UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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
March 31, 1997
[ ] 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 (IRS Employer
incorporation or organization) Identification No.)
10100 Reisterstown Road, Owings Mills, 21117
Maryland (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 410/363-1111
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:
May 9, 1997
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)
March 31, September 30,
1997 1996
------------------ ----------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 3,693 $ 4,371
Restricted cash 30,114 28,870
Receivables, less allowances of $2,559 and $2,466, respectively 77,054 88,183
Inventories 184,926 192,937
Deferred income taxes 1,771 1,771
---------- ----------
Total current assets 297,558 316,132
Property, plant and equipment 552,201 527,394
Less - Accumulated depreciation 120,900 99,561
---------- ----------
Net property, plant and equipment 431,301 427,833
Other assets 17,755 18,645
---------- ----------
Total assets $ 746,614 $ 762,610
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 62,080 $ 70,472
Accrued payroll and related costs 47,324 47,828
Other current liabilities 37,500 33,918
Current portion of long-term debt and bonds 2,006 1,535
---------- ----------
Total current liabilities 148,910 153,753
Long-term debt 424,748 381,879
Long-term bonds 3,700 3,700
Deferred income taxes 1,255 17,803
Other liabilities 71,004 84,060
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 (540) (322)
Retained (deficit) earnings (3,192) 21,060
Note receivable related to purchase of common stock (371) (423)
---------- ----------
Total shareholders' equity 96,997 121,415
---------- ----------
Total liabilities and shareholders' equity $ 746,614 $ 762,610
========== ==========
<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
March 31, For the six months ended
-------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 183,686 $ 203,196 $ 373,157 $ 411,089
Cost of sales 170,257 183,407 353,306 374,908
-------- -------- -------- --------
Gross income 13,429 19,789 19,851 36,181
Selling, general and administrative
expense 20,363 19,078 40,288 36,430
-------- -------- -------- --------
Operating (loss) income (6,934) 711 (20,437) (249)
Interest expense 10,103 9,688 20,056 19,258
Other (expense) income, net (265) 421 72 874
-------- -------- -------- --------
Loss before income tax benefit (17,302) (8,556) (40,421) (18,633)
Income tax benefit (6,921) (3,426) (16,168) (7,456)
-------- -------- -------- --------
Net loss $ (10,381) $ (5,130) $ (24,253) $ (11,177)
======== ======== ======== ========
<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 six months ended
March 31,
--------------------------------
1997 1996
--------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (24,253) $(11,177)
23,384 20,012
Depreciation and amortization (16,168) (7,484)
Deferred income tax benefit 11,129 13,450
Decrease in receivables 8,011 1,692
Decrease in inventories (8,392) (9,519)
Decrease in accounts payable (11,771) (6,677)
Other, net -------- --------
Net cash (used in) provided by operating activities (18,060) 297
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (24,889) (19,806)
Proceeds from sale of property, plant and equipment - 179
-------- --------
Net cash used in investing activities (24,889) (19,627)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of debt 170,058 74,927
Repayment of debt (126,595) (51,613)
Increase in restricted cash (1,244) (6,491)
Payment received on common stock note receivable 52 20
-------- --------
Net cash provided by financing activities 42,271 16,843
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (678) (2,487)
-------- --------
CASH AND CASH EQUIVALENTS, beginning of period 4,371 8,001
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 3,693 $ 5,514
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 18,529 $ 17,638
======== ========
Income taxes paid $ 571 $ 1,339
======== ========
<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 March 31, 1997 and the
results of operations and cash flows for the six months ended March 31, 1997
have been included. Operating results for the six month period ended March 31,
1997 are not necessarily indicative of the results to be expected for the year
ending September 30, 1997.
(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 $30.1 million at March 31, 1997 and $28.9 million at September 30,
1996.
(3) INVENTORIES
The components of inventories were as follows (in thousands):
March 31, September 30,
1997 1996
----------- ------------
Raw materials and supplies $ 47,446 $ 55,265
Finished goods and partly-finished products 137,480 137,672
-------- --------
$ 184,926 $192,937
======== ========
(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)
March 31, 1997 September 30,1996
----------------- -----------------
Current assets $575,130 $572,259
Noncurrent assets 173,413 174,006
Current liabilities 124,374 127,728
Noncurrent liabilities 550,199 519,635
(Unaudited) (Unaudited)
For the quarter ended For the six months ended
March 31, March 31,
----------------------------- -------------------------
1997 1996 1997 1996
------------- ------------ ----------- ----------
Net sales $183,686 $203,196 $373,157 $411,089
Gross income 6,056 16,402 5,600 23,405
Net Loss (10,735) (2,764) (24,714) (9,861)
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.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
Net sales decreased to $183.7 million for the three months ended March 31,
1997 from $203.2 million for the same period in 1996, a decrease of $19.5
million or 9.6%. The decrease in net sales reflects a 4.1% decrease in domestic
sales volume and a 4.5% decrease in domestic sales price. Foodservice sales
volume decreased 2.7% while Food Packaging sales volume decreased 12.2%. Sales
volume measures the dollar value of unit sales, assuming constant prices between
periods. The decrease in Food Packaging volume is primarily attributable to
decreases in demand experienced by key accounts in their customer base in both
the cultured and frozen segments. Foodservice and Food Packaging selling prices
decreased 4.6% and 4.0%, respectively. Price has been negatively impacted by
falling raw material prices and by competition in the marketplace. The benefits
of lower raw material prices are generally passed on to customers. Canadian
sales decreased 7.8% from the same period in 1996.
Cost of sales decreased to $170.3 million for the three months ended
March 31, 1997 from $183.4 million for the same period in 1996, a decrease of
$13.1 million or 7.1%. As a percentage of net sales, cost of sales increased to
92.7% for the three months ended March 31, 1997 from 90.3% for the same period
in 1996. The Company has focused on initiatives to reduce manufacturing costs
in light of price conditions in the marketplace described above. Raw material
and labor costs have been held constant as a percentage of sales. Although
overhead spending has remained at 1996 levels, this cost as a percentage of
sales has increased.
Gross income decreased to $13.4 million for the three months ended
March 31, 1997 from $19.8 million for the same period in 1996, a decrease of
$6.4 million due to the reasons described above.
Selling, general and administrative expenses increased to $20.4
million for the three months ended March 31, 1997 from $19.1 million for the
same period in 1996, an increase of $1.3 million or 6.8%. As a percentage of
net sales, selling, general and administrative expenses increased to 11.1% for
the three months ended March 31, 1997 from 9.4% for the same period in 1996.
This increase is primarily attributable to normal inflation in the wage base,
and maintenance and depreciation on the new MIS system.
Operating loss was $6.9 million for the three months ended March 31,
1997 while operating income was $0.7 million for the same period in 1996, a
decrease of $7.6 million due to the reasons described above.
Interest expense increased $0.4 million or 4.1% to $10.1 million for
the three months ended March 31, 1997 from $9.7 million for the same period in
1996. This increase is a result of higher revolving loan borrowings.
Income tax benefit increased to $6.9 million for the three months
ended March 31, 1997 from $3.4 million for the same period in 1996.
Net loss increased to $10.4 million for the three months ended March
31, 1997 from $5.1 million for the same period in 1996, an increase of $5.3
million, due to the reasons described above.
SIX MONTHS ENDED MARCH 31, 1997 COMPARED TO SIX MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
Net sales decreased to $373.2 million for the six months ended March 31,
1997 from $411.1 million for the same period in 1996, a decrease of $37.9
million or 9.2%. The decrease in net sales reflects a 2.5% decrease in domestic
sales volume and a 5.7% decrease in domestic sales price. Foodservice sales
volume decreased 0.8% while Food Packaging sales volume decreased 12.8%. Sales
volume measures the dollar value of unit sales, assuming constant prices between
periods. The decrease in Food Packaging volume is primarily attributable to
decreases in demand experienced by key accounts in their customer base in both
the cultured and frozen segments. Foodservice and Food Packaging selling prices
decreased 6.0% and 3.5%, respectively. Price has been negatively impacted by
falling raw material prices and by competition in the marketplace. The benefits
of lower raw material prices are generally passed on to customers. Canadian
sales decreased 7.5% from the same period in 1996.
Cost of sales decreased to $353.3 million for the six months ended
March 31, 1997 from $374.9 million for the same period in 1996, a decrease of
$21.6 million or 5.8%. As a percentage of net sales, cost of sales increased to
94.7% for the six months ended March 31, 1997 from 91.2% for the same period in
1996. The increase in cost of sales as a percentage of net sales was due to the
reasons described for the quarter's cost of sales above, as well as to changes
in overhead absorption. 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 year
period. In 1996, inventory levels increased, resulting in an absorption of
fixed costs into inventory. In 1997, inventory levels declined, and the fixed
costs associated with inventories sold were recognized.
Gross income decreased to $19.9 million for the six months ended March
31, 1997 from $36.2 million for the same period in 1996, a decrease of $16.3
million due to the reasons described above.
Selling, general and administrative expenses increased to $40.3
million for the six months ended March 31, 1997 from $36.4 million for the same
period in 1996, an increase of $3.9 million or 10.7%. As a percentage of net
sales, selling, general and administrative expenses increased to 10.8% for the
six months ended March 31, 1997 from 8.9% for the same period in 1996 This
increase is primarily attributable to normal inflation in the wage base, and
maintenance and depreciation on the new MIS system.
Operating loss increased to $20.4 million for the six months ended
March 31, 1997 from $0.2 million for the same period in 1996, an increase of
$20.2 million due to the reasons described above.
Interest expense increased $0.8 million or 4.1% to $20.1 million for
the six months ended March 31, 1997 from $19.3 million for the same period in
1996. This increase is a result of higher revolving loan borrowings.
Income tax benefit increased to $16.2 million for the six months ended
March 31, 1997 from $7.5 million for the same period in 1996.
Net loss increased to $24.3 million for the six months ended March 31,
1997 from $11.2 million for the same period in 1996, an increase of $13.1
million, due to the reasons described above.
1997 OUTLOOK
Several factors are anticipated to impact the results for the remainder of
fiscal 1997. Historically, the Company has experienced better financial results
in the last two quarters of its fiscal year due to seasonality. As well, the
Company plans to continue its focus on cost savings initiatives in both the
manufacturing and selling, general and administrative expense areas.
Additionally, during the latter part of fiscal 1996, the Company recognized the
favorable impact of inventory overhead absorption, an effect which has reversed
in 1997. In light of year-to-date results and the trends described above, the
Company anticipates that full year 1997 results will fall short of those
achieved in 1996, but will improve relative to the first two quarters of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is highly seasonal with the majority of its net
cash inflows from operations realized in the last two quarters of the fiscal
year. The Company builds inventory to prepare for the higher seasonal demands
of the summer months when away-from-home consumption increases. As a result,
the Company uses its revolving credit facilities to meet its production
requirements during periods of reduced cash flow.
For the six months ended March 31, 1997, $24.8 million of net capital
additions, $18.1 million of cash used for operations, $1.2 million increase in
restricted cash balances, and the payment of $0.1 million of industrial revenue
bond principal were funded through a $0.7 million decrease in cash balances,
$43.2 million of domestic revolving loan borrowings, and $0.3 million of
Canadian operating facility borrowings. The maximum combined month end
outstanding balance of the domestic revolving loan and Canadian operating
facilities during the six months ended March 31, 1997 was $66.8 million, while
the average balance outstanding totaled approximately $45.0 million. At March
31, 1997, the Company had approximately $7.0 million of combined availability
under its domestic revolving loan and Canadian operating facilities.
The Company's principal uses of cash for the next several years will
be capital expenditures, debt service requirements, and seasonal working capital
needs. 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 from
borrowings under the domestic revolving loan facility and the Canadian operating
facility will be sufficient to meet the Company's expected operating needs,
including capital expenditures and debt service requirements.
NET OPERATING LOSS CARRYFORWARDS
As of September 30, 1996, the Company had approximately $126 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. 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
capital spending programs for cost reduction opportunities and new product
development.
ACCOUNTING PRONOUNCEMENTS
In October 1996, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption of SFAS 121 did not
have a material impact on net income.
In October 1996, the Company adopted SFAS No. 123, Accounting for Stock
Based Compensation, which provides an alternative to APB Opinion No. 25,
Accounting for Stock Issued to Employees in accounting for stock based
compensation issued to employees. The company has adopted only the disclosure
provisions of Statement 123, and the impact was not material.
FORWARD-LOOKING STATEMENTS
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. For additional information see the
Company's annual report on Form 10-K for the most recent fiscal year.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the Aldridge litigation, on March 14, 1997, the United States
District Court entered an order denying Plaintiffs' Motion for
Amendment, Reconsideration or Correction of the Court's Order of March
22, 1996 in which judgment was granted in favor of the Company. On
April 11, 1997, the Plaintiffs' filed a Notice of Appeal of this order
with the United States Court of Appeals for the Eleventh Circuit.
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
Not applicable.
ITEM 5. OTHER INFORMATION
On March 14, 1997, the directors elected William F. Spengler as Vice
President, Finance and Chief Financial Officer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the three month period
ended March 31, 1997.
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: May 9, 1997 By: /s/ William F. Spengler
------------- -----------------------
William F. Spengler
Vice President, Finance and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Sweetheart Holdings Inc. Second quarter 1997 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 33807
<SECURITIES> 0
<RECEIVABLES> 79613
<ALLOWANCES> 2559
<INVENTORY> 184926
<CURRENT-ASSETS> 297558
<PP&E> 552201
<DEPRECIATION> 120900
<TOTAL-ASSETS> 746614
<CURRENT-LIABILITIES> 148910
<BONDS> 428448
0
0
<COMMON> 10460
<OTHER-SE> 86537
<TOTAL-LIABILITY-AND-EQUITY> 746614
<SALES> 373157
<TOTAL-REVENUES> 373157
<CGS> 353306
<TOTAL-COSTS> 353306
<OTHER-EXPENSES> 40288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20056
<INCOME-PRETAX> (40421)
<INCOME-TAX> (16168)
<INCOME-CONTINUING> (24253)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24253)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
