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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 Twenty-Six Weeks Ended
March 26, 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 April 17, 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 the 9 5/8 % Senior Secured Notes due
September 1, 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
<TABLE>
<CAPTION>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share data)
---------------------------------
(Unaudited)
March 26, September 26,
2000 1999
------------------ ----------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 4,271 $ 2,965
Receivables, less allowances of $2,090 and $1,905,
respectively 91,314 88,325
Inventories 155,270 129,473
Deferred income taxes 12,962 12,962
Spare parts - current 17,015 16,278
--------- ---------
Total current assets 280,832 250,003
--------- ---------
Property, plant and equipment, net 311,658 322,967
Deferred income taxes 40,531 41,055
Spare Parts 11,344 10,852
Other assets 9,400 9,763
--------- ---------
Total assets $ 653,765 $ 634,640
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 81,750 $ 66,654
Accrued payroll and related costs 42,076 45,089
Other current liabilities 34,425 39,045
Current portion of long-term debt 288,213 275,446
--------- ---------
Total current liabilities 446,464 426,234
--------- ---------
Long-term debt 120,211 118,446
Other liabilities 68,830 71,686
--------- ---------
Total liabilities 635,505 616,366
--------- ---------
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 100,149 101,090
Accumulated deficit (79,696) (80,083)
Accumulated other comprehensive income (loss) (2,247) (2,787)
--------- ---------
Total shareholders' equity 18,260 18,274
--------- ---------
Total liabilities and shareholders' equity $ 653,765 $ 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 Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
March 26, 2000 March 28, 1999 March 26, 2000 March 28, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 217,380 $ 195,389 $ 431,595 $ 399,298
Cost of sales 189,052 176,402 376,392 365,853
--------- --------- --------- ---------
Gross profit 28,328 18,987 55,203 33,445
Selling, general and administrative expenses 19,515 17,278 36,011 33,281
Other (income) expense, net (3,166) 32 (1,944) (181)
---------- --------- ---------- ----------
Operating income 11,979 1,677 21,136 345
Interest expense, net of interest income of $45,
$52, $48 and $89, respectively 10,327 10,330 20,489 21,143
--------- --------- --------- ---------
Income (loss) before income tax expense
(benefit) 1,652 (8,653) 647 (20,798)
Income tax expense (benefit) 661 (3,461) 260 (8,319)
--------- ---------- --------- ----------
Net income (loss) 991 (5,192) 387 (12,479)
--------- ---------- --------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 60 252 71 (11)
Minimum pension liability adjustment (net
of income taxes of $(163), $(268), $313 and
$1,029, respectively) (244) (402) 469 1,142
---------- ---------- --------- ---------
Other comprehensive income (loss) (184) (150) 540 1,131
---------- ---------- --------- ---------
Comprehensive income (loss) $ 807 $ (5,342) $ 927 $ (11,348)
========== =========== ========== ===========
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 Twenty- For the Twenty-
six weeks ended six weeks ended
March 26, March 28,
2000 1999
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 387 $ (12,479)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 22,706 23,878
Deferred income tax credit 260 (8,319)
Gain on sale of assets (4,094) (407)
Changes in operating assets and liabilities:
Receivables (2,989) (2,647)
Inventories (25,797) 1,963
Accounts payable 15,096 8,242
Other, net (12,013) 5,449
---------- ---------
Net cash provided by (used in) operating activities (6,444) 15,680
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (14,851) (19,242)
Proceeds from sale of property, plant and equipment 8,101 7,247
---------- ----------
Net cash provided by (used in) investing activities (6,750) (11,995)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit
facilities 14,990 (5,514)
Repayment of other (490) (448)
Decrease in cash escrow - 3,870
--------- ----------
Net cash provided by (used in) financing activities 14,500 (2,092)
--------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,306 1,593
CASH AND CASH EQUIVALENTS, beginning of period 2,965 1,367
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 4,271 $ 2,960
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 19,310 $ 20,251
========== ==========
Income taxes paid $ 12 $ 82
========== ==========
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)
March 26, September 26,
2000 1999
-------------- ---------------
<S> <C> <C>
Raw materials and supplies $ 36,600 $ 30,092
Finished products 109,709 92,193
Work in progress 8,961 7,188
--------- ----------
Total inventories $ 155,270 $ 129,473
========= ==========
</TABLE>
(3) RELATED PARTY TRANSACTIONS
During the twenty-six weeks ended March 26, 2000, the Company sold $6.6
million of cups to The Fonda Group, Inc. ("Fonda") and $0.2 million of scrap
paper to Fibre Marketing Group, LLC ("Fibre Marketing"). Accounts receivable as
of March 26, 2000 are $1.5 million due from Fonda and $0.2 million due from
Fibre Marketing.
During the twenty-six weeks ended March 26, 2000, the Company purchased
(i) $4.0 million of corrugated containers and $0.1 million of shared services
from Four M Corporation ("Four M"), (ii) $5.6 million of paper plates and $0.5
million of equipment rental and shared services from Fonda and (iii) $0.2
million of travel services from Emerald Lady, Inc. Accounts payable, as of March
26, 2000, resulting from these purchases, are $0.6 million due to Four M and
$0.8 million due to Fonda.
During the twenty-six weeks ended March 26, 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 $0.9 million. Independent appraisals
were obtained to determine the fairness of the purchase price.
During the twenty-six weeks ended March 28, 1999, the Company sold $1.2
million of cups to Fonda. Accounts receivable as of March 28, 1999 was $0.6
million due from Fonda. During the twenty-six weeks ended March 28, 1999, the
Company purchased $2.5 million of corrugated containers from Four M. Accounts
payable as of March 28, 1999 was $0.4 million due to Four M. Other purchases
from and sales to affiliates, if any, in the twenty-six weeks ended March 28,
1999 were not significant.
All of the above referenced affiliates are under the common control of
the Company's Chief Executive Officer.
<PAGE>
(4) OTHER (INCOME) EXPENSE
During the twenty-six weeks ended March 26, 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 has 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. This reserve is
captured as part of Other liabilities.
(5) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as
follows (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
March 26, September 26,
2000 1999
--------------- ----------------
<S> <C> <C>
Foreign currency translation adjustment $ (1,226) $ (1,297)
Minimum pension liability adjustment (1,021) (1,490)
------------ ------------
Accumulated other comprehensive income (loss) $ (2,247) $ (2,787)
============ ============
</TABLE>
(6) 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 has begun
the process of paying out the termination liability and as of March 26, 2000,
the Company had disbursed $8.9 million in termination payments. The initial
estimate of the total termination liability, less these payments, exceeds assets
set aside in the Plan by approximately $11.6 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
<PAGE>
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. This amount has been fully reserved by
the Company, with the first of two payments, $1.6 million, made on September 30,
1999. The second payment of $1.0 million is due July 1, 2000.
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>
(7) 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)
March 26, 2000 September 26, 1999
------------------ --------------------
<S> <C> <C>
Current assets $282,339 $251,508
Noncurrent assets 370,572 394,180
Current liabilities 424,586 402,037
Other liabilities 232,541 247,868
<CAPTION>
(Unaudited)
------------------------------------------------------------------------
For the For the For the For the
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
March 26, March 28, March 26, March 28,
2000 1999 2000 1999
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 217,380 $ 195,389 $ 431,595 $ 399,298
Gross profit 22,788 13,417 44,264 22,471
Net income (loss) 1,065 (5,454) 404 (12,966)
</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 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.
Recent Developments
On December 20, 1999, Sweetheart Cup entered into a Stock Purchase
Agreement with the stockholders (collectively, the "Sellers") of Sherwood
Industries, Inc. ("Sherwood"), a manufacturer of paper cups, containers and cup
making equipment, pursuant to which Sweetheart Cup will acquire all of the
issued and outstanding capital stock (the "Sherwood Acquisition") of Sherwood
and its subsidiaries for an aggregate purchase price of $19.0 million, subject
to adjustment for changes in working capital. On April 6, 2000 all of the
conditions to closing were satisfied. The Company expects the foregoing
transaction to be consummated during the third quarter of Fiscal 2000.
<PAGE>
Thirteen Weeks Ended March 26, 2000 Compared to Thirteen Weeks Ended
March 28, 1999 (Unaudited)
Net sales increased $22.0 million, or 11.3%, to $217.4 million for the
thirteen weeks ended March 26, 2000 compared to $195.4 million for the thirteen
weeks ended March 28, 1999, reflecting a 7.9% increase in sales volume and a
3.4% increase in average realized sales price. Net sales to institutional
foodservice customers increased 12.6%, reflecting a 8.9% increase in sales
volume and a 3.7% 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. Net sales to food packaging customers
increased 1.4%, reflecting a 0.9% increase in sales volume and a 0.5% increase
in average realized sales price. This growth is primarily the result of
increased demand by large accounts in the food packaging customer base and
increased pricing resulting from raw material cost increases.
Gross profit increased $9.3 million, or 49.2%, to $28.3 million for the
thirteen weeks ended March 26, 2000 compared to $19.0 million for the thirteen
weeks ended March 28, 1999. As a percentage of net sales, gross profit increased
to 13.0% for the thirteen weeks ended March 26, 2000 from 9.7% for the thirteen
weeks ended March 28, 1999. This improvement is attributable to a shift in sales
towards a more profitable product mix, improved manufacturing efficiencies and
improved margins through customer price initiatives.
Selling, general and administrative expenses increased $2.2 million, or
12.9%, to $19.5 million for the thirteen weeks ended March 26, 2000 compared to
$17.3 million for the thirteen weeks ended March 28, 1999. This is principally
attributable to an increase in bad debt expense resulting from a customer's
bankruptcy filing.
Other (income) expense increased $3.2 million, to income of $3.2
million for the thirteen weeks ended March 26, 2000 compared to income of $0.0
million for the thirteen weeks ended March 28, 1999, due to a gain on the sale
of a warehousing facility, which was partially offset by restructuring charges
associated with 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 $10.3 million, to operating income of $12.0
million for the thirteen weeks ended March 26, 2000 compared to an operating
income of $1.7 million for the thirteen weeks ended March 28, 1999, due to the
reasons stated above.
Interest expense, net remained flat at $10.3 million for the thirteen
weeks ended March 26, 2000 and for the thirteen weeks ended March 28, 1999.
Net income (loss) increased $6.2 million, to a net income of $1.0
million for the thirteen weeks ended March 26, 2000 compared to a $5.2 million
net loss for the thirteen weeks ended March 28, 1999, due to the reasons stated
above.
Twenty-six Weeks Ended March 26, 2000 Compared to Twenty-six Weeks Ended
March 28, 1999 (Unaudited)
Net sales increased $32.3 million, or 8.1%, to $431.6 million for the
twenty-six weeks ended March 26, 2000 compared to $399.3 million for the
twenty-six weeks ended March 28, 1999, reflecting a 5.6% increase in sales
volume and a 2.5% increase in average realized sales price. Net sales to
institutional foodservice customers increased 9.1%, reflecting a 6.3% increase
in sales volume and a 2.8% 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. Net sales to food packaging customers
increased 0.1%, reflecting a 0.3% increase in average realized sales price
offset by a 0.2% decrease in sales volume. This increase is primarily due to
increased pricing resulting from raw material cost increases.
Gross profit increased $21.8 million, or 65.1%, to $55.2 million for
the twenty-six weeks ended March 26, 2000 compared to $33.4 million for the
twenty-six weeks ended March 28, 1999. As a percentage of net sales, gross
profit increased to 12.8% for the twenty-six weeks ended March 26, 2000
<PAGE>
from 8.4% for the twenty-six weeks ended March 28, 1999. This improvement is
attributable to a shift in sales to a more profitable product mix, improved
manufacturing efficiencies and improved margins through customer price
initiatives.
Selling, general and administrative expenses increased $2.7 million, or
8.2%, to $36.0 million for the twenty-six weeks ended March 26, 2000 compared to
$33.3 million for the twenty-six weeks ended March 28, 1999. This is principally
attributable to an increase in bad debt expense resulting from a customer's
bankruptcy filing.
Other (income) expense increased $1.7 million, to income of $1.9
million for the twenty-six weeks ended March 26, 2000 compared to income of $0.2
million for the twenty-six weeks ended March 28, 1999, due to the sale of a
warehouse facility, offset by the following; (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 $20.8 million, to operating income of $21.1
million for the twenty-six weeks ended March 26, 2000 compared to operating
income of $0.3 million for the twenty-six weeks ended March 28, 1999, due to the
reasons stated above.
Interest expense, net decreased $0.6 million, or 3.1%, to $20.5 million
for the twenty-six weeks ended March 26, 2000 compared to $21.1 million for the
twenty-six weeks ended March 28, 1999. This decrease is attributable to lower
outstanding balances under the Company's U. S. Credit Facility, which was
partially offset by an increase in market interest rates.
Net income (loss) increased $12.9 million, to a net income of $0.4
million for the twenty-six weeks ended March 26, 2000 compared to a $12.5
million net loss for the twenty-six weeks ended March 28, 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 $22.1 million to a
use of $6.4 million in the twenty-six weeks ended March 26, 2000 compared to a
source of $15.7 million in the twenty-six weeks ended March 28, 1999. This is
primarily due to management's decision to build inventory which is partially
offset by more favorable income from operating activities.
Capital expenditures for the twenty-six weeks ended March 26, 2000 were
$14.9 million compared to $19.2 million for the twenty-six weeks ended March 28,
1999. Capital expenditures in the twenty-six weeks ended March 26, 2000 included
$4.6 million for new production equipment, $7.4 million spent on growth and
expansion projects, with the remaining consisting primarily of routine capital
improvements.
The Company's revolving credit facility allows up to $135.0 million in
borrowings, subject to borrowing base limitations (the "U.S. Credit Facility").
Borrowings under the U.S. Credit Facility mature on August 1, 2000. As of March
26, 2000, $35.8 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. As of April 17, 2000, $24.7 million was available under such facility,
which primarily reflects the issuance of letters of credit related to the
Sherwood Acquisition, see "Recent Developments".
<PAGE>
The Company has a credit facility which provides 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 March 26, 2000, Cdn $1.4 million (approximately US $1.0
million) was available under such facility.
The Company's Senior Secured Notes mature on September 1, 2000.
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.
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 as of
March 26, 2000, the Company had disbursed $8.9 million in termination payments.
The initial estimate of the total termination liability, less these payments,
exceeds assets set aside in the Plan by approximately $11.6 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. This amount has been fully reserved by
the Company, with the first of two payments, $1.6 million, made on September 30,
1999. The second payment of $1.0 million is due July 1, 2000.
Management believes that cash generated by operations, amounts
available under the Company's credit facilities, proceeds from expected
refinancing 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, the acquisition of Sherwood 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. 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.
Item 3. QUANTATATIVE AND QUALATATIVE DISCLOSURES ABOUT MARKET RISK
NONE
<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
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.
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:
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 26, 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: April 17, 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)
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