UNITED STATES
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
December 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 (I.R.S. Employer
incorporation or organization) Identification No.)
10100 Reisterstown Road, Owings Mills, Maryland 21117
(Address of principal executive offices) (Zip Code)
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
February 17, 1998:
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.
Page 1 of 10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
Sweetheart Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
<CAPTION>
(Unaudited)
December 31, September 30,
1997 1997
------------- ------------
<S> <C> <C>
ASSETS
-------------
CURRENT ASSETS
Cash and cash equivalents $ 4,687 $ 2,650
Restricted cash 29,016
Cash in escrow 23,720 13,323
Receivables, less allowances of $1,851 and $1,740, respectively 72,417 85,774
Inventories 140,941 148,845
Deferred income taxes 2,471 2,471
Assets held for sale - 8,466
Other current assets 19,532 20,868
---------- ----------
Total current assets 263,768 311,413
Property, plant and equipment 526,770 527,999
Less - Accumulated depreciation 154,052 145,508
---------- ----------
Net property, plant and equipment 372,718 382,491
Deferred income taxes 19,083 12,471
Other assets 17,482 13,155
---------- ----------
Total assets $ 673,051 $ 719,530
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 50,870 $ 58,933
Accrued payroll and related costs 35,770 40,528
Other current liabilities 45,819 43,815
Current portion of long-term debt and bonds 5,516 1,369
---------- ----------
Total current liabilities 137,975 144,645
Long-term debt 397,258 426,799
Long-term bonds 3,700 3,700
Other liabilities 69,062 69,775
SHAREHOLDERS' EQUITY
Common stock -- Par value $.01 per share; 3,000,000 shares
authorized; 1,046,000 shares issued and outstanding 101,100 101,100
Cumulative translation adjustment (926) (507)
Retained earnings (34,747) (25,611)
Note receivable related to purchase of common stock (371) (371)
---------- ----------
Total shareholders' equity 65,056 74,611
---------- ----------
Total liabilities and shareholders' equity $ 673,051 $ 719,530
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Sweetheart Holdings Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(In Thousands)
<CAPTION>
For the three months ended December 31,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
Net sales $ 201,952 $ 202,102
Cost of sales 164,341 176,859
--------- ---------
Gross income 37,611 25,243
Transportation expense 23,665 22,462
Selling, general and administrative expense 19,102 16,216
--------- ---------
Operating income (loss) (5,156) (13,435)
Interest expense (11,126) (9,952)
Other income, net 3,576 268
--------- ---------
Income (loss) before income tax expense
(benefit) and cumulative effect of
change in accounting principle (12,706) (23,119)
Income tax expense (benefit) (5,081) (9,247)
--------- ---------
Income (loss) before cumulative effect
of change in accounting principle (7,625) (13,872)
Cumulative effect of change in accounting
principle (net of income taxes of $1,007) (1,511) -
--------- ---------
Net income (loss) $ (9,136) $ (13,872)
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Sweetheart Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<CAPTION>
For the three months ended
December 31,
----------------------
1997 1996
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,136) $ (13,872)
Depreciation and amortization 11,415 11,494
Deferred income tax credit (5,081) (9,222)
Gain on sale of assets (4,245) -
Cumulative effect of change in accounting principle, net 1,511 -
Decrease in receivables 13,357 17,886
Decrease in inventories 7,904 22,638
Decrease in accounts payable (8,063) (27,011)
Other, net (6,924) (4,751)
--------- ---------
Net cash provided by (used in) operating activities 738 (2,838)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (7,134) (9,523)
Proceeds from sale of property, plant and equipment 15,767 -
--------- ---------
Net cash provided by (used in) investing activities 8,633 (9,523)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of debt 149,467 85,150
Repayment of debt (174,585) (64,533)
(Increase) decrease in restricted cash 29,016 (6,284)
(Increase) decrease in cash in escrow (10,397) -
Payments of financing fees (835) -
--------- ---------
Net cash provided by (used in) financing activities (7,334) 14,333
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,037 1,972
CASH AND CASH EQUIVALENTS, beginning of period 2,650 4,371
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 4,687 $ 6,343
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 2,348 $ 1,813
======== =========
Income taxes paid $ 335 $ 69
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
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 December 31, 1997 and the
results of operations and cash flows for the three months ended December 31,
1997 have been included. Operating results for the three month period ended
December 31, 1997 are not necessarily indicative of the results to be expected
for the year ending September 30, 1998. Certain prior period amounts have been
reclassified to conform to current period presentation.
(2) ACCOUNTING PRONOUNCEMENTS
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.
(3) RESTRICTED CASH
During the quarter ended December 31, 1997, the Company entered into
the 1997 Amended and Restated Credit Agreement, at which time the SRC Series
1994 A-V Notes were repaid with the balance in Restricted Cash and other
consideration. The balance of restricted cash was $29.0 million at September
30, 1997. The cash balances of Sweetheart Receivables Corporation had been
restricted from transfer to other entities within the Company.
(4) CASH IN ESCROW
Cash received as proceeds from the sale of assets is restricted to
qualified capital expenditures under the Bond Indentures, and is held in escrow
with the trustee until utilized. The balance of cash in escrow was $23.7
million and $13.3 million at December 31, 1997 and September 30, 1997,
respectively.
(5) INVENTORIES
The components of inventories were as follows (in thousands):
December 31, September 30,
1997 1997
----------- ----------
Raw materials and supplies $ 39,721 $ 32,302
Finished goods and partly-finished products 101,220 116,543
--------- ---------
$ 140,941 $ 148,845
========= =========
<PAGE>
(6) 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, certain prior period amounts have been reclassified to
conform to current period presentation):
(Unaudited)
December 31, 1997 September 30,1997
----------- -----------
Current assets $516,878 $562,731
Noncurrent assets 165,103 176,382
Current liabilities 101,786 114,415
Noncurrent liabilities 539,110 563,065
(Unaudited)
For the three months ended
December 31,
-----------------------
1997 1996
--------- -----------
Net sales $201,952 $202,102
Gross income 31,744 18,059
Net loss before cumulative
effect of change in
accounting principle (9,308) (13,979)
Net loss (9,308) (13,979)
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, and cutlery. 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.
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996 (UNAUDITED)
Net sales were $202.0 million for the three months ended December 31,
1997, which is consistent with the same period in 1996. Net sales for the three
months ended December 31, 1997 reflect a 4.2% increase in domestic sales volume
and a 4.6% decrease in domestic sales price. Foodservice selling prices
decreased 4.9% while Food Packaging selling prices decreased 1.7%. 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. Foodservice sales volume increased 4.5% while Food Packaging
sales volume increased 2.4% Sales volume measures the dollar value of unit
sales, assuming constant prices between periods. The increase in sales volume
is primarily attributable to increased market penetration into key Foodservice
distributors. Canadian sales increased .5% from the prior year.
Cost of sales decreased to $164.3 million for the three months ended
December 31, 1997 from $176.9 million for the same period in 1996, a decrease of
$12.6 million or 7.1%. As a percentage of net sales, cost of sales decreased to
81.3% for the three months ended December 31, 1997 from 87.5% for the same
period in 1996. Gross income increased to $37.6 million for the three months
ended December 31, 1997 from $25.2 million for the same period in 1996, an
increase of $12.4 million or 49.2%. The improvement in gross income can be
attributed to several factors. In the first quarter of fiscal 1997, the Company
executed a planned inventory reduction resulting in $5 million of fixed overhead
absorption into cost of sales. A similar inventory reduction was not necessary
in the first quarter of fiscal 1998, resulting in a positive year-to-year
comparison. The Company implemented cost reduction programs in fiscal year
1997, including plant consolidation and manufacturing and operational
improvements, which have favorably impacted costs in fiscal year 1998.
Additionally, the Company is focusing on increasing sales of higher margin
product lines to improve gross income.
Transportation costs have increased to $23.7 million for the three months
ended December 31, 1997 from $22.5 million for the same period in 1996, an
increase of $1.2 million or 5.3% mainly due to the sales volume increases
described above.
Selling, general and administrative expenses increased to $19.1 million
for the three months ended December 31, 1997 from $16.2 million for the same
period in 1996, an increase of $2.9 million or 17.9%. As a percentage of net
sales, selling, general and administrative expenses increased to 9.5% for the
three months ended December 31, 1997 from 8.0% for the same period in 1996.
This increase is due primarily to increased employee benefits, both performance
and non-performance related, an executive retention plan, and costs associated
with the new MIS system.
Operating loss was $5.2 million for the three months ended December 31,
1997 compared to an operating loss of $13.4 million for the same period in 1996,
a decrease of $8.2 million or 61.2%, due to the reasons described above.
Interest expense increased to $11.1 million for the three months ended
December 31, 1997 from $10.0 million for the same period in 1996, an increase of
$1.1 million or 11.0%, due primarily to slightly higher average use of revolving
credit borrowings and incremental interest paid on the portion of the new
revolving bank loan used to refinance the SRC Series 1994-1 A-V Notes.
Other income increased to $3.6 million for the three months ended
December 31, 1997 from $.3 million for the same period in 1996, an increase of
$3.3 million, primarily due to the $3.5 million gain on the sale of the bakery
operations.
Income tax benefit was $5.1 million for the three months ended December
31, 1997 compared to $9.2 million for the same period in 1996, a change of $4.1
million. The effective tax rate for the three months ended December 31, 1997
and 1996 was 40.0%.
Cumulative effect of change in accounting principle was an expense
recorded to write-off previously capitalized costs as explained in Note 2.
<PAGE>
Net loss was $9.1 million for the three months ended December 31, 1997
compared to $13.9 million for the same period in 1996, a change of $4.8 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 from operations realized in the second and third quarters of the
calendar year. The Company builds inventory to prepare for 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 three months ended December 31, 1997, $174.6 million of debt
repayments, which includes the repayment of the SRC Notes and the refinancing of
the revolving credit facility, $7.1 million of capital additions, a $10.4
million increase in cash in escrow, $.8 million of financing fees and a $2.0
million net increase in cash and cash equivalents were funded through a $29.0
million decrease in restricted cash, $15.8 million of proceeds from sale of
property, plant and equipment, $.7 million of net cash provided by operations
and $149.5 million of proceeds from debt borrowings, which also includes
proceeds from the refinancing.
The Company's principal uses of cash for the next several years will
be for working capital, capital expenditures, and debt service requirements. 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, as well as funds generated by
asset sales, including the bakery operation sale, 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, 1997, the Company had approximately $170 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.
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.
<PAGE>
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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
The first quarter earnings release was filed as an Item 5
disclosure on Form 8-K on January 27, 1998.
<PAGE>
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: February 17, 1998 By: /s/ WILLIAM F. SPENGLER
-------------------
William F. Spengler
Vice President, Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Sweetheart Holdings Inc. First quarter 1998 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 28407
<SECURITIES> 0
<RECEIVABLES> 74268
<ALLOWANCES> (1851)
<INVENTORY> 140941
<CURRENT-ASSETS> 263768
<PP&E> 526770
<DEPRECIATION> (154052)
<TOTAL-ASSETS> 673051
<CURRENT-LIABILITIES> 137975
<BONDS> 411958
0
0
<COMMON> 10
<OTHER-SE> 65046
<TOTAL-LIABILITY-AND-EQUITY> 673051
<SALES> 201952
<TOTAL-REVENUES> 201952
<CGS> 164341
<TOTAL-COSTS> 164341
<OTHER-EXPENSES> 42767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11126
<INCOME-PRETAX> (12706)
<INCOME-TAX> (5081)
<INCOME-CONTINUING> (7625)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1511)
<NET-INCOME> (9136)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
