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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 Six Months Ended June 30, 2004
[ ] 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
SOLO CUP COMPANY
(Exact name of registrant as specified in its charter)
Delaware 47-0938234
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1700 Old Deerfield Road, Highland Park, Illinois 60035
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847/831-4800
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 [ ] No [ X]
The number of shares outstanding of the Registrant's common stock
as of August 13, 2004:
Class A Common Stock, $0.01 par value - 100 shares
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SOLO CUP COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2004 2003
------------- --------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 22,339 $ 3,269
Cash in escrow 15,000 10,003
Accounts receivable:
Trade, less allowance for doubtful accounts of $8,038 and $3,900 229,978 88,393
Other 26,750 5,917
Inventories 323,115 99,719
Spare parts 31,256 7,864
Deferred income taxes 54,776 895
Prepaid expenses and other current assets 18,735 4,951
----------- ----------
Total current assets 721,949 221,011
Property, plant and equipment, net 858,609 299,284
Spare parts 11,669 -
Goodwill and intangible assets 289,371 95,495
Restricted cash 1,905 2,139
Other assets 42,817 11,681
----------- ----------
Total assets $ 1,926,320 $ 629,610
=========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 181,769 $ 64,140
Accrued payroll and related costs 60,372 15,202
Accrued customer allowances 28,286 10,304
Accrued expenses and other current liabilities 50,765 18,545
Short-term debt 6,854 44,182
Current maturities of long-term debt 7,126 5,916
----------- ----------
Total current liabilities 335,172 158,289
Long-term debt, net of current maturities 994,624 202,878
Deferred income taxes 94,737 1,605
Pensions and post retirement benefits 76,167 12,460
Other liabilities 3,266 1,656
----------- ----------
Total liabilities 1,503,966 376,888
----------- ----------
Minority interest 1,009 2,060
----------- ----------
Shareholders' equity:
Class A Common Stock of Solo Delaware - Par value $0.01 per share;
1,000 shares authorized; 100 shares issued and outstanding
at June 30, 2004 - -
Class A Common Stock of Solo Illinois - Par value $0.01 per share;
10,367,626 shares authorized, issued and outstanding
at December 31, 2003 - 103
Class B Common Stock of Solo Illinois - Par value $0.01 per share;
57,474 shares authorized, issued and outstanding
at December 31, 2003 - 1
Additional paid-in capital 258,818 24,965
Retained earnings 159,738 225,244
Accumulated other comprehensive income 2,789 349
----------- ----------
Total shareholders' equity 421,345 250,662
----------- ----------
Total liabilities and shareholders' equity $ 1,926,320 $ 629,610
=========== ==========
See accompanying Notes to Consolidated Financial Statements.
2
SOLO CUP COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales $ 597,850 $ 240,043 $ 925,146 $ 416,800
Cost of goods sold 512,616 200,518 802,988 360,513
---------- ---------- ---------- ----------
Gross profit 85,234 39,525 122,158 56,287
Selling, general and administrative expenses 58,985 24,981 104,673 44,750
---------- ---------- ---------- ----------
Operating income 26,249 14,544 17,485 11,537
Interest expense, net of interest income of
$39, $678, $128 and $1,417 14,927 4,014 23,273 6,573
Prepayment penalties - - 30,690 -
Loss on debt extinguishment - - 916 -
Foreign currency exchange loss (gain), net 999 (1,612) (375) 1
Other (income) expense, net (84) 84 684 17
---------- ---------- ---------- ----------
Income (loss) before income taxes
and minority interest 10,407 12,058 (37,703) 4,946
Income tax provision 4,131 1,211 14,679 1,667
Minority interest 105 75 116 39
---------- ---------- ---------- ----------
Net income (loss) $ 6,171 $ 10,772 $ (52,498) $ 3,240
========== ========== ========== ==========
Comprehensive income (loss):
Net income (loss) $ 6,171 $ 10,772 $ (52,498) $ 3,240
Foreign currency translation adjustment (3,003) 1,906 (707) 2,298
Minimum pension liability adjustment (net of
income tax benefit of $(232)) (348) - (348) -
Unrealized investment gain (net of
income tax provision of $289) 416 - 416 -
Unrealized gain on cash flow hedge (net of
income tax provision $2,053) 3,079 - 3,079 -
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 6,315 $ 12,678 $ (50,058) $ 5,538
========== ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
3
SOLO CUP COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands, except share amounts)
Class A Class B
Common stock Common stock
---------------------- -----------------
Accumulated
other Total
Additional Retained comprehensive shareholders'
Shares Amount Shares Amount paid-in capital earnings income (loss) equity
------------- -------- -------- -------- --------------- ---------- ------------- -------------
Balances at December 31, 2003 10,367,626 $ 103 57,474 $ 1 $ 24,965 $ 225,244 $ 349 $ 250,662
Net loss (Unaudited) - - - - - (52,498) - (52,498)
Dividends declared (Unaudited) - - - - - (13,008) - (13,008)
Retirement of common stock -
Solo Illinois (Unaudited) (10,367,626) (103) (57,474) (1) (24,965) - - (25,069)
Issuance of common stock -
Solo Delaware (Unaudited) 100 - - - 258,818 - - 258,818
Foreign currency translation
adjustment (Unaudited) - - - - - - (707) (707)
Minimum pension liability
adjustment (Unaudited) - - - - - - (348) (348)
Unrealized investment gain
(Unaudited) - - - - - - 416 416
Unrealized gain on cash flow
hedge (Unaudited) - - - - - - 3,079 3,079
------------ ------- ------- ------- ---------- ---------- -------- ----------
Balances at June 30, 2004
(Unaudited) 100 $ - - $ - $ 258,818 $ 159,738 $ 2,789 $ 421,345
============ ======= ======= ======= ========== ========== ======== ==========
See accompanying Notes to Consolidated Financial Statements.
4
SOLO CUP COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six months ended June 30,
------------------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (52,498) $ 3,240
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization 41,117 20,131
Gain on sale of property, plant and equipment (1,210) (236)
Loss on debt extinguishment 916 -
Minority interest 116 39
Deferred income taxes 12,742 1,483
Changes in operating assets and liabilities (net of business acquisitions):
Accounts receivable (32,029) (2,190)
Inventories (5,280) (21,268)
Prepaid expenses and other current assets (7,176) (2,962)
Other assets 5,430 1,868
Accounts payable (3,500) 10,029
Accrued expenses and other current liabilities 16,181 (989)
Other liabilities 220 (425)
Other, net (942) 208
----------- ---------
Net cash (used in) provided by operating activities (25,913) 8,928
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for business acquisitions, net of cash acquired (874,734) (132)
Purchase of property, plant and equipment (17,681) (24,846)
Proceeds from sale of property, plant and equipment 2,006 2,527
Increase in cash in escrow (4,997) -
----------- ---------
Net cash used in investing activities (895,406) (22,451)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving credit facilities 24,800 4,500
Borrowings under the term notes 650,000 -
Borrowings under the 8.5% Senior Subordinated Notes 325,000 -
Borrowings under the Securitization Facility 5,000 71,300
Borrowings under the 364-day revolving credit agreement 16,500 -
Proceeds from sale of common stock 230,463 -
Repayments of the 7.08% Senior Notes (160,000) -
Repayments of the 3.67% Yen-denominated Senior Notes (44,170) -
Repayments of the interest rate swap (1,656) -
Repayments of the Securitization Facility (27,800) (63,000)
Repayments of the 364-day revolving credit agreement (29,500) -
Repayments of the term notes (1,625) -
Repayments of other debt (2,361) (3,640)
Debt issuance costs (31,497) -
Dividends paid (13,008) (5,238)
Decrease in restricted cash 234 -
----------- ---------
Net cash provided by financing activities 940,380 3,922
----------- ---------
Effect of exchange rate changes on cash 9 (88)
----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,070 (9,689)
CASH AND CASH EQUIVALENTS, beginning of period 3,269 12,627
----------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 22,339 $ 2,938
=========== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 11,028 $ 6,723
=========== =========
Income taxes paid $ 1,537 $ 230
=========== =========
See accompanying Notes to Consolidated Financial Statements.
5
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
As used in these notes, unless the context otherwise requires, the
"Company" shall refer to Solo Cup Company ("Solo Delaware"), a Delaware
corporation which is the holding company for Solo Cup Company ("Solo Illinois"),
an Illinois corporation, and its subsidiaries and SF Holdings Group, Inc. ("SF
Holdings") and its subsidiaries, including Sweetheart Cup Company Inc.
("Sweetheart"). The Company is a wholly owned subsidiary of Solo Cup Investment
Corporation ("SCI Corporation"), a Delaware corporation. SCC Holding Company LLC
("SCC Holding"), a Delaware limited liability company and Vestar Capital
Partners ("Vestar") own 67.2% and 32.7% of SCI Corporation, respectively.
Effective February 22, 2004, the predecessor company, Solo Illinois
became a wholly-owned subsidiary of a newly formed holding company, Solo
Delaware. Solo Delaware is a holding company, the material assets of which are
100% of the capital stock of Solo Illinois and 100% of the capital stock of SF
Holdings. The consolidated financial statements presented herein as of December
31, 2003 and for the three and six months ended June 30, 2003 present the
financial position and results of operations of the predecessor company, Solo
Illinois, which are the same operations as those of the Company under a
different capital structure.
On February 27, 2004, with an effective date of February 22, 2004, the
Company acquired 100.0% of the outstanding stock of SF Holdings. For the three
and six months ended June 30, 2004, the financial position and results of
operations for the Company include the accounts of SF Holdings for the periods
from March 29, 2004 to June 27, 2004 and February 22, 2004 to June 27, 2004,
respectively.
The information included in the accompanying interim consolidated
financial statements of the Company is unaudited but, in the opinion of
management, includes all adjustments (consisting only of normal recurring
adjustments and accruals) which the Company considers necessary for a fair
presentation of the operating results and cash flows for these periods. Results
for the interim periods are not necessarily indicative of results for the entire
year. These consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto of the Company for the
year ended December 31, 2003 included in its registration statement on Form S-4
filed July 13, 2004 with the Securities and Exchange Commission.
(2) INVENTORIES
The components of inventories are as follows (in thousands):
June 30, December 31,
2004 2003
------------- ----------------
Finished goods $ 246,821 $ 70,249
Work in progress 17,362 5,189
Raw materials and supplies 58,932 24,281
--------- --------
Total inventories $ 323,115 $ 99,719
========= ========
(3) INCOME TAXES
Prior to January 1, 2004, the Company was subject to taxation under the
provisions of subchapter S of the Internal Revenue Code in the United States
and, as a result, the federal and certain state income tax liabilities of the
Company were the responsibility of its shareholders. As of January 1, 2004, the
Company revoked its subchapter S status and became a subchapter C Corporation,
and became subject to United States federal and state income tax at the
corporate level. Consequently, the Company, pursuant to generally accepted
accounting principles in the United States, recorded a one-time, $29.8 million
non-cash tax expense to establish a $29.8 million net deferred income tax
liability for the future tax consequences attributable to differences between
the financial statement and income tax
6
bases of its assets and liabilities as of January 1, 2004.
From December 31, 2003 to June 30, 2004, the net deferred tax liability
of the Company increased by $39.3 million from a $0.7 million net deferred tax
liability to a $40.0 million net deferred tax liability, respectively. At June
30, 2004, the balances include the preliminary valuation of the deferred tax
assets and liabilities resulting from the SF Holdings acquisition.
The increase is comprised of the following (in thousands):
Net deferred tax liability of SF Holdings as of acquisition $ (26,509)
Effect of the Company's change from S corporation to C corporation (29,792)
Benefit of book loss through June 30, 2004 15,113
Other 1,937
----------
Increase in net deferred tax liability $ (39,251)
==========
The net deferred tax asset of SF Holdings decreased by $71.3 million
from a $44.8 million net deferred tax asset at March 31, 2004 to a $26.5 million
net deferred tax liability at June 30, 2004 due to purchase price adjustments,
comprised primarily of deferred tax liabilities totaling $67.8 million related
to step-up in basis of property, plant and equipment and intangible assets for
financial statement purposes.
The income tax expense includes the following components (in
thousands):
Three months ended Six months ended
June 30, June 30,
------------------------ --------------------------
2004 2003 2004 2003
----------- ----------- ------------- -----------
Income tax expense (benefit) at federal statutory tax rate $ 3,642 $ 4,220 $ (13,196) $ 1,731
Effect of United States S corporation status - (3,344) - (391)
Effect of change from S Corporation to C Corporation - - 29,792 -
State income taxes (net of federal benefit) 462 - (1,905) -
Foreign tax rate differentials 27 335 (12) 327
------- -------- ---------- --------
Income tax provision $ 4,131 $ 1,211 $ 14,679 $ 1,667
======= ======== ========== ========
(4) PROPERTY, PLANT AND EQUIPMENT, NET
The Company's major classes of property, plant and equipment, net are
as follows (in thousands):
June 30, December 31,
2004 2003
------------ --------------
Land $ 44,115 $ 22,350
Buildings and improvements 307,762 95,631
Machinery and equipment 882,596 528,221
Construction in progress 29,651 23,865
----------- ----------
Total property, plant and equipment 1,264,124 670,067
Less - accumulated depreciation and amortization (405,515) (370,783)
----------- ----------
Property, plant and equipment, net $ 858,609 $ 299,284
=========== ==========
Depreciation of property, plant and equipment was $22.1 million and
$36.6 million for the three months and six months ended June 30, 2004,
respectively. Capitalized interest was $0.3 million and $0.4 million for the
three months and six months ended June 30, 2004, respectively.
7
(5) ACQUISITION
On February 27, 2004 with an effective date of February 22, 2004, the
Company consummated the purchase of 100.0% of the issued and outstanding capital
stock of SF Holdings (the "SF Holdings Acquisition"). SF Holdings and its
subsidiaries are one of the largest converters and marketers of plastic and
paper disposable foodservice and food packaging products in North America. The
results of operations of SF Holdings from February 22, 2004 to June 27, 2004 are
included in the consolidated financial statements of the Company.
The aggregate purchase price was $917.1 million of which $15.0 million
is being held in an escrow account pending the final working capital adjustment.
The $15.0 million held in escrow is not included in the allocation of the cost
of the assets acquired and liabilities assumed as it represents contingent
consideration for which the contingency has not been resolved. The consideration
was applied to the purchase of all common stock and common stock equivalents of
SF Holdings, as well as the repayment of all outstanding debt of SF Holdings and
the repurchase and cancellation of its preferred stock. In addition, the Company
purchased from a lessor certain leased manufacturing equipment and other assets
that SF Holdings uses in its operations for an aggregate purchase price of
$209.1 million, plus $8.0 million of accrued rent on the leases and the payment
of documentation expenses. These amounts are included in the $917.1 million of
aggregate consideration paid.
The funding of the SF Holdings Acquisition was made through bank
financing, bonds and private investment. The SF Holdings Acquisition resulted in
goodwill of $151.2 million that is not tax deductible and $44.8 million of
acquired intangible assets with a weighted average useful life of approximately
five years. These intangible assets consisted of trademarks and trade names of
$22.2 million with an estimated useful life of five years, Trophy manufacturing
technology valued at $21.1 million with an estimated useful life of five years,
and $1.5 million of other intangible assets previously established by the
acquired company with an estimated useful life of three year.
The following are the amounts assigned to the acquired assets and
liabilities at the acquisition date (in millions):
Purchase price $ 917.1
Less cash in escrow (15.0)
---------
Adjusted purchase price $ 902.1
=========
Cash $ 30.2
Accounts receivable 130.9
Inventories 218.2
Other current assets 63.6
Property, plant and equipment, net 579.7
Intangible assets 44.8
Other long term assets 39.4
---------
Total assets 1,106.8
=========
Current liabilities $ 200.7
Other long term liabilities 155.2
---------
Total liabilities $ 355.9
=========
Excess of purchase price over assets and liabilities acquired $ 151.2
=========
The allocation of purchase price is subject to final determination
based on valuations and other determinations that are expected to be completed
during 2004. The Company is obtaining valuations of certain actuarially
determined liabilities, and finalizing estimates related to income taxes and
certain restructuring liabilities.
8
The following are the pro-forma results assuming that the acquisition
had occurred as of January 1, 2003 (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------------ ----------------------------
2004 2003 2004 2003
----------- ----------- ------------- -------------
Net sales $ 597,850 $ 585,892 $ 1,092,668 $ 1,055,994
========== ========== ============ ============
Net income (loss) $ 6,171 $ 15,973 $ (11,239) $ 6,810
========== ========== ============ ============
In a subsequent transaction, on May 20, 2004 SF Holdings and Sweetheart
purchased the remaining issued and outstanding 20.0% interest in Global Cup,
S.A. De C.V. ("Global Cup") for $2.9 million. The purchase resulted in $0.4
million of goodwill.
(6) GOODWILL AND OTHER INTANGIBLE ASSETS
The following are changes in the carrying value of goodwill by
reporting unit (in thousands):
North Asia -
America Europe Pacific Total
--------- --------- --------- -----------
Balance at December 31, 2003 $ 56,298 $ 38,362 $ 216 $ 94,876
Acquisition of SF Holdings 151,174 - - 151,174
Purchase of Global Cup
minority interest 350 - - 350
Translation adjustment - 573 (4) 569
--------- --------- --------- -----------
Balance at June 30, 2004 $207,822 $ 38,935 $ 212 $ 246,969
========= ========= ========= ===========
The following are changes in the carrying value of intangible assets by
reporting unit (in thousands):
North Asia -
America Europe Pacific Total
--------- --------- --------- -----------
Balance at December 31, 2003 $ - $ 105 $ 514 $ 619
Acquisition of SF Holdings 44,849 - - 44,849
Other additions 179 - - 179
Amortization (3,183) - (55) (3,238)
Translation adjustment - 2 (9) (7)
--------- --------- --------- -----------
Balance at June 30, 2004 $ 41,845 $ 107 $ 450 $ 42,402
========= ========= ========= ===========
9
(7) DEBT
Long-term debt, including amounts payable within one year, is as
follows (in thousands):
June 30, December 31,
2004 2003
------------ --------------
Yen-denominated short term bank borrowings $ 6,854 $ 8,382
Securitization facility - 22,800
364-day revolving credit agreement - 13,000
Senior Credit Facility 673,175 -
8.5% Senior Subordinated Notes 325,000 -
Capital lease obligations 3,575 3,966
7.08% Senior Notes - 160,000
3.67% Yen-denominated Senior Notes - 44,828
----------- ----------
Total debt 1,008,604 252,976
Less - Current maturities of long-term debt 13,980 50,098
-----------
Total long-term debt $ 994,624 $ 202,878
=========== ==========
On February 27, 2004, the Company entered into credit facilities
comprised of a $150.0 million revolving credit facility maturing in 2010 and a
$650.0 million term loan facility maturing in 2011 ("Senior Credit Facility").
The revolver is principally used for working capital purposes, and the term loan
was used to finance the acquisition and related transactions. For purposes of
calculating interest, loans under the credit facility are designated as
Eurodollar rate loans or, in certain circumstances, base rate loans. Eurodollar
rate loans bear interest at the British Bankers Association Interest Settlement
Rate for deposits in dollars plus a borrowing margin as described below.
Interest on Eurodollar rate loans is payable at the end of the applicable
interest period of one, two, three or six months, but not less frequently than
quarterly. Base rate loans bear interest at (a) the greater of (i) the rate most
recently announced by Bank of America as its "prime rate" or (ii) the Federal
Funds Rate plus 1/2 of 1% per annum, plus (b) a borrowing margin as described
below. The margin varies from 2.0% to 2.75% on Eurodollar rate loans and from
1.0% to 1.75% on base rate loans, depending on the Company's leverage ratio. As
of June 30, 2004, the weighted average annual interest rate applicable to
Eurodollar rate loans was 3.94% and the weighted average annual interest rate
applicable to base rate loans was 5.75%. During the three months ended June 30,
2004, the weighted average annual interest rate for the credit facilities was
3.98%. A commitment fee of 0.50% on the unused portion of the credit facilities
is payable on a quarterly basis. As of June 30, 2004, $122.9 million was
available under the credit facilities.
The Senior Credit Facility is secured by (i) the present and future
personal and real property and assets of the Company and its restricted
subsidiaries, as defined; (ii) a pledge of 100.0% of the stock of each of SCI
Corporation's present and future direct and indirect domestic subsidiaries and
66.0% of the stock of each first-tier foreign subsidiary, as defined; (iii) all
present and future intercompany debt of the Company and its restricted
subsidiaries; and (iv) all proceeds of the foregoing. Under the Senior Credit
Facility, the Company is required to meet certain restrictive financial
covenants, including a maximum consolidated leverage ratio, minimum consolidated
interest coverage ratio and maximum capital expenditures. The Senior Credit
Facility also contains other various covenants that limit, or restrict, among
other things, indebtedness, dividends, leases, capital expenditures and the use
of proceeds from asset sales and certain other business activities. The Company
is currently in compliance with all covenants under the Senior Credit Facility.
At June 30, 2004, the interest rate on the term loan facility was 3.95% and
4.86% on the revolving credit facility.
The Company may make optional prepayments to either credit facility in
million dollar increments with a minimum prepayment of $10.0 million. There are
mandatory quarterly prepayments for the term loan. The first prepayment of
$1.625 million was made on its scheduled due date of May 27, 2004. The quarterly
prepayments range from $1.625 million per quarter through February 27, 2006 to
$6.25 million per quarter from May 27, 2006 through February 27, 2008 to $12.5
million per quarter from May 27, 2008 through November 27, 2010 with a
10
balloon payment of $449.5 million due on February 27, 2011. The Company is
required to make a mandatory annual prepayment of the term loan facility and the
revolving credit facility in an amount equal to 50.0% of excess cash flow, as
defined when the consolidated leverage ratio, as defined, is 3.5x or greater, or
25.0% of excess cash flow when the Company's consolidated leverage ratio is less
than 3.5x. In addition, the Company is required to make a mandatory prepayment
of the term loan facility and the revolving credit facility with, among other
things: (i) 100.0% of the net cash proceeds of any property or asset sale,
subject to certain exceptions and reinvestment requirements; (ii) 100.0% of the
net cash proceeds of any extraordinary receipts, as defined, subject to certain
exceptions and reinvestment requirements; (iii) 100.0% of the net cash proceeds
of certain debt issuances, subject to certain exceptions; and (iv) 50.0% of the
net cash proceeds from the issuance of additional equity interests when the
consolidated leverage ratio is 3.5x or greater, or 25.0% of such proceeds when
the consolidated leverage ratio is less than 3.5x.
The credit facilities require the Company to fix the interest rate for
a portion of the borrowings. Accordingly, on March 10, 2004, the Company entered
into an interest rate swap agreement to hedge the cash flows associated with the
interest payments on $180.0 million of the Eurodollar rate based borrowings.
Also, on June 1, 2004, the Company entered into an interest rate cap agreement
to hedge the cash flows associated with the interest payments on $30.0 million
of the Eurodollar rate based borrowings.
On February 27, 2004, the Company issued $325.0 million of Senior
Subordinated Notes with a coupon of 8.5% (the "8.5% Senior Subordinated Notes").
The Company registered the 8.5% Senior Subordinated Notes with the Securities
and Exchange Commission on July 13, 2004. The 8.5% Senior Subordinated Notes
mature on February 15, 2014 with interest paid semi-annually every February 15
and August 15. Under the indenture governing the 8.5% Senior Subordinated Notes,
the Company must meet a minimum fixed charge coverage ratio to incur additional
indebtedness. The 8.5% Senior Subordinated Notes are non-callable for the first
five years. Starting on February 15, 2009, the Company has the option to redeem
all or a portion of the 8.5% Senior Subordinated Notes at a redemption price
equal to a percentage of the principal amount there of plus accrued interest. If
redeemed during the twelve-month period beginning on February 15, 2009 the price
is 104.25%, from February 15, 2010 the price is 102.833%, from February 15, 2011
the price is 101.417% and from February 15, 2012 and thereafter, the price is
100.0% of the principal amount. The 8.5% Senior Subordinated Notes provide that
upon the occurrence of a change of control (as defined), the holders thereof
will have an option to require the redemption of the 8.5% Senior Subordinated
Notes at a redemption price equal to 101.0% of the principal amount thereof plus
accrued interest. The 8.5% Senior Subordinated Notes contain various covenants
which prohibit, or limit, among other things, asset sales, change of control,
dividend payments, equity repurchases or redemption the incurrence of additional
indebtedness, the issuance of disqualified stock, certain transactions with
affiliates, the creation of additional liens and certain other business
activities.
On February 27, 2004, the Company extinguished $160.0 million of 7.08%
senior notes due June 30, 2011 (the "7.08% Senior Notes") and $44.2 million of
3.67% Yen-denominated senior notes due July 16, 2008 (the "3.67% Yen-denominated
Senior Notes") resulting in prepayment penalties of $26.9 million and $3.8
million, respectively. As a result of early extinguishment of debt, the Company
incurred a $0.9 million loss from the write off of deferred finance fees.
The following sets forth the payments made in connection with
termination of the debt instruments outstanding on February 27, 2004 (in
thousands):
Foreign
Prepayment Exchange
Principal Penalties Interest Loss Total
------------ -------------- ---------- ----------- -----------
Interest rate swap $ 1,656 $ - $ - $ - $ 1,656
Securitization facility 27,800 - 34 - 27,834
364-day revolving credit agreement 29,500 - - - 29,500
7.08% Senior Notes 160,000 26,920 1,713 - 188,633
3.67% Yen-denominated Senior Notes 44,170 3,770 228 679 48,847
---------- --------- -------- ------ ----------
Total $ 263,126 $ 30,690 $ 1,975 $ 679 $ 296,470
========== ========= ======== ====== ==========
11
(8) DERIVATIVES AND HEDGING ACTIVITIES
The Company historically used interest rate swap contracts to manage
exposure relating to the fair value of its outstanding fixed rate debt. During
2004, the Company entered into an interest rate swap contract to manage the
exposure related to variability in the future interest payments on a portion of
its variable rate debt. The Company does not use derivative financial
instruments for trading or other speculative purposes.
All derivative financial instruments, such as interest rate swap
agreements, are required to be recorded on the balance sheet at fair value. At
inception of the derivative contract, the Company designates the derivative
contract as a hedge of the fair value of the underlying debt or a hedge of the
future cash flows associated with interest payments on its variable rate debt.
For those contracts designated as a hedge of the fair value of the
underlying debt, the Company assesses whether or not the derivative contract
qualifies as a highly effective hedge of the underlying hedged item as
prescribed by Statement of Financial Accounting Standards ("SFAS") Nos. 133 and
138. Changes in the fair value of derivative contracts are recorded in earnings.
To the extent that a derivative contract is effective as a hedge of an exposure
to future changes in fair value, the change in the derivative contract's fair
value will be offset in the Consolidated Statements of Operations and
Comprehensive Income (Loss) by the change in the fair value of the item being
hedged.
If the derivative is designated as a cash flow hedge, the effective
portion of changes in the fair value of the derivative are recorded in
comprehensive income (loss) and are recognized in operations when the hedged
item affects earnings. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in earnings.
Derivative financial instruments involve elements of credit risk not
recognized in the financial statements. The credit risk relates to the risk of
nonperformance by a counterparty to one of the Company's derivative
transactions. The Company believes that there is no significant credit risk
associated with the potential failure of the counterparty to perform under the
terms of its derivative financial instrument.
To limit the variability of a portion of the interest payments under
the credit facilities, on March 10, 2004 the Company entered into
receive-variable, pay-fixed interest rate swaps with a total notional amount of
$180.0 million. Under these interest rate swaps, the Company receives variable
interest rate payments and makes fixed interest rate payments; thereby fixing
the rate on a portion of the outstanding debt. The variable rate of interest
received is the Eurodollar rate. The fixed rate of interest paid is 2.375% to
2.376%. The swap agreements extend through March 31, 2007. At June 30, 2004, the
fair value of these swap agreements was a $5.1 million asset.
Also, on June 1, 2004 the Company entered into an interest rate cap
agreement with a total notional amount of $30.0 million. Under this interest
rate cap agreement, the Company receives variable interest rate payments when
the three month Eurodollar rises above 4.0% before January 1, 2005. This
interest rate cap agreement extends through March 31, 2005. At June 30, 2004,
the fair value of the interest rate cap was $1,000.
(9) PENSIONS
In connection with the SF Holdings Acquisition, the Company assumed the
obligations of certain domestic employee benefit plans. The related liabilities
recorded in the initial purchase price allocation were $66.5 million, of which
$56.5 million is long-term and $10.0 million is short-term, included within
accrued payroll and related costs on the consolidated balance sheet.
12
The following are components of net periodic benefit costs (in
thousands):
Pension Benefits Other Benefits
---------------------- ----------------------
Three months ended June 30,
-----------------------------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Service costs $ 192 $ - $ 317 $ -
Interest costs 1,239 - 785 -
Expected return on plan assets (1,396) - - -
--------- --------- --------- ---------
Net periodic benefit costs $ 35 $ - $ 1,102 $ -
========== ========= ========= =========
-
Pension Benefits Other Benefits
---------------------- ----------------------
Six months ended June 30,
-----------------------------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Service costs $ 255 $ - $ 423 $ -
Interest costs 1,652 - 1,046 -
Expected return on plan assets (1,860) - - -
--------- --------- --------- ---------
Net periodic benefit costs $ 47 $ - $ 1,469 $ -
========= ========= ========= =========
As of June 30, 2004, $0.8 million of contributions had been made to the
Company's pension plans. The Company presently anticipates contributing an
additional $2.1 million to fund its pension plans in 2004 for a total of $2.9
million.
(10) EQUITY TRANSACTIONS
During the six months ended June 30, 2004, the Company received net
proceeds of $230,463 from the issuance of 100 shares of Class A common stock to
SCI Corporation. SCI Corporation is a holding company that owns 100% of the
outstanding stock of the Company. SCI Corporation has no operations and no cash
flows, other than those provided by its investors, or resulting from equity
transactions with its subsidiaries, which include the Company and its investors.
In order to fund the proceeds for this purchase of stock in the Company, SCI
Corporation issued $240.9 million of convertible preferred stock to a
third-party investor. The convertible preferred stock pays cash dividends at a
rate of 10.0% per annum on an amount equal to the sum of the original purchase
price of the convertible preferred stock plus all accrued and unpaid dividends.
Dividends will accumulate to the extent not paid, whether or not earned or
declared. SCI Corporation is further required to redeem the convertible
preferred stock for an amount in cash equal to its original purchase price plus
all accrued and unpaid dividends on the eleventh anniversary of its issuance,
and is subject to other accelerated redemption clauses. The Company provides no
guarantees with respect to these obligations of SCI Corporation, and the
recourse of the holders of the preferred stock is limited to claims against the
common stockholders of SCI Corporation.
(11) STOCK-BASED COMPENSATION
SCI Corporation, the Company's parent, has a management investment and
incentive compensation plan for certain key employees of the Company. Under this
plan, SCI Corporation has reserved 1.4 million shares of common stock, and 5,000
shares of convertible participating preferred stock for issuance. As of June 30,
2004, SCI Corporation issued 3,283 Convertible Preferred Units ("CPU's) to
certain Company employees in settlement of certain deferred compensation
liabilities. The fair value of the CPU's granted by SCI Corporation was linked
to the fair market value of one share of SCI Corporation convertible
participating preferred stock. The fair market value of a share of common stock
as of June 30, 2004 was $47.32 per share, based on a conversion rate of 21.13
shares of common for each convertible participating preferred share. CPU's do
not have voting rights and are in certain circumstances convertible to common
stock or convertible preferred participating stock of SCI Corporation. The
issuance of CPU's by SCI Corporation in settlement of deferred compensation
liabilities of the Company totaling $3.3 million were recorded as additional
paid in capital. As of June 30, 2004, SCI Corporation granted 1,036,624 options
to purchase shares of SCI Corporation common stock at a price equal to the fair
market value at the date of grant. Included in this grant were 414,646 options
that are conditional upon the Company achieving certain defined performance
targets for EBITDA and debt reduction.
13
The Company accounts for these stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the measurement date, between the estimated fair value of
the Company's stock and the exercise price of options to purchase that stock.
The compensation expense is amortized on a straight-line basis over the vesting
period of the options. For performance-based options, compensation expense is
recognized periodically based on changes in the fair value of the stock relative
to the exercise price of the option, the ratable vesting schedule, and
management's estimate regarding the Company's ability to meet the performance
criteria. For CPU's, compensation expense is recognized periodically based on
changes in the fair value of the CPU relative to the grant-date fair value of
the CPU. To date, no compensation expense has been recorded related to
stock-based compensation agreements with employees.
(12) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as
follows (in thousands):
June 30, December 31,
2004 2003
-------------- --------------
Foreign currency translation adjustment $ 2,701 $ 3,408
Minimum pension liability adjustment (3,407) (3,059)
Unrealized investment gain 416 -
Unrealized gain on cash flow hedge 3,079 -
--------- --------
Accumulated other comprehensive income $ 2,789 $ 349
========= ========
(13) RELATED PARTY TRANSACTIONS
Robert L. Hulseman, who is John F. Hulseman's brother and the husband
of Sheila M. Hulseman, is the Chairman and Chief Executive Officer of the
Company, received salary and benefits of $552,367 for the six months ended June
30, 2004 and June 30, 2003. John F. Hulseman, who is Robert L. Hulseman's
brother and the husband of Georgia S. Hulseman, is the Vice Chairman and
Secretary of the Company, received salary and benefits of $552,367 for the six
months ended June 30, 2004 and June 30, 2003. Robert L. and John F. Hulseman
each hold 50.0% of the voting membership interests of SCC Holding, which owns
67.2% of the voting stock of the SCI Corporation. In addition, Robert L., Sheila
M., John F., Georgia S. Hulseman and Ronald L. Whaley, the Company's President
and Chief Operating Officer, are directors of the Company.
In the six months ended June 30, 2004, the Company and SCI Corporation
entered into a management agreement with SCC Holding providing for, among other
things, the payment by SCI Corporation of an annual advisory fee of $2.5
million. In addition, SCC Holding and Vestar entered into a stockholders'
agreement relating to their ownership of voting stock of SCI Corporation. Robert
L. Hulseman and John F. Hulseman, as a result of their ownership of voting and
non-voting membership interests in SCC Holding, have economic interests of
0.2758% and 0.8512%, respectively, in SCC Holding. Ten children of Robert L. and
Sheila M. Hulseman each have economic interests in SCC Holding, either directly
or as beneficiaries of trusts, of 4.9765%; and six children of John F. and
Georgia S. Hulseman each have economic interests in SCC Holding, either directly
or as beneficiaries of trusts, of 8.1859% (in the case of two of the children),
8.1841% (in the case of three of the children) and 8.1849% (in the case of the
remaining child).
In the six months ended June 30, 2004, SCI Corporation paid to Vestar a
one-time $4.0 million advisory fee and reimbursed specified out of pocket
expenses of Vestar. SCI Corporation also entered into a management agreement
with Vestar pursuant to which SCI Corporation will pay Vestar an $800,000 annual
advisory fee, plus reimbursement of its expenses. Vestar also is party to a
registration rights agreement with SCI Corporation and SCC Holding. In addition,
Vestar and SCC Holding entered into a stockholders' agreement relating to, among
other things, their ownership of voting stock of SCI Corporation. Vestar owns
convertible preferred stock representing 32.7% of the voting stock of SCI
Corporation. Daniel S. O'Connell and Norman W. Alpert are directors the Company
and are both employees and equity owners of Vestar.
14
The Company paid dividends of $13.0 million and $5.2 million to
shareholders for the six months ended June 30, 2004 and June 30, 2003,
respectively.
(14) LEASES
The Company leases certain transportation vehicles, warehouse and
office facilities and machinery and equipment under both cancelable and
non-cancelable operating leases, most of which expire within ten years and may
be renewed by the Company. The full amount of lease rental payments is charged
to expense using the straight-line method over the term of the lease. Future
minimum rental commitments under non-cancelable operating leases in effect at
June 30, 2004 are as follows (in thousands):
Remainder of 2004 $ 15,331
2005 25,099
2006 22,018
2007 19,014
2008 16,592
2009 15,453
Thereafter 149,362
----------
Total $ 262,869
==========
(15) SEGMENTS
The Company manages and evaluates its operations in three reportable
segments: North America, Europe and Asia-Pacific. The operating segments are
managed separately based on the products and requirements of the different
markets. North America includes all U.S. entities, Canada, Mexico, Corporate and
Puerto Rico; Europe includes all U.K. entities and Denmark; and Asia-Pacific
includes all Japanese entities and Australia; Other includes Panama.
The accounting policies of the operating segments are the same as those
described in the notes to consolidated financial statements in the Company's
registration statement on Form S-4 filed July 13, 2004 with the Securities and
Exchange Commission listed in the summary of significant accounting policies.
Interest expense, interest income and income taxes are not reported on an
operating segment basis because they are not considered in the performance
evaluation by the Company's chief operating decision-maker. Segment operating
results are measured based on operating income (loss). Intersegment net sales
are accounted for on an arm's length pricing basis.
15
Three months ended North Asia- Total Elimin-
June 30, 2004 America Europe Pacific Other Segments ations Total
- ----------------------------- --------- -------- --------- ------- ---------- ---------- -----------
(in thousands)
Net sales from external
customers $ 554,214 $ 18,868 $ 28,039 $ 2,815 $ 603,936 $ (6,086) $ 597,850
Intersegment net sales 5,578 - - 508 6,086 (6,086) -
Operating income 23,280 1,592 1,170 185 26,227 22 26,249
Six months ended
June 30, 2004
- -----------------------------
Net sales from external
customers $ 842,558 $ 35,948 $ 51,297 $ 5,842 $ 935,645 $ (10,499) $ 925,146
Intersegment net sales 9,631 - - 868 10,499 (10,499) -
Operating income 12,246 2,974 1,830 413 17,463 22 17,485
Depreciation and amortization 36,185 1,830 2,729 373 41,117 - 41,117
Expenditures for long-lived
assets 15,496 255 1,793 137 17,681 - 17,681
At June 30, 2004
- -----------------------------
Property, plant and $ 794,254 $ 24,253 $ 37,480 $ 2,622 $ 858,609 $ - $ 858,609
equipment, net
Total assets 1,872,343 89,815 85,802 11,668 2,059,628 (133,308) 1,926,320
Three months ended
June 30, 2003
- -----------------------------
Net sales from external
customers $ 201,587 $ 16,070 $ 24,757 $ 2,525 $ 244,939 $ (4,896) $ 240,043
Intersegment net sales 4,535 - - 361 4,896 (4,896) -
Operating income 11,258 1,774 1,353 159 14,544 - 14,544
Six months ended
June 30, 2003
- -----------------------------
Net sales from external
customers $ 345,118 $ 29,708 $ 45,007 $ 5,232 $ 425,065 $ (8,265) $ 416,800
Intersegment net sales 7,679 - - 586 8,265 (8,265) -
Operating income 6,732 2,740 1,896 177 11,545 (8) 11,537
Depreciation and amortization 15,204 1,604 2,925 398 20,131 - 20,131
Expenditures for long-lived
assets 21,218 1,245 2,281 102 24,846 - 24,846
Three months Six months
ended ended
June 30, 2004 June 30, 2004
--------------- ---------------
(in thousands)
Revenues:
Total segments and other net sales $ 603,936 $ 935,645
Eliminations of intersegment net sales (6,086) (10,499)
---------- ----------
Total consolidated net sales $ 597,850 $ 925,146
========== ==========
Operating income (loss):
Total segment operating income $ 26,249 $ 17,485
Interest expense, net of interest income of $39 and $128 14,927 23,273
Prepayment penalties - 30,690
Loss on debt extinguishment - 916
Foreign currency exchange loss (gain), net 999 (375)
Other (income) expense, net (84) 684
---------- ----------
Total consolidated income (loss) before income taxes,
and minority interest $ 10,407 $ (37,703)
========== ==========
16
At June 30, 2004
------------------
(in thousands)
Assets:
Total segments $ 2,059,628
Eliminations of intersegment receivables (133,308)
------------
Total consolidated assets $ 1,926,320
============
(16) GUARANTOR NOTE
On February 27, 2004, with an effective date of February 22, 2004, the
Company acquired SF Holdings. The Company partially funded this acquisition
through the issuance of the 8.5% Senior Subordinated Notes. The 8.5% Senior
Subordinated Notes are guaranteed, jointly and severally, by all of the domestic
and European subsidiaries of the Company. The consolidated guarantors include:
Solo Cup Company, Solo Management Company, P.R. SOLO CUP, INC., SOLO TEXAS, LLC,
SF Holdings, Inc., Sweetheart Cup Company, Inc., Lily Canada Holdings
Corporation, EMERALD LADY INC., Solo Cup (UK) Limited, Insulpak Holdings Limited
and Solo Cup Europe Limited. The following financial information presents the
consolidated guarantors and non-guarantors of the 8.5% Senior Subordinated
Notes, in accordance with Rule 3-10 of Regulation S-K (in thousands):
17
Consolidated Balance Sheet
June 30, 2004
Non-
Guarantors Guarantors Eliminations Consolidated
------------ ------------ -------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 9,853 $ 12,486 $ - $ 22,339
Cash in escrow 15,000 - - 15,000
Accounts receivable:
Trade 194,101 44,788 (8,911) 229,978
Other 24,826 1,924 - 26,750
Inventories 302,908 20,462 (255) 323,115
Deferred income taxes 54,043 733 - 54,776
Prepaid expenses and other current assets 42,568 7,423 - 49,991
------------ ---------- ---------- ------------
Total current assets 643,299 87,816 (9,166) 721,949
Property, plant and equipment, net 794,060 64,549 - 858,609
Goodwill and intangible assets 285,565 3,806 - 289,371
Restricted cash 1,905 - - 1,905
Other assets 103,564 5,306 (54,384) 54,486
------------ ---------- ---------- ------------
Total assets $ 1,828,393 $ 161,477 $ (63,550) $ 1,926,320
============ ========== ========== ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 134,361 $ 56,330 $ (8,922) $ 181,769
Accrued expenses and other current liabilities 125,164 14,249 10 139,423
Short-term debt - 6,854 - 6,854
Current maturities of long-term debt 6,500 626 - 7,126
------------ ---------- ---------- ------------
Total current liabilities 266,025 78,059 (8,912) 335,172
Long-term debt, net of current maturities 978,163 16,461 - 994,624
Deferred income taxes 94,014 723 - 94,737
Other liabilities 72,913 34,791 (28,271) 79,433
------------ ---------- ---------- ------------
Total liabilities 1,411,115 130,034 (37,183) 1,503,966
------------ ---------- ---------- ------------
Minority interest - 1,009 - 1,009
------------ ---------- ---------- ------------
Shareholders' equity:
Class A common stock - 2,114 (2,114) -
Additional paid-in capital 258,818 16,630 (16,630) 258,818
Retained earnings 154,920 12,441 (7,623) 159,738
Accumulated other comprehensive income (loss) 3,540 (751) - 2,789
------------ ---------- ---------- ------------
Total shareholders' equity 417,278 30,434 (26,367) 421,345
------------ ---------- ---------- ------------
Total liabilities and shareholders' equity $ 1,828,393 $ 161,477 $ (63,550) $ 1,926,320
============ ========== ========== ============
18
Consolidated Balance Sheet
December 31, 2003
Non-
Guarantors Guarantors Eliminations Consolidated
------------ ------------ -------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 1,987 $ 1,282 $ - $ 3,269
Cash in escrow 10,003 - - 10,003
Accounts receivable:
Trade 53,253 35,140 - 88,393
Other 13,135 3,369 (10,587) 5,917
Inventories 90,509 9,279 (69) 99,719
Deferred income taxes - 895 - 895
Prepaid expenses and other current assets 10,341 2,474 - 12,815
------------ ---------- ---------- ------------
Total current assets 179,228 52,439 (10,656) 221,011
Property, plant and equipment, net 257,013 42,271 - 299,284
Goodwill and intangible assets 94,765 730 - 95,495
Restricted cash 2,139 - - 2,139
Other assets 50,097 3,063 (41,479) 11,681
------------ ---------- ---------- ------------
Total assets $ 583,242 $ 98,503 $ (52,135) $ 629,610
============ ========== ========== ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 46,453 $ 28,277 $ (10,590) $ 64,140
Accrued expenses and other current liabilities 37,373 6,678 - 44,051
Short-term debt 35,800 8,382 - 44,182
Current maturities of long-term debt 5,274 642 - 5,916
------------ ---------- ---------- ------------
Total current liabilities 124,900 43,979 (10,590) 158,289
Long-term debt, net of current maturities 199,554 3,324 - 202,878
Deferred income taxes 2,396 (791) - 1,605
Other liabilities 10,153 22,918 (18,955) 14,116
------------ ---------- ---------- ------------
Total liabilities 337,003 69,430 (29,545) 376,888
------------ ---------- ---------- ------------
Minority interest - 2,060 - 2,060
------------ ---------- ---------- ------------
Shareholders' equity:
Class A common stock 103 843 (843) 103
Class B common stock 1 - - 1
Additional paid-in capital 24,965 14,088 (14,088) 24,965
Retained earnings 222,708 10,195 (7,659) 225,244
Accumulated other comprehensive income (loss) (1,538) 1,887 - 349
------------ ---------- ---------- ------------
Total shareholders' equity 246,239 27,013 (22,590) 250,662
------------ ---------- ---------- ------------
Total liabilities and shareholders' equity $ 583,242 $ 98,503 $ (52,135) $ 629,610
============ ========== ========== ============
19
Consolidated Statement of Operations
Three Months Ended June 30, 2004
Non-
Guarantors Guarantors Eliminations Consolidated
------------ ------------ -------------- --------------
Net sales $ 547,363 $ 59,432 $ (8,945) $ 597,850
Cost of goods sold 471,994 49,562 (8,940) 512,616
---------- --------- ---------- ----------
Gross profit 75,369 9,870 (5) 85,234
Selling, general and administrative expenses 53,780 5,299 (94) 58,985
---------- --------- ---------- ----------
Operating income 21,589 4,571 89 26,249
Interest expense, net 14,201 726 - 14,927
Foreign currency exchange loss, net 598 401 - 999
Other expense (income), net 5 (89) - (84)
---------- --------- ---------- ----------
Income before income tax and minority interest 6,785 3,533 89 10,407
Income tax provision 2,358 1,797 (24) 4,131
Minority interest - 105 - 105
---------- --------- ---------- ----------
Net income $ 4,427 $ 1,631 $ 113 $ 6,171
========== ========= ========== ==========
Consolidated Statement of Operations
Three Months ended June 30, 2003
Non-
Guarantors Guarantors Eliminations Consolidated
------------ ------------ -------------- --------------
Net sales $ 213,034 $ 30,057 $ (3,048) $ 240,043
Cost of goods sold 178,344 25,222 (3,048) 200,518
---------- --------- ---------- ----------
Gross profit 34,690 4,835 - 39,525
Selling, general and administrative expenses 21,678 3,303 - 24,981
---------- --------- ---------- ----------
Operating income 13,012 1,532 - 14,544
Interest expense, net 3,776 238 - 4,014
Foreign currency exchange gain, net (1,612) - - (1,612)
Other expense, net 95 32 (43) 84
---------- --------- ---------- ----------
Income before income tax and minority interest 10,753 1,262 43 12,058
Income tax provision 591 620 - 1,211
Minority interest - 75 - 75
---------- --------- ---------- ----------
Net income $ 10,162 $ 567 $ 43 $ 10,772
========== ========= ========== ==========
20
Consolidated Statement of Operations
Six Months Ended June 30, 2004
Non-
Guarantors Guarantors Eliminations Consolidated
------------ ------------ -------------- --------------
Net sales $ 841,719 $ 97,048 $ (13,621) $ 925,146
Cost of goods sold 735,320 81,177 (13,509) 802,988
---------- --------- ---------- ----------
Gross profit 106,399 15,871 (112) 122,158
Selling, general and administrative expenses 95,623 9,174 (124) 104,673
---------- --------- ---------- ----------
Operating income 10,776 6,697 12 17,485
Interest expense, net 22,248 1,025 - 23,273
Prepayment penalties 30,690 - - 30,690
Foreign currency exchange (gain) loss, net (444) 69 - (375)
Other expense, net 965 635 - 1,600
---------- --------- ---------- ----------
Income (loss) before income tax and minority interest (42,683) 4,968 12 (37,703)
Income tax provision 12,098 2,605 (24) 14,679
Minority interest - 116 - 116
---------- --------- ---------- ----------
Net income (loss) $ (54,781) $ 2,247 $ 36 $ (52,498)
========== ========= ========== ==========
Consolidated Statement of Operations
Six Months ended June 30, 2003
Non-
Guarantors Guarantors Eliminations Consolidated
------------ ------------ -------------- --------------
Net sales $ 366,432 $ 55,333 $ (4,965) $ 416,800
Cost of goods sold 318,905 46,573 (4,965) 360,513
---------- --------- ---------- ----------
Gross profit 47,527 8,760 - 56,287
Selling, general and administrative expenses 38,605 6,145 - 44,750
---------- --------- ---------- ----------
Operating income 8,922 2,615 - 11,537
Interest expense, net 6,119 454 - 6,573
Foreign currency exchange loss, net 1 - - 1
Other (income) expense, net (251) 134 134 17
---------- --------- ---------- ----------
Income before income tax and minority interest 3,053 2,027 (134) 4,946
Income tax provision 873 794 - 1,667
Minority interest - 39 - 39
---------- --------- ---------- ----------
Net income $ 2,180 $ 1,194 $ (134) $ 3,240
========== ========= ========== ==========
21
Consolidated Statement of Cash Flows
Six months ended June 30, 2004
----------------------------------------------------------
Non-
Guarantors Guarantors Eliminations Consolidated
------------ ------------ -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash (used in) provided by operating activities $ (41,022) $ 15,109 $ - $ (25,913)
---------- --------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for business acquisition, net of cash acquired (874,734) - - (874,734)
Purchase of property, plant and equipment (14,648) (3,033) - (17,681)
Proceeds from sale of property, plant and equipment 1,741 265 - 2,006
Increase in cash in escrow (4,997) - - (4,997)
---------- --------- ---------- ----------
Net cash used in investing activities (892,638) (2,768) - (895,406)
---------- --------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving credit facilities 24,263 537 - 24,800
Borrowings under the term notes 650,000 - - 650,000
Borrowings under the 8.5% Senior Subordinated Notes 325,000 - - 325,000
Borrowings under the Securitization Facility 5,000 - - 5,000
Borrowings under the 364-day revolving credit agreement 16,500 - - 16,500
Proceeds from sale of common stock 230,463 - - 230,463
Repayments of the 7.08% Senior Notes (160,000) - - (160,000)
Repayments of the 3.67% Yen-denominated Senior Notes (44,170) - - (44,170)
Repayments of interest rate swap (1,656) - - (1,656)
Repayments of the Securitization Facility (27,800) - - (27,800)
Repayments of the 364-day revolving credit agreement (29,500) - - (29,500)
Repayments of the term notes (1,625) - - (1,625)
Repayments of other debt (657) (1,704) - (2,361)
Debt issuance costs (31,497) - - (31,497)
Dividends paid (13,008) - - (13,008)
Decrease in restricted cash 234 - - 234
---------- --------- ---------- ----------
Net cash provided by (used in) financing activities 941,547 (1,167) - 940,380
---------- --------- ---------- ----------
Effect of exchange rate changes on cash (21) 30 - 9
---------- --------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,866 11,204 - 19,070
Cash and cash equivalents, beginning of period 1,987 1,282 - 3,269
---------- --------- ---------- ----------
Cash and cash equivalents, end of period $ 9,853 $ 12,486 $ - $ 22,339
========== ========= ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 10,980 $ 48 $ - $ 11,028
========== ========= ========== ==========
Income taxes paid $ 1,278 $ 259 $ - $ 1,537
========== ========= ========== ==========
22
Consolidated Statement of Cash Flows
Six months ended June 30, 2003
----------------------------------------------------------
Non-
Guarantors Guarantors Eliminations Consolidated
------------ ------------ -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 5,671 $ 3,257 $ - $ 8,928
---------- --------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for business acquisition, net of cash acquired (132) - - (132)
Purchase of property, plant and equipment (22,463) (2,383) - (24,846)
Proceeds from sale of property, plant and equipment 564 1,963 - 2,527
---------- --------- ---------- ----------
Net cash used in investing activities (22,031) (420) - (22,451)
---------- --------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolver credit facilities 4,500 - - 4,500
Borrowings under the Securitization Facility 71,300 - - 71,300
Repayments of the Securitization Facility (63,000) - - (63,000)
Repayments of other debt (75) (3,565) - (3,640)
Dividends paid (5,238) - - (5,238)
---------- --------- ---------- ----------
Net cash provided by (used in) financing activities 7,487 (3,565) - 3,922
---------- --------- ---------- ----------
Effect of exchange rate changes on cash (80) (8) - (88)
---------- --------- ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,953) (736) - (9,689)
Cash and cash equivalents, beginning of period 10,769 1,858 - 12,627
---------- --------- ---------- ----------
Cash and cash equivalents, end of period $ 1,816 $ 1,122 $ - $ 2,938
========== ========= ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 6,653 $ 70 $ - $ 6,723
========== ========= ========== ==========
Income taxes paid $ 84 $ 146 $ - $ 230
========== ========= ========== ==========
(17) SUBSEQUENT EVENTS
On July 6, 2004, the Company consummated the purchase of certain assets
and liabilities of Erving Paper Products, Inc. ("Erving") located in Green Bay,
Wisconsin. Erving specializes in and provides foodservice distributors with high
quality paper products which include: placemats, banquet rolls, table covers,
white and color napkins, seasonal designs and specialty prints. The aggregate
purchase price was $2.6 million and was paid in cash.
On July 19, 2004, the Company announced the elimination of thirty-three
sales people in association with the integration of Sweetheart. These
individuals will be terminated by September 30, 2004.
On July 27, 2004, the Company announced the reorganization of its
administrative offices, including the closure of its Urbana, Illinois
administrative office and the transfer of various functions between the
Company's Owings Mills, Maryland and Highland Park, Illinois facilities. The
Company expects this reorganization to be substantially completed during 2005.
In connection with the Company's closure of its manufacturing and
warehouse facilities in Kensington, Connecticut, the Company sold certain assets
of its Worthington Tool and Sherwood Tool businesses. On June 23, 2004, the
Company consummated the sale of certain assets of its Worthington tool business
to Lanco Manufacturing Inc. for an aggregate purchase price of $60,000, of which
$40,000 was paid in cash and the remainder is payable by promissory note in
twelve equal monthly installments. On July 12, 2004, the Company consummated the
sale of certain assets of its Sherwood Tool business to Paper Manufacturing
Corporation for an
23
aggregate purchase price of $2.3 million which was paid in cash. On July 30,
2004, the Company sold the remaining assets of Sherwood Tool to Thomas
Industries Inc. for an aggregate purchase price of $0.3 million.
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.
General
On February 27, 2004, with an effective date of February 22, 2004, the
Company completed the SF Holdings Acquisition. In connection with the
acquisition, the Company became the parent company of Solo Illinois and SF
Holdings. The Company is a holding company, the material assets of which are
100% of the capital stock of Solo Illinois and 100% of the capital stock of SF
Holdings.
The Company is a leading global producer and marketer of disposable
foodservice products and has served the industry for over 60 years. The Company
manufactures one of the broadest product lines of cups, lids, food containers,
plates, bowls, cutlery, napkins and tablecovers in the industry, with products
available in plastic, paper and foam. The Company is recognized for product
innovation and customer service, and its products are known for their quality,
reliability and consistency. The Company's products are marketed primarily under
the Solo and Sweetheart brands, as well as Jack Frost, Lily, Trophy, Jazz,
Hoffmaster, Creative Expressions and All Occasions. The Company believes it is
the leading supplier of branded disposable cups and plastic plates and bowls to
consumer customers in the United States. In addition to its branded products,
the Company provides a majority of its product lines to its customers under
private label. The Company currently operates manufacturing facilities and
warehouse distribution centers in North America, Japan and the United Kingdom,
and the Company sells its products worldwide.
The Company serves two primary customer groups:
o Foodservice: The Company's foodservice customers include (1)
broadline distributors, such as Sysco Corporation and Bunzl
Distribution USA, Inc., (2) quick service restaurants, or QSRs, such
as McDonald's Corporation, Wendy's International, Inc. and Burger King
Corporation, (3) national accounts, such as Starbucks Corporation and
7-Eleven, Inc., and (4) dairy and food processors, such as Nissin Food
Products Company Ltd. and Blue Bell Creameries Inc. The Company
believes it has developed strong relationships with leading
foodservice customers due to its emphasis on product innovation and
customer service and the fact that it has one of the broadest product
offerings in the industry. The Company sells its products to
foodservice customers through its regionally-organized, in-house
direct sales force and through national account representatives.
o Consumer: The Company's consumer customers include (1) grocery
stores, such as Publix Supermarkets Inc., The Kroger Co. and
Albertson's, Inc., (2) mass merchandisers, such as Wal-Mart Stores,
Inc. and Target Corporation, (3) warehouse clubs, such as Costco
Wholesale Corporation and BJ's Wholesale Club, and (4) other retail
outlets, such as drug stores, party stores and dollar stores. The
Company believes it is the leading supplier of branded disposable cups
and plastic plates and bowls to consumer customers in the United
States, which it sells under the Solo and Jack Frost brand names. In
addition, The Company sells paper and party goods under the brand
names Creative Expressions and All Occasions. The Company's sales and
marketing strategy for consumer customers is designed around
supporting the Company's strong brand names, as well as selling
private label products. The Company sells its products to consumer
customers through both regional broker networks and our in-house
direct sales force.
24
Seasonality has a limited impact on the Company's business. In the
past, the Company experienced seasonality as more of its products are sold in
the warmer months with the majority of its net cash flows from operations
realized during the last six months of the fiscal year. Sales for such periods
reflect the high seasonal demands of the summer months when outdoor and
away-from-home consumption increases. However, with the increase in popularity
of hot drinks and the introduction of more indoor sporting events, this
seasonality has been decreasing. In the event that the Company's cash flows from
operations are insufficient to provide working capital necessary to fund its
requirements, the Company will need to borrow under its credit facility or seek
other sources of capital. The Company believes that funds available under such
credit facility, together with cash generated from operations, will be adequate
to provide for cash requirements for the remainder of the calendar year. Since
these forward-looking statements are based upon current expectations of future
events and projections and are subject to a number of risks and uncertainties,
many of which are beyond our control, actual results or outcomes may differ
materially from those expressed or implied herein, and you should not place
undue reliance on these statements.
Critical Accounting Policies and Estimates
The Company's critical accounting policies are described in its
registration statement on Form S-4 filed July 13, 2004 with the Securities and
Exchange Commission.
Recent Developments
On July 6, 2004, the Company consummated the purchase of certain assets
and liabilities of Erving Paper Products, Inc. ("Erving") located in Green Bay,
Wisconsin. Erving specializes in and provides foodservice distributors with high
quality paper products which include: placemats, banquet rolls, table covers,
white and color napkins, seasonal designs and specialty prints. The aggregate
purchase price was $2.6 million and was paid in cash.
On July 19, 2004, the Company announced the elimination of thirty-three
sales people in association with the integration of Sweetheart. These
individuals will be terminated by September 30, 2004.
On July 27, 2004, the Company announced the reorganization of its
administrative offices, including the closure of its Urbana, Illinois
administrative office and the transfer of various functions between the
Company's Owings Mills, Maryland and Highland Park, Illinois facilities. The
Company expects this reorganization to be substantially completed during 2005.
In connection with the Company's closure of its manufacturing and
warehouse facilities in Kensington, Connecticut, the Company sold certain assets
of its Worthington Tool and Sherwood Tool businesses. On June 23, 2004, the
Company consummated the sale of certain assets of its Worthington tool business
to Lanco Manufacturing Inc. for an aggregate purchase price of $60,000, of which
$40,000 was paid in cash and the remainder is payable by promissory note in
twelve equal monthly installments. On July 12, 2004, the Company consummated the
sale of certain assets of its Sherwood Tool business to Paper Manufacturing
Corporation for an aggregate purchase price of $2.3 million which was paid in
cash. On July 30, 2004, the Company sold the remaining assets of Sherwood Tool
to Thomas Industries Inc. for an aggregate purchase price of $0.3 million.
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
Net Sales
Net sales increased $357.8 million, or 149.1%, to $597.9 million for
the three months ended June 30, 2004 compared to $240.0 million for the three
months ended June 30, 2003, reflecting a 4.0% increase in average realized sales
prices and a 145.1% increase in sales volume. The increase in average realized
sales prices reflects the implementation of several price increases to customers
as a result of higher raw material costs. Sales volume growth was primarily a
result of the acquisition. Excluding the impact of the acquisition, net sales
increased $19.0 million, or 7.9%, reflecting a 4.0% increase in average realized
sales prices and a 3.9% increase in sales volume as compared to the three months
ended June 30, 2003.
25
Gross Profit
Gross profit increased $45.7 million, or 115.6%, to $85.2 million for
the three months ended June 30, 2004 compared to $39.5 million for the three
months ended June 30, 2003. As a percentage of net sales, gross profit decreased
to 14.3% for the three months ended June 30, 2004 from 16.5% for the three
months ended June 30, 2003. Gross profit increased $44.5 million primarily as a
result of the acquisition. Excluding the results of the acquisition, gross
profit increased $1.2 million, or 3.0%, to $40.7 million for the three months
ended June 30, 2004 compared to $39.5 million for the three months ended June
30, 2003 primarily due to increased sales volume and increased prices offset by
higher raw material prices.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $34.0 million,
or 136.1%, to $59.0 million for the three months ended June 30, 2004 compared to
$25.0 million for the three months ended June 30, 2003. This increase includes
$23.9 million of expenses associated with the Sweetheart operations. The
remaining increase of $9.0 million resulted from $7.9 million of costs
associated with the integration of support functions and systems of Sweetheart
in connection with the acquisition and $0.9 million of professional services.
Operating income
Operating income increased $11.7 million, or 80.5%, to $26.2 million
for the three months ended June 30, 2004 compared to $14.5 million for the three
months ended June 30, 2003, due to the reasons stated above.
Interest expense, net
Interest expense, net increased $10.9 million, or 271.9%, to $14.9
million for the three months ended June 30, 2004 compared to $4.0 million for
the three months ended June 30, 2003. This increase is primarily attributed to
borrowings under the Company's credit facilities and the additional interest
associated with the 8.5% Senior Subordinated Notes issued in connection with the
acquisition.
Foreign currency exchange loss (gain), net
Foreign currency exchange loss (gain), net changed $2.6 million, or
162.5% to a loss of $1.0 million for the three months ended June 30, 2004
compared to a gain of $1.6 million for the three months ended June 30, 2003.
This change is primarily attributed to fluctuations in the United Kingdom pound
sterling denominated inter-company debt.
Income tax provision
Income tax provision increased $2.9 million, or 241.1%, to $4.1 million
for the three months ended June 30, 2004 compared to $1.2 million for the three
months ended June 30, 2003. This increase resulted primarily from the Company's
change in tax filing status from subchapter S to subchapter C of the Internal
Revenue Code in the United States.
Minority interest
Minority interest increased $30,000, or 40.0%, to $105,000 for the
three months ended June 30, 2004 compared to $75,000 for the three months ended
June 30, 2003. This amount represents a 20.0% ownership in Global Cup which was
purchased by the Company as of May 20, 2004 and a 2.0% ownership in Sanyo Pax
Operations Company, LTD for the three months ended June 30, 2004.
Net income
Net income decreased $4.6 million, or 42.7%, to $6.2 million for the
three months ended June 30, 2004 compared to $10.8 million for the three months
ended June 30, 2003, due to the reasons stated above.
26
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
Net Sales
Net sales increased $508.3 million, or 122.0%, to $925.1 million for
the six months ended June 30, 2004 compared to $416.8 million for the six months
ended June 30, 2003, reflecting a 2.9% increase in average realized sales prices
and a 119.1% increase in sales volume. The increase in average realized sales
prices reflects the implementation of several price increases to customers as a
result of higher raw material costs. Sales volume growth was primarily a result
of the acquisition. Excluding the impact of the acquisition, net sales increased
$40.1 million, or 9.6%, reflecting a 2.9% increase in average realized sales
prices and a 6.7% increase in sales volume as compared to the six months ended
June 30, 2003.
Gross Profit
Gross profit increased $65.9 million, or 117.0%, to $122.2 million for
the six months ended June 30, 2004 compared to $56.3 million for the six months
ended June 30, 2003. As a percentage of net sales, gross profit decreased to
13.2% for the six months ended June 30, 2004 from 13.5% for the six months ended
June 30, 2003. Gross profit increased $63.6 million primarily as a result of the
acquisition. Excluding the results of the acquisition, gross profit increased
$2.3 million, or 4.1%, to $58.6 million for the six months ended June 30, 2004
compared to $56.3 million for the six months ended June 30, 2003, primarily due
to increased sales volume offset by higher raw material prices.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $59.9 million,
or 133.9%, to $104.7 million for the six months ended June 30, 2004 compared to
$44.8 million for the six months ended June 30, 2003. This increase includes
$37.6 million of expenses associated with the Sweetheart operations. The
remaining increase of $22.3 million resulted primarily from (i) $15.1 million of
costs associated with the integration of support functions and systems of
Sweetheart in connection with the acquisition, (ii) $2.3 million of professional
services (iii) $1.6 million of costs associated with higher employee health
insurance benefits and (iv) $1.1 million of management fees due to SCI
Corporation.
Operating income
Operating income increased $5.9 million, or 51.6%, to $17.5 million for
the six months ended June 30, 2004 compared to $11.5 million for the six months
ended June 30, 2003, due to the reasons stated above.
Interest expense, net
Interest expense, net increased $16.7 million, or 254.1%, to $23.3
million for the six months ended June 30, 2004 compared to $6.6 million for the
six months ended June 30, 2003. This increase is primarily attributed to
borrowings under the Company's credit facilities and the additional interest
associated with the 8.5% Senior Subordinated Notes issued in connection with the
acquisition.
Prepayment penalties
Prepayment penalties were $30.7 million for the six months ended June
30, 2004. This expense was primarily attributed to the prepayment fees
associated with early extinguishment of $160.0 million of 7.08% senior notes due
2011 and $40.5 million of 3.67% Yen-denominated senior notes due 2008.
Loss on debt extinguishment
Loss on debt extinguishment was $0.9 million for the six months ended
June 30, 2004. This loss was due to write off of debt issuance costs related to
the extinguishment of the 7.08% senior notes due 2011 and the 3.67%
Yen-denominated senior notes due 2008.
27
Foreign currency exchange loss (gain), net
Foreign currency exchange loss (gain), net changed $376,000, to a gain
of $375,000 for the six months ended June 30, 2004 compared to a loss of $1,000
for the six months ended June 30, 2003. This change is primarily attributed to
fluctuations in the United Kingdom pound sterling denominated inter-company
debt.
Income tax provision
Income tax provision increased $13.0 million, or 780.6%, to $14.7
million for the six months ended June 30, 2004 compared to $1.7 million for the
six months ended June 30, 2003. This increase resulted primarily from a $29.8
million expense due to the Company's change in tax filing status from subchapter
S to subchapter C of the Internal Revenue Code in the United States. This
expense was partially offset by an increased tax benefit of $15.1 million
resulting primarily from the operating losses.
Minority interest
Minority interest increased $77,000, or 197.4%, to $116,000 for the six
months ended June 30, 2004 compared to $39,000 for the six months ended June 30,
2003. This amount represents a 20.0% ownership in Global Cup which was purchased
by the Company as of May 20, 2004 and a 2.0% ownership in Sanyo Pax Operations
Company, LTD.
Net income (loss)
Net income (loss) changed $55.7 million, to a loss of $52.5 million for
the six months ended June 30, 2004 compared to income of $3.2 million for the
six months ended June 30, 2003, due to the reasons stated above.
Liquidity and Capital Resources
Historically, the Company has relied on cash flows from operations and
revolving credit borrowings to finance its working capital requirements and
capital expenditures. During the six months ended June 30, 2004, the Company
funded its business acquisition, retirement of pre-acquisition debt and capital
expenditures primarily from (i) borrowings under the Company's $800.0 million
credit facilities, (ii) the issuance of the 8.5% senior subordinated notes and
(iii) proceeds from the sale of common stock. The Company expects to fund its
capital expenditures for the remainder of 2004 from a combination of cash
generated from operations, funds generated from asset sales and revolving credit
borrowings.
Net cash used in operating activities during the six months ended June
30, 2004 was $25.9 million compared to net cash provided by operating activities
of $8.9 million during the six months ended June 30, 2003. This decrease
primarily resulted from $30.7 million prepayment penalties paid for the early
extinguishment of debt, higher losses and higher trade account receivable
balances.
Net cash used in investing activities during the six months ended June
30, 2004 was $895.4 million compared to $22.5 million during the six months
ended June 30, 2003. This increase is primarily due to the acquisition.
Net cash provided by financing activities during the six months ended
June 30, 2004 was $940.4 million compared to $3.9 million during the six months
ended June 30, 2003. This increase resulted primarily from (i) additional
borrowing under the Company's credit facilities, (ii) the issuance of the 8.5%
senior subordinated notes due 2014 and (iii) proceeds from the sale of common
stock. Theses increases were partially offset by (i) repayment of the 7.08%
senior notes due 2011, (ii) repayment of the 3.67% Yen-denominated senior notes
due 2008, (iii) repayment of a $27.8 million securitization facility, (iv)
payment of debt issuance costs and (vi) payment of dividends.
Working capital increased $324.1 million to $386.8 million at June 30,
2004 from $62.7 million at December 31, 2003. This increase resulted primarily
due to the acquisition.
28
Capital expenditures during the six months ended June 30, 2004 were
$17.7 million compared to $24.8 million during the six months ended June 30,
2003. Capital expenditures during the six months ended June 30, 2004 included
$12.0 million for new production equipment, $2.3 million for routine capital
improvements, $1.2 million for renovations and equipment conversions, $0.9 for
building and land improvements, and $1.3 million for various other projects.
Cash from revolving credit borrowings primarily provided funding during the six
months ended June 30, 2004 for capital expenditures. For the remainder of 2004,
the Company intends to rely on cash provided by operations, the sale of assets
and revolving credit borrowings for its capital expenditures.
On February 27, 2004, the Company entered into credit facilities
comprised of a $150.0 million revolving credit facility maturing in 2010 and a
$650.0 million term loan facility maturing in 2011. The revolving credit
facility is principally used for working capital purposes, and the term loan was
used to finance the acquisition and related transactions. For purposes of
calculating interest, loans under the credit facility are designated as
Eurodollar rate loans or, in certain circumstances, base rate loans. Eurodollar
rate loans bear interest at the British Bankers Association Interest Settlement
Rate for deposits in dollars plus a borrowing margin as described below.
Interest on Eurodollar rate loans is payable at the end of the applicable
interest period of one, two, three or six months, but not less frequently than
quarterly. Base rate loans bear interest at (a) the greater of (i) the rate most
recently announced by Bank of America as its "prime rate" or (ii) the Federal
Funds Rate plus 1/2 of 1% per annum, plus (b) a borrowing margin as described
below. The margin varies from 2.0% to 2.75% on Eurodollar rate loans and from
1.0% to 1.75% on base rate loans, depending on the Company's leverage ratio. As
of June 30, 2004, the weighted average annual interest rate applicable to
Eurodollar rate loans was 3.94% and the weighted average annual interest rate
applicable to base rate loans was 5.75%. During the three months ended June 30,
2004, the weighted average annual interest rate for the credit facilities was
3.98%. A commitment fee of 0.50% on the unused portion of the credit facilities
is payable on a quarterly basis. As of June 30, 2004, $122.9 million was
available under the credit facilities.
The Company's obligations under the credit facilities are guaranteed by
SCI Corporation and each existing direct and indirect subsidiary of SCI
Corporation other than the issuer, subject to certain exceptions. In addition,
each significant domestic subsidiary of the issuer formed after the closing date
is required to guarantee those obligations. The credit facilities are secured by
(1) all present and future property and assets, real and personal, of the
Company and each guarantor, subject to certain exceptions; (2) a pledge of
100.0% of the stock of each of SCI Corporation's present and future direct and
indirect domestic subsidiaries and a lien on 66.0% of the stock of each
first-tier foreign subsidiary; (3) all present and future intercompany debt of
the Company and each guarantor; and (4) all proceeds of the assets described in
clauses (1), (2) and (3) of this sentence. Under the credit facilities, the
Company is required to meet specified restrictive financial covenants, including
a maximum consolidated leverage ratio, minimum consolidated interest coverage
ratio and maximum capital expenditures. The credit facilities also contain other
various covenants that limit the Company's ability to, among other things:
o incur additional indebtedness, including guarantees;
o create, incur, assume or permit to exist liens on property and assets;
o make loans and investments and enter into acquisitions and joint ventures;
o engage in sales, transfers and other dispositions of the Company's property or
assets;
o prepay, redeem or repurchase the Company's debt, or amend or modify the
terms of certain material debt or certain other agreements;
o declare or pay dividends to, make distributions to, or make redemption and
repurchases from, equity holders; and
o restrict the ability of the Company's subsidiaries to pay dividends and make
distributions.
The Company is currently in compliance with all covenants under the
credit facilities.
29
The term loan facility under the credit facilities are amortized
quarterly from February 27, 2004 through the date of maturity, with the first
amortization payment of $1.625 million paid on May 27, 2004. The scheduled
quarterly amortization payments are $1.625 million per quarter through February
27, 2006, $6.25 million per quarter from May 27, 2006 through February 27, 2008
and $12.5 million per quarter from May 27, 2008 through November 27, 2010, with
a balloon payment of $449.5 million due on February 27, 2011.
The Company is required to make a mandatory annual prepayment of the
term loan facility in an amount equal to 50.0% of excess cash flow, as defined
in the term loan documentation, when the consolidated leverage ratio is 3.5x or
greater, or 25.0% of excess cash flow when the consolidated leverage ratio is
less than 3.5x. In addition, the Company is required to make a mandatory
prepayment of the term loans and the revolving credit loans with, among other
things:
o 100.0% of the net cash proceeds of any property or asset sale, subject to
certain exceptions and reinvestment requirements;
o 100.0% of the net cash proceeds of any extraordinary receipts, as defined
in the loan documentation, such as tax refunds, pension plan reversions,
proceeds of insurance and condemnation awards, subject to certain
exceptions and reinvestment requirements;
o 100.0% of the net cash proceeds of certain debt issuances, subject to certain
exceptions; and
o 50.0% of the net cash proceeds from the issuance of additional equity
interests when the consolidated leverage ratio is 3.5x or greater, or 25.0%
of such proceeds when the consolidated leverage ratio is less than 3.5x.
Mandatory prepayments will be applied first to the term loans on a pro
rata basis, and thereafter to the revolving loans.
The credit facilities require the Company to hedge a portion of the
borrowings under the credit facilities. On March 10, 2004 with an effective date
of March 31, 2004, the Company entered into a swap arrangement to hedge $180.0
million of Eurodollar rate loans at an average rate of 2.375% plus applicable
margin for three years. Also, on June 1, 2004 the Company entered into an
interest rate cap agreement with a total notional amount of $30.0 million under
which the Company receives variable interest rate payments when the three month
Eurodollar rate rises above 4.0% before January 1, 2005. The interest rate cap
agreement extends through March 31, 2005. As of June 30, 2004, there was $24.8
million drawn on the revolving credit facility and $648.4 million outstanding
under the term loan facility. At June 30, 2004, the interest rate on borrowings
under the term loan was 3.95%, and the interest rate on borrowings under the
revolving credit facility was 4.86%.
On February 27, 2004, the Company issued $325.0 million of 8.5% Senior
Subordinated Notes due 2014. The 8.5% Senior Subordinated Notes mature on
February 15, 2014 with interest paid semi-annually every February 15 and August
15. Under the indenture governing the 8.5% Senior Subordinated Notes, subject to
exceptions, the Company must meet a minimum fixed charge coverage ratio to incur
additional indebtedness. Prior to February 15, 2007, the issuer may, on any one
or more occasions, redeem up to 35% of the aggregate principal amount of the
notes issued under the indenture at a redemption price of 108.5% of the
principal amount thereof, plus accrued and unpaid interest. Otherwise, the notes
under the indenture are not redeemable until February 15, 2009. Starting on
February 15, 2009, the Company has the option to redeem all or a portion of the
8.5% Senior Subordinated Notes at a redemption price equal to a percentage of
the principal amount thereof plus accrued and unpaid interest. In the event of
this kind of an optional redemption, the redemption price would be 104.25% for
the twelve-month period beginning February 15, 2009; 102.833% for the twelve
month period beginning February 15, 2010; 101.417% for the twelve month period
beginning on February 15, 2011 and 100.0% of the principal amount thereafter. If
the Company experiences specific kinds of changes of control, it must offer to
purchase the 8.5% Senior Subordinated Notes at a price of 101.0% of their
principal amount, plus accrued and unpaid interest. The indenture governing the
8.5% Senior Subordinated Notes contain various covenants which, subject to
exception, limit the ability of the issuer and its restricted subsidiaries to,
among other things:
o borrow money, guarantee debt and, in the case of restricted subsidiaries,
sell preferred stock;
o create liens;
30
o pay dividends on or redeem or repurchase stock;
o make specified types of investments;
o restrict dividends or other payments from restricted subsidiaries;
o enter into transactions with affiliates; and
o sell assets or merge with other companies.
On February 27, 2004, the Company extinguished $160.0 million of 7.08%
senior notes due June 30, 2011 and $44.2 million of 3.67% Yen-denominated senior
notes due July 16, 2008 resulting in prepayment penalties of $26.9 million and
$3.8 million, respectively. As a result of early extinguishment of debt, the
Company incurred a $0.9 million loss from the write off of deferred finance
fees.
At June 30, 2004, the Company has approximately 750.0 million Yen ($6.9
million) of short-term borrowings with Japanese banks. These borrowings have
various termination dates and have no restrictive covenants. The interest rate
on these borrowings ranges between 0.84% and 0.89% per year
The Company has capital leases of approximately 391.1 million Yen ($3.6
million) of which approximately 68.5 million Yen ($0.6 million) is classified as
short-term.
The following summarizes the Company's contractual obligations at June
30, 2004, and the effect such obligations are expected to have on its liquidity
and cash flows in future periods (in 000's):
Payments Due in Fiscal
--------------------------------------------------------------------------------------------
Total 2004 2005 2006 2007 2008 2009 Thereafter
------------ --------- --------- --------- --------- --------- --------- ------------
Non-cancelable
operating
leases $ 262,869 $ 15,331 $ 25,099 $ 22,018 $ 19,014 $ 16,592 $ 15,453 $ 149,362
Total debt 1,005,029 10,104 6,500 20,375 25,000 43,750 50,000 849,300
Capital leases 3,575 315 625 615 584 507 429 500
------------ --------- --------- --------- --------- --------- --------- ------------
Total obligations $ 1,271,473 $ 25,750 $ 32,224 $ 43,008 $ 44,598 $ 60,849 $ 65,882 $ 999,162
============ ========= ========= ========= ========= ========= ========= ============
In November 2001, the Company began outsourcing its logistical
operations, including warehousing and transportation of products to and from
distribution centers, to DSC Logistics, Inc. As part of this outsourcing
arrangement, in November 2001, the Company and DSC executed an agreement that
provides for a five-year term, subject to earlier termination in certain
circumstances. After DSC began providing services under the agreement in 2002,
the compensation claimed by DSC under the agreement significantly exceeded the
amounts that the Company had contemplated, and disputes arose regarding various
aspects of the outsourcing arrangement, including the amounts that the Company
would be required to pay under the agreement. In 2002, the Company invoked the
arbitration provisions of the agreement, submitting a demand for arbitration to
the American Arbitration Association in Chicago, Illinois. The Company submitted
an amended demand for arbitration in 2003. In the arbitration, the Company is
seeking to recoup from DSC amounts that the Company believes are in excess of
those required by the agreement and an order rescinding or allowing the Company
to terminate the agreement. DSC has asserted counterclaims in the arbitration
against the Company seeking damages, costs and expenses of less than $2.0
million in the aggregate.
DSC recently has claimed that its outsourcing arrangement with Solo
Illinois entitles DSC to provide customary warehousing and transportation
services for Sweetheart and has sought to amend its counterclaim in the
arbitration to include Sweetheart and Sweetheart's distribution facilities. In
June 2004, Sweetheart filed a declaratory judgment action in the Circuit Court
for Baltimore County, Maryland, seeking a declaratory judgment that Sweetheart
is not bound by, subject to or obligated under the outsourcing arrangement
between DSC and Solo Illinois or the pending arbitration. Management believes
that there is no contractual basis for DSC's claim. However, there can be no
assurances that Sweetheart will be successful in receiving its declaratory
judgment.
31
The Company has entered into an agreement with the State of Illinois
relating to the development of certain properties. The Company received grants
under this agreement of approximately $5.0 million and $7.0 million for the
years ended December 31, 2003 and 2001, respectively. Under this agreement, the
Company is required to fulfill certain obligations, which, if not fulfilled,
would result in the repayment of amounts granted.
Management believes that cash generated by operations and 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,
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 June 30, 2004, the Company had approximately $67.0 million of net
operating loss carryforwards for federal income tax purposes that expire between
2016 and 2023 that are subject to the provisions of Internal Revenue Code
Section 382. Although future earnings cannot be predicted with certainty,
management currently believes that realization of the net deferred tax asset is
more likely than not.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk in the ordinary course of
business, which consists primarily of interest rate risk associated with its
variable rate debt. The senior credit facilities include a revolving and term
credit facility which bear interest at a variable rate. The interest rate on
both facilities is either Eurodollar rate based (1, 2, 3 or 6 months) plus a
margin or the bank's base rate plus a margin, whichever the Company selects. The
margin varies from 2.0% to 2.75% on the Eurodollar rate borrowing and from 1.0%
to 1.75% on the base rate borrowings depending on the Company's leverage ratio.
As of June 30, 2004, the outstanding indebtedness under the revolving credit
facility was $24.8 million. As of June 30, 2004, $122.9 million was available
under the senior credit facilities. Based upon these amounts, the annual net
income would change by approximately $2.8 million for each one-percentage point
change in the interest rates applicable to the variable rate debt. The level of
the exposure to interest rate movements may fluctuate significantly as a result
of changes in the amount of indebtedness outstanding under the revolving credit
facilities.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures:
The Company carried out an evaluation, under the supervision and with
the participation of its management, of the effectiveness of its disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this report. Based on this
evaluation, the Company's chief executive officer and chief financial officer
have concluded that its disclosure controls and procedures were effective at the
end of the period covered by this report.
(b) Changes in internal control over financial reporting:
With respect to Solo Cup Company's (Solo Illinois) 2003 audit, the
Company's auditors identified "material weaknesses" relating to internal
control, its financial reporting systems and the manner in which it processed
consolidating entries, principally related to its reliance on manual processes
for identifying and making adjustments and for consolidating financial
information, particularly with respect to its non-U.S. subsidiaries.
The Company has implemented processes to enhance internal controls.
Specifically, all entries are recorded on the general ledger, manual adjustments
have been eliminated, sales cut-off procedures for recordation have been
automated, capital interest is recorded on construction in progress for fixed
assets, and accrual and allowance procedures have been documented. Also, the
Company has shifted the recordation of purchase accounting and adjustments to
comply with Generally Accepted Accounting Principles in the United States to one
of the two foreign subsidiaries which were noted as having this weakness. These
changes among others, in management's opinion, provide the Company with adequate
internal controls over its financial reporting.
32
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In November 2001, the Company began outsourcing its logistical
operations, including warehousing and transportation of products to and from
distribution centers, to DSC Logistics, Inc. As part of this outsourcing
arrangement, in November 2001, the Company and DSC executed an agreement that
provides for a five-year term, subject to earlier termination in certain
circumstances. After DSC began providing services under the agreement in 2002,
the compensation claimed by DSC under the agreement significantly exceeded the
amounts that the Company had contemplated, and disputes arose regarding various
aspects of the outsourcing arrangement, including the amounts that the Company
would be required to pay under the agreement. In 2002, the Company invoked the
arbitration provisions of the agreement, submitting a demand for arbitration to
the American Arbitration Association in Chicago, Illinois. The Company submitted
an amended demand for arbitration in 2003. In the arbitration, the Company is
seeking to recoup from DSC amounts that the Company believes are in excess of
those required by the agreement and an order rescinding or allowing the Company
to terminate the agreement. DSC has asserted counterclaims in the arbitration
against the Company seeking damages, costs and expenses of less than $2.0
million in the aggregate.
DSC recently has claimed that its outsourcing arrangement with Solo
Illinois entitles DSC to provide customary warehousing and transportation
services for Sweetheart and has sought to amend its counterclaim in the
arbitration to include Sweetheart and Sweetheart's distribution facilities. In
June 2004, Sweetheart filed a declaratory judgment action in the Circuit Court
for Baltimore County, Maryland, seeking a declaratory judgment that Sweetheart
is not bound by, subject to or obligated under the outsourcing arrangement
between DSC and Solo Illinois or the pending arbitration. Management believes
that there is no contractual basis for DSC's claim. However, there can be no
assurances that Sweetheart will be successful in receiving its declaratory
judgment.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Operating Officer
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Financial Officer
(b) Reports on Form 8-K:
None.
33
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.
SOLO CUP COMPANY
(registrant)
Date: August 13, 2004 By: /s/ Susan H. Marks
--------------- ------------------
Susan H. Marks
Chief Financial Officer,
Executive Vice President and
Assistant Secretary
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
34
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Robert L. Hulseman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Solo Cup Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the quarter covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2004 SOLO CUP COMPANY
--------------- (Registrant)
By: /s/ ROBERT L. HULSEMAN
-----------------------
Robert L. Hulseman
Chairman, Chief Executive Officer and
Director
35
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Ronald L. Whaley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Solo Cup Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the quarter covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2004 SOLO CUP COMPANY
--------------- (Registrant)
By: /s/ RONALD L. WHALEY
---------------------
Ronald L. Whaley
President, Chief Operating Officer
and Director
36
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Susan H. Marks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Solo Cup Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the quarter covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2004 SOLO CUP COMPANY
--------------- (Registrant)
By: /s/ SUSAN H. MARKS
-------------------
Susan H. Marks
Chief Financial Officer,
Executive Vice President and
Assistant Secretary
(Principal Financial and
Accounting Officer)
37