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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 Thirty-nine Weeks Ended
June 27, 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
August 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)
June 27, September 27,
1999 1998
------------------ ----------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,440 $ 1,367
Cash in escrow 1,622 5,464
Receivables, less allowances of $1,894 and $1,817, respectively
97,386 85,248
Inventories 133,939 133,065
Deferred income taxes 11,506 11,506
Spare parts 18,224 19,278
--------- ---------
Total current assets 265,117 255,928
Property, plant and equipment, net 337,490 355,224
Deferred income taxes 45,096 41,395
Other assets 10,891 13,079
--------- ---------
Total assets $ 658,594 $ 665,626
========== ==========
Liabilities and Shareholders' Equity Current liabilities:
Accounts payable $ 72,216 $ 66,205
Accrued payroll and related costs 43,725 39,324
Other current liabilities 46,036 40,866
Current portion of long-term debt 974 3,445
--------- ---------
Total current liabilities 162,951 149,840
--------- ---------
Long-term debt 407,573 422,438
Other liabilities 75,022 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 (83,814) (75,670)
Accumulated other comprehensive loss (4,282) (6,491)
--------- ---------
Total shareholders' equity 13,048 18,983
--------- ---------
Total liabilities and shareholders' equity $ 658,594 $ 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 For the For the
Thirteen Quarter Thirty-nine Nine months
weeks ended ended weeks ended ended
June 27, June 30, June 27, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 234,290 $ 233,792 $ 633,588 $ 626,960
Cost of sales 200,613 214,856 566,466 588,821
---------- ---------- ------------ ------------
Gross profit 33,677 18,936 67,122 38,139
Selling, general and administrative expenses 16,218 16,010 49,499 54,134
Other (income) expense, net (200) (94) (381) 6,183
Asset impairment expense - - - 5,000
Restructuring charges - - - 5,527
----------- ----------- ------------ ------------
Operating income (loss) 17,659 3,020 18,004 (32,705)
Interest expense, net 10,433 10,942 31,576 32,440
----------- ----------- ------------ ------------
Income (loss) before income tax benefit and
cumulative effect of change in
accounting principle 7,226 (7,922) (13,572) (65,145)
Income tax expense (benefit) 2,891 (3,168) (5,428) (26,055)
----------- ------------ ------------- -------------
Income (loss) before cumulative effect of
change accounting principle 4,335 (4,754) (8,144) (39,090)
Cumulative effect of change in accounting principle
(net of income taxes of $1,007) - - - (1,511)
----------- ----------- ------------ ------------
Net income (loss) 4,335 (4,754) (8,144) (40,601)
----------- ------------ ------------ ------------
Other comprehensive income (loss), net
of tax:
Foreign currency translation adjustment 323 (383) 312 (716)
Minimum pension liability adjustment (net
of income taxes of $503 and $1,264
respectively) 755 - 1,897 -
----------- ----------- ------------ ------------
Other comprehensive income (loss) 1,078 (383) 2,209 (716)
----------- ------------ ------------ -------------
Comprehensive income (loss) $ 5,413 $ (5,137) $ (5,935) $ (41,317)
=========== ============ ============ =============
</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
Thirty-nine Nine months
weeks ended ended
June 27, June 30,
1999 1998
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (8,144) $ (40,601)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 35,966 34,364
Deferred income tax credit (5,428) (26,055)
Gain on sale of assets (437) (4,245)
Cumulative effect of change in accounting principle, net - 1,511
Asset impairment expense - 5,000
Changes in operating assets and liabilities:
Receivables (12,138) (4,990)
Inventories (874) 8,587
Accounts payable and accrued expenses 15,691 20,130
Other 7,698 (7,544)
--------- ----------
Net cash provided by (used in) operating activities 32,334 (13,843)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (26,019) (26,144)
Proceeds from sale of bakery - 14,718
Proceeds from sale of property, plant and equipment 8,174 889
--------- ---------
Net cash used in investing activities (17,845) (10,537)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit
facilities (12,587) 50,009
Repayment of debt (4,671) (58,562)
Decrease in restricted cash - 29,016
Decrease in cash in escrow 3,842 6,504
Payments of financing fees - (1,372)
Other - 371
--------- ---------
Net cash provided by (used in) financing activities (13,416) 25,966
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,073 1,586
CASH AND CASH EQUIVALENTS, beginning of period 1,367 2,650
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 2,440 $ 4,236
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 22,735 $ 22,241
========= =========
Income taxes paid $ 83 $ 459
========= =========
</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 in accordance with the covenants set forth in the
Company's debt instruments, and is held in escrow with the trustee until
utilized.
(3) INVENTORIES
The components of inventories were as follows (in thousands):
(Unaudited)
June 27, September 27,
1999 1998
----------- ------------
Raw materials and supplies $ 30,231 $ 32,938
Finished goods 95,508 91,666
Work in progress 8,200 8,461
----------- ------------
$ 133,939 $ 133,065
=========== ============
(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 thirty-nine weeks ended June
27, 1999 and the remaining $0.5 million will be paid within the next three
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. During the thirty-nine weeks ended June 27,
1999, the Company sold $4.0 million of cups to Fonda, and purchased
<PAGE>
$1.4 million of paper plates from Fonda. The Company believes that the terms on
which it (i) sold such assets to Fonda, (ii) leases such assets from Fonda, and
(iii) sold and purchased such products are at least as favorable as those it
could have obtained from unrelated third parties and were negotiated on an arm's
length basis.
(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) June September 27, 1998
27, 1999
-------------------- ---------------------
<S> <C> <C>
Foreign currency translation adjustment $(1,257) $(1,569)
Minimum pension liability adjustment (3,025) (4,922)
-------------------- ---------------------
Accumulated other comprehensive loss $(4,282) $(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 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 Company's 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 three 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. On June 17, 1999, the court
deferred these motions, and ordered discovery in connection therewith. Discovery
is expected to be completed by the end of October 1999. 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. On May 17, 1999, the Company filed a
motion for summary judgment on all claims. 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.
On July 13, 1999, the Company received a letter from the
Environmental Protection Agency (the "EPA") identifying the Company, among
numerous others, as a "potential responsible party" under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, at a
site in Baltimore, Maryland. The Company has no reason to believe that the final
outcome of this matter will have a material adverse effect on the Company's
financial condition or results of operations. However, no assurance can be given
about its ultimate effect on the Company, if any, given the early stage of this
investigation.
<PAGE>
(8) SWEETHEART CUP COMPANY INC. SUMMARIZED FINANCIAL INFORMATION
The Company is the guarantor of the 9 5/8% Senior Secured Notes due
September 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):
(Unaudited)
June 27, 1999 September 27, 1998
------------------------- --------------------------
Current assets $266,621 $257,399
Noncurrent assets 403,267 424,017
Current liabilities 138,232 123,625
Noncurrent liabilities 541,035 560,446
<TABLE>
<CAPTION>
(Unaudited)
------------------ --------------- -------------------- ---------------------
For the Thirteen For the Quarter For the Thirty-nine For the Nine months
weeks ended June ended weeks ended June 27, ended June 30, 1998
27, 1999 June 30, 1998 1999
------------------ --------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Net sales $234,290 $233,792 $633,588 $626,960
Gross profit 28,009 13,043 50,480 20,765
Net income (loss) before cumulative
effect of change in accounting principle
4,031 (9,205) (8,935) (40,922)
Net income (loss) 4,031 (9,205) (8,935) (42,329)
</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 June 27, 1999 Compared to Three Months Ended June 30, 1998
(Unaudited)
Net sales increased $0.5 million, or 0.2%, to $234.3 million for the
thirteen weeks ended June 27, 1999 compared to $233.8 million for the three
months ended June 30, 1998. Domestic net sales decreased by $1.1 million, or
0.5%, reflecting a 0.7% decrease in domestic sales volume which is partially
offset by a 0.2% increase in realized domestic sales price. The increase in
average realized sales price reflects price increases in selected product lines
which was partially offset by a shift in sales mix to lower priced products.
Foodservice sales volume increased 1.2% primarily as a result of the Company's
focus on revenue growth with key customers. Food packaging sales volume
decreased 12.7%, primarily resulting from decreases in demand by large accounts
in the food packaging customer base due to market conditions. Canadian sales
increased 9.9% from the prior comparable period due primarily to increased sales
volume from the introduction of new products.
Gross profit increased $14.8 million, or 77.9%, to $33.7 million for
the thirteen weeks ended June 27, 1999 compared to $18.9 million for the three
months ended June 30, 1998. As a percentage of net sales, gross profit increased
to 14.4% for the thirteen weeks ended June 27, 1999 from 8.1% for the three
months ended June 30, 1998. This improvement is attributable to a shift in sales
to a more profitable product mix and the cost reduction initiatives implemented
by the Company in the latter part of the 1998 fiscal year, which has resulted in
improved manufacturing efficiencies.
<PAGE>
Selling, general and administrative expenses increased $0.2 million,
or 1.3%, to $16.2 million in the thirteen weeks ended June 27, 1999 compared to
$16.0 million in the three months ended June 30, 1998. This increase is due
primarily to legal expenses associated with pending litigation.
Operating income increased $14.7 million, to operating income of
$17.7 million in the thirteen weeks ended June 27, 1999 compared to operating
income of $3.0 million in the three months ended June 30, 1998 due to the
reasons described above.
Interest expense, net decreased $0.5 million, to $10.4 million in the
thirteen weeks ended June 27, 1999 compared to $10.9 million in the three months
ended June 30, 1998. This decrease is attributable to lower market interest
rates on lower outstanding balances under the Company's U. S. Credit Facility,
which was partially offset by a reduction in interest income earned on escrow
fund balances.
Net income (loss) increased $9.1 million, to net income of $4.3
million in the thirteen weeks ended June 27, 1999 compared to a net loss of $4.8
million in the three months ended June 30, 1998 due to the reasons described
above.
Thirty-nine Weeks Ended June 27, 1999 Compared to Nine Months Ended June 30,
1998 (Unaudited)
Net sales increased $6.6 million, or 1.1%, to $633.6 million for the
thirty-nine weeks ended June 27, 1999 compared to $627.0 million for the nine
months ended June 30, 1998. Excluding the $3.0 million decrease in sales from
the December 1997 sale of the bakery business, net sales increased by $9.6
million, or 1.5%, reflecting a 1.9% increase in domestic sales volume which was
partially offset by a 0.6% 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 2.9% while food packaging
sales volume decreased 5.2%. Foodservice sales volume has been positively
impacted by the Company's focus on revenue growth with key customers. The food
packaging sales volume decline is primarily the result of decreases in demand by
large accounts in the food packaging customer base due to market conditions.
Canadian sales increased 5.2% from the prior comparable period due primarily to
increased sales volume from the introduction of new products.
Gross profit increased $29.0 million, or 76.0%, to $67.1 million for
the thirty-nine weeks ended June 27, 1999 compared to $38.1 million for the nine
months ended June 30, 1998. As a percentage of net sales, gross profit increased
to 10.6% for the thirty-nine weeks ended June 27, 1999 from 6.1% for the nine
months ended June 30, 1998. This improvement is attributable to increased sales
volumes and the cost reduction initiatives implemented by the Company in the
1998 fiscal year, which has resulted in improved manufacturing efficiencies.
Selling, general and administrative expenses decreased $4.6 million,
or 8.6%, to $49.5 million for the thirty-nine weeks ended June 27, 1999 compared
to $54.1 million for the nine months ended June 30, 1998. As a percentage of net
sales, selling, general and administrative expenses decreased to 7.8% for the
thirty-nine weeks ended June 27, 1999 from 8.6% for the nine months ended June
30, 1998. This decrease is due primarily to cost savings associated with
headcount reductions made in the second quarter of the 1998 fiscal year, which
is partially offset by increased legal expenses associated with pending
litigation.
Other expense (income), net of $6.2 million, in the 1998 nine month
period includes 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.
<PAGE>
Asset impairment expense of $5.0 million was recognized in the 1998
nine month period. 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 1998
nine month period in connection with a workforce reduction resulting in
severance and related costs.
Operating income (loss) increased $50.7 million, to operating income
of $18.0 million for the thirty-nine weeks ended June 27, 1999 compared to an
operating loss of $32.7 million for the nine months ended June 30, 1998 due to
the reasons described above.
Interest expense, net decreased $0.8 million, to $31.6 million for
the thirty-nine weeks ended June 27, 1999 compared to $32.4 million for the nine
months ended June 30, 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.
Cumulative effect of change in accounting principle totaling $1.5
million was expensed in the quarter ended December 31, 1997 to write-off
previously capitalized reengineering costs.
Net loss decreased $32.5 million, to $8.1 million for the thirty-nine
weeks ended June 27, 1999 compared to $40.6 million for the nine months ended
June 30, 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. The Company expects to continue to fund a significant
portion of its 1999 capital expenditures from the sale of assets.
Net cash provided by operating activities was $32.3 million in the
thirty-nine weeks ended June 27, 1999 compared to a use of $13.8 million in the
nine months ended June 30, 1998. This is primarily due to the Company's improved
operating performance, and a reduction in cash expended on non-recurring charges
realized in the 1998 nine month period. This improvement was partially offset by
an increase in accounts receivable due to higher sales.
Capital expenditures for the thirty-nine weeks ended June 27, 1999
were $26.0 million compared to $26.1 million for the nine months ended June 30,
1998. Capital expenditures in the thirty-nine weeks ended June 27, 1999 included
$12.1 million for new production equipment, $5.3 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 the 1998
fiscal year and other equipment sales. As of June 27, 1999, the Company had $1.6
million of such proceeds from asset sales held in escrow (see Note 2 of the
Notes to Consolidated Financial Statements).
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 June 27, 1999, $27.8 million was
available under such facility. 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 June 27, 1999, Cdn $2.2 million
(approximately $1.5 million) was available under such facility. Borrowings under
the Canadian Credit Facility bear interest at an index rate plus 2.25% with
<PAGE>
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 United States Supreme Court 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 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 three 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. On June 17, 1999, the Court deferred these motions,
and ordered discovery in connection therewith. Discovery is expected to be
completed by the end of October 1999. 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.
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 in the next twelve months.
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 August, 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 been in contact with key vendors and
business partners to ensure that key business transactions will be Year 2000
compliant. As of July 27, 1999, the Company has received detailed business plans
and commitments from the majority of these vendors that they are or will be Year
2000 compliant. The Company expects that its business systems
<PAGE>
will be Year 2000 compliant, but it may experience isolated incidences of
non-compliance and potential outages with respect to its information technology
infrastructure. The Company plans to allocate internal resources to be ready to
take action should these events occur. Investors are cautioned, however, that
the Company's assessment of its compliance, of the costs of performing the
program and the risks attendant thereto, and of the need for any contingency
plans may change materially in the future as the Company proceeds further
with its compliance program.
The Company estimates the cost of its Year 2000 program to be $2.7
million, of which $2.5 million has been spent through June 27, 1999, including
$1.3 million in the thirty-nine 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. On June
17, 1999, the Court deferred these motions, and ordered discovery in connection
therewith. Discovery is expected to be completed by the end of October 1999.
On July 13, 1999, the Company received a letter from the
Environmental Protection Agency (the "EPA") identifying the Company, among
numerous others, as a "potential responsible party" under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, at a
site in Baltimore, Maryland.
Item 5. OTHER INFORMATION
On May 12, 1999, Kim Marvin, a principal at American Industrial
Partners, was elected 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 June 27, 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: August 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)
<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: August 11, 1999 By: __________________________________
---------------- Hans H. Heinsen
Senior Vice President - Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
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