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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 25, 2000
[ ] 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 1, 2000:
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 10 1/2% Senior Subordinated Notes due
2003 (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
<TABLE>
<CAPTION>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share data)
---------------------------------
(Unaudited)
June 25, September 26,
2000 1999
----------------- -----------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 6,649 $ 2,965
Receivables, less allowances of $2,130 and $1,905, respectively 106,691 88,325
Inventories 156,791 129,473
Deferred income taxes 12,962 12,962
Spare parts - current 18,374 16,278
--------- ---------
Total current assets 301,467 250,003
--------- ---------
Property, plant and equipment, net 208,647 322,967
Deferred income taxes 37,801 41,055
Spare parts 12,250 10,852
Goodwill, net 10,953 -
Other assets 11,108 9,763
--------- ---------
Total assets $ 582,226 $ 634,640
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 82,884 $ 66,654
Accrued payroll and related costs 44,304 45,089
Other current liabilities 33,812 39,045
Current portion of deferred gain on sale of assets 10,276 -
Current portion of long-term debt 14,588 275,446
--------- -------
Total current liabilities 185,864 426,234
--------- ---------
Long-term debt 204,995 118,446
Deferred gain on sale of assets 96,516 -
Other liabilities 70,317 71,686
--------- ---------
Total liabilities 557,692 616,366
--------- ---------
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 100,070 101,090
Accumulated deficit (72,093) (80,083)
Accumulated other comprehensive income (loss) (3,497) (2,787)
---------- ----------
Total shareholders' equity 24,534 18,274
--------- ---------
Total liabilities and shareholders' equity $ 582,226 $ 634,640
========== ==========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
AND OTHER COMPREHENSIVE INCOME (LOSS)
-------------------------------------
(Unaudited)
(In thousands)
For the For the For the For the
Thirteen Thirteen Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
June 25, 2000 June 27, 1999 June 25, 2000 June 27, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 264,605 $ 234,290 $ 696,200 $ 633,588
Cost of sales 226,250 200,613 602,643 566,466
---------- ---------- ---------- ----------
Gross profit 38,355 33,677 93,557 67,122
Selling, general and administrative expenses 13,991 16,218 50,001 49,499
Other (income) expense, net (392) (200) (2,336) (381)
----------- ----------- ----------- -----------
Operating income 24,756 17,659 45,892 18,004
Interest expense, net of interest income of $122,
$16, $170 and $105, respectively 11,563 10,433 32,052 31,576
---------- ---------- ---------- ----------
Income (loss) before income tax expense
(benefit) and extraordinary loss 13,193 7,226 13,840 (13,572)
Income tax expense (benefit) 5,277 2,891 5,537 (5,428)
Income (loss) before extraordinary loss 7,916 4,335 8,303 (8,144)
Extraordinary (loss) on early extinguishment of debt
(net of income tax benefit of $209) (313) - (313) -
----------- ---------- ----------- ----------
Net income (loss) 7,603 4,335 7,990 (8,144)
========== ========== ========== ===========
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (148) 323 (77) 312
Minimum pension liability adjustment (net
of income taxes of $(734), $503, $(422) and
$1,264 respectively) (1,102) 755 (633) 1,897
----------- ---------- ----------- ----------
Other comprehensive income (loss) (1,250) 1,078 (710) 2,209
----------- ---------- ----------- ----------
Comprehensive income (loss) $ 6,353 $ 5,413 $ 7,280 $ (5,935)
=========== =========== =========== ============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands)
For the For the
Thirty-nine Thirty-nine
weeks ended weeks ended
June 25, June 27,
2000 1999
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 7,990 $ (8,144)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 33,023 35,166
Deferred income tax credit 5,537 (5,428)
Gain on sale of assets (4,175) (437)
Changes in operating assets and liabilities:
Receivables (17,743) (12,138)
Inventories (21,452) (874)
Accounts payable 12,911 15,691
Other, net (14,456) 7,698
--------- --------
Net cash provided by (used in) operating activities 1,635 32,334
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (19,477) (26,019)
Payments for business acquisitions (12,411) -
Proceeds from sale of property, plant and equipment 220,543 8,174
-------- --------
Net cash provided by (used in) investing activities 188,655 (17,845)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under credit facilities 3,394 (12,587)
Net borrowings (repayments) of other debt (190,000) (4,671)
Decrease in cash escrow - 3,842
-------- --------
Net cash provided by (used in) financing activities (186,606) (13,416)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,684 1,073
CASH AND CASH EQUIVALENTS, beginning of period 2,965 1,367
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 6,649 $ 2,440
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 29,257 $ 22,735
========= =========
Income taxes paid $ 19 $ 83
========= =========
SUPPLEMENTAL NON-CASH INVESTING ACTIVITY:
Note payable associated with business acquisition $ 2,914 $ -
========= =========
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 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 26, 1999. Certain
prior period amounts have been reclassified to conform to current period
presentation.
(2) INVENTORIES
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
June 25, September 26,
2000 1999
---------------- ----------------
<S> <C> <C>
Raw materials and supplies $ 40,578 $ 30,092
Finished products 104,205 92,193
Work in progress 12,008 7,188
--------- ---------
Total inventories $ 156,791 $ 129,473
========== ==========
</TABLE>
(3) RELATED PARTY TRANSACTIONS
During the thirty-nine weeks ended June 25, 2000, the Company sold $11.5
million of cups to The Fonda Group, Inc. ("Fonda") and $0.3 million of scrap
paper to Fibre Marketing Group, LLC ("Fibre Marketing"). Included in accounts
receivable, as of June 25, 2000, is $2.7 million due from Fonda.
During the thirty-nine weeks ended June 25, 2000, the Company purchased (i)
$6.1 million of corrugated containers from Four M Corporation ("Four M"), (ii)
$8.7 million of paper plates and $0.1 million of equipment rental from Fonda and
(iii) $0.3 million of travel services from Emerald Lady, Inc. Included in
accounts payable, as of June 25, 2000, are $0.5 million due to Four M and $0.6
million due to Fonda. Other purchases from and sales to affiliates, if any, in
the thirty-nine weeks ended June 25, 2000 were not significant.
During the thirty-nine weeks ended June 25, 2000, the Company purchased
certain paper cup machines from Fonda at a fair market value of $1.3 million.
The equipment was recorded in property, plant and equipment at Fonda's net book
value, resulting in a charge to equity of $1.0 million. Independent appraisals
were obtained to determine the fairness of the purchase price.
During the thirty-nine weeks ended June 27, 1999, the Company sold $4.0
million of cups to Fonda. Accounts receivable, as of June 27, 1999, was $1.3
million due from Fonda. During the thirty-nine weeks ended June 27, 1999, the
Company purchased $1.4 million of paper plates from Fonda and $4.3 million of
corrugated containers from Four M. Included in accounts payable, as of June 27,
1999, was $0.7 million due to Fonda and $0.6 million due to Four M. Other
purchases from and sales to affiliates, if any, in the thirty-nine weeks ended
June 27, 1999 were not significant.
<PAGE>
All of the above referenced affiliates are under the common control of the
Company's Chief Executive Officer.
(4) GOODWILL
On May 15, 2000, Sweetheart Cup acquired Sherwood Industries, Inc.
("Sherwood"), a manufacturer of paper cups, containers and cup making equipment.
Pursuant to a certain Stock Purchase Agreement among Sweetheart Cup and the
stockholders of Sherwood, Sweetheart Cup acquired all of the issued and
outstanding capital stock (the "Sherwood Acquisition") of Sherwood and its
subsidiaries for an aggregate purchase price of $17.4 million, subject to post
closing adjustments. As part of the purchase price, Sweetheart Cup issued to the
stockholders of Sherwood promissory notes due May 2005 in an aggregate principal
amount of $5.0 million and a present value of $2.9 million. Sweetheart Cup also
assumed $9.3 million of Sherwood debt, which was paid in full on June 15, 2000.
The Sherwood Acquisition has preliminarily resulted in goodwill of $11.0
million, which is being amortized over 20 years. The acquisition has been
accounted for using the purchase method of accounting. Amounts and allocations
of costs recorded may require adjustment based upon information coming to the
attention of the Company that is not currently available.
(5) LONG-TERM DEBT
The Company completed the following transactions in the current period to
refinance its short-term debt. On June 15, 2000, the Company's revolving credit
facility was amended and restated to extend the maturity of the $135.0 million
revolving credit facility, subject to borrowing base limitations, through June
15, 2005 and to add a term loan of $25.0 million that requires equal monthly
installments through June 2005. Borrowings under the revolving credit facility
will now bear interest, at the Company's election, at a rate equal to (i) LIBOR
plus 2.00% or (ii) a bank's base rate plus 0.25%, plus certain other fees.
Borrowings under the term loan will bear interest, at the Company's election, at
a rate equal to (i) LIBOR plus 2.50% or (ii) a bank's base rate plus 0.50%, plus
certain other fees. The proceeds from the term loan were used in part to redeem
the Senior Secured Notes. The balance, as of June 25, 2000, under the U.S.
Credit Facility was approximately $95.0 million.
On June 15, 2000, the Company funded the redemption of its $190.0 million
Senior Secured Notes due September 1, 2000 by depositing with the U.S. Trust
Company of New York funds sufficient to redeem such notes.
In conjunction with the Sherwood Acquisition, Sweetheart Cup issued to the
stockholders of Sherwood subordinated promissory notes in an aggregate principal
amount of $5.0 million due May 2005. The present value of these notes as
recorded is $2.9 million, which will accrete interest at an annual rate of
10.85% over the term of the notes.
(6) DEFERRED GAIN ON SALE OF ASSETS
In connection with a sale-leaseback transaction, on June 15, 2000,
Sweetheart Cup and Sweetheart Holdings Inc. sold certain production equipment
located in Owings Mills, Maryland, Chicago, Illinois and Dallas, Texas for a
fair market value of $212.3 million to several owner participants. Pursuant to a
lease dated as of June 1, 2000 ("the Lease") between Sweetheart Cup and State
Street Bank and Trust Company of Connecticut, National Association ("State
Street"), Sweetheart Cup will lease such production equipment from State Street,
as owner trustee for several owner participants, through November 9, 2010. The
associated property, plant and equipment was removed from the balance sheet and
a deferred gain of $107.0 million was recorded and will be amortized over the
term of the Lease. Annual rental payments under the Lease will be approximately
$32.0 million.
<PAGE>
(7) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as
follows (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
June 25, September 26,
2000 1999
-------------- ---------------
<S> <C> <C>
Foreign currency translation adjustment $ (1,374) $ (1,297)
Minimum pension liability adjustment (2,123) (1,490)
--------- ---------
Accumulated other comprehensive
income (loss) $ (3,497) $ (2,787)
========== ==========
</TABLE>
(8) OTHER (INCOME) EXPENSE
During the thirty-nine weeks ended June 25, 2000, the Company realized a
$4.1 million gain on the sale of a warehouse facility in Owings Mills, Maryland.
This gain was partially offset by a one-time write-off of a $1.0 million
unsecured note receivable issued in connection with the Fiscal 1998 sale of the
bakery business due to the bankruptcy of the borrower.
The Company also established a restructuring reserve of $0.7 million in
conjunction with the planned elimination of the Company's centralized machine
shop operation, which will be phased out over the remainder of Fiscal 2000
including the elimination of approximately 65 positions. Approximately $0.5
million of the restructuring reserve remained at June 25, 2000, which the
Company expects to utilize through December 2000.
(9) EXTRAORDINARY LOSS
During June 2000, in conjunction with the redemption of the Company's
Senior Secured Notes and the refinancing of the U.S. Credit Facility, the
Company charged $0.5 million, or $0.3 million net of income tax benefit, to
results of operations as an extraordinary item, which amount represents the
unamortized deferred financing fees, prepaid interest and redemption fees
pertaining to such debt.
(10) CONTINGENCIES
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084,
was initially filed in state court in Georgia in April 1987 and is currently
pending in federal court. The remaining plaintiffs claimed, among other things,
that the Company wrongfully terminated the Lily-Tulip, Inc. Salary Retirement
Plan (the "Plan") in violation of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). The relief sought by plaintiffs was to have the plan
termination declared ineffective. In December 1994, the United States Court of
Appeals for the Eleventh Circuit (the "Circuit Court") ruled that the Plan was
lawfully terminated on December 31, 1986. Following that decision, the
plaintiffs sought a rehearing which was denied, and subsequently filed a
petition for a writ of certiorari with the United States Supreme Court, which
was also denied. Following remand, in March 1996, the United States District
Court for the Southern District of Georgia (the "District Court") entered a
judgment in favor of the Company. Following denial of a motion for
reconsideration, the plaintiffs, in April 1997, filed an appeal with the Circuit
Court. On May 21, 1998, the Circuit Court affirmed the judgment entered in favor
of the Company. On June 10, 1998, the plaintiffs petitioned the Circuit Court
for a rehearing of their appeal which petition was denied on July 29, 1998. In
October 1998, plaintiffs filed a Petition for Writ of Certiorari to the United
States Supreme Court, which was denied in January 1999. The Company is in the
process of paying out the termination liability and associated expenses and as
of June 25, 2000, the
<PAGE>
Company had disbursed $9.6 million in termination payments. The initial estimate
of the total termination liability and associated expenses, less payments,
exceeds assets set aside in the Plan by approximately $10.2 million, which
amount has been fully reserved by the Company.
On April 27, 1999, the plaintiffs filed a motion in the 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 to
such fees. On June 17, 1999, the District Court deferred these motions and
ordered discovery in connection therewith. Discovery has been completed and the
Company is awaiting further action by the plaintiffs. Due to the complexity
involved in connection with the claims asserted in this case, the Company cannot
determine at present with any certainty the amount of damages it would be
required to pay should the plaintiffs prevail; accordingly, there can be no
assurance that such amounts would not have a material adverse effect on the
Company's financial position or results of operations.
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. During the fourth quarter of Fiscal 1999, mediation
resulted in a settlement of this action whereby the Company agreed to pay
damages of $2.6 million. As of June 29, 2000, all payments in conjunction with
this settlement have been paid.
On July 13, 1999, the Company received a letter from the Environmental
Protection Agency ("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 ("CERCLA"), at a site in
Baltimore, Maryland. The EPA letter states that it does not constitute a final
determination by EPA concerning the liability of the Company or any other
entity. On December 20, 1999, the Company received an information request letter
from the EPA, pursuant to CERCLA, regarding a Container Recycling Superfund Site
in Kansas City, Kansas. The Company denies liability and has no reason to
believe the final outcomes will have a material effect on the Company's
financial condition or results of operations. However, no assurance can be given
about the ultimate effect on the Company, if any, given the early stage of the
investigations.
The Company is also involved in a number of legal proceedings arising in
the ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position or results of operations.
<PAGE>
(11) SUMMARIZED FINANCIAL INFORMATION FOR SWEETHEART CUP COMPANY INC.
The following tables provide summary financial information for Sweetheart
Cup Company Inc. ("Sweetheart Cup") and subsidiaries (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
June 25, 2000 September 26, 1999
------------------- --------------------
<S> <C> <C>
Current assets $303,682 $251,508
Non-current assets 188,552 394,180
Current liabilities 157,670 402,037
Other liabilities 332,378 247,868
<CAPTION>
(Unaudited)
-----------------------------------------------------------------------
For the For the For the For the
Thirteen Thirteen Thirty-nine Thirty-nine
Weeks ended weeks ended weeks ended weeks ended
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 264,605 $ 234,290 $ 696,200 $ 633,588
Gross profit 32,752 28,009 77,016 50,480
Net income (loss) 7,729 4,031 8,133 (8,935)
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Forward-looking statements in this filing, including those in the Notes to
Consolidated 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 costs, energy costs 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.
General
On March 12, 1998, SF Holdings purchased 48% of the voting stock and 100%
of the non-voting stock, or 90% of the Company's total outstanding stock from
the then existing shareholders (the "SF Holdings Investment"). The Company's
business is the successor to the businesses of Maryland Cup Corporation, which
was founded in 1911 and was a major supplier of paper and plastic disposable
foodservice and food packaging products, and Lily-Tulip, Inc. In conjunction
with the SF Holdings Investment, American Industrial Partners Capital Fund, L.P.
("AIP") assigned the Management Services Agreement, as amended, to SF Holdings
Group, Inc. ("SF Holdings") which assigned its interest to Fonda, a wholly owned
subsidiary of SF Holdings.
The Company has historically sold its products to two principal customer
groups, institutional foodservice and food packaging. Institutional foodservice
customers primarily purchase disposable hot and cold drink cups, lids, food
containers, plates, bowls, cutlery and straws. Products are sold directly and
through distributors to quick service restaurant chains, full service
restaurants, convenience stores, hospitals, airlines, theaters, school systems
and other institutional customers. Food packaging customers primarily purchase
paper and plastic containers for the dairy and food processing industries. Food
packaging customers also lease filling and packaging machines designed and
manufactured by the Company that fill and seal the Company's containers in
customers' plants. The Company manufactures and markets its products in Canada
to national accounts and distributors. During Fiscal 1999, the Company began
selling consumer foodservice products primarily through grocery stores, club
stores and convenience stores.
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 25, 2000 Compared to Thirteen Weeks Ended June 27,1999
(Unaudited)
Net sales increased $30.3 million, or 12.9%, to $264.6 million for the
thirteen weeks ended June 25, 2000 compared to $234.3 million for the thirteen
weeks ended June 27, 1999, reflecting a 7.3% increase in sales volume and a 5.6%
increase in average realized sales price. Net sales to institutional foodservice
customers increased 12.9%, reflecting a 6.7% increase in sales volume and a 6.2%
increase in average realized sales price. This increase is primarily the result
of the Company's focus on revenue growth with key institutional foodservice
customers, peak seasonal demand and customer price initiatives. Net sales to
food packaging customers increased 3.5%, reflecting a 1.4% increase in sales
volume and a 2.1% increase in average realized sales price. This growth is
primarily the result of increased seasonal demand by large food packaging
accounts and increased pricing resulting from raw material cost increases. Net
sales to consumer customers increased 119.1% as a result of the Company's focus
on expanding into the consumer market.
<PAGE>
Gross profit increased $4.7 million, or 13.9%, to $38.4 million for the
thirteen weeks ended June 25, 2000 compared to $33.7 million for the thirteen
weeks ended June 27, 1999. As a percentage of net sales, gross profit increased
to 14.5% for the thirteen weeks ended June 25, 2000 from 14.4% for the thirteen
weeks ended June 27, 1999. This improvement is attributable to a shift in sales
towards a more profitable product mix in combination with increased volume,
improved manufacturing efficiencies and improved margins through customer price
initiatives, partially offset by increased raw material costs.
Selling, general and administrative expenses decreased $2.2 million, or
13.7%, to $14.0 million for the thirteen weeks ended June 25, 2000 compared to
$16.2 million for the thirteen weeks ended June 27, 1999. The change is
principally attributable to lower spending in the areas of legal and information
technology.
Other (income) expense increased $0.2 million to income of $0.4 million for
the thirteen weeks ended June 25, 2000 compared to income of $0.2 million for
the thirteen weeks ended June 27, 1999, due to the amortization of deferred gain
in conjunction with the sale-leaseback transaction.
Operating income increased $7.1 million to operating income of $24.8
million for the thirteen weeks ended June 25, 2000 compared to an operating
income of $17.7 million for the thirteen weeks ended June 27, 1999, due to the
reasons stated above.
Interest expense, net increased $1.1 million to $11.6 million for the
thirteen weeks ended June 25, 2000 compared to $10.4 million for the thirteen
weeks ended June 27, 1999. This is due primarily to the acceleration of interest
expense in conjunction with the redemption of the Senior Secured Notes, as well
as higher interest rates, partially offset by lower outstanding balances, under
the Company's credit facilities.
Net income (loss) increased $3.3 million to a net income of $7.6 million
for the thirteen weeks ended June 25, 2000 compared to a net income of $4.3
million for the thirteen weeks ended June 27, 1999, due to the reasons stated
above.
Thirty-nine Weeks Ended June 25, 2000 Compared to Thirty-nine Weeks Ended June
27, 1999 (Unaudited)
Net sales increased $62.6 million, or 9.9%, to $696.2 million for the
thirty-nine weeks ended June 25, 2000 compared to $633.6 million for the
thirty-nine weeks ended June 27, 1999, reflecting a 6.6% increase in sales
volume and a 3.2% increase in average realized sales price. Net sales to
institutional foodservice customers increased 9.4%, reflecting a 5.9% increase
in sales volume and a 3.5% increase in average realized sales price. This
increase is primarily the result of the Company's focus on revenue growth with
key institutional foodservice customers and customer price initiatives. Net
sales to food packaging customers increased 1.4%, reflecting a 0.4% increase in
sales volume and 1.0% increase in average realized sales price. This growth is
primarily the result of increased demand by large food packaging accounts and
increased pricing resulting from raw material cost increases. Net sales to
consumer customers increased 264.1% as a result of the Company's focus on
expanding into the consumer market.
Gross profit increased $26.4 million, or 39.4%, to $93.6 million for the
thirty-nine weeks ended June 25, 2000 compared to $67.1 million for the
thirty-nine weeks ended June 27, 1999. As a percentage of net sales, gross
profit increased to 13.4% for the thirty-nine weeks ended June 25, 2000 from
10.6% for the thirty-nine weeks ended June 27, 1999. This improvement is
attributable to a shift in sales to a more profitable product mix in combination
with increased volume, improved manufacturing efficiencies and improved margins
through customer price initiatives.
Selling, general and administrative expenses increased $0.5 million, or
1.0%, to $50.0 million for the thirty-nine weeks ended June 25, 2000 compared to
$49.5 million for the thirty-nine weeks ended June 27, 1999. This is primarily
due to increased bad debt resulting from a customer's bankruptcy filing,
partially offset by lower spending in the areas of legal and information
technology.
Other (income) expense increased $1.9 million to income of $2.3 million for
the thirty-nine weeks ended June 25, 2000 compared to income of $0.4 million for
the thirty-nine weeks ended June 27, 1999, due
<PAGE>
to the sale of a warehouse facility and the amortization of deferred gain in
conjunction with the sale-leaseback transaction, partially offset by the (i) the
write-off of an unsecured note receivable issued in connection with the Fiscal
1998 sale of the bakery business, and (ii) a restructuring reserve for the
discontinuation of the centralized machine shop operation which will be phased
out during the remainder of Fiscal 2000 including the elimination of
approximately 65 positions.
Operating income increased $27.9 million to operating income of $45.9
million for the thirty-nine weeks ended June 25, 2000 compared to operating
income of $18.0 million for the thirty-nine weeks ended June 27, 1999, due to
the reasons stated above.
Interest expense, net increased $0.5 million, or 1.5%, to $32.1 million for
the thirty-nine weeks ended June 25, 2000 compared to $31.6 million for the
thirty-nine weeks ended June 27, 1999. This is due primarily to the acceleration
of interest expense in conjunction with the redemption of the Senior Secured
Notes, as well as higher interest rates, partially offset by lower outstanding
balances, under the Company's credit facilities.
Net income (loss) increased $16.1 million to a net income of $8.0 million
for the thirty-nine weeks ended June 25, 2000 compared to a net loss of $8.1
million for the thirty-nine weeks ended June 27, 1999, due to the reasons stated
above.
Liquidity and Capital Resources
Historically, the Company has relied on cash flow from operations and the
sale of assets to finance its working capital requirements and capital
expenditures. The Company expects to continue this method of funding for its
2000 capital expenditures.
Net cash provided by operating activities decreased $30.7 million to $1.6
million in the thirty-nine weeks ended June 25, 2000 compared to $32.3 million
in the thirty-nine weeks ended June 27, 1999. This is primarily due to an
increase in receivables, management's decision to build inventory and increased
inventory levels from the Sherwood Acquisition, partially offset by more
favorable income from operating activities.
Capital expenditures for the thirty-nine weeks ended June 25, 2000 were
$19.5 million compared to $26.0 million for the thirty-nine weeks ended June 27,
1999. Capital expenditures in the thirty-nine weeks ended June 25, 2000 included
$12.2 million for additional production equipment, $1.8 million spent on growth
and expansion projects, with the remaining consisting primarily of routine
capital improvements.
On May 15, 2000, Sweetheart Cup acquired Sherwood Industries, Inc.
("Sherwood"), a manufacturer of paper cups, containers and cup making equipment.
Pursuant to a certain Stock Purchase Agreement among Sweetheart Cup and the
stockholders of Sherwood, Sweetheart Cup acquired all of the issued and
outstanding capital stock (the "Sherwood Acquisition") of Sherwood and its
subsidiaries for an aggregate purchase price of $17.4 million, subject to post
closing adjustments. As part of the purchase price, Sweetheart Cup issued to the
stockholders of Sherwood promissory notes due May 2005 in an aggregate principal
amount of $5.0 million and a present value of $2.9 million. Sweetheart Cup also
assumed $9.3 million of Sherwood debt, which was paid in full on June 15, 2000.
In connection with a sale-leaseback transaction, on June 15, 2000,
Sweetheart Cup and Sweetheart Holdings Inc. sold certain production equipment
located in Owings Mills, Maryland, Chicago, Illinois and Dallas, Texas for a
fair market value of $212.3 million to several owner participants. The proceeds
from this sale were used in part to redeem the Senior Secured Notes, repay debt
in connection with the Sherwood Acquisition and repay a portion of the
outstanding balance under the revolving credit facility.
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Pursuant to a lease dated as of June 1, 2000 ("the Lease") between
Sweetheart Cup and State Street Bank and Trust Company of Connecticut, National
Association ("State Street"), Sweetheart Cup will lease such production
equipment from State Street, as owner trustee for several owner participants,
through November 9, 2010. Sweetheart Cup may renew the Lease at its option for
up to four consecutive renewal terms of two years each. Sweetheart may also
purchase such equipment for fair market value either at the conclusion of the
Lease term or November 21, 2006, at its option. The Company's obligations in
connection with the Lease are collateralized by substantially all of the
Company's property, plant and equipment owned as of June 15, 2000.
The Company is accounting for this transaction as an operating lease,
expensing the $32.0 million annualized rental payments and removing the
property, plant and equipment sold from its balance sheet. A deferred gain of
$107.0 million was realized from this sale and will be amortized over 125
months, which is the term of the Lease. The taxable gain will allow the Company
to utilize a substantial portion of its net operating loss carryforward.
On June 15, 2000, the Company's revolving credit facility (the "U.S. Credit
Facility") was amended and restated to extend the maturity of the $135 million
revolving credit facility, subject to borrowing base limitations, through June
15, 2005 and to add a term loan of $25 million that requires equal monthly
installments through June 2005. Both the term loan and revolving credit facility
have an accelerated maturity date of July 1, 2003 if the Company's Senior
Subordinated Notes due September 1, 2003 are not refinanced before June 1, 2003.
Borrowings under the revolving credit facility will now bear interest, at the
Company's election, at a rate equal to (i) LIBOR plus 2.00% or (ii) a bank's
base rate plus 0.25%, plus certain other fees. Borrowings under the term loan
will bear interest, at the Company's election, at a rate equal to (i) LIBOR plus
2.50% or (ii) a bank's base rate plus 0.50%, plus certain other fees. The credit
facility is collateralized by the Company's inventories and receivables with the
term loan portion of the credit facility further collateralized by certain
production equipment. As of June 25, 2000, $60.9 million was available under
such facility.
The Company also has a credit facility providing for a term loan of up to
Cdn $10.0 million and revolving credit of up to Cdn $10.0 million that expire on
June 15, 2001. As of June 25, 2000, Cdn $4.2 million (approximately US $2.8
million) was available under such facility. Although the Company 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.
On June 15, 2000, the Company issued a redemption notice to the holders of
its Senior Secured Notes due September 1, 2000. In connection therewith, the
Company deposited $190.0 million plus accrued interest with the U.S. Trust
Company of New York and as of August 1, 2000, substantially all of these notes
have been redeemed.
These transactions set forth above are expected to increase annual net
income by approximately $8.0 million. This increase will be comprised of (i)
decreased interest expense and (ii) increased other income, as the gain from the
asset sale is amortized over the lease term, partially offset by (iii) decreased
gross profit, as increased rent expense will exceed depreciation expense, and
(iv) increased income tax expenses.
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 decided that the Plan was lawfully terminated.
On April 27, 1999, the Plaintiffs filed a motion in the 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 to
such fees. On June 17, 1999, the District Court deferred these motions and
ordered discovery in connection therewith. The discovery process has been
completed and the Company is awaiting further action by the plaintiffs. The
Company has begun the process of paying out the termination liability and
associated expenses and as of June 25, 2000, the Company had disbursed $9.6
million in termination payments. The initial estimate of the total
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termination liability and associated expenses, less payments, exceeds assets set
aside in the Plan by approximately $10.2 million, which amount has been fully
reserved by the Company. The remaining payments are expected to be paid during
Fiscal 2000. 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.
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. During the fourth quarter of Fiscal 1999, mediation
resulted in a settlement of this action whereby the Company agreed to pay
damages of $2.6 million. As of June 29, 2000, all payments in conjunction with
the settlement have been paid.
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, payments
in conjunction with the Company's lease commitments and debt service
requirements in the next twelve months.
Net Operating Loss Carryforwards
As of September 26, 1999, the Company had approximately $214 million of net
operating loss carryforwards ("NOLs") for federal income tax purposes, which
expire at various dates through 2019.
A taxable gain was realized from the June 15, 2000 sale-leaseback
transaction, which will allow the Company to utilize a substantial portion of
its NOLs. Although the Company expects that sufficient taxable income will be
generated in the future to realize the remainder of these NOLs, there can be no
assurance that future taxable income will be generated to utilize the remaining
NOLs.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NONE
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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. During the fourth quarter of Fiscal 1999, mediation
resulted in a settlement of this action whereby the Company agreed to pay
damages of $2.6 million. As of June 29, 2000, all payments in conjunction with
the settlement have been paid.
The Company is also involved in a number of legal proceedings arising in
the ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position or results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.57 Second Amended and Restated Loan and Security Agreement dated
as of June 15, 2000 among Sweetheart Cup Company Inc.
("Sweetheart"), as Borrower, Sweetheart Holdings Inc. (the
"Company"), as Parent, Bank of America, N.A., as Agent, and
several Financial Institutions, named therein as Lenders.
10.58 Intercreditor Agreement dated as of June 15, 2000 among Bank
of America, N.A., as Agent, and State Street Bank and Trust
Company of Connecticut, National Association ("State
Street"), solely in its capacity as Owner Trustee and Lessor.
10.59 Lease Agreement dated as of June 1, 2000 between State
Street, solely in its capacity as Owner Trustee and Lessor,
and Sweetheart, as Lessee.
10.60 Lease Supplement dated as of June 1, 2000 between State
Street, solely in its capacity as Owner Trustee and Lessor,
and Sweetheart, as Lessee.
10.61 Participation Agreement dated as of June 1, 2000 among
Sweetheart, as Lessee, the Company, as Guarantor, State
Street, solely in its capacity as Owner Trustee, and several
Owner Participants.
10.62 Definitions and Rules of Usage dated as of June 1, 2000
executed in conjunction with the Participation Agreement.
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
A sale-leaseback transaction, accounted for as an operating lease,
was filed as an Item 2 disclosure on Form 8-K on June 27, 2000.
A redemption notice to the holders of the Company's Senior Secured
Notes was filed as an Item 5 disclosure on Form 8-K on June 27,
2000.
An amended and restated U.S. Credit Facility agreement was filed
as an Item 5 disclosure on Form 8-K on June 27, 2000.
<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 1, 2000 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)
