SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the Quarterly Period Ended
June 30, 1996
[ ] 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 33-64814
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.)
7575 South Kostner Avenue, Chicago IL 60652
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 312/767-3300
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 [ ]
The number of shares outstanding of the Registrant's common stock as of
August 12, 1996:
Sweetheart Holdings Inc. Common Stock, $0.01 par value - 1,046,000 shares
* The Registrant is the guarantor of the 9 5/8 % Senior Secured Notes due
2000 and the 10 1/2% Senior Subordinated Notes due 2003 (collectively, the
"Notes") of Sweetheart Cup Company Inc., a wholly owned subsidiary of the
Registrant.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
Sweetheart Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
<CAPTION>
(Unaudited)
June 30, September 30,
1996 1995
------------ -------------
<S> <C> <C>
ASSETS
-------
CURRENT ASSETS
Cash and cash equivalents $3,995 $8,001
Restricted cash 18,458 15,966
Receivables, less allowances of $2,517 and $2,524,
respectively 95,590 102,286
Inventories 183,467 172,059
Deferred income taxes 3,165 3,165
----- -----
Total current assets 304,675 301,477
Property, plant and equipment 507,481 478,159
Less - Accumulated depreciation 89,007 60,596
------ ------
Net property, plant and equipment 418,474 417,563
Other assets 19,928 22,866
------ ------
Total assets $743,077 $741,906
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES
Accounts payable $64,799 $65,213
Accrued payroll and related costs 44,107 43,155
Other current liabilities 40,397 36,649
Current portion of long-term debt and bonds 3,141 2,509
----- -----
Total current liabilities 152,444 147,526
Long-term debt 373,988 366,581
Long-term bonds 2,500 2,600
Deferred income taxes 13,373 17,190
Other liabilities 88,662 92,204
SHAREHOLDERS' EQUITY
Common stock -- Par value $.01 per share;
3,000,000 shares authorized; 1,046,000 shares
issued and outstanding 101,100 101,100
Cumulative translation adjustment (378) (141)
Retained earnings 11,811 15,346
Note receivable related to purchase of common
stock (423) (500)
----- -----
Total shareholders' equity 112,110 115,805
------- -------
Total liabilities and shareholders' equity $743,077 $741,906
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Sweetheart Holdings Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(In Thousands)
<CAPTION>
For the quarter ended For the nine months ended
June 30, June 30,
------------------------- -------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $246,063 $253,516 $657,152 $666,214
Cost of sales 204,617 214,714 579,525 581,022
------- ------- ------- -------
Gross income 41,446 38,802 77,627 85,192
Selling, general and
administrative 19,206 18,475 55,636 56,830
------ ------ ------ ------
Operating income 22,240 20,327 21,991 28,362
Interest expense 9,880 9,830 29,138 29,122
Other income, net 380 426 1,254 1,458
--- --- ----- -----
Income (loss) before
income tax expense
(benefit) 12,740 10,923 (5,893) 698
Income tax expense (benefit) 5,098 4,369 (2,358) 277
----- ----- ------- ---
Net income (loss) $7,642 $6,554 $(3,535) $421
====== ====== ======= ====
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Sweetheart Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<CAPTION>
For the nine months ended
June 30,
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(3,535) $421
Depreciation and amortization 31,745 27,821
Deferred income tax benefit (2,890) (313)
Decrease (increase) in receivables 6,696 (13,011)
Increase in inventories (11,408) (421)
(Decrease) increase in accounts payable (414) 9,312
Other, net 832 3,630
--- -----
Net cash provided by operating activities $21,026 $27,439
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment $(30,897) $(37,188)
Proceeds from sale of property, plant and
equipment 202 128
--- ---
Net cash used in investing activities $(30,695) $(37,060)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of debt $132,299 $101,882
Repayment of debt (124,221) (100,039)
(Increase) decrease in restricted cash (2,492) 1,517
Payment received on common stock note
receivable 77 -
--- ---
Net cash provided by financing activities $5,663 $3,360
NET DECREASE IN CASH AND CASH EQUIVALENTS $(4,006) $(6,261)
-------- --------
CASH AND CASH EQUIVALENTS, beginning of period $8,001 $12,231
------ -------
CASH AND CASH EQUIVALENTS, end of period $3,995 $5,970
====== ======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $19,425 $19,389
======= =======
Income taxes paid $2,146 $942
====== ====
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles (GAAP) for
interim financial information and with the instructions of Form 10-Q and rule
10-01 of regulation S-X. Accordingly, these statements do not include all the
information required by GAAP for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of Sweetheart Holdings Inc. and
subsidiaries' (the "Company") financial position as of June 30, 1996 and the
results of operations and cash flows for the nine months ended June 30, 1996
have been included. Operating results for the nine month period ended June 30,
1996 are not necessarily indicative of the results to be expected for the year
ending September 30, 1996.
(2) RESTRICTED CASH
The cash balances of Sweetheart Receivables Corporation are restricted
from transfer to other entities within the Company. The balance of restricted
cash was $18.5 million at June 30, 1996 and $16.0 million at September 30, 1995.
(3) INVENTORIES
The components of inventories were as follows (in thousands):
June 30, September 30,
1996 1995
------------- -------------
Raw materials and supplies $73,533 $67,452
Finished goods and partly-finished
products 109,934 104,607
------- -------
$183,467 $172,05
======== =======
(4) SWEETHEART CUP COMPANY INC. SUMMARIZED FINANCIAL INFORMATION
Sweetheart Holdings Inc. is the guarantor of the 9 5/8% Senior Secured
Notes due 2000 and the 10 1/2% Senior Subordinated Notes due 2003 of Sweetheart
Cup Company Inc., a wholly owned subsidiary of Sweetheart Holdings Inc.
Summarized financial information for Sweetheart Cup Company Inc. is presented as
follows (in thousands):
(Unaudited) September
June 30, 1996 30,1995
---------------- ----------------
Current assets $556,846 $557,248
Noncurrent assets 171,997 173,051
Current liabilities 127,910 122,259
Noncurrent liabilities 518,522 529,171
(Unaudited) (Unaudited)
For the quarter ended June 30, For the nine months ended June 30,
------------------------------- ----------------------------------
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
Net sales $246,063 $253,516 $657,152 $666,214
Gross income 44,253 28,721 67,658 54,861
Net income
(loss) 13,641 5,323 3,780 (3,406)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
The Company operates in two principal business lines: Foodservice and Food
Packaging. Foodservice products include disposable hot and cold drink cups,
lids, food containers, plates, bowls, cutlery and ice cream cones. These
products are sold directly and through distributors to fast food chains, full
service restaurants, hospitals, airlines, theaters and other institutional
customers. Food Packaging products include paper and plastic containers for the
dairy and food processing industries. Food Packaging also designs, manufactures
and leases filling and packaging machines that fill and seal the Company's
containers in customers' plants. Through Lily Canada, the Company manufactures
and markets its products in Canada to national accounts and distributors.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
Net sales decreased to $246.1 million for the three months ended June 30,
1996 from $253.5 million for the same period in 1995, a decrease of $7.4 million
or 2.9%. The decrease in net sales reflects a flat domestic sales volume
coupled with a 2.7% decrease in domestic sales price. Foodservice sales volume
decreased 0.2% while Food Packaging sales volume increased 1.3%. Sales volume
measures the dollar value of unit sales, assuming constant prices between
periods. The decrease in Foodservice volume is primarily attributable to
decreases in the distributor and club store market segments offset by higher
national account volume. Foodservice and Food Packaging selling prices
decreased 2.5% and 4.1%, respectively. Canadian sales increased 1.3% from the
same period in 1995.
Cost of sales decreased to $204.6 million for the three months ended
June 30, 1996 from $214.7 million for the same period in 1995, a decrease of
$10.1 million or 4.7%. As a percentage of net sales, cost of sales decreased to
83.1% for the three months ended June 30, 1996 from 84.7% for the same period in
1995. The decrease in cost of sales as a percentage of net sales was due
primarily to lower than anticipated unit sales volume which resulted in
increased inventory levels and caused more overhead costs to be absorbed into
inventory. Overhead costs are allocated and absorbed into inventory when
inventory is produced and expensed when inventory is sold. As a result, profit
comparisons can be materially affected when a change in inventory levels during
a period differs materially from the change in the prior year period.
Gross income increased to $41.5 million for the three months ended
June 30, 1996 from $38.8 million for the same period in 1995, an increase of
$2.7 million or 7.0%, due to the reasons described above.
Selling, general and administrative expenses increased to $19.2
million for the three months ended June 30, 1996 from $18.5 million for the same
period in 1995, an increase of $0.7 million or 3.8%. As a percentage of net
sales, selling, general and administrative expenses increased to 7.8% for the
three months ended June 30, 1996 from 7.3% for the same period in 1995. This
increase is primarily due to the depreciation of capitalizable implementation
fees, hardware costs, and system/application costs associated with the Company's
redesign of its management information systems, specifically those related to
customer service and warehouse management.
Operating income increased to $22.3 million for the three months ended
June 30, 1996 from $20.3 million for the same period in 1995, an increase of
$2.0 million due to the reasons described above.
Interest expense increased to $9.9 million for the three months ended
June 30, 1996 from $9.8 million for the same period in 1995, an increase of $0.1
million or 1.0%.
Income tax expense increased to $5.1 million for the three months
ended June 30, 1996 from $4.4 million for the same period in 1995. The tax rate
for the 1996 and 1995 periods was 40% of pre-tax income.
Net income increased to $7.6 million for the three months ended June
30, 1996 from $6.6 million for the same period in 1995, an increase of $1.0
million, due to the reasons described above.
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
Net sales decreased to $657.1 million for the nine months ended June
30, 1996 from $666.2 million for the same period in 1995, a decrease of $9.1
million or 1.4%. The decrease in net sales reflects a 2.6% decrease in domestic
sales volume offset by a 1.4% increase in domestic sales price. Foodservice
sales volume decreased 2.8% while Food Packaging sales volume decreased 1.2%.
Sales volume measures the dollar value of unit sales, assuming constant prices
between periods. The decrease in Foodservice volume is primarily attributable
to decreases in the distributor and clubstore market segments offset by higher
national account volume. The decrease in Food Packaging sales volume is
primarily due to a decrease in the cultured products market segment.
Foodservice selling prices increased 1.8% and Food Packaging selling prices
decreased 0.7%. Canadian sales increased 6.8% from the same period in 1995.
Cost of sales decreased to $579.5 million for the nine months ended
June 30, 1996 from $581.0 million for the same period in 1995, a decrease of
$1.5 million or 0.3%. As a percentage of net sales, cost of sales increased to
88.2% for the nine months ended June 30, 1996 from 87.2% for the same period in
1995. The increase in cost of sales as a percent of net sales reflects
unfavorable shifts in both product and customer sales mix experienced primarily
during the three months ended December 31, 1995.
Gross income decreased to $77.6 million for the nine months ended June
30, 1996 from $85.2 million for the same period of 1995, a decrease of $7.6
million or 8.9%, due to the reasons described above.
Selling, general and administrative expenses decreased to $55.6
million for the nine months ended June 30, 1996 from $56.8 million for the same
period in 1995, a decrease of $1.2 million or 2.1%. As a percentage of net
sales, selling, general and administrative expenses remained constant at 8.5%
for the nine months ended June 30, 1996 and 1995.
Operating income decreased to $22.0 million for the nine months ended
June 30, 1996 from $28.4 million for the same period in 1995, a decrease of $6.4
million due to the reasons described above.
Interest expense remained constant at $29.1 million for the nine
months ended June 30, 1996 and 1995.
Income tax benefit was $2.4 million for the nine months ended June 30,
1996 compared to income tax expense of $0.3 million for the same period in 1995.
An effective tax rate of 40% was maintained for both periods.
Net loss was $3.5 million for the nine months ended June 30, 1996
compared to net income of $0.4 million for the same period in 1995, a change of
$3.9 million, due to the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is highly seasonal with the majority of its net
cash inflows realized in the second and third quarters of the calendar year.
The Company builds inventory throughout year to satisfy the high seasonal
demands of the summer months when away-from-home consumption increases. As a
result, the Company requires access to working capital lines to meet its
production requirements during periods of reduced cash flow.
For the nine months ended June 30, 1996, a $2.5 million increase in
restricted cash, $30.7 million of net capital additions, the payment of $0.1
million for industrial revenue bond principal, and $1.4 million of Canadian term
loan reductions were funded through $21.0 million of cash provided by
operations, a $4.0 million decrease in cash balances, $7.6 million of domestic
revolving loan facility borrowings, and $2.1 million of Canadian operating
facility borrowings. At June 30, 1996, the Company had approximately $58.5
million of combined availability under its domestic revolving loan and Canadian
operating facilities. The maximum combined month end outstanding balance of the
domestic revolving loan and Canadian operating facilities during the nine months
ended June 30, 1996 was $27.1 million, while the average balance outstanding
totaled approximately $12.5 million.
For the nine months ended June 30, 1995, $37.1 million of net capital
additions, the payment of $0.1 million for industrial revenue bond principal,
and $1.4 million of Canadian term loan reductions were funded through $27.4
million of cash provided by operations, a $6.3 million decrease in cash
balances, a $1.5 million decrease in restricted cash and $3.4 million of
Canadian operating facility borrowings. At June 30, 1995, the Company had
approximately $66.0 million of combined availability under its domestic
revolving loan and Canadian operating facilities. The maximum combined month
end outstanding balance of the domestic revolving loan and Canadian operating
facilities during the nine months ended June 30, 1995 was $18.1 million, while
the average balance outstanding totaled approximately $8.3 million.
The Company's principal uses of cash for the next several years will
be working capital requirements, capital expenditures and debt service
requirements. Management expects that annual capital expenditures will remain
at or near historical levels during the next few years as the Company continues
to pursue new product development and cost reduction opportunities. In
addition, the Company may be required to fund various contingent liabilities at
any time, including amounts accrued for litigation, claims and assessments
reflected on the balance sheet as other current liabilities.
Management believes that cash generated by operations and funds
available for working capital borrowings under the domestic revolving loan
facility and the Canadian operating facility will be sufficient to meet the
Company's expected operating needs, planned capital expenditures and debt
service requirements.
NET OPERATING LOSS CARRYFORWARDS
As of September 30, 1995, the Company had approximately $130 million
of net operating loss ("NOL") carryforwards for federal income tax purposes.
Although the Company has taken certain steps to allow utilization of the NOL
carryforwards and anticipates that a substantial portion of its NOL
carryforwards will be available to offset future taxable income, there can be no
assurance that its NOL carryforwards will become available or that the Company
will generate future taxable income. Accordingly, all or a portion of its NOL
carryforwards could expire unutilized, which could adversely affect the
Company's ability to satisfy its obligations as they become due. The Company
has reserved a portion of the tax benefit of its NOL carryforwards for financial
statement purposes. The Company believes that future taxable income will be
attainable due primarily to management's commitment to cost reduction strategies
(as indicated by the Company's intent to continue significant capital spending
for cost reduction opportunities) and significantly reduced interest expense due
to the Company's new capital and debt structure.
EFFECT OF INFLATION
Inflation may increase the Company's costs, including the cost of
borrowing and raw materials. Depending upon business conditions, the Company
attempts to increase the sales price of its products to mitigate the effect of
such potential increases. There can be no assurance that the Company will be
successful in increasing the prices of its products to offset all, or any
portion, of any cost increases.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective May 1, 1996, the Board of Directors accepted the resignations
of Michael H. Beaumont and Gottfried P. Tittiger as Directors, and
elected Peter W. C. Mather to the Board of Directors.
The Board of Directors accepted the resignation of Roger A. Cregg as
Vice President and Chief Financial Officer effective May 6, 1996, and
elected Lawrence W. Ward, Jr. as Vice President and Chief Financial
Officer effective June 10, 1996.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the three month
period ended June 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its duly authorized officer and principal financial officer.
SWEETHEART HOLDINGS INC.
(registrant)
Date: August 12, 1996 By: /s/ LAWRENCE W. WARD, JR.
-------------------------
Lawrence W. Ward, Jr.
Vice President and Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Sweetheart Holdings Inc. Third quarter 1996 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 22453
<SECURITIES> 0
<RECEIVABLES> 98107
<ALLOWANCES> 2517
<INVENTORY> 183467
<CURRENT-ASSETS> 304675
<PP&E> 507481
<DEPRECIATION> 89007
<TOTAL-ASSETS> 743077
<CURRENT-LIABILITIES> 152444
<BONDS> 376488
0
0
<COMMON> 10460
<OTHER-SE> 101650
<TOTAL-LIABILITY-AND-EQUITY> 743077
<SALES> 657152
<TOTAL-REVENUES> 657152
<CGS> 579525
<TOTAL-COSTS> 579525
<OTHER-EXPENSES> 55636
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29138
<INCOME-PRETAX> (5893)
<INCOME-TAX> (2358)
<INCOME-CONTINUING> (3535)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3535)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
