================================================================================
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
Twenty-six Weeks Ended
March 28, 1999
[ ] 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 (IRS 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 May 11,
1999:
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.
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share data)
---------------------------------
<TABLE>
<CAPTION>
(Unaudited)
March 28, September 27,
1999 1998
----------------- ----------------
<S> <C> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 2,960 $ 1,367
Cash in escrow 1,594 5,464
Receivables, less allowances of $1,778 and $1,817, respectively 87,895 85,248
Inventories 131,102 133,065
Deferred income taxes 11,506 11,506
Spare parts 18,765 19,278
--------- ---------
Total current assets 253,822 255,928
Property, plant and equipment, net 343,627 355,224
Deferred income taxes 48,581 41,395
Other assets 12,145 13,079
--------- ---------
Total assets $ 658,175 $ 665,626
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 74,447 $ 66,205
Accrued payroll and related costs 43,621 39,324
Other current liabilities 36,387 40,866
Current portion of long-term debt 3,444 3,445
--------- ---------
Total current liabilities 157,899 149,840
--------- ---------
Long-term debt 416,370 422,438
Other liabilities 76,271 74,365
Shareholders' equity:
Class A Common stock -- Par value $.01 per share; 1,100,000
shares authorized; 1,046,000 shares issued and outstanding 10 10
Class B Common stock - Par value $.01 per share; 4,600,000
shares authorized; 4,393,200 shares issued and outstanding 44 44
Additional paid-in capital 101,090 101,090
Accumulated deficit (88,149) (75,670)
Accumulated other comprehensive loss (5,360) (6,491)
--------- ---------
Total shareholders' equity 7,635 18,983
--------- ---------
Total liabilities and shareholders' equity $ 658,175 $ 665,626
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
AND COMPREHENSIVE INCOME (LOSS)
-------------------------------
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the For the
Thirteen For the Twenty-six For the
weeks ended Quarter weeks ended Six months
March 28, ended March 28, ended
1999 March 31, 1999 March 31,
1998 1998
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net sales $ 195,389 $ 191,216 $ 399,298 $ 393,168
Cost of sales 176,402 185,959 365,853 373,965
---------- ---------- ------------ ------------
Gross profit 18,987 5,257 33,445 19,203
Selling, general and administrative expenses 17,278 19,022 33,281 38,124
Other expense (income), net 32 9,389 (181) 6,277
Asset impairment expense - 5,000 - 5,000
Restructuring charges - 5,527 - 5,527
---------- ---------- ------------ ------------
Operating income (loss) 1,677 (33,681) 345 (35,725)
Interest expense, net 10,330 10,719 21,143 21,498
---------- ---------- ------------ ------------
Loss before income tax benefit and cumulative
effect of change in
accounting principle (8,653) (44,400) (20,798) (57,223)
Income tax benefit (3,461) (17,759) (8,319) (22,887)
---------- ---------- ------------ ------------
Loss before cumulative effect of change
accounting principle (5,192) (26,641) (12,479) (34,336)
Cumulative effect of change in accounting principle
(net of income taxes of $1,007) - - - (1,511)
---------- ---------- ------------ ------------
Net loss (5,192) (26,641) (12,479) (35,847)
---------- ---------- ------------ ------------
Other comprehensive income (loss), net
of tax:
Foreign currency translation adjustment 252 86 (11) (333)
Minimum pension liability adjustment (net
of income taxes of ($268) and $1,029,
respectively) (402) - 1,142 -
---------- ---------- ------------ ------------
Other comprehensive income (loss) (150) 86 1,131 (333)
---------- ---------- ------------ ------------
Comprehensive loss $ (5,342) $ (26,555) $ (11,348) $ (36,180)
========== ========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the For the
Twenty-six Six months
weeks ended ended
March 28, March 31,
1999 1998
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (12,479) $ (35,847)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 23,878 22,988
Deferred income tax credit (8,319) (22,887)
Gain on sale of assets (407) (4,245)
Cumulative effect of change in accounting principle, net - 1,511
Asset impairment expense - 5,000
Changes in operating assets and liabilities:
Receivables (2,647) 6,290
Inventories 1,963 1,254
Accounts payable 8,242 11,183
Other, net 5,449 (3,789)
--------- ----------
Net cash provided by (used in) operating activities 15,680 (18,542)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (19,242) (20,317)
Proceeds from sale of bakery - 14,718
Proceeds from sale of property, plant and equipment 7,247 889
--------- ----------
Net cash used in investing activities (11,995) (4,710)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit
facilities (5,514) 52,554
Repayment of debt (448) (60,000)
Decrease in restricted cash - 29,016
Decrease in cash in escrow 3,870 3,037
Payments of financing fees - (1,117)
Other - 371
--------- ----------
Net cash (used in) provided by financing activities (2,092) 23,861
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,593 609
CASH AND CASH EQUIVALENTS, beginning of period 1,367 2,650
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 2,960 $ 3,259
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 20,251 $ 19,370
========= =========
Income taxes paid $ 82 $ 307
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
-----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
(1) BASIS OF PRESENTATION
The information included in the foregoing interim financial statements
of Sweetheart Holdings Inc. and subsidiaries (the "Company") are unaudited but,
in the opinion of management, include all adjustments (consisting only of normal
recurring adjustments and accruals) which the Company considers necessary for a
fair presentation of the operating results for these periods. Results for the
interim periods are not necessarily indicative of results for the entire year.
These condensed financial statements should be read in conjunction with the
Company's financial statements and notes thereto included in the Company's
annual report on Form 10-K for the fiscal year ended September 27, 1998. Certain
amounts for the prior period have been reclassified to conform with current
period presentation.
(2) 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.
(3) INVENTORIES
The components of inventories were as follows (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
March 28, September 27,
1999 1998
------------------ -----------------
<S> <C> <C>
Raw materials and supplies $ 28,839 $ 32,938
Finished goods 94,046 91,666
Work in progress 8,217 8,461
--------- ----------
$ 131,102 $ 133,065
========= ==========
</TABLE>
(4) OTHER CURRENT LIABILITIES
The balance of other current liabilities as of September 27, 1998
included $1.6 million of restructuring reserves primarily for severance in
connection with headcount reductions made in the quarter ended March 31, 1998.
Of such balance, $1.1 million was paid during the twenty-six weeks ended March
28, 1999 and the remaining $0.5 million will be paid within the next six months.
The Company considers its restructuring plan to be substantially complete.
(5) RELATED PARTY TRANSACTIONS
In December 1998, the Company sold certain of its paper plate
manufacturing assets to The Fonda Group, Inc. ("Fonda"), an affiliate, for $2.4
million. In February 1999, the Company entered into a five year operating lease
with Fonda, whereby the Company leases certain paper cup manufacturing assets
from Fonda, resulting in equal monthly payments totaling $0.2 million per year.
Independent appraisals were obtained to determine the fairness of both the
purchase price and lease terms. The Company believes that the terms on which it
sold such assets to Fonda or leases such assets from Fonda are at least as
favorable as those it could have obtained from unrelated third parties and were
negotiated on an arm's length basis.
<PAGE>
(6) ACCUMULATED OTHER COMPREHENSIVE LOSS
The Company adopted the comprehensive income statement format required
by Financial Accounting Standards Board statement No. 130, Reporting
Comprehensive Income effective with its first fiscal quarter, and has restated
all prior periods presented. The components of accumulated other comprehensive
loss are as follows (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
March 28, September 27,
1999 1998
------------------ ------------------
<S> <C> <C>
Foreign currency translation adjustment $ (1,580) $ (1,569)
Minimum pension liability adjustment (3,780) (4,922)
----------- -----------
Accumulated other comprehensive loss $ (5,360) $ (6,491)
=========== ===========
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
On January 11, 1999, the United States Supreme Court denied Plaintiff's
petition for Writ of Certiorari in the matter of Aldridge v. Lily-Tulip, Inc.
Salary Retirement Benefits Committee and Fort Howard Cup Corporation, Civil
Action No. CV 187-084. The court has decided that the Lily-Tulip Salary
Retirement Plan (the "Plan") was lawfully terminated. The Company is in the
process of determining the amount of total payouts for which the Plan is liable.
The initial estimate of the total termination liability exceeds assets set aside
in the Plan by approximately $17 million, which amount has been fully reserved
by the Company. The Company expects to fund such payments within the next six
months. On April 27, 1999, the Plaintiffs filed a motion in the United States
District Court for reconsideration of the court's dismissal without appropriate
relief, and a motion for attorneys' fees with a request for delay in
determination of entitlement of such fees. Management is currently reviewing
these motions to determine what effect, if any, they may have on the payments
referred to above. See Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources.
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 have a material adverse affect on the
Company's financial position or results of operations.
<PAGE>
(8) SWEETHEART CUP COMPANY INC. SUMMARIZED FINANCIAL INFORMATION
The Company 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 the Company. 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):
<TABLE>
<CAPTION>
(Unaudited)
March 28, 1999 September 27, 1998
--------------------- ----------------------
<S> <C> <C>
Current assets $255,323 $257,399
Noncurrent assets 406,961 424,017
Current liabilities 120,059 123,625
Noncurrent liabilities 556,715 560,446
(Unaudited)
--------------------------------------------------------------------------------------
For the Thirteen For the Quarter For the Twenty-six For the Six
weeks ended ended weeks ended March months ended
March 28, 1999 March 31, 1998 28, 1999 March 31, 1998
------------------ ------------------ -------------------- ------------------
Net sales $195,389 $191,216 $399,298 $393,168
Gross profit 13,418 (549) 22,471 7,722
Net loss before cumulative
effect of change in accounting
principle (5,454) (22,951) (12,966) (31,717)
Net loss (5,454) (22,951) (12,966) (33,124)
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
based on the current expectations of management and involve a number of known
and unknown risks and uncertainties that could cause the actual results,
performance or achievements of the Company to be materially different from those
anticipated in these forward-looking statements. Such risks and uncertainties
include, but are not limited to, the highly competitive nature of the industry,
raw material costs and fluctuations in demand for the Company's products, due in
part to general economic and business conditions. For additional information see
the Company's annual report on Form 10-K for the most recent fiscal year.
General
The Company sells its products to two principal customer groups:
foodservice and food packaging. Foodservice customers purchase 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 customers purchases include primarily 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.
The price of the Company's primary raw materials, including SBS
paperboard and plastic resin, historically fluctuate. These fluctuations are
generally passed on to the Company's customers through price increases or
reductions. However, in the short term, the Company is at risk of margin
erosion. The severity of such margin erosion depends on various factors
including inventory levels at the time of a price change, the timing and
frequency of such price changes, and the lead and lag time that generally
accompanies the implementation of both raw materials and subsequent selling
price changes.
The Company's business is seasonal as away from home consumption of
disposable products increases in the late spring and summer. This results in
disproportionately higher net income in the last six months of the fiscal year
as cost absorption improves resulting from a more profitable sales and
production mix.
Thirteen Weeks Ended March 28, 1999 Compared to Three Months Ended March 31,
1998 (Unaudited)
Net sales increased $4.2 million, or 2.2%, to $195.4 million for the
thirteen weeks ended March 28, 1999 compared to $191.2 million for the three
months ended March 31, 1998. Domestic net sales increased by $3.3 million, or
1.9%, reflecting a 3.3% increase in domestic sales volume which is partially
offset by a 1.4% decrease in realized domestic sales price. The decrease in
average realized sales price reflects a shift in sales mix to lower priced
products which was partially offset by price increases in selected product
lines. Foodservice sales volume increased 4.2% primarily as a result of the
Company's focus on revenue growth with key customers. Food packaging sales
volume decreased 2.7%, primarily due to decreases in demand by large accounts in
the food packaging customer base due to market conditions. Canadian sales
increased 7.0% from the prior comparable period due primarily to increased sales
volume from the introduction of new products.
Gross profit increased $13.7 million, or 261.2% to $19.0 million for
the thirteen weeks ended March 28, 1999 compared to $5.3 million for the three
months ended March 31, 1998. As a percentage to net sales, gross profit
increased to 9.7% for the thirteen weeks ended March 28, 1999 from 2.7% for the
three months ended March 31, 1998. This improvement is attributable to increased
sales volumes and the cost reduction initiatives implemented by the Company in
the latter part of fiscal year ending September 27, 1998 ("Fiscal Year 1998"),
which has resulted in improved manufacturing efficiencies.
<PAGE>
Selling, general and administrative expenses decreased $1.7 million,
or 9.2%, to $17.3 million in the thirteen weeks ended March 28, 1999 compared to
$19.0 million in the three months ended March 31, 1998. This decrease is due
primarily to cost savings associated with headcount reductions made in the
second quarter of Fiscal Year 1998.
Other expense, net included $9.4 million in the three months ended
March 31, 1998, to recognize certain one-time charges. These charges consisted
primarily of $4.4 million of financial advisory and legal fees associated with
the investment by SF Holdings 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. These
expenses were paid during Fiscal Year 1998.
Asset impairment expense of $5.0 million was recognized in the three
months ended March 31, 1998. 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 such product
lines and wrote down the assets to their fair market value.
Restructuring charges of $5.5 million were recognized in the three
months ended March 31, 1998. In March 1998, the Company reduced its workforce
and recognized charges for severance and related costs.
Operating income (loss) increased $35.4 million, to income of $1.7
million in the thirteen weeks ended March 28, 1999 compared to a loss of $33.7
million in the three months ended March 31, 1998 due to the reasons described
above.
Interest expense, net decreased $0.4 million, to $10.3 million in the
thirteen weeks ended March 28, 1999 compared to $10.7 million in the three
months ended March 31, 1998. This decrease is attributable to lower market
interest rates on lower outstanding balances under the Company's U. S. Credit
Facility, which was offset by a reduction in interest income earned on escrow
fund balances.
Income tax benefit decreased $14.3 million, to $3.5 million in the
thirteen weeks ended March 28, 1999 compared to $17.8 million in the three
months ended March 31, 1998. The effective tax rate for the thirteen weeks ended
March 28, 1999 and the three months ended March 31, 1998 was 40%.
Net loss decreased $21.4 million, to $5.2 million in the
thirteen weeks ended March 28, 1999 compared to $26.6 million in the three
months ended March 31, 1998 due to the reasons described above.
Twenty-six Weeks Ended March 28, 1999 Compared to Six Months Ended March 31,
1998 (Unaudited)
Net sales increased $6.1 million, or 1.6%, to $399.3 million for the
twenty-six weeks ended March 28, 1999 compared to $393.2 million for the six
months ended March 31, 1998. Excluding the $3.0 million decrease in sales from
the December 1997 sale of the bakery business, net sales increased by $9.1
million, or 2.3%, reflecting a 3.4% increase in domestic sales volume which was
partially offset by a 1.0% decrease in realized domestic sales price. The
decrease in average realized sales price reflects a shift in sales mix to lower
priced products which was partially offset by price increases in selected
product lines. Foodservice sales volume increased 3.9% while food packaging
sales volume decreased 0.4%. Foodservice sales volume has been positively
impacted by the Company's focus on revenue growth with key customers. Canadian
sales increased 2.3% from the prior comparable period due primarily to increased
sales volume from the introduction of new products.
Gross profit increased $14.2 million, or 74.2%, to $33.4 million for
the twenty-six weeks ended March 28, 1999 compared to $19.2 million for the six
months ended March 31, 1998. As a percentage to net sales, gross profit
increased to 8.4% for the twenty-six weeks ended March 28, 1999 from 4.9% for
the six months ended March 31, 1998. This improvement is attributable to
increased sales volumes and the cost reduction initiatives implemented by the
Company in the latter part of Fiscal Year 1998, which has resulted in improved
manufacturing efficiencies.
<PAGE>
Selling, general and administrative expenses decreased $4.8 million, or
12.7%, to $33.3 million for the twenty-six weeks ended March 28, 1999 compared
to $38.1 million for the six months ended March 31, 1998. As a percentage of net
sales, selling, general and administrative expenses decreased to 8.3% for the
twenty-six weeks ended March 28, 1999 from 9.7% for the six months ended March
31, 1998. This decrease is due primarily to cost savings associated with
headcount reductions made in the second quarter of Fiscal Year 1998.
Other expense, net was $6.3 million in the six months ended March 31,
1998. In the quarter ended March 31, 1998, the Company recognized one time
charges, consisting primarily of $4.4 million of financial advisory and legal
fees associated with the investment by SF Holdings 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. These expenses were offset partially by a gain of $3.3 million on
the sale of the bakery business.
Asset impairment expense of $5.0 million was recognized in the quarter
ended March 31, 1998. 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 such product lines
and wrote down the assets to their fair market value.
Restructuring charges of $5.5 million were recognized in the quarter
ended March 31, 1998. In March 1998, the Company reduced its workforce and
recognized charges for severance and related costs.
Operating income(loss) increased $36.1 million, to $0.3 million of
income for the twenty-six weeks ended March 28, 1999 compared to a net loss of
$35.7 million for the six months ended March 31, 1998 due to the reasons
described above.
Interest expense, net decreased $0.4 million, to $21.1 million for the
twenty-six weeks ended March 28, 1999 compared to $21.5 million for the six
months ended March 31, 1998. This decrease is attributable to lower market
interest rates on lower outstanding balances under the Company's U. S. Credit
Facility, which was offset by a reduction in interest income earned on escrow
fund balances.
Income tax benefit decreased $14.6 million, to $8.3 million for the
twenty-six weeks ended March 28, 1999 compared to $22.9 million for the six
months ended March 31, 1998. The effective tax rate for the thirteen weeks ended
March 28, 1999 and the three months ended March 31, 1998 was 40%.
Cumulative effect of change in accounting principle totaling $1.5
million was expensed in the three months ended December 31, 1997 to write-off
previously capitalized reengineering costs.
Net loss decreased $23.4 million, to $12.5 million for the twenty-six
weeks ended March 28, 1999 compared to $35.8 million for the six months ended
March 31, 1998, 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, 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 provided by operating activities was $15.7 million, in the
twenty-six weeks ended March 28, 1999, compared to a use of $18.5 million in the
six months ended March 31, 1998. This is primarily due to the Company's improved
operating performance, and a reduction in cash expended on non-recurring charges
and bonus payments in Fiscal Year 1998. This improvement was partially offset by
an increase in accounts receivable due to higher sales.
<PAGE>
Working capital decreased $10.2 million, or 9.6%, to $95.9 million at
March 28, 1999 compared to $106.1 million at September 27, 1998. This decrease
consisted primarily of (i) a $8.2 million increase in accounts payable due to
fluctuations in raw materials purchases as a result of the Company's seasonality
and inventory needs, (ii) a $4.3 million increase in accrued payroll and related
costs due to accruals for employee benefits and, (iii) a $3.9 million decrease
in cash held in escrow. These decreases in working capital were partially offset
by a $4.5 million decrease in other current liabilities due to the payment of
restructuring accruals.
Capital expenditures for the twenty-six weeks ended March 28, 1999 were
$19.2 million compared to $20.3 million for the six months ended March 31, 1998.
Capital expenditures in the twenty-six weeks ended March 28, 1999 included $11.6
million for new production equipment, $4.4 million spent at the Canadian
subsidiary, with the remaining consisting primarily of routine capital
improvements. Funding for such capital expenditures was provided by funds held
in escrow from the sale of the Riverside, CA manufacturing facility in Fiscal
Year 1998 and other equipment sales. 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 March 28,
1999, the Company had $1.6 million of such proceeds held in escrow (see Note 2
of the Notes to Consolidated Financial Statements). The Company does not
anticipate any material capital expenditures in the next twelve months other
than those funded through asset sales.
The Company's revolving credit facility, as amended, provides for
borrowings in an amount of up to $135.0 million, subject to borrowing base
limitations (the "U.S. Credit Facility"). As of March 28, 1999, $12.5 million
was available. Borrowings under the U.S. Credit Facility bear interest, at the
Company's election, at a rate equal to LIBOR plus 2.25% or a bank's base rate
plus 1.00%. The Company's Canadian subsidiary has a term loan and revolving
credit facility agreement which provides for a term loan facility of up to Cdn
$10.0 million and revolving credit facility of up to Cdn $10.0 million (the
"Canadian Credit Facility"). As of March 28, 1999, Cdn $2.8 million
(approximately $1.9 million) was available under such facility. 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.
The Company's Senior Secured Notes and the U.S. Credit Facility mature
in September 2000, and August 2000, respectively. Although the Company's intends
to refinance this debt, there can be no assurances that the Company will be able
to obtain such refinancing on terms and conditions acceptable to the Company.
In January 1999, the Company was notified that the United States
Supreme Court had denied plaintiffs' petition for Writ of Certiorari in the
matter of Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan Benefits Committee
and Fort Howard Cup Corporation, Civil Action No. CV 187-084. The court has
decided that the Lily-Tulip Salary Retirement Plan (the "Plan") was lawfully
terminated. The Company is in the process of determining the amount of total
payouts for which the Plan is liable. The initial estimate of the total
termination liability exceeds assets set aside in the Plan by approximately $17
million, which amount has been fully reserved by the Company. The Company
expects to fund such payments within the next six months. The Company's
operating plan contemplates that cash generated by operations and amounts
available under the Company's credit facilities will be sufficient to make the
required payments under the Plan when due. However, there can be no assurance
that the Company will achieve its operating plan and have the necessary cash to
make these payments. Failure by the Company to make such payments could have a
material adverse effect on the Company and its financial condition. On April 27,
1999, the Plaintiffs filed a motion in the United States District Court for
reconsideration of the court's dismissal without appropriate relief, and a
motion for attorneys' fees with a request for delay in determination of
entitlement of such fees. Management is currently reviewing these motions to
determine what effect, if any, they may have on the payments referred to above.
<PAGE>
Management believes that cash generated by operations, amounts
available under the Company's credit facilities and funds generated from asset
sales should be sufficient to meet the Company's expected operating needs,
including termination liabilities under the Plan, planned capital expenditures
and debt service requirements through March 29, 2000.
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 has completed its hardware and operating
systems conversion. With respect to the application phase, the Company is
compliant in its planning, order management, manufacturing, and warehousing
systems. 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, manufacturing, 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 $2.2 million has been spent through March 28, 1999, including
$1.0 million in the twenty-six weeks then ended. 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 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 carryforwards ("NOLs") 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 that future taxable income will be generated to
utilize the NOLs.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On January 11, 1999, the United States Supreme Court denied
Plaintiff's petition for Writ of Certiorari in the matter of Aldridge v.
Lily-Tulip, Inc. Salary Retirement Benefits Committee and Fort Howard Cup
Corporation, Civil Action No. CV 187-084. On April 27, 1999, the Plaintiffs
filed a motion in the United States District Court for reconsideration of the
court's dismissal without appropriate relief, and a motion for attorneys' fees
with a request for delay in determination of entitlement of such fees.
Item 5. OTHER INFORMATION
On January 5, 1999, Lawrence W. Ward, Jr. resigned as a member of
the Board of Directors.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the thirteen weeks ended
March 28, 1999.
<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: May 11, 1999 By: /s/ Hans H. Heinsen
-------------- -------------------
Hans H. Heinsen
Senior Vice President - Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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