fiscal Year 1997. As a percentage
of net sales, gross profit decreased to 6.6% in Fiscal Year 1998 from 7.1% in
Fiscal Year 1997. This decrease is partially attributable to charges relating to
the Company's initiative to eliminate certain slow-moving and low demand
inventory items which were recognized in the third quarter of Fiscal Year 1998.
In addition, gross profit was negatively impacted by the sale of the bakery
business.
Selling, general and administrative expenses increased $2.0 million, or
3.0%, to $68.8 million in Fiscal Year 1998 compared to $66.8 million in Fiscal
Year 1997. As a percentage of net sales, selling, general and administrative
expenses increased to 8.2% in Fiscal Year 1998 from 7.5% in Fiscal Year 1997.
The Company incurred increased expenses primarily as a result of (i) increased
sales and marketing costs associated with the Company's focus on increasing
sales volume with key customers, (ii) costs associated with the year 2000
compliance program, (iii) maintenance and depreciation on the new MIS system,
and (iv) expenses associated with employee relocation charges. These increased
expenses were partially offset in the third and fourth quarters of Fiscal Year
1998 by cost savings as a result of headcount reductions and related spending as
discussed below.
Restructuring expense decreased to $0.9 million in Fiscal Year 1998
compared to $9.7 million in Fiscal Year 1997. In March 1998, the Company reduced
its workforce and, in connection therewith, recognized charges of $5.1 million,
primarily for severance and related costs. This charge was offset by $4.2
million of the restructuring reserves as of September 30, 1997, which were
adjusted due to a change in the restructuring plan as a result of a change in
senior management in connection with the SF Holdings Investment. See Note 15 of
the Notes to Consolidated Financial Statements.
Asset impairment expense decreased to $5.0 million in Fiscal Year 1998
compared to $24.5 million in Fiscal Year 1997. In March 1998, the Company
decided to rationalize certain product lines. As a result, the Company evaluated
the recoverability of the carrying value of the equipment and other assets
utilized for
11
such product lines, which resulted in a $5.0 million charge to write down the
assets to their fair market value. The Company believes these product line
rationalizations will not have a material adverse effect on the Company's
results of operations or financial condition. The Fiscal Year 1997 charges are
more fully described in the Fiscal Year 1997 to Fiscal Year 1996 comparison
below. See Note 15 of the Notes to Consolidated Financial Statements.
Other (income) expense, net was $12.4 million of expense in Fiscal Year
1998 compared to $0.1 million of income in Fiscal Year 1997. In Fiscal Year
1998, the Company recognized certain nonrecurring charges, consisting primarily
of $4.4 million of financial advisory and legal fees associated with the SF
Holdings Investment, $3.7 million of severance expenses as a result of the
termination of certain officers of the Company pursuant to executive separation
agreements and retention plans for certain key executives, $3.4 million of
expense based on actuarial estimates associated with pending litigation, and
asset write downs of $1.8 million associated with the sale of the Riverside
facility. These expenses were offset in part by the $3.3 million gain on the
sale of the bakery business.
Operating loss decreased $6.5 million to $31.3 million in Fiscal Year
1998 compared to $37.8 million in Fiscal Year 1997 due to the reasons described
above.
Interest expense increased $2.7 million, or 6.7%, to $43.0 million in
Fiscal Year 1998 compared to $40.3 million in Fiscal Year 1997 due primarily to
higher average use of revolving credit borrowings and incremental interest paid
on the portion of the U.S. Credit Facility used to refinance the SRC Series
1994-1 A-V Notes (the "SRC Notes").
Income tax benefit decreased $1.5 million to $29.7 million in Fiscal
Year 1998 compared to $31.2 million in the Fiscal Year 1997. The effective rate
for the 1998 and 1997 Fiscal Years was 40%.
Cumulative effect of a change in accounting principle was an expense
recorded to write-off previously capitalized costs as explained in Note 15 of
the Notes to Consolidated Financial Statements.
Net loss decreased $1.6 million, or 3.5%, to $46.1 million in Fiscal
Year 1998 compared to $47.7 million in Fiscal Year 1997 due to the reasons
described above.
Fiscal Year 1997 Compared to Fiscal Year 1996
Net sales decreased $73.8 million, or 7.7%, to $886.0 million in Fiscal
Year 1997 compared to $959.8 million in Fiscal Year 1996. The decrease in net
sales reflects a 2.9% decrease in domestic sales volume and a 4.4% average
decrease in domestic sales price. Foodservice selling prices decreased 4.5%
while food packaging selling prices decreased 3.5%. Price has been negatively
impacted by declining raw material prices and by competition in the marketplace.
The benefits of lower raw material prices are generally passed on to customers.
Foodservice sales volume decreased 1.7% while food packaging sales volume
decreased 11.5%. The decrease in foodservice sales volume is primarily
attributable to decreases in the national and clubstore markets offset by
increases in foodservice distributor accounts. The decrease in food packaging
sales volume is primarily attributable to decreases in demand experienced by key
accounts in their customer base in both the cultured and frozen segments.
Canadian net sales decreased 2.1% compared to the prior period.
Gross profit decreased $37.6 million, or 37.3%, to $63.2 million in
Fiscal Year 1997 compared to $100.8 million in Fiscal Year 1996. As a percentage
of net sales, gross profit decreased to 7.1% in Fiscal Year 1997 from 10.5% in
Fiscal Year 1996. The Company has implemented initiatives which have reduced
variable manufacturing costs to offset price conditions in the marketplace
described above. As a result, raw material and labor costs have been held
constant as a percentage of sales despite lower selling prices to customers.
Although overhead spending was contained at 1996 levels, this cost as a
percentage
12
of sales has increased. In addition, year-to-date results have been impacted by
changes in overhead absorption relating to planned inventory reductions.
Overhead costs are allocated and absorbed into inventory when inventory is
produced and expensed when inventory is sold. As a result, profit comparisons
can be materially affected when a change in inventory levels during a period
differs significantly from the change in the prior period. In Fiscal Year 1996,
inventory levels increased, resulting in an absorption of fixed costs into
inventory. In Fiscal Year 1997, inventory levels declined, and the fixed costs
associated with inventories sold were recognized. This has resulted in a
period-to-period unfavorable impact on gross profit of $10.5 million.
Selling, general and administrative expenses increased $5.0 million, or
8.1% to $66.8 million in Fiscal Year 1997 compared to $61.8 million in Fiscal
Year 1996. As a percentage of net sales, selling, general and administrative
expenses increased to 7.5% in Fiscal Year 1997 from 6.4% in Fiscal Year 1996.
Approximately $3.0 million of the increase relates to maintenance and
depreciation on the new MIS system, while the remainder reflects increased sales
and marketing costs associated with the Company's focus on increasing sales
volume with key customers and normal inflation in the wage base. All other
selling, general and administrative expenses were held below prior period
levels.
Loss on asset disposal and impairment of $24.6 million was recorded in
the fourth quarter of Fiscal Year 1997 relating to the review of the carrying
value of the Company's long-lived assets. See Note 15 of the Notes to
Consolidated Financial Statements.
Restructuring expense of $9.7 million was recorded in the fourth
quarter of Fiscal Year 1997 relating to plant closures and other expenses as
part of the Company's strategic planning process. See Note 15 of the Notes to
Consolidated Financial Statements.
Other (income) expense, net increased $4.4 million to $0.1 million of
income in Fiscal Year 1997 compared to $4.3 million of expense in Fiscal Year
1996. Fiscal Year 1996 was unfavorably impacted by one-time expenses incurred by
the Company relating to an investigation of the Company's strategic
alternatives.
Operating profit (loss) decreased $72.5 million to a $37.8 million
operating loss in Fiscal Year 1997 compared to $34.7 of operating income in the
same period in Fiscal Year 1996 due to the reasons described above.
Interest expense increased $2.8 million, or 7.3%, to $40.3 million in
Fiscal Year 1997 compared to $37.5 million in Fiscal Year 1996 due primarily to
higher average usage of revolving borrowings.
Income tax benefit increased $30.1 million to $31.2 million in Fiscal
Year 1998 compared to $1.1 million in Fiscal Year 1997. The effective rate for
the 1998 and 1997 Fiscal Years was 40%.
Extraordinary loss of $0.9 million (net of $0.6 million in income
taxes) was recorded in the fourth quarter of Fiscal Year 1997 relating to the
write-off of deferred financing fees associated with a portion of the Company's
debt, which was refinanced subsequent to September 30, 1997.
Net loss increased $46.0 million to $47.7 million in Fiscal Year 1997
compared to net loss of $1.7 million in Fiscal Year 1996 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 Year 1998,
13
the Company began to fund a majority of its capital expenditures from the sale
of assets. The Company expects to continue to fund a majority of its 1999
capital expenditures from the sale of assets.
Net cash used in operating activities in Fiscal Year 1998 was $17.8
million compared to $3.2 million in Fiscal Year 1997. The net cash used in
operating activities in both periods was due principally to the net losses
recorded in such periods which reflect both market conditions and nonrecurring
charges.
Working capital decreased $54.1 million to $106.1 million at September
27, 1998 from $160.2 million at September 30, 1997. This decrease consisted
primarily of a $29.0 million decrease in restricted cash as a result of the
refinancing of the SRC Notes, a $14.2 million decrease in bakery assets, which
were sold in December 1997, a $7.9 million decrease in escrow cash utilized for
capital expenditures, and a $7.3 million increase in accounts payable due to the
Company's efforts to achieve more favorable vendor terms.
Capital expenditures for Fiscal Year 1998 were $37.5 million compared
to $47.8 million in Fiscal Year 1997. Capital expenditures in Fiscal Year 1998
included $12.0 million for new production equipment and $3.9 million for
management information systems, with the remaining consisting primarily of
routine capital improvements. Funding for the 1998 capital expenditures was
provided by $14.7 million of net proceeds from the sale of the bakery business,
$6.8 million from the sale of the Riverside, CA manufacturing facility, $0.9
million from the sale of other property, plant and equipment, and $15.1 million
from cash in escrow related to asset sales in Fiscal Year 1997. During the
current fiscal period, the Company has and will continue to rely principally on
proceeds from the sale of property, plant and equipment to fund capital
expenditures. As of September 27, 1998, the Company had $5.5 million of such
proceeds on deposit in escrow. The Company does not anticipate any material
capital expenditures in the next twelve months other than those funded through
asset sales.
In the fourth quarter of Fiscal Year 1997, the Company completed
negotiations for a three-year renewal of its supply arrangement with its largest
customer, McDonald's. The Company committed to convert McDonald's cold cup
volume to a new raw material substrate (from wax to double-sided polyethylene)
over the life of the supply arrangement. The Company has incurred, and expects
to incur in Fiscal Years 1999 and 2000, capital expenditures in conjunction with
this raw material substrate conversion.
On October 24, 1997, the Company refinanced its then existing revolving
credit facility and other indebtedness and entered into a new revolving credit
facility, as amended, in an amount of up to $135.0 million, subject to borrowing
base limitations (the "U.S. Credit Facility"). Borrowings under the U.S. Credit
Facility mature on September 30, 2000 and as of September 27, 1998, $8.8 million
was available. Borrowings under the U.S. Credit Facility bear interest, at
Sweetheart's election, at a rate equal to (i) LIBOR plus 2.25% or (ii) a bank's
base rate plus 1.00%, plus certain other fees. The U.S. Credit Facility is
secured by accounts receivable, inventory, equipment, intellectual property,
general intangibles and the net proceeds on the sale of any of the foregoing.
On June 15, 1998, Lily Canada refinanced its then existing term loan
and revolving credit facility and entered into a new term loan and revolving
credit facility agreement which provides for a term loan facility of up to Cdn
$10.0 million and a revolving credit facility of up to Cdn $10.0 million (the
"Canadian Credit Facility"). Term loan borrowings under the Canadian Credit
Facility are payable quarterly through May 2001 and revolving credit borrowings
and term loan borrowings have a final maturity date of June 15, 2001. As of
September 27, 1998, Cdn $5.4 million (approximately $3.6 million) was available
under such facility. The Canadian Credit Facility is secured by all the existing
and after acquired real and personal, tangible assets of Lily Canada and the net
proceeds on the sale of any of the foregoing. Borrowings bear interest at an
index rate of 2.25% with respect to the revolving credit borrowings, and an
index rate of 2.50% with respect to the term loan borrowings.
14
The Company may, at its election, redeem the Senior Secured Notes at
any time at a redemption price equal to a percentage (currently 101.604% and
declining to 100% after August 31, 1999) of the principal amount, plus accrued
interest. The Senior Secured Notes are secured by mortgages on the real property
owned by the Company. Payment of principal and interest of the Senior
Subordinated Notes is subordinate to the Senior Indebtedness (as defined
therein), which includes the U.S. Credit Facility and the Senior Secured Notes.
The Company may, at its election, redeem the Senior Subordinated Notes at any
time at a redemption price equal to a percentage (currently 103.938% and
declining in annual increments to 100% after August 31, 2001) of the principal
amount, plus accrued interest. The Sweetheart Notes provide that upon the
occurrence of a Change of Control (as defined therein) the holders will have the
option to require the redemption of the Sweetheart Notes at a redemption price
equal to 101% of the principal amount, plus accrued interest.
The instruments governing the indebtedness of the Company contain
customary covenants and events of default, including without limitation,
restrictions on, subject to defined exceptions, the payment of dividends, the
incurrence of additional indebtedness, investment activities and transactions
with affiliates.
Management believes that cash generated by operations, amounts
available under the Company's credit facilities and funds generated from asset
sales will be sufficient to meet the Company's expected operating needs, planned
capital expenditures and debt service requirements through September 30, 1999.
Year 2000
Many of the Company's computer systems may be unable to process dates
beyond December 31, 1999. This could result in system failures or
miscalculations which could have material adverse effect on the Company's
business, financial condition or results of operations. The Company has
implemented a Year 2000 compliance program intended to identify the programs and
infrastructures that could be effected by Year 2000 issues and resolve the
problems that were identified on a timely basis.
The Company has completed the assessment phase, in which it has
identified potential Year 2000 issues with respect to information technology
systems, as well as equipment that interfaces with vendors and third parties,
and developed a compliance project for its hardware, operating systems, and
application systems. The Company is scheduled to complete the hardware and
operating systems conversion plans by January 1999. With respect to the
application phase, the Company is compliant in its order management and
warehousing systems. Manufacturing and planning systems are in final testing and
are expected to be compliant by April 1999 and January 1999, respectively.
Financial, corporate and in-house developed systems are scheduled for compliance
by July 1999. The Company has completed its internal assessment phase for
technology embedded within equipment and is awaiting responses from certain
vendors. Sweetheart believes a significant portion of its manufacturing
equipment is not affected by Year 2000 issues due to its operations use, or was
compliant when purchased. The Company has or is in the process of contacting key
vendors and business partners, to ensure that key business transactions will be
Year 2000 compliant. Furthermore, in the event the Company is unable to meet
certain key operational dates, it believes its already compliant Year 2000
systems for planning, order management and warehouse management, together with
its manual systems, would allow the Company to ship products to customers and
engage in other critical business functions.
The Company estimates the cost of its Year 2000 program to be $2.7
million, of which $1.2 million had been spent through September 27, 1998. Future
expenditures will be funded from cash flow from operations or borrowings under
credit facilities. However, there can be no assurance that the Company will
identify all Year 2000 issues in its computer systems in advance of their
occurrence or
15
that they will be able to successfully remedy all problems that are discovered.
Failure by the Company and/or its significant vendors and customers to complete
Year 2000 compliance programs in a timely manner could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the revenue stream and financial stability of existing customers
may be adversely impacted by Year 2000 problems which could cause fluctuations
in the Company's revenues and operating profitability.
Net Operating Loss Carryforwards
As of September 27, 1998 the Company had approximately $202 million of
net operating loss ("NOL") carryforwards for federal income tax purposes which
expire at various dates through 2018. Although the Company expects that
sufficient taxable income will be generated in the future to realize these NOLs,
there can be no assurance future taxable income will be generated to utilize
such NOLs.
Impact of Recently Issued Accounting Standards
The impact of recently issued accounting standards is discussed in Note
1 of the Notes to the Consolidated Financial Statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of
this report, beginning on page 30.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On April 29, 1998, Deloitte & Touche LLP was appointed as independent
auditors for the Company, replacing Arthur Andersen LLP. The decision to change
accountants was approved by the Company's Board of Directors. The Company had no
disagreements with Arthur Andersen LLP in the six months ended March 31, 1998 or
its fiscal years ended September 30, 1997 and 1996.
16
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 18, 1998. 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 56 Chairman and Chief Executive Officer of Sweetheart Holdings and
Sweetheart Cup
Thomas Uleau 53 President, Chief Operating Officer and Director of Sweetheart
Holdings and Sweetheart Cup
W. Richard Bingham 62 Director of Sweetheart Holdings and Sweetheart Cup
Lawrence W. Ward, Jr. 46 Director of Sweetheart Holdings and Sweetheart Cup
Theodore C. Rogers 64 Director of Sweetheart Holdings and Sweetheart Cup
Michael Hastings 51 Senior Vice President - Sales and Marketing of Sweetheart
Holdings and Sweetheart Cup
Hans H. Heinsen 45 Senior Vice President - Finance and Chief Financial Officer of
Sweetheart Holdings and Sweetheart Cup
Charles E. Busse 60 Vice President - Research and Engineering of Sweetheart
Holdings and Sweetheart Cup
Daniel M. Carson 52 Vice President - General Counsel and Corporate Secretary of
Sweetheart Holdings and Sweetheart Cup
William H. Haas 57 Vice President - Sales of Sweetheart Holdings and Sweetheart
Cup
Rick Schneider 49 Vice President - Manufacturing of Sweetheart Holdings and
Sweetheart Cup
Jeffrey Seidman 44 Vice President - Human Resources of Sweetheart Holdings and
Sweetheart Cup
Roger A. Lindahl 41 Treasurer of Sweetheart Holdings and Sweetheart Cup
Mr. Mehiel has been Chairman of the Board and Chief Executive Officer
of Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Mehiel is also
Chairman and Chief Executive Officer of SF Holdings and its subsidiary Fonda.
Since 1966, he has been Chairman of Four M Corporation ("Four M"), a converter
and seller of interior packaging, corrugated sheets and corrugated containers
which he co-founded, and since 1977 (except during a leave of absence from April
1994 through July 1995) he has been the Chief Executive Officer of Four M. Mr.
Mehiel is also the Chairman of Box USA of New Jersey, Inc. ("Box USA"), a
manufacturer of corrugated containers, and Chairman and Chief Executive Officer
of Creative Expressions Group ("CEG"), an affiliate of Fonda and seller of
disposable party goods products.
Mr. Uleau has been President, Chief Operating Officer and a Director of
Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Uleau is also
President, Chief Operating Officer and a Director of SF Holdings and Executive
Vice President of Fonda. He has been a director of Fonda since 1988. He also
served in a variety of executive officer positions at Fonda since 1988. He has
been Executive Vice President of CEG since 1996. He served as Executive Vice
President and Chief Financial Officer of Four M from 1989 through 1993 and its
Chief Operating Officer in 1994. He is also currently a director of Four M, CEG,
and Box USA.
17
Mr. Bingham has been a Director of Sweetheart Holdings and Sweetheart
Cup Company 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-LP. 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 also currently serves as a Director of Bucyrus
International, Great Lakes Carbon Corporation, RBX Group, Inc., Standadyne
Automotive Corporation and Deerfield Associates.
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-LP. From 1980-1987, he
served as Chairman, President and Chief Executive Officer of NL Industries,
Inc., a petroleum service and chemical company. Prior to 1980, he served as an
executive of Armco Inc., a diversified steel company, where he managed numerous
manufacturing operations in the United States and Mexico Mr. Rogers is a former
director of Allied Stores Corporation, Allied-Signal Inc., Parsons Corporation
and Southwest Bancshares. He is currently a director of Mcorp. and Derby
International Corporation.
Mr. Ward has been a Director of Sweetheart Holdings and Sweetheart Cup
since March 1998. Mr. Ward has been a Principal with AIP since May 1992. Mr.
Ward served as Chief Financial Officer of Sweetheart Holdings and Sweetheart Cup
from June 1996 through November 1996. Mr. Ward also currently serves as a
Director of Bucyrus International, Inc., Easco, Inc., Great Lakes Carbon
Corporation, RBX Group Inc. and Stanadyne Automotive Corporation.
Mr. Hastings has served as Senior Vice President - Sales and Marketing
for Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Hastings is
also Senior Vice President of Fonda. Prior to joining the Company, Mr. Hastings
served as President of the Fonda Division of Fonda, which he joined in May 1995.
From December 1990 to April 1995, Mr. Hastings served as Vice President of Sales
and Marketing and as a member of the Board of Directors of Anchor Packaging
Company, a manufacturer of institutional films and thermoformed plastic
packaging. Prior to joining Anchor Packaging Company, Mr. Hastings was employed
for over 25 years in a variety of positions in the paper and plastic industries,
including sales, marketing and plant operations management at Scott Paper
Company and Thompson Industries.
Mr. Heinsen has served as Senior Vice President - Finance and Chief
Financial Officer of Sweetheart Holdings and Sweetheart Cup since March 1998.
Mr. Heinsen also serves as Senior Vice President, Chief Financial Officer and
Treasurer of SF Holdings since February 1998, Senior Vice President and
Treasurer of Fonda since February 1997, Chief Financial Officer of Fonda since
June 1996 and Chief Financial Officer of CEG since November 1998. Prior to
joining Fonda, Mr. Heinsen spent 21 years in a variety of corporate finance
positions with The Chase Manhattan Bank, N.A.
Mr. Busse has served as Vice President - Research and Engineering of
Sweetheart Holdings and Sweetheart Cup and their predecessors since 1983. Mr.
Busse has held several other positions with the Company and its predecessors
since 1963.
Mr. Carson has served as Vice President - General Counsel and Corporate
Secretary of Sweetheart Holdings since October 1993 and has served as Vice
President - General Counsel, and Corporate Secretary of Sweetheart Cup and as
Corporate Secretary of Sweetheart Holdings since February 1993. He served as
Assistant General Counsel and Director of U.S. Legal Affairs of Avon Products,
Inc., a consumer products company, from September 1991 to February 1993 and was
Of Counsel to Bell, Boyd & Lloyd (Chicago, Illinois) from June 1991 to August
1991. From May 1981 until June 1991, Mr. Carson was Associate General Counsel
for Continental Can Company, Inc., a packaging and paper products company.
Mr. Haas has served as Vice President - Sales for Sweetheart Cup and
their predecessors since 1985, and as Vice President - Sales for Sweetheart
Holdings since October 1998. Prior to joining the Company, Mr. Haas was employed
for more than 20 years by Carnation Co., Inc., a food products company, in
various sales and sales management capacities and by Nabisco, Inc., a food
products company, as Director of National Account Sales.
18
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 in
Owings Mills including, Production Staff Manager, Operations Manager, and Plant
Manager. Prior to joining Sweetheart, Mr. Schneider was employed for ten years
by Boise Cascade Composite Can Division in a variety of manufacturing positions.
Mr. Seidman has served as Vice President - Human Resources of
Sweetheart Holdings and Sweetheart Cup since September 1998. Prior to joining
the Company, he was with Fonda from 1995 to 1998, where he held various
positions including Vice President of Human Resources and Director of
Operations. Prior to Fonda, he was employed by Scott Paper in various human
resources positions since 1989.
Mr. Lindahl has served as Treasurer of Sweetheart Holdings and
Sweetheart Cup since October 1994. From November, 1989 to October, 1994, Mr.
Lindahl served as Assistant Treasurer of Sweetheart Cup. Prior to 1989, Mr.
Lindahl was employed by Fort James and Bull Information Systems and its
predecessors.
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 "Certain Relationships and Related Transactions".
Directors are reimbursed for expenses incurred while serving on the Board.
19
Item 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the
compensation for Fiscal Years 1998, 1997 and 1996, 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 and
(ii) $50,000. Thus, such amounts are not reflected in the following table.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
Awards
- ----------------------------------------- --------------------------------------- -------------- --------------
# of Options All Other
Name and Principal Fiscal Salary Bonus Granted Compensation
Position Period ($) ($) (1) (2) ($)
- ----------------------------------------- ------------- ----------- ------------ -------------- --------------
Dennis Mehiel
Chairman and Chief Executive Officer 1998(3) 188,775 -- -- --
of Sweetheart Holdings and 1997 -- -- -- --
Sweetheart Cup 1996 -- -- -- --
William F. McLaughlin
President and Chief Executive 1998(4) 239,102 -- -- 2,413,876(5)
Officer of Sweetheart Holdings and 1997 491,667 -- 10,000 129,805(6)
Sweetheart Cup 1996 400,000 498,000 -- 18,207(7)
Thomas Uleau
President, Chief Operating Officer 1998(8) 144,414 -- -- 34,451(9)
and Director of Sweetheart Holdings 1997 -- -- -- --
and Sweetheart Cup 1996 -- -- -- --
Charles E. Busse
Vice President - Research and 1998 175,848 -- -- 352,642(10)
Engineering of Sweetheart Holdings 1997 177,900 -- -- 123,375(11)
and Sweetheart Cup 1996 176,325 63,766 -- 5,369(12)
William H. Haas
Vice President - Sales of 1998 177,923 -- -- 443,348(13)
Sweetheart Holdings and Sweetheart 1997 180,000 -- -- 364,443(14)
Cup 1996 178,313 89,640 600 35,235(15)
Joseph A. Lucas
Vice President and General Manager 1998(16) 172,981 -- -- 357,485(17)
- Packaging of Sweetheart Holdings 1997 175,000 -- -- 138,554(18)
and Sweetheart Cup 1996 174,150 87,150 -- 65,997(19)
(1) Amounts shown were paid pursuant to the Company's Management Incentive Plans.
(2) All such grants were made pursuant to the 1994 Stock Option and Purchase Plan.
(3) Mr. Mehiel became Chairman and Chief Executive Officer effective March 12, 1998.
Amounts shown here were paid during the remainder of Fiscal Year 1998.
(4) Mr. McLaughlin resigned as Chief Executive Officer effective March 12, 1998.
(5) Reflects $2,407,557 paid under a Separation Agreement, $5,250
contributed under the 401(k) Plan, $1,002 of life insurance premiums
paid by the Company and $67 of long-term disability insurance
20
premiums paid by the Company.
(6) Reflects $125,000 paid under the Special Incentive Agreement, $4,500
contributed under the the Sweetheart 401(k) Retirement Plan (the
"401(k) Plan") (to which the Company contributes an amount equal to 50%
of the participant's contributions not in excess of 6% of the
participant's eligible earnings) and $305 of life insurance premiums
paid by the Company.
(7) Reflects $10,989 paid for relocation expenses, $6,000 contributed under
the 401(k) Plan and $1,218 of life insurance premiums paid by the Company.
(8) Mr. Uleau became President, Chief Operating Officer and Director
effective March 12, 1998. Amounts shown here were paid during the
remainder of Fiscal Year 1998.
(9) Reflects $29,167 paid for relocation expenses, $2,785 contributed under
the 401(k) Plan, $2,376 of life insurance premiums paid by the Company
and $123 of long-term disability insurance premiums paid by the
Company.
(10) Reflects $190,077 paid under the Executive Retention Plan, $118,600
paid under the Special Incentive Agreement, $35,458 paid under the
Stock Option Repurchase Plan, $4,750 paid under the 401(k) Plan, $3,651
of life insurance premiums paid by the Company, and $106 of long-term
disability premiums paid by the Company.
(11) Reflects $118,600 paid under the Special Incentive Agreement, $4,500
paid under the 401(k) Plan and $275 of life insurance premiums paid
by the Company.
(12) Reflects $4,271 contributed under the 401(k) Plan and $1,098 of life
insurance premiums paid by the Company.
(13) Reflects $196,019 paid under the Executive Retention Plan, $120,000
paid under the Special Incentive Agreement, $67,631 paid for relocation
expenses, $52,378 paid under the Stock Option Repurchase Plan, $4,750
paid under the 401(k) Plan, $2,462 of life insurance premiums paid by
the Company, and $108 of long-term disability premiums paid by the
Company.
(14) Reflects $239,664 paid for relocation expenses, $120,000 paid under the
Special Incentive Agreement, $4,500 contributed under the 401(k) Plan
and $279 of life insurance premiums paid by the Company.
(15) Reflects $30,000 paid for relocation expenses, $4,219 contributed
under the 401(k) Plan and $1,016 of life insurance premiums paid by the Company.
(16) Mr. Lucas resigned from the Company effective November 6, 1998.
(17) Reflects $193,394 paid under the Executive Retention Plan, $116,667
paid under the Special Incentive Agreement, $40,161 paid under the
Stock Option Repurchase Plan, $4,750 paid under the 401(k) Plan, $2,408
of life insurance premiums paid by the Company, and $105 of long-term
disability premiums paid by the Company.
(18) Reflects $116,667 paid under the Special Incentive Agreement, $17,113
paid for relocation expenses, $4,500 paid under the 401(k) Plan and
$274 of life insurance premiums paid by the Company.
(19) Reflects $59,026 paid for relocation expenses, $5,873 contributed
under the 401(k) Plan and $1,098 of life insurance premiums paid by the Company.
McLaughlin Employment Agreement
The Company entered into an employment agreement with William F.
McLaughlin dated as of May 15, 1994 (the "McLaughlin Agreement") pursuant to
which the Company employed Mr. McLaughlin to serve as president and chief
executive officer of the Company. On January 15, 1998, Mr. McLaughlin and the
Company entered into an agreement whereby Mr. McLaughlin's employment and other
executive compensation contracts were terminated and replaced by a Separation
Agreement, a copy of which is filed as an exhibit to this report on Form 10-K.
Mr. McLaughlin resigned from the Company effective March 12, 1998.
21
Employment Contracts
Messrs. Haas, Lucas, Busse and Carson each entered into an executive
retention agreement with the Company dated October 1, 1997 which provides for an
incentive payment to the executive if he remains employed by the Company for a
period of two years. Payment of the incentive is accelerated under certain
circumstances, including a sale of more than fifty percent of the equity value
of the Company, which acceleration was triggered by the SF Holdings Investment.
The amount of the incentive is one year's base salary for each of the
executives. Messrs. Haas and Carson entered into an relocation agreement with
the Company dated December 19, 1997 which provides for reimbursement of losses
up to a specified amount by individual in the event of a termination of their
employment under certain specified circumstances and for reasons other than
cause, including a change of control or a sale of more than fifty percent of the
equity value of the Company.
Stock Option Plan
On March 12, 1998, all outstanding options to purchase stock of the
Company were cashed out in full pursuant to the agreement governing the SF
Holdings Investment. There are currently no options to purchase either Class A
or Class B common stock outstanding.
Employee Benefit Plans
A majority of the Company's employees ("participants") are covered
under a 401(k) defined contribution plan. The Company's annual contributions to
this defined contribution plan represent a 50% match on participant
contributions. The Company's match is limited to participant contributions up to
6% of participant salaries. In addition, the Company is allowed to make
discretionary contributions. Certain Sweetheart 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 postretirement health care
plans that cover substantially all full-time employees. The plans, in most
cases, pay stated percentages of most medical expenses incurred by retirees,
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants generally become eligible after reaching
age 60 with 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.
None of the executive officers of the Company is covered under any of
the Company's defined benefit plans. Rather, such persons are covered under
defined contribution plans only.
22
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 18,
1998, 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
--------------------------- --------------------------
Name of Beneficial Owner Number of Percent Number of Percent
- ------------------------ 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
Mellon Bank, N.A., as Trustee for First Plaza Group
Trust (1) .............................................. 182,000 17.4 -- --
One Mellon Bank Center
Pittsburgh, PA 15258
Leeway & Co., as nominee for the AT&T Master Pension
Trust (2) .............................................. 78,000 7.5 -- --
c/o State Street Bank & Trust Co.
Master Trust Division - W6C
1 Enterprise Drive
North Quincy, MA 02171
SF Holdings Group, Inc.(3) ............................. 502,080 48.0 4,393,200 100.0%
115 Stevens Avenue
Valhalla, NY 10595
W. Richard Bingham (3) ............................... 280,189 26.8 -- --
Theodore C. Rogers (3) ................................. 280,189 26.8 -- --
Lawrence W. Ward, Jr. .................................. 26 * -- --
Dennis Mehiel (4) ...................................... 399,656 38.2 3,496,987 79.6
Directors and executive officers as a group
(13 persons) (5) ......... ............................ 687,402 65.7 3,562,885 81.1
- --------------------------------------
* Less than 1%.
(1) Mellon Bank, N.A., acts as the trustee (the "Trustee") for First Plaza
Group Trust ("First Plaza"), a trust under and for the benefit of certain
employee benefit plans of General Motors Corporation ("GM") and its
subsidiaries. These shares may be deemed to be owned beneficially by General
Motors Investment Management Corporation ("GMIMCo"), a wholly-owned subsidiary
of GM. GMIMCo's principal business is providing investment advice and investment
management services with respect to the assets of certain
23
employee benefit plans of GM and its subsidiaries and with respect to the assets
of certain direct and indirect subsidiaries of GM and associated entities.
GMIMCo is serving as First Plaza's investment manager with respect to these
shares and in that capacity it has the sole power to direct the Trustee as to
the voting and disposition of these shares. Because of the Trustee's limited
role, beneficial ownership of the shares by the Trustee is disclaimed.
(2) State Street Bank & Trust Co. acts as trustee for a trust under and for the
benefit of certain employee benefit plans of American Telephone & Telegraph Co.
("AT&T") and its subsidiaries. These shares may be deemed to be owned
beneficially by the AT&T Master Pension Trust (the "Trust").
(3) All of such shares are held of record by AIP. Messrs. Bingham and Rogers are
general partners of the general partner of AIP and share investment and voting
power with respect to the securities owned by AIP. The business address of Mr.
Bingham is One Maritime Plaza, Suite 2525, San Francisco, CA 94111, and the
business address of Mr. Rogers is 551 Fifth Avenue, Suite 3800, New York, NY
10176.
(4) All of such shares are held of record by SF Holdings of which Mr. Mehiel
beneficially owns 79.6% of the outstanding common stock. The business address of
Mr. Mehiel is 115 Stevens Avenue, Valhalla, NY, 10595.
(5) All of such shares are held of record by either AIP or SF Holdings.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stockholders' 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 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 of 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,
The Fonda Group, Inc., an affiliate of SF Holdings, manages the day-to-day
operations of the Company subject to the direction of the Board of Directors.
The Original Shareholders, after March 12, 2003, have the right to
exchange their shares of Class A Common Stock for warrants (the "Exchange
Warrants") to purchase, for nominal consideration, shares of Class C Common
Stock of SF Holdings representing 10% of the total outstanding shares of common
stock of SF Holdings at the consummation of the SF Holdings Investment on a
fully diluted basis. SF Holdings has the right to cause such exchange and has
the right thereafter to repurchase the Exchange Warrants, in whole or in part,
for an aggregate call price of $50.0 million, subject to increase at 12.5% per
annum until March 12, 2003. Upon occurrence of a merger (as defined in the
Company's Stockholders' Agreement), 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
24
of common stock in an amount greater than 30% of the outstanding shares of
common stock, then 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-LP, 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 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 are split between SF Holdings and AIPM, respectively, 50/50
during the first year following the SF Holdings Investment (which occurred on
March 12, 1998), 60/40 during the second year, 70/30 during the third year, and
are paid 100% to SF Holdings thereafter. SF Holdings has assigned substantially
all of its interests under this agreement to Fonda, but retains $200,000 per
year of fees for administrative services.
In addition, in Fiscal Year 1996, the Company reimbursed AIPM for
$950,000 of expenses incurred in connection with an investigation of the
Company's strategic alternatives.
Transactions with Affiliates
The Company purchases corrugated containers from Four M, an affiliate
of the Company. Purchases totaled $1.8 million in Fiscal Year 1998, and were not
material in the preceding fiscal periods. The Company believes that the terms on
which it purchased such products are at least as favorable as those it could
otherwise have obtained from unrelated third parties and were negotiated on an
arm's length basis.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
1. The financial statements listed in the "Index to Consolidated
Financial Statements."
2. The financial statement schedule listed in the "Index to Financial
Statement Schedules."
3. Exhibits
3.1 Certificate of Incorporation of Sweetheart Holdings Inc.
(incorporated by reference from Exhibit 3.1 of the Company's
report on Form 10-K dated December 22, 1993 (the "1993
10-K")).
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation of Sweetheart Holdings Inc. dated March 11,
1998 (incorporated by reference from Exhibit 3.3 of the
Company's report on Form 10-Q dated May 15, 1998).
25
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).
10.1 Employment Agreement dated May 15, 1994 between Sweetheart
Holdings Inc. and William F. McLaughlin (incorporated by
reference from Exhibit 10.4 of the Company's report on Form
10-Q dated August 12, 1994).
10.2 Receivables Purchase Agreement between Sweetheart Cup
Company Inc. and Sweetheart Receivables Corporation dated
September 20, 1994 (incorporated by reference from Exhibit
10.5 of the Company's report on Form 10-K dated December 9,
1994 (the "1994 10-K")).
10.3 Indenture and Security Agreement among Sweetheart
Receivables Corporation, Sweetheart Cup Company Inc. and
Manufacturers and Traders Trust Company dated September 20,
1994 (incorporated by reference from Exhibit 10.6 of the
1994 10-K).
10.4 Supplemental Indenture for Series 1994-1 A-V Notes among
Sweetheart Receivables Corporation, Sweetheart Cup Company
Inc. and Manufacturers and Traders Trust Company dated
September 20, 1994 (incorporated by reference from Exhibit
10.7 of the 1994 10-K).
10.5 Credit Agreement among Sweetheart Inc., Sweetheart Cup
Company Inc., various banks and Bankers Trust Company, as
Agent (the "Credit Agreement") (incorporated by reference
from Exhibit 28.1 of the 1993 8-K). 10.6 First Amendment to
the Credit Agreement dated July 22, 1994 (incorporated by
reference from Exhibit 10.9 of the 1994 10-K).
10.11 $2,500,000 Manchester, New Hampshire Industrial Revenue
Bonds, Series 1979: Loan Agreement and Assignment in Trust
dated as of June 1, 1979 between the Industrial Development
Authority of the State of New Hampshire and Maryland Cup
Corporation and State Street Bank and Trust Company,
Trustee; and Assumption Agreement dated as of August 26,
1983 by MC Acquisition Corp. (incorporated by reference from
Exhibit 10.10 of the Registration Statement).
10.12 Term and Revolving Credit Facilities Agreement, dated as of
December 20, 1989, among Lily Canada, BT Bank of Canada and
The Bank of Nova Scotia and Amendment Agreement, dated as of
August 30, 1993 between Lily Canada and The Bank of Nova
Scotia (incorporated by reference from Exhibit 10.8 of the
1993 10-K).
10.13 Asset Sale Agreement dated as of October 6, 1993 between
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
(incorporated by reference from Exhibit 10.1 of the
Company's report on Form 10-Q dated February 11, 1994).
10.14 Bill of Sale, Assignment and Assumption Agreement dated as
of October 6, 1993 between Sweetheart Holdings Inc. and
Sweetheart Cup Company Inc. (incorporated by reference from
Exhibit 10.2 of the Company's report on Form 10-Q dated
February 11, 1994).
10.15 Wraparound Note dated as of October 6, 1993 made by
Sweetheart Holdings Inc. to Sweetheart Cup Company Inc.
(incorporated by reference from Exhibit 10.3 of the
Company's report on Form 10-Q dated February 11, 1994).
10.16 Asset Distribution Agreement dated as of October 6, 1993
between Sweetheart Holdings Inc. and Sweetheart Cup Company
Inc. (incorporated by reference from Exhibit 10.4 of the
Company's report on Form 10-Q dated February 11, 1994).
10.17 Manufacturing Agreement dated as of October 6, 1993 between
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
(the "Manufacturing Agreement") (incorporated by
26
reference from Exhibit 10.5 of the Company's report on Form
10-Q dated February 11, 1994).
10.18 First Amendment to Manufacturing Agreement dated February
25, 1994 (incorporated by reference from Exhibit 10.21 of
the 1994 10-K).
10.19 Patent/Know-How License Agreement dated as of October 6,
1993 between Sweetheart Holdings Inc. and Sweetheart Cup
Company Inc. (incorporated by reference from Exhibit 10.6 of
the Company's report on Form 10-Q dated February 11, 1994).
10.20 Sweetheart Holdings Inc. Stock Option and Purchase Plan
dated December 17, 1993 (incorporated by reference from
Exhibit 10.26 of the 1994 10-K).
10.21 Sweetheart Holdings Inc. Management Incentive Plan dated as
of January 27, 1995 (incorporated by reference from Exhibit
10.1 of the Company's report on Form 10-Q dated February 9,
1995).
10.22 Sweetheart Cup Company Inc. Severance Pay Plan (Effective
July 1, 1994) (incorporated by reference from Exhibit 10.2
of the Company's report on Form 10-Q dated February 9,
1995).
10.23 Sweetheart Cup Company Inc. Deferred Compensation Plan dated
as of January 27, 1995 (incorporated by reference from
Exhibit 10.3 of the Company's report on Form 10-Q dated
February 9, 1995).
10.24 Registration Statement on Form S-8 dated April 17, 1995 for
the Sweetheart Cup Company Inc. Deferred Compensation Plan
(incorporated by reference from Exhibit 10.1 of the
Company's report on Form 10-Q dated May 11, 1995).
10.26 Second Amendment to the Credit Agreement dated September 6,
1996 (incorporated by reference from Exhibit 10.26 of the
Company's report on Form 10-K dated December 20, 1996 (the
"1996 10-K")).
10.27 Loan Agreement dated August 1, 1996 between Sweetheart
Holdings Inc. and the State of Maryland Department of
Business and Economic Development (incorporated by reference
from Exhibit 10.27 of the 1996 10-K).
10.28 Special Incentive Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and William
F. McLaughlin dated December 9, 1996 (incorporated by
reference from Exhibit 10.28 of the 1996 10-K).
10.29 Special Incentive Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and Joseph
A. Lucas dated November 18, 1996 (incorporated by reference
from Exhibit 10.29 of the 1996 10-K).
10.30 Special Incentive Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and William
H. Haas dated November 18, 1996 (incorporated by reference
from Exhibit 10.30 of the 1996 10-K).
10.31 Special Incentive Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and Daniel
M. Carson dated November 18, 1996 (incorporated by reference
from Exhibit 10.31 of the 1996 10-K).
10.32 Special Incentive Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and Charles
E. Busse dated November 18, 1996 (incorporated by reference
from Exhibit 10.32 of the 1996 10-K).
10.33 Promissory Note dated September 24, 1996 between Sweetheart
Holdings Inc. and the State of Maryland Department of
Business and Economic Development (relating to the Loan
Agreement filed as exhibit 10.27 to the 1996 10-K,
incorporated by reference from Exhibit 10.33 of the
Company's report on Form 10-Q dated February 11, 1997).
10.34 Third Amendment to Credit Agreement dated June 17, 1997
(incorporated by reference from Exhibit 10.34 of the
Company's report on Form 10-Q dated August 5, 1997).
10.35 Amended and Restated Loan and Security Agreement dated
October 24, 1997 between Sweetheart Holdings Inc. as
borrower and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference from Exhibit 10.35 of the
Company's report on Form 10-K dated December 30, 1997 (the
"1997 10-K")).
10.36 Special Incentive Agreement between Sweetheart Holdings Inc.
and its subsidiary,
27
Sweetheart Cup Company Inc. and James R. Mullen dated
November 18, 1996 (incorporated by reference from Exhibit
10.36 of the 1997 10-K).
10.37 Employment Agreement dated March 1, 1997 between Sweetheart
Holdings Inc. and William F. Spengler (incorporated by
reference from Exhibit 10.37 of the 1997 10-K).
10.38 Executive Retention Agreement between Sweetheart Holdings
Inc. and its subsidiary, Sweetheart Cup Company Inc. and
William F. McLaughlin dated October 1, 1997 (incorporated by
reference from Exhibit 10.38 of the 1997 10-K)
10.39 Executive Retention Agreement between Sweetheart Holdings
Inc. and its subsidiary, Sweetheart Cup Company Inc. and
William H. Haas dated October 1, 1997 (incorporated by
reference from Exhibit 10.39 of the 1997 10-K).
10.40 Executive Retention Agreement between Sweetheart Holdings
Inc. and its subsidiary, Sweetheart Cup Company Inc. and
William F. Spengler dated October 1, 1997 (incorporated by
reference from Exhibit 10.40 of the 1997 10-K).
10.41 Executive Retention Agreement between Sweetheart Holdings
Inc. and its subsidiary, Sweetheart Cup Company Inc. and
Daniel M. Carson dated October 1, 1997 (incorporated by
reference from Exhibit 10.41 of the 1997 10-K).
10.42 Executive Retention Agreement between Sweetheart Holdings
Inc. and its subsidiary, Sweetheart Cup Company Inc. and
James R. Mullen dated October 1, 1997 (incorporated by
reference from Exhibit 10.42 of the 1997 10-K).
10.43 Employee Relocation Agreement between Sweetheart Holdings
Inc. and its subsidiary, Sweetheart Cup Company Inc. and
William F. McLaughlin dated December 19, 1997 (incorporated
by reference from Exhibit 10.43 of the 1997 10-K).
10.44 Employee Relocation Agreement between Sweetheart Holdings
Inc. and its subsidiary, Sweetheart Cup Company Inc. and
James R. Mullen dated December 19, 1997 (incorporated by
reference from Exhibit 10.44 of the 1997 10-K).
10.45 Employee Relocation Agreement between Sweetheart Holdings
Inc. and its subsidiary, Sweetheart Cup Company Inc. and
Daniel M. Carson dated December 19, 1997 (incorporated by
reference from Exhibit 10.45 of the 1997 10-K).
10.46 Employee Relocation Agreement between Sweetheart Holdings
Inc. and its subsidiary, Sweetheart Cup Company Inc. and
William H. Haas dated December 19, 1997 (incorporated by
reference from Exhibit 10.46 of the 1997 10-K).
10.47 Second Restated Management Services Agreement dated March
12, 1998 (incorporated by reference from Exhibit 10.47 of
the Company's report on Form 10-Q dated May 15, 1998).
10.48 Amendment No. 1 to the Second Restated Management Services
Agreement dated March 12, 1998 (incorporated by reference
from Exhibit 10.48 of the Company's report on Form 10-Q
dated May 15, 1998).
10.49 Amendment No. 2 to the Amended and Restated Loan and
Security Agreement dated March 10, 1998 (incorporated by
reference from Exhibit 10.49 of the Company's report on Form
10-Q dated May 15, 1998).
10.50 Amendment No. 3 to the Amended and Restated Loan and
Security Agreement dated May 12, 1998 (incorporated by
reference from Exhibit 10.50 of the Company's report on Form
10-Q dated May 15, 1998).
10.51 Credit Agreement dated as of June 15, 1998 between Lily Cups
Inc. as Borrower and General Electric Capital Canada Inc. as
Lender (incorporated by reference from Exhibit 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).
10.53 Separation Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc., and William F.
McLaughlin dated January 19, 1998.
10.54 Consent and Amendment No. 4 to the Amended and Restated Loan
and Security Agreement dated November 1, 1998.
10.55 Executive Retention Agreement between Sweetheart Holdings
Inc. and its subsidiary,
28
Sweetheart Cup Company Inc. and Charles E. Busse dated
October 1, 1997.
10.56 Executive Retention Agreement between Sweetheart Holdings
Inc. and its subsidiary, Sweetheart Cup Company Inc. and
Joseph A. Lucas dated October 1, 1997.
16.0 Letter from Arthur Andersen LLP in accordance with Item 304
(a)(3) of Regulation S-K (incorporated by reference from
Exhibit 16.0 to the Company's report on Form 8-K dated April
29, 1998).
18.0 Preferability Letter (incorporated by reference from Exhibit
18.0 of the Company's report on Form 10-Q dated August 14,
1998).
21.1 Subsidiaries of the Company (incorporated by reference from
Exhibit 21.1 of the 1994 10-K).
27.0 September 27, 1998 Financial Data Schedule
(b) Current Reports on Form 8-K
A change in the Company's fiscal year end was filed as an Item 8
disclosure on October 30, 1998.
29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 31
Report of Independent Public Accountants 32
Consolidated Balance Sheets as of September 27, 1998
and September 30, 1997 33
Consolidated Statements of Operations for Fiscal Years 1998, 1997 and 1996 34
Consolidated Statements of Cash Flows for Fiscal Years 1998, 1997 and 1996 35
Consolidated Statements of Shareholders' Equity for Fiscal
Years 1998, 1997 and 1996 36
Notes to Consolidated Financial Statements 37
30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Sweetheart Holdings Inc.:
We have audited the accompanying consolidated balance sheet of Sweetheart
Holdings Inc. and Subsidiaries (the "Company") as of September 27, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of the Company for the years ended September
30, 1997 and 1996 were audited by other auditors whose report, dated December 8,
1997 (except with respect to the matter in Note 1, as to which the date was
December 3, 1998), expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of September 27,
1998 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1998 the
Company changed its method for accounting for inventories from the
last-in-first-out method to the first-in first-out method and retroactively
restated the 1997 and 1996 consolidated financial statements for the change.
Also, as discussed in Note 15 to the consolidated financial statements, the
Company changed its method for accounting for reengineering costs in connection
with software installation.
/s/ DELOITTE & TOUCHE LLP
Baltimore, Maryland
December 10, 1998
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Sweetheart Holdings Inc.:
We have audited the accompanying consolidated balance sheets of SWEETHEART
HOLDINGS INC. (a Delaware corporation) AND SUBSIDIARIES as of September 30, 1997
and the related consolidated statements of operations, shareholders' equity and
cash flows for the Fiscal Years ended September 30, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sweetheart Holdings Inc. and
Subsidiaries as of September 30, 1997, and the consolidated results of their
operations and their cash flows for the Fiscal Years ended September 30, 1997
and 1996 in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, the Company has given
retroactive effect to the change in accounting for inventory valuation from the
last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO") method.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
December 8, 1997
(except with respect to
the matter discussed in
Note 1 - Inventories, as
to which the date is
December 3, 1998)
32
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 27, September 30,
1998 1997 (a)
--------------- ----------------
Assets
------
Current assets:
Cash and cash equivalents $1,367 $2,650
Restricted cash -- 29,016
Cash in escrow 5,464 13,323
Receivables, less allowances of $1,817 and $1,740, respectively 85,248 85,774
Inventories 133,065 142,277
Deferred income taxes 11,506 2,471
Assets held for sale, net -- 8,466
Spare parts 19,278 20,868
------ ------
Total current assets 255,928 304,845
------- -------
Property, plant and equipment, net 355,224 382,491
Deferred income taxes 41,395 15,098
Other assets 13,079 13,155
------ ------
Total assets $665,626 $715,589
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $66,205 $58,933
Accrued payroll and related costs 39,324 40,528
Other current liabilities 40,866 43,815
Current portion of long-term debt 3,445 1,369
----- -----
Total current liabilities 149,840 144,645
------- -------
Long-term debt 422,438 430,499
Other non-current liabilities 74,365 69,775
Shareholders' equity:
Common stock - Par value $.01 per share; 3,000,000 shares authorized;
1,046,000 shares issued and outstanding -- 101,100
Class A Common Stock - Par value $.01 per share; 1,100,000 shares
authorized; 1,046,000 shares issued and outstanding 101,100 --
Class B Common Stock - Par value $.01 per share; 4,600,000 shares
authorized; 4,393,200 shares issued and outstanding 44 --
Cumulative translation adjustment (1,569) (507)
Minimum pension liability adjustment (4,922) --
Accumulated deficit (75,670) (29,552)
Note receivable related to purchase of common stock -- (371)
-------- -------
Total shareholders' equity 18,983 70,670
------ -------
Total liabilities and shareholders' equity $665,626 $715,589
======== ========
(a) Prior period balances have been restated (see Note 1 to Consolidated Financial Statements).
The accompanying notes are an integral part of these consolidated financial statements.
33
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Fiscal Years
-------------------------------------------------------
1998 1997 (a) 1996 (a)
-------------------------------------------------------
Net sales $843,502 $886,017 $959,818
Cost of sales 787,706 822,818 859,029
------- ------- -------
Gross profit 55,796 63,199 100,789
Selling, general, and administrative 68,818 66,792 61,788
Loss on asset disposal and impairment 5,000 24,550 -
Restructuring charges 897 9,680 -
Other expense (income), net 12,400 (73) 4,271
------- ------- -------
Operating income (loss) (31,319) (37,750) 34,730
Interest expense, net of interest income
of $755, $1,547 and $1,315 in 1998,
1997 and 1996, respectively 42,955 40,265 37,517
------ ------ ------
Loss before income tax benefit,
cumulative effect of an (74,274) (78,015) (2,787)
accounting change and
extraordinary loss
Income tax benefit (29,711) (31,206) (1,115)
------- ------- -------
Loss before cumulative effect of
an accounting change and
extraordinary loss (44,563) (46,809) (1,672)
Cumulative effect of an accounting change
(net of income taxes of $1,000) 1,511 - -
Extraordinary loss on debt
extinguishment (net of income taxes
of $627) - 940 -
------- ------- -------
Net loss $ (46,074) $(47,749) $(1,672)
========= ========= ========
(a) Prior period balances have been restated (see Note 1 to Consolidated Financial Statements).
The accompanying notes are an integral part of these consolidated financial statements.
34
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Years
------------------------------------------------------
1998 1997 1996
------------------------------------------------------
Cash flows from operating activities:
Net loss $(46,074) $(47,749) $(1,672)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 46,738 47,723 43,373
Asset impairment expense 5,000 24,550 -
Extraordinary loss, net of tax - 940 -
Cumulative effect of an accounting
change, net of tax 1,511 - -
Deferred income taxes (29,711) (31,206) (2,279)
Gain on sale of bakery (4,245) - -
Changes in operating assets and liabilities:
Receivables 526 (1,341) 14,103
Inventories 9,212 25,790 (8,542)
Accounts payable 7,272 (11,541) 5,259
Other, net (8,023) (10,408) (6,734)
------- -------- -------
Net cash provided by (used in)
operating activities (17,794) (3,242) 43,508
-------- ------- ------
Cash flows from investing activities:
Additions to property, plant, and
equipment (37,534) (47,757) (50,236)
Proceeds from sale of bakery 14,718
Proceeds from sales of property,
plant, and equipment 7,719 17,843 -
------ ------ -----
Net cash used in investing activities (15,097) (29,914) (50,236)
-------- -------- --------
Cash flows from financing activities:
Proceeds from debt 6,813 - -
Repayment of debt (65,375) - -
Net borrowings under revolving credit facilities 54,433 44,852 15,925
Payment of financing fees (1,509) - -
Payment received on common stock
note receivable 371 52 77
Increase in restricted cash 29,016 (146) (12,904)
Increase in cash in escrow 7,859 (13,323) -
------ ------ -----
Net cash provided by financing activities 31,608 31,435 3,098
------ ------ -----
Net decrease in cash and cash equivalents (1,283) (1,721) (3,630)
Cash and cash equivalents, beginning
of period 2,650 4,371 8,001
----- ----- -----
Cash and cash equivalents, end of period $1,367 $2,650 $4,371
====== ====== ======
Supplemental cash flow disclosures:
Interest paid $39,866 $38,818 $35,767
======= ======= =======
Income taxes paid $ 711 $ - $2,226
====== ==== ======
The accompanying notes are an integral part of these consolidated financial statements.
35
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Minimum Retained
Class A Class B Cumulative Pension Earnings/ Total
Common Stock Common Common Stock Translation Liability (Accumulated Note Shareholders'
Stock Adjustment Adjustment Deficit) Receivable Equity
------------------------------------------------------------------------------------------------------
Balance, September 30, 1995,
as previously reported $ 101,100 $ - $ - $ (141) $ - $ 15,346 $ (500) $ 115,805
Cumulative effect on prior
years of applying
retrocactively the new
method of accounting for
inventory valuation - - - - - 4,523 - 4,523
--------- -------- --------- ---------- --------- --------- -------- ---------
Balance, September 30, 1995,
as restated 101,100 - - (141) - 19,869 (500) 120,328
Net loss - - - - - (1,672) - (1,672)
Payment received on note
receivable - - - - - - 77 77
Translation adjustment - - - (181) - - - (181)
--------- -------- --------- ---------- --------- --------- -------- ---------
Balance, September 30, 1996 101,100 - - (322) - 18,197 (423) 118,552
Net loss - - - - - (47,749) - (47,749)
Payment received on note
receivable - - - - - - 52 52
Translation adjustment - - - (185) - - - (185)
--------- -------- --------- ---------- --------- --------- -------- ---------
Balance, September 30, 1997 101,100 - - (507) - (29,552) (371) 70,670
Net loss - - - - - (46,074) - (46,074)
Stock dividend - - 44 - - (44) - -
Common stock exchange (101,100) 101,100 - - - - - -
Payment received on note
receivable - - - - - - 371 371
Minimum pension liability
adjustment - - - - (4,922) - - (4,922)
Translation adjustment - - - (1,062) - - - (1,062)
--------- -------- --------- ---------- --------- --------- -------- ---------
Balance, September 27, 1998 $ - $101,100 $ 44 $ (1,569) $ (4,922) $ (75,670) $ - $ 18,983
========= ======== ========= ========== ========= ========= ======== =========
The accompanying notes are an integral part of these consolidated financial statements.
36
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
-----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
As used in these notes, unless the context otherwise requires, the
"Company" shall refer to Sweetheart Holdings Inc. ("Sweetheart Holdings") and
its subsidiaries, including Sweetheart Cup Company Inc. ("Sweetheart Cup").
1. SIGNIFICANT ACCOUNTING POLICIES
Fiscal year end - On October 22, 1998, the Company's Board of Directors
approved a change in the Company's fiscal year from the year ended September 30
to the 52 or 53 week period ending on the last Sunday in September. This change
is effective for the period from October 1, 1997 through September 27, 1998
("Fiscal Year 1998"). The fiscal 1997 and 1996 periods are shown as the
historical periods from October 1 through September 30 of the respective fiscal
years ("Fiscal Year 1997" and "Fiscal Year 1996", respectively).
Principles of Consolidation and Translation - The financial statements
include the accounts of the Company and its subsidiaries on a consolidated basis
as of September 27, 1998 and September 30, 1997 and for Fiscal Years 1998, 1997
and 1996. For all fiscal years presented, the consolidated financial statements
include the accounts of the Company's United States operations (Sweetheart
Holdings and its domestic subsidiaries, Sweetheart Cup and Sweetheart
Receivables Corporation) and Lily Cups Inc., a Canadian subsidiary. Assets and
liabilities of Lily Cups Inc. are translated at the rates of exchange in effect
at the balance sheet date. Income amounts are translated at the average of the
monthly exchange rates. The cumulative effect of translation adjustments is
deferred and classified as a cumulative translation adjustment. All significant
intercompany and intergroup accounts and transactions have been eliminated.
Cash, including Cash Equivalents, Restricted Cash and Cash in Escrow -
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash overdrafts are reclassified to
accounts payable and accrued payroll and related costs. Cash received as
proceeds from the sale of assets is restricted to qualified capital expenditures
under the indentures governing the Senior Secured Notes and the Senior
Subordinated Notes (see Note 10), and is held in escrow with the trustee until
utilized. The balance of cash in escrow was $5.5 million and $13.3 million at
September 27, 1998 and September 30, 1997, respectively. Cash balances related
to Sweetheart Receivables Corporation ("SRC") were restricted from transfer to
other entities within the Company. The restricted cash balance, along with other
consideration, was used to reacquire the SRC notes in the first quarter of
Fiscal Year 1998. See Note 10. The balance of restricted cash was $29.0 million
at September 30, 1997.
Inventories - Effective June 1, 1998, the Company changed its method of
accounting for inventories from the last-in first-out (LIFO) method to the
first-in first-out (FIFO) method. Management believes that the FIFO method is
preferable because it more accurately presents the Company's financial position
as it reflects more recent costs at the balance sheet date and more accurately
matches revenues with costs reported during the period presented. The financial
statements of prior periods have been restated to apply the FIFO method of
accounting for inventories retroactively. The effect of this restatement was to
increase retained earnings as of September 30, 1995 by $4.5 million. Net income
decreased by $0.1 million, $1.1 million and $7.4 million in Fiscal Years 1998,
1997 and 1996, respectively.
Assets held for sale - Property, plant, and equipment for the Bakery
division was reclassified as held for sale at September 30, 1997 and was sold on
November 30, 1997. See Note 14.
Property, Plant and Equipment - Property, plant and equipment is
recorded at cost, less accumulated depreciation, and is depreciated on the
straight-line method over the estimated useful lives of
37
the assets, with the exception of property, plant, and equipment acquired prior
to January 1, 1991, which is depreciated on the declining balance method.
The asset lives of buildings and fixtures range between 12 and 50 years
and have an average useful life of 38 years. The asset lives of equipment range
between 5 and 18 years and have an average useful life of 13 years.
Income Taxes - Deferred income taxes are provided to recognize
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities. The principal differences relate to
depreciation expense and pension and postretirement benefits.
No deferred income taxes have been provided on the cumulative
undistributed earnings of the Canadian subsidiary of Sweetheart Cup. Those
earnings (approximately $12.8 million) are considered permanently reinvested
under Accounting Principles Bulletin No. 23.
Reclassifications - Certain prior period balances have been
reclassified to conform with current presentation.
Impact of Recently Issued Accounting Standards - During 1997, the
Financial Accounting Standards Board issued SFAS No. 130, Reporting
Comprehensive Income and SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. In February 1998, the FASB issued SFAS No.
132, Employers' Disclosure about Pensions and Other Postretirement Benefits. The
Company is in the process of evaluating the new statements, which are effective
for Fiscal Year 1999. The adoption of these statements is not expected to have a
material effect on the Company's financial statements.
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments, and
requires that an entity recognize all derivatives at fair value in the statement
of financial position. The Company is in the process of evaluating the new
statement, which is effective for Fiscal Year 2000.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting Fiscal Years. Actual results could differ from those
estimates.
2. INVENTORIES
The components of inventories are as follows (in thousands):
September 27, September 30,
1998 1997
---------------- ----------------
Components-
Raw materials and supplies $27,661 $30,907
Finished products 96,943 103,669
Work in progress 8,461 7,701
------ -----
$133,065 $142,277
======== ========
38
3. PROPERTY, PLANT AND EQUIPMENT, NET
The Company's major classes of property, plant and equipment, net are
as follows (in thousands):
September 27, September 30,
1998 1997
------------------------- ---------------------
Land $ 19,111 $ 23,801
Buildings 79,774 83,040
Machinery and equipment 414,273 397,522
Construction in progress 26,561 23,636
------------ ------------
Total 539,719 527,999
------------ ------------
Accumulated depreciation (184,495) (145,508)
------------ -------------
Property, plant and equipment, net $ 355,224 $ 382,491
============ ============
4. OTHER ASSETS
The components of long term other assets are as follows (in thousands):
September 27, September 30,
1998 1997
------------------------- ---------------------
Debt issuance costs, net of
accumulated amortization $ 6,426 $ 8,159
Intangible pension asset
(see Note 7) 2,256 860
Prepaid assets 2,016 2,423
Other 2,381 1,713
---------- ----------
Total long-term $ 13,079 $ 13,155
========== ==========
Amortization of debt issuance costs totaled $2.8 million, $5.2 million
and $3.6 million for Fiscal Years 1998, 1997 and 1996, respectively, and is
included in interest expense except as noted as follows. During Fiscal Year
1997, the Company accelerated $1.6 million of amortization for the debt issuance
costs related to the SRC Notes and the 1993 Credit Agreement, both of which were
refinanced in Fiscal Year 1998. (See Note 10). This charge is shown as an
extraordinary loss (net of $0.6 million of income taxes) on the consolidated
statement of operations.
39
5. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in
thousands):
September 27, September 30,
1998 1997
------------------------- ---------------------
Sales allowances $ 8,146 $ 7,052
Restructuring costs 1,637 13,201
Taxes other than income taxes 3,591 2,841
Litigation, claims and assessments
(see Note 17) 18,903 15,445
Interest payable 3,925 2,806
Other 4,664 2,470
----------- -----------
Total $ 40,866 $ 43,815
=========== ===========
6. OTHER NON-CURRENT LIABILITIES
The components of other non-current liabilities are as follows (in
thousands):
September 27, September 30,
1998 1997
------------------------- ---------------------
Post retirement health care benefits
(see Note 8) $ 57,564 $ 57,983
Pensions (see Note 7) 15,960 9,761
Other 841 2,031
----------- -----------
Total $ 74,365 $ 69,775
=========== ===========
40
7. EMPLOYEE BENEFIT PLANS
A majority of the employees ("participants") are covered under a 401(k)
defined contribution plan. The Company's annual contributions to this defined
contribution plan represent a 50% match on participant contributions. The
Company's match is limited to participant contributions up to 6% of participant
salaries. In addition, the Company is allowed to make discretionary
contributions. Costs charged against operations for this defined contribution
plan were $3.4 million, $3.6 million and $3.7 million for Fiscal Years 1998,
1997 and 1996, respectively. Certain employees are covered under defined benefit
plans. Benefits under the plans are generally based on fixed amounts for each
period of service.
The components of net pension expense for domestic defined benefit
plans are as follows (in thousands):
Fiscal Year
-------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ---------------------
Service cost $ 989 $ 1,111 $ 1,078
Interest cost 3,881 3,720 3,545
Projected return
on assets 249 (3,212) (2,874)
Net amortization (3,869) 262 188
----------- ---------- ----------
Net pension
expense $ 1,250 $ 1,881 $ 1,937
========== ========== ==========
The status of defined benefit pension plans using data as of the most
recent actuarial valuation dates is as follows (in thousands):
September 27, 1998 September 30, 1997
----------------------- ----------------------
Actuarial present value of
benefit obligations -
Vested benefits $ 55,418 $ 41,616
Nonvested benefits 3,235 11,094
---------- ----------
Accumulated and projected
benefit obligation 58,653 52,710
Plan assets at fair value 38,600 39,243
---------- ----------
Funded status (20,053) (13,467)
Unrecognized prior service cost 2,256 1,529
Unrecognized net loss 8,004 473
Adjustment required to recognize
minimum liability (10,459) (860)
---------- ----------
Net pension liability $ (20,252) $ (12,325)
========== ==========
41
As required by SFAS No. 87, "Employers' Accounting for Pensions," the
Company recognized additional pension liabilities of $10.5 million and $0.9
million as of September 27, 1998 and September 30, 1997, respectively, of which
$2.3 million and $0.9 million were recognized as other assets, respectively. Of
the Fiscal Year 1998 amount, $8.2 million was recognized as a charge to
Shareholders' equity ($4.9 million net of tax).
Actuarial assumptions used in calculating the above amounts include a
10% return on plan assets for Fiscal Years 1998 and 1997, a 7.0% and 7.5%
discount rate on benefit obligations as of September 27, 1998 and September 30,
1997, respectively, and a 7.0% and 7.5% weighted average discount rate for
Fiscal Years 1998 and 1997, respectively.
8. POSTRETIREMENT HEALTH CARE PLANS
The Company sponsors various defined benefit postretirement health care
plans that cover substantially all full-time employees. The plans, in most
cases, pay stated percentages of most medical expenses incurred by retirees,
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants generally become eligible after reaching
age 60 with ten years of participation. The majority of the Company's plans are
contributory, with retiree contributions adjusted annually. The Company does not
fund the plans.
The following table analyzes the plans' unfunded, accrued
postretirement health care cost liability as reflected on the balance sheet (in
thousands):
September 27, September 30,
1998 1997
----------------------- ----------------------
Accumulated Postretirement Benefit
Obligation:
Retirees $ 30,655 $ 24,936
Other fully eligible participants 5,401 5,731
Other active participants 12,715 12,166
----------- -----------
48,771 42,833
Unrecognized prior service cost 4,098 4,861
Unrecognized actuarial gain 7,796 13,389
----------- -----------
Accrued postretirement health care
cost liability $ 60,665 $ 61,083
=========== ===========
42
The components of net postretirement health care cost are as follows (in
thousands):
Fiscal Year
---------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- -----------------------
Service cost-
benefits attributed to
service during the period $ 898 $ 859 $ 1,533
Interest cost on
accumulated post-
retirement benefit
obligation 3,056 3,098 3,868
Net amortization and
deferral (1,410) (1,326) (187)
--------- --------- ---------
Net postretirement
health care cost $ 2,544 $ 2,631 $ 5,214
========= ========= =========
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%, and 7.5% at September 27, 1998 and
September 30, 1997, respectively. Net postretirement health care cost was
computed using a weighted average discount rate of 7.0% for Fiscal Year 1998,
8.0% for Fiscal Year 1997, and 7.75% for Fiscal Year 1996. For measuring the
expected postretirement benefit obligation, a 9% annual rate of increase in the
per capita claims cost was assumed for 1998. This rate is assumed to decrease by
1.0% per year to an ultimate rate of 5.0%. The health care cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
September 27, 1998 and September 30, 1997 by approximately $1.5 million and $2.2
million, respectively, and the aggregate of the service and interest cost
components of net postretirement health care cost by approximately $0.2 million,
$0.2 million and $0.4 million for Fiscal Years 1998, 1997 and 1996,
respectively.
43
9. INCOME TAXES
The income tax benefit includes the following components (in
thousands):
Fiscal Year
-------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Current-
Federal $ - $ - $ -
State - - -
Foreign - - (1,164)
--------- --------- --------
Total current - - (1,164)
--------- --------- --------
Deferred -
Federal 25,588 26,794 1,995
State 3,656 3,828 284
Foreign 467 584 -
--------- --------- --------
Total deferred 29,711 31,206 2,279
--------- --------- --------
$ 29,711 $ 31,206 $ 1,115
========= ========= =========
The effective tax rate varied from the U.S. Federal tax rate of 35% for
Fiscal Years 1998, 1997 and 1996 as a result of the following:
Fiscal Years
---------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- -----------------------
U.S. Federal tax rate 35% 35% 35%
State income taxes, net of
U.S. Federal tax impact 4 4 4
Other, net 1 1 1
------ ------ ------
Effective tax rate 40% 40% 40%
===== ===== ======
At September 27, 1998, the Company had deferred tax liabilities of $137
million, of which $17 million are current in nature, and deferred tax assets of
$190 million, of which $28 million are current in nature. Deferred tax assets
and liabilities have been netted as a current asset and a non-current asset in
the accompanying Consolidated Balance Sheets. The principal temporary
differences included above are depreciation, a $64 million liability, inventory
adjustments, a $17 million liability, net operating loss carryforwards, a $79
million asset, postretirement health and pension benefits, a $30 million asset,
other employee benefits, a $11 million asset and $14 million of other net
miscellaneous asset items.
At September 30, 1998, the Company had deferred tax liabilities of $164
million, of which $32 million are current in nature, and deferred tax assets of
$182 million, of which $35 million are current in nature. Deferred tax assets
and liabilities have been netted as a current asset and non-current asset in the
accompanying Consolidated Balance Sheets. The principal temporary differences
included above are depreciation, a $75 million liability, inventory adjustments,
a $19 million liability, net operating loss carryforwards, a $67 million asset,
postretirement health and pension benefits, a $28 million asset, and $17 million
of other net miscellaneous items. Although future earnings cannot be predicted
with certainty, management currently believes that realization of the net
deferred tax asset is more likely than not.
44
The Company has net operating loss carryforwards for income tax
purposes of approximately $202 million, of which $5 million expire in 2004, $51
million expire in 2005, $25 million expire in 2006, $13 million expire in 2007,
$28 million expire in 2008, $45 million expire in 2012 and $35 million expire in
2018.
10. LONG-TERM OBLIGATIONS
Long-term debt, including amounts payable within one year, is as
follows (in thousands):
September 27, September 30,
1998 1997
----------------- -----------------
Sweetheart Cup
- --------------
Senior Secured Notes, at 9.625%, interest payable semiannually
on March 1 and September 1 of each year, due on September
1, 2000. $190,000 $190,000
Senior Subordinated Notes, at 10.50%, interest payable semiannually
on March 1 and September 1 of each year, due on
September 1, 2003. 110,000 110,000
Revolving Loan at Bank of America's prime rate plus 1.00%, or
Bank of America's Eurodollar rate plus 2.25%, subject to
certain limitations, due on August 1, 2000. 113,708 -
Revolving Loan at Bankers Trust - 60,000
Sweetheart Receivables Corporation
- ----------------------------------
Sweetheart Receivables Corporation Series 1994-1 A-V Trade
Receivables-Backed Notes. - 60,000
Lily Cups Inc.
- --------------
Term and revolving facilities 9,675 8,168
Bonds
- -----
Industrial revenue bond with the State of New Hampshire 2,500 2,500
Other industrial revenue bonds - 1,200
--------- -----
425,883 431,868
------- -------
Less - Current portion of long-term debt (3,445) (1,369)
------- -------
$422,438 $430,499
======== ========
45
The aggregate annual maturities of long-term debt at September 27, 1998 are as
follows (in thousands):
1999 $ 3,445
2000 304,653
2001 7,785
2002 -
2003 110,000
2004 and thereafter -
---------------
$425,883
1997 Amended and Restated Credit Agreement - On October 24, 1997, the
Company entered into the 1997 Amended and Restated Credit Agreement, as amended
through November 4, 1998, which provides for a $135 million Revolving Credit
Facility (the "U.S. Credit Facility"), with BankAmerica Business Credit as Agent
and various other financial institutions. Borrowings bear interest, at the
Company's election, at a rate equal to LIBOR plus 2.25% or a bank's base rate
plus 1%. The average interest rate in Fiscal Year 1998 was 9.0%.
Availability under the U.S. Credit Facility is determined by a
calculation based on eligible inventory and accounts receivable as defined by
the credit agreement. As of September 27, 1998, there was $8.8 million of
unutilized availability under the U.S. Credit Facility. Up to $15 million of the
U.S. Credit Facility may be utilized to issue letters of credit. The letter of
credit fee is 1.75% per annum, plus out of pocket fees and expense. The U.S.
Credit Facility also provides for the payment of a commitment fee of 0.5% per
annum on the daily average unused amount of the commitments under the Facility.
As of September 27, 1998, unused letters of credit totaled $9.0 million.
Loans made pursuant to the U.S. Credit Facility can be borrowed,
repaid, and reborrowed from time to time until final maturity on August 1, 2000.
The U.S. Credit Facility provides for partial mandatory prepayments upon the
issuance of equity by Sweetheart Holdings or any of its subsidiaries, and full
repayment upon any change of control (as defined in the Agreement).
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, spare parts, accounts receivable and all
proceeds of the foregoing of Sweetheart Cup, a first priority security interest,
shared with the holders of the Senior Secured Notes, in Shared Collateral (as
defined in the 1993 Credit Agreement 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 intercompany indebtedness payable to
Sweetheart Holdings or Sweetheart Cup by Sweetheart Holdings, Sweetheart Cup or
their respective present and future subsidiaries, and any proceeds from business
interruption insurance), and a second priority perfected security interest in
the Senior Secured Note collateral as described below.
The U.S. Credit Facility contains various covenants which limit, or
restrict, among other things, indebtedness, dividends, leases, capital
expenditures, the use of proceeds from asset sales and certain other business
activities. Additionally, the Company must maintain on a 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, as amended.
Senior Secured Notes and Senior Subordinated Notes - Sweetheart Cup is
the obligor with respect to $190 million of Senior Secured Notes and $110
million of Senior Subordinated Notes. The Senior Secured Notes were issued
pursuant to an Indenture among Sweetheart Cup, Sweetheart Holdings, as
Guarantor, and United States Trust Company of New York, as Trustee (the "Senior
Secured Indenture").
46
The Senior Secured Notes bear interest at 9.625% per annum, payable
semi-annually in arrears on March 1 and September 1 each year to holders of
record on February 15 or August 15 next preceding the interest payment date. The
Senior Secured Notes mature on September 1, 2000.
The Senior Secured Notes are subject to redemption at the option of the
Company, in whole or in part, at the redemption prices (expressed as percentages
of the principal amount), plus accrued interest to the redemption date, for
redemptions during the twelve month period beginning September 1 as follows:
1998 - 101.604%, and 1999 - 100.000%.
The Senior Secured Notes are secured by a first priority lien on the
Senior Secured Note collateral (which includes all material properties and
equipment and substantially all of the other assets of Sweetheart Cup, but
excludes collateral under the 1993 Credit Agreement, the capital stock of its
subsidiaries, and intercompany indebtedness) and by a second lien on collateral
under the 1993 Credit Agreement (primarily accounts receivable, inventory, and
proceeds thereof as described above). The Senior Secured Notes and borrowings
under the U.S. Credit Facility are also jointly secured by Shared Collateral
(comprised of pledges of the capital stock of Lily Canada, the capital stock of
any direct subsidiaries formed or acquired in the future, future intercompany
notes, and the proceeds of business interruption insurance).
The Senior Subordinated Notes were issued pursuant to an Indenture
among Sweetheart Cup, Sweetheart Holdings, as Guarantor, and U.S. Trust Company
of Texas, N.A., as Trustee (the "Senior Subordinated Indenture"). The Senior
Subordinated Notes bear interest at 10.50% per annum, payable semi-annually in
arrears on March 1 and September 1 each year to holders of record on the
February 15 or August 15 next preceding the interest payment date. The Senior
Subordinated Notes mature on September 1, 2003.
The Senior Subordinated Notes are subject to redemption at the option
of the Company, in whole or in part, at the redemption prices (expressed as
percentages of the principal amount), plus accrued interest to the redemption
date, for redemptions during the twelve month period beginning September 1 as
follows: 1998 - 103.938%, 1999 - 102.625%, 2000 - 101.313%, and 2001 and
thereafter - 100.000%.
The Senior Subordinated Notes are subordinate in right of payment to
the prior payment in full of all Senior Secured Notes, all borrowings under the
U.S. Credit Facility, and all other indebtedness not otherwise prohibited.
The Sweetheart Notes contain various covenants which prohibit, or
limit, among other things, asset sales, change of control, dividend payments,
equity repurchases or redemptions, the incurrence of additional indebtedness,
the issuance of disqualified stock, certain transactions with affiliates, the
creation of additional liens, and certain other business activities.
1993 Credit Agreement - On August 30, 1993, the Company entered into
the 1993 Credit Agreement with Bankers Trust Company, which provided for a $40
million Term Loan and a $75 million Revolving Loan Facility. The Company prepaid
the $40 million Term Loan on September 20, 1994 in connection with the issuance
of the Sweetheart Receivables Corporation 1994-1 A-V Trade Receivables-Backed
Notes (the "SRC Notes") and it may not be reborrowed. The 1993 Credit Agreement
was amended and restated, as described in the 1997 Amended and Restated Credit
Agreement above.
Sweetheart Receivables Corporation Series 1994-1 A-V Trade
Receivables-Backed Notes - On September 20, 1994, SRC issued and sold to Bankers
Trust as Placement Agent, $60 million of the SRC Notes, under an indenture and
security agreement. The proceeds of the SRC Notes were used to purchase
substantially all of the receivables of Sweetheart Cup on the closing date. The
SRC Notes were repurchased when the Company entered into the U.S.
Credit Facility on October 24, 1997, as described above.
47
Canadian Credit Facility - On June 15, 1998, Lily Cups Inc. entered
into a Credit Agreement with General Electric Capital Canada Inc. (the "Canadian
Credit Facility"). The Canadian Credit Facility refinanced Lily Cups Inc.'s then
outstanding debt into a new term loan and revolving credit facility agreement
which provides for a term loan facility of up to Cdn $10 million and a revolving
credit facility of up to Cdn $10 million. Term loan borrowings under the
Canadian Credit Facility are payable quarterly through May 2001, and revolving
credit and term loan borrowings have a final maturity date of June 15, 2001. The
Canadian Credit Facility is secured by all existing and after acquired real and
personal, tangible assets of Lily Cups Inc. and net proceeds on the sale of any
of the foregoing. Borrowings under the Canadian Credit Facility bear interest at
an index rate plus 2.25% with respect to the revolving credit borrowings, and an
index rate plus 2.50% with respect to the term loan borrowings. As of September
27, 1998, Cdn $5.4 million (approximately $3.6 million) was available under the
Canadian Credit Facility.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments included in current
assets and current liabilities approximate their estimated fair value because of
the relatively short maturities of these instruments. Long-term debt
instruments, other than the Company's Senior Secured Notes and Senior
Subordinated Notes, have variable interest rates that fluctuate along with
current market conditions, and thus the carrying value approximates their fair
value.
The fair value of the Company's Senior Secured Notes and Senior
Subordinated Notes is estimated to be $40.0 million lower than the carrying
value at September 27, 1998 and $1.5 million higher than the carrying value at
September 30, 1997. The Fiscal Year 1998 difference in market value is due to
volatility in the non-investment grade market in the latter half of calendar
1998, as well as the recent financial results of the Company.
12. LEASE COMMITMENTS
The Company leases certain transportation vehicles, warehouse and
office facilities, and machinery and equipment under both cancelable and
non-cancelable operating leases, most of which expire within ten years and may
be renewed by the Company. Rent expense under such arrangements totaled $16.6
million, $16.8 million and $15.6 million for Fiscal Years 1998, 1997 and 1996,
respectively. Future minimum rental commitments under non-cancelable operating
leases in effect at September 27, 1998 are as follows (in thousand of dollars):
Fiscal 1999 $16,744
Fiscal 2000 14,830
Fiscal 2001 12,098
Fiscal 2002 8,729
Fiscal 2003 5,897
Fiscal 2004 and thereafter 24,295
------
$82,593
13. SHAREHOLDERS' EQUITY
Prior to March 12, 1998, Sweetheart Holdings had a single-class capital
structure consisting of
48
3,000,000 shares of common stock, par value $.01 per share, of which 1,046,000
shares were issued and outstanding. Of the outstanding shares, 1,040,000 were
issued in conjunction with the acquisition of the Company on August 30, 1993. In
fiscal 1994, the Company sold an additional 6,000 shares of stock, for which it
received approximately $100,000 in cash and a $500,000 promissory note. The
promissory note which was reflected as a reduction to shareholders' equity in
the consolidated balance sheet at September 30, 1997 was paid in full on March
12, 1998.
On March 12, 1998, the stockholders of the Company consummated the SF
Holdings Investment. In connection with this transaction, the Board of Directors
of Sweetheart Holdings authorized two new classes of common stock: 1,100,000
shares of Class A Common Stock, $0.01 par value, and 4,600,000 shares of Class B
Common Stock, $0.01 par value. On March 11, 1998, the shareholders of record
exchanged their shares of common stock for a new Class A Common Stock in a one
for one stock exchange. In addition, a stock dividend of 4.2 shares of a new
Class B Common Stock was declared to the shareholders of record on March 11,
1998. SF Holdings acquired from the Company's stockholders 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.
Upon consummation of the SF Holdings Investment, the Company's then
existing stockholders nominated three of the Company's five directors and SF
Holdings nominated two directors. 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 of 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, The Fonda Group, Inc., an affiliate of SF Holdings, manages the
day-to-day operations of the Company subject to the direction of the Board of
Directors.
The Class A and Class B Common Stock have the same powers, preferences
and rights, except that the Class B Common Stock has no voting rights. Class A
and Class B Common Stock share the profits and losses generated by the Company
on a pro-rata basis. Each outstanding Class A Common Share is entitled to one
vote on any matter submitted to a vote of stockholders. The Class A Common Stock
has no cumulative voting rights. Subject to Delaware law and limitations in
certain debt instruments (Senior Secured Notes, Senior Subordinated Notes, and
borrowings under the 1993 Credit Agreement), 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 shareholders of the Company prior to the SF Holdings
Investment (the "Original Shareholders"), after March 12, 2003, have the right
to exchange their shares of Class A Common Stock for warrants (the "Exchange
Warrants") to purchase, for nominal consideration, shares of Class C Common
Stock of SF Holdings representing 10% of the total outstanding shares of common
stock of SF Holdings at the consummation of the SF Holdings Investment on a
fully diluted basis. SF Holdings has the right to cause such exchange and has
the right to 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 until March 12,
49
2003. Upon occurrence of a merger (as defined in the Company's stockholders'
agreement), 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, then SF Holdings will have the right
to require the Original Shareholders to sell all, but not less than all, of
their shares of common stock.
The Board of Directors of Sweetheart Holdings approved the Stock Option
and Purchase Plan (the "Plan") during fiscal year 1994 which provides for the
granting of nonqualified and incentive stock options as defined by the Internal
Revenue Code. The Plan is administered by the Compensation Committee (the
"Committee") of the Board of Directors. The Committee has the authority to
select participants, grant stock purchase options, and make all necessary
determinations for the administration of the Plan. The exercise price per share
of common stock under each option is fixed by the Committee at the time of the
grant of the option and is equal to at least 100% of the fair market value of a
share of common stock on the date of grant, but not less than $100 per share.
The Committee determines the term of each option which may not exceed ten years
from the date of grant of the option. The Plan provides for the issuance of up
to 103,000 shares of common stock in connection with the stock options granted
under the Plan. Options that are canceled or expire unexercised are available
for future grants. All options are granted via approval of the Board of
Directors. In conjunction with the SF Holdings Investment, all options
outstanding as of March 12, 1998 were cashed out in full and canceled.
14. OTHER EXPENSE (INCOME)
In the fourth quarter of Fiscal Year 1998, the Company sold its
Riverside facility. In connection therewith, the Company recognized $1.8 million
of asset write-down charges. Additionally, in the fourth quarter, the Company
recognized $3.4 million of expense based on actuarial estimates associated with
pending litigation.
In March 1998, the Company recognized certain one-time charges,
consisting primarily of $4.4 million of financial advisory and legal fees
associated with the SF Holdings Investment and $3.7 million of severance
expenses as a result of the termination of certain officers of the Company
pursuant to executive separation agreements and retention plans for certain key
executives.
On November 30, 1997, the Company entered into an agreement to sell
assets of its bakery operation to Ace Baking Company Limited Partnership. Assets
sold included property, plant, and equipment, which have been reclassified to
assets held for sale, and inventories. Consideration of $22.3 million was
received, including $20.3 million of cash, and a $2 million non-interest bearing
note. A gain of $3.3 million was recognized as "Other income" in Fiscal Year
1998. Bakery operations represented 3% of net sales in Fiscal Year 1997.
15. NON-RECURRING CHARGES
In the quarter ended March 31, 1998, the Company reduced its salaried
workforce by approximately 15% and hourly workforce by less than 5%. In
connection with such plans, the Company recognized $5.1 million of charges for
severance and related costs, of which $1.4 million of cash expenditures remain
unpaid as of September 27, 1998. The Company anticipates substantial completion
of this restructuring within the next twelve months.
50
In the quarter ended March 31, 1998, the Company decided to rationalize
certain product lines. As a result, the Company evaluated the recoverability of
the carrying value of the equipment and other assets utilized for such product
lines, which resulted in a $5.0 million charge to write down the assets to their
fair market value.
In the quarter ended September 30, 1997, the Company adopted a
restructuring plan designed to improve efficiency and enhance its
competitiveness. Restructuring charges of $9.7 million were recognized,
consisting of cash charges primarily related to severance costs, as well as
costs to close and exit the Riverside facility. Including the unspent portion of
these charges, the Company had total restructuring reserves of $13.2 million
classified as "Other current liabilities" as of September 30, 1997. During
Fiscal Year 1998, the Company paid $8.8 million of severance, plant closure and
related costs. In addition, $4.2 million of the restructuring reserve was
adjusted due to a change in the restructuring plan as a result of a change in
senior management in connection with the SF Holdings Investment. As of September
27, 1998, the restructuring plan is substantially complete, and the balance in
the restructuring reserve is $0.2 million.
During the quarter ended December 31, 1997, the Company recorded a $1.5
million expense as a cumulative effect of change in accounting principle (net of
$1.0 million of income taxes) relating to the implementation of EITF 97-13,
which requires companies to expense any previously capitalized reengineering
costs in connection with software installation.
As a result of market conditions experienced by the Company and the
decision to close facilities as described above, the Company reviewed the
carrying value of its long-lived assets in Fiscal Year 1997. Certain assets were
identified which would be disposed of, abandoned or become obsolete prior to the
end of their accounting useful lives, and were written-down accordingly,
resulting in a pre-tax non-cash charge totaling $24.6 million in Fiscal Year
1997. The loss on asset disposal and impairment had no impact on the Company's
cash flow or its ability to generate cash flow in the future. As a result of
this charge, depreciation expense related to these assets will decrease in
future periods.
16. RELATED-PARTY TRANSACTIONS
Pursuant to the Management Services Agreement, as amended, SF Holdings
and AIPM, which manages AIP-LP, 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 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 are split to SF Holdings and AIPM, respectively, 50/50 during
the first year following the SF Holdings Investment, 60/40 during the second
year, 70/30 during the third year, and are paid 100% to SF Holdings thereafter.
SF Holdings has assigned substantially all of its interests under this agreement
to Fonda, but retains $200,000 per year of fees for administrative services.
In addition, in Fiscal Year 1996, the Company reimbursed AIPM for
$950,000 of expenses incurred in connection with an investigation of the
Company's strategic alternatives.
The Company purchases corrugated containers from its affiliate, Four M.
Purchases totaled $1.8 million in Fiscal Year 1998, of which $0.4 million is
payable as of September 27, 1998, and were not material in the preceding Fiscal
Years. The Company believes that the terms on which it purchased such products
are at least as favorable as those it could otherwise have obtained from
unrelated third parties and were negotiated on an arm's length basis.
51
17. BUSINESS SEGMENT AND MAJOR CUSTOMERS
The Company operates in a single industry which is the manufacture and
distribution of paper and plastic related products in foodservice and food
packaging disposables. Sales to a major customer accounted for 12.1%, 13.7% and
13.6% for Fiscal Years 1998, 1997 and 1996, respectively.
18. CONTINGENCIES
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084,
was initially filed in state court in Georgia in April 1987 and is currently
pending against the Company in federal court. The remaining issue involved in
the case is a claim that the Company wrongfully terminated the Lily-Tulip, Inc.
Salary Retirement Plan (the "Plan") in violation of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The relief sought by
plaintiffs is to have the plan termination declared ineffective. In December
1994, the United States Court of Appeals for the Eleventh Circuit (the "Circuit
Court") ruled that the Plan was terminated on December 31, 1986. Following that
decision, the plaintiffs sought a rehearing which was denied, and subsequently
filed a petition for a writ of certiorari with the United States Supreme Court,
which was also denied. Following remand, in March 1996 the United States
District Court for the Southern District of Georgia (the "District Court")
entered a judgment in favor of the Company. Following denial of a motion for
reconsideration, the plaintiffs in April 1997 filed an appeal with the Circuit
Court. On May 21, 1998, the Circuit Court affirmed the judgment entered in favor
of the Company. On June 10, 1998, the plaintiffs petitioned the Circuit Court
for a rehearing of their appeal which petition was denied on July 29, 1998.
Plaintiffs have filed a motion in the District Court for attorney's fees. No
amount has been specified in such motion. In October 1998, plaintiffs filed a
Petition for Writ of Certiorari to the United States Supreme Court.
Management believes that the Company will ultimately prevail on the
remaining material issues in the Aldridge litigation. Due to the complexity
involved in connection with the claims asserted in this case, the Company cannot
determine at present with any certainty the amount of damages it would be
required to pay should the plaintiffs prevail; accordingly, there can be no
assurance that such amount would not have a material adverse effect on the
Company's financial position or results of operations.
A patent infringement action seeking injunctive relief and damages
relating to the Company's production and sale of certain paper plates entitled
Fort James Corporation v. Sweetheart Cup Company Inc., Civil Action No.
97-C-1221, was filed in the United States District Court for the Eastern
District of Wisconsin on November 21, 1997. The Company filed an Answer to the
Complaint denying liability and asserting various defenses to the claims.
Discovery proceedings are in progress. In the opinion of management, the
ultimate liability, if any, will not materially affect the Company's financial
position or results of operations.
The Company is subject to a variety of environmental and pollution
control laws and regulations in all jurisdictions in which it operates. The
Company is also involved in various other claims and lawsuits incidental to its
business. In the opinion of management, the ultimate liabilities, if any, after
considering the reserves established relating to these matters, will not
materially affect the Company's financial position or results of operations.
19. SUMMARIZED FINANCIAL INFORMATION FOR SWEETHEART CUP COMPANY INC.
52
The following tables provide summarized financial information for
Sweetheart Cup and subsidiaries (in thousands):
September 27, September 30,
1998 1997
------------------ ------------------
Current assets $257,399 $301,448
Noncurrent assets 437,264 436,195
Current liabilities 122,516 116,886
Noncurrent liabilities 562,828 563,066
Prior year amounts below have been reclassified as noted in Note 1:
Fiscal Years
-------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
Net sales $843,502 $886,017 $959,818
Gross profit 32,664 35,331 83,193
Income (loss) from
continuing operations
before cumulative effect
of an accounting change
and extraordinary loss (41,593) (37,221) 12,827
Net income (loss) (42,999) (38,161) 12,827
53
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
----
Independent Auditors' Report 55
Report of Independent Public Accountants 56
Schedule II - Valuation and Qualifying Accounts 57
54
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 27, 1998 and for the
fiscal year ended September 27, 1998, and have issued our report thereon dated
December 10, 1998; such consolidated financial statements and report are
included in this Form 10-K. The schedule listed in the accompanying index is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. In our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/DELOITTE & TOUCHE LLP
Baltimore, Maryland
December 10, 1998
55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Sweetheart Holdings Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated balance sheet as of September 30, 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for the Fiscal
Years ended September 30, 1997 and 1996 of Sweetheart Holdings Inc. and
Subsidiaries included in this Form 10-K and have issued our reports thereon
dated December 8, 1997 (except with respect to the matter discussed in Note 1 -
Inventories as to which the date is December 3, 1998). Our audits were made for
the purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The schedule listed in the accompanying index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
December 8, 1997
(except with respect to the
matter discussed in Note 1 -
Inventories, as to which the
date is December 3, 1998)
56
SCHEDULE II
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Additions
-----------------------------
Balance at Charged to Charged
beginning costs and to other Balance at
Classifications of expenses (1) accounts (2) Deductions (3) end of
period period
------------- -------------- -------------- ---------------- ------------
Allowance for Doubtful Accounts:
Fiscal Year 1998 $ 1,740 $769 $ (4) $ 688 $ 1,817
Fiscal Year 1997 2,466 446 51 1,223 1,740
Fiscal Year 1996 2,524 369 46 473 2,466
- --------------------
(1) Provision for doubtful accounts.
(2) Includes recoveries on accounts previously written off, translation
adjustments and reclassifications.
(3) Accounts written off.
57
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 18, 1998.
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 18, 1998, by the following
persons in the capacities indicated:
Signature Capacity
--------- --------
/s/ DENNIS MEHIEL Chief Executive Officer
----------------------------- and Chairman of the Board
Dennis Mehiel
/s/ THOMAS ULEAU President, Chief Operating
----------------------------- Officer and Director
Thomas Uleau
/s/ W. RICHARD BINGHAM Director
-----------------------------
W. Richard Bingham
/s/ THEODORE C. ROGERS Director
-----------------------------
Theodore C. Rogers
/s/ LAWRENCE W. WARD, JR. Director
-----------------------------
Lawrence W. Ward, Jr.
/s/ HANS H. HEINSEN Senior Vice President -
----------------------------- Finance and Chief
Hans H. Heinsen Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
58