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EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Solo Cup COdex321.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Solo Cup COdex311.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Solo Cup COdex312.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Solo Cup COdex322.htm
EX-10.33 - STOCK PURCHASE AGREEMENT - Solo Cup COdex1033.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 28, 2010

 

¨ 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: 333-116843

 

 

SOLO CUP COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   47-0938234

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

150 South Saunders Road, Suite 150, Lake Forest, Illinois   60045
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: 847/444-5000

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the Registrant’s common stock as of May 11, 2010:

Common Stock, $0.01 par value – 100 shares

 

 

 


Table of Contents

INDEX

 

         Page
PART I.  

Financial Information

  
Item 1.  

Financial Statements

   1
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   17
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

   22
Item 4T.  

Controls and Procedures

   22
PART II.  

Other Information

  
Item 1.  

Legal Proceedings

   23
Item 1A.  

Risk Factors

   23
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   23
Item 3.  

Defaults upon Senior Securities

   23
Item 4.  

(Removed and Reserved)

   23
Item 5.  

Other Information

   23
Item 6.  

Exhibits

   23

 

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Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

SOLO CUP COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

     March 28,
2010
    December 27,
2009
 
     (Unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 28,425      $ 30,006   

Accounts receivable – trade, less allowance for doubtful accounts of $646 and $1,114

     112,223        117,203   

Accounts receivable – other

     7,482        7,662   

Inventories

     288,357        232,582   

Deferred income taxes

     21,445        19,131   

Prepaid expenses

     4,607        6,193   

Assets held for sale

     2,825        2,825   

Restricted cash

     8,240        —     

Other current assets

     17,234        20,799   
                

Total current assets

     490,838        436,401   

Property, plant and equipment, less accumulated depreciation and amortization of $535,692 and $527,050

     507,463        508,964   

Restricted cash

     —          10,410   

Other assets

     29,881        31,643   
                

Total assets

   $ 1,028,182      $ 987,418   
                

Liabilities and Shareholder’s Equity

    

Current liabilities:

    

Accounts payable

   $ 96,570      $ 81,990   

Accrued payroll and related costs

     29,809        25,785   

Accrued customer allowances

     23,600        29,810   

Current maturities of long-term debt

     411        779   

Accrued interest

     20,770        19,499   

Other current liabilities

     34,659        27,608   
                

Total current liabilities

     205,819        185,471   

Long-term debt, net of current maturities

     677,773        635,310   

Deferred income taxes

     24,908        22,672   

Pensions and other postretirement benefits

     35,290        36,011   

Deferred gain on sale-leaseback

     42,880        43,540   

Other liabilities

     39,280        46,201   
                

Total liabilities

     1,025,950        969,205   

Shareholder’s equity:

    

Common stock - Par value $0.01 per share; 1,000 shares authorized; 100 shares issued and outstanding

     —          —     

Additional paid-in capital

     254,895        254,995   

Accumulated deficit

     (243,431     (226,903

Accumulated other comprehensive loss

     (9,232     (9,879
                

Total shareholder’s equity

     2,232        18,213   
                

Total liabilities and shareholder’s equity

   $ 1,028,182      $ 987,418   
                

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

SOLO CUP COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands)

 

     For the thirteen weeks ended  
     March 28, 2010     March 29, 2009  

Net sales

   $ 344,872      $ 349,636   

Cost of goods sold

     306,588        312,341   
                

Gross profit

     38,284        37,295   

Selling, general and administrative expenses

     34,822        35,727   

Loss on asset disposals

     963        2,252   
                

Operating income (loss)

     2,499        (684

Interest expense, net of interest income of $34 and $155

     17,100        14,578   

Foreign currency exchange loss, net

     1,376        894   
                

Loss before income taxes

     (15,977     (16,156

Income tax provision (benefit)

     551        (5,962
                

Net loss

   $ (16,528   $ (10,194
                

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

SOLO CUP COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY

(Unaudited, in thousands, except share amounts)

 

    

 

Common stock

   Additional
paid-in
capital
    Accumulated
deficit
    Accumulated
other
comprehensive
loss
    Total
shareholder's
equity
 
     Shares    Amount         

Balance at December 27, 2009

   100    $ —      $ 254,995      $ (226,903   $ (9,879   $ 18,213   

Net loss

   —        —        —          (16,528     —          (16,528

Foreign currency translation adjustment

   —        —        —          —          345        345   

Pension liability adjustments, net of tax of $224

   —        —        —          —          302        302   

Return of capital to parent

   —        —        (100     —          —          (100
                                            

Balance at March 28, 2010

   100    $ —      $ 254,895      $ (243,431   $ (9,232   $ 2,232   
                                            

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

SOLO CUP COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

     Thirteen weeks ended  
     March 28, 2010     March 29, 2009  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net loss

   $ (16,528   $ (10,194

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

    

Depreciation and amortization

     17,007        17,852   

Deferred financing fee amortization

     1,720        1,589   

Loss on asset disposals

     963        2,252   

Deferred income taxes

     (257     (5,442

Foreign currency exchange loss, net

     1,376        894   

Changes in operating assets and liabilities:

    

Accounts receivable, net

     4,585        11,738   

Inventories

     (56,526     27,048   

Prepaid expenses and other current assets

     1,324        1,945   

Other assets

     832        (1,227

Accounts payable

     18,540        (6,260

Accrued expenses and other current liabilities

     896        (14,665

Other liabilities

     37        1,212   

Other, net

     655        (29
                

Net cash (used in) provided by operating activities

     (25,376     26,713   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from sale of property, plant and equipment

     21        63   

Purchases of property, plant and equipment

     (20,032     (15,942

Decrease in restricted cash

     2,170        —     

Decrease in cash in escrow

     —          50   
                

Net cash used in investing activities

     (17,841     (15,829
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net borrowings under revolving credit facilities

     42,300        39,000   

Repayments of term notes

     (348     (60,295

Repayments of other debt

     (64     (142

Return of capital to parent

     (100     —     

Debt issuance costs

     (480     —     
                

Net cash provided by (used in) financing activities

     41,308        (21,437
                

Effect of exchange rate changes on cash

     328        (240
                

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (1,581     (10,793

CASH AND CASH EQUIVALENTS, beginning of period

     30,006        57,504   
                

CASH AND CASH EQUIVALENTS, end of period

   $ 28,425      $ 46,711   
                

SUPPLEMENTAL CASH FLOW DISCLOSURES:

    

Interest paid, net of capitalized interest

   $ 15,595      $ 19,824   
                

Income (tax refunds) taxes paid, net

   $ (1,958   $ 475   
                

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

SOLO CUP COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

Organization. Solo Cup Company, a Delaware corporation (“Solo Delaware”), is a holding company, the material assets of which are 100% of the capital stock of SF Holdings Group, Inc. SF Holdings owns 100% of the capital stock of Solo Cup Operating Corporation, which, in turn, owns various domestic and foreign operating subsidiaries. In these financial statements, the terms “we,” “us” and “our” refer to Solo Delaware and its direct and indirect subsidiaries.

Solo Delaware is a wholly owned subsidiary of Solo Cup Investment Corporation, a Delaware corporation. SCC Holding Company LLC owns 67.26%, Vestar Capital Partners IV, L.P. and certain of its affiliates own 32.71% and management of Solo Delaware owns the remaining 0.03% of Solo Cup Investment Corporation.

Principles of consolidation. These unaudited condensed consolidated financial statements include the accounts of Solo Delaware and its subsidiaries. All material intercompany accounts, transactions and profits are eliminated in consolidation. The information included in the accompanying interim condensed consolidated financial statements is unaudited but, in our opinion, includes all adjustments (consisting only of normal recurring adjustments and accruals unless otherwise indicated) that we consider necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. Results for the interim periods are not necessarily indicative of results expected for the entire year. These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the fiscal year ended December 27, 2009, included in our 2009 Annual Report on Form 10-K, which we filed with the Securities and Exchange Commission on March 25, 2010.

Estimates. We have prepared these interim condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles, using our best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from these estimates and judgments.

(2) RECENTLY ADOPTED ACCOUNTING STANDARDS

On December 28, 2009, the first day of our 2010 fiscal year, we adopted new accounting guidance that is included in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures. Historically, we were required to disclose only the amounts of transfers into or out of Level 3 of the fair value hierarchy. This new guidance requires us also to disclose the amount of significant transfers into or out of Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers. In addition, the guidance clarifies certain existing disclosure requirements. The adoption of these changes had no impact on our consolidated financial statements or disclosures for the thirteen weeks ended March 28, 2010.

 

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SOLO CUP COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(3) ASSETS HELD FOR SALE

Assets held for sale includes a property that we intend to sell within the next twelve months and that meets the held for sale criteria as defined by FASB ASC Topic 360, Property, Plant, and Equipment. As of March 28, 2010 and December 27, 2009, assets held for sale consisted of a manufacturing facility in Belen, New Mexico that we closed during the first quarter of 2009 and subsequently reclassified to assets held for sale. The facility is included at its unadjusted carrying value and is included within our North America operating segment.

We record assets held for sale at the lower of the assets’ carrying value or fair value less costs to sell. The fair value of the Belen property was determined using the market approach, which includes an analysis of sales prices for similar properties in similar locations. This is considered a Level 2 input in the fair value hierarchy described in FASB ASC Topic 820, Fair Value Measurements and Disclosures.

(4) INVENTORIES

The components of inventories were as follows (in thousands):

 

     March 28,
2010
   December 27,
2009

Finished goods

   $ 212,197    $ 164,628

Work in process

     13,288      12,218

Raw materials and supplies

     62,872      55,736
             

Total inventories

   $ 288,357    $ 232,582
             

(5) INCOME TAXES

During the thirteen weeks ended March 29, 2009, we recorded an adjustment to correct an error in our previously reported deferred tax liabilities. The adjustment increased our income tax benefit and decreased our deferred tax liabilities (noncurrent) by $5.1 million. We determined that this adjustment was immaterial to our then-current and prior period financial statements. If the adjustment had been recorded to the corresponding prior period financial statements, it would have increased (decreased) income tax provision by approximately $0.7 million, $2.4 million and $(8.0) million in fiscal years 2008, 2007 and 2006, respectively, and increased other comprehensive income by $0.2 million in 2008.

(6) DEBT

Long-term debt as of March 28, 2010 and December 27, 2009, including amounts payable within one year, was as follows (in thousands):

 

     March 28,
2010
    December 27,
2009
 

Long-term debt:

    

10.5% Senior Secured Notes due 2013

   $ 300,000      $ 300,000   

Unamortized discount

     (5,407     (5,703
                

10.5% Senior Secured Notes due 2013, net

     294,593        294,297   

8.5% Senior Subordinated Notes due 2014

     325,000        325,000   

Asset-based Revolving Credit Facility

     57,300        15,000   

Canadian Credit Facility – Term Loan

     61        404   

Capital lease obligations

     1,230        1,388   
                

Total long-term debt

     678,184        636,089   

Less: Current maturities of long-term debt

     411        779   
                

Long-term debt, net of current maturities

   $ 677,773      $ 635,310   
                

 

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Table of Contents

SOLO CUP COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(7) FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial instruments consist primarily of cash equivalents, accounts receivable, accounts payable, derivative financial instruments and debt, including obligations under capital leases. The carrying values of financial instruments other than derivative financial instruments and fixed-rate debt approximated their fair values as of March 28, 2010 and December 27, 2009 due to their short-term maturities or market rates of interest. Derivative financial instruments were recorded at fair value (Note 8). The fair value of our floating-rate debt as of March 28, 2010 and December 27, 2009, consisting of our asset-based revolving credit facility and the term loan under our Canadian credit facility, approximated carrying value due to our ability to borrow at comparable terms in the open market.

Our 8.5% Senior Subordinated Notes (Note 6) had a carrying value of $325.0 million and an estimated fair value of $316.5 million and $320.9 million as of March 28, 2010 and December 27, 2009, respectively. The fair value of these notes was determined based on the price of the last trade of the debt on March 26, 2010 and December 24, 2009, the last business day of each respective fiscal period. These estimated fair values were determined using Level 1 inputs of the fair value hierarchy, as defined in FASB ASC Topic 820, Fair Value Measurements and Disclosures.

Our 10.5% Senior Secured Notes, issued on July 2, 2009 (Note 6), had a carrying value of $294.6 million and an estimated fair value of $317.3 million as of March 28, 2010, and a carrying value of $294.3 million and an estimated fair value of $318.0 million as of December 27, 2009. The fair value of the senior secured notes as of March 28, 2010 was determined based on the price of the last trade of the debt on March 26, 2010, the last business day of the fiscal period. The fair value of the senior secured notes as of December 27, 2009 was determined based on the average of the bid price (low) and ask price (high) as of December 24, 2009, the last business day of the fiscal year. The estimated fair values were determined using Level 1 inputs of the fair value hierarchy, as defined in FASB ASC Topic 820.

The fair value hierarchy consists of three levels:

 

   

Level 1 fair values are valuations that the entity has the ability to access and that are based on quoted market prices in active markets for identical assets or liabilities;

 

   

Level 2 fair values are valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities; and

 

   

Level 3 fair values are valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Our interest rate swap agreements (Note 8) are measured at fair value on a recurring basis using Level 2 inputs in the fair value hierarchy. We use an income approach to value the outstanding interest rate swaps. The income approach consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts incorporating observable market inputs as of the reporting date such as prevailing interest rates. Both the counterparty’s credit risk and our credit risk are considered in the fair value determination.

(8) DERIVATIVE INSTRUMENTS

As of March 28, 2010, we had three outstanding receive-variable (Eurodollar), pay-fixed interest rate swap agreements with an aggregate notional amount of $150 million that were originally entered into to hedge a portion of our exposure to interest rate risk under our variable-rate first lien facility term loan borrowings. The effective date of the interest rate swaps was August 28, 2007 and the fixed rate paid is 5.3765%. The interest rate swaps were designated and qualified as highly-effective cash flow hedges. As of June 28, 2009, these swaps no longer qualified for hedge accounting because we extinguished our first lien credit facility as part of our July 2009 refinancing transactions.

As a result of the refinancing transactions, the counterparty to the interest rate swaps required us to post a specified amount of collateral against the current market value of the swaps. Our obligation to post collateral will continue through the expiration date of the swaps in February 2011. The balance of such collateral as of March 28, 2010 and December 27, 2009 of $8.2 million and $10.4 million, respectively, is included in restricted cash on our Consolidated Balance Sheets and classified as current as of March 28, 2010 and noncurrent as of December 27, 2009. The amount of collateral that must remain on account with the counterparty will fluctuate based on future changes in the estimated fair value of the swaps, including as a result of changes in interest rates.

 

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SOLO CUP COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

When the interest rate swaps had been designated as cash flow hedges, we reported the mark-to-market changes on the swaps as a component of accumulated other comprehensive income (loss) in accordance with FASB ASC Topic 815, Derivatives. As a result of the refinancing, the hedged forecasted payments of variable-rate interest under the first lien borrowings were no longer probable of occurring. Accordingly, we discontinued hedge accounting prospectively, and, as a result, the cumulative mark-to-market loss of $9.1 million associated with these swaps was reclassified from accumulated other comprehensive loss to interest expense in June 2009. Since the third fiscal quarter of 2009, the mark-to-market loss of these interest rate swaps has been recognized as interest expense.

The reclassification adjustment to interest expense from accumulated other comprehensive loss for losses realized in net earnings, net of tax, was $1.8 million for the thirteen weeks ended March 29, 2009.

We report our interest rate swap agreements at fair value on our consolidated balance sheets as current or non-current liabilities based on their expiration date of February 28, 2011. As of March 28, 2010, their fair value of $6.8 million was included in other current liabilities. As of December 27, 2009, their fair value of $8.3 million was included in other liabilities.

During the thirteen weeks ended March 29, 2009, we also had a receive-variable (Eurodollar), pay-fixed interest rate swap agreement with an effective date of October 2, 2007 and a notional amount of $50 million. The fixed rate of interest paid was 4.6475%. This swap expired on April 2, 2009.

As of March 28, 2010 and December 27, 2009, we had no outstanding derivatives designated as part of a cash flow or fair value hedging relationship and no hedges of the foreign currency exposure of a net investment in a foreign operation.

(9) PENSIONS AND OTHER POSTRETIREMENT BENEFITS

Net periodic benefit cost for our pension and other postretirement benefit plans consisted of the following (in thousands):

 

     For the thirteen weeks ended  
     March 28, 2010     March 29, 2009  

Pension Benefits

    

Service cost

   $ 343      $ 219   

Interest cost

     1,758        1,716   

Expected return on plan assets

     (1,773     (1,416

Amortization of prior service cost

     570        540   

Amortization of net loss

     51        51   
                

Net periodic benefit cost

   $ 949      $ 1,110   
                

Other Postretirement Benefits

    

Service cost

   $ 14      $ 8   

Interest cost

     93        192   

Amortization of prior service cost (credit)

     13        (109

Amortization of net (gain) loss

     (108     87   
                

Net periodic benefit cost

   $ 12      $ 178   
                

During the thirteen weeks ended March 28, 2010, we made approximately $1 million of contributions to our pension and other postretirement benefit plans. We presently anticipate contributing an additional $7 million to fund our pension and other postretirement benefit plans in 2010 for a total of approximately $8 million.

On January 1, 2009, we temporarily eliminated, at our discretion, employer-match contributions for our 401(k) defined contribution plan, which covers substantially all of our U.S. employees. We reinstated these contributions beginning in January 2010.

 

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SOLO CUP COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(10) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consisted of the following (in thousands):

 

     For the thirteen weeks ended  
     March 28, 2010     March 29, 2009  

Net loss

   $ (16,528   $ (10,194

Foreign currency translation adjustment

     345        (2,160

Pension liability adjustments, net of tax of $224 and $0

     302        569   

Unrealized investment loss, net of tax of $0

     —          (3

Recognition of realized gain on cash flow hedge, net of tax of $38

     —          (27

Unrealized loss on cash flow hedge, net of tax of $0

     —          (478

Reclassification of realized loss on cash flow hedge to interest expense, net of tax of $0

     —          1,847   
                

Comprehensive loss

   $ (15,881   $ (10,446
                

Accumulated other comprehensive loss consisted of the following (in thousands):

 

     March 28,
2010
    December 27,
2009
 

Foreign currency translation adjustments

   $ 11,585      $ 11,240   

Pension liability adjustments, net of tax benefit of $4,596 and $4,820

     (20,817     (21,119
                

Accumulated other comprehensive loss

   $ (9,232   $ (9,879
                

(11) RELATED PARTY TRANSACTIONS

Advisory fees. In 2004, Solo Delaware and Solo Cup Investment Corporation entered into a management agreement with SCC Holding providing for, among other items, the payment by Solo Cup Investment Corporation of an annual advisory fee of $2.5 million to SCC Holding. On June 30, 2009, during our third fiscal quarter of 2009, Solo Delaware and Solo Cup Investment Corporation amended the management agreement to provide that the annual advisory fee would be $0.8 million, beginning with the 2009 fee. Pursuant to the agreement, we incurred $0.2 million and $0.6 million of advisory fees to SCC Holding during the thirteen weeks ended March 28, 2010 and March 29, 2009, respectively. As of March 28, 2010, prepaid advisory fees to SCC Holding of $0.2 million were included in prepaid expenses on our consolidated balance sheet.

In 2004, Solo Delaware and Solo Cup Investment Corporation also entered into a management agreement with Vestar pursuant to which Solo Cup Investment Corporation agreed to pay Vestar an annual advisory fee of $0.8 million, plus reimbursement of its expenses. Pursuant to the agreement, we recorded $0.2 million of advisory fees during each of the thirteen-week periods ended March 28, 2010 and March 29, 2009. As of March 28, 2010, prepaid advisory fees to Vestar of $0.2 million were included in prepaid expenses on our consolidated balance sheet. Out-of-pocket expenses incurred were approximately $0.1 million during each of the thirteen-week periods ended March 28, 2010 and March 29, 2009. As of March 28, 2010 and December 27, 2009, approximately $60 thousand and $40 thousand, respectively, were included in other current liabilities for out-of-pocket expenses.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(11) RELATED PARTY TRANSACTIONS (CONTINUED)

 

Return of capital. In March 2010, resulting from the departure of an employee from the Company, $0.1 million of contributed capital was returned to Solo Cup Investment Corporation as a dividend reflecting the cancellation of 100 shares of Solo Cup Investment Corporation’s convertible participating preferred stock.

(12) SEGMENTS

We manage and evaluate our operations in two reportable segments: North America and Europe. Both of these segments manufacture and supply a broad portfolio of single-use products used to serve food and beverages that are available in plastic, paper, foam, post-consumer recycled content and annually renewable materials. We manage our operating segments separately based on the products and requirements of the different markets. North America includes all of our entities established in the United States, Canada, Mexico and Puerto Rico, and our corporate function. Europe includes all U.K. entities. Other includes Australia and Panama. We dissolved our sole Australian entity in May 2009.

The accounting policies of the operating segments are the same as those described in Note 2 to the consolidated financial statements in our 2009 Annual Report on Form 10-K. Segment operating results are measured based on operating income (loss). We account for intersegment net sales on an arm’s length pricing basis.

 

(in thousands)    North
America
   Europe     Other    Total
Segments
    Eliminations     Total  

For the thirteen weeks ended March 28, 2010

              

Revenues from external customers

   $ 320,402    $ 25,098      $ 3,043    $ 348,543      $ (3,671   $ 344,872   

Intersegment net sales

     3,671      —          —        3,671        (3,671     —     

Operating income (loss)

     3,509      (1,405     326      2,430        69        2,499   

For the thirteen weeks ended March 29, 2009

              

Revenues from external customers

   $ 329,377    $ 21,559      $ 3,615    $ 354,551      $ (4,915   $ 349,636   

Intersegment net sales

     4,915      —          —        4,915        (4,915     —     

Operating income (loss)

     350      (1,549     479      (720     36        (684

 

     For the thirteen weeks ended  
(in thousands)    March 28, 2010     March 29, 2009  

Operating income (loss):

    

Total segment and other operating income (loss)

   $ 2,430      $ (720

Elimination of intersegment operating loss

     69        36   

Interest expense

     (17,134     (14,733

Interest income

     34        155   

Foreign currency exchange loss, net

     (1,376     (894
                

Loss before income taxes

   $ (15,977   $ (16,156
                

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(13) GUARANTOR NOTE

On July 2, 2009, Solo Delaware and Solo Cup Operating Corporation (“SCOC”) co-issued $300.0 million of 10.5% Senior Secured Notes due 2013. The senior secured notes are fully and unconditionally guaranteed, on a joint and several basis, by certain of our subsidiaries. The consolidated guarantors are: SF Holdings; Solo Manufacturing LLC; P.R. Solo Cup, Inc.; Lily-Canada Holding Corporation; Solo Cup (UK) Limited; Insulpak Holdings Limited; Solo Cup Europe Limited; and Solo Cup Owings Mills Holdings.

In February 2004, Solo Delaware acquired SF Holdings and its subsidiaries, including Sweetheart Cup Company. Solo Delaware partially funded the acquisition through the issuance of its 8.5% Senior Subordinated Notes due 2014. The senior subordinated notes are fully and unconditionally guaranteed, on a joint and several basis, by certain of our subsidiaries. The consolidated guarantors of the senior subordinated notes are the same as the senior secured notes, except for SCOC, which is a guarantor of the senior subordinated notes, but a co-issuer of the senior secured notes.

We have revised the following statement of operations and statement of cash flows for the thirteen weeks ended March 29, 2009 to present the guarantors and non-guarantors of the senior subordinated notes and the senior secured notes in accordance with Rule 3-10 of Regulation S-X under the Securities Exchange Act of 1934. Also, we have revised the statement of operations for the thirteen weeks ended March 29, 2009 from amounts previously presented to properly reflect investments in subsidiaries under the equity method. In presenting this financial information, we have applied the equity method of accounting to (1) Solo Delaware’s investment in SF Holdings, (2) SF Holdings’ investment in SCOC, and (3) SCOC’s investment in the Other Guarantors and Non-Guarantor subsidiaries. All such subsidiaries meet the requirements to be consolidated under U.S. generally accepted accounting principles. All intercompany balances and transactions have been eliminated.

(Continued)

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(13) GUARANTOR NOTE (CONTINUED)

 

    Condensed Consolidated Balance Sheet
March 28, 2010
(In thousands)
    Solo
Delaware(1)
  SF  Holdings(2)
(Guarantor)
  SCOC (3)   Other
Guarantors(4)
    Non-
Guarantors
  Eliminations     Consolidated

Assets

             

Current assets:

             

Cash and cash equivalents

  $ —     $ —     $ 5   $ 2,456      $ 25,964   $ —        $ 28,425

Accounts receivable – trade

    —       —       80,359     16,231        15,633     —          112,223

Accounts receivable – other

    2,732     —       40,637     2,197        —       (38,084     7,482

Inventories

    —       —       248,330     16,452        26,064     (2,489     288,357

Deferred income taxes

    —       —       21,021     —          424     —          21,445

Restricted cash

    8,240     —       —       —          —       —          8,240

Prepaid expenses and other current assets

    —       —       21,276     1,130        2,260     —          24,666
                                             

Total current assets

    10,972     —       411,628     38,466        70,345     (40,573     490,838

Property, plant and equipment, net

    —       —       461,054     14,016        32,393     —          507,463

Intercompany receivables – non-current

    160,637     —       6,088     —          —       (166,725     —  

Intercompany debt – non-current

    432,536     —       39,567     —          —       (472,103     —  

Investments in subsidiaries

    26,976     329,470     55,457     —          —       (411,903     —  

Other assets

    14,644     —       11,514     1,599        2,124     —          29,881
                                             

Total assets

  $ 645,765   $ 329,470   $ 985,308   $ 54,081      $ 104,862   $ (1,091,304   $ 1,028,182
                                             
Liabilities and Shareholder’s Equity              

Current liabilities:

             

Accounts payable

  $ 38   $ —     $ 80,248   $ 10,034      $ 6,250   $ —        $ 96,570

Intercompany payable

    —       —       4,912     22,887        10,285     (38,084     —  

Accrued expenses and other current liabilities

    23,902     —       78,389     1,159        5,388     —          108,838

Current maturities of long-term debt

    —       —       —       350        61     —          411
                                             

Total current liabilities

    23,940     —       163,549     34,430        21,984     (38,084     205,819

Long-term debt, net of current maturities

    619,593     —       57,300     880        —       —          677,773

Long-term debt, net of current maturities – intercompany

    —       135,769     299,769     36,565        —       (472,103     —  

Deferred income taxes

    —       —       22,717     —          2,191     —          24,908

Long-term payable – intercompany

    —       166,725     —       —          —       (166,725     —  

Other long-term liabilities

    —       —       112,503     1,890        3,057     —          117,450
                                             

Total liabilities

    643,533     302,494     655,838     73,765        27,232     (676,912     1,025,950
                                             

Total shareholder's equity (deficit)

    2,232     26,976     329,470     (19,684     77,630     (414,392     2,232
                                             

Total liabilities and shareholder's equity (deficit)

  $ 645,765   $ 329,470   $ 985,308   $ 54,081      $ 104,862   $ (1,091,304   $ 1,028,182
                                             

 

(1) Issuer of 8.5% Senior Subordinated Notes; co-issuer of 10.5% Senior Secured Notes
(2) Guarantor of 8.5% Senior Subordinated Notes and 10.5% Senior Secured Notes
(3) Guarantor of 8.5% Senior Subordinated Notes; co-issuer of 10.5% Senior Secured Notes
(4) Guarantors of 8.5% Senior Subordinated Notes and 10.5% Senior Secured Notes

(Continued)

 

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SOLO CUP COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(13) GUARANTOR NOTE (CONTINUED)

 

    Condensed Consolidated Balance Sheet
December 27, 2009
(In thousands)
    Solo
Delaware
  SF Holdings
(Guarantor)
  SCOC   Other
Guarantors
    Non-
Guarantors
  Eliminations     Consolidated
Assets              

Current assets:

             

Cash and cash equivalents

  $ —     $ —     $ 5   $ 4,517      $ 25,484   $ —        $ 30,006

Accounts receivable – trade

    —       —       83,808     16,912        16,483     —          117,203

Accounts receivable – other

    2,163     —       42,699     2,182        23     (39,405     7,662

Inventories

    —       —       192,131     18,781        23,895     (2,225     232,582

Deferred income taxes

    —       —       18,696     —          435     —          19,131

Prepaid expenses and other current assets

    —       —       24,776     2,533        2,508     —          29,817
                                             

Total current assets

    2,163     —       362,115     44,925        68,828     (41,630     436,401

Property, plant and equipment, net

    —       —       460,800     15,799        32,365     —          508,964

Intercompany receivables – non-current

    155,108     —       6,088     —            (161,196     —  

Intercompany debt – non-current

    439,708     —       39,175     —            (478,883     —  

Investments in subsidiaries

    39,372     336,337     53,609     —          —       (429,318     —  

Restricted cash

    10,410     —       —       —          —       —          10,410

Other assets

    15,441     —       13,387     782        2,033     —          31,643
                                             

Total assets

  $ 662,202   $ 336,337   $ 935,174   $ 61,506      $ 103,226   $ (1,111,027   $ 987,418
                                             
Liabilities and Shareholder’s Equity              

Current liabilities:

             

Accounts payable

  $ 301   $ —     $ 64,294   $ 11,320      $ 6,075   $ —        $ 81,990

Intercompany payable

    —       —       4,343     24,348        10,714     (39,405     —  

Accrued expenses and other current liabilities

    16,105     —       78,847     1,570        6,180     —          102,702

Current maturities of long-term debt

    —       —       —       374        405     —          779
                                             

Total current liabilities

    16,406     —       147,484     37,612        23,374     (39,405     185,471

Long-term debt, net of current maturities

    619,297     —       15,000     1,013        —       —          635,310

Long-term debt, net of current maturities – intercompany

    —       135,769     303,941     39,173        —       (478,883     —  

Deferred income taxes

    —       —       20,384     —          2,288     —          22,672

Long-term payable – intercompany

    —       161,196     —       —          —       (161,196     —  

Other long-term liabilities

    8,286     —       112,028     2,317        3,121     —          125,752
                                             

Total liabilities

    643,989     296,965     598,837     80,115        28,783     (679,484     969,205
                                             

Total shareholder's equity (deficit)

    18,213     39,372     336,337     (18,609     74,443     (431,543     18,213
                                             

Total liabilities and shareholder's equity (deficit)

  $ 662,202   $ 336,337   $ 935,174   $ 61,506      $ 103,226   $ (1,111,027   $ 987,418
                                             

(Continued)

 

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SOLO CUP COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(13) GUARANTOR NOTE (CONTINUED)

 

     Consolidated Statement of Operations
For the thirteen weeks ended March 28, 2010
(In thousands)
 
     Solo
Delaware
    SF Holdings
(Guarantor)
    SCOC     Other
Guarantors
    Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 288,597      $ 25,125      $ 43,788      $ (12,638   $ 344,872   

Cost of goods sold

     —          —          255,461        24,612        39,143        (12,628     306,588   
                                                        

Gross profit

     —          —          33,136        513        4,645        (10     38,284   

Selling, general and administrative expenses

     —          —          30,362        1,875        2,613        (28     34,822   

Loss on asset disposals

     —          —          921        42        —          —          963   
                                                        

Operating income (loss)

     —          —          1,853        (1,404     2,032        18        2,499   

Interest expense, net

     3,484        5,529        7,947        131        9        —          17,100   

Foreign currency exchange loss (gain), net

     —          —          568        1,163        (355     —          1,376   

Equity in loss of subsidiaries

     13,044        7,515        928        —          —          (21,487     —     
                                                        

(Loss) income before income taxes

     (16,528     (13,044     (7,590     (2,698     2,378        21,505        (15,977

Income tax provision

     —          —          (75     (33     659        —          551   
                                                        

Net (loss) income

   $ (16,528   $ (13,044   $ (7,515   $ (2,665   $ 1,719      $ 21,505      $ (16,528
                                                        
     Consolidated Statement of Operations
For the thirteen weeks ended March 29, 2009
(In thousands)
 
     Solo
Delaware
    SF Holdings
(Guarantor)
    SCOC     Other
Guarantors
    Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 304,521      $ 21,583      $ 37,115      $ (13,583   $ 349,636   

Cost of goods sold

     —          —          269,718        21,064        35,137        (13,578     312,341   
                                                        

Gross profit

     —          —          34,803        519        1,978        (5     37,295   

Selling, general and administrative expenses

     —          —          31,507        2,067        2,177        (24     35,727   

Loss (gain) on asset disposals

     —          —          1,803        (1     450        —          2,252   
                                                        

Operating income (loss)

     —          —          1,493        (1,547     (649     19        (684

Interest expense, net

     590        5,036        8,646        314        (8     —          14,578   

Foreign currency exchange loss, net

     —          —          65        656        173        —          894   

Equity in loss of subsidiaries

     9,566        4,530        2,439        —          —          (16,535     —     
                                                        

Loss before income taxes

     (10,156     (9,566     (9,657     (2,517     (814     16,554        (16,156

Income tax provision (benefit)

     38        —          (5,127     (707     (166     —          (5,962
                                                        

Net loss

   $ (10,194   $ (9,566   $ (4,530   $ (1,810   $ (648   $ 16,554      $ (10,194
                                                        

(Continued)

 

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SOLO CUP COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(13) GUARANTOR NOTE (CONTINUED)

 

     Condensed Consolidated Statement of Cash Flows
For the thirteen weeks ended March 28, 2010
(In thousands)
 
     Solo
Delaware
    SF Holdings
(Guarantor)
   SCOC     Other
Guarantors
    Non-
Guarantors
    Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net cash (used in) provided by operating activities

   $ (8,917   $ —      $ (15,247   $ (1,726   $ 514      $ —        $ (25,376
                                                       

CASH FLOWS FROM INVESTING ACTIVITIES

               

Purchases of property, plant and equipment

     —          —        (19,754     (137     (165     24        (20,032

Proceeds from sale of property, plant and equipment

     —          —        28        17        —          (24     21   

Decrease in restricted cash

     2,170        —        —          —          —          —          2,170   
                                                       

Net cash provided by (used in) investing activities

     2,170        —        (19,726     (120     (165     —          (17,841
                                                       

CASH FLOWS FROM FINANCING ACTIVITIES

               

Net borrowings under revolving credit facilities

     —          —        42,300        —          —          —          42,300   

Repayments of term notes

     —          —        —            (348     —          (348

Return of capital to parent

     (100     —        —          —            —          (100

Collection on (repayment of) intercompany debt

     7,173        —        (7,173     —          —          —          —     

Repayments of other debt

     —          —        —          (64     —          —          (64

Debt issuance costs

     (326     —        (154     —          —          —          (480
                                                       

Net cash provided by (used in) financing activities

     6,747        —        34,973        (64     (348     —          41,308   
                                                       

Effect of exchange rate changes on cash

     —          —        —          (151     479        —          328   
                                                       

Net (decrease) increase in cash and cash equivalents

     —          —        —          (2,061     480        —          (1,581

Cash and cash equivalents, beginning of period

     —          —        5        4,517        25,484        —          30,006   
                                                       

Cash and cash equivalents, end of period

   $ —        $ —      $ 5      $ 2,456      $ 25,964      $ —        $ 28,425   
                                                       

(Continued)

 

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SOLO CUP COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(13) GUARANTOR NOTE (CONTINUED)

 

     Condensed Consolidated Statement of Cash Flows
For the thirteen weeks ended March 29, 2009
(In thousands)
 
     Solo
Delaware
    SF Holdings
(Guarantor)
   SCOC     Other
Guarantors
    Non-
Guarantors
    Eliminations    Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES

                

Net cash (used in) provided by operating activities

   $ (10,956   $ —      $ 44,119      $ 1,755      $ (8,205   $ —      $ 26,713   
                                                      

CASH FLOWS FROM INVESTING ACTIVITIES

                

Purchases of property, plant and equipment

     —          —        (15,330     (582     (30     —        (15,942

Proceeds from sale of property, plant and equipment

     —          —        63        —          —          —        63   

Decrease in cash in escrow

     —          —        50        —          —          —        50   
                                                      

Net cash used in investing activities

     —          —        (15,217     (582     (30     —        (15,829
                                                      

CASH FLOWS FROM FINANCING ACTIVITIES

                

Net borrowings under revolving credit facilities

     39,000        —        —          —          —          —        39,000   

Repayments of term notes

     (60,000     —        —          —          (295     —        (60,295

Collection on (repayment of) intercompany debt

     28,902        —        (28,902     —          —          —        —     

Repayments of other debt

     —          —        —          (142     —          —        (142
                                                      

Net cash provided by (used in) financing activities

     7,902        —        (28,902     (142     (295     —        (21,437
                                                      

Effect of exchange rate changes on cash

     —          —        —          (133     (107     —        (240
                                                      

Net (decrease) increase in cash and cash equivalents

     (3,054     —        —          898        (8,637     —        (10,793

Cash and cash equivalents, beginning of period

     40,310        —        7        1,020        16,167        —        57,504   
                                                      

Cash and cash equivalents, end of period

   $ 37,256      $ —      $ 7      $ 1,918      $ 7,530      $ —      $ 46,711   
                                                      

(14) SUBSEQUENT EVENTS

Acquisition of InnoWare Plastic Holding Company, Inc.

On March 31, 2010, we acquired all of the outstanding capital stock of InnoWare Plastic Holding Company, Inc. to further broaden our product offering. Acquisition consideration totaled $24 million in cash. InnoWare Plastic Holding Company, Inc. owns all of the capital stock of InnoWare Plastic, Inc., a manufacturer and marketer of a comprehensive line of plastic take-out containers. InnoWare Plastic, Inc. operates a manufacturing facility and warehouse in Thomaston, Georgia and an administrative office in Alpharetta, Georgia.

On April 30, 2010, we merged InnoWare Plastic Holding Company, Inc. and InnoWare Plastic, Inc. with and into Solo Cup Operating Corporation, with Solo Cup Operating Corporation as the surviving entity of the merger.

Closure of manufacturing facilities

On May 6, 2010, our Board of Directors committed to a plan designed to further optimize our manufacturing footprint. Under the plan, we intend to close certain of our U.S. manufacturing facilities by the end of the second quarter of 2012. We expect to incur costs over the life of the plan in the range of $113 to $133 million. The total costs include severance payments of approximately $4 to $6 million, equipment relocation and related costs of approximately $17 to $20 million, a charge of approximately $4 to $6 million attributable to lease payments to be made in periods after the related closure, asset impairment charges of approximately $13 to $16 million, and accelerated depreciation of approximately $75 to $85 million for certain property, plant and equipment that will no longer be used after the facilities are closed. Of the total expected costs over the life of the plan, approximately $21 to $26 million will require incremental cash expenditures.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report, as well as the consolidated financial statements and notes thereto and related management’s discussion and analysis of financial condition and results of operations included in our 2009 Annual Report on Form 10-K.

General

We are a leading producer and marketer of single-use products used to serve food and beverages in the home, quick-service restaurants and other foodservice settings. We distribute our products globally and have served our industry for more than 70 years. We manufacture and supply a broad portfolio of single-use products, including cups, lids, food containers, plates, bowls, portion cups, cutlery and straws, with products available in plastic, paper, foam, post-consumer recycled content and annually renewable materials. We are recognized for our customer service, and our products are known for their quality, reliability and consistency. Our products are marketed primarily under the Solo® brand, as well as Jack Frost®, Trophy® and BareTM by Solo. We are one of the leading suppliers of branded single-use cups, plates and bowls in the United States. We also provide a line of products to select customers under private label brands. We operate manufacturing facilities and distribution centers in North America, the United Kingdom and Panama.

Thirteen weeks ended March 28, 2010 compared to the thirteen weeks ended March 29, 2009

 

     For the thirteen weeks ended     Favorable (Unfavorable)  
(In millions)    March 28, 2010     March 29, 2009     $     %  

Net sales

   $ 344.9      $ 349.6      $ (4.7   (1.3

Cost of goods sold

     306.6        312.3        5.7      1.8   
                          

Gross profit

     38.3        37.3        1.0      2.7   

Selling, general and administrative expenses

     34.8        35.7        0.9      2.5   

Loss on asset disposals

     1.0        2.3        1.3      56.5   
                          

Operating income (loss)

     2.5        (0.7     3.2      *   

Interest expense, net

     17.1        14.6        (2.5   (17.1

Foreign currency exchange loss, net

     1.4        0.9        (0.5   (55.6
                          

Loss before income taxes

     (16.0     (16.2     0.2      1.2   

Income tax provision (benefit)

     0.5        (6.0     (6.5   *   
                          

Net loss

   $ (16.5   $ (10.2   $ (6.3   (61.8
                          

 

* Not meaningful

Net sales decreased $4.7 million, or 1.3%, for the thirteen weeks ended March 28, 2010 compared to the prior year period. The decrease in net sales reflects a 4.1% decrease in average realized sales price partially offset by a 2.3% benefit from the impact of changes in foreign currency exchange rates and a 0.5% increase in sales volume compared to the thirteen weeks ended March 29, 2009.

The decrease in average realized sales price in the first quarter of 2010 reflects lower overall pricing driven by an increasingly competitive marketplace, and to a lesser extent, a shift in our product mix. The increase in sales volumes occurred as a result of growth in our existing product portfolio as well as an increase in new product offerings, and was offset by both an overall decline in the industry that lowered demand and our de-emphasis of certain product categories, such as straws and stirrers, that are high-volume commodity products.

 

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For the thirteen weeks ended March 28, 2010, gross profit increased by $1.0 million compared to the prior year period. The increase in gross profit reflects the benefit of lower operating costs for our U.S. operations of approximately $18 million, driven by greater overhead absorption from higher production in the current quarter, a more consolidated manufacturing footprint, and the absence of consolidation costs, which totaled approximately $5 million in the comparable prior-year period. The increase in gross profit was partially offset by a decrease of approximately $17 million in the difference between sales prices and raw material costs for our U.S. operations in the first quarter of 2010 compared to the first quarter of 2009. The decrease was a result of relatively flat raw material costs against a declining average realized sales price driven by an increasingly competitive marketplace.

As a percentage of net sales, gross profit was 11.1% in the first quarter of 2010 versus 10.7% in the first quarter of 2009. The improvement was primarily driven by lower operating costs, resulting from a more consolidated manufacturing footprint, and greater overhead absorption from higher production in the current quarter.

Selling, general and administrative expenses decreased $0.9 million for the thirteen weeks ended March 28, 2010 compared to the thirteen weeks ended March 29, 2009. The improvement primarily reflects lower incentive-based compensation as well as lower management advisory fees that resulted from the June 2009 amendment of our management agreement with SCC Holding. The decrease in selling, general and administrative expenses was partially offset by an increase in employee-related costs to normalized levels. In the first quarter of 2009, employee-related costs were temporarily reduced in response to the uncertain global economy. As a percentage of net sales, selling, general and administrative expenses were 10.1% in the first quarter of 2010 versus 10.2% in the first quarter of 2009.

For the thirteen weeks ended March 28, 2010, net interest expense increased by $2.5 million compared to the prior year period. Higher interest expense was primarily due to higher average interest rates attributable to our July 2009 debt refinancing, partially offset by lower average outstanding term debt compared to the prior-year period.

During the thirteen weeks ended March 28, 2010, the income tax provision of $0.5 million primarily reflects income tax expense from our foreign jurisdictions. In the United States, we are in a net operating loss carryforward position and our deferred income tax assets are subject to a full valuation allowance; therefore, any loss before income taxes does not generate a corresponding income tax benefit. During the thirteen weeks ended March 29, 2009, the income tax benefit of $6.0 million included a $5.1 million adjustment to correct an error in our previously reported deferred tax liabilities. We determined that this adjustment was immaterial to our then-current and prior period financial statements. If the adjustment had been recorded to the corresponding prior period financial statements, it would have increased (decreased) income tax provision by approximately $0.7 million, $2.4 million and $(8.0) million in fiscal years 2008, 2007 and 2006, respectively, and increased other comprehensive income by $0.2 million in 2008. Excluding the $5.1 million adjustment, the remaining income tax benefit of approximately $0.9 million was primarily due to a small loss in our foreign jurisdictions.

 

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Liquidity and Capital Resources

Historically, we have relied on cash flows from operations to finance our working capital requirements and capital expenditures. Net cash used in operating activities during the thirteen weeks ended March 28, 2010 was $25.4 million compared to net cash provided by operating activities of $26.7 million during the thirteen weeks ended March 29, 2009. The decreased cash flow from operations was primarily a result of a planned build in finished goods inventories in the first quarter of 2010 to prepare for the growth in demand expected during the second quarter to ensure that customer service levels are maintained. Conversely, in 2009, we reduced inventory levels during the first quarter because we anticipated a significant decrease in demand in our industry driven by the global economic recession. The decrease in cash flow from operating activities driven by the inventory build was partially offset by an increase in accounts payable during the quarter, also a result of the increase in production.

Working capital increased $34.1 million to $285.0 million as of March 28, 2010, from $250.9 million as of December 27, 2009. The increase mostly reflects the inventory build during the first quarter of 2010, partially offset by a related increase in accounts payable as a result of the increased production.

Net cash used in investing activities during the thirteen weeks ended March 28, 2010 was $17.8 million compared to $15.8 million during the thirteen weeks ended March 29, 2009. Capital expenditures during the thirteen weeks ended March 28, 2010 were $20.0 million compared to $15.9 million during the thirteen weeks ended March 29, 2009. We funded our capital expenditures during the thirteen weeks ended March 28, 2010 with borrowings under our asset-based revolving credit facility.

Net cash provided by financing activities during the thirteen weeks ended March 28, 2010 was $41.3 million compared to net cash used in financing activities of $21.4 million during the thirteen weeks ended March 29, 2009. The cash flows in 2010 consisted primarily of increased borrowings under our asset-based revolving credit facility to fund our capital expenditures and support the build of finished goods inventories during the quarter. The cash flows in 2009 primarily represented the prepayment of $60.0 million of principal on the term loan under our first lien credit facility partially offset by $39.0 million of net borrowings under the revolving credit facility under our first lien credit facility.

The following is a summary of our long-term debt as of March 28, 2010 (in thousands):

 

     March 28, 2010  

Long-term debt:

  

10.5% Senior Secured Notes due 2013

   $ 300,000   

Unamortized discount

     (5,407
        

10.5% Senior Secured Notes due 2013, net

     294,593   

8.5% Senior Subordinated Notes due 2014

     325,000   

Asset-based Revolving Credit Facility

     57,300   

Canadian Credit Facility—Term Loan

     61   

Capital lease obligations

     1,230   
        

Total long-term debt

     678,184   

Less: Current maturities of long-term debt

     411   
        

Long-term debt, net of current maturities

   $ 677,773   
        

The following is a summary of our committed revolving credit facilities as of March 28, 2010 (in thousands):

 

     Commitment
Amount
   Amounts
Outstanding
   Letters of
Credit  (1)
   Available
Capacity

Asset-based revolving credit facility (2)

   $ 200,000    $ 57,300    $ 12,470    $ 100,528

Canadian credit facility (revolving facility) (3)

     16,029      —        —        10,182
                           
   $ 216,029    $ 57,300    $ 12,470    $ 110,710
                           

 

  (1)

Availability under the credit facilities is reduced by letters of credit issued under the facilities.

  (2)

The commitment amount for the asset-based revolving credit facility is $200.0 million; however, available capacity was $100.5 million due to the borrowing base limit of $170.3 million in effect at March 28, 2010.

  (3)

The commitment amount for the Canadian revolving credit facility is CAD 16.5 million (approximately $16.0 million); however, available capacity was CAD 10.5 million (approximately $10.2 million) due to borrowing base limitations.

 

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Government Obligations

We are subject to agreements with the City of Chicago and the State of Illinois relating to our 2001 acquisition of an undeveloped parcel of land in Chicago, Illinois. Pursuant to these agreements, the City of Chicago paid a portion of the 2001 purchase price on our behalf in the form of cash and the issuance of a note. The State of Illinois also provided a grant to us. Under these agreements, we are required to fulfill certain obligations relating to development of the property and retention of a certain number of employees. Our intention is no longer to develop the property, but rather to sell the property. We expect that these obligations will either transfer to a new owner or be repaid from the proceeds of a sale. The obligations total approximately $16.2 million, of which approximately $3.0 million bears interest, and are included in other current liabilities in the accompanying consolidated balance sheets.

Contractual Obligations

During the thirteen weeks ended March 28, 2010, there were no material changes outside the normal course of business in the contractual obligations disclosed in Item 7 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2009, under the caption “Contractual Obligations”.

Outlook and Subsequent Events

We expect that our total 2010 capital expenditures will be approximately $80 million, which includes $24 million of capital invested in our acquisition of InnoWare Plastic Holding Company, Inc. on March 31, 2010. We expect that our total contributions to defined benefit plans in 2010 will be approximately $8 million, of which $1 million was contributed during the first quarter of 2010. Subsequent to March 28, 2010, we increased our outstanding borrowings under our asset-based revolving credit facility to fund our acquisition of InnoWare Plastic Holding Company, Inc. and support seasonal working capital requirements. We believe that cash on hand, cash generated by operations and amounts available under our credit facilities should be sufficient to meet our expected operating needs, planned capital expenditures, payments in conjunction with our lease commitments and debt service requirements for the remainder of 2010.

On May 6, 2010, our Board of Directors committed to a plan designed to further optimize our manufacturing footprint. Under the plan, we intend to close certain of our U.S. manufacturing facilities by the end of the second quarter of 2012. We expect to incur costs over the life of the plan in the range of $113 to $133 million. The total costs include severance payments of approximately $4 to $6 million, equipment relocation and related costs of approximately $17 to $20 million, a charge of approximately $4 to $6 million attributable to lease payments to be made in periods after the related closure, asset impairment charges of approximately $13 to $16 million, and accelerated depreciation of approximately $75 to $85 million for certain property, plant and equipment that will no longer be used after the facilities are closed. Of the total expected costs over the life of the plan, approximately $21 to $26 million will require incremental cash expenditures.

Net Operating Loss Carryforwards

As of March 28, 2010, we had approximately $291.4 million of U.S. federal tax net operating loss carryforwards that expire between 2024 and 2030. None of the carryforwards was subject to the provisions of Internal Revenue Code Section 382. We establish a valuation allowance for deferred tax assets, including our net operating loss carryforwards, when the amount of expected future taxable income is not likely to support the use of the deduction or credit. During the thirteen weeks ended March 28, 2010, our valuation allowance on all tax attributes increased by $5.2 million, to $119.3 million, all of which was related to activity from our U.S. operations. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Critical Accounting Estimates

Our critical accounting estimates are described in our 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2010. There have been no changes to the critical accounting estimates since that filing.

 

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Forward-Looking Statements

This report on Form 10-Q contains forward-looking statements. The words “anticipate,” “intend,” “plan,” “estimate,” “believe,” “expect,” “predict,” “potential,” “project,” “could,” “will,” “should,” “may,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All statements in this report other than statements of historical fact, including statements regarding our business strategy, future operations, financial position, prospects, plans and objectives, as well as information concerning industry trends and any expected action or inaction of third parties, are forward-looking statements. All forward-looking statements speak only as of the date on which they are made. Such statements reflect our current assumptions concerning future events and are subject to a number of risks and uncertainties, many of which are outside our control and could cause actual results to differ materially from such statements. These risks and uncertainties include, but are not limited to:

 

   

the impact of the continuing global recession and restricted credit markets on our cash flow and debt service requirements;

 

   

the impact of our significant current and future debt level on the availability of cash flows for operations, our financial health and our ability to service debt;

 

   

the impact of covenant restrictions under our debt agreements on our ability to operate our business;

 

   

the impact of economic, financial, industry conditions and our continued realization of cost savings on our ability to drive capital growth to service our debt;

 

   

the impact of any downgrades in our corporate ratings on the credit terms offered to us by our vendors and the interest rates offered to us if we require additional capital or financing;

 

   

the availability of and increases in raw material pricing, energy and fuel;

 

   

the impact of competitive products and pricing and fluctuations in demand for our products;

 

   

effect of increased regulation of certain raw materials used in our products and changing federal, state, foreign and local environmental and occupational health and safety laws and regulations;

 

   

the impact of any significant deficiencies or material weaknesses in our internal controls over financial reporting;

 

   

the risks associated with conducting business in multiple foreign jurisdictions, including foreign currency exchange rate fluctuations;

 

   

our ability to improve existing products and develop new products;

 

   

a catastrophic loss of one of our key manufacturing facilities;

 

   

the potential conflicts of interest between our noteholders and the stockholders of Solo Cup Investment Corporation;

 

   

the loss of one or more of our principal customers;

 

   

the diversion of management attention from other business activities in connection with additional acquisitions or divestitures in the future, and the assumption of undisclosed liabilities in connection with completed and any future acquisitions;

 

   

our ability to enforce our intellectual property and other proprietary rights; and

 

   

the impact that financial market conditions have on our requirements to fund our pension plans.

For a more detailed description of some of these risks and uncertainties, see the “Risk Factors” included in Item 1A of our 2009 Annual Report on Form 10-K. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission, we do not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

In the ordinary course of business, we are exposed to market risk-sensitive instruments that consist primarily of our variable interest rate debt. On July 2, 2009, we extinguished our first lien credit facility with the net proceeds from the issuance of $300.0 million of 10.5% senior secured notes and initial borrowings of $28.3 million under a new asset-based revolving credit facility.

Interest accrues on outstanding borrowings under the asset-based revolving credit facility at a rate of either LIBOR (as defined in the asset-based revolving credit facility) plus a margin of 4% per annum, or a specified base rate plus a margin of 3% per annum, at our option. These interest rate margins are subject to adjustment after July 2, 2010 based on borrowing base availability. As of March 28, 2010, the asset-based revolving credit facility had an outstanding balance of $57.3 million and carried an effective interest rate of 4.843%. As of March 28, 2010, $100.5 million was available under the asset-based revolving credit facility, after taking into account borrowing base limitations.

We also have a Canadian credit facility that includes revolving and term credit facilities. The Canadian revolving and term loan facilities bear interest at the Canadian prime rate plus 0.25% or the Canadian bankers’ acceptance rate plus 1.50%, at our option. As of March 28, 2010, outstanding borrowings under the term loan of CAD 0.1 million (approximately $0.1 million) carried an effective interest rate of 1.90%. As of March 28, 2010, CAD 10.5 million (approximately $10.2 million) was available under the revolving credit facility, after taking into account borrowing base limitations.

We enter into derivative instruments as part of our risk management strategy. As of March 28, 2010, we had three forward-starting receive-variable, pay-fixed interest rate swap agreements with a total notional amount of $150.0 million that we entered into in August 2007 to hedge a portion of our exposure to interest rate risk related to our variable interest rate borrowings under our first lien credit facility. The variable rate of interest received is the Eurodollar rate. The fixed rate of interest paid is 5.3765%. The swap agreements are effective from August 28, 2007 through February 28, 2011. Prior to the refinancing transactions, the interest rate swaps were designated and qualified as highly-effective cash flow hedges. As long as these interest rate swaps were designated as cash flow hedges, the mark-to-market changes on the swaps had been reported as a component of accumulated other comprehensive loss. As a result of the refinancing, the hedged forecasted payments of variable-rate interest on the first lien credit facility borrowings were no longer probable of occurring. Accordingly, we discontinued hedge accounting prospectively, and, as a result, the cumulative mark-to-market loss of $9.1 million associated with the swaps was reclassified from accumulated other comprehensive loss to interest expense in June 2009. In periods subsequent to June 2009 through the expiration of these interest rate swaps, we are exposed to future variations in the fair value of the swaps as three-month LIBOR fluctuates.

Based upon the information above, our annual pre-tax income would increase by approximately $0.9 million for each one-percentage point increase in the interest rates applicable to our variable rate debt and interest rate swap agreements. At the end of March 2010, three-month LIBOR was less than one percent; therefore, the maximum decrease in our annual pre-tax income based on a decrease in interest rates applicable to our variable rate debt and interest rate swap agreements to zero would be approximately $0.2 million. The level of our exposure to interest rate movements may fluctuate significantly as a result of changes in the amount of debt outstanding under our credit facilities.

 

Item 4T. Controls and Procedures.

 

(a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

 

(b) Changes in Internal Control over Financial Reporting. During the thirteen weeks ended March 28, 2010, the Company implemented a new software system that affects its processes and controls over the settlement of deductions taken by and calculations of trade marketing incentives due to our foodservice customers by automating the claim review and approval process, facilitating the calculations that support the journal entries, and centralizing the claim documentation. This system implementation has resulted in a significant change to the Company’s internal controls. While management believes the changes have improved and strengthened its overall system of internal control, there are inherent risks associated with implementing software changes. Management believes that its controls in the affected areas, as modified, continue to be designed appropriately and operate effectively. There have been no other changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the thirteen weeks ended March 28, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

We are involved in various claims and legal actions arising from time to time in the ordinary course of business. We establish reserves for claims and actions when it is probable that we will incur a loss and such loss is capable of being estimated. While we cannot predict the outcome of these claims and actions with certainty, we believe that based on our current assessment of the facts and circumstances we are not a party to any pending legal proceeding, the ultimate disposition of which would have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Item 1A. Risk Factors.

We do not believe there have been any material changes in our risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2009 filed with the Securities and Exchange Commission on March 25, 2010.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

 

Item 3. Defaults upon Senior Securities.

Not applicable.

 

Item 4. (Removed and Reserved).

 

Item 5. Other Information.

Costs Associated With Exit or Disposal Activities.

On May 6, 2010, our Board of Directors committed to a plan designed to further optimize our manufacturing footprint. Under the plan, we intend to close certain of our U.S. manufacturing facilities by the end of the second quarter of 2012. We expect to incur costs over the life of the plan in the range of $113 to $133 million. The total costs include severance payments of approximately $4 to $6 million, equipment relocation and related costs of approximately $17 to $20 million, a charge of approximately $4 to $6 million attributable to lease payments to be made in periods after the related closure, asset impairment charges of approximately $13 to $16 million, and accelerated depreciation of approximately $75 to $85 million for certain property, plant and equipment that will no longer be used after the facilities are closed. Of the total expected costs over the life of the plan, approximately $21 to $26 million will require incremental cash expenditures.

 

Item 6. Exhibits.

 

10.33    Stock purchase agreement dated March 31, 2010 among Solo Cup Operating Corporation, as buyer, and InnoWare, LLC, as seller
31.1    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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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 thereunto duly authorized.

 

    SOLO CUP COMPANY
Date: May 11, 2010     By:  

/s/ Robert D. Koney, Jr.

      Robert D. Koney, Jr.
      Executive Vice President and Chief Financial Officer
      (Principal Financial and Accounting Officer and Duly Authorized Officer)

 

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INDEX OF EXHIBITS FILED WITH OR

INCORPORATED BY REFERENCE INTO

FORM 10-Q OF SOLO CUP COMPANY

FOR THE THIRTEEN WEEKS ENDED MARCH 28, 2010

 

10.33    Stock purchase agreement dated March 31, 2010 among Solo Cup Operating Corporation, as buyer, and InnoWare, LLC, as seller
31.1    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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