10-K 1 solo-10kx122511.htm FORM 10-K WebFilings | SOLO-10K-12.25.11
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________ 
FORM 10-K
 __________________________________________
 
S Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 25, 2011

£ 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
__________________________________________ 
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  £   No  S
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  S    No  £
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  S
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  S    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  S    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  S
The number of shares outstanding of the Registrant’s common stock as of March 23, 2012:
Common Stock, $0.01 par value – 100 shares


INDEX
 
 
Page
PART I.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7a.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
PART III.
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
PART IV.
 
 
 
 
 
Item 15.

i

PART I—FINANCIAL INFORMATION
Item 1.
Business.

In this annual report, the terms “we,” “us” and “our” refer to Solo Cup Company, a Delaware corporation, and its direct and indirect subsidiaries.
Overview
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 75 years. We manufacture and supply a broad portfolio of single-use products, including cups, lids, take-out and other food containers, plates, bowls, portion cups, cutlery and straws. Our products are available in plastic, paper, foam, post-consumer recycled content and annually renewable materials. We are one of the leading suppliers of branded single-use products in the United States, marketing our products primarily under the Solo®, Jack Frost®, Trophy®, Bare® by Solo® and Creative Carryouts® brands. We also provide a line of products to select customers under private label brands. We are recognized for our customer service, and our products are known for their quality, reliability and consistency.
We currently operate 13 manufacturing facilities and 13 distribution centers, some of which are combined with a manufacturing facility at a single location, in the United States, Canada, Mexico, Panama and the United Kingdom.
We generated approximately $1.6 billion of net sales for the fiscal year ended December 25, 2011. Financial information about our two business segments - North America and Europe - is disclosed in Note 20 to our consolidated financial statements included in Item 8 of this annual report.
Background
Solo Cup Company (“Solo Delaware”) was incorporated in Delaware in January 2004 to be the holding company for Solo Cup Company, an Illinois corporation (“Solo Illinois”), and its subsidiaries, and for SF Holdings Group, Inc. and its subsidiaries, including Sweetheart Cup Company Inc. Effective February 22, 2004, Solo Illinois became a wholly owned subsidiary of Solo Delaware, and Solo Delaware acquired 100% of the outstanding capital stock of SF Holdings. Prior to these transactions, Solo Delaware had no operations other than in connection with its formation and the authorization of the transactions described above.
Solo Illinois was established in 1936. Sweetheart Cup Company's operating history dated back to the founding of a predecessor company in 1911. In September 2005, Sweetheart Cup Company changed its name to Solo Cup Operating Corporation, and in October 2005, Solo Illinois merged with and into Solo Cup Operating Corporation, with Solo Cup Operating Corporation as the surviving entity. As a result of these transactions, Solo Delaware is a holding company, the material assets of which are 100% of the capital stock of SF Holdings. SF Holdings owns 100% of the capital stock of Solo Cup Operating Corporation.
Solo Delaware is a wholly owned subsidiary of Solo Cup Investment Corporation, a Delaware corporation. SCC Holding Company LLC, a Delaware limited liability company, 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 as of March 1, 2012.

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Our fiscal year is the 52- or 53-week period ending on the last Sunday in December. Our fiscal quarters for 2011 were the thirteen weeks ended March 27, June 26, September 25 and December 25, 2011.

Products
We produce a broad range of plastic, paper and foam single-use products used to serve food and beverages. Our plastic products include a wide range of cups, lids, take-out and other food containers, plates, bowls, cutlery and portion cups. Our paper products include cups, plates, bowls, portion cups and food containers. Our foam products include cups, plates and bowls. Our plastic, paper and foam products are offered in a variety of sizes, designs and colors, and at a range of price points. We also offer an Eco-forward® product line called Bare by Solo, which includes products made with recycled plastic or paper, compostable products made with wax, plant-based polylactic acid (PLA) or sugarcane, and products made with other renewable resources.
Customers
We serve two primary customer groups: (1) foodservice distributors and operators, referred to collectively in this annual report as foodservice customers; and (2) retailers of consumer products, referred to in this annual report as consumer customers.

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Foodservice
Approximately 79% of our net sales for fiscal year 2011 were to foodservice customers, including:
•
foodservice distributors, including broadline distributors, such as Sysco Corporation, US Foods, Gordon Food Service and Foodservices of America Inc., and specialty distributors, such as Bunzl plc, Network Services Company and UniPro Foodservice, Inc.; and
•
foodservice operators, such as Starbucks Corporation, Dunkin' Donuts, Burger King Corporation, Panera Bread Company, ARAMARK Corporation and Sodexo.

We believe we have strong relationships with our foodservice customers due to our broad array of product offerings, longstanding leadership in the industry and demonstrated capability in product quality, innovation, graphics and customer service.
We sell our products to foodservice customers through our regionally organized, in-house direct sales force, national account direct sales force and, to a lesser extent, select broker networks. We also maintain direct selling relationships with several of our major national accounts for which we provide direct customer service and tailored products for specific customer requirements. Our distributor-customers' stocking decisions are based on demand from foodservice operators. Consequently, our direct and national account sales force maintains a service-oriented supplier relationship with distributors and drives end-market demand from foodservice operators by offering a breadth of high-quality products. Our sales force also works closely with distributors and their customers to develop unique product offerings and promotional programs.
Consumer
Sales to consumer customers accounted for approximately 21% of our net sales for fiscal year 2011 and are made through various outlets, including:
•
grocery stores, such as Publix Super Markets, Inc., The Kroger Co. and Albertson's, Inc.;
•
mass merchandisers, such as Target Corporation and Wal-Mart Stores, Inc.;
•
warehouse clubs, such as Costco Wholesale Corporation and BJ's Wholesale Club, Inc.;
•
value channel stores, such as Dollar General Corporation, Family Dollar Stores Inc., ALDI Inc. and Sav-A-Lot Foods Inc.; and
•
other retail outlets, such as drug and party stores.

We sell to a diverse group of consumer customers primarily through regional broker networks. In the case of some of our larger consumer customers, we maintain a direct supplier relationship through our in-house direct sales force. Our sales and marketing strategy for consumer customers is designed to support our strong brand names and private label product offerings and includes integrated marketing programs that consist of a combination of in-store, online, television, print and product-placement brand enhancement activities.
Any backlog of orders we may have with our foodservice or consumer customers is not material.
Seasonality
Historically, we have experienced fluctuations in sales by season. We have higher sales volume in the warmer months and realize the majority of our net cash flows from operations during the last nine months of the year. Typically, during the first quarter we build inventory to meet demand in the warmer months. Sales for such periods reflect the high seasonal demands of the summer months when outdoor and away-from-home consumption increases.

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Raw Materials
Our principal raw materials are (1) various types of resins for our plastic and foam products and (2) paperboard for our paper products. The resins that we use include polystyrene, polypropylene, and polyethylene terephthalate (PET). We purchase resins from large petrochemical and resin producers. Resin prices are influenced by input feedstock prices, such as crude oil, natural gas, benzene, ethylene, propylene and paraxylene, as well as availability of supply and changes in demand.
The principal raw material used in our paper operations is solid bleached sulfate paperboard. We purchase coated and uncoated paperboard from a variety of large and small manufacturers. Paper prices are driven by global supply and demand as well as input costs for energy, fiber, chemicals, polyethylene and transportation.
We believe we have good relationships with our major raw material suppliers. For 2011, our overall supply of raw materials was adequate, and for 2012, we believe it will remain adequate.
Our raw material costs make up a significant portion of our cost of goods sold. Although we generally enter into one- to three-year supply contracts with a number of our raw material suppliers, we continue to have exposure to changes in raw material prices. Historically, we have not hedged our exposure to fluctuations in raw material prices.
Manufacturing
Our manufacturing strategy is to reduce costs through continuous process improvements and innovation, while meeting our customers' needs and maintaining our standard for quality. We employ various technologies and strategies to supply our wide product line, including working with third parties to supply manufacturing capability in instances where expertise or economies of scale are not available in-house. We manufacture and supply a variety of products in plastic, paper and foam. Our flexibility and proficiency in these technologies enable us to respond quickly to customer needs.
We use the following primary processes to manufacture our products:
•
Plastic cups, lids, plates and bowls, and foam plates. We use plastic extrusion to convert plastic resin from pellets to a flat extruded sheet. Using a thermoforming process, we convert the extruded sheet into the final product. We add graphics based on customer specifications and package our products in various quantities depending on customer requirements. We have the capability to utilize a variety of resins, including polystyrene, polypropylene, and PET.
•
Paper cups, plates and food containers, and foam cups. We print graphics on paperboard according to customer requirements and feed the paperboard through machines that cut, form or fold the material into the final product. We produce our thin-wall foam cups using a process similar to the one we employ for paper cups.
•
Plastic cutlery and straws. We utilize injection molding machines to manufacture plastic cutlery. We melt plastic pellets and inject the molten resin into molds. The pieces of cutlery are automatically cooled, trimmed and ejected from the machines. We individually wrap or package the product in bulk. An extrusion process is used to form different sizes of straws based on customer specifications. We can make our plastic cutlery and straws with polypropylene or polystyrene.
 
Distribution
Our self-managed distribution centers in North America are located in proximity to major population centers, generally consolidating the output of our manufacturing operations. We offer a broad range of products from these distribution centers. This strategy provides value to our customers by allowing us to respond to demand more rapidly and allowing our customers to carry less inventory. Our international subsidiaries operate out of owned or leased warehouses and manage the related distribution and transportation networks.
Competition
We compete in the single-use foodservice products industry. The industry encompasses a wide variety of products, including single-use cups, lids, plates, bowls, containers, cutlery and straws. These products are manufactured from plastic and paper raw materials, such as coated and uncoated paperboard, polystyrene, polypropylene and PET, emerging bio-resins such as PLA, and renewable resources such as sugarcane. Our products also compete with metal, glass and other packaging materials, as well as plastic packaging materials made through different manufacturing processes.
We compete for customers based on brand reputation, quality, cost, service, breadth of product offering, product differentiation, innovation, marketing programs and value. Our competitors include large multinational companies as well as regional manufacturers. Some of our competitors compete across many of our product lines, while most compete with only some of our products.

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Intellectual Property
We rely on a combination of trade secrets, confidentiality agreements, patents, trademarks, copyrights, licenses, and contractual provisions, as well as various intellectual property and unfair competition laws to protect our intellectual property and other proprietary rights. We own a number of patents and trademarks, which vary in duration depending upon when the application was filed or granted. We believe that, in the aggregate, the rights under our patents and trademarks are generally important to our business; however, no single right is material to our business.
Research and Development
Our research and development strategy has three goals: (1) create innovative, value-added products and packaging that target both new and existing customers; (2) differentiate our products in the marketplace; and (3) explore new products, processes and market opportunities that will enhance our overall market position. We continue to develop, test and sample new, alternative and recycled raw materials for use in our products, including those derived from renewable resources. In 2011, we continued our investment in manufacturing lines for our core product categories, as well as in support of new products developed in conjunction with our customers.
International
Our international operations consist of operating subsidiaries in Canada, Mexico, Panama and the United Kingdom, as well as international export sales originating in the United States and at our international subsidiaries. Approximately 21% of our net sales for fiscal year 2011 were generated outside of the United States. International operations are subject to additional risks inherent in conducting business outside the United States, such as changes in currency exchange rates, price and currency exchange controls, import restrictions, nationalization and other restrictive governmental actions, and, in some countries, volatile economic, social and political conditions.
Employees
As of December 25, 2011, we had approximately 6,400 employees worldwide, including approximately 5,100 in the United States. Approximately 5,100, or 80%, of our total employees worldwide were hourly employees, and approximately 900, or 18%, of those hourly employees were covered by collective bargaining agreements. We currently have collective bargaining agreements in effect at our facilities in Augusta, Georgia; Cuautitlan, Mexico; Juan Diaz, Panama; and Scarborough, Ontario, Canada. These agreements cover all hourly-paid production, maintenance and distribution employees at each of those facilities and contain standard provisions relating to, among other things, management rights, grievance procedures, strikes and lockouts, seniority and union rights. The current expiration dates of the Augusta, Cuautitlan, Juan Diaz and Scarborough agreements are March 31, 2012, December 31, 2012, June 30, 2013 and May 31, 2015, respectively. The Company and the union are renegotiating the terms of the collective bargaining agreement with respect to our facility in Augusta, Georgia. Other than the agreements described above, no employees currently are covered by collective bargaining agreements. We believe that we have good relationships with our employees.
Environmental Regulation
In the normal course of business, we are required to comply with federal, state, foreign and local environmental and occupational health and safety laws and regulations, including those governing emissions of air pollutants, discharges of waste and storm water, and the handling, use, treatment, storage and disposal of, or exposure to, hazardous substances. Historical capital and operating expenditures deemed necessary to remain in compliance have not had a material impact on our financial position. We believe that we are in material compliance with applicable standards and regulations of the various regulatory agencies.
The federal Clean Air Act requires the phase-out of specified refrigerant compounds. We must upgrade or retrofit the air conditioning and chilling systems we currently use over the next few years. We have decided to replace units as they become inefficient or unserviceable, and we do not believe that the costs associated with such replacement will be material to our business, financial condition, results of operations or cash flows.
Some of our facilities contain asbestos. We monitor such asbestos on an ongoing basis and maintain and/or remove it as appropriate to prevent the release of friable asbestos. We do not believe the costs associated with this program will be material to our business, financial condition, results of operations or cash flows.
We have received a number of requests for information or notifications of potential liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, regarding the investigation or cleanup of environmental contamination at third-party sites. We have no reason to believe that the final outcome of these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows; however, we can give you no

5

assurance about the ultimate effect, if any, of such matters on us.
Available Information
Our Internet website is www.solocup.com. We are an electronic filer and make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to our reports filed or furnished pursuant to Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission, or SEC. You may read and copy any materials we file with or furnish to the SEC at its Public Reference Room at 100 F Street, NE., Washington, DC 20549. Information relating to the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains our annual, quarterly and current reports, and other information that we electronically file with or furnish to the SEC.

 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, including without limitation the statements found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 below, contain 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 expected actions 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 factors listed in “Risk Factors” in Item 1A below. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, 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 statement.


Item 1A.
Risk Factors.

Set forth below and elsewhere in this annual report are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and in other documents we file or furnish with the SEC. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also affect our business. Any or all of these risks could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our ability to meet our cash requirements and service our debt is affected by many factors that are outside our control, including the current global recession and restricted credit markets.
Our future operating performance is dependent on many factors, some of which are beyond our control, including prevailing economic, financial and industry conditions. The sales of our products are primarily dependent on the discretionary income of consumers. If global economic conditions continue to adversely affect employment rates and consumer discretionary spending, our sales could decline or become increasingly concentrated in lower-margin products, and our business, financial condition, results of operations or cash flows could be materially adversely affected.
The impact of the global recession and credit crisis on our suppliers and customers is also unpredictable, outside of our control and may create additional risks for us, both directly and indirectly. The inability of our raw material suppliers to access financing or the insolvency of one or more of our raw material suppliers, could lead to disruptions in our supply chain, which could adversely affect our sales or increase our costs. Our suppliers may require us to pay cash in advance or obtain letters of credit for their benefit as a condition to selling us their products and services. A number of restaurant chains and consumer product retailers have sought bankruptcy protection. If one or more of our principal customers filed for bankruptcy, our sales could be adversely affected and our ability to collect outstanding accounts receivable from any such customer could be limited. Any of these risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Our operating performance is dependent on our continued ability to access funds under our asset-based revolving credit facility and Canadian credit facility, maintain sales volumes, drive profitable growth, realize cost savings and generate cash

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from operations. The financial institutions that fund our asset-based revolving and Canadian credit facilities are also being affected by the volatility in the credit markets. If one or more of those institutions cannot fulfill one of our revolving credit requests, then our operations may be adversely affected. If we cannot borrow under one of our credit facilities because a lender is unable to fund requested amounts, we do not have a sufficient borrowing base or we otherwise are unable to comply with the terms and conditions under the applicable credit facility, or if we do not meet our cost, sales or growth initiatives within the time frame we expect, our business, financial condition, results of operations and cash flows could be materially adversely affected.
A material decline in our cash flows also could cause us to fail to pay interest or principal when due under our asset-based revolving or Canadian credit facility, the indenture for our senior secured or senior subordinated notes or under our other financing arrangements. A payment default or a default under any of the other covenants in our debt agreements or other financing arrangements could restrict or terminate our access to borrowings and materially impair our ability to meet our obligations as they come due. If we do not comply with our payment or other covenants under our debt agreements or other financing arrangements and we do not obtain a waiver or amendment that otherwise addresses that non-compliance, the lenders who participate in our asset-based revolving and Canadian credit facilities may accelerate payment of all amounts outstanding under the credit facilities, which amounts would immediately become due and payable, together with accrued interest. Such an acceleration would cause a default under the indentures governing our senior secured and senior subordinated notes, under our lease agreement with iStar SCC Financial Distribution Centers LLC covering six of our facilities and under other arrangements that provide us with access to funding. An inability to generate sufficient cash flow to service our debt and meet our other needs, or a default of any of the covenants under our debt agreements, may require us to reduce expenditures that we deem necessary to our business, refinance all or a portion of our debt or obtain additional financing. Our ability to refinance our existing debt or obtain additional financing is subject to a number of factors, including our financial performance and prevailing economic, financial and industry conditions, many of which are out of our control. We cannot assure you that any refinancing would be possible or that any additional financing could be obtained on acceptable terms or at all. An inability to refinance existing debt or obtain additional financing could have a material adverse effect on our business, financial condition, results of operations and cash flows, and on our ability to meet our obligations under our credit facilities, indentures and other financing arrangements as they become due. See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in Item 7 of this annual report.
Our significant level of debt could limit cash flows available for our operations, adversely affect our financial health and prevent us from fulfilling our obligations under our credit facilities, indentures and other debt agreements.
As of December 25, 2011, we had total debt of $662.5 million, which included $325.0 million of our 8.5% senior subordinated notes, $296.9 million of our 10.5% senior secured notes (reflecting $300.0 million in aggregate principal amount less $3.1 million of unamortized original issue discount), $36.5 million of borrowings under our asset-based revolving credit facility and $4.1 million of capital lease obligations.
Our significant level of debt could have important consequences for our business, including:
•
requiring that we use a large portion of our cash flows to pay principal and interest on borrowings under our credit facilities, our senior secured and senior subordinated notes and our other debt, which would reduce the availability of cash to fund working capital, capital expenditures, research and development and other business activities;
•
increasing our vulnerability to general adverse economic and industry conditions;
•
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•
restricting us from making strategic acquisitions or exploiting business opportunities;
•
making it more difficult for us to satisfy our obligations under the credit facilities, the senior secured and senior subordinated notes and our other debt;
•
placing us at a competitive disadvantage relative to competitors that have less debt; and
•
limiting our ability to borrow additional monies in the future to fund working capital, capital expenditures, research and development and other business activities.
We may be able to incur additional debt that could further exacerbate the risks associated with our substantial leverage.
We may incur significant additional debt in the future. Although the indentures governing our senior secured and senior subordinated notes and the terms of our asset-based revolving and Canadian credit facilities contain restrictions on our incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions. As of December 25, 2011, we had available capacity, subject to borrowing base limitations and other specified terms and conditions, of $150.7 million under our asset-based revolving credit facility and $16.7 million under our Canadian credit facility, in each case after taking into account outstanding letters of credit. If we incur additional debt, the risks described above under “Our significant level of debt could limit cash flows available for our operations, adversely affect our financial health and prevent us from fulfilling our obligations under our credit facilities, indentures and other debt agreements” would intensify.


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Covenant restrictions under our debt agreements may limit our ability to operate our business.
The indentures governing our senior secured and senior subordinated notes, the agreements governing our asset-based revolving and Canadian credit facilities and the agreements governing our other financing arrangements contain covenants that may restrict our ability to finance future operations or capital needs or to engage in other business activities, which restrictions include, among other things, limitations on our ability to:
•incur additional debt or issue preferred and other specified classes of stock;
•create liens;
•pay dividends, make investments or make other restricted payments;
•sell assets;
•consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
•enter into transactions with affiliates; and
•designate subsidiaries as unrestricted under specified agreements governing our indebtedness.
In addition, if available capacity under our asset-based revolving credit facility falls below a specified level (the greater of (a) $15,000,000 or (b) 15% of the lesser of our borrowing base or the aggregate amount of commitments under the facility), we will be required to maintain a Fixed Charge Coverage Ratio (as defined in the facility) of 1.1 to 1 for a trailing twelve-month period.
A breach of any of these covenants would result in a default under the loan agreements governing our asset-based revolving and Canadian credit facilities and under the indentures governing our senior secured and senior subordinated notes. If an event of default under the loan agreement governing our asset-based revolving or Canadian credit facility, the indenture governing our senior secured or senior subordinated notes or our other financing arrangements were to occur, all amounts outstanding under those agreements and other arrangements could be declared immediately due and payable, together with accrued interest. If all or a portion of our debt were accelerated, we cannot assure you that we would have access to sufficient funds or other assets to pay amounts due.
Failure to maintain our credit ratings could limit our access to the capital markets, adversely affect the cost and terms upon which we are able to obtain additional financing and negatively impact our business.
Although we believe existing cash, funds generated by operations and amounts available under our asset-based revolving and Canadian credit facilities will provide adequate resources to fund our ongoing operating requirements, we may be required to seek additional financing to compete effectively. Any downgrade to our credit ratings could, among other things, limit our access to the capital markets and adversely affect the cost and terms upon which we are able to obtain additional financing, including any financing from our suppliers, which could negatively affect our business. Our credit ratings have fluctuated in the past as a result of a number of factors, including company performance and outlook, and conditions in our industry, the general economy and financial markets. We cannot assure you that we will be able to maintain our existing credit ratings.
We could be adversely affected by raw material availability and pricing or a shortage of supply due to supplier financial difficulties, natural disasters or other causes.
Our principal raw materials include polystyrene, polypropylene, PET and coated and uncoated paperboard. There are currently a limited number of polystyrene suppliers, and periods of short supply may occur if one or more suppliers' operations are materially affected by financial difficulties, natural disasters or other factors. To the extent that our supply of raw materials becomes restricted and we cannot locate or substitute adequate alternative sources, our business, financial condition, results of operations and cash flows may be materially adversely affected.
In addition, prices for our raw materials fluctuate. In recent years, including 2011, our industry has experienced volatility in raw material and energy pricing. When raw material prices decline, we face increased pressure from our customers to reduce our selling prices for products containing that raw material. When raw material prices increase, our selling prices have historically also increased, although often with a time lag. A number of factors affect the impact that raw material price changes have on us, including the underlying cause of price changes (e.g., natural disasters, weather conditions or general economic conditions), the level of our inventories at the time of price changes, the specific timing and frequency of price changes and the lead and lag time that generally accompany the implementation of both raw material price changes and subsequent selling price changes. If raw material prices increase and we are unable to pass the price increases on to our customers or there is a significant time lag in any selling price increases that we are able to implement, our profitability may be adversely affected, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We have not historically employed hedging strategies to limit our exposure to fluctuations in raw material prices on any meaningful level.

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Our ability to successfully operate is dependent on the availability of energy and fuel at anticipated prices.
Sustained increases in global energy prices, particularly for crude oil and electricity, at prices greater than we have anticipated could have a material adverse impact on our operations if we are unable to pass through such increases to our customers in a timely manner. Increases in crude oil prices particularly impact our transportation and production costs and the price we pay for some raw materials. Global energy prices are determined by many factors that are beyond our control and unpredictable. Consequently, we cannot predict whether global energy prices will remain at their current levels, and we cannot predict the impact that these prices will have on our business, financial condition, results of operations or cash flows.
We operate in a highly competitive environment and may not be able to compete successfully.
The single-use foodservice products industry is extremely competitive and highly fragmented. We compete for customers based on brand reputation, quality, cost, service, breadth of product offering, product differentiation, innovation, marketing programs and value. Some of our competitors compete across many of our product lines, while most compete with only some of our products. A few of our competitors are integrated in the manufacturing of single-use foodservice products and related raw materials, which reduces their costs for these materials and gives them greater access to the materials in periods of short supply. We also face competition from foreign competitors who are entering regional U.S. markets in some product categories and are aggressively trying to differentiate their product offerings based on price. Our current or potential competitors may offer products at a lower price or products and services that are superior to ours. In addition, our competitors may be more effective and efficient in integrating new technologies or emerging raw materials to meet changing consumer demands or legislative mandates. Our success depends upon successful research, development and engineering efforts to utilize emerging and legislatively mandated raw materials, our ability to expand or modify our manufacturing capacity and the extent to which we are able to convince customers and consumers to accept our new products. If we fail to successfully innovate, introduce, market, manufacture and differentiate our products from those of our competitors, our ability to maintain or expand our net sales and to maintain or enhance our industry position or profit margins could be adversely affected. This, in turn, could materially adversely affect our business, financial condition, results of operations or cash flows.
Our products also compete with products that incorporate metal, glass, reusables and other packaging materials. If we are unable to react timely to changing consumer demands, legislative mandates and competitive conditions that favor those or other competing products, we may experience lower prices, sales volume and gross margins, and a reduced ability to attract and retain customers.
Our operations and products are subject to environmental and governmental regulations that could adversely affect our business, financial condition, results of operations or cash flows.
Our operations are subject to comprehensive and frequently changing federal, state, local and foreign environmental and occupational health and safety laws and regulations. These laws and regulations include the federal Food, Drug and Cosmetic Act, which regulates materials that have direct contact with food, and laws governing the use of specified raw materials in our products, emissions of air pollutants, discharges of waste and storm water, and the handling, use, treatment, storage and disposal of, or exposure to, hazardous substances. We are presently, and may in the future be, subject to liability for the investigation and remediation of environmental contamination, including contamination caused by other parties, at properties that we own or operate or formerly owned or operated, and at other properties where we or our predecessors arranged for the disposal of hazardous substances. As a result, we are involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters. Any present or future investigations, future clean up costs or remedial efforts relating to environmental matters could entail material costs or otherwise result in material liabilities. Under environmental laws applicable to our operations and our properties, we are required to obtain various environmental permits granted by federal, state, local and foreign authorities. There are various risks associated with noncompliance with these permits, including cessation of our operations at the noncompliant facilities and significant fines and penalties.
We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or affect the use of our products, or what environmental conditions may be found to exist at our facilities or at third-party sites for which we are liable. Enactment of stricter laws or regulations, stricter interpretation of existing laws and regulations or the requirement to undertake the investigation or remediation of currently unknown environmental contamination at our own or third-party sites may require us to make additional expenditures, some of which could be material.
The single-use foodservice products industry is subject to evolving federal, state, local and foreign legislation and regulations affecting the types of raw materials we may use in our products. Some of the legislation and regulations are designed to reduce solid waste and litter by requiring, among other things, that manufacturers pay for the disposal of products they create or use raw materials that are recyclable, biodegradable or compostable. Other legislation and regulations are intended to promote health and safety by prohibiting, or requiring the disclosure of, the use of specified materials. The legislation passed to date has not had a material adverse effect on our operations; however, if we are unable to procure or substitute raw materials that meet the requirements of future environmental legislation or regulations, our sales may decline in

9

those localities where such laws and regulations have been adopted. Proposed legislation could increase our operating costs as a result of any fees imposed on manufacturers of foodservice products for the disposal of products that are not recyclable or compostable and could increase the cost of our products by prohibiting the use of traditional raw materials and requiring the use of emerging materials that are more expensive. Proposed legislation and regulations also could lower demand for products that include, or are associated with, materials that are the focus of health and safety legislation or regulations.
Our international operations expose us to risks related to conducting business in multiple jurisdictions outside the United States.
Our international operations consist of operating subsidiaries in four countries, as well as international export sales originating in the United States and at our international facilities. The international scope of our operations may lead to volatile financial results and difficulties in managing our business. We generated approximately 21% of our net sales outside the United States during fiscal year 2011. International sales and operations are subject to a number of risks, including the following:
•
exchange rate fluctuations and limitations on currency convertibility;
•
import limitations and export control restrictions;
•
social and political turmoil, corruption and civil unrest;
•
restrictive governmental actions, such as the imposition of trade quotas and restrictions on transfers of funds;
•
changes in non-U.S. labor laws and regulations affecting our ability to hire, retain or dismiss employees;
•
violations of U.S. or local laws, including the U.S. Foreign Corrupt Practices Act;
•
compliance with multiple and potentially conflicting laws and regulations;
•
preference for locally-branded products, and laws and business practices favoring local competition;
•
less effective protection of intellectual property;
•
difficulties and costs of staffing, managing and accounting for foreign operations; and
•
unfavorable business conditions or economic instability in any particular country or region.
Our exposure to risks associated with currency exchange rate fluctuations results primarily from translation exposure associated with the preparation of our consolidated financial statements, as well as from transaction exposure associated with generating revenues and incurring expenses in different currencies. While our consolidated financial statements are reported in U.S. dollars, the financial statements of our foreign subsidiaries are measured using the local currency as the functional currency and translated into U.S. dollars by applying an appropriate exchange rate. As a result, fluctuations in the exchange rate of the U.S. dollar relative to the local currencies in which our foreign subsidiaries report could cause significant fluctuations in our consolidated results. We record sales and expenses in a variety of currencies. While our expenses with respect to foreign operations are generally denominated in the same currency as the corresponding sales, we have transaction exposure to the extent our receipts and expenditures are not offsetting in any currency. Moreover, the costs of doing business abroad may increase as a result of adverse exchange rate fluctuations. In addition, we may lose customers if exchange rate fluctuations, currency devaluation or economic crises increase the local currency price of our products or reduce our customers' ability to purchase our products. If we are unable to manage the operational challenges associated with our international activities, our business, financial condition, results of operations or cash flows could be materially adversely affected.
In the event of a catastrophic loss of one of our key manufacturing facilities, our business would be adversely affected.
While we manufacture our products in a number of diversified facilities and maintain insurance covering our facilities, including business interruption insurance, a catastrophic loss of the use of all or a portion of one of our key manufacturing facilities due to accident, weather conditions, natural disaster or otherwise, whether short- or long-term, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We are controlled by the stockholders of Solo Cup Investment Corporation, the interests of which may conflict with the interests of holders of our senior secured and senior subordinated notes.
All of our outstanding capital stock is owned by our parent company, Solo Cup Investment Corporation. Holders of SCC Holding's voting interests control 100% of the outstanding common stock of Solo Cup Investment Corporation, and affiliates of Vestar hold 99.9% of Solo Cup Investment Corporation's outstanding convertible participating preferred stock, or SCIC preferred stock, with the remaining balance of the SCIC preferred stock held by members of our management.
The SCIC preferred stock is currently convertible at any time, at the option of the holders, into 32.71% of the common stock of Solo Cup Investment Corporation. The SCIC preferred stock is entitled to vote on all matters, voting together with the holders of common stock as a single class. In December 2006, Vestar, in its capacity as the significant shareholder of SCIC preferred stock, became entitled to appoint a majority of the director positions of Solo Delaware and Solo Cup Investment Corporation pursuant to a stockholders' agreement dated as of February 27, 2004, as amended, among Vestar, Solo Cup Investment Corporation, SCC Holding, Solo Delaware and various other parties. If Vestar receives a bona fide offer from a third party to purchase (whether by stock purchase, merger or otherwise) at least 80% of Solo Delaware's common stock, SCC Holding has agreed at Vestar's request to vote in favor of such offer.

10

The interests of SCC Holding and the holders of SCIC preferred stock, including Vestar, could conflict with the interests of holders of our senior secured and senior subordinated notes. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of these indirect equity holders might conflict with the interests of a holder of our notes. Solo Cup Investment Corporation's stockholders may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though the transactions might involve risks to a holder of our senior secured or senior subordinated notes. In addition, SCC Holding and Vestar, or any of their affiliates, may in the future own businesses that directly compete with our business. While we are subject to specified provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, these provisions do not require us to have independent directors.
The loss of one or more of our principal customers could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We have a number of large customers that account for a significant portion of our net sales. For fiscal year 2011, our five largest customers represented approximately 30% of our net sales, with no one customer accounting for more than 9.5% of our net sales. The loss of one or more of our large customers could have a material adverse effect on our business, financial condition, results of operations or cash flows. In line with industry practice, we generally do not enter into long-term sales agreements with customers.
We may undertake acquisitions or divestitures and consequently face potential integration, management diversion and other risks.
We may make acquisitions or divestitures in the future. Any future acquisitions or divestitures could be of significant size and may involve U.S. or international parties. To acquire and integrate a separate organization or significant new assets or to divest a portion of our business would divert management attention from other business activities. This diversion, together with other difficulties we may encounter in integrating an acquired business or selling a portion of our business, could have a material adverse effect on our business, financial condition, results of operations or cash flows. In connection with future acquisitions, we may assume undisclosed liabilities of the businesses we acquire. These liabilities could materially adversely affect our business, financial condition, results of operations or cash flows.
We may not be able to adequately protect our intellectual property and other proprietary rights.
We rely on a combination of trade secrets, confidentiality agreements, patents, trademarks, copyrights, licenses, and contractual provisions, as well as various intellectual property and unfair competition laws to protect our intellectual property and other proprietary rights. Such measures may not provide adequate protection and may not prevent our competitors from gaining access to our intellectual property and proprietary information or independently developing technologies that are substantially equivalent or superior to our technology, which could harm our competitive position and could have a material adverse effect on our business, financial condition, results of operations or cash flows. Furthermore, we cannot give you any assurance that any pending patent application or trademark application made by us will result in an issued patent or registered trademark, or that any issued or registered patents or trademarks will not be challenged, invalidated, circumvented or rendered unenforceable.
Litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties related to our intellectual property. Even if our proprietary rights are enforceable, others may be able to design around our patents or independently develop products and processes equivalent to our proprietary and confidential information. Any litigation or claims brought by or against us, whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property and proprietary rights, subject us to significant liabilities, require us to seek licenses on unfavorable terms, if available at all, prevent us from manufacturing or selling products or require us to redesign, relabel or, in the case of trademark claims, rename our products, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

11

Financial market conditions may negatively impact the return on plan assets for our pension plans, require additional funding and negatively impact our cash flows.
Certain U.S., Canadian and European hourly and salaried employees are covered by our defined benefit pension plans. Between December 31, 1987 and March 31, 2001, the majority of the U.S. plans were frozen to new participants. Our pension expense and required contributions to our pension plan are directly affected by the value of plan assets, the projected rate of return on plan assets, the actual rate of return on plan assets and the actuarial assumptions we use to measure the defined benefit pension plan obligations. Due to the significant financial market downturn that started in 2008 and continued into 2009, the funded status of our pension plans has declined and actual asset returns were below the assumed rate of return used to determine pension expense. Our pension plans were underfunded by approximately $40.2 million and $31.3 million as of December 25, 2011 and December 26, 2010. If plan assets continue to perform below expectations, future pension expense and funding obligations will increase, which could have a negative impact on our cash flows from operations, decrease borrowing capacity and increase interest expense. Moreover, under the Pension Protection Act of 2006, it is possible that continued losses to asset values may necessitate accelerated funding of U.S. pension plans in the future to meet minimum federal government requirements.

Item 1B.
Unresolved Staff Comments.
None.



12

Item 2.
Properties.

We own, lease and operate manufacturing and distribution facilities in North America, Panama and the United Kingdom. The table below provides summary information regarding the material manufacturing, distribution and office properties that we currently utilize. We believe these properties are being used, and are adequate, for their intended purposes and are well-maintained. A number of our owned properties are mortgaged as collateral under the indenture governing our senior secured notes and under our asset-based revolving credit facility. The table below does not include our owned manufacturing and office facilities in Highland Park, Illinois or our leased manufacturing facility in North Andover, Massachusetts. We closed the Highland Park facility in 2009 and currently are seeking a buyer for the facility. We closed the North Andover facility in 2011 and currently are seeking a subtenant for the facility. The table also excludes a leased distribution facility in Ontario, California and leased office space in Alpharetta, Georgia. We currently sublease our entire space in each of these facilities and accordingly do not utilize the facilities in our operations.
Facilities
 
Location
 
Function
 
Owned/
Leased 
 
Size (Approximate
Square Footage)
 
California
Rialto
Distribution
Leased
882,230

Georgia
Augusta
Manufacturing
Leased
364,000

 
Conyers
Manufacturing
Leased
367,000

 
Social Circle
Distribution
Leased
1,225,716

 
Thomaston
Manufacturing
Owned
171,232

 
 
Distribution
Leased
166,000

Idaho
Twin Falls
Manufacturing
Owned
130,000

Illinois
Chicago
Manufacturing
Leased
820,000

 
Lake Forest
Executive Office
Leased
133,218

 
University Park
Distribution
Leased
1,552,475

 
Urbana
Manufacturing
Leased
269,000

Maryland
Federalsburg
Manufacturing
Leased
405,000

 
Hampstead
Distribution
Leased
1,034,000

Oklahoma
Ada
Manufacturing
Owned
267,000

Texas
Dallas
Manufacturing/Distribution
Leased
1,220,000

 
Grand Prairie
Distribution
Leased
603,354

Washington
Sumner
Distribution
Leased
201,966

Non-US
Mississauga, Ontario, Canada
Distribution/Office
Leased
262,087

 
Toronto, Ontario, Canada
Manufacturing/Distribution
Owned
485,825

 
Cuautitlan, Mexico
(4 facilities)
Manufacturing/Distribution
1 Owned/ 3 Leased
98,425

 
Panama
(2 facilities)
Manufacturing/Distribution
1 Owned/ 1 Leased
359,773

 
United Kingdom (5 facilities)
Manufacturing/Distribution
Leased (1)
287,000

 
(1) At one of these facilities we own a building on leased land.




13


Item 3.
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 4.
Removed and Reserved.

PART II—OTHER INFORMATION


Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

There is no public trading market for Solo Delaware's common stock. Solo Cup Investment Corporation is the owner of record of all of the common stock of Solo Delaware. We do not have any equity compensation plans under which Solo Delaware securities may be issued.
Since our formation in January 2004, we have not paid dividends on Solo Delaware's common stock and we do not anticipate paying cash dividends in the foreseeable future. In addition, our bank credit facilities and the indentures governing our senior secured and senior subordinated notes restrict our ability to pay dividends on Solo Delaware's common stock.




14


Item 6.
Selected Financial Data.

The following table sets forth our selected historical consolidated financial data. You should read the information in this table in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this annual report and our consolidated financial statements and related notes included in Item 8 of this annual report.

(In millions)
For the year ended
Statement of Operations Data:
December 25,
2011
 
December 26,
2010
 
December 27,
2009
 
December 28,
2008
 
December 30,
2007
Net sales
$
1,636.3

 
$
1,582.9

 
$
1,502.6

 
$
1,847.0

 
$
2,110.1

Cost of goods sold
1,505.9

 
1,439.3

 
1,296.2

 
1,599.2

 
1,859.7

Gross profit
130.4

 
143.6

 
206.4

 
247.8

 
250.4

Selling, general and administrative expenses
135.2

 
150.4

 
150.1

 
159.0

 
203.6

Loss (gain) on asset disposals
0.9

 
3.9

 
9.0

 
22.6

 
(8.5
)
Impairment of goodwill
—

 
—

 
17.2

 
—

 
—

Asset impairment
13.1

 
20.5

 
—

 
0.6

 
—

Operating (loss) income
(18.8
)
 
(31.2
)
 
30.1

 
65.6

 
55.3

Interest expense, net
70.6

 
70.6

 
63.1

 
61.6

 
79.8

Prepayment penalty
—

 
—

 
—

 
—

 
1.3

Loss on debt extinguishment
—

 
—

 
2.5

 
—

 
4.0

Reclassification of unrealized loss on cash flow hedges to interest expense
—

 
—

 
9.1

 
—

 
—

Foreign currency exchange loss (gain), net
1.8

 
2.2

 
(2.6
)
 
14.1

 
(4.1
)
Gain from bargain purchase
—

 
(1.7
)
 
—

 
—

 
—

Other income, net
—

 
—

 
—

 
—

 
(0.2
)
Loss from continuing operations before income taxes
(91.2
)
 
(102.3
)
 
(42.0
)
 
(10.1
)
 
(25.5
)
Income tax provision (benefit)
2.3

 
1.9

 
(6.3
)
 
2.1

 
(19.5
)
Loss from continuing operations
(93.5
)
 
(104.2
)
 
(35.7
)
 
(12.2
)
 
(6.0
)
Loss from discontinued operations, net of income tax provision
—

 
—

 
—

 
(0.7
)
 
(0.1
)
Gain on sale of discontinued operations, net of income tax provision
—

 
—

 
—

 
0.8

 
77.2

Net (loss) income
$
(93.5
)
 
$
(104.2
)
 
$
(35.7
)
 
$
(12.1
)
 
$
71.1

Balance Sheet Data (1):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
19.3

 
$
21.5

 
$
30.0

 
$
57.5

 
$
33.6

Total assets
779.1

 
864.7

 
987.4

 
1,073.8

 
1,203.2

Total debt, including current maturities
662.5

 
637.7

 
636.1

 
718.2

 
759.0

Total shareholder's (deficit) equity
(194.7
)
 
(87.5
)
 
18.2

 
31.3

 
88.5

Other Financial Data (2) :
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(21.1
)
 
$
43.7

 
$
137.9

 
$
131.9

 
$
95.6

Net cash (used in) provided by investing activities
(3.3
)
 
(48.4
)
 
(65.6
)
 
(68.4
)
 
305.6

Net cash provided by (used in) financing activities
23.5

 
(3.9
)
 
(101.1
)
 
(40.3
)
 
(394.9
)
Capital expenditures
28.3

 
42.2

 
71.8

 
79.7

 
49.0


(1) Balance Sheet Data is as of the last day of the relevant fiscal year.
(2) Other Financial Data for our 2007 fiscal year includes our continuing and discontinued operations.


15


Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.

Executive Summary
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 manufacture and supply a broad portfolio of single-use products, including cups, lids, take-out and other 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 serve two primary customer groups, foodservice and consumer. Sales to foodservice customers, including foodservice and specialty distributors, and foodservice operators, accounted for approximately 79% of our net sales in 2011. Sales to consumer customers, retailers that sell convenience tableware to consumers, such as grocery stores, mass merchandisers, warehouse clubs, value channel stores and other retail outlets, accounted for the remaining 21%.
Manufacturing Footprint Optimization
During 2011, as we completed the execution of our plan to further optimize our manufacturing footprint, we closed our manufacturing facilities in Owings Mills, Maryland; North Andover, Massachusetts; and Springfield, Missouri. Over the life of the plan, we incurred costs of approximately $132 million. Of these costs, approximately $35 million were cash expenditures, including severance payments and equipment relocation and related costs. The other costs consist of a pension plan curtailment loss, a charge attributable to lease payments that we remain obligated to make in periods after we ceased use of the related facility, a lease termination charge, asset impairment charges related to these three plant closures, and accelerated depreciation for certain property, plant and equipment that would not be used after the facilities were closed, as follows (in millions):
 
 
Year ended
 
Year ended
 
Total costs
 
 
December 26, 2010
 
December 25, 2011
 
incurred (expense)
Severance
 
$
7

 
$
—

 
$
7

Equipment relocation and related costs
 
5

 
23

 
28

Pension plan curtailment loss
 
2

 
—

 
2

Lease charges
 
—

 
8

 
8

Asset impairment (1)
 
17

 
12

 
29

Accelerated depreciation
 
40

 
18

 
58

Total costs
 
$
71

 
$
61

 
$
132

(1) The asset impairment charges in 2010 related to equipment that we no longer expected to utilize in our operations and a charge to adjust the carrying value of our Springfield property to fair value less costs to sell. The asset impairment charges in 2011 related primarily to a charge to adjust the carrying value of our Owings Mills property to fair value less costs to sell.
Excluding the asset impairment charges, all of the amounts included in the above table are reflected in cost of goods sold. Plant closure and consolidation costs included in cost of goods sold decreased by $5 million to $49 million in 2011 compared to $54 million in 2010. Excluding these costs in both years, gross profit as a percentage of net sales was 10.9% for 2011 compared to 12.5% for 2010. The decline in gross profit was primarily driven by the economic and industry conditions that our company has faced in recent years, as described below.
Economic and industry conditions
Our results of operations were significantly affected directly and indirectly by economic and industry conditions. The economic downturn has reduced the discretionary income of consumers and negatively affected demand for single-use products used to serve food and beverages. We believe this decline was driven by a variety of external factors such as consumers eating out less frequently and higher unemployment rates, which contracted the market for our foodservice operators. Lower consumer discretionary spending translated into a smaller consumer market, as did a shift from national brands to private label products, which are traditionally offered at lower prices. All of these factors have resulted in increased competition and pressure on the price at which our products may be offered. Concurrently, raw material, particularly resins utilized to manufacture plastic products and paperboard has risen. Resin prices are influenced by other input prices such as crude oil, natural gas, benzene, ethylene, propylene and paraxylene, as well as availability of supply and changes in demand. Paper prices are driven by global supply and demand as well as input costs for energy, fiber, chemicals, polyethylene and transportation.
As a result of these economic and industry conditions, we experienced a decline in sales volume in 2011 compared to 2010 which had a significant impact on gross profit. Partially offsetting the gross profit impact of lower sales volume was an increase in average realized sales price driven by both pricing increases and a favorable shift in product mix.
 

16


Results of Operations for Fiscal Years 2011, 2010 and 2009
 
 
 
 
 
 
 
2011 vs. 2010
 
2010 vs. 2009
 
Fiscal Year**
 
Favorable / (Unfavorable)
($ in millions)
2011
 
2010
 
2009
 
$
 
%
 
$
 
%
Net sales
$
1,636.3

 
$
1,582.9

 
$
1,502.6

 
$
53.4

 
3.4

 
$
80.3

 
5.3

Cost of goods sold
1,505.9

 
1,439.3

 
1,296.2

 
(66.6
)
 
(4.6
)
 
(143.1
)
 
(11.0
)
Gross profit
130.4

 
143.6

 
206.4

 
(13.2
)
 
(9.2
)
 
(62.8
)
 
(30.4
)
Selling, general and administrative expenses
135.2

 
150.4

 
150.1

 
15.2

 
10.1

 
(0.3
)
 
—

Loss on asset disposals
0.9

 
3.9

 
9.0

 
3.0

 
76.9

 
5.1

 
56.7

Impairment of goodwill
—

 
—

 
17.2

 
—

 
—

 
17.2

 
100.0

Asset impairment
13.1

 
20.5

 
—

 
7.4

 
36.1

 
(20.5
)
 
   *
Operating (loss) income
(18.8
)
 
(31.2
)
 
30.1

 
12.4

 
39.7

 
(61.3
)
 
(203.7
)
Interest expense, net
70.6

 
70.6

 
63.1

 
—

 
—

 
(7.5
)
 
(11.9
)
Loss on debt extinguishment
—

 
—

 
2.5

 
—

 
—

 
2.5

 
100.0

Reclassification of unrealized loss on cash flow hedges to interest expense
—

 
—

 
9.1

 
—

 
—

 
9.1

 
100.0

Foreign currency exchange loss (gain), net
1.8

 
2.2

 
(2.6
)
 
0.4

 
18.2

 
(4.8
)
 
   *
Gain from bargain purchase
—

 
(1.7
)
 
—

 
(1.7
)
 
(100.0
)
 
1.7

 
   *
Loss before income taxes
(91.2
)
 
(102.3
)
 
(42.0
)
 
11.1

 
10.9

 
(60.3
)
 
(143.5
)
Income tax provision (benefit)
2.3

 
1.9

 
(6.3
)
 
(0.4
)
 
(21.1
)
 
(8.2
)
 
   *
Net loss
$
(93.5
)
 
$
(104.2
)
 
$
(35.7
)
 
$
10.7

 
10.3

 
$
(68.5
)
 
(191.9
)
*     Not meaningful
**
Our fiscal year is the 52- or 53-week period ending on the last Sunday in December. Fiscal year 2011 ended on December 25, 2011, fiscal year 2010 ended on December 26, 2010, and fiscal year 2009 ended on December 27, 2009. Each was a 52-week period.

Fiscal Year 2011 Compared to Fiscal Year 2010
($ in millions)
For the year ended
 
Favorable (Unfavorable)
Reportable segment:
December 25, 2011
 
December 26, 2010
 
$
 
%
North America
$
1,530.5

 
$
1,481.6

 
$
48.9

 
3.3

Europe
120.5

 
109.7

 
10.8

 
9.8

Other
15.1

 
12.9

 
2.2

 
17.1

Inter-segment eliminations
(29.8
)
 
(21.3
)
 
(8.5
)
 
(39.9
)
Consolidated net sales
$
1,636.3

 
$
1,582.9

 
$
53.4

 
3.4

Consolidated net sales increased by $53.4 million, or 3.4%, for the year ended December 25, 2011 from the comparable prior-year period. The increase resulted from a 8.6% increase in average realized sales price and a 0.7% increase in net sales attributable to foreign currency fluctuations, partially offset by a 5.9% decline in sales volume driven by our North American segment.
North America - Net sales for our North American segment increased by $48.9 million, or 3.3%, for the year ended December 25, 2011 from the comparable prior-year period. The increase in net sales excluding intersegment sales was 2.8% and resulted from a 8.9% increase in average realized sales price and a 0.5% increase in net sales attributable to foreign currency fluctuations, offset by a 6.6% decline in sales volume. The increase in average realized sales price reflects the price increases we implemented in the second half of 2010 and, to a lesser extent, the first half of 2011, in response to higher raw material costs, and the favorable impact of a shift in product mix. The decline in sales volume was primarily due to the economic and industry conditions described under Executive Summary above, and, to a lesser extent, our strategic decision to eliminate certain unprofitable business.

17


Europe - Net sales for our European segment increased by $10.8 million, or 9.8%, for the year ended December 25, 2011 from the comparable prior-year period. The increase in net sales resulted from a 4.2% increase attributable to foreign currency fluctuations, a 3.2% increase in average realized sales price, and a 2.4% increase in sales volume. Inter-segment eliminations primarily consist of intercompany sales from North America to Europe which increased from the prior period due to higher sales volume driven by increased demand.

Gross profit
For the year ended December 25, 2011, consolidated gross profit decreased by $13.2 million, or 9.2%, from the comparable prior-year period. Consolidated gross margin, or gross profit as a percentage of net sales, was 8.0% for fiscal year 2011 versus 9.1% for fiscal year 2010. Excluding plant consolidation costs, consolidated gross margin for fiscal year 2011 was 10.9% compared to 12.5% for fiscal year 2010, primarily due to the impact of lower sales volumes and lower production volumes on fixed cost absorption for our North America segment, all as described below.
North America - The decrease in gross profit for our North American segment of approximately $19 million includes (1) a decrease in gross profit of approximately $26 million resulting from lower sales volumes in North America, (2) an increase in logistics costs of approximately $8 million, primarily due to increases in diesel fuel prices, (3) an approximate $7 million decline in fixed cost absorption due to lower production volumes in the current-year period and (4) a decrease in gross profit of approximately $6 million representing the net impact of incremental manufacturing costs driven primarily by the accelerated timing of the plant closures, partially offset by the benefits of fewer manufacturing facilities.
These decreases in gross profit were partially offset by a benefit of approximately $16 million due to a more favorable product mix, an increase of approximately $7 million in the difference between sales prices and raw material costs for our U.S. operations in 2011 compared to 2010, and a $5 million decrease in plant consolidation costs compared to the prior-year period.
Plant consolidation costs included in cost of goods sold during 2011 were approximately $49 million and comprised (1) accelerated depreciation of approximately $18 million, (2) costs related to the transfer of equipment from closing manufacturing facilities to receiving manufacturing facilities of approximately $23 million, including ramp-down costs at the closing facilities and start-up costs at the receiving facilities, and (3) a charge of approximately $7 million attributable to lease payments for our North Andover facility we remain obligated to make in future periods and a lease termination charge of approximately $1 million.
Europe - The decline in North American gross profit was partially offset by an approximate $6 million increase in gross profit for our European segment. The increase was primarily driven by increased manufacturing efficiencies resulting from targeted cost improvements, higher sales volume and the impact of changes in foreign currency exchange rates.
Operating income (loss)
($ in millions)
For the year ended
 
Favorable (Unfavorable)
Reportable segment:
December 25, 2011
 
December 26, 2010
 
$
 
%
North America
$
(22.3
)
 
$
(29.4
)
 
$
7.1

 
24.1
Europe
2.3

 
(3.0
)
 
5.3

 
176.7
Other
1.4

 
1.1

 
0.3

 
27.3
Inter-segment eliminations
(0.2
)
 
0.1

 
(0.3
)
 
*
Consolidated operating loss
$
(18.8
)
 
$
(31.2
)
 
$
12.4

 
39.7
*    Not meaningful
North America - Operating loss for our North American segment decreased by $7.1 million, or 24.1%, for the year ended December 25, 2011 from the comparable prior-year period. The improvement was driven primarily by lower selling, general and administrative expenses and less asset impairment partially offset by lower gross profit, as discussed above.
As a percentage of net sales, selling, general and administrative expenses improved to 8.2% for 2011 from 9.6% for 2010. The improvement resulted primarily from decreases in employee-related costs, advertising and related costs, and professional fees. Lower employee-related costs were driven by lower headcount as well as lower incentive-based compensation expense.
The improvement was also driven by lower asset impairment, which was $13.0 million in 2011 compared to $20.5 million in 2010. The current-period impairment primarily related to our Owings Mills, Maryland manufacturing facility, which we sold during our fourth fiscal quarter of 2011. The prior-period impairments related to equipment we no longer expected to utilize after the plant closures and our Springfield, Missouri manufacturing facility, which we sold during 2010.

18


Europe - Operating income for our European segment increased by $5.3 million due primarily to higher gross profit, as discussed above. Inter-segment eliminations consist of the change in the amount of intercompany profit in the other segment's inventory resulting from intercompany sales from North America to such segment.
Income tax provision
Our consolidated income tax provision was $2.3 million for fiscal year 2011 compared to an income tax provision of $1.9 million for fiscal year 2010. The 2011 income tax provision was attributable to the income tax expense from foreign jurisdictions with a minimal offsetting domestic income tax benefit.  The 2010 income tax provision primarily reflects income tax expense from foreign jurisdictions with a minimal offsetting domestic income tax benefit resulting from pension activity included in other comprehensive income. 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.

Fiscal Year 2010 Compared to Fiscal Year 2009
On March 31, 2010, we acquired InnoWare Plastic, a manufacturer of a comprehensive line of plastic take-out containers. The new product line, which we market under our Creative Carryouts® brand, further broadened our product offering. Operating results of the acquired business are included in our results from the March 31, 2010 acquisition date.
While the majority of our 5.3% increase in consolidated net sales for 2010 was driven by growth in our existing product portfolio, the acquisition also contributed significantly to this improvement. Approximately 40% of our sales volume increase in 2010 was driven by the acquisition. The acquisition also resulted in an increase in our selling, general and administrative expenses primarily due to costs to close the acquired administrative office, and severance costs related to the consolidation of selling, general and administrative functions, which we completed during the third quarter of 2010.
Net sales
Net sales increased by $80.3 million, or 5.3%, to $1,582.9 million for fiscal year 2010 compared to $1,502.6 million for fiscal year 2009. The increase in net sales reflects a 5.3% increase in sales volume and a 0.9% increase resulting from foreign currency fluctuations, partially offset by a 0.9% decrease in average realized sales price compared to the prior year. About 60% of the increase in sales volume resulted from growth in our historical product portfolio and an increase in new product offerings (other than Creative Carryouts) despite continuing difficult economic conditions that resulted in lower industry demand. The remaining increase in sales volume reflects incremental sales attributable to Creative Carryouts. The decrease in average realized sales price compared to the previous year reflects lower overall pricing driven primarily by the continuing competitive conditions in the marketplace, partially offset by a favorable shift in our product mix. The year over year impact of lower pricing had less impact on our fourth fiscal quarter, as we began to experience the benefit of price increases that we implemented in the second half of the year.
Gross profit
Gross profit decreased by $62.8 million, or 30.4%, to $143.6 million for fiscal year 2010 from $206.4 million for fiscal year 2009. The decline in gross profit resulted primarily from a decrease of approximately $59 million in the difference between sales prices and raw material costs for our U.S. operations due to both an increase in raw material costs and a decline in average realized sales price in 2010 compared to 2009. The gross profit decline also reflects an increase of $42 million in network optimization costs compared to the prior-year period. The current-year period includes accelerated depreciation of approximately $40 million, severance expense of approximately $7 million, a pension plan curtailment loss of approximately $2 million and costs incurred to transfer equipment from closing manufacturing facilities of approximately $5 million, including ramp-down costs at the closing facilities and start-up costs at the receiving plants. The prior-year period included $12 million of costs related to plant consolidation, consisting of costs incurred to transfer equipment from closed manufacturing facilities, ramp-down costs and start-up costs.
The decrease in gross profit was partially mitigated by (1) an approximately $18 million benefit from lower operating costs for our U.S. operations, driven by greater overhead absorption from higher production in the current year and one less manufacturing facility, (2) a $9 million benefit attributable to higher sales volumes in the United States, (3) a $6 million benefit from a favorable shift in product mix and (4) a $5 million gross profit contribution from our international subsidiaries.
Gross margin, or gross profit as a percentage of net sales, was 9.1% in 2010 versus 13.7% in 2009. The decrease in gross margin was primarily driven by the decrease in the difference between sales prices and raw material costs and the increase in plant consolidation costs, partially offset by a favorable shift in product mix and lower operating costs as described above.

19



Selling, general and administrative expenses
Selling, general and administrative expenses increased slightly to $150.4 million in fiscal year 2010 from $150.1 million in fiscal year 2009. An increase in employee-related costs to normalized levels in 2010 compared to 2009, when we reduced such costs in response to the uncertain global economy, were mostly offset by reductions in professional fees and lower expenses for advertising and trade fund spending. As a percentage of net sales, selling, general and administrative expenses were 9.5% for fiscal year 2010 versus 10.0% for fiscal year 2009, driven by the increase in sales volume and a continuing focus on the management of selling, general and administrative expenses.
Loss on asset disposals
Loss on asset disposals was $3.9 million for fiscal year 2010 compared to $9.0 million for fiscal year 2009. The losses in both years reflect the disposal of production equipment in connection with plant closures and consolidation. The 2009 loss also includes adjustments made to record approximately $5.8 million of equipment retirements that should have been reflected in prior periods. We determined that the adjustments were immaterial to our current- and prior-period consolidated financial statements.
Asset impairment
As a result of our decision in the second fiscal quarter of 2010 to close three manufacturing facilities, we recognized approximately $13.2 million of asset impairment related to equipment that we no longer expect to utilize in our operations. In addition, during the third fiscal quarter of 2010, we entered into a contract to sell our Springfield, Missouri manufacturing facility and recorded $3.4 million of asset impairment to adjust the carrying value of the facility to fair value less costs to sell. We completed the sale transaction in December 2010 and recognized a loss of approximately $0.9 million. In the fourth fiscal quarter of 2010, we recorded impairment of approximately $3.9 million to reduce the carrying amounts of certain real estate to estimated fair value less costs to sell.
Interest expense, net
Interest expense, net increased by $7.5 million, or 11.9%, to $70.6 million for fiscal year 2010 compared to $63.1 million for fiscal year 2009. The increase in interest expense was driven primarily by higher average interest rates in 2010 compared to 2009 as a result of our July 2009 refinancing, which included the issuance of our 10.5% senior secured notes. To a lesser extent, the increase in interest expense was driven by an increase in average outstanding borrowings year over year.
Foreign currency exchange loss (gain), net
We recognized a net foreign currency exchange loss of $2.2 million for fiscal year 2010 compared to a net gain of $2.6 million for fiscal year 2009. The fluctuation was primarily the exchange rate impact on our United Kingdom subsidiary's financial statements driven by their U.S. dollar intercompany payable, which resulted in a net loss in 2010 compared to a net gain in 2009. To a lesser extent, the net foreign currency exchange loss for 2010 reflects the net loss on our forward contracts that we use to hedge the net foreign currency exposure in each our foreign subsidiaries.
Gain from bargain purchase
We recognized a bargain purchase gain of approximately $1.7 million on our March 31, 2010 acquisition, which represents the excess of the fair value of the assets acquired, net of liabilities assumed, over the acquisition consideration of $24 million.
Income tax provision (benefit)
Income tax provision was $1.9 million for fiscal year 2010 compared to an income tax benefit of $6.3 million for fiscal year 2009. The 2010 income tax provision primarily reflects income tax expense from foreign jurisdictions with a minimal offsetting domestic income tax benefit resulting from pension activity included in other comprehensive income.  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.
The benefit in 2009 includes a $5.1 million adjustment made during the first fiscal quarter of 2009 to correct an error in our previously reported deferred tax liabilities.  If the adjustment had been recorded in 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 fiscal year 2008. Excluding the $5.1 million adjustment, the remaining income tax benefit in 2009 of approximately $1.2 million reflects a U.S. tax benefit relating to current year pension activity included in other comprehensive income and the acceleration of taxable temporary differences associated with the goodwill impairment charge related to our Europe reporting unit, partially offset by income tax provision related to our foreign entities.

20


 
Liquidity and Capital Resources
Operating Cash Flows
We rely on cash flows from operations and borrowings under our asset-based revolving credit facilities to finance our working capital requirements. Net cash used in operating activities during 2011 was $21.1 million compared to net cash provided by operating activities of $43.7 million during 2010. The decreased cash flows from operations resulted primarily from a net cash inflow from inventories during 2010 compared to a net cash outflow for inventories during 2011. During 2011, working capital increased by $34.5 million, primarily reflecting the net increase in inventory levels during the year, and to a lesser extent, an increase in the cost of plastic resins and paper, our primary raw materials.
Investing Cash Flows
Net cash used in investing activities during 2011 was $3.3 million compared to $48.4 million during 2010. The reduction was mostly due to lower capital expenditures and higher proceeds from the sale of property, plant and equipment.
Capital expenditures during 2011 were $28.3 million compared to $65.8 million during 2010. Capital expenditures during 2010 included the cost of the acquisition of InnoWare Plastic ($23.7 million, net of cash acquired). We funded our capital expenditures in both years, including the acquisition in 2010, with cash flows from operations and borrowings under our U.S. asset-based revolving credit facility.
During 2011, proceeds from the sale of property, plant and equipment of $25.7 million consisted mainly of proceeds from the sale of our Owings Mills, Maryland manufacturing facility, an undeveloped property in Chicago, Illinois and our Belen, New Mexico manufacturing facility. Cash and cash equivalents as of December 25, 2011 includes approximately $6.7 million representing the net proceeds from the sale of the Owings Mills facility. The indentures governing our senior secured and senior subordinated notes generally require us to use these proceeds to purchase or improve assets useful in our business or to purchase a business that is related, complementary or ancillary to our existing business. During 2010, investing cash inflows of $7.7 million consisted mainly of proceeds from the sale of our Springfield, Missouri manufacturing facility during the fourth quarter. Cash and cash equivalents as of December 26, 2010 includes approximately $7.3 million representing the net proceeds from the sale. These proceeds had the same restriction and were fully utilized to fund capital expenditures by April 2011.
Financing Cash Flows
Net cash used in financing activities during 2011 was $23.5 million compared to net cash provided by financing activities of $3.9 million during 2010. The fluctuation was driven by net borrowings under revolving credit facilities of $23.9 million in 2011 compared to net repayments of $2.3 million in 2010. The increase in borrowings in 2011 was a result of lower cash flow generated from operations.
The following is a summary of long-term debt as of December 25, 2011 and December 26, 2010 (in thousands):

 
December 25,
2011
 
December 26,
2010
Long-term debt:
 
 
 
10.5% Senior Secured Notes due November 2013
$
300,000

 
$
300,000

Unamortized discount
(3,066
)
 
(4,464
)
10.5% Senior Secured Notes due November 2013, net
296,934

 
295,536

8.5% Senior Subordinated Notes due February 2014
325,000

 
325,000

Asset-based Revolving Credit Facility, maturing July 2013
36,480

 
10,027

Canadian Revolving Credit Facility, maturing December 2013
—

 
2,669

Capital lease obligations
4,050

 
4,483

Total long-term debt
662,464

 
637,715

Less: Current maturities of long-term debt
452

 
430

Long-term debt, net of current maturities
$
662,012

 
$
637,285



21



Refinancing Transactions
On July 2, 2009, we issued $300.0 million of 10.5% Senior Secured Notes due 2013, which we refer to as the senior secured notes, and entered into a new asset-based revolving credit facility providing for borrowings of up to $200.0 million, subject to borrowing base limitations and other specified terms and conditions. We used the initial borrowings under our asset-based revolving credit facility of $28.3 million, together with net proceeds of $293.8 million from the issuance of our senior secured notes to (1) repay the $300.9 million of borrowings outstanding, including accrued interest thereon, under our first lien credit facility, (2) pay $17.3 million of debt issuance costs relating to the senior secured notes and asset-based revolving credit facility, and (3) provide $3.9 million for operating needs. We deferred the debt issuance costs and are amortizing them through 2013, when the senior secured notes and borrowings under the asset-based revolving credit facility mature.
In connection with the refinancing transactions, we reclassified $9.1 million of unrealized losses associated with interest rate swap agreements from accumulated other comprehensive loss to interest expense in July 2009. These interest rate swap agreements had a total notional amount of $150.0 million. Under the agreements, we received a variable amount based on the Eurodollar rate and pay a fixed amount based on an interest rate of 5.3765%. The swap agreements, which became effective on August 28, 2007, expired on February 28, 2011.
We also wrote off the remaining $2.5 million of unamortized debt issuance costs related to the first lien credit facility in July 2009 as a result of the refinancing.
Available Capacity
The following is a summary of our committed revolving credit facilities as of December 25, 2011 (in thousands):
 
 
Commitment
Amount 
 
 
Amounts
Outstanding 
 
 
Letters of
Credit (1) 
 
 
Available
Capacity
 
Asset-based revolving credit facility (2)
$
200,000

 
$
36,480

 
$
12,867

 
$
122,499

Canadian revolving credit facility (3)
16,662

 
—

 
—

 
13,080

 
$
216,662

 
$
36,480

 
$
12,867

 
$
135,579

 
(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 is $122.5 million due to the borrowing base limit of $171.8 million in effect as of December 25, 2011.
(3) 
The commitment amount for the Canadian revolving credit facility is CA$17.0 million (approximately $16.7 million); however, available capacity is CA$13.3 million (approximately $13.1 million) due to the borrowing base limit in effect as of December 25, 2011.
10.5 % Senior Secured Notes
Solo Delaware and Solo Cup Operating Corporation co-issued the senior secured notes under an indenture, dated as of July 2, 2009, among the co-issuers, the subsidiary guarantors identified therein and U.S. Bank National Association, as trustee.
The senior secured notes mature on November 1, 2013 and bear interest at a rate of 10.5% per annum. Interest on the senior secured notes is payable semi-annually on May 1 and November 1 of each year. We made our first interest payment on November 1, 2009, and we have made all scheduled interest payments to date. The senior secured notes were issued at 97.928% of their aggregate principal amount for gross proceeds of $293.8 million, representing a yield to maturity of 11.125%.
Guarantees and security - The obligations of Solo Delaware and Solo Cup Operating Corporation under the senior secured notes are fully and unconditionally guaranteed, jointly and severally, by the existing guarantors under the indenture (SF Holdings Group, Inc., Solo Manufacturing LLC, P. R. Solo Cup, Inc., Solo Cup Owings Mills Holdings, Lily-Canada Holding Corporation, Solo Cup (UK) Limited, Insulpak Holdings Limited and Solo Cup Europe Limited and Solo Cup Finance Limited) and will be so guaranteed by any future domestic subsidiaries of Solo Delaware, subject to specified exceptions. The term “domestic subsidiaries,” as used in this description, includes, in addition to U.S. subsidiaries, non-U.S. subsidiaries (including the Company's current subsidiaries located in the United Kingdom) other than controlled foreign corporations (as such term is defined under the Internal Revenue Code of 1986, as amended) and subsidiaries of controlled foreign corporations. The senior secured notes and related guarantees are secured by a senior lien on substantially all of the assets (other than accounts receivable, specified payment intangibles, inventory, deposit accounts, commodity accounts, securities accounts, lock-boxes, instruments, chattel paper, cash and cash equivalents, general intangibles related to any of the foregoing, proceeds and products of the foregoing and specified assets related thereto, and specifically excluded assets) of the co-issuers and guarantors and by a junior lien on the accounts receivable and other assets identified above that are not subject to the senior lien.

22


 
Redemption options
We have the option to redeem all or a portion of the senior secured notes at a redemption price equal to a percentage of the principal amount thereof plus any accrued and unpaid interest, as follows:
 
Period
 
 
Redemption price 
 
For the twelve-month period beginning May 1, 2011
 
105.25%
May 1, 2012 and thereafter
 
100%
Requirements to repurchase - If specified change of control events occur, we must offer to repurchase the senior secured notes at a repurchase price equal to 101% of the principal amount of the senior secured notes repurchased, plus any accrued and unpaid interest to the applicable repurchase date. If we sell assets under specified circumstances, we must offer to repurchase the senior secured notes at a repurchase price equal to 100% of the principal amount of the senior secured notes repurchased, plus any accrued and unpaid interest to the applicable repurchase date.
Covenants - The indenture for our senior secured notes contains covenants that, among other things, restrict the ability of Solo Delaware, Solo Cup Operating Corporation and their restricted subsidiaries to:
•
incur additional debt or issue disqualified stock or preferred stock;
•
create liens;
•
pay dividends, make investments or make other restricted payments;
•
sell assets;
•
consolidate, merge, sell or otherwise dispose of all or substantially all of the assets of Solo Delaware and its restricted subsidiaries;
•
enter into transactions with affiliates;
•
designate subsidiaries as unrestricted; and
•
undertake other specified business activities.
These covenants are subject to a number of important limitations and exceptions. As of December 25, 2011, we were in compliance with the covenants included in this indenture.
Events of default - The indenture for our senior secured notes provides for customary events of default, including without limitation, cross defaults to specified other debt of Solo Delaware and its subsidiaries. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding notes will become due and payable immediately without further action or notice. If any other event of default under the indenture occurs and is continuing, the trustee or holders of at least 25% in principal amount of the then-outstanding senior secured notes may declare all of the senior secured notes to be due and payable immediately, provided that, if any debt is outstanding under the asset-based revolving credit facility, the acceleration of the senior secured notes will not be effective until the earlier of the acceleration of debt under the asset-based revolving credit facility or five business days after receipt by the issuers and the administrative agent under the related loan agreement of notice of the acceleration.
Asset-Based Revolving Credit Facility
On July 2, 2009, we entered into a loan agreement with Bank of America, N.A., as administrative agent, co-collateral agent and lender; General Electric Capital Corporation, as co-collateral agent and lender; and Wells Fargo Foothill, LLC and Goldman Sachs Lending Partners LLC, as lenders, providing for revolving credit financing of up to $200.0 million, including a $40.0 million sub-limit for letters of credit, with a maturity date of July 2, 2013.
Guarantors - Subject to specified exceptions, newly-created or acquired direct and indirect domestic subsidiaries of Solo Delaware will be required to become guarantors under the asset-based revolving credit facility. The term “domestic subsidiaries,” as used in this description, includes, in addition to U.S. subsidiaries, non-U.S. subsidiaries (including the Company's current subsidiaries located in the United Kingdom) other than controlled foreign corporations (as such term is defined under the Internal Revenue Code of 1986, as amended) and subsidiaries of controlled foreign corporations.
 
Borrowing base and availability - Our ability to borrow under the asset-based revolving credit facility is limited to a borrowing base equal to 85% of eligible accounts receivable plus the lower of (1) 65% of eligible inventory and (2) 85% of the net orderly liquidation value of eligible inventory minus availability reserves, and is subject to other conditions, limitations and reserve requirements.

23



Under the asset-based revolving credit facility, we have the right to increase the aggregate principal amount of the commitments from time to time, in an aggregate amount not to exceed $100.0 million, without the consent of any lender (other than the lenders participating in such increase), so long as any such increase is at least $25.0 million, subject to borrowing base limitations and other specified terms and conditions.
Security - We are jointly and severally liable for all obligations under the asset-based revolving credit facility and under certain hedging arrangements and bank product and cash management services provided by the asset-based revolving credit facility lenders or their affiliates to us, and such obligations will be guaranteed by the direct and indirect domestic subsidiaries of Solo Delaware that are not borrowers, subject to specified exceptions. These obligations will be secured by:
•
senior liens on the following assets of the asset-based revolving credit facility borrowers and guarantors, referred to as ABL Collateral: their accounts receivable, specified payment intangibles, inventory, deposit accounts, commodity accounts, securities accounts, lock-boxes, instruments, chattel paper, cash and cash equivalents, general intangibles related to any of the foregoing and proceeds and products of the foregoing and certain assets related thereto, subject to specified exceptions; and
•
junior liens on the following assets of the asset-based revolving credit facility borrowers and guarantors, referred to as Notes Collateral, which are subject to senior liens in favor of holders of the senior secured notes and Solo Cup Operating Corporation: substantially all of their tangible and intangible assets, other than ABL Collateral and specified excluded assets.
Interest - 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 were subject to adjustment after July 2, 2010 based on borrowing base availability. Letters of credit issued and outstanding under the asset-based revolving credit facility accrue fees at a per annum rate equal to the LIBOR interest rate margin described above plus a 0.125% per annum fronting fee to the issuing bank on the face amount thereof, in addition to the issuing bank's customary fees and charges in connection with the issuance, amendment, negotiation, payment, processing, transfer and administration of such letters of credit. An unused line fee of 0.75% per annum accrues on an amount equal to (1) the aggregate lending commitments under the asset-based revolving credit facility less (2) the average daily amount of the outstanding borrowings plus the face amount of any outstanding letters of credit under the asset-based revolving credit facility.
Covenants - The asset-based revolving credit facility contains customary affirmative and negative covenants, including covenants that restrict the ability of each borrower, each guarantor and each subsidiary of the foregoing to, among other things:
•
incur, assume, guarantee or suffer to exist additional debt or liens;
•
make investments or loans or acquire any person or entity;
•
enter into transactions with affiliates;
•
enter into certain restrictive agreements;
•
engage in mergers, acquisitions, consolidations and asset sales;
•
prepay, redeem, purchase, defease or otherwise satisfy specified types of debt;
•
modify the terms of other debt; and
•
declare, pay or make distributions or dividends.
These covenants are subject to a number of important limitations and exceptions. As of December 25, 2011, we were in compliance with the covenants included in this agreement.
In addition, the asset-based revolving credit facility contains a springing covenant that is not currently applicable to us. In the event our available capacity under the facility drops below a specified threshold (the greater of (a) $15.0 million or (b) 15% of the lesser of our borrowing base or the aggregate amount of commitments under the facility), all cash receipts would be controlled by our lenders and used to pay down outstanding borrowings under the facility. In addition, we would be required to maintain a minimum Fixed Charge Coverage Ratio (as defined in the facility) of 1.1 to 1 for a trailing twelve-month period. The lenders would maintain control over our receipts and the minimum Fixed Charge Coverage Ratio requirement would remain in effect until such time that our available capacity rises to a level that equals or exceeds the above specified threshold for 45 consecutive days.

24



Events of default - The loan agreement underlying our asset-based revolving credit facility contains customary events of default, including, but not limited to, cross defaults to specified other debt of Solo Delaware and its subsidiaries, and specified change of control events. Failure to maintain the minimum Fixed Charge Coverage Ratio, if applicable in the future as discussed in the immediately preceding paragraph, would also constitute an event of default. If an event of default occurs and is continuing under the loan agreement, the lenders may, among other things, terminate their commitments and require immediate repayment of all amounts owed by the borrowers and the guarantors under the asset-based revolving credit facility.
8.5% Senior Subordinated Notes
On February 27, 2004, we issued $325.0 million of 8.5% Senior Subordinated Notes due 2014, which we refer to as the senior subordinated notes. The senior subordinated notes mature on February 15, 2014 and bear interest at a rate of 8.5% per annum. Interest on the senior subordinated notes is payable semi-annually every February 15 and August 15. We have made all scheduled interest payments to date. Under the indenture governing the senior subordinated notes, subject to exceptions, we must meet a minimum fixed charge coverage ratio to incur additional debt. We have the option to redeem all or a portion of the senior subordinated notes at a redemption price equal to 100% of the principal amount thereof plus accrued interest.
The senior subordinated notes provide that upon the occurrence of a change in control, as defined, the holders will have an option to require the redemption of the senior subordinated notes at a redemption price equal to 101% of the principal amount thereof plus accrued interest. The indenture governing the senior subordinated notes contains various covenants which, subject to exception, prohibit, or limit, among other things:
•
asset sales;
•
changes of control;
•
dividend payments;
•
equity repurchases or redemptions;
•
the incurrence of additional debt;
•
the issuance of disqualified stock;
•
certain transactions with affiliates;
•
the creation of additional liens; and
•
certain other business activities.
These covenants are subject to a number of important limitations and exceptions. As of December 25, 2011, we were in compliance with the covenants included in this indenture.
From time to time, and in accordance with any applicable securities laws, Solo Delaware's principal shareholders or their affiliates may enter the market to purchase or sell senior subordinated notes or senior secured notes.

Canadian Revolving Credit Facility
On December 15, 2010, Solo Cup Canada Inc., an indirect wholly owned subsidiary of Solo Delaware, entered into a credit agreement with GE Canada Finance Holding Company, as a lender and agent for all lenders, providing for asset-based revolving credit financing of up to CA$17.0 million, including a CA$2.0 million sublimit for letters of credit. The Canadian credit facility expires on December 15, 2013. The Canadian credit agreement amended and replaced in its entirety the Credit Agreement dated as of September 24, 2004, as amended, between Solo Cup Canada (formerly known as Lily Cups Inc.), as borrower, and GE Canada Finance Holding Company, as agent and lender, and terminated the availability of borrowings thereunder.
Solo Cup Canada is the sole borrower under the Canadian credit facility. Its obligations under the Canadian credit agreement will be guaranteed by any future subsidiary of Solo Cup Canada, unless the provisions of the Canadian credit agreement specifically exclude that subsidiary from the requirement to provide a guarantee or the lenders otherwise agree not to require that subsidiary to provide a guarantee.
Solo Cup Canada's ability to borrow under the Canadian credit facility is limited to a borrowing base equal to 85% of eligible accounts receivable plus the lower of (1) 70% of eligible raw materials and finished goods inventory and (2) 85% of the net orderly liquidation value of eligible raw materials and finished goods inventory plus the lower of (a) 25% of eligible work-in-process inventory and (b) CA$1.0 million minus availability reserves, and is subject to other conditions, limitations and reserve requirements.

25


The obligations of Solo Cup Canada and any future subsidiary guarantor under the Canadian credit facility are secured by first priority liens on, subject to specified exclusions, the existing and after-acquired personal property of Solo Cup Canada and any future subsidiary guarantor.
Solo Cup Canada may borrow funds under the Canadian credit facility, at its option, in Canadian or U.S. dollars. Canadian dollar denominated loans bear interest, at Solo Cup Canada's option, at a variable rate equal to: (1) the Canadian Bankers Acceptance Rate (the “BA Rate”), plus 2.5% per annum; or (2) the Canadian Prime Rate (being the higher of the (a) Canadian Bank Prime Rate and (b) 1.35% over the 30-day BA Rate), plus 1.25% per annum. U.S. dollar denominated loans bear interest, at Solo Cup Canada's option, at a variable rate equal to: (1) the U.S. Base Rate, plus 0.75% per annum; or (b) LIBOR, plus 2.5% per annum. As of December 25, 2011, we had no borrowings outstanding under this facility, and we were in compliance with the covenants included in this facility

Contractual obligations
The following table summarizes our contractual obligations as of December 25, 2011, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
 
 
 
Payments due in fiscal year
 
Total
 
2012(2)
 
2013
 
2014
 
2015
 
2016
 
Thereafter
Long-term debt obligations
$
661,480

 
$
—

 
$
336,480

 
$
325,000

 
$
—

 
$
—

 
$
—

Capital lease obligations(1)
5,762

 
765

 
769

 
696

 
476

 
476

 
2,580

Non-cancelable operating leases
513,108

 
47,595

 
45,891

 
44,316

 
39,119

 
37,197

 
298,990

Interest payments(3)
140,518

 
64,064

 
62,641

 
13,813

 
—

 
—

 
—

Total
$
1,320,868

 
$
112,424

 
$
445,781

 
$
383,825

 
$
39,595

 
$
37,673

 
$
301,570

(1) We had capital lease obligations of approximately $4.1 million as of December 25, 2011. Amounts in the table above also include the interest obligation attributable to these leases.
(2) 
We expect that our contributions in 2012 to our defined benefit plans will be approximately $9 million, which are not included in the contractual obligations table above.
(3) 
In estimating future interest payments for 2012 and 2013, we used interest rates in effect as of December 25, 2011 and used our average outstanding borrowings under the asset-based revolving credit facility during 2011, taking into consideration the July 2013 maturity of such facility, to estimate future years' average outstanding borrowings.
The above table excludes the liability for unrecognized tax benefits as these are not contractual obligations by nature. We cannot determine with any degree of reliability the years in which these liabilities might ultimately settle. The above table also excludes the governmental obligations described below.
Government Obligations
We entered into agreements with the City of Chicago and the State of Illinois in 2001 relating to an undeveloped property located in Chicago, Illinois that we acquired in that year. Pursuant to those agreements, the City of Chicago paid on our behalf a portion of the acquisition price of the property 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 were required to fulfill specified obligations relating to the development of the property and retention of a specified number of employees.
In February 2011, we entered into an agreement to sell the property for $5.0 million in cash and received $1.0 million at that time towards the purchase price. Our obligation to sell the property was contingent upon the assumption by the buyer and our release from the government obligations described above, which totaled approximately $19.8 million as of June 26, 2011. These amounts were included in other current liabilities in our consolidated balance sheet as of that date.
We closed the sale of the undeveloped property in September 2011, during our third fiscal quarter, and received gross proceeds of $4 million, representing the remaining balance of the $5 million purchase price payable to us. In connection with the sale, the buyer assumed all of the government obligations described above and we were released from all but $3.3 million of those obligations. At closing, the buyer agreed to indemnify us fully from any and all liability relating to the $3.3 million of obligations from which we were not released.
As a result of the sale transaction, we reduced our other current liabilities by approximately $16.5 million to reflect the government obligations from which we were released. The government obligations of $3.3 million from which we were not released remain as other current liabilities in the accompanying balance sheet as of December 25, 2011, with a corresponding receivable of $3.3 million in other assets to reflect our right to receive indemnification from the buyer.
 

26


2012 Outlook
Management believes that cash generated by operations, existing cash and cash equivalents and amounts available under our credit facilities will be sufficient to meet our reasonably foreseeable liquidity needs, including operating needs, planned capital expenditures, payments in conjunction with our lease commitments and debt service requirements during 2012. We expect that our total 2012 capital investment will be in the range of $35 million to $40 million. In addition, we expect to contribute approximately $9 million to our defined benefit plans.
For 2012, we expect raw material prices to rise in comparison to 2011. Increases in resin prices are expected to occur throughout 2012 and are primarily driven by supply and demand, feedstock availability, and geopolitical unrest. Paper prices are expected to remain flat compared to 2011, with the potential to increase in the second half of 2012 depending on supplier backorder levels.

Off-balance sheet arrangements
We issue letters of credit to ensure performance and payment to third parties in accordance with specified terms and conditions. Under our asset-based revolving credit facility, we have the ability to issue up to $40.0 million in letters of credit. As of December 25, 2011, approximately $12.9 million of standby letters of credit were outstanding. These standby letters of credit are primarily used to support our workers' compensation insurance programs. We are not required to provide cash collateral for letters of credit issued. All issued letters of credit are secured by the asset-based revolving credit facility.
We also have the ability to issue up to CA$2.0 million in letters of credit under our Canadian credit facility. As of December 25, 2011, no letters of credit were outstanding thereunder.
In June 2007, we entered into a lease agreement in conjunction with the sale of six of our manufacturing facilities. The sale proceeds of $130.0 million were used to retire our term loan under our senior secured second lien credit facility. Upon the sale of the six properties, we immediately leased them back pursuant to a 20-year term lease. The lease contains four five-year renewal term options and is non-cancelable. Rent for the six properties is payable on a quarterly basis, due on the first day of each calendar quarter, with an annual 2% escalation. Annual rent expense of $14.2 million is recognized on a straight-line basis over the 20-year term of the lease. The lease is classified as an operating lease in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 840, Leases.

Net Operating Loss Carryforwards
As of December 25, 2011, we had approximately $413.3 million of U.S. federal tax net operating loss carryforwards that expire between 2017 and 2031, of which approximately $17 million were 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 fiscal year ended December 25, 2011, our valuation allowance on all tax attributes increased by $37.4 million to $190.0 million primarily related to activity from our U.S. and European 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
In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we make decisions that impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of the relevant circumstances, current developments and historical experience. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Board of Directors, and the members of the Audit Committee have reviewed this disclosure.
Our significant accounting policies are described in Note 2 to the consolidated financial statements in Item 8 of this annual report. Some of these significant accounting policies require us to make difficult, subjective or complex judgments or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (1) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made and (2) different estimates reasonably could have been used or changes in the estimate that are reasonably likely to occur from period to period would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. Our critical accounting estimates include the following:

27



Accounts receivable valuation. We value accounts receivable, net of an allowance for doubtful accounts. Each quarter, we estimate our ability to collect outstanding receivables and establish an allowance for doubtful accounts that reflects our best estimate of the amount of probable credit losses in our existing accounts receivable. In doing so, we evaluate the age of our receivables, past collection history, current financial condition of key customers and economic conditions. Based on this evaluation, we establish a reserve for specific accounts receivable that we believe are uncollectible, as well as an estimate of uncollectible receivables not specifically known. Our estimate of the allowance for doubtful accounts is a critical accounting estimate because it is highly susceptible to change from period to period. In addition, it requires us to make judgments about the future financial condition of our customers.
Deterioration in the financial condition of any key customer or a significant downturn in the economy could have a material negative impact on our ability to collect a portion or all of the accounts receivable. We believe that analysis of historical trends and current knowledge of potential collection problems provide us with sufficient information to establish a reasonable estimate of an allowance for doubtful accounts; however, since we cannot predict with certainty future changes in the financial stability of our customers, our actual future losses from uncollectible accounts may differ from our estimates. In the event we determine that a smaller or larger balance of the allowance for doubtful accounts was appropriate, we would record a credit or charge to selling, general and administrative expenses in the period in which we made such a determination.
Customer discounts and allowances. We provide allowances for customer incentive programs when the revenue is recognized, based on historical experience and current trends. The customer allowances are determined with significant management judgment and reviewed regularly to determine the adequacy of the amounts. Changes in economic conditions, markets and customer relationships may require adjustments to these allowances from period to period. In the event that future trends vary significantly from past or expected trends, our reported net sales may increase or decrease by a material amount.
Certain customer discounts and allowances are earned and payable to customers if a specified level of sales volume is met. We record such customer discounts and allowances based on the estimated and probable allowances for the period. The amounts are recorded as a reduction of net sales based on the customers' actual sales volume during the period. If actual allowances differ from management estimates, gross profit and operating income could be affected. The most significant allowance reflects our estimates of discounts that certain foodservice customers are entitled to claim based on their distribution activities. 
Vendor incentives. Certain vendor incentives are earned only if a specified level of annual purchases is achieved. We record such incentives during the interim periods based on the actual results achieved on a year-to-date basis compared to targets or specified levels of purchases. The amounts are recorded as a reduction of cost of goods sold based on the purchase volume during the interim period. If actual purchase volume differs from management estimates, gross margin and operating income could be affected.
Inventory valuation. Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. We write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on our estimates of future demand, which are based on criteria established by our supply chain organization taking into account our historical experience. We monitor inventory levels on a regular basis and write-downs of inventory are recorded in cost of goods sold.
Impairment of long-lived assets. For purposes of testing impairment, we group our long-lived assets at the lowest level for which there are identifiable cash flows independent of other asset groups. In performing this analysis, we consider whether the results and cash flows of an asset or asset group can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. We generally group our long-lived assets by geographic location.
We test an asset or asset group for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Such events include, but are not limited to, significant adverse changes in the business climate, the impact of significant customer losses, current period operating or cash flow losses, forecasted continuing losses, or a current expectation that an asset or asset group will be disposed of before the end of its useful life, for example, as a result of a decision to exit a product line or close a manufacturing facility. Recoverability is evaluated by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset exceeds the estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over their remaining useful lives. Restoration of a previously recognized impairment loss is not allowed. There are inherent uncertainties associated with these judgments and estimates.

28



Income taxes. We account for income taxes in accordance with the asset and liability method under FASB ASC Topic 740, Income Taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement and income tax bases of assets and liabilities and tax credit and operating loss carryforwards using enacted tax rates expected to apply to taxable income in the years in which the differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The recoverability of deferred tax assets is dependent upon our assessment of whether it is more likely than not that sufficient future taxable income will be generated in the relevant tax jurisdiction to utilize the deferred tax asset. In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent fiscal years, and our forecast of future taxable income on a jurisdiction by jurisdiction basis. In determining future taxable income, we review the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. In the event we determine that our future taxable income will not be sufficient to utilize our deferred tax assets, we record a valuation allowance. If our determination changes, a charge or a benefit would be recorded in our statement of operations. We currently do not believe that we will fully realize the benefit of our deferred tax assets in the United States and Europe, except for the reversal of deferred tax liabilities, and therefore we have a full valuation allowance against these deferred tax assets.

Recent Accounting Pronouncements

In June 2011, the FASB amended its guidance on the presentation of comprehensive income. Under the amended guidance, an entity has the option to present comprehensive income in either one continuous statement or two consecutive financial statements. A single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income. In a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The option under the current guidance that permits the presentation of components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated. The amendment becomes effective on January 1, 2012 and is applied retrospectively. Early adoption is permitted. This guidance will not have an impact on our consolidated financial position, results of operations or cash flows as it is disclosure-only in nature.


Item 7a. 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. Interest accrues on outstanding borrowings under our 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 based on borrowing base availability. As of December 25, 2011, the asset-based revolving credit facility had an outstanding balance of $36.5 million and carried an effective interest rate of 4.897%. As of December 25, 2011, $122.5 million was available under the asset-based revolving credit facility, after taking into account borrowing base limitations.
We also have a Canadian revolving credit facility which bears interest at the Canadian prime rate plus 1.25% or the Canadian bankers’ acceptance rate plus 2.50%, at our option. As of December 25, 2011, CA$13.3 million (approximately $13.1 million) was available under the revolving credit facility, after taking into account borrowing base limitations.
Based upon the information above, our annual pre-tax income would decrease by approximately $0.4 million for each one-percentage point increase in the interest rates applicable to our variable rate debt. At the end of 2011, three-month LIBOR was less than one percent; therefore, the maximum increase in our annual pre-tax income based on a decrease in interest rates applicable to our variable rate debt 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.


29


Item 8.
Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholder
Solo Cup Company:
We have audited the accompanying consolidated balance sheets of Solo Cup Company and subsidiaries (the Company) as of December 25, 2011 and December 26, 2010, and the related consolidated statements of operations, shareholder's (deficit) equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 25, 2011. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Solo Cup Company and subsidiaries as of December 25, 2011 and December 26, 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 25, 2011, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP
Chicago, Illinois
March 23, 2012




30


SOLO CUP COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) 

 
December 25,
2011
 
December 26,
2010
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
19,322

 
$
21,511

Accounts receivable - trade, less allowance for doubtful accounts of $831 and $1,837
121,720

 
116,213

Accounts receivable - other
7,947

 
4,512

Inventories
255,510

 
227,589

Deferred income taxes
7,746

 
13,056

Prepaid expenses
5,288

 
6,039

Restricted cash
—

 
1,940

Other current assets
19,115

 
17,809

Total current assets
436,648

 
408,669

Property, plant and equipment, less accumulated depreciation and amortization of $565,853 and $612,847
318,102

 
429,113

Intangible assets, net
696

 
910

Other assets
23,629

 
25,980

Total assets
$
779,075

 
$
864,672

Liabilities and Shareholder’s Deficit
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
91,286

 
$
63,058

Accrued payroll and related costs
23,707

 
28,707

Accrued customer allowances
20,794

 
27,172

Current maturities of long-term debt
452

 
430

Accrued interest
16,201

 
20,000

Other current liabilities
19,650

 
39,189

Total current liabilities
172,090

 
178,556

Long-term debt, net of current maturities
662,012

 
637,285

Deferred income taxes
7,829

 
14,876

Pensions and other postretirement benefits
46,547

 
38,428

Deferred gain on sale-leaseback
38,280

 
40,758

Other liabilities
47,026

 
42,273

Total liabilities
973,784

 
952,176

Shareholder’s deficit:
 
 
 
Common stock - Par value $0.01 per share; 1,000 shares authorized; 100 shares issued and outstanding
—

 
—

Additional paid-in capital
254,895

 
254,895

Accumulated deficit
(424,645
)
 
(331,116
)
Accumulated other comprehensive loss
(24,959
)
 
(11,283
)
Total shareholder’s deficit
(194,709
)
 
(87,504
)
Total liabilities and shareholder’s deficit
$
779,075

 
$
864,672

See accompanying Notes to Consolidated Financial Statements.

31

SOLO CUP COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands) 

 
For the year ended
 
December 25,
2011
 
December 26,
2010
 
December 27,
2009
Net sales
$
1,636,315

 
$
1,582,861

 
$
1,502,552

Cost of goods sold
1,505,915

 
1,439,312

 
1,296,132

Gross profit
130,400

 
143,549

 
206,420

Selling, general and administrative expenses
135,205

 
150,339

 
150,139

Loss on asset disposals
946

 
3,879

 
8,969

Impairment of goodwill
—

 
—

 
17,210

Asset impairment
13,048

 
20,536

 
—

Operating (loss) income
(18,799
)
 
(31,205
)
 
30,102

Interest expense, net of interest income of $164, $211 and $535
70,581

 
70,616

 
63,096

Loss on debt extinguishment
—

 
—

 
2,520

Reclassification of unrealized loss on cash flow hedges to interest expense
—

 
—

 
9,108

Foreign currency exchange loss (gain), net
1,826

 
2,221

 
(2,577
)
Gain from bargain purchase
—

 
(1,733
)
 
—

Loss before income taxes
(91,206
)
 
(102,309
)
 
(42,045
)
Income tax provision (benefit)
2,323

 
1,904

 
(6,389
)
Net loss
$
(93,529
)
 
$
(104,213
)
 
$
(35,656
)
See accompanying Notes to Consolidated Financial Statements.

32

SOLO CUP COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S DEFICIT
(In thousands, except share amounts) 

 
 
 
Additional
paid-in capital
 
Accumulated deficit
 
Accumulated
other
comprehensive loss
 
Total
shareholder’s equity (deficit)
 
Comprehensive income (loss)
 
Common Stock
 
Shares
 
Amount
December 28, 2008
100

 
$
—

 
$
254,995

 
$
(191,247
)
 
$
(32,456
)
 
$
31,292

 
 
Net loss
—

 
—

 
—

 
(35,656
)
 
—

 
(35,656
)
 
$
(35,656
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
10,435

 
10,435

 
10,435

Pension liability adjustments, net of tax of $1,050
—

 
—

 
—

 
—

 
1,174

 
1,174

 
1,174

Unrealized investment loss, net of tax of $0
—

 
—

 
—

 
—

 
12

 
12

 
12

Recognition of realized gain on cash flow hedge, net of tax benefit of $215
—

 
—

 
—

 
—

 
(150
)
 
(150
)
 
(150
)
Unrealized loss on cash flow hedges, net of tax of $0
—

 
—

 
—

 
—

 
(1,514
)
 
(1,514
)
 
(1,514
)
Reclassification of realized loss on cash flow hedges to interest expense, net of tax of $0
—

 
—

 
—

 
—

 
3,512

 
3,512

 
3,512

Reclassification of unrealized loss on cash flow hedges to interest expense upon termination of hedge accounting, net of tax of $0
—

 
—

 
—

 
—

 
9,108

 
9,108

 
9,108

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
$
(13,079
)
December 27, 2009
100

 
$
—

 
$
254,995

 
$
(226,903
)
 
$
(9,879
)
 
$
18,213

 
 
Net loss
—

 
—

 
—

 
(104,213
)
 
—

 
(104,213
)
 
$
(104,213
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
1,845

 
1,845

 
1,845

Pension liability adjustments, net of tax benefit of $395
—

 
—

 
—

 
—

 
(3,249
)
 
(3,249
)
 
(3,249
)
Return of capital to parent
—

 
—

 
(100
)
 
—

 
—

 
(100
)
 
 
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
$
(105,617
)
December 26, 2010
100

 
$
—

 
$
254,895

 
$
(331,116
)
 
$
(11,283
)
 
$
(87,504
)
 
 
Net loss
—

 
—

 
—

 
(93,529
)
 
—

 
(93,529
)
 
$
(93,529
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(2,026
)
 
(2,026
)
 
(2,026
)
Pension liability adjustments, net of tax benefit of $1,022
—

 
—

 
—

 
—

 
(11,650
)
 
(11,650
)
 
(11,650
)
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
$
(107,205
)
December 25, 2011
100

 
$
—

 
$
254,895

 
$
(424,645
)
 
$
(24,959
)
 
$
(194,709
)
 
 

See accompanying Notes to Consolidated Financial Statements.

33

SOLO CUP COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
For the year ended
 
December 25,
2011
 
December 26,
2010
 
December 27,
2009
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
Net loss
$
(93,529
)
 
$
(104,213
)
 
$
(35,656
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
 
Depreciation and amortization
80,569

 
109,576

 
70,003

Deferred financing fee amortization
7,397

 
6,989

 
6,017

Loss on asset disposals
946

 
3,879

 
8,969

Loss on debt extinguishment
—

 
—

 
2,520

Gain from bargain purchase
—

 
(1,733
)
 
—

Impairment of goodwill
—

 
—

 
17,210

Asset impairment
13,048

 
20,536

 
—

Pension plan curtailment loss
—

 
1,475

 
—

Reclassification of unrealized loss on cash flow hedges to interest expense
—

 
—

 
9,108

Deferred income taxes
(508
)
 
(911
)
 
(8,553
)
Foreign currency exchange loss (gain), net
1,826

 
2,221

 
(2,577
)
Changes in operating assets and liabilities, net of business acquisition:
 
 
 
 
 
Accounts receivable, net
(5,924
)
 
5,450

 
1,245

Inventories
(28,840
)
 
12,123

 
54,523

Prepaid expenses and other current assets
2,384

 
(1,415
)
 
5,596

Other assets
(598
)
 
2,013

 
1,106

Accounts payable
23,553

 
(14,086
)
 
23

Accrued expenses and other current liabilities
(19,168
)
 
3,336

 
493

Other liabilities
(4,999
)
 
(3,300
)
 
5,600

Other, net
2,700

 
1,761

 
2,310

Net cash (used in) provided by operating activities
(21,143
)
 
43,701

 
137,937

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
Proceeds from sale of property, plant and equipment
25,650

 
7,721

 
16,610

Purchases of property, plant and equipment
(28,342
)
 
(42,155
)
 
(71,815
)
Business acquisition, net of cash acquired
—

 
(23,661
)
 
—

Decrease (increase) in restricted cash
1,940

 
8,470

 
(10,410
)
Decrease in cash in escrow
—

 
—

 
50

Proceeds from insurance reimbursement
—

 
1,201

 
—

Other
(2,500
)
 
—

 
—

Net cash used in investing activities
(3,252
)
 
(48,424
)
 
(65,565
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
Net borrowings (repayments) under revolving credit facilities
23,931

 
(2,321
)
 
(13,000
)
Borrowings under the 10.5% Senior Secured Notes
—

 
—

 
293,784

Repayments of term notes
—

 
(410
)
 
(363,204
)
Repayments of other debt
(443
)
 
(373
)
 
(344
)
Return of capital to parent
—

 
(100
)
 
—

Debt issuance costs
—

 
(743
)
 
(18,314
)
Net cash provided by (used in) financing activities
23,488

 
(3,947
)
 
(101,078
)
Effect of exchange rate changes on cash
(1,282
)
 
175

 
1,208

NET DECREASE IN CASH AND CASH EQUIVALENTS
$
(2,189
)
 
$
(8,495
)
 
$
(27,498
)

(continued)


34

SOLO CUP COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
 
December 25, 2011
 
December 26, 2010
 
December 27, 2009
NET DECREASE IN CASH AND CASH EQUIVALENTS
$
(2,189
)
 
$
(8,495
)
 
$
(27,498
)
CASH AND CASH EQUIVALENTS, beginning of period
21,511

 
30,006

 
57,504

CASH AND CASH EQUIVALENTS, end of period
$
19,322

 
$
21,511

 
$
30,006

SUPPLEMENTAL CASH FLOW DISCLOSURES:
 
 
 
 
 
Interest paid, net of capitalized interest
$
64,680

 
$
70,031

 
$
53,139

Income taxes paid (tax refunds), net
$
3,438

 
$
(88
)
 
$
1,912

NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
 
Extinguishment of liabilities and receipt of asset in connection with sale of property
$
(19,841
)
 
$
—

 
$
—




See accompanying Notes to Consolidated Financial Statements.

35
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1) Nature, Formation and Organization of Business
Solo Cup Company, a Delaware corporation (“Solo Delaware”), was incorporated in Delaware in January 2004 to be the holding company for Solo Cup Company, an Illinois corporation (“Solo Illinois”), and its subsidiaries, and for SF Holdings Group, Inc. and its subsidiaries, including Sweetheart Cup Company Inc. Effective February 22, 2004, Solo Illinois became a wholly owned subsidiary of Solo Delaware, and Solo Delaware acquired 100% of the outstanding capital stock of SF Holdings.
Solo Illinois was established in 1936. Sweetheart Cup Company's operating history dated back to the founding of a predecessor company in 1911. In September 2005, Sweetheart Cup Company changed its name to Solo Cup Operating Corporation, and in October 2005, Solo Illinois merged with and into Solo Cup Operating Corporation, with Solo Cup Operating Corporation as the surviving entity. As a result of these transactions, Solo Delaware is a holding company, the material assets of which are 100% of the capital stock of SF Holdings. SF Holdings owns 100% of the capital stock of Solo Cup Operating Corporation, which, in turn, owns various direct and indirect 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. As of December 25, 2011, 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.
We are a leading producer and marketer of single-use products used to serve food and beverages. We distribute our products     globally and have served our industry for 75 years. We manufacture and supply a broad portfolio of single-use products, including cups, lids, take-out and other 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 operate manufacturing facilities and distribution centers in the United States, Canada, Mexico, Panama and the United Kingdom.

(2) Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Solo Delaware and its subsidiaries. As of December 25, 2011 and December 26, 2010, Solo Delaware wholly owned all of its subsidiaries directly or indirectly. All significant intercompany balances and transactions have been eliminated in consolidation.
Assets and liabilities of foreign subsidiaries are translated at current exchange rates with the related translation adjustments reported in shareholder's equity as a component of accumulated other comprehensive income (loss). Income and expense accounts and cash flows are translated at the average exchange rate during the period. Components of shareholder's equity are translated at historical exchange rates. Resulting translation gains and losses are recorded in comprehensive income (loss). Gains or losses resulting from foreign currency transactions are recorded in the Consolidated Statements of Operations.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period. Financial statement elements subject to estimation include, but are not limited to: the realizable value of accounts receivable, inventories, spare parts and deferred tax assets; the carrying value of property, plant, and equipment, intangible and other assets; the measurement of assets and obligations related to employee benefit plans and our long term incentive plan; the determination of the fair value of derivative instruments and debt; and provisions for discounts and allowances provided to customers. Actual results may differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid securities with original maturities of thirty days or less. As of December 25, 2011, cash and cash equivalents includes approximately $6.7 million, held in a segregated account, representing the remaining net proceeds of the August 2011 sale of our Owings Mills, Maryland manufacturing facility (Note 4). Under the indentures governing our senior secured and senior subordinated notes generally require us to use these proceeds by August 30, 2012 to purchase or improve assets useful in our business or to purchase a business that is related, complementary or ancillary to our existing business.

36
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Accounts Receivable
Accounts receivable are stated net of allowances for doubtful accounts and discounts and deductions, and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on a specific analysis of collectability and historical write-off experience. Account balances are charged against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote.
Some customer discounts and allowances are earned by, and payable to, customers only if they meet specified levels of sales volume. We record such customer discounts and allowances based on the estimated and probable allowances for the period. The amounts are recorded as a reduction of net sales based on the customers' actual sales volumes for the period. The most significant allowance reflects our estimates of discounts that some foodservice customers are entitled to claim based on their distribution activities. Customer accounts and allowances for which a right of offset exists are presented net within accounts receivable. If no right of offset exists, the amounts are included in accrued customer allowances.
Inventories
Inventories are stated at the lower of cost or market, using the first-in, first-out (FIFO) method, reduced by write-downs related to excess or obsolete inventories.
Vendor Incentives
We are entitled to certain vendor incentives only if we make a specified level of annual purchases. We record such incentives based on the actual purchases made on a year-to-date basis compared to targets or specified levels of purchases. The amounts are recorded as a reduction of cost of goods sold and inventory based on the volume purchased during the period.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Plant and equipment held under capital leases are stated at the present value of minimum lease payments. Depreciation on property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Amortization of assets held under capital leases is included within depreciation expense. Buildings are depreciated over 30 to 50 years, depending upon the construction of the building. Leasehold improvements are amortized over the lives of the corresponding leases. Machinery and equipment are depreciated over three to 10 years. Capitalized software is depreciated over five years.
The estimated useful life for building and improvements and machinery and equipment held under capital leases is the lesser of the lease term or the asset's estimated useful life. Costs for repairs and maintenance are expensed as incurred. Gains and losses on sales of property, plant and equipment are recorded as a component of operating income.
We capitalize interest costs, when appropriate, as a component of construction in progress.
Spare Parts
We capitalize the spare parts that we purchase and expense them as the parts are used. The carrying value of capitalized spare parts is stated net of an allowance for excess and obsolete parts, and is included in other current assets and other assets in our Consolidated Balance Sheets.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over the fair value of net assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized. In accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other, we test goodwill and other intangible assets with indefinite lives for impairment at least annually, at the end of October, or sooner if a triggering event that suggests possible impairment of the values of these assets occurs. Impairment testing for these assets involves a two-step process. In the first step, the fair value of the reporting unit holding the assets is compared to its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of the impairment loss, if any. In the second step, the fair market value of the reporting unit is allocated to all of its assets and liabilities including intangible assets with indefinite lives. The excess, if any, of the fair market value of the reporting unit over the sum of the fair market values allocated to identified assets and liabilities is the calculated value of goodwill to be compared to its carrying value (Note 7).

37
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Deferred Financing Fees
Deferred financing fees include costs incurred to obtain financing from lenders. We capitalize debt issuance costs as deferred financing fees and amortize the fees over the term of the related debt using the effective interest rate method for term debt and on a straight-line basis for revolving credit facilities.
Pre-production Design and Development Costs
We expense design and development costs related to products to be sold under long-term supply arrangements as those costs are incurred, with the exception of costs for molds, dies and other tools that we will own or have non-cancelable rights to use in producing the products under long-term supply arrangements. We capitalize and depreciate those costs as equipment.
Impairment of Long-lived Assets
We review long-lived assets, such as property, plant, and equipment and purchased intangibles subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure the recoverability of an asset to be held and used by comparing the carrying amount of that asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, we recognize an impairment charge in the amount by which the carrying amount of the asset exceeds the fair value of the asset. We present assets that meet the criteria of assets held for sale separately in our Consolidated Balance Sheets and report them at the lower of the carrying amount or fair value less costs to sell. Such assets are no longer depreciated (Note 4).
Deferred Rent
Some of our operating leases include rent escalation clauses that provide for scheduled changes in base rentals over their terms, tenant improvement allowances funded by landlord incentives or rent holidays that provide for rental payments commencing at a date other than the date of initial occupancy. For these leases, we recognize the total rental amounts due, net of tenant improvement allowances, over the lease terms as rental expense on a straight-line basis. The difference between the rent due under the stated periods of the lease compared to that of the straight-line basis is recorded as deferred rent. Deferred rent of $28.6 million and $28.8 million is included in other liabilities (non-current) in our Consolidated Balance Sheets as of December 25, 2011 and December 26, 2010, respectively.
Income Taxes
We account for income taxes in accordance with the asset and liability method described in FASB ASC Topic 740, Income Taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement and income tax bases of assets and liabilities, and tax credit and operating loss carryforwards. These items are recorded using enacted tax rates expected to apply to taxable income in the years in which the differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period in which the rate change is enacted.
A valuation allowance is established whenever we believe that it is more likely than not that deferred tax assets may not be realizable (Note 8).
Derivative Instruments and Hedging Activities
We record all derivative instruments on our Consolidated Balance Sheets at their respective fair values.
We historically have used interest rate derivative contracts, including interest rate swaps or caps, to manage exposure relating to the variability in interest payments on our outstanding debt. At the inception of a derivative contract, we designate the derivative as part of a cash flow hedge or a fair value hedging relationship, depending on the nature of the risk being hedged and whether or not the derivative contract qualifies as a highly-effective hedge of the underlying hedged item. Changes in the fair value of derivative contracts are recorded in earnings or deferred in accumulated other comprehensive income (loss), depending on whether a derivative is effective as a hedge and on the type of hedging transaction.
Derivatives are classified in our Consolidated Balance Sheets in other assets or other liabilities, as applicable, and are classified as current or non-current based on the scheduled maturity of the instrument (Note 12).

38
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Revenue Recognition
We recognize all of our revenue through the sale of manufactured or sourced products and record sales when the sales price is fixed or determinable, products are shipped, title and risk of loss has passed to the customer, and collection is reasonably assured.
We record specified costs that relate to promotional programs and incentive cash rebates as a reduction of sales.
Cost of Goods Sold
The primary components of cost of goods sold are material, direct and indirect labor and other manufacturing costs associated with the products we sell. Cost of goods sold also includes freight and distribution costs, including inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs and internal transfer costs.
Depreciation and Amortization
Substantially all depreciation and amortization expense is included in cost of goods sold in our consolidated statement of operations, as substantially all of our capital assets relate to our production activities. The remaining amount is included in selling, general and administrative expenses.
Research and Development Costs
Research and development costs are included in cost of goods sold and are expensed as incurred. Research and development costs amounted to $3.3 million, $4.0 million and $2.5 million for the years ended December 25, 2011, December 26, 2010 and December 27, 2009, respectively.
Selling, General and Administrative Expenses
The primary components of selling, general, and administrative expenses are compensation and benefits relating to our sales, marketing and administrative personnel, professional fees and other selling and administrative costs.
Advertising production costs are expensed as incurred, while advertising media costs are expensed in the period in which the related advertising first takes place. Advertising costs amounted to $4.2 million, $7.2 million and $7.7 million for the years ended December 25, 2011, December 26, 2010 and December 27, 2009, respectively.
Fair Value Measurements
We use a fair value hierarchy that prioritizes the inputs to techniques used to measure fair value into three broad levels. The level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety. These levels include:
Level 1 fair values are valuations based on quoted market prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2 fair values are those 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.
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.
We have applied fair value measurements for either accounting or disclosure purposes, as applicable, to our assets and liabilities, as follows: assets held for sale (Note 4), goodwill (Note 7), 10.5% senior secured notes and 8.5% senior subordinated notes (Note 9), interest rate swap agreements and foreign currency forward contracts (Note 12), pension plan assets (Note 13), long term incentive plan (Note 16) and an accounting guarantee (Note 17).
 


39
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) PLANT CLOSURES
On May 6, 2010, our Board of Directors committed to a plan designed to further optimize our manufacturing footprint. Pursuant to the plan, we closed our manufacturing facilities in Springfield, Missouri, North Andover, Massachusetts and Owings Mills, Maryland in March 2011, May 2011 and August 2011, respectively. We incurred costs over the life of the plan of approximately $132 million, of which approximately $35 million (identified in the table below as severance and equipment relocation and related costs) required or will require cash expenditures. In addition, the total costs include a charge attributable to lease payments for our North Andover facility that we will remain obligated to make in future periods, a lease termination charge, asset impairment charges, and accelerated depreciation for certain property, plant and equipment that would not be used after the facilities were closed. The following table summarizes the total plan costs incurred (expensed) by year (in millions):
 
 
Year ended
 
Year ended
 
 
 
 
December 26,
2010
 
December 25,
2011
 
Total plan costs
Severance (1) (3)
 
$
7

 
$
—

 
$
7

Equipment relocation and related costs (2) (3)
 
5

 
23

 
28

Pension plan curtailment loss (3)
 
2

 
—

 
2

Lease charges (3)
 
—

 
8

 
8

Asset impairment
 
17

 
12

 
29

Accelerated depreciation (3)
 
40

 
18

 
58

Total costs
 
$
71

 
$
61

 
$
132

(1) Approximately $6.6 million of severance was paid during the year ended December 25, 2011. As of December 25, 2011, accrued severance of approximately $0.5 million is included in other current liabilities on our accompanying consolidated balance sheet.
(2) Equipment relocation and related costs, which are expensed as incurred, were approximately $23 million, for the year ended December 25, 2011 and constituted cash expenditures incurred during the year.
(3) Excluding asset impairment which is presented separately, all costs in the above table are included in cost of goods sold on our accompanying consolidated statement of operations.

(4) ASSETS HELD FOR SALE
In May 2011, we entered into an agreement to sell our Owings Mills, Maryland manufacturing facility for $15 million. We classify assets as held for sale when they meet the criteria set forth in FASB ASC Topic 360, Property, Plant, and Equipment. Based on the execution of the purchase and sale agreement during our second fiscal quarter, this facility met the criteria and we reclassified this property from held and used to held for sale. Accordingly, we recorded an impairment of approximately $12.3 million to adjust the carrying value of this property to fair value less estimated costs to sell during the thirteen weeks ended June 26, 2011. On August 31, 2011, we sold the property and received net proceeds of approximately $14 million. We are leasing back the property through March 2012 to complete the decommissioning of the facility.
In September 2011, we entered into an agreement to sell our Belen, New Mexico manufacturing facility. We had ceased operations at the facility in 2009. Based on the execution of the purchase and sale agreement, this facility met the criteria to be classified as held for sale and was included in assets held for sale on our consolidated balance sheet as of September 25, 2011. We recorded an impairment of approximately $550 thousand to adjust the carrying value of this property to approximately $2 million, representing fair value less estimated costs to sell, during the thirteen weeks ended September 25, 2011. On September 30, 2011, in our fourth fiscal quarter, we sold the facility and received net proceeds of approximately $2 million.


40
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) INVENTORIES
Inventories consist of the following (in thousands): 
 
December 25,
2011
 
December 26,
2010
Finished goods
$
192,516

 
$
166,042

Work in process
15,163

 
12,307

Raw materials and supplies
47,831

 
49,240

Total inventories
$
255,510

 
$
227,589



(6) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following (in thousands):

 
December 25,
2011
 
December 26,
2010
Land
$
9,825

 
$
39,231

Buildings and improvements
96,986

 
168,326

Machinery and equipment
764,554

 
816,857

Construction in progress
12,590

 
17,546

Total property, plant and equipment
883,955

 
1,041,960

Less - accumulated depreciation
(565,853
)
 
(612,847
)
Total property, plant and equipment, net
$
318,102

 
$
429,113


Depreciation and amortization of property, plant and equipment for the years ended December 25, 2011, December 26, 2010, and December 27, 2009, was $80.4 million, $109.3 million and $70.0 million, respectively. Depreciation expense in 2011 and 2010 includes approximately $17.9 million and $39.8 million, respectively, of accelerated depreciation resulting from our decision in May 2010 to close three manufacturing facilities during 2011 (Note 3). We capitalized approximately $0.9 million, $2.2 million and $2.9 million of interest related to construction in progress for the years ended December 25, 2011, December 26, 2010, and December 27, 2009, respectively.

The loss on asset disposals of $0.9 million and $3.9 million in our Consolidated Statement of Operations for the years ended December 25, 2011 and December 26, 2010, respectively, reflects the sale of real estate and the disposal of production equipment retired as a result of plant closures and consolidation.

The loss on asset disposals of $9.0 million in our Consolidated Statement of Operations for the year ended December 27, 2009 primarily reflects the disposal of production equipment retired as a result of plant closures and consolidation. In addition, it includes adjustments made during the third and fourth fiscal quarters of 2009 to record the retirement of approximately $5.8 million of equipment that should have been recorded in prior periods. We determined these adjustments were not material to our then-current- and prior- period consolidated financial statements.



41
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(7) GOODWILL AND INTANGIBLE ASSETS

On March 31, 2010, we acquired InnoWare Plastic Holding Company, Inc. In accordance with the accounting guidance related to business combinations, we recognized a gain from bargain purchase of approximately $1.7 million, representing the excess of fair value of acquired net assets over the acquisition consideration of $24 million. We disclose the bargain purchase gain as a separate item in our Consolidated Statement of Operations for the year ended December 26, 2010. Amortizable intangible assets established as part of fair value accounting for the acquisition consisted of a brand name, a trade name, a patent and customer relationships. The intangible assets have a weighted-average useful life of approximately five years. The table below summarizes the intangible assets by major category (in thousands):
 
December 25,
2011
 
December 26,
2010
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Brand name, trade name and patent
$
920

 
$
367

 
$
920

 
$
197

Customer relationships
220

 
77

 
220

 
33

      Total identifiable intangible assets
$
1,140

 
$
444

 
$
1,140

 
$
230


Amortization expense related to amortizable intangible assets was $0.2 million during each of the years ended December 25, 2011 and December 26, 2010, respectively. Our amortizable intangible assets established as part of fair value accounting for our February 2004 acquisition of SF Holdings were fully amortized as of December 28, 2008; therefore, no amortization expense was recognized during the year ended December 27, 2009.

The changes in the carrying value of goodwill formerly included in our Europe reporting unit were as follows (in thousands):
 
Europe
Balance at December 28, 2008
$
15,459

Translation adjustment
1,751

Impairment of goodwill
(17,210
)
Balance at December 27, 2009
$
—


In the above table, the carrying value of goodwill is presented net of accumulated impairment losses of $37.5 million as of December 27, 2009 and $20.3 million as of December 28, 2008.


42
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


We tested goodwill for impairment at least annually, as of the end of October, or sooner if a triggering event that suggested possible impairment of the value of the goodwill occurred. During the third quarter of 2009, despite increasing sales in the first and second quarters and the implementation of programs intended to reduce costs and gain manufacturing efficiencies, our Europe reporting unit continued to incur declining margins and lower operating results. These results were in part due to increased competition, a decline in the European economy and higher input costs, such as resins and electricity, which were unable to be passed along through further price increases. We considered this combination of factors evidence of a permanent change in the long-term prospects of our European business. As a result, we determined that it was at risk of failing step one of the impairment test such that the reporting unit’s estimated fair value would not be in excess of its carrying value and concluded that there were sufficient indicators to perform an interim goodwill impairment analysis of our Europe reporting unit. Step one of the impairment test was performed as of September 27, 2009. Fair value was estimated using a discounted cash flow valuation model. The key assumptions used in the model included the discount rate, terminal growth rate, and cash flow projections. These key assumptions represent significant unobservable inputs, which are considered Level 3 inputs as defined by FASB ASC Topic 820, Fair Value Measurements and Disclosures. The discount rate was set by using the Weighted Average Cost of Capital methodology, which considers market and industry data. The 14% discount rate utilized in the test was indicative of the return an investor would expect to receive for investing in such a business. The determination of projected cash flows was based on the business’ strategic plans and long-range planning forecasts and represented our best estimates based on current and forecasted market conditions. The profit margin assumptions were projected based on the then current cost structure and anticipated net cost increases and/or reductions. The terminal business value was determined using a common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant weighted average cost of capital and terminal growth rate of 3%. Step one of the impairment test resulted in an estimated fair value less than carrying value. Consequently, step two was performed to calculate the amount of impairment, which concluded that the goodwill was fully impaired. As a result, we recorded a goodwill impairment charge of approximately $17.2 million during the thirteen weeks ended September 27, 2009. After this charge, there is no remaining goodwill on our Consolidated Balance Sheet.

For the third quarter of 2009, an impairment analysis of long-lived assets, excluding goodwill, was performed in conjunction with the interim goodwill impairment test for our Europe reporting unit. An impairment loss would be recognized if the carrying amount of these long-lived assets was not recoverable and exceeded its estimated fair value. The undiscounted future cash flows expected to result from the use and eventual disposition of these assets substantially exceeded their carrying value; therefore, we concluded that the assets were not impaired.



43
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(8) INCOME TAXES

Sources of the loss before income taxes and the components of income tax provision (benefit) are as follows (in thousands):
 
For the year ended December 25, 2011
 
For the year ended December 26, 2010
 
For the year ended December 27, 2009
Loss before income taxes:
 
 
 
 
 
   United States
$
(99,233
)
 
$
(105,481
)
 
$
(26,049
)
Foreign
8,027

 
3,172

 
(15,996
)
Total
$
(91,206
)
 
$
(102,309
)
 
$
(42,045
)
Income tax provision (benefit):
 
 
 
 
 
Current:
 
 
 
 
 
U.S. federal
$
—

 
$
—

 
$
—

State
608

 
371

 
182

Foreign
2,223

 
2,444

 
1,982

Total current
2,831

 
2,815

 
2,164

Deferred:
 
 
 
 
 
U.S. federal
1,523

 
(1,003
)
 
(8,265
)
State
(2,184
)
 
301

 
—

Foreign
153

 
(209
)
 
(288
)
Total deferred
(508
)
 
(911
)
 
(8,553
)
Total income tax provision (benefit)
$
2,323

 
$
1,904

 
$
(6,389
)

The following reconciles the expected U.S. federal statutory income tax benefit based on loss before income taxes with our income tax provision (benefit) (in thousands):
 
For the year ended December 25, 2011
 
For the year ended December 26, 2010
 
For the year ended December 27, 2009
Income tax benefit at U.S. statutory rate
$
(31,922
)
 
$
(35,808
)
 
$
(14,715
)
Foreign rate differential
(806
)
 
364

 
(324
)
State taxes, net of federal benefit
317

 
372

 
151

Impairment of goodwill
—

 
—

 
3,904

Change in valuation allowance
33,665

 
36,853

 
9,267

Other
1,069

 
123

 
(4,672
)
Income tax provision (benefit)
$
2,323

 
$
1,904

 
$
(6,389
)

During the first quarter of fiscal year 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. The $5.1 million benefit is included in Other in the above reconciliation.

44
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Our deferred tax assets and liabilities are as follows (in thousands):

 
December 25,
2011
 
December 26,
2010
Deferred tax assets attributable to:
 
 
 
Net operating loss and other carryforwards
$
156,278

 
$
119,994

Pensions and other postretirement benefits
17,839

 
14,629

Inventory
13,269

 
15,314

Employee benefit accruals
5,710

 
10,423

Accounts receivable
8,033

 
10,861

Intangible assets
6,416

 
9,053

Sale-leaseback
15,590

 
16,545

Unrealized losses
301

 
1,438

Other accruals
16,247

 
16,486

Gross deferred tax assets
239,683

 
214,743

Valuation allowance
(189,988
)
 
(152,675
)
Net deferred tax assets
49,695

 
62,068

Deferred tax liabilities attributable to:
 
 
 
Property, plant and equipment
49,778

 
63,888

Unrealized gains
—

 
—

Gross deferred tax liabilities
49,778

 
63,888

Net deferred tax liabilities
$
(83
)
 
$
(1,820
)

As of December 25, 2011, we had approximately $413.3 million of U.S. federal tax net operating loss carryforwards that expire between 2017 and 2031, of which approximately $17 million were subject to the provisions of Internal Revenue Code Section 382. We establish a valuation allowance for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

Based upon the level of historical pre-tax losses and projections for future taxable income over the periods in which the deferred tax assets are deductible, we concluded during 2006 that it was more likely than not that we would not fully realize the benefits of our deductible differences in the United States. Accordingly, we recorded an income tax provision of $119.6 million during 2006 to establish a valuation allowance for our net deferred tax assets, including federal and state net operating loss carryforwards and other deferred tax assets. During the year ended December 25, 2011, we increased our U.S. valuation allowance by $37.7 million.

In 2009, we assessed the realizability of the deferred tax assets of our European operations and concluded that it was more likely than not that we would not fully realize the benefits of our deductible differences. Accordingly, we recorded an income tax provision of $1.6 million to establish a valuation allowance for our net deferred tax assets. During the year ended December 25, 2011 we decreased the valuation allowance related to our European operations by $0.3 million.

It is our intention to permanently reinvest undistributed earnings in our foreign subsidiaries with the exception of $29.7 million of Canadian earnings, $19.7 million of which was deemed to be distributed to the United States in 2010, and $5.0 million of Panamanian earnings. We have not made a provision for future income taxes for the remaining undistributed earnings of certain foreign subsidiaries, as we consider these earnings to be indefinitely reinvested in these operations. As of December 25, 2011, such aggregated earnings for which taxes have not been provided were $50.9 million.




45
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Solo Delaware and its subsidiaries file income tax returns with federal and various states and provinces in the United States, Canada, Mexico, Panama, and the United Kingdom. Our U.S. tax returns remain subject to examination for the year ended December 31, 2004 and all subsequent periods. Our Canadian federal tax returns remain subject to examination for the fiscal year ended December 31, 2004 and all subsequent periods. Our United Kingdom returns remain subject to examination for the year ended December 31, 2003 and all subsequent periods.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 
For the year ended December 25, 2011
 
For the year ended December 26, 2010
Balance at the beginning of the year
$
11,557

 
$
8,442

Additions related to tax positions taken in the current year
742

 
2,781

Additions related to tax position taken in previous years
248

 
442

Reduction in tax position taken in previous years
(225
)
 
(108
)
Balance at the end of the year
$
12,322

 
$
11,557


As of December 25, 2011, the unrecognized tax benefits are $12.3 million, of which only $1.9 million would affect our annual effective tax rate, if recognized, because of valuation allowances in certain jurisdictions. We are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

We recognize interest and penalties related to unrecognized tax benefits as income tax expense. As of December 25, 2011, we had accrued approximately $0.3 million for interest and penalties.


(9) DEBT
Long-term debt as of December 25, 2011 and December 26, 2010, including amounts payable within one year, was as follows (in thousands): 
 
December 25,
2011
 
December 26,
2010
Long-term debt:

 

10.5% Senior Secured Notes due November 2013
$
300,000

 
$
300,000

Unamortized discount
(3,066
)
 
(4,464
)
10.5% Senior Secured Notes due November 2013, net
296,934

 
295,536

8.5% Senior Subordinated Notes due February 2014
325,000

 
325,000

Asset-based Revolving Credit Facility, maturing July 2013
36,480

 
10,027

Canadian Revolving Credit Facility, maturing December 2013
—

 
2,669

Capital lease obligations
4,050

 
4,483

Total long-term debt
662,464

 
637,715

Less: Current maturities of long-term debt
452

 
430

Long-term debt, net of current maturities
$
662,012

 
$
637,285


Scheduled maturities of long-term debt at December 25, 2011, excluding capital lease obligations (Note 10), are as follows (in thousands):
 
December 25,
2011
2013
$
336,480

2014
325,000

 
$
661,480



46
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


On July 2, 2009, Solo Delaware and Solo Cup Operating Corporation issued $300.0 million of 10.5% Senior Secured Notes due 2013, and we entered into a new asset-based revolving credit facility providing for borrowings of up to $200.0 million, subject to borrowing base limitations and other specified terms and conditions. We used the initial borrowings under our asset-based revolving credit facility of $28.3 million, together with net proceeds of $293.8 million from the issuance of our senior secured notes, to (1) repay the $300.9 million of borrowings outstanding, including accrued interest thereon, under the first lien credit facility, (2) pay $17.3 million of debt issuance costs relating to the senior secured notes and the asset-based revolving credit facility, and (3) provide $3.9 million for operating needs. We deferred the debt issuance costs and are amortizing them through 2013, when the senior secured notes and borrowings under the asset-based revolving credit facility mature. As of December 25, 2011, unamortized debt issuance costs related to the refinancing of $8.4 million are included in other assets on our Consolidated Balance Sheet.

In connection with these refinancing transactions, we reclassified $9.1 million of unrealized losses associated with interest rate swap agreements from accumulated other comprehensive loss to interest expense during the thirteen weeks ended June 28, 2009. See further description in Note 12. In addition, the unamortized balance of debt issuance costs related to the first lien credit facility of $2.5 million was written off in July 2009 as a result of the refinancing.

10.5% Senior Secured Notes

Solo Delaware and Solo Cup Operating Corporation co-issued the senior secured notes under an indenture, dated as of July 2, 2009, among the co-issuers, the initial guarantors identified therein and U.S. Bank National Association, as trustee. The senior secured notes mature on November 1, 2013 and bear interest at a rate of 10.5% per annum. Interest on the senior secured notes is payable semi-annually on May 1 and November 1 of each year. We made our first interest payment on November 1, 2009 and have made all scheduled interest payments to date. The senior secured notes were issued at 97.928% of their aggregate principal amount for gross proceeds of $293.8 million, representing a yield to maturity of 11.125%. As of December 25, 2011, we were in compliance with the covenants included in this indenture.

The obligations of Solo Delaware and Solo Cup Operating Corporation under the senior secured notes are fully and unconditionally guaranteed, jointly and severally, by the existing guarantors under the indenture (SF Holdings Group, Inc., Solo Manufacturing LLC, P.R. Solo Cup, Inc., Solo Cup Owings Mills Holdings, Lily-Canada Holding Corporation, Solo Cup (UK) Limited, Insulpak Holdings Limited, Solo Cup Europe Limited and Solo Cup Finance Limited). The senior secured notes and related guarantees are secured by a senior lien on substantially all of the assets (other than accounts receivable, specified payment intangibles, inventory, deposit accounts, commodity accounts, securities accounts, lock-boxes, instruments, chattel paper, cash and cash equivalents, general intangibles related to any of the foregoing, proceeds and products of the foregoing and specified assets related thereto, and specifically excluded assets) of the co-issuers and guarantors and by a junior lien on the accounts receivable and other assets identified above that are not subject to the senior lien.

We may redeem all or a part of the senior secured notes at a redemption price equal to a percentage of the principal amount thereof, plus any accrued and unpaid interest. If redeemed during the 12-month period beginning May 1, 2011, the redemption price would be 105.25%. If redeemed on May 1, 2012 or thereafter, the redemption price would be 100%.

If specified change of control events occur, we must offer to repurchase the senior secured notes at a repurchase price equal to 101% of the principal amount of the senior secured notes repurchased, plus any accrued and unpaid interest to the applicable repurchase date. If we sell assets under specified circumstances, we must offer to repurchase the senior secured notes at a repurchase price equal to 100% of the principal amount of the senior secured notes repurchased, plus any accrued and unpaid interest to the applicable repurchase date.

The indenture contains covenants that, among other things, restrict the ability of Solo Delaware and its restricted subsidiaries to incur additional debt or issue disqualified stock or preferred stock; create liens; pay dividends, make investments or make other restricted payments; sell assets; consolidate, merge, sell or otherwise dispose of all or substantially all of the assets of Solo Delaware and its restricted subsidiaries; enter into transactions with affiliates; and designate subsidiaries as unrestricted. These covenants are subject to a number of important limitations and exceptions.


47
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Asset-Based Revolving Credit Facility

The asset-based revolving credit facility provides for revolving credit financing of up to $200.0 million, including a $40.0 million sub-limit for letters of credit, and has a maturity date of July 2, 2013. Our ability to borrow under the asset-based revolving credit facility is limited to a borrowing base equal to 85% of eligible accounts receivable plus the lower of (1) 65% of eligible inventory and (2) 85% of the net orderly liquidation value of eligible inventory, minus availability reserves, and is subject to other conditions, limitations and reserve requirements. As of December 25, 2011, we had available capacity of $122.5 million under our asset-based revolving credit facility after taking into account borrowing base limitations and outstanding letters of credit.

Under the asset-based revolving credit facility, we have the right to increase the aggregate principal amount of the commitments from time to time, in an aggregate amount not to exceed $100.0 million, without the consent of any lender (other than the lenders participating in such increase), so long as any such increase is at least $25.0 million, subject to borrowing base limitations and other specified terms and conditions.

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 based on borrowing base availability. As of December 25, 2011, outstanding borrowings under the asset-based revolving credit facility bore interest at an effective rate of 6.25%. As of December 25, 2011, we were in compliance with the covenants included in this debt agreement.

8.5% Senior Subordinated Notes

On February 27, 2004, Solo Delaware issued $325.0 million of 8.5% Senior Subordinated Notes due 2014 under an indenture among the issuer, the initial guarantors identified therein and U.S. Bank National Association, as trustee. The senior subordinated notes mature on February 15, 2014 and bear interest at a rate of 8.5% per annum. Interest on the senior subordinated notes is payable semi-annually on February 15 and August 15 of every year. We have made all scheduled interest payments to date. As of December 25, 2011, we were in compliance with the covenants included in this indenture.

The obligations of Solo Delaware under the senior subordinated notes are fully and unconditionally guaranteed, jointly and severally, by the existing guarantors under the indenture (SF Holdings Group, Inc., Solo Manufacturing LLC, P.R. Solo Cup, Inc., Solo Cup Owings Mills Holdings, Lily-Canada Holding Corporation, Solo Cup (UK) Limited, Insulpak Holdings Limited, Solo Cup Europe Limited and Solo Cup Finance Limited).

The senior subordinated notes were not redeemable before February 15, 2009. Starting on that date, we have the option to redeem all or a portion of the senior subordinated notes at a redemption price equal to a percentage of the principal amount thereof plus accrued interest. If redeemed during the 12-month period from February 15, 2010, the applicable percentage is 102.833%; from February 15, 2011, the applicable percentage is 101.417%; and from February 15, 2012 and thereafter, the applicable percentage is 100% of the principal amount to be redeemed. The 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 notes at a redemption price equal to 101% of the principal amount thereof, plus accrued interest. The indenture governing the senior subordinated notes contains various covenants which, subject to specified exceptions, prohibit, or limit, among other things, asset sales, changes of control, dividend payments, equity repurchases or redemptions, the incurrence of additional debt, the issuance of disqualified stock, specified transactions with affiliates, the creation of additional liens and specified other business activities.

Canadian Credit Facility

On December 15, 2010, Solo Cup Canada Inc. (“Solo Canada”), an indirect wholly owned subsidiary of Solo Cup Company, entered into a credit agreement (the “Canadian Credit Agreement”) with GE Canada Finance Holding Company (“GE Capital”), as a lender and agent for all lenders, providing for an asset-based revolving credit financing of up to CA$17.0 million, including a CA$2.0 million sublimit for letters of credit. The Canadian credit facility expires on December 15, 2013. The Canadian Credit Agreement amends and replaces in its entirety the Credit Agreement dated as of September 24, 2004, as amended, between Solo Canada (formerly known as Lily Cups Inc.), as borrower, and GE Capital, as agent and lender, and terminates the availability of borrowings thereunder.


48
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Solo Canada’s ability to borrow under the Canadian credit facility is limited to a borrowing base equal to 85% of eligible accounts receivable; plus the lower of (a) 70% of eligible raw materials and finished goods inventory and (b) 85% of the net orderly liquidation value of eligible raw materials and finished goods inventory; plus the lower of (a) 25% of eligible work-in-process inventory and (b) CA$1.0 million; less availability reserves, and is subject to other conditions, limitations and reserve requirements. As of December 25, 2011, we had available capacity of $13.1 million under our Canadian credit facility after taking into account borrowing base limitations and outstanding letters of credit.

Solo Canada may borrow funds under the Canadian credit facility, at its option, in Canadian or U.S. dollars. Canadian dollar denominated loans bear interest, at Solo Canada’s option, at a variable rate equal to: (1) the Canadian Bankers Acceptance Rate (the “BA Rate”), plus 2.5% per annum; or (2) the Canadian Prime Rate (being the higher of the (a) Canadian Bank Prime Rate and (b) 1.35% over the 30-day BA Rate), plus 1.25% per annum. U.S. dollar denominated loans bear interest, at Solo Canada’s option, at a variable rate equal to: (1) the U.S. Base Rate, plus 0.75% per annum; or (b) LIBOR, plus 2.5% per annum. As of December 25, 2011, we had no outstanding borrowings under the Canadian ABL facility and we were in compliance with the covenants included therein.

(10) LEASES

The gross amount of machinery and equipment held under capital leases, and related accumulated amortization, was as follows (in thousands):

 
December 25,
2011
 
December 26,
2010
Machinery and equipment
$
5,219

 
$
5,202

Less accumulated amortization
(1,523
)
 
(1,009
)
 
$
3,696

 
$
4,193


Capital lease obligations were $4.1 million and $4.5 million as of December 25, 2011 and December 26, 2010, respectively. As of December 25, 2011, capital lease obligations consisted of various machines and one warehouse with leases expiring between 2014 and 2022. Amortization expense was $0.7 million, $0.3 million, and $0.4 million for the years ended December 25, 2011, December 26, 2010, and December 27, 2009, respectively.

We also have several non-cancelable operating leases that expire over the next 16 years and provide for renewal terms. These include property leases with escalation clauses averaging 0.3% to 4.0% annually, as well as leases of machinery, office equipment and vehicles.

In June 2007, we entered into a lease agreement in conjunction with the sale of six of our manufacturing facilities. The sole proceeds of $130.0 million were used to retire the second lien credit facility. Upon the sale of the six properties, we immediately leased them back pursuant to a 20-year term lease. The lease contains four five-year renewal term options and is non-cancelable. Rent is payable on a quarterly basis, due on the first day of each calendar quarter, with an annual 2% escalation. Annual rent expense of $14.2 million is recognized on a straight-line basis over the 20-year term of the lease. Payments during fiscal years 2011 and 2010 were $12.5 million and $12.3 million, respectively.

Net property, plant and equipment was reduced in 2007 by the carrying values of the six properties sold, which amounted to approximately $73.0 million, of which $65.5 million was buildings and improvements, and $7.5 million was land. The resulting gain of approximately $53.2 million (net of $3.7 million of closing costs) was recorded as a deferred credit in our Consolidated Balance Sheet. The remaining deferred credit is being amortized to income on a straight-line basis as an offset to rent expense over the 20-year lease term. As of December 25, 2011, the remaining deferred credit was $40.9 million, of which $2.6 million was included in other current liabilities. As of December 26, 2010, the remaining deferred credit was $43.4 million, of which $2.6 million was included in other current liabilities.


49
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


As of December 25, 2011, future minimum lease payments for capital leases and non-cancelable operating leases having an initial or remaining noncancelable lease term in excess of one year, were as follows (in thousands):

 
Capital Leases
 
Operating Leases
For the fiscal year:
 
 
 
2012
$
765

 
$
47,595

2013
769

 
45,891

2014
696

 
44,316

2015
476

 
39,119

2016
476

 
37,197

Thereafter
2,580

 
298,990

Total minimum lease payments
5,762

 
$
513,108

Less amounts representing interest
(1,712
)
 
 
Present value of minimum payments on capital leases
$
4,050

 
 

Future minimum rental payments to be received under noncancelable subleases as of December 25, 2011 totaled approximately $4.1 million. Total rental expense for operating leases, including rentals on month-to-month leases, was $60.3 million, $53.3 million and $50.6 million for the years ended December 25, 2011, December 26, 2010, and December 27, 2009, respectively.

(11) 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 December 25, 2011 and December 26, 2010 due to their short-term maturities or market rates of interest. Derivative financial instruments were recorded at fair value (Note 12). As of December 25, 2011 and December 26, 2010, the fair value of our floating-rate debt, consisting of our asset-based revolving credit facility and the revolving loan under our Canadian credit facility, approximated carrying value due to our ability to borrow at comparable terms in the open market.
The following table presents the carrying values and fair values of our fixed-rate debt (in thousands):
 
December 25, 2011
 
December 26, 2010
 
Carrying value
 
Fair value
 
Carrying value
 
Fair value
 
 
 
 
 
 
 
 
10.5% Senior Secured Notes due November 2013 (1)
$
296,934

 
$
305,250

 
$
295,536

 
$
319,500

8.5% Senior Subordinated Notes due February 2014
325,000

 
298,188

 
325,000

 
295,100

(1) The carrying values of the 10.5% Senior Secured Notes are presented net of the unamortized discount as of each date.
The estimated fair values of the senior secured notes and the senior subordinated notes were determined using Level 1 inputs in the fair value hierarchy, as defined in FASB ASC Topic 820, Fair Value Measurements and Disclosures and were based on the last trade price of the debt prior to close of trading on December 23, 2011 and December 23, 2010, the last business day of each respective fiscal period.
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.


50
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


On a recurring basis prior to their expiration date in February 2011, we measured our interest rate swap agreements (Note 12) at fair value using an income approach and Level 2 inputs in the fair value hierarchy. 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 were considered in the fair value determination.

(12) DERIVATIVE INSTRUMENTS
As of December 26, 2010, we had three outstanding receive-variable (three-month LIBOR), pay-fixed interest rate swap agreements with an aggregate notional amount of $150.0 million that were originally entered into to hedge a portion of our exposure to interest rate risk related to term loan borrowings under our former variable-rate first lien facility. The effective date of the interest rate swaps was August 28, 2007 and the expiration date was February 28, 2011. The interest rate swaps were initially 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 continued through the expiration date of the swaps in February 2011. The amount of collateral that remained on account with the counterparty fluctuated based on changes in the estimated fair value of the swaps, including as a result of changes in interest rates. The amount of collateral as of December 26, 2010 of $1.9 million is included in restricted cash on our Consolidated Balance Sheet and classified as current.

When the interest rate swaps were 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 transactions, the hedged forecasted payments of variable-rate interest on borrowings under the first lien credit facility 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, we have reported the mark-to-market changes on the swaps as a component of interest expense, net. The mark-to-market gains (losses) recognized in interest expense during the years ended December 25, 2011, December 26, 2010, and December 27, 2009 were $1.4 million, $6.9 million and $(2.8) million, respectively. The net (loss) gain recognized in interest expense during the years ended December 25, 2011, December 26, 2010 and December 27, 2009 was $(0.1) million, $0.8 million and $6.3 million, respectively. The accounting impact in 2011 was all recognized in the thirteen weeks ended March 27, 2011.

The location and amount of all gains or losses recognized in income on the interest rate swaps, including the reclassification from accumulated other comprehensive loss to interest expense are as follows (in millions):
 
 
 
(Gain) Loss Recognized during the Year Ended
Derivative Instruments
Location in Consolidated Statements of Operations
 
December 25,
2011
 
December 26,
2010
 
December 27,
2009
Interest rate swaps
Interest (income) expense, net
 
$
(0.1
)
 
$
0.8

 
$
6.3

Interest rate swaps
Reclassification of unrealized loss on cash flow hedges to interest expense
 
—

 
—

 
9.1


The reclassification adjustment from accumulated other comprehensive loss for losses realized in net earnings, net of tax, was $3.5 million for the year ended December 27, 2009.
Prior to their expiration date of February 28, 2011, we reported our interest rate swap agreements at fair value on our consolidated balance sheet. As of December 26, 2010, their fair value of $1.4 million was included in other current liabilities.


51
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(13) PENSION AND OTHER POSTRETIREMENT BENEFITS

We sponsor defined benefit pension plans and a postretirement health care plan for certain U.S. employees. These plans provide certain union and non-union employees with retirement and disability income benefits. Pension costs are based upon the actuarially determined normal costs, plus interest on and amortization of the unfunded liabilities. These plans are frozen to new participants and the benefits for the majority of the participants in the pension plans are frozen. Our policy has been to fund annually the minimum contributions required by applicable regulations. Plan assets for the U.S. pension plans are held in retirement trust funds with investments primarily in common stock, corporate bonds and government securities. The postretirement health care plan covers a small group of retirees. The plan, in most cases, pays stated percentages of most medical expenses incurred by retirees after subtracting payments by Medicare or other providers and after a stated deductible has been met. The plan is contributory, with retiree contributions adjusted annually.

We also sponsor defined benefit pension plans and a postretirement health care plan that covers all Solo Cup Canada employees who meet certain length of service requirements. These plans provide certain union and non-union employees with retirement and disability income benefits. Our funding policy is to contribute amounts necessary to satisfy the amounts required by local laws and regulations. Plan assets for the Solo Cup Canada pension plans are held in retirement trust funds with investments primarily in common stock, corporate bonds and government securities.

We also sponsor a noncontributory defined benefit pension plan that covers all Solo Cup Europe Limited employees who meet certain length of service requirements. Plan benefits are based on participants’ compensation during their final year of service. Our funding policy is to contribute amounts necessary to satisfy the amounts required by local laws and regulations. Plan assets for the Solo Cup Europe Limited pension plan are held in retirement trust funds with investments primarily in common stock, corporate bonds and government securities.
The following table sets forth the change in benefit obligation for our benefit plans (in thousands):
 
Pension Benefits
 
Other Postretirement Benefits
 
December 25, 2011
 
December 26, 2010
 
December 25, 2011
 
December 26, 2010
Change in benefit obligation:
 
 
 
 
 
 
 
Benefit obligation at beginning of year
$
134,404

 
$
122,910

 
$
8,122

 
$
7,922

Service cost
1,074

 
1,384

 
102

 
56

Interest cost
7,038

 
7,044

 
363

 
374

Curtailment loss
—

 
577

 
—

 
—

Actuarial losses (gains)
6,184

 
8,967

 
(103
)
 
568

Foreign currency exchange rate changes
(596
)
 
821

 
(39
)
 
81

Plan participant contributions
173

 
170

 
355

 
415

Benefits paid
(8,101
)
 
(7,469
)
 
(1,234
)
 
(1,294
)
Benefit obligation at end of year
$
140,176

 
$
134,404

 
$
7,566

 
$
8,122

 
 
 
 
 
 
 
 
Change in plan assets:
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
$
103,098

 
$
93,567

 
$
—

 
$
—

Actual return on plan assets
(1,318
)
 
9,764

 
—

 
—

Foreign currency exchange rate changes
(440
)
 
835

 
—

 
—

Employer contributions
6,605

 
6,231

 
879

 
879

Plan participant contributions
173

 
170

 
355

 
415

Benefits paid
(8,101
)
 
(7,469
)
 
(1,234
)
 
(1,294
)
Fair value of plan assets at end of year
$
100,017

 
$
103,098

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Funded Status - Benefit obligation in Excess of Plan Assets
$
(40,159
)
 
$
(31,306
)
 
$
(7,566
)
 
$
(8,122
)

52
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Pension Benefits
 
Other Postretirement Benefits
 
December 25, 2011
 
December 26, 2010
 
December 25, 2011
 
December 26, 2010
Noncurrent assets
$
—

 
$
—

 
$
—

 
$
—

Current liabilities
(407
)
 
(449
)
 
(1,017
)
 
(806
)
Noncurrent liabilities
(39,752
)
 
(30,857
)
 
(6,549
)
 
(7,316
)
Net amount recognized at end of year
$
(40,159
)
 
$
(31,306
)
 
$
(7,566
)
 
$
(8,122
)
Prior service credit
$
—

 
$
—

 
$
4,307

 
$
4,742

Net actuarial loss
(44,859
)
 
(32,441
)
 
(1,703
)
 
(1,884
)
Accumulated other comprehensive (loss) income
$
(44,859
)
 
$
(32,441
)
 
$
2,604

 
$
2,858


The estimated amount that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost (income) in 2012 is as follows (in thousands):
 
 
Pension Benefits
 
Other Postretirement Benefits
Amortization of actuarial losses
 
$
2,378

 
$
67

Amortization of prior service credit
 
—

 
(435
)
Total loss (income)
 
$
2,378

 
$
(368
)

The accumulated benefit obligation for all defined benefit pension plans was approximately $137.6 million and $131.7 million as of December 25, 2011 and December 26, 2010, respectively. The following table presents aggregated information for individual pension plans with an accumulated benefit obligation in excess of plan assets as of December 25, 2011 and December 26, 2010, (in thousands):
 
 
December 25, 2011
 
December 26, 2010
Projected benefit obligation
 
$
140,176

 
$
103,053

Accumulated benefit obligation
 
137,588

 
103,053

Fair value of plan assets
 
100,017

 
73,441


Net periodic benefit cost for our pension and other postretirement benefit plans consists of the following (in thousands):
 
For the year ended
 
December 25,
2011
 
December 26,
2010
 
December 27,
2009
Pension Benefits
 
 
 
 
 
Service cost
$
1,074

 
$
1,384

 
$
925

Interest cost
7,038

 
7,044

 
7,065

Expected return on plan assets
(7,818
)
 
(7,105
)
 
(5,864
)
Amortization of prior service cost
—

 
119

 
204

Amortization of net loss
2,663

 
2,643

 
2,201

 
2,957

 
4,085

 
4,531

Curtailment loss(1)
—

 
1,475

 
—

Net periodic benefit cost
$
2,957

 
$
5,560

 
$
4,531

Other Postretirement Benefits
 
 
 
 
 
Service cost
$
102

 
$
56

 
$
35

Interest cost
363

 
374

 
773

Amortization of prior service credit
(435
)
 
(435
)
 
(435
)
Amortization of net loss
77

 
52

 
343

Net periodic benefit cost
$
107

 
$
47

 
$
716

 

53
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Pursuant to FASB ASC Topic 715, Compensation - Retirement Benefits, we recorded a curtailment loss of approximately $1.5 million during the thirteen weeks ended September 26, 2010, as a result of the closure of our manufacturing facility in Springfield, Missouri which significantly reduced the expected years of future service of active employees at this facility who participated in one of our U.S. defined benefit pension plans.

Key assumptions - The following weighted-average assumptions were used to determine the benefit obligation at fiscal year-end and the net periodic benefit cost for each fiscal year:
 
Pension Benefits
 
Other Postretirement Benefits
 
2011
 
2010
 
2011
 
2010
To determine benefit obligation at fiscal year-end:
 
 
 
 
 
 
 
Discount rate:
 
 
 
 
 
 
 
North America
4.89
%
 
5.38
%
 
4.47
%
 
4.72
%
Europe
4.75
%
 
5.25
%
 
—

 
—

Expected long-term rate of return on plan assets:
 
 
 
 
 
 
 
North America
6.86
%
 
7.59
%
 
—

 
—

Europe
5.60
%
 
7.30
%
 
—

 
—

 
 
 
 
 
 
 
 
To determine net periodic benefit cost for each fiscal year:
 
 
 
 
 
 
 
Discount rate:
 
 
 
 
 
 
 
North America
5.38
%
 
5.94
%
 
4.72
%
 
5.04
%
Europe
5.25
%
 
5.65
%
 
—

 
—

Expected long-term rate of return on plan assets:
 
 
 
 
 
 
 
North America
7.59
%
 
7.61
%
 
—

 
—

Europe
7.30
%
 
7.70
%
 
—

 
—


We generally estimate the discount rate for our pension and other postretirement benefit obligations based on a hypothetical investment in a portfolio of high-quality bonds that approximate the estimated cash flows of the pension and other postretirement benefit obligations. We believe this approach permits a matching of future cash outflows related to benefit payments with future cash inflows associated with bond coupons and maturities.

One of the pension plans for Solo Cup Canada is pay-related. The rate of compensation increase used to determine the benefit obligation as of December 25, 2011 and December 26, 2010, and the net periodic benefit cost for the plan for the fiscal years then ended was 3.50%. The discount rate is based on rates at which the pension benefit obligation could effectively be settled on a present value basis. To determine the weighted average discount rate, we review long-term, high-quality corporate bonds at our measurement date and use a model that matches the projected benefit payments for our plans to coupons and maturities from high-quality bonds.

The expected long-term rate of return on plan assets takes into consideration historical and expected long-term returns based upon the weighted-average allocation of equities, fixed income and other asset components comprising the plans’ assets at the plans’ measurement dates.


54
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


For measurement purposes, the assumed health care cost trend rates were as follows:
Health care cost trend rate assumed for 2012
8.0%
Rate to which the cost trend rate is assumed to decline
4.5% - 5.0%
Year that the rate reaches the ultimate trend rate
2018 - 2019

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):
 
1-Percentage-Point Increase
 
1-Percentage-Point Decrease
Effect on total of service and interest cost
$
40

 
$
(31
)
Effect on postretirement benefit obligation
391

 
(322
)

Plan Assets - The weighted-average asset allocation of our pension plan assets, by category, were as follows:
 
Plan Assets at
 
December 25, 2011
 
December 26, 2010
Asset Category
 
 
 
Equity securities
63.2
%
 
64.7
%
Debt securities
33.5
%
 
32.4
%
Real estate
2.3
%
 
1.5
%
Other
1.0
%
 
1.4
%
Total
100.0
%
 
100.0
%

The pension plans’ assets are invested with the objective of being able to meet current and future benefit payments needs, while maximizing total investment returns within the constraints of a prudent level of portfolio risk and diversification. The assets of each plan are diversified across asset classes to achieve an optimal balance between risk and return, and between income and growth of assets through capital appreciation.

Several external investment managers manage the assets of the pension plans and may invest in both fixed-income and equity investments. Fixed income investments may include cash and short-term instruments, U.S. government securities, corporate bonds, mortgages and other fixed income investments. Equity investments may include various types of stock, such as large-, mid-, and small-cap stocks, and foreign equities. Each investment manager is allowed to exercise investment discretion, subject to limitations, if any, established by our retirement committee for the pension plans. The retirement committee periodically reviews the performance of the investment managers and asset allocation. For the U.S. plans, Mercer Global Investments is the Manager of Investment Managers and provides expert advice and recommendations to help the retirement committee fulfill its fiduciary responsibilities in furtherance of each plans’ goals and objectives.


55
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Fair value measurements for the pension plans’ assets at December 25, 2011 and December 26, 2010 are summarized below (in thousands):
December 25, 2011
Quoted Prices in Active Markets for Identical Inputs (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
Plan net assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,570

 
$
—

 
$
—

 
$
2,570

Common collective funds (1)
 
 
 
 
 
 
 
Equity securities
—

 
29,646

 
—

 
29,646

Fixed-income securities
—

 
19,897

 
—

 
19,897

Pooled pension funds (2)
 
 
 
 
 
 
 
Equity securities
—

 
17,486

 
—

 
17,486

Fixed-income securities
—

 
11,263

 
—

 
11,263

Pooled pension fund (3)
—

 
19,155

 
—

 
19,155

Total plan net assets at fair value
$
2,570

 
$
97,447

 
$
—

 
$
100,017


December 26, 2010
Quoted Prices in Active Markets for Identical Inputs (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
Plan net assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,412

 
$
—

 
$
—

 
$
1,412

Common collective funds (1)
 
 
 
 
 
 
 
Equity securities
—

 
33,573

 
—

 
33,573

Fixed-income securities
—

 
18,938

 
—

 
18,938

Pooled pension funds (2)
 
 
 
 
 
 
 
Equity securities
—

 
18,540

 
—

 
18,540

Fixed-income securities
—

 
10,855

 
—

 
10,855

Pooled pension fund (3)
—

 
19,780

 
—

 
19,780

Total plan net assets at fair value
$
1,412

 
$
101,686

 
$
—

 
$
103,098


(1) 
These common collective funds are held in the trusts for our U.S. pension plans. These funds are comprised of shares or units in commingled funds that are not publicly traded. The underlying assets in these funds (equity securities and fixed income securities) are publicly traded and price quotes for the assets held by these funds are readily available. The values of these funds are not publicly quoted and must trade through a broker. The fair values included in the above table were provided by the fund administrator who values these funds using the net asset value, or NAV, per fund share, which is based on the value of the underlying securities.

(2) 
These pooled pension funds are held in the trusts for our Canadian pension plans. The funds are similar to the U.S. common collective funds and are priced using the same inputs.

(3) 
This pooled pension fund is held in the trust for our European pension plan. This fund is comprised of shares or units in a commingled fund that is not publicly traded. The fair value included in the above table was provided by the fund administrator who values this fund using the net asset value, or NAV, per fund share, which is based on the value of the underlying securities.


56
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Contributions - We expect to contribute approximately $8 million to our pension plans and approximately $1 million to our other postretirement benefit plans in 2012.
As a result of the closing of our Springfield, Missouri manufacturing facility in March 2011 (Note 3), we are currently in discussions with the Pension Benefit Guaranty Corporation regarding the timing of company contributions into the related defined benefit pension plan.

Estimated future benefit payments - The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
 
Pension Benefits
 
Other Postretirement Benefits
2012
$
7,879

 
$
1,016

2013
8,008

 
895

2014
8,188

 
843

2015
8,353

 
778

2016
8,547

 
562

Years 2017 - 2021
44,921

 
2,111


Defined contribution plans - Our U.S. defined contribution benefit plan, the Solo Cup Company Profit Sharing Plus Plan, covers substantially all U.S. employees of Solo Cup Operating Corporation and qualifies under Section 401(k) of the Internal Revenue Code. The plan allows employees to contribute up to 75% of their qualified gross wages as defined in the plan. Prior to January 1, 2009, we provided a matching contribution equal to 75% of the first 2%, and 50% of the next 4%, of each employee’s eligible compensation contributed to the plan. For certain union employees, we provide a matching contribution equal to 100% of the first 2%, and 50% of the next 4%, of each employee’s eligible compensation contributed to the plan. In addition, we may make additional profit-sharing contributions at the sole discretion of our Board of Directors. Charges for employer contributions to the plan were $2.9 million for the year ended December 25, 2011 and were nominal for the years ended December 26, 2010 and December 27, 2009 because we temporarily eliminated employer-match contributions for our employees during 2009. The employer-match contributions were reinstated in 2010; however, the 2010 contributions were funded out of plan forfeitures. Charges for employer contributions to the plan are recorded in cost of goods sold and selling, general and administrative expenses in the accompanying Consolidated Statement of Operations.

We also have defined contribution plans for Solo Cup Canada and Solo Cup Europe Limited employees. Charges for employer contributions to these plans were approximately $0.5 million in each of the years ended December 25, 2011, December 26, 2010 and December 27, 2009, and are recorded in cost of goods sold and selling, general and administrative expenses in the accompanying Consolidated Statements of Operations.



57



(14) SHAREHOLDER'S EQUITY

On February 27, 2004, Solo Delaware received net proceeds of $229.6 million from the issuance of 100 shares of Common Stock to Solo Cup Investment Corporation and the retirement of all outstanding shares of Solo Illinois’ Class A and Class B common stock. To fund this purchase of Solo Delaware common stock, Solo Cup Investment Corporation issued $240.0 million of convertible participating preferred stock (“CPPS”) to Vestar. The CPPS 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 CPPS plus all accrued and unpaid dividends. Dividends accumulate to the extent not paid, whether or not earned or declared. As of December 25, 2011, accrued and unpaid dividends were approximately $276.2 million.

Solo Cup Investment Corporation is required to redeem the CPPS for an amount in cash equal to its original purchase price, plus all accrued and unpaid dividends, on the eleventh anniversary of its issuance. Prior to that time, the CPPS is subject to specified accelerated redemption clauses. The CPPS may be converted into common shares of Solo Cup Investment Corporation at any time, subject to specified limitations, at the option of the holders of the CPPS. Mandatory conversion occurs upon the closing of an initial public offering. We provide no guarantees with respect to these obligations of Solo Cup Investment Corporation.


(15) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as follows (in thousands): 
 
December 25,
2011
 
December 26,
2010
Foreign currency translation adjustments
$
11,059

 
$
13,085

Pension liability adjustments, net of tax benefit of $6,237 and $5,215
(36,018
)
 
(24,368
)
Accumulated other comprehensive loss
$
(24,959
)
 
$
(11,283
)


(16) SHARE-BASED PAYMENTS

On October 1, 2007, the Board of Directors of Solo Delaware approved a Long Term Incentive Plan (the “Plan”). The purpose of the Plan is to provide long-term incentives to select key management employees of Solo Delaware and its affiliates. Awards under the Plan provide the opportunity to receive a cash bonus payment upon the occurrence of any sale, redemption, transfer or other disposition by Vestar of all or a portion of its equity interest in Solo Cup Investment Corporation for cash or marketable securities (a “Liquidity Event”). The aggregate award amount under the Plan (the “LTIP Award Pool”) will be determined based on a sliding percentage of the equity value of Solo Cup Investment Corporation (the “Equity Value”), as determined by the Solo Delaware Board, in accordance with the existing stockholder agreement of Solo Cup Investment Corporation, upon the occurrence of the earlier of a Liquidity Event or the Plan Termination Date (October 1, 2014), which is the seventh anniversary of the Plan’s effective date. Awards may also be allocated if Vestar sells, redeems, transfers or otherwise disposes of less than 100% of its equity interest in Solo Cup Investment Corporation for cash or marketable securities (a “Partial Liquidity Event”).

If there has not been a Liquidity Event prior to the Plan Termination Date, the Board of Solo Delaware will determine the Equity Value of Solo Cup Investment Corporation (as defined in the Plan) as of such date and will establish the LTIP Award Pool based on a sliding percentage of such valuation. The entire LTIP Award Pool will be distributed to the participants upon the occurrence of a Liquidity Event or the Plan Termination Date.


58
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following table reflects the percentage of the LTIP Award Pool granted by the Board to individual participants and forfeited by individual participants during the years ended December 26, 2010 and December 25, 2011:

Percentage of LTIP Award Pool outstanding at December 27, 2009
69
%
2010 Grants
12
%
Less: 2010 Forfeitures
16
%
Percentage of LTIP Award Pool outstanding at December 26, 2010
65
%
2011 Grants
13
%
Less: 2011 Forfeitures
2
%
Percentage of LTIP Award Pool outstanding at December 25, 2011
76
%

As of December 25, 2011, 76% of the LTIP Award Pool was outstanding. The percentage outstanding determines the allocation of the total LTIP Award Pool amongst the recipients and does not impact the total LTIP Award Pool. Expense is recorded over the participants’ service periods representing the period between a participant’s grant date and the Plan Termination Date. As additional grants are made to existing or new participants, compensation expense will be recorded over the respective future service period. Accordingly, the expense recorded in future periods will be affected by future participant grants and forfeitures. Based on our valuations of the Plan as of December 25, 2011, December 26, 2010, and December 27, 2009, we recorded a reduction of compensation expense of approximately $0.3 million in 2011, reduction of compensation expense of approximately $0.1 million in 2010, and compensation expense of $0.4 million in 2009. Compensation expense of $4.0 million is expected to be recognized over the remaining service period of 2.75 years. We measure the LTIP Award Pool’s fair value on a quarterly basis with a corresponding adjustment to compensation expense over the remaining service period.

The estimated fair value of the LTIP Award Pool is derived based on a lattice (binomial) forecast model with the primary input being the estimated business enterprise value for us, which is determined based on the estimated discounted cash flows of the business and through a comparison to market values of peer companies. The inputs used to calculate the estimated business enterprise value represent significant unobservable inputs, which are considered Level 3 inputs as defined by FASB ASC Topic 820, Fair Value Measurements and Disclosures. The LTIP Award is derived from the binomial model forecasts based on the probabilities of obtaining the forecasted future business enterprise values. FASB ASC Topic 718, Compensation—Stock Compensation requires that the fair value of the LTIP Award Pool be determined assuming a full payout at the Plan Termination Date with no consideration of a Liquidity Event. As the LTIP Award Pool is based on our business enterprise value, the fair value of the equity was calculated by the lattice model utilizing a Black-Scholes Option Model.

The key assumptions used in the Black-Scholes Option Model include:

i.
the fair value of the underlying asset set equal to the estimated business enterprise value,
ii.
the strike price equal to the face value of the debt plus accrued interest,
iii.
volatility of 38.8%, 47.0% and 42.5% in 2011, 2010 and 2009, respectively, which was based on historic and implied forward volatilities for selected publicly-traded companies and calibrated such that the value derived by the model for the public debt was equivalent to the market trading price for the public debt on the valuation date,
iv.
forward one-year risk free rates ranging from 0.12% to 0.79% in 2011, 0.30% to 3.09% in 2010, and 0.43% to 4.62% in 2009, based on the market yields of government bonds with terms corresponding to the remaining term of the Plan at the respective node in the lattice model (ranging from 1 to 3 years for 2011; 1 to 4 years for 2010; 1 to 5 years for 2009), and
v.
a dividend yield of 0% for 2011, 2010 and 2009 based on the assumption that dividends would not be paid.

The recorded expense reflects management’s estimate of forfeitures, which is based on management’s turnover expectations related to the Plan participants and historical forfeiture rates. The assumed annual forfeiture rate applied in 2011, 2010 and 2009 was approximately 6%, 16% and 16%, respectively.



59
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(17) RELATED PARTY TRANSACTIONS
Advisory fees. Solo Delaware and Solo Cup Investment Corporation are parties to a management agreement with SCC Holding providing for, among other things, the payment by Solo Cup Investment Corporation of an annual advisory fee of $0.8 million to SCC Holding. Pursuant to the SCC Holding Agreement, we recorded $0.8 million of advisory fees during each of the years ended December 25, 2011, December 26, 2010 and December 27, 2009.
Solo Delaware and Solo Cup Investment Corporation are also parties to 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 Vestar Agreement, we recorded $0.8 million of advisory fees during each of the years ended December 25, 2011, December 26, 2010 and December 27, 2009 and out-of-pocket expenses of approximately $50 thousand, $66 thousand and $0.2 million, in 2011, 2010 and 2009, respectively. As of December 25, 2011 and December 26, 2010, approximately $30 thousand and $20 thousand, respectively, were including in other current liabilities for out-of-pocket expenses.

Accounting guarantee. In February 2009, we entered into an agreement by which we leased to Sun Products Corporation a warehouse located in Havre de Grace, Maryland, which we closed in December 2008. One or more Vestar entities have an equity interest in Sun Products. The lease is for a term of seven years and includes two 5-year renewal options. During September 2009, we sold the Havre de Grace property and simultaneously assigned the lease to the new owner. One of the contractual terms of the purchase agreement with the new owner requires us to lease the property from the new owner for years 8-15 beginning in 2016 in the event the tenant does not renew the lease. We recorded a liability equal to the estimated fair value of this guarantee of approximately $1.2 million in accordance with FASB ASC Topic 460, Guarantees and Topic 820, Fair Value Measurements and Disclosures, and, due to our continuing involvement in the property, deferred the gain on the sale. The inputs used in the fair value calculation represent significant unobservable inputs, which are considered Level 3 inputs as defined by Topic 820.


(18) COMMITMENTS AND CONTINGENCIES

We are involved in various claims and legal actions arising from time to time in the ordinary course of business. We believe that the ultimate disposition of these matters would not have a material adverse effect on our business, consolidated financial position, results of operations or liquidity.



SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(19) GOVERNMENT OBLIGATIONS
We entered into agreements with the City of Chicago and the State of Illinois in 2001 relating to an undeveloped property located in Chicago, Illinois that we acquired in that year. Pursuant to those agreements, the City of Chicago paid on our behalf a portion of the acquisition price of the property 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 were required to fulfill specified obligations relating to the development of the property and retention of a specified number of employees.
In February 2011, we entered into an agreement to sell the property for $5.0 million in cash and received $1.0 million at that time towards the purchase price. Our obligation to sell the property was contingent upon the assumption by the buyer and our release from the government obligations described above, which totaled approximately $19.8 million as of June 26, 2011. These amounts were included in other current liabilities in our consolidated balance sheet as of that date.
We closed the sale of the undeveloped property in September 2011, during our third fiscal quarter, and received gross proceeds of $4 million, representing the remaining balance of the $5 million purchase price payable to us. In connection with the sale, the buyer assumed all of the government obligations described above and we were released from all but $3.3 million of those obligations. At closing, the buyer agreed to indemnify us fully from any and all liability relating to the $3.3 million of obligations from which we were not released.
As a result of the sale transaction, we reduced our other current liabilities by approximately $16.5 million to reflect the government obligations from which we were released. The government obligations of $3.3 million from which we were not released remain as other current liabilities in the accompanying balance sheet as of December 25, 2011, with a corresponding receivable of $3.3 million in other assets to reflect our right to receive indemnification from the buyer.


(20) 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 that are used to serve food and beverages and 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 Panama.
The accounting policies of the operating segments are the same as those described in Note 2. Segment operating results are measured based on operating income (loss). We account for intersegment net sales on an arm’s-length pricing basis.
No individual customer accounted for greater than 10% of consolidated net sales in fiscal year 2011, 2010 or 2009. It is not practicable for us to report revenues from external customers for each product and service or for each group of similar products.
(Continued)























61
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(20) SEGMENTS (CONTINUED)
 
(in thousands)
North America
 
Europe (1)
 
Other
 
Total Segments
 
Eliminations
 
Total
Year ended December 25, 2011
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
1,500,859

 
$
120,405

 
$
15,051

 
$
1,636,315

 
$
—

 
$
1,636,315

Intersegment net sales
29,682

 
87

 
—

 
29,769

 
(29,769
)
 
—

Operating (loss) income
(22,276
)
 
2,331

 
1,319

 
(18,626
)
 
(173
)
 
(18,799
)
Depreciation and amortization
84,063

 
3,711

 
192

 
87,966

 
—

 
87,966

Capital expenditures
27,859

 
1,111

 
40

 
29,010

 
(668
)
 
28,342

Property, plant and equipment, net
305,481

 
10,428

 
2,193

 
318,102

 
—

 
318,102

Total assets at year end
768,453

 
58,552

 
13,771

 
840,776

 
(61,701
)
 
779,075

Year ended December 26, 2010
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
1,460,319

 
$
109,692

 
$
12,850

 
$
1,582,861

 
$
—

 
$
1,582,861

Intersegment net sales
21,315

 
—

 
—

 
21,315

 
(21,315
)
 
—

Operating (loss) income
(29,458
)
 
(2,936
)
 
1,057

 
(31,337
)
 
132

 
(31,205
)
Depreciation and amortization
112,476

 
3,821

 
268

 
116,565

 
—

 
116,565

Capital expenditures
40,740

 
1,318

 
126

 
42,184

 
(29
)
 
42,155

Property, plant and equipment, net
413,863

 
12,905

 
2,345

 
429,113

 
—

 
429,113

Total assets at year end
857,455

 
53,409

 
12,368

 
923,232

 
(58,560
)
 
864,672

Year ended December 27, 2009
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
1,382,999

 
$
106,252

 
$
13,301

 
$
1,502,552

 
$
—

 
$
1,502,552

Intersegment net sales
23,575

 
28

 
—

 
23,603

 
(23,603
)
 
—

Operating income (loss)
50,741

 
(21,953
)
 
1,416

 
30,204

 
(102
)
 
30,102

Depreciation and amortization
71,678

 
4,039

 
303

 
76,020

 
—

 
76,020

Capital expenditures
70,286

 
1,419

 
110

 
71,815

 
—

 
71,815

Property, plant and equipment, net
490,678

 
15,800

 
2,486

 
508,964

 
—

 
508,964

Total assets at year end
973,787

 
59,309

 
12,258

 
1,045,354

 
(57,936
)
 
987,418


(1)  
The operating loss of the Europe reporting segment for the year ended December 27, 2009, includes a goodwill impairment charge of approximately $17.2 million (Note 7).

Net sales by customer group were as follows:
 
For the year ended
(in thousands)
December 25, 2011
 
December 26, 2010
 
December 27, 2009
Foodservice
$
1,293,661

 
$
1,255,779

 
$
1,212,539

Consumer
342,654

 
327,082

 
290,013

Net Sales
$
1,636,315

 
$
1,582,861

 
$
1,502,552


Geographic information:

Net sales from external customers by customer location are determined based on where our products were delivered. Long-lived assets include property, plant and equipment, net; intangible assets, net; and certain other non-current assets.
 
For the year ended
(in thousands)
December 25, 2011
 
December 26, 2010
 
December 27, 2009
United States
$
1,287,229

 
$
1,262,687

 
$
1,200,067

Other countries
349,086

 
320,174

 
302,485

Revenues from external customers
$
1,636,315

 
$
1,582,861

 
$
1,502,552


(Continued)

62
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(20) SEGMENTS (CONTINUED)

 
For the year ended
(in thousands)
December 25, 2011
 
December 26, 2010
United States
$
301,185

 
$
408,190

Other countries
40,973

 
47,545

Total long-lived assets
$
342,158

 
$
455,735


Reconciliation:
 
For the year ended
(in thousands)
December 25,
2011
 
December 26,
2010
 
December 27,
2009
Operating income (loss):
 
 
 
 
 
Total segment and other operating (loss) income
$
(18,626
)
 
$
(31,337
)
 
$
30,204

Elimination of intersegment operating (income) loss
(173
)
 
132

 
(102
)
Interest expense
(70,745
)
 
(70,827
)
 
(72,739
)
Interest income
164

 
211

 
535

Loss on debt extinguishment
—

 
—

 
(2,520
)
Foreign currency exchange (loss) gain, net
(1,826
)
 
(2,221
)
 
2,577

Gain from bargain purchase
—

 
1,733

 
—

Loss before income taxes
$
(91,206
)
 
$
(102,309
)
 
$
(42,045
)
 
(21) VALUATION AND QUALIFYING ACCOUNT

The valuation and qualifying account is the allowance for doubtful accounts. The changes in this account were as follows (in thousands):
 
Beginning balance
 
Charged to costs and expenses
 
Charged to other accounts (1)
 
Deductions
 
Ending balance
Allowance for doubtful accounts
 
 
 
 
 
 
 
 
 
2011
$
1,837

 
$
167

 
$
110

 
$
(1,283
)
 
$
831

2010
1,114

 
1,061

 
106

 
(444
)
 
1,837

2009
1,453

 
655

 
(44
)
 
(950
)
 
1,114


(1) 
Charged to other accounts includes recoveries received, reclassifications and cumulative translation adjustments for translation of foreign accounts.


(22) QUARTERLY FINANCIAL DATA (UNAUDITED)

The following sets forth certain unaudited financial data for quarterly periods during fiscal years 2011 and 2010 (in millions):

 
 
4Q 2011
3Q 2011
2Q 2011
1Q 2011
4Q 2010
3Q 2010
2Q 2010
1Q 2010
Net sales
 
$
413.0

$
416.3

$
435.9

$
371.1

$
409.2

$
409.6

$
419.2

$
344.9

Gross profit
 
30.2

32.7

37.1

30.4

45.3

27.4

32.6

38.3

Net loss
 
(22.5
)
(16.6
)
(29.1
)
(25.3
)
(17.2
)
(30.7
)
(39.8
)
(16.5
)




63
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(23) 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 include SF Holdings; Solo Manufacturing LLC; P.R. Solo Cup, Inc.; Lily-Canada Holding Corporation; Solo Cup Finance Limited; Solo Cup (UK) Limited; Insulpak Holdings Limited; Solo Cup Europe Limited; and Solo Cup Owings Mills Holdings. Each of the subsidiary guarantors is 100% owned, directly or indirectly, by Solo Delaware.
Effective February 22, 2004, Solo Delaware acquired SF Holdings. 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.
The following financial information is presented in accordance with Rule 3-10 of Regulation S-X under the Securities Exchange Act of 1934. In presenting this financial information, the equity method of accounting has been applied 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)

64
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(23) GUARANTOR NOTE (CONTINUED)
 
Condensed Consolidated Balance Sheet
December 25, 2011
(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
$
—

 
$
—

 
$
6,185

 
$
4,821

 
$
8,316

 
$
—

 
$
19,322

Accounts receivable - trade
—

 
—

 
82,046

 
18,277

 
21,397

 
—

 
121,720

Accounts receivable - other
1,857

 
—

 
21,303

 
2,202

 
77

 
(17,492
)
 
7,947

Inventories
—

 
—

 
210,622

 
22,067

 
25,257

 
(2,436
)
 
255,510

Deferred income taxes
—

 
—

 
7,242

 
—

 
504

 
—

 
7,746

Prepaid expenses and other current assets
—

 
—

 
20,968

 
1,847

 
1,588

 
—

 
24,403

Total current assets
1,857

 
—

 
348,366

 
49,214

 
57,139

 
(19,928
)
 
436,648

Property, plant and equipment, net
—

 
—

 
280,062

 
10,428

 
27,612

 
—

 
318,102

Intangible assets, net
—

 
—

 
696

 
—

 
—

 
—

 
696

Intercompany receivables - non-current
203,178

 
—

 
6,089

 
—

 
—

 
(209,267
)
 
—

Intercompany debt - non-current
373,561

 
—

 
38,314

 
—

 
—

 
(411,875
)
 
—

Investments in subsidiaries
(144,127
)
 
200,907

 
53,758

 
—

 
20,389

 
(130,927
)
 
—

Other assets
8,217

 
—

 
12,209

 
1,129

 
2,074

 
—

 
23,629

Total assets
$
442,686

 
$
200,907

 
$
739,494

 
$
60,771

 
$
107,214

 
$
(771,997
)
 
$
779,075

Liabilities and Shareholder’s (Deficit) Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable
$
—

 
$
—

 
$
72,955

 
$
11,781

 
$
6,550

 
$
—

 
$
91,286

Intercompany payable
—

 
—

 
4,047

 
7,192

 
6,253

 
(17,492
)
 
—

Accrued expenses and other current liabilities
15,461

 
—

 
55,690

 
2,164

 
7,037

 
—

 
80,352

Current maturities of long-term debt
—

 
—

 
202

 
250

 
—

 
—

 
452

Total current liabilities
15,461

 
—

 
132,894

 
21,387

 
19,840

 
(17,492
)
 
172,090

Long-term debt, net of current maturities
621,934

 
—

 
39,584

 
494

 
—

 
—

 
662,012

Long-term debt, net of current maturities - intercompany
—

 
135,767

 
237,791

 
38,317

 
—

 
(411,875
)
 
—

Deferred income taxes
—

 
—

 
7,149

 
—

 
680

 
—

 
7,829

Long-term payable - intercompany
—

 
209,267

 
—

 
—

 
—

 
(209,267
)
 
—

Other long-term liabilities
—

 
—

 
121,169

 
2,408

 
8,276

 
—

 
131,853

Total liabilities
637,395

 
345,034

 
538,587

 
62,606

 
28,796

 
(638,634
)
 
973,784

Total shareholder’s (deficit) equity
(194,709
)
 
(144,127
)
 
200,907

 
(1,835
)
 
78,418

 
(133,363
)
 
(194,709
)
Total liabilities and shareholder’s (deficit) equity
$
442,686

 
$
200,907

 
$
739,494

 
$
60,771

 
$
107,214

 
$
(771,997
)
 
$
779,075

 

(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)




65
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(23) GUARANTOR NOTE (CONTINUED)
 
Condensed Consolidated Balance Sheet
December 26, 2010
(In thousands)
 
Solo
Delaware
 
SF
Holdings
(Guarantor)
 
SCOC
 
Other
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
—

 
$
7,455

 
$
4,896

 
$
9,160

 
$
—

 
$
21,511

Accounts receivable - trade
—

 
—

 
82,118

 
16,612

 
17,483

 
—

 
116,213

Accounts receivable - other
2,756

 
—

 
15,633

 
2,184

 
—

 
(16,061
)
 
4,512

Inventories
—

 
—

 
189,455

 
15,625

 
24,598

 
(2,089
)
 
227,589

Deferred income taxes
—

 
—

 
12,573

 
—

 
483

 
—

 
13,056

Restricted cash
1,940

 
—

 
—

 
—

 
—

 
—

 
1,940

Prepaid expenses and other current assets
—

 
—

 
20,379

 
1,726

 
1,743

 
—

 
23,848

Total current assets
4,696

 
—

 
327,613

 
41,043

 
53,467

 
(18,150
)
 
408,669

Property, plant and equipment, net
—

 
—

 
385,381

 
12,905

 
30,827

 
—

 
429,113

Intangible assets, net
—

 
—

 
910

 
—

 
—

 
—

 
910

Intercompany receivables - non-current
178,021

 
—

 
6,088

 
—

 
—

 
(184,109
)
 
—

Intercompany debt - non-current
407,488

 
—

 
37,894

 
—

 
—

 
(445,382
)
 
—

Investments in subsidiaries
(51,681
)
 
268,197

 
56,089

 
—

 
19,488

 
(292,093
)
 
—

Other assets
11,984

 
—

 
9,915

 
1,662

 
2,419

 
—

 
25,980

Total assets
$
550,508

 
$
268,197

 
$
823,890

 
$
55,610

 
$
106,201

 
$
(939,734
)
 
$
864,672

Liabilities and Shareholder’s (Deficit) Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
—

 
$
46,925

 
$
10,861

 
$
5,272

 
$
—

 
$
63,058

Intercompany payable
—

 
—

 
5,265

 
4,805

 
5,991

 
(16,061
)
 
—

Accrued expenses and other current liabilities
17,476

 
—

 
89,448

 
1,649

 
6,495

 
—

 
115,068

Current maturities of long-term debt
—

 
—

 
168

 
262

 
—

 
—

 
430

Total current liabilities
17,476

 
—

 
141,806

 
17,577

 
17,758

 
(16,061
)
 
178,556

Long-term debt, net of current maturities
620,536

 
—

 
13,330

 
747

 
2,672

 
—

 
637,285

Long-term debt, net of current maturities - intercompany
—

 
135,768

 
271,720

 
37,893

 
—

 
(445,381
)
 
—

Deferred income taxes
—

 
—

 
13,132

 
—

 
1,744

 
—

 
14,876

Long-term payable - intercompany
—

 
184,110

 
—

 
—

 
—

 
(184,110
)
 
—

Other long-term liabilities
—

 
—

 
115,705

 
667

 
5,087

 
—

 
121,459

Total liabilities
638,012

 
319,878

 
555,693

 
56,884

 
27,261

 
(645,552
)
 
952,176

Total shareholder’s (deficit) equity
(87,504
)
 
(51,681
)
 
268,197

 
(1,274
)
 
78,940

 
(294,182
)
 
(87,504
)
Total liabilities and shareholder’s (deficit) equity
$
550,508

 
$
268,197

 
$
823,890

 
$
55,610

 
$
106,201

 
$
(939,734
)
 
$
864,672


 
(Continued)



66
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(23) GUARANTOR NOTE (CONTINUED)
 
Consolidated Statement of Operations
For the year ended December 25, 2011
(In thousands)
 
Solo
Delaware
 
SF Holdings
(Guarantor)
 
SCOC
 
Other
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
—

 
$
1,427,621

 
$
120,609

 
$
227,528

 
$
(139,443
)
 
$
1,636,315

Cost of goods sold
—

 
—

 
1,326,898

 
110,375

 
207,456

 
(138,814
)
 
1,505,915

Gross profit
—

 
—

 
100,723

 
10,234

 
20,072

 
(629
)
 
130,400

Selling, general and administrative expenses
—

 
—

 
114,686

 
8,021

 
12,616

 
(118
)
 
135,205

Loss (gain) on asset disposals
—

 
—

 
593

 
(122
)
 
475

 
—

 
946

Asset impairment
—

 
—

 
13,048

 
—

 
—

 
—

 
13,048

Operating (loss) income
—

 
—

 
(27,604
)
 
2,335

 
6,981

 
(511
)
 
(18,799
)
Interest expense, net
14,757

 
25,157

 
29,936

 
538

 
193

 
—

 
70,581

Foreign currency exchange loss, net
—

 
—

 
1,271

 
123

 
432

 
—

 
1,826

Equity in loss (earnings) of subsidiaries
78,772

 
53,615

 
(5,143
)
 
—

 
—

 
(127,244
)
 
—

(Loss) income before income taxes
(93,529
)
 
(78,772
)
 
(53,668
)
 
1,674

 
6,356

 
126,733

 
(91,206
)
Income tax (benefit) provision
—

 
—

 
(53
)
 
(2
)
 
2,378

 
—

 
2,323

Net (loss) income
$
(93,529
)
 
$
(78,772
)
 
$
(53,615
)
 
$
1,676

 
$
3,978

 
$
126,733

 
$
(93,529
)
 
 
 
Consolidated Statement of Operations
For the year ended December 26, 2010
(In thousands)
 
Solo
Delaware
 
SF Holdings
(Guarantor)
 
SCOC
 
Other
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
—

 
$
1,383,917

 
$
109,808

 
$
193,356

 
$
(104,220
)
 
$
1,582,861

Cost of goods sold
—

 
—

 
1,264,607

 
105,573

 
173,033

 
(103,901
)
 
1,439,312

Gross profit
—

 
—

 
119,310

 
4,235

 
20,323

 
(319
)
 
143,549

Selling, general and administrative expenses
—

 
—

 
130,246

 
7,191

 
13,041

 
(139
)
 
150,339

Loss (gain) on asset disposals
—

 
—

 
3,811

 
(24
)
 
92

 
—

 
3,879

Asset impairment
—

 
—

 
20,536

 
—

 
—

 
—

 
20,536

Operating (loss) income
—

 
—

 
(35,283
)
 
(2,932
)
 
7,190

 
(180
)
 
(31,205
)
Interest expense, net
14,562

 
22,915

 
32,536

 
566

 
37

 
—

 
70,616

Foreign currency exchange loss (gain), net
—

 
—

 
1,743

 
728

 
(250
)
 
—

 
2,221

Equity in loss (earnings) of subsidiaries
89,651

 
66,736

 
(763
)
 
—

 
—

 
(155,624
)
 
—

Gain from bargain purchase
—

 
—

 
(1,733
)
 
—

 
—

 
—

 
(1,733
)
(Loss) income before income taxes
(104,213
)
 
(89,651
)
 
(67,066
)
 
(4,226
)
 
7,403

 
155,444

 
(102,309
)
Income tax (benefit) provision
—

 
—

 
(330
)
 
(433
)
 
2,667

 
—

 
1,904

Net (loss) income
$
(104,213
)
 
$
(89,651
)
 
$
(66,736
)
 
$
(3,793
)
 
$
4,736

 
$
155,444

 
$
(104,213
)

During the thirteen weeks ended September 26, 2010, we determined that certain expenses related to intercompany information technology services had not been charged by Solo Cup Operating Corporation (“SCOC”) to Solo Cup Canada Inc., a non-guarantor subsidiary, for the fiscal years ended December 31, 2006 and December 30, 2007. We corrected this prior-period error in our September 26, 2010 financial statements as we deemed the error to be immaterial to our consolidated financial statements in both the originating periods and the then current period. We recorded expenses related to intercompany information technology services of $1.2 million related to 2007 and $1.0 million related to 2006 which reduced SCOC’s selling, general and administrative expenses by $2.2 million and increased Non-Guarantors’ selling, general and administrative expenses by $2.2 million. The correction did not have a material impact on our consolidated balance sheets or consolidated statements of operations.

(Continued)

67
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(23) GUARANTOR NOTE (CONTINUED)
 
Consolidated Statement of Operations
For the year ended December 27, 2009
(In thousands)
 
Solo
Delaware
 
SF Holdings
(Guarantor)
 
SCOC
 
Other
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
—

 
$
1,317,912

 
$
106,394

 
$
176,719

 
$
(98,473
)
 
$
1,502,552

Cost of goods sold
—

 
—

 
1,129,529

 
103,312

 
161,655

 
(98,364
)
 
1,296,132

Gross profit
—

 
—

 
188,383

 
3,082

 
15,064

 
(109
)
 
206,420

Selling, general and administrative expenses
15

 
—

 
132,764

 
7,814

 
9,662

 
(116
)
 
150,139

Loss on asset disposals
—

 
—

 
8,508

 
8

 
453

 
—

 
8,969

Asset impairment
—

 
—

 
—

 
17,210

 
—

 
—

 
17,210

Operating (loss) income
(15
)
 
—

 
47,111

 
(21,950
)
 
4,949

 
7

 
30,102

Interest expense, net
9,009

 
20,872

 
32,095

 
1,070

 
50

 
—

 
63,096

Loss on debt extinguishment
2,520

 
—

 
—

 
—

 
—

 
—

 
2,520

Reclassification of unrealized loss on cash flow hedges to interest expense
9,108

 
—

 
—

 
—

 
—

 
—

 
9,108

Foreign currency exchange gain, net
—

 
—

 
(282
)
 
(1,435
)
 
(860
)
 
—

 
(2,577
)
Equity in loss (earnings) of subsidiaries
14,789

 
(6,083
)
 
17,513

 
—

 
—

 
(26,219
)
 
—

(Loss) income before income taxes
(35,441
)
 
(14,789
)
 
(2,215
)
 
(21,585
)
 
5,759

 
26,226

 
(42,045
)
Income tax provision (benefit)
215

 
—

 
(8,298
)
 
201

 
1,493

 
—

 
(6,389
)
Net (loss) income
$
(35,656
)
 
$
(14,789
)
 
$
6,083

 
$
(21,786
)
 
$
4,266

 
$
26,226

 
$
(35,656
)
 
 


(Continued)


68
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(23) GUARANTOR NOTE (CONTINUED)
 
Condensed Consolidated Statement of Cash Flows
For the year ended December 25, 2011
(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
$
(35,867
)
 
$
—

 
$
8,719

 
$
1,558

 
$
4,447

 
$
—

 
$
(21,143
)
CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Proceeds from sale of property, plant and equipment
—

 
—

 
26,234

 
81

 
3

 
(668
)
 
25,650

Purchases of property, plant and equipment
—

 
—

 
(26,081
)
 
(1,110
)
 
(1,819
)
 
668

 
(28,342
)
Decrease in restricted cash
1,940

 
—

 
—

 
—

 
—

 
—

 
1,940

Other
—

 
—

 
(2,500
)
 
—

 
—

 
—

 
(2,500
)
Net cash provided by (used in) investing activities
1,940

 
—

 
(2,347
)
 
(1,029
)
 
(1,816
)
 
—

 
(3,252
)
CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Net borrowings (repayments) under revolving credit facilities
—

 
—

 
26,452

 
—

 
(2,521
)
 
—

 
23,931

Repayments of other debt
—

 
—

 
(167
)
 
(276
)
 
—

 
—

 
(443
)
Collection on (repayment of) intercompany debt
33,927

 
—

 
(33,927
)
 
—

 
—

 
—

 
—

Net cash provided by (used in) financing activities
33,927

 
—

 
(7,642
)
 
(276
)
 
(2,521
)
 
—

 
23,488

Effect of exchange rate changes on cash
—

 
—

 
—

 
(328
)
 
(954
)
 
—

 
(1,282
)
Net decrease in cash and cash equivalents
—

 
—

 
(1,270
)
 
(75
)
 
(844
)
 
—

 
(2,189
)
Cash and cash equivalents, beginning of period
—

 
—

 
7,455

 
4,896

 
9,160

 
—

 
21,511

Cash and cash equivalents, end of period
$
—

 
$
—

 
$
6,185

 
$
4,821

 
$
8,316

 
$
—

 
$
19,322


 
(Continued)


69
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(23) GUARANTOR NOTE (CONTINUED)

 
Condensed Consolidated Statement of Cash Flows
For the year ended December 26, 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
$
(40,218
)
 
$
—

 
$
100,231

 
$
(17,686
)
 
$
1,758

 
$
(384
)
 
$
43,701

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Proceeds from sale of property, plant and equipment
—

 
—

 
7,666

 
83

 
1

 
(29
)
 
7,721

Purchases of property, plant and equipment
—

 
—

 
(40,520
)
 
(1,318
)
 
(346
)
 
29

 
(42,155
)
Investment in subsidiary
—

 
—

 
—

 
—

 
(19,521
)
 
19,521

 
—

Business acquisition, net of cash acquired
—

 
—

 
(23,661
)
 
—

 
—

 
—

 
(23,661
)
Decrease in restricted cash
8,470

 
—

 
—

 
—

 
—

 
—

 
8,470

Proceeds from insurance reimbursement
—

 
—

 
1,201

 
—

 
—

 
—

 
1,201

Net cash provided by (used in) investing activities
8,470

 
—

 
(55,314
)
 
(1,235
)
 
(19,866
)
 
19,521

 
(48,424
)
CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Net borrowings (repayments) under revolving credit facilities
—

 
—

 
(4,973
)
 
—

 
2,652

 
—

 
(2,321
)
Repayments of term notes
—

 
—

 
—

 
—

 
(410
)
 
—

 
(410
)
Proceeds from investment in subsidiary
—

 
—

 
—

 
19,521

 
—

 
(19,521
)
 
—

Return of capital to parent
(100
)
 
—

 
—

 
—

 
—

 
—

 
(100
)
Collection on (repayment of) intercompany debt
32,221

 
—

 
(32,221
)
 
—

 
—

 
—

 
—

Repayments of other debt
—

 
—

 
(117
)
 
(256
)
 
—

 
—

 
(373
)
Debt issuance costs
(373
)
 
—

 
(156
)
 
—

 
(214
)
 
—

 
(743
)
Net cash provided by (used in) financing activities
31,748

 
—

 
(37,467
)
 
19,265

 
1,644

 
(19,137
)
 
(3,947
)
Effect of exchange rate changes on cash
—

 
—

 
—

 
35

 
140

 
—

 
175

Net increase (decrease) in cash and cash equivalents
—

 
—

 
7,450

 
379

 
(16,324
)
 
—

 
(8,495
)
Cash and cash equivalents, beginning of period
—

 
—

 
5

 
4,517

 
25,484

 
—

 
30,006

Cash and cash equivalents, end of period
$
—

 
$
—

 
$
7,455

 
$
4,896

 
$
9,160

 
$
—

 
$
21,511



(Continued)


70
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(23) GUARANTOR NOTE (CONTINUED)

 
Condensed Consolidated Statement of Cash Flows
For the year ended December 27, 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
$
(24,415
)
 
$
—

 
$
150,610

 
$
1,582

 
$
10,160

 
$
—

 
$
137,937

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from sale of property, plant and equipment
—

 
—

 
17,016

 
2

 
22

 
(430
)
 
16,610

Purchases of property, plant and equipment
—

 
—

 
(69,655
)
 
(1,733
)
 
(857
)
 
430

 
(71,815
)
Investment in subsidiary
—

 
—

 
(3,000
)
 
—

 
—

 
3,000

 
—

Increase in restricted cash
(10,410
)
 
—

 
—

 
—

 
—

 
—

 
(10,410
)
Decrease in cash in escrow
—

 
—

 
50

 
—

 
—

 
—

 
50

Net cash (used in) provided by investing activities
(10,410
)
 
—

 
(55,589
)
 
(1,731
)
 
(835
)
 
3,000

 
(65,565
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (repayments) borrowings under revolving credit facilities
(28,000
)
 
—

 
15,000

 
—

 
—

 
—

 
(13,000
)
Borrowings under Senior Secured Notes
293,784

 
—

 
—

 
—

 
—

 
—

 
293,784

Repayments of term notes
(361,954
)
 
—

 
—

 
—

 
(1,250
)
 
—

 
(363,204
)
Capital contribution from parent
—

 
—

 
—

 
3,000

 
—

 
(3,000
)
 
—

Collection on (repayment of) intercompany debt
100,501

 
—

 
(101,526
)
 
1,025

 
—

 
—

 
—

Repayments of other debt
—

 
—

 
—

 
(344
)
 
—

 
—

 
(344
)
Debt issuance costs
(9,816
)
 
—

 
(8,498
)
 
—

 
—

 
—

 
(18,314
)
Net cash (used in) provided by financing activities
(5,485
)
 
—

 
(95,024
)
 
3,681

 
(1,250
)
 
(3,000
)
 
(101,078
)
Effect of exchange rate changes on cash
—

 
—

 
—

 
(34
)
 
1,242

 
—

 
1,208

Net (decrease) increase in cash and cash equivalents
(40,310
)
 
—

 
(3
)
 
3,498

 
9,317

 
—

 
(27,498
)
Cash and cash equivalents, beginning of period
40,310

 
—

 
8

 
1,020

 
16,166

 
—

 
57,504

Cash and cash equivalents, end of period
$
—

 
$
—

 
$
5

 
$
4,518

 
$
25,483

 
$
—

 
$
30,006






71
SOLO CUP COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(24) SUBSEQUENT EVENT

On March 21, 2012, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Solo Cup Investment Corporation (“SCIC”), SCC Holding Company LLC, Vestar Capital Partners IV, L.P., Vestar Cup Investment, LLC, Vestar Cup Investment II, LLC, the stockholders listed on the signature pages thereto and Dart Container Corporation (“Dart”). Pursuant to the Stock Purchase Agreement, the selling stockholders have agreed to sell, and Dart has agreed to purchase, all of the outstanding capital stock of SCIC, which is the sole stockholder of the Company (the “Transaction”). The aggregate value of the Transaction, including the Company's outstanding indebtedness, is approximately $1.0 billion and is subject to customary closing adjustments. Consummation of the Transaction is anticipated by the end of the third quarter of 2012.

Under the Stock Purchase Agreement, Dart has the option to request the Company to effect a tender offer for both the Company's 10.5% Senior Secured Notes due 2013 and its 8.5% Senior Subordinated Notes due 2014 (Note 9) and/or cause the Company to satisfy and discharge such Notes in accordance with their respective indentures in connection with the closing of the Transaction.

The Transaction would be considered a Liquidity Event as defined in our Long Term Incentive Plan, and as such, the consumation of the Transaction would trigger an award under this plan as described in Note 16.



72



Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
Our management, including our chief executive officer (principal executive officer) and chief financial officer (principal financial and accounting officer), has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.
Based on such evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 25, 2011.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our chief executive officer (principal executive officer) and chief financial officer (principal financial and accounting officer), management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of the Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment using those criteria, management concluded that the Company's internal control over financial reporting as of December 25, 2011 was effective.
Changes in Disclosure Controls and Procedures
During the thirteen weeks ended December 25, 2011, the Company substantially completed the retirement of a software system that affects its processes and controls over the recording of manufacturing activity at approximately half our plants. With the completion of the implementation, all U.S. and Canadian manufacturing plants now use the same software system to record and report these transactions. This system retirement has resulted in a significant change to the Company's internal controls as now all plants apply the same financial reporting processes, and management's review process has become more efficient. 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 December 25, 2011, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


Item 9B.
Other Information.

None.





73


Part III

Item 10.
Directors, Executive Officers and Corporate Governance.
Name
Age
Position
Kevin A. Mundt (1)
58
Chairman of the Board, Chairman of the Audit Committee, Member of the Compensation Committee
Robert L. Hulseman
79
Chairman Emeritus of the Board
Robert M. Korzenski
57
Chief Executive Officer, President and Director
Robert D. Koney, Jr.
55
Executive Vice President and Chief Financial Officer
George F. Chappelle, Jr.
50
Executive Vice President and Chief Operating Officer
Jan Stern Reed
52
Executive Vice President - HR, General Counsel and Secretary
Peter J. Mendola
57
Senior Vice President - Operations
Larinda I. Becker
47
Vice President - Foodservice Marketing
Kimberly V. Healy
42
Vice President - Consumer Products Division
Jeffrey W. Lombardo
49
Vice President - Foodservice Sales
R. James Alexy
71
Director
Jeffrey M. Greene
52
Director, Chairman of the Compensation Committee
Neil Harrison
59
Director, Member of the Audit Committee
James R. Hulseman
58
Director
John D. Hulseman
55
Director
Paul J. Hulseman
51
Director
Daniel S. O'Connell (1)
58
Director, Member of the Compensation Committee
Brian P. O'Connor (1)
36
Director, Member of the Audit Committee

(1) 
Each of Messrs Mundt, O’Connell and O’Connor is an employee and equity owner of Vestar Capital Partners, an affiliate of Solo Delaware, due to its ownership of 32.71% of the voting stock of Solo Cup Investment Corporation, the parent of Solo Delaware.

Kevin A. Mundt is a director and has served as Chairman of the Board since December 2006. Mr. Mundt is a managing director of Vestar Capital Partners, which he joined in 2004. Previously he was a Managing Director of Mercer Oliver Wyman, the financial consulting arm of Marsh and McLennan from 1998 to 2003. Prior to that, beginning in 1983, he was one of the founders of Corporate Decisions, Inc., which was acquired by Marsh and McLennan. Mr. Mundt is also currently a director of MediMedia, Del Monte Foods, National Mentor and Sun Products Corporation. He also served as a director of Telephone Data Systems, Inc. (AMEX: TDS) from July 1998 through December 2005.

Robert L. Hulseman is a director and has served as Chairman Emeritus since December 2006. He served as Chairman and Chief Executive Officer of Solo Delaware from January 2004 until December 2006. Mr. Hulseman served as Chairman and Chief Executive Officer of Solo Illinois from January 1998 to October 2005, and served as a director of Solo Illinois from April 1956 to June 2005. He began his career in the disposable foodservice and food packaging products industry with Solo Illinois in 1950. Mr. Hulseman is the father of Paul J. Hulseman, and the uncle of James R. and John D. Hulseman, all of whom are directors of Solo Delaware.

Robert M. Korzenski is a director and Chief Executive Officer and President of Solo Delaware, having served as a director and President since April 2006 and as the Chief Executive Officer since August 2006. Prior to that, he served as Executive Vice President – Sales and Marketing of Solo Delaware from February 2005 until April 2006, and as Senior Vice President – Integration; Hoffmaster-Fonda Brands of Solo Delaware and Solo Illinois from February 2004 to February 2005. Mr. Korzenski served as President of the Hoffmaster brand of Sweetheart from March 2002 until February 2004. Prior to that, Mr. Korzenski served at The Fonda Group, Inc. from March 1995 until March 2002, where he was President and Chief Operating Officer from March 1998 to March 2002.

    

74



Robert D. Koney, Jr. is Chief Financial Officer and Executive Vice President of Solo Delaware, having served in that capacity since April 2007. Prior to joining the Company, Mr. Koney was Chief Financial Officer and Senior Vice President of Russell Corporation (NYSE: RML), an athletic and sporting goods company, from September 2004 to December 2006. Mr. Koney also served at Goodrich Corporation (NYSE: GR), a global supplier of systems and services to the aerospace and defense markets, from 1986 to 2004, where he was Vice President, Corporate Controller and Principal Accounting Officer from 1998 to 2004.

George F. Chappelle, Jr. is Chief Operating Officer and Executive Vice President of Solo Delaware, having served in that capacity since October 2009. Prior to joining Solo Delaware, Mr. Chappelle was Senior Vice President, Chief Supply Chain Officer and Senior Corporate Officer of Sara Lee Corporation (NYSE: SLE), a global consumer goods company, from June 2005 to February 2008. Prior to his tenure at Sara Lee, Mr. Chappelle served as Vice President, Chief Information Officer and Corporate Officer of H.J. Heinz Company (NYSE: HNZ), a global marketer and producer of foods, from August 2002 to June 2005. During that time, Mr. Chappelle also served as H.J. Heinz Company’s Vice President of Business Transformation from March 2003 to June 2005.

Jan Stern Reed is Executive Vice President – Human Resources, General Counsel and Secretary of Solo Delaware, having served in that capacity since April 2006. Prior to that, Ms. Reed served as Executive Vice President, General Counsel and Secretary of Solo Delaware from June 2005 to April 2006. From December 2004 to June 2005, she served as Senior Vice President, General Counsel and Secretary of Solo Delaware. Prior to joining Solo Delaware, Ms. Reed served as Associate General Counsel and Corporate Secretary for Baxter International Inc. (NYSE: BAX), a global developer and manufacturer of products used in the health care field, from February 1998 to November 2004, and also served as its Chief Governance Officer from March 2003 to November 2004.
    
Peter J. Mendola is Senior Vice President – Operations of Solo Delaware, having served in that capacity since April 2007. Prior to joining Solo Delaware, Mr. Mendola spent 19 years at Georgia Pacific/Dixie , a world-wide manufacturer and marketer of tissue, packaging, paper, pulp and building products, most recently as Vice President – Paper Operations from 2004 until 2007, and Vice President – Supply Chain and Technical Services from 2001 to 2004.

Larinda I. Becker is Vice President – Foodservice Marketing, having served in that capacity since May 2010. Prior to joining Solo Delaware, Ms. Becker worked at Diversey, Inc. (formerly JohnsonDiversey, Inc.), as Vice President – North American Marketing Operations from April 2007 to May 2010. From 1991 to 2007, Ms. Becker worked in a number of marketing, business development and sales roles at Reynolds Food Packaging, including as Vice President – Marketing.

Kimberly V. Healy is Vice President – Consumer Products Division, having served in that capacity since January 2010. Prior to that, Ms. Healy served as Vice President, Marketing Consumer from July 2007 to January 2010. Ms. Healy joined the company as a Brand Manager in August 1999, and from August 2002 to July 2007 served as Director, Marketing – Consumer.

Jeffrey W. Lombardo is Vice President – Foodservice Sales, having served in that capacity since October 2010. Prior to joining Solo Delaware, Mr. Lombardo served as Group Vice President – Foodservice Sales of H.J. Heinz Company (NYSE: HNZ), a leading global marketer and producer of foods, from 2007-2009. He previously served as Vice President National Accounts – Foodservice of PepsiCo (NYSE: PEP), a leading global marketer and producer of convenient snacks, foods and beverages, from 2002-2006.

R. James Alexy is a director of Solo Delaware, having served in that capacity since April 2010. Mr. Alexy served as the Chairman of Network Services Company, a global distributor of disposable plastic, paper and sanitary supply products, from January 2009 until his retirement effective January 1, 2010. He previously served as the Chief Executive Officer and President of Network Services Company from 1992 through 2008.

Jeffrey M. Greene is a director of Solo Delaware, having served in that capacity since September 2010. Mr. Greene has served since October 2005 as the President and Chief Executive Officer of Consolidated Container Company LLC, a developer, manufacturer and marketer of rigid plastic containers for consumer products and beverage companies.

    

75



Neil Harrison is a director of Solo Delaware, having served in that capacity since April 2007. Mr. Harrison is also currently a director of Sun Products Corporation and Del Monte Foods. Mr. Harrison served as the Chairman, President and Chief Executive Officer of Birds Eye Foods, an international producer of canned, bottled and frozen products, from September 2005 to December 2009. Prior to that time Mr. Harrison was Chairman, President and Chief Executive Officer of Atkins Nutritionals Inc. from February 2005 to June 2005. Prior to that role, Mr. Harrison was with the H.J. Heinz Company (NYSE: HNZ), where he served as an Executive Vice President – H. J. Heinz and President and Chief Executive Officer – Heinz North America from 2002 to 2004. From 1999 to 2002, Mr. Harrison was the President and Chief Executive Officer – Heinz Frozen Food Company.

James R. Hulseman is a director of Solo Delaware, having served in that capacity since August 2007. Mr. Hulseman is currently Vice President – Special Projects of Solo Cup Operating Corporation, the operating subsidiary of Solo Delaware. He previously held the position of Vice President – Global Quality Initiatives from 2002 to 2007 and prior to that as Vice President – Quality from October 2000. James R. Hulseman is the brother of John D. Hulseman, a director of Solo Delaware. He is also the nephew of Robert L. Hulseman, Chairman Emeritus of Solo Delaware, and a cousin of Paul J. Hulseman, a director of Solo Delaware.

John D. Hulseman is a director of Solo Delaware, having served in that capacity since August 2007. Mr. Hulseman has held the position of Energy Manager of Solo Cup Operating Corporation since 2006. From 2001 until 2006 he was a Production Manager. John D. Hulseman is the brother of James R. Hulseman, a director of Solo Delaware. He is also the nephew of Robert L. Hulseman, Chairman Emeritus of Solo Delaware, and a cousin of Paul J. Hulseman, a director of Solo Delaware.

Paul J. Hulseman is a director of Solo Delaware, having served in that capacity since November 2011. During the past five years, Mr. Hulseman has held the position of Senior Vice President of Solo Cup Operating Corporation. Mr. Hulseman is the son of Robert L. Hulseman, Chairman Emeritus of Solo Delaware, and a cousin of James R. and John D. Hulseman, directors of Solo Delaware.

Daniel S. O’Connell is a director of Solo Delaware, having served in that capacity since February 2004. Mr. O’Connell is the Chief Executive Officer and founder of Vestar Capital Partners. Prior to founding Vestar Capital Partners in 1998, Mr. O’Connell was a Managing Director and Co-Head of the Management Buyout Group at The First Boston Corporation. Mr. O’Connell is currently a director of Sun Products Corporation, Sunrise Medical, Inc., and Triton Container Ltd. He also served as a director of Birds Eye Foods, Inc. from 2002 to 2009, and Radiation Therapy Services, Inc. from 2008 to 2009.

Brian P. O’Connor is a Director of Solo Delaware, having served in that capacity since April 2008. In August 2000, Mr. O’Connor joined Vestar and most recently has served as a Managing Director since January 2012. Prior to that time he served in other capacities including as Principal from January 2009 to January 2012. Prior to joining Vestar, Mr. O’Connor was a member of the Merchant Banking group at Donaldson, Lufkin & Jenrette from August 1998 to June 2000.

Board Structure and Risk Oversight

Our business and affairs are managed under the direction of our board of directors. We currently have eleven directors. Pursuant to the Stockholders Agreement among Solo Delaware, Solo Cup Investment Corporation, Vestar, SCC Holding and specified other parties:

•
Messrs. Mundt, Alexy, Greene, Harrison, O'Connell and O'Connor serve on Solo Delaware's board of directors as designees of Vestar;
•
Messrs. Korzenski, Robert L. Hulseman, James R. Hulseman, John D. Hulseman and Paul J. Hulseman serve on Solo Delaware's board of directors as designees of SCC Holding; and
•
Mr. Mundt serves as Chairman of the Board of Solo Delaware as Vestar's designee to that position.

There are no other arrangements or understandings between any member of the board of directors or executive officer and any other person pursuant to which that person was elected or appointed to his or her position.

    

76


    
Our audit committee is responsible for overseeing our risk management function. While the audit committee has primary responsibility for overseeing risk management, our entire Board of Directors is actively involved in overseeing our risk management. For example, the Board engages in periodic discussions with our executive management team, including our Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and General Counsel, and with such other company officers as the Board deems appropriate. We believe that the leadership structure of our Board supports effective risk management oversight.

Board Meetings and Committees
    
The Board of Directors of Solo Delaware maintains an Audit Committee and a Compensation Committee that assist the Board of Directors in fulfilling its oversight responsibilities. The Audit Committee reviews Solo Delaware’s financial reporting process, its system of internal controls, the audit process and the process of monitoring Solo Delaware’s compliance with laws and regulations. Mr. Mundt serves as the chair of Solo Delaware’s Audit Committee, and the Board has designated Mr. Harrison as an “audit committee financial expert,” as defined by the SEC. None of the Directors is considered “independent” under the standards established by the New York Stock Exchange. The Compensation Committee reviews Solo Delaware’s employee benefit plans and executive compensation. The charters of the Audit and Compensation Committees are available free of charge at our website, www.solocup.com. In 2011, Solo Delaware’s Board of Directors held six meetings, the Audit Committee held four meetings and the Compensation Committee met once. All incumbent directors attended at least 75 percent of the total meetings held by the Board of Directors or of the total committee meetings of the Board on which that director served, except for Daniel S. O'Connell, who attended four of the six meetings of the Board of Directors.

Section 16(a) Beneficial Owner Reporting Compliance
    
Solo Delaware does not have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.

Code of Business Conduct
    
We have adopted the “Solo Cup Company Code of Business Conduct,” which applies to all of our directors, officers and employees. We make this code available free of charge on our website, www.solocup.com, or by request. We intend to disclose certain amendments to the “Solo Cup Company Code of Business Conduct,” or any waivers of the “Solo Cup Company Code of Business Conduct” granted to executive officers and directors, on our website within four business days following the date of any such amendment or waiver.



77


Item 11.
Executive Compensation

Compensation Discussion and Analysis
The following discussion is provided to give an understanding of our compensation policies and decisions regarding the executive officers identified in the Summary Compensation Table below, who we refer to as our “named executive officers.” The discussion in this section does not apply to the Hulseman family members who are identified in “Certain Relationships and Related Transactions and Director Independence” below, as their compensation is determined by the terms of the Stockholders Agreement and of the Transition Agreement dated December 14, 2006 among Solo Delaware, Vestar and certain of its affiliates, SCC Holding and Solo Cup Investment Corporation.

Compensation Philosophy. The compensation committee of our Board of Directors oversees our executive compensation. The objectives of our compensation programs are to (1) drive our financial performance through incentives and rewards designed to direct individual performance toward achieving our common goals; (2) align the executive officers and senior management with the entire employee team; (3) attract and retain executive talent at compensation levels that are market competitive; and (iv) reflect the value of each employee’s position. Our compensation philosophy is to provide a competitive total rewards program comprised of four components: compensation; benefits; development; and work environment. The compensation portion of our total rewards program seeks to equitably and consistently recognize and compensate employees for superior performance. The short-term aspect of our program primarily focuses on competitive compensation consisting of both fixed and variable pay in the form of cash. These incentives are provided in the form of base compensation and an annual bonus plan. Because we do not have publicly-traded equity securities, we do not have the ability to utilize stock-based incentives as a component of our at-risk compensation; however, we have implemented a long-term incentive plan that is designed to align the senior management team with our long-term future financial success. Our total rewards approach is also geared towards supporting our overall business objectives by driving and maintaining a performance-driven culture, offering competitive benefits, encouraging and rewarding individual career development and providing a balance between work and family life.

Process for Determining Executive Compensation. The compensation committee determines annual cash compensation for each executive officer based on a number of factors, including the executive officer’s individual performance contributions during the year, any additional roles and responsibilities assumed, the ability of the executive officer to drive favorable change within the organization, our financial performance and the achievement of personal goals and objectives. Prior to recruiting for any open executive officer position, we analyze the position to determine the specific job criteria, relocation considerations and the median market compensation for that position. After candidates are identified and selected, the compensation committee and management work together to develop a compensation package that we believe is market competitive and sufficiently rewarding, taking into account the candidate’s current compensation, current position and overall experience.

Compensation Components. Our executive compensation includes a base salary, an annual cash incentive opportunity, a one-time cash retention bonus opportunity, traditional benefits and a long-term incentive cash award opportunity. We do not have any formal or informal policy or target for the percentage of compensation that is allocated between annual and long-term compensation, between cash and non-cash compensation or among the different forms of non-cash compensation. Instead, we determine subjectively on a case-by-case basis – within a range based on job description and level – the appropriate amount and mix of the various compensation components.

Base Salaries. Base salaries are used to recognize the experience, skills, knowledge and responsibilities required of all our employees, including our executive officers. Base salaries for each executive officer (other than our CEO), together with other components of compensation, are evaluated annually for adjustment by our CEO based on an assessment of each executive officer’s performance utilizing the criteria set forth above under “Process for Determining Executive Compensation,” as well as the executive’s contribution to achieving our goals and objectives, his or her leadership skills, economic market conditions and compensation trends in our industry, after which a recommendation by our CEO is presented to the compensation committee for ultimate approval by the board of directors. The process and criteria for determining our CEO’s compensation is the same as that described above, with the exception that our compensation committee chair takes on the role of assessing the CEO’s performance and recommending adjustments to the compensation committee for ultimate approval by the board of directors.

Annual Cash Bonuses. In addition to base salaries, our executive officers are eligible to receive an incentive cash payment based primarily on annual financial performance and, to a lesser degree, annual individual objectives. This variable portion of our cash incentive program provides an opportunity for the executive officer to receive remuneration in direct proportion to the extent to which we have achieved our strategic, operational and financial goals. The annual bonuses are paid under our management incentive plan, which was established in 2007.


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Management Incentive Plan (“MIP”):

Background: All managers and above are eligible to participate in the MIP. The MIP generally provides the opportunity for a cash payment to each MIP participant if we attain specified levels of company financial performance and the MIP participant achieves individual performance goals. A targeted cash payment, expressed as a percentage of base salary, is established for each MIP participant at the beginning of each year. The percentage of the targeted cash payment that is based on company financial performance versus individual participant performance varies for each participant under the MIP, depending upon the participant’s position.

Each year, the compensation committee and Solo Delaware’s board of directors determine the metric or metrics by which company financial performance will be measured, and establish threshold (minimum), target and maximum payout levels for each such performance measure. If corporate financial performance measures are exceeded, participants may receive up to 200% of their targeted cash payment. If the threshold level of company financial performance is not achieved, there is no individual or company performance award payout under the MIP for that year.

2011 Management Incentive Plan: The compensation committee and Solo's board of directors established three financial metrics (Adjusted EBITDA, net debt and the achievement of a specific set of internal activities designed to reduce cost and improve profitability) on which company financial performance under the 2011 MIP was to be measured. In order for any amounts to be paid under the plan, a threshold level of Adjusted EBITDA was required to be achieved. For 2011, it was determined that Solo Delaware did not meet the threshold Adjusted EBITDA amount required to fund the plan, and accordingly, no awards were granted to any participants in the 2011 MIP, including the executive officers.
    
2012 Management Incentive Plan: The compensation committee and Solo's board of directors established Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, as adjusted for specified items) as the financial metric on which company financial performance under the 2012 MIP will be measured. The compensation committee has not yet recommended, and the full board has not yet approved, the 2012 salaries or 2012 MIP target bonus award opportunities (expressed as a percent of salary) for the named executive officers.

The remaining terms of the 2012 MIP are as described above under “Management Incentive Plan (“MIP”) – Background.”

Stock Options. We do not offer any stock options.

Benefits and Perquisites. The executive officers participate in medical, dental, life, disability, vision and insurance benefit plans on the same basis, terms and conditions as all of our other employees. In addition, the named executive officers currently receive substantially the same perquisites as those available to all employees. Mr. Korzenski and Ms. Reed received whole life insurance policies in 2010.

Long Term Incentive Plan. See the discussion below under the heading “Long Term Incentive Plan.” The compensation committee believes that this plan will provide a significant long-term incentive for key senior management team members and continue to promote our performance-based philosophy.

    

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Retirement Benefits. Executive officers also participate in our 401(k) plan, a tax-qualified retirement savings plan available to all employees, pursuant to which employees are permitted to defer a portion of their income under the 401(k) plan. In 2010, we matched 25% of the first 2% of salary contributed by an employee to the 401(k) plan on an after-tax basis. In 2011, we matched, and in 2012, we will match, 75% of the first 2% of salary and 50% of the next 4% of salary contributed by an employee to the 401(k) plan on an after-tax basis. We do not maintain any defined benefit plans in which our named executive officers participate. We offer a deferred compensation plan; none of our current named executive officers participated in this plan during 2009, 2010 or 2011.

Retention Bonuses. Our executive officers are eligible to receive a one-time cash retention bonus payable only upon the completion of a transaction involving a change of control of Solo Delaware occurring prior to June 1, 2012. These retention bonus arrangements are intended to retain executives and provide continuity of management in connection with a threatened or actual change in control transaction. The retention arrangements with each of the named executive officers are described below under the caption “Retention Bonuses.”

Severance Payments. Each of our named executive officers is entitled to receive severance benefits upon certain qualifying terminations of employment, based upon either an applicable provision in such executive’s employment agreement or pursuant to the terms of our Severance Policy. These severance arrangements are intended to retain executives and provide continuity of management in connection with a threatened or actual change in control transaction. The severance arrangements with each of the named executive officers are described below under the caption “Executive Employment Agreements.”

Compensation Committee Report

The Compensation Committee has reviewed the Compensation Discussion and Analysis and has discussed it with the Company’s management. Based on our review and discussion, we recommend to the board of directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the year ended December 25, 2011.

Compensation Committee
Jeffrey M. Greene, Chair
Kevin A. Mundt
Daniel S. O’Connell

Summary Compensation Information for Named Executive Officers

The following tables, narrative and footnotes summarize the compensation earned by Solo Delaware’s named executive officers for all services rendered in all capacities to us. The named executive officers include our chief executive officer, chief financial officer and the next three most highly compensated executive officers in 2011 who were serving as such at the end of 2011.






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Summary Compensation Table — Fiscal Year 2011

Name and Principal Position (1)
Year
Salary ($)
Bonus ($)
Non-Equity Incentive Plan Compensation ($) (1)
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)
All Other Compensation ($) (2)
Total ($)
Robert M. Korzenski
2011
750,000

—

—

—

18,873

768,873

Chief Executive Officer and
2010
745,961

—

291,395

—

10,226

1,047,582

President
2009
735,002

—

—

—

8,814

743,816

 
 
 
 
 
 
 
 
Robert D. Koney, Jr.
2011
425,000

—

—

—

9,076

434,076

EVP and Chief Financial Officer
2010
425,000

—

165,124

—

1,226

591,350

 
2009
395,000

—

—

—

—

395,000

 
 
 
 
 
 
 
 
George F. Chappelle, Jr. (3)
2011
475,000

—

—

—

—

475,000

EVP and Chief Operating Officer
2010
468,269

—

184,550

—

125,731

778,550

 
2009
77,885

100,000 (4)

—

—

—

177,885

 
 
 
 
 
 
 
 
Jan Stern Reed
2011
465,000

—

—

—

14,722

479,722

EVP - HR, General Counsel and
2010
460,962

—

180,665

—

6,239

647,866

Secretary
2009
450,001

—

—

—

5,008

455,009

 
 
 
 
 
 
 
 
Jeffrey W. Lombardo (5)
2011
288,115

—

—

—

135,573

423,688

VP - Foodservice Sales
2010
58,173

50,000 (6)

20,063

—

—

128,236

 
2009
—

—

—

—

—

—


(1) 
Amounts for 2010 represent annual incentive awards earned under the 2010 Management Incentive Plan, but paid in 2011. No amounts were awarded under the 2011 or 2009 Management Incentive Plan.

(2) 
Amounts in this column consist of those items identified in the table “All Other Compensation” immediately following the Summary Compensation Table.

(3) 
Mr. Chappelle joined Solo Delaware in October 2009.

(4) 
Represents amount paid as a hiring bonus.

(5) 
Mr. Lombardo joined Solo Delaware in October 2010.

(6) 
Represents amount paid as a hiring bonus.













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All Other Compensation

Name
Year
Perquisites and Other Personal Benefits ($)
Tax Reimbursements ($) (1)
Insurance Premiums and Health Care Expenses ($) (2)
Company Contributions to Retirement and 401(k) Plans ($)
Severance
Total All Other Compensation ($)
Robert M. Korzenski
2011
—

2,701

5,888

10,284

—

18,873

Chief Executive Officer and
2010
—

3,060

5,888

1,278

—

10,226

President
2009
—

2,926

5,888

—

—

8,814

 
 
 
 
 
 
 
 
Robert D. Koney, Jr.
2011
—

—

—

9,076

—

9,076

EVP and Chief Financial
2010
—

—

—

1,226

—

1,226

Officer
2009
—

—

—

—

—

—

 
 
 
 
 
 
 
 
George F. Chappelle, Jr.
2011
—

—

—

—

—

—

EVP and Chief Operating
2010
125,000 (4)

—

—

731

—

125,731

Officer (3)
2009
—

—

—

—

—

—

 
 
 
 
 
 
 
 
Jan Stern Reed
2011
—

1,621

3,533

9,568

—

14,722

EVP - HR, General Counsel
2010
—

1,475

3,533

1,231

—

6,239

and Secretary
2009
—

1,475

3,533

—

—

5,008

 
 
 
 
 
 
 
 
Jeffrey W. Lombardo
2011
131,291 (5)

—

—

4,282

—

135,573

VP - Foodservice Sales
2010
—

—

—

—

—

—

 
2009
—

—

—

—

—

—


(1) 
Amounts represent tax reimbursements on income imputed to the named executive officers for whole life insurance premiums paid on behalf of the officer by Solo Delaware.

(2) 
Amounts represent whole life insurance premiums paid by Solo Delaware on behalf of the named executive officers.

(3) 
Mr. Chappelle joined Solo Delaware in October 2009.

(4) 
Represents a payment to Mr. Chappelle by Solo Delaware to partially reimburse him for certain relocation expenses that he became required to repay in 2010 to his former employer as a result of Mr. Chappelle’s decision to join Solo Delaware in October 2009.

(5) 
Represents a lump-sum payment to Mr. Lombardo in 2011 to cover relocation expenses incurred by Mr. Lombardo in accordance with Solo Delaware's Relocation Policy.

Long Term Incentive Plan

Our Long Term Incentive Plan (the “LTIP” or “Plan”) was adopted in 2007 and amended in March 2010 by our board of directors. We filed a copy of the LTIP with the SEC on March 25, 2010, as Exhibit 10.2 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2009. The following description is qualified in its entirety by reference to the Plan. The purpose of the LTIP is to provide long-term incentives to selected key management employees of Solo Delaware and its affiliates, including the named executive officers. The principal terms and conditions of the LTIP are as follows:

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•
Awards under the Plan represent the opportunity to receive a cash bonus payment upon the occurrence of any sale, redemption, transfer or other disposition by Vestar of all or a portion of its equity interest in Solo Cup Investment Corporation for cash or marketable securities (a “Liquidity Event”). Vestar currently controls Solo Cup Investment Corporation’s and Solo Delaware’s boards of directors and owns 32.71% of Solo Cup Investment Corporation’s common stock on an as-converted basis.

•
The aggregate of all awards available under the LTIP (the “LTIP Award Pool”) will be determined based on a sliding percentage of the equity value of Solo Cup Investment Corporation, as determined by the Solo Delaware board of directors, in accordance with the existing Stockholders’ Agreement of Solo Cup Investment Corporation, upon the occurrence of the earlier of a Liquidity Event or the plan termination date, which is the seventh anniversary of the LTIP’s effective date, as follows:

Equity Value of SCIC
Percentage Used for LTIP Award Pool
First $240 million
2.5%
Next $240 million
7.5%
Over $480 million
15%

•
Individual awards under the LTIP (the “Awards”) will be determined by the compensation committee in consultation with Solo Delaware’s CEO and will represent a percentage interest in the LTIP Award Pool.

•
If Vestar sells, redeems, transfers or otherwise disposes of less than 100% of its equity interest in Solo Cup Investment Corporation for cash or marketable securities (a “Partial Liquidity Event”), the Solo Delaware board of directors will determine the equity value of Solo Cup Investment Corporation as of the date of such a sale and will calculate the LTIP Award Pool by (1) multiplying such equity value by a ratio corresponding to the percentage of aggregate equity interests held by Vestar that was disposed of in the transaction constituting the Partial Liquidity Event and (2) applying the formula described above to such reduced equity value of Solo Cup Investment Corporation.

•
If there are a series of Partial Liquidity Events, the LTIP Award Pool for each such event will take into account the value received in respect of any prior Partial Liquidity Event(s) in order to reflect the intent of the equity value formula described above and to avoid the duplication of benefits.

•
If there has not been a Liquidity Event prior to the plan termination date, Solo Delaware’s board of directors will determine the equity value of Solo Cup Investment Corporation as of such date and will establish the LTIP Award Pool based on such valuation, calculated by using half of each applicable percentage amount shown in the table above.

•
If a participant’s employment with Solo Delaware or one of its affiliates is terminated for Cause, as defined in the Plan, or he or she resigns voluntarily from Solo Delaware or an affiliate prior to a Liquidity Event, or if no Liquidity Event occurs, prior to the plan termination date, the participant will forfeit his or her Award and immediately cease to participate in the Plan. Notwithstanding the provisions summarized in the previous sentence, in the event a participant’s employment with Solo Delaware or one of its affiliates is terminated after a Partial Liquidity Event has occurred, then (1) if the termination was for Cause, the participant will forfeit his or her award and will have no further rights under the LTIP (including for any payment relating to an earlier Partial Liquidity Event); and (2) if the termination was a result of the participant’s voluntary resignation, the participant’s Award relating to the Partial Liquidity Event will be paid in accordance with the LTIP and the Participant will have no further rights to payments of any kind under the LTIP.

•
If a participant’s employment with Solo is terminated (1) without Cause or (2) as a result of death or Disability, as defined in the LTIP, the participant will vest in his or her award based on the number of full years that have elapsed between the date the Award was granted and the termination date, as set forth below:


83


Date of Termination
Percentage Vested
Prior to the 1st anniversary of Grant Date
—
%
On or after the 1st anniversary of Grant Date and prior to the 2nd anniversary of Grant Date
20
%
On or after the 2nd anniversary of Grant Date and prior to the 3rd anniversary of Grant Date
40
%
On or after the 3rd anniversary of Grant Date and prior to the 4th anniversary of Grant Date
60
%
On or after the 4th anniversary of Grant Date and prior to the 5th anniversary of Grant Date
80
%
On or after the 5th anniversary of Grant Date
100
%

•
Generally, Awards will not be paid until the earlier to occur of (1) a Change in Control, as defined in the Plan, or (2) the plan termination date. If there is a Partial Liquidity Event or a Liquidity Event that does not result in a Change in Control prior to the date of a Change in Control or the plan termination date, Award payments will be credited to a Solo Delaware bookkeeping account that will earn interest at a rate equal to that of the 10-year Treasury Note as in effect as of the last day of the previous calendar quarter, plus two percentage points, compounded quarterly.

Solo Delaware’s board of directors granted ten percent of the LTIP Award Pool to Mr. Korzenski and five percent of the LTIP Award Pool to each of Ms. Reed and Mr. Koney in October 2007, five percent of the LTIP Award Pool to Mr. Chappelle in October 2009, and three percent of the LTIP Award Pool to Mr. Lombardo in October 2010. No subsequent grants have been made to the named executive officers. Total grants of 76% of the LTIP Award Pool (including those grants to the above named executive officers) were outstanding as of December 25, 2011.


Director Compensation
Solo Delaware pays annual compensation of $50,000 to each director who is appointed by Vestar but is not employed by Vestar. For 2011, each of Messrs. Alexy, Greene and Harrison earned $50,000 for his services as a director. Solo Delaware also reimburses all directors for reasonable expenses for attending board meetings.


Executive Employment Agreements
The agreements described under this heading “Executive Employment Agreements” and amendments to such agreements are filed as exhibits to this annual report on Form 10-K.

Solo Cup Investment Corporation and Solo Cup Operating Corporation have employment agreements, as amended, with Mr. Korzenski and Ms. Reed. Mr. Korzenski’s agreement commenced on April 14, 2004, and Ms. Reed’s agreement commenced on November 30, 2004. The agreements automatically renew for one-year periods unless the executive or we provide the other with notice of termination at least ninety (90) days prior to its expiration. No notification of termination was provided during the existing terms of the agreements. Accordingly, Mr. Korzenski’s and Ms. Reed’s agreements will automatically renew on April 14, 2012 for additional one-year terms that may again be automatically renewed. In addition to base salary, which is reviewed annually and can be increased but not decreased, each executive is eligible to receive a percentage of annual salary as an annual bonus under the Management Incentive Plan. Upon termination of employment due to death or disability, the employment agreements provide that the executive will be paid all accrued and unpaid base salary and bonus and a prorated annual bonus for the year in which the termination occurs.

If the executive terminates his or her employment for “good reason” or Solo Cup Investment Corporation terminates the executive’s employment without “cause,” as such terms are defined in the employment agreements, Solo Cup Investment Corporation will pay to the executive all accrued and unpaid base salary and bonus, and a severance amount equal to the greater of (A) the amount of base salary that would have been paid over the remainder of the then-current agreement term and (B) two and one-half times annual base salary, each payable in accordance with the normal payroll practices of Solo Cup Investment Corporation.

Additionally, Solo Cup Investment Corporation will provide the executive with continued coverage under the welfare benefit programs covering the executive at the time of termination for the above-described severance period or until the executive obtains similar coverage by a new employer.

Upon termination of an employment agreement following a change-in-control, Mr. Korzenski and Ms. Reed are not entitled to any additional payments or benefits under the employment agreement beyond those described above.

    

84



Each of Messrs. Chappelle and Koney is entitled to receive a severance amount equal to his annual base salary in effect as of the date of his termination if he terminates his employment for “good reason,” as such term is defined in his offer letter, as amended, or his employment is terminated without “cause,” as such term is defined in Solo Delaware's Salary Severance Policy.

Mr. Lombardo is entitled to receive a severance amount equal to his annual base salary in effect as of the date of his termination if his employment is terminated without “cause,” as such term is defined in Solo Delaware's Salary Severance Policy.

Retention Bonuses

Each of Messrs. Korzenski, Chappelle and Koney, and Ms. Reed is entitled to receive a bonus of $500,000, and Mr. Lombardo is entitled to receive a bonus of $100,000, in each case only upon the completion of a transaction involving a change of control of Solo Delaware occurring prior to June 1, 2012. The bonuses will be paid on the earliest to occur of: (1) the termination of the executive's employment on the date that is the later to occur of the completion of the transaction or the date until which a purchaser chooses to continue the executive's employment following the completion of the transaction or (2) the date that is four months following completion of the transaction, provided that the executive remains employed by the Company through such date.


Compensation Committee Interlocks and Insider Participation

For the fiscal year ended December 25, 2011, the compensation committee of the board of directors of Solo Delaware determined executive compensation. None of Solo Delaware’s executive officers served as a director or member of the compensation committee or other board committee performing equivalent functions of another corporation.



85


Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

All of Solo Delaware’s outstanding capital stock is owned by its parent company, Solo Cup Investment Corporation. Solo Delaware does not maintain any compensation plan under which equity securities of Solo Delaware are authorized for issuance. The following table presents the beneficial ownership of Solo Cup Investment Corporation’s voting stock as of March 1, 2012 by (1) Solo Delaware’s directors and named executive officers, (2) Solo Delaware’s current directors and executive officers as a group, and (3) other persons that beneficially own in excess of 5% of Solo Cup Investment Corporation’s voting stock. As of March 1, 2012, 10,425,100 shares of Solo Cup Investment Corporation common stock, or SCIC common stock, and 240,200 shares of Solo Cup Investment Corporation convertible participating preferred stock, or SCIC preferred stock, were outstanding.

All persons listed in the table below have sole voting and investment power with respect to their shares, except as otherwise indicated. In addition, unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Solo Cup Company, 150 South Saunders Road, Suite 150, Lake Forest, Illinois 60045. Beneficial ownership is determined in accordance with the rules of the SEC, under which, in general, persons having voting or investment power with respect to a security are deemed to be beneficial owners of that security. Shares of capital stock issuable pursuant to options or convertible securities, to the extent those options or convertible securities are exercisable or convertible, as applicable, within 60 days as of March 1, 2012, are treated as beneficially owned and outstanding for the purpose of computing the percentage ownership of the person holding the option or convertible security, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 
Common Stock
Convertible Participating Preferred Stock
 
Name of Beneficial Owner
Shares Beneficially Owned
Percent of Class Beneficially Owned
Shares Beneficially Owned
Percent of Class Beneficially Owned
Stock Options Exercisable Within 60 Days
SCC Holding Company, LLC (1)
10,425,100

100.0% (2)

—

—

—

Vestar Capital Partners IV, L.P. and affiliates (2)
5,071,200 (4)

32.7% (4)

240,000

99.9
%
—

Robert L. Hulseman (5)
10,425,100

100.0% (2)

—

—

—

Robert M. Korzenski
2,113 (4)

*
100

*
—

Robert D. Koney, Jr.
—

—

—

—

—

George F. Chappelle, Jr.
—

—

—

—

—

Jan Stern Reed
2,113 (4)

*
100

*
—

Peter J. Mendola
—

—

—

—

—

R. James Alexy
—

—

—

—

—

Jeffrey M. Greene
—

—

—

—

—

Neil Harrison
—

—

—

—

—

Paul J. Hulseman (1)
—

—

—

—

—

James R. Hulseman (1)
—

—

—

—

—

John D. Hulseman (1)
—

—

—

—

—

Kevin A. Mundt (3)
5,071,200 (4)

32.7% (4)

240,000

99.9
%
—

Daniel S. O'Connell (3)
5,071,200 (4)

32.7% (4)

240,000

99.9
%
—

Brian P. O'Connor (3)
5,071,200 (5)

32.7% (5)

240,000

99.9
%
—

All directors and executive officers as a group (17 persons) (3) (4) (5)
15,500,526 (6)

100.0
%
240,200

100
%
—


*    Indicates less than 1% ownership.

(1) 
Robert L. Hulseman holds 50% of the voting membership interests of SCC Holding. His brother John F. Hulseman, a former Director of Solo Delaware, holds the other 50% of the voting membership of SCC Holding. Neither Paul J. Hulseman, son of Robert L. Hulseman and a Director of Solo Delaware, nor James R. or John D. Hulseman, sons of John F. Hulseman and Directors of Solo Delaware, hold any voting membership interests in SCC Holding.


86


(2) 
If the issued and outstanding shares of SCIC preferred stock were converted into shares of SCIC common stock, this percentage would decline to approximately 67.26%.

(3) 
Vestar Capital Partners IV, L.P. (“Vestar IV”) owns 216,071 shares of SCIC preferred stock, Vestar Cup Investment, LLC (“Vestar I”) owns 18,929 shares of SCIC preferred stock and Vestar Cup Investment II, LLC (“Vestar II”) owns 5,000 shares of SCIC preferred stock. Vestar IV is the managing member of both Vestar I and Vestar II. Vestar IV is a Delaware limited partnership, the general partner of which is Vestar Associates IV, L.P., a Delaware limited partnership. The general partner of Vestar Associates IV, L.P. is Vestar Associates Corporation IV, a Delaware corporation. The board of directors of Vestar Associates Corporation IV consists solely of Daniel S. O’Connell, who also serves as its President and Chief Executive Officer. Mr. Mundt is a managing director of Vestar IV, and Mr. O’Connor is Vice President of Vestar IV. In their roles as directors or officers of these entities, Messrs. Mundt, O’Connell and O’Connor may be deemed to share beneficial ownership of Vestar IV’s shares of SCIC common stock and SCIC preferred stock. Each of Messrs. Mundt and O’Connor disclaims beneficial ownership of those shares except to the extent of his pecuniary interest therein. The address of Vestar IV is 245 Park Avenue, 41st Floor, New York, New York 10167.

(4) 
Represents beneficial ownership of shares of SCIC common stock issuable upon conversion of SCIC preferred stock.

(5) 
Robert L. Hulseman holds 50% of the voting membership interests of SCC Holding and, as a result, may be deemed to
beneficially own the shares of SCIC common stock held by SCC Holding. Mr. Hulseman disclaims beneficial ownership of those shares except to the extent of his pecuniary interest therein.

(6) 
Includes 5,075,426 shares of common stock issuable upon conversion of the SCIC preferred stock.




87


Item 13.
Certain Relationships and Related Transactions, and Director Independence.

Robert L. Hulseman, who is the father or Paul J. Hulseman and the uncle of James R. and John D. Hulseman, is the Chairman Emeritus and a director of Solo Delaware. Paul J., James R. and John D. Hulseman are directors of Solo Delaware. Robert L. Hulseman holds 50% of the voting membership interests of SCC Holding, which owns 67.26% of the voting stock of Solo Cup Investment Corporation, the parent of Solo Delaware.

SCC Holding’s ownership structure includes ownership interests of 9,867,626 Units of Class A Non-Voting Common Units, 57,474 Class B Voting Common Units, and 500,000 Class A Non-Voting Preferred Units. The Class A Non-Voting Preferred Units, or Preferred Units, require an annual preferred return to each Preferred Unit holder in the amount of $4.30 per Unit. The Preferred Units also have a preference upon the liquidation of SCC Holding in the amount of $43.00 per Unit. The Class A Non-Voting and Class B Voting Common Units are identical, except that the Class B Voting Common Units are voting Units. The Class A Non-Voting and Class B Common Units, known collectively as the Common Units, constitute 100% of the total common units in SCC Holding. Robert L. Hulseman, as a result of his ownership of Class B Voting Common Units, has an economic interest of 0.28954% of SCC Holding’s value allocable to the Common Units and 0.27565% of SCC Holding’s total value allocable to all Preferred and Common Units.

Each of the ten children of Robert L. Hulseman, including Paul J. Hulseman, has an economic interest in SCC Holding, either directly or indirectly as the beneficiary of one or more trusts, of 5% of the Preferred Units and approximately 5% of the Common Units. Each of James R. Hulseman, John D. Hulseman and four of their siblings has an economic interest in SCC Holding, either directly or indirectly as the beneficiary of one or more trusts, of approximately 3.76% of the Preferred Units and approximately 6.16% of the Common Units.

In connection with Solo Delaware’s acquisition of SF Holdings in February 2004, Vestar purchased for cash $240.0 million in SCIC preferred stock. Holders of SCIC preferred stock are entitled to vote on all matters on which the holders of Solo Cup Investment Corporation common stock, or SCIC common stock, are entitled to vote. Each holder of SCIC preferred stock may vote that number of shares of SCIC common stock into which its SCIC preferred stock is convertible. Subject to specified exceptions, the holders of SCIC preferred stock and common stock vote together as a single class. As a result of its ownership of SCIC preferred stock, Vestar controls 32.71% of SCIC’s voting stock.

Also in connection with the SF Holdings acquisition, Vestar and SCC Holding entered into several agreements, including a preferred stock purchase agreement, management agreements, the stockholders’ agreement and a registration rights agreement relating to, among other things, ownership of, and registration rights with respect to, voting stock in Solo Cup Investment Corporation.

In connection with our February 2004 acquisition of SF Holdings, Solo Delaware and Solo Cup Investment Corporation entered into two management agreements: one with SCC Holding and one with Vestar. The Vestar management agreement provides for, among other things, the payment of an $800,000 annual management fee by Solo Cup Investment Corporation to Vestar. The management agreement with SCC Holding provided for, among other things, the payment of a $2.5 million annual management fee by Solo Cup Investment Corporation to SCC Holding or an affiliate or successor of SCC Holding. The management agreement with SCC Holding was amended in connection with the July 2009 refinancing transactions, and pursuant to that amendment, the amount of the annual management fee payable to SCC Holding was reduced from $2.5 million to $800,000. In 2011, each of SCC Holding and Vestar received an annual management fee of $800,000 under its respective management agreement. In addition, pursuant to the terms of the Vestar management agreement, Solo Cup Investment Corporation paid Vestar approximately $50,000 for out-of-pocket expenses.

The SCC Holding management agreement terminates when SCC Holding ceases to beneficially own at least 10% of the SCIC common stock, and similarly, the Vestar management agreement terminates when Vestar ceases to beneficially own at least 10% of the SCIC common stock.

In December 2006, in connection with the transition of control of Solo Delaware’s and Solo Cup Investment Corporation’s board of directors, Solo Delaware and Solo Cup Investment Corporation entered into a transition agreement with Vestar and SCC Holding. Among other things, the transition agreement determines the compensation of “Solo Family Members,” which is defined as any individual who held beneficial interests in units of SCC Holding on the date of the closing of the acquisition of SF Holdings and any immediate family member thereof.

    

88


Solo Delaware currently employs Robert L. Hulseman’s son, Paul J. Hulseman, as a Senior Vice President. In this capacity, he received salary and benefits of approximately $308,550 in 2011. Solo Delaware currently employs Robert L. Hulseman’s son, Thomas J. Hulseman, as a Director of International Marketing. In this capacity, he received salary and benefits of approximately $220,330 in 2011.
    
Solo Delaware currently employs Robert L. Hulseman’s son-in-law, Joseph P. Kovach, as a Vice President — Operations. In this capacity, he received salary and benefits of approximately $303,780 in 2011. James R. Hulseman, a director of Solo Delaware, is also Vice President, Special Projects of the company. As Vice President, he received salary and benefits of approximately $247,950 in 2011. Solo Delaware also employs John D. Hulseman, one of its Directors, as Energy Manager, for which he received salary and benefits of approximately $48,645 in 2011. Solo Delaware also paid John F. Hulseman $114,000 pursuant to the stockholders’ agreement and the transition agreement.

In accordance with the transition agreement, the salary that we pay to each Solo Family Member employed by us (other than Robert L. Hulseman who was paid $295,000 for his role as Chairman Emeritus in 2011) is commensurate with the salaries that we pay to other employees holding similar positions. Aggregate annual amounts paid to all Solo Family Members cannot exceed $1.5 million, excluding any management fees paid to SCC Holding. The Solo Family Members that we employ also receive health and life insurance benefits and reimbursement of personal expenses commensurate with those being provided to our executive officers. The Solo Family Members are subject to the same employee policies as all of our other employees.

Any Solo Family Member that may be terminated by us with or without cause would be entitled to severance benefits under the then-existing policy, provided however, that the severance benefits may not be for less than six months. In 2010, Solo Delaware provided Robert L. Hulseman with an automobile in accordance with the provisions of the transition agreement. As provided for in the stockholders’ agreement and in accordance with the transition agreement, as of December 2006, the size of the board of directors of Solo Delaware and Solo Cup Investment Corporation increased by four members to a total of eleven directors, and Vestar appointed four additional directors. Following these appointments on December 15, 2006, directors appointed by Vestar constituted a majority of each of Solo Delaware’s and Solo Cup Investment Corporation’s boards of directors. The directors currently appointed by Vestar are R. James Alexy, Jeffrey M. Greene, Neil Harrison, Kevin A. Mundt, Daniel S. O’Connell and Brian P. O’Connor. Directors appointed by Vestar who are neither employees nor equity owners of Vestar (Messrs. Alexy, Greene and Harrison) receive annual compensation of $50,000 for director services.

In February 2009, Solo Cup Operating Corporation entered into an agreement with Sun Products Corporation under which Solo Cup Operating Corporation leased to Sun a warehouse located in Havre de Grace, Maryland that we closed in December 2008. Mr. Mundt, Chairman of Solo Delaware’s board of directors, and Mr. O’Connell, a director of Solo Delaware, are also directors of Sun Products, and one or more Vestar entities have an equity interest in Sun Products. During September 2009, Solo Cup Operating Corporation sold the Havre de Grace property and simultaneously assigned the lease to the new owner. One of the contractual terms of the sale agreement requires Solo Cup Operating Corporation to lease the property from the new owner for years 8-15, beginning in 2016, if Sun does not renew the lease.

The board of directors of Solo Delaware has not yet adopted formal written policies and procedures regarding related person transactions. Solo Delaware took initial steps to evaluate a number of the related person transactions through its entry into the transition agreement. None of the directors of Solo Delaware are “independent” under standards established by the New York Stock Exchange.



89


Item 14.
Principal Accounting Fees and Services.

Relationship with Independent Registered Public Accounting Firm
KPMG LLP has served as our independent registered public accounting firm since 2002. Since July 13, 2004, when Solo Delaware became a registrant, the Board of Directors (the Audit Committee beginning February 2007) has pre-approved all audit and non-audit services provided by KPMG LLP. KPMG LLP's fees for the years ended December 25, 2011 and December 26, 2010 were as follows (in thousands):
 
 
For the year ended December 25, 2011 
 
For the year ended December 26, 2010
Audit fees (1)
$
1,527

 
$
1,482

Audit-related fees (2)
85

 
—

Tax fees (3)
27

 
30

Other
2

 
4

Total
$
1,641

 
$
1,516

 
(1) 
Audit fees consisted of work performed for the audit of financial statements, quarterly financial statement reviews, statutory audits, and filings with the Securities and Exchange Commission ("SEC").
(2) 
Audit-related fees consisted of work performed in conjunction with SEC staff comment letters.
(3) 
Tax fees consisted of all services performed by the independent auditor's tax personnel, except those related to the audit of financial statements.
The Audit Committee reviews all relationships between KPMG LLP and Solo Delaware, including the provision of non-audit services, which may relate to the auditor's independence. The Board of Directors' pre-approval is required to retain KPMG LLP for any services and for the fees payable for such services.





90


Part IV

Item 15.
Exhibits and Financial Statement Schedules.

(a)    The following documents are filed as part of this Report:

1.    Financial Statements:
See Item 8, "Financial Statements and Supplementary Data," in Part II of this document.

2.    Financial Statement Schedules:
All schedules are omitted because of the absence of conditions under which they are required or because information called for is shown in the consolidated financial statements and notes thereto in Item 8.

3.    Exhibits
See Index of Exhibits beginning on page 94 of this document.






91

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:
March 23, 2012
By:
 
/s/ Robert M. Korzenski
 
 
 
 
Robert M. Korzenski
 
 
 
 
President and Chief Executive Officer
 
 
 
 
(Principal Executive Officer and Duly Authorized Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated.

By:
 
/s/ Kevin A. Mundt
 
Date:
March 23, 2012
 
 
Kevin A. Mundt
 
 
 
 
 
Chairman of the Board
 
 
 
 
 
 
 
 
 
By:
 
/s/ Robert L. Hulseman
 
Date:
March 23, 2012
 
 
Robert L. Hulseman
 
 
 
 
 
Chairman Emeritus
 
 
 
 
 
 
 
 
 
By:
 
/s/ Robert M. Korzenski
 
Date:
March 23, 2012
 
 
Robert M. Korzenski
 
 
 
 
 
Chief Executive Officer, President and
 
 
 
 
 
Director (Principal Executive Officer)
 
 
 
 
 
 
 
 
 
By:
 
/s/ Robert D. Koney, Jr.
 
Date:
March 23, 2012
 
 
Robert D. Koney, Jr.
 
 
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
 
 
 
By:
 
/s/ Brian P. O'Connor
 
Date:
March 23, 2012
 
 
Brian P. O'Connor
 
 
 
 
 
Director
 
 
 
 
 
 
 
 
 
By:
 
/s/ Neil Harrison
 
Date:
March 23, 2012
 
 
Neil Harrison
 
 
 
 
 
Director
 
 
 
 
 
 
 
 
 
By:
 
/s/ James R. Hulseman
 
Date:
March 23, 2012
 
 
James R. Hulseman
 
 
 
 
 
Director
 
 
 
 
 
 
 
 
 
By:
 
/s/ John D. Hulseman
 
Date:
March 23, 2012
 
 
John D. Hulseman
 
 
 
 
 
Director
 
 
 

92

 
 
 
 
 
 
By:
 
/s/ Paul J. Hulseman
 
Date:
March 23, 2012
 
 
Paul J. Hulseman
 
 
 
 
 
Director
 
 
 
 
 
 
 
 
 
By:
 
/s/ R. James Alexy
 
Date:
March 23, 2012
 
 
R. James Alexy
 
 
 
 
 
Director
 
 
 
 
 
 
 
 
 
By:
 
/s/ Jeffrey M. Greene
 
Date:
March 23, 2012
 
 
Jeffrey M. Greene
 
 
 
 
 
Director
 
 
 
 
 
 
 
 
 
By:
 
/s/ Daniel S. O'Connell
 
Date:
March 23, 2012
 
 
Daniel S. O'Connell
 
 
 
 
 
Director
 
 
 

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act:

No annual report or proxy material has been sent to security holders of Solo Cup Company.


93


INDEX OF EXHIBITS FILED WITH OR
INCORPORATED BY REFERENCE INTO
FORM 10-K OF SOLO CUP COMPANY
FOR THE YEAR ENDED DECEMBER 25, 2011
Exhibit Number
Exhibit Description
†3.1
Amended and Restated Certificate of Incorporation of Solo Cup Company (incorporated by reference to Exhibit 3.1 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†3.2
Second Amended and Restated By-laws of Solo Cup Company (incorporated by reference to Exhibit 99.1 to the Form 8-K filed by Solo Cup Company on June 24, 2005)
 
 
†3.3
Amended and Restated Certificate of Incorporation of Solo Cup Operating Corporation (f/k/a Sweetheart Cup Company Inc.) (incorporated by reference to Annex A-1 to Exhibit A to Exhibit 3.12 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†3.4
Amended and Restated By-laws of Solo Cup Operating Corporation (f/k/a Sweetheart Cup Company Inc.) (incorporated by reference to Exhibit 3.4 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†3.5
Amended and Restated Certificate of Incorporation of SF Holdings Group, Inc. (incorporated by reference to Exhibit A to Exhibit 3.10 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†3.6
Amended and Restated By-laws of SF Holdings Group, Inc. (incorporated by reference to Exhibit 3.6 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†3.7
Certificate of Incorporation of Lily-Canada Holding Corporation (incorporated by reference to Exhibit 3.14 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†3.8
Amended and Restated By-laws of Lily-Canada Holding Corporation (incorporated by reference to Exhibit 3.8 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†3.9
Certificate of Formation of Solo Manufacturing LLC (incorporated by reference to Exhibit 3.9 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†3.10
Limited Liability Company Agreement of Solo Manufacturing LLC (incorporated by reference to Exhibit 3.10 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†3.11
Certificate of Trust of Solo Cup Owings Mills Holdings (incorporated by reference to Exhibit 3.11 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†3.12
Trust Agreement, dated as of June 24, 2009 between Solo Cup Operating Corporation and Wilmington Trust Company (incorporated by reference to Exhibit 3.12 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†3.13
Certificate of Incorporation of P. R. SOLO CUP, INC. (incorporated by reference to Exhibit 3.7 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†3.14
By-laws of P. R. SOLO CUP, INC. (incorporated by reference to Exhibit 3.8 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†3.15
First Amendment to By-laws of P. R. SOLO CUP, INC. (incorporated by reference to Exhibit 3.15 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†3.16
Certificate of Incorporation of Solo Cup (UK) Limited (incorporated by reference to Exhibit 3.22 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†3.17
Memorandum of Association and Articles of Association of Solo Cup (UK) Limited (f/k/a Realglass Limited) (incorporated by reference to Exhibit 3.17 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†3.18
Certificate of Incorporation of Insulpak Holdings Limited (incorporated by reference to Exhibit 3.24 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†3.19
Articles of Association and Memorandum of Association of Insulpak Holdings Limited (incorporated by reference to Exhibit 3.19 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†3.20
Certificate of Incorporation of Solo Cup Europe Limited (incorporated by reference to Exhibit 3.26 to the Form S-4 filed by Solo Cup Company on June 24, 2004)



94

Exhibit Number
Exhibit Description
†3.21
Memorandum of Association and Articles of Association of Solo Cup Europe Limited (incorporated by reference to Exhibit 3.21 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†3.22
Articles of Association of Solo Cup Finance Limited (incorporated by reference to Exhibit 3.22 to the Form 10-K filed by Solo Cup Company on March 17, 2011)
 
 
†4.1
Indenture, dated as of February 27, 2004, by and among Solo Cup Company, a Delaware corporation, certain guarantors of Solo Cup Company and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†4.2
Form of 8 1/2% Senior Subordinated Notes (incorporated by reference to Exhibit A to Exhibit 4.2 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†4.3
First Supplemental Indenture dated as of June 18, 2004, by and among Solo Cup Company, a Delaware corporation, certain guarantors of Solo Cup Company and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.4 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†4.4
Second Supplemental Indenture dated as of June 30, 2005, by and among Solo Cup Company, certain guarantors of Solo Cup Company and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.13 to the Form 10-Q filed on August 11, 2009)
 
 
†4.5
Third Supplemental Indenture dated as of July 2, 2009, by and among Solo Cup Company, certain guarantors of Solo Cup Company and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.14 to the Form 10-Q filed on August 11, 2009)
 
 
†4.6
Fourth Supplemental Indenture dated as of December 17, 2010, by and among Solo Cup Company, certain guarantors of Solo Cup Company and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.6 to the Form 10-K filed on March 17, 2011)
 
 
†4.7
Certificate of Designations of Convertible Participating Preferred Stock of Solo Cup Investment Corporation (incorporated by reference to Exhibit 4.5 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†4.8
Certificate of Designations of Redeemable Preferred Stock of Solo Cup Investment Corporation (incorporated by reference to Exhibit 4.6 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†4.9
Indenture, dated as of July 2, 2009, among Solo Cup Company, Solo Cup Operating Corporation, the guarantors listed on the signature pages thereto and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.6 to the Form 8-K filed by Solo Cup Company on July 9, 2009)
 
 
†4.10
First Supplemental Indenture dated as of April 30, 2010, by and among Solo Cup Company and Solo Cup Operating Corporation, as co-issuers, the guarantors listed on the signature pages thereto and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.10 to the Form 10-K filed by Solo Cup Company on March 17, 2011)
 
 
†4.11
Second Supplemental Indenture dated as of December 17, 2010, by and among Solo Cup Company and Solo Cup Operating Corporation, as co-issuers, the guarantors listed on the signature pages thereto and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.11 to the Form 10-K filed by Solo Cup Company on March 17, 2011)
 
 
†4.12
Security Agreement dated as of July 2, 2009 by and among Solo Cup Company, Solo Cup Operating Corporation, the other subsidiaries of Solo Cup Company listed on the signature pages thereof and U.S. Bank National Association, as collateral trustee (incorporated by reference to Exhibit 4.8 to the Form 8-K filed by Solo Cup Company on July 9, 2009)
 
 
†4.13
Notes Debenture dated July 2, 2009 between U.S. Bank National Association, as collateral trustee, and Solo Cup (UK) Limited, Insulpak Holdings Limited and Solo Cup Europe Limited as the Chargors (incorporated by reference to Exhibit 4.9 to the Form 8-K filed by Solo Cup Company on July 9, 2009)
 
 
†4.14
Collateral Trust Agreement, dated as of July 2, 2009, by and among Solo Cup Company, Solo Cup Operating Corporation, the guarantors from time to time party thereto, U.S. Bank National Association, as trustee, the other secured debt representatives from time to time party thereto, and U.S. Bank National Association, as collateral trustee (incorporated by reference to Exhibit 4.10 to the Form 8-K filed by Solo Cup Company on July 9, 2009)
 
 
†4.15
Lien Subordination and Intercreditor Agreement, dated as of July 2, 2009, among Bank of America, N.A., as agent for the ABL Secured Parties referred to therein, U.S. Bank National Association, as collateral trustee for the Priority Lien Secured Parties and the Subordinated Lien Secured Parties referred to therein, Solo Cup Company, Solo Cup Operating Corporation and the subsidiaries of Solo Cup Company named therein (incorporated by reference to Exhibit 4.11 to the Form 8-K filed by Solo Cup Company on July 9, 2009)
 
 
†4.16
Form of 10.5% Senior Secured Notes due 2013 (included in Exhibit A to Exhibit 4.9)

95

Exhibit Number
Exhibit Description
†10.1
The Solo Cup Company Management Incentive Plan (incorporated by reference to Exhibit 10.35 to the Form 10-Q filed by Solo Cup Company on May 15, 2007)*
 
 
10.2
Solo Cup Company Management Long-Term Incentive Plan dated October 1, 2007, as amended as of March 24, 2010 (incorporated by reference to Exhibit 10.2 to the Form 10-K filed by Solo Cup Company on March 25, 2010)*
 
 
†10.3
Employment Agreement, dated as of April 14, 2004, among Solo Cup Investment Corporation, Solo Cup Operating Corporation and Robert M. Korzenski (incorporated by reference to Exhibit 10.11 to the Form S-4 filed by Solo Cup Company on June 24, 2004)*
 
 
†10.4
Amendment No. 1, dated as of July 26, 2006, to Employment Agreement dated as of April 14, 2004, by and between Solo Cup Investment Corporation, Solo Cup Operating Corporation and Robert M. Korzenski (incorporated by reference to Exhibit 10.5 to the Form 10-Q filed by Solo Cup Company on October 16, 2006)*
 
 
†10.5
Amendment No. 2, dated as of October 11, 2006, to Employment Agreement dated as of April 14, 2004, by and between Solo Cup Investment Corporation, Solo Cup Operating Corporation and Robert M. Korzenski (incorporated by reference to Exhibit 10.8 to the Form 10-Q filed by Solo Cup Company on October 16, 2006)*
 
 
†10.6
Amendment No. 3, dated as of December 12, 2008, to Employment Agreement dated as of April 14, 2004, by and between Solo Cup Investment Corporation, Solo Cup Operating Corporation (successor by merger to Solo Cup Company, an Illinois corporation) and Robert M. Korzenski (incorporated by reference to Exhibit 99.3 to the Form 8-K filed by Solo Cup Company on December 23, 2008)*
 
 
†10.7
Employment Agreement, dated as of November 30, 2004, among Solo Cup Investment Corporation, Solo Cup Operating Corporation and Jan Stern Reed (incorporated by reference to Exhibit 99.1 to the Form 8-K filed by Solo Cup Company on December 3, 2004)*
 
 
†10.8
Amendment No. 1, dated as of July 26, 2006, to Employment Agreement dated as of November 30, 2004, by and between Solo Cup Investment Corporation, Solo Cup Operating Corporation and Jan Stern Reed (incorporated by reference to Exhibit 10.4 to the Form 10-Q filed by Solo Cup Company on October 16, 2006)*
 
 
†10.9
Amendment No. 2, dated as of October 11, 2006, to Employment Agreement dated as of November 30, 2004, by and between Solo Cup Investment Corporation, a Delaware corporation, Solo Cup Operating Corporation, a Delaware corporation (successor by merger to Solo Cup Company, an Illinois corporation) and Jan Stern Reed (incorporated by reference to Exhibit 10.7 to the Form 10-Q filed by Solo Cup Company on October 16, 2006)*
 
 
†10.10
Amendment No. 3, dated as of December 12, 2008, to Employment Agreement dated as of November 30, 2004, by and between Solo Cup Investment Corporation, a Delaware corporation, Solo Cup Operating Corporation, a Delaware corporation (successor by merger to Solo Cup Company, an Illinois corporation) and Jan Stern Reed (incorporated by reference to Exhibit 99.5 to the Form 8-K filed by Solo Cup Company on December 23, 2008)*
 
 
†10.11
Management Agreement, dated as of February 27, 2004, among Solo Cup Investment Corporation, Solo Cup Company and Vestar Capital Partners (incorporated by reference to Exhibit 10.16 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†10.12
Amendment No. 1, dated as of December 19, 2008, to Management Agreement, dated as of February 27, 2004, among Solo Cup Investment Corporation, Solo Cup Company and Vestar Capital Partners (incorporated by reference to Exhibit 99.1 to the Form 8-K filed by Solo Cup Company on December 23, 2008)



96

Exhibit Number
Exhibit Description
†10.13
Management Agreement, dated as of February 27, 2004, among Solo Cup Investment Corporation, Solo Cup Company and SCC Holding Company LLC (incorporated by reference to Exhibit 10.17 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†10.14
Amendment No. 1, dated as of December 19, 2008, to Management Agreement, dated as of February 27, 2004, among Solo Cup Investment Corporation, Solo Cup Company, a Delaware corporation, and SCC Holding Company LLC (incorporated by reference to Exhibit 99.2 to the Form 8-K filed by Solo Cup Company on December 23, 2008)
 
 
†10.15
Amendment No. 2, dated as of June 30, 2009, to Management Agreement, dated as of February 27, 2004, among Solo Cup Investment Corporation, Solo Cup Company, a Delaware corporation, and SCC Holding Company LLC (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on July 7, 2009)
 
 
†10.16
Stockholders' Agreement, dated as of February 27, 2004, among Vestar Capital Partners IV, L.P., Vestar Cup Investment, LLC, Vestar Cup Investment II, LLC, SCC Holding Company LLC, Solo Cup Investment Corporation and Solo Cup Company (Robert M. Korzenski and Thomas Pasqualini became parties to the Stockholders' Agreement effective April 14, 2004 and Jan Stern Reed effective November 30, 2004, by executing a joinder agreement in the form of Exhibit 10.19 to the Form S-4 filed by Solo Cup Company on June 24, 2004) (incorporated by reference to Exhibit 10.18 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†10.17
Amendment No. 1, dated as of June 26, 2008, to Stockholders' Agreement, dated as of February 27, 2004, among Vestar Capital Partners IV, L.P., Vestar Cup Investment, LLC, Vestar Cup Investment II, LLC, SCC Holding Company LLC, Solo Cup Company, Solo Cup Investment Corporation and the parties identified on the signature pages thereto as Management Investors (incorporated by reference to Exhibit 10.32 to the Form 8-K filed by Solo Cup Company on July 2, 2008)
 
 
†10.18
Amendment No. 2, dated as of September 14, 2010, to Stockholders' Agreement, dated as of February 27, 2004, among Vestar Capital Partners IV, L.P., Vestar Cup Investment, LLC, Vestar Cup Investment II, LLC, SCC Holding Company LLC, Solo Cup Company, Solo Cup Investment Corporation and the parties identified on the signature pages thereto as Management Investors (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed by Solo Cup Company on November 9, 2010)
 
 
†10.19
Transition Agreement, dated December 14, 2006, among Vestar Capital Partners IV, L.P., Vestar Cup Investment, LLC, Vestar Cup Investment II, LLC, SCC Holding Company LLC, Solo Cup Investment Corporation and Solo Cup Company (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by Solo Cup Company on December 15, 2006)
 
 
†10.20
Form of Joinder to Stockholders' Agreement (incorporated by reference to Exhibit 10.19 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†10.21
Registration Rights Agreement, dated as of February 27, 2004, between Solo Cup Investment Corporation, SCC Holding Company LLC, Vestar Capital Partners IV, L.P., Vestar Cup Investment, LLC, and Vestar Cup Investment II, LLC (Robert M. Korzenski became a party to the Stockholders' Agreement effective April 14, 2004 and Jan Stern Reed effective November 30, 2004, by executing a joinder agreement in the form of Exhibit 10.21to the Form S-4 filed by Solo Cup Company on June 24, 2004) (incorporated by reference to Exhibit 10.20 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†10.22
Form of Joinder to Registration Rights Agreement (incorporated by reference to Exhibit 10.21 to the Form S-4 filed by Solo Cup Company on June 24, 2004)
 
 
†10.23
Lease Agreement between iSTAR SCC Distribution Centers LLC, as Landlord and Solo Cup Operating Corporation and SF Holdings Group, Inc. and Solo Cup Company, jointly and severally as Tenant, dated as of June 27, 2007 (incorporated by reference to Exhibit 10.31 to the Form S-4 filed by Solo Cup Company on December 4, 2009)
 
 
†10.24
Loan Agreement, dated as of July 2, 2009, among Solo Cup Company, Solo Cup Operating Corporation, certain subsidiaries of Solo Cup Company from time to time party thereto as guarantors, the financial institutions from time to time party thereto as lenders, Bank of America, N.A., as a co-collateral agent and as administrative agent for the lenders, and General Electric Capital Corporation, as a co-collateral agent for the lenders (incorporated by reference to Exhibit 10.37 to the Form 8-K filed on July 9, 2009)
 
 
†10.25
Guaranty Supplement dated December 17, 2010 of Solo Cup Finance Limited (incorporated by reference to Exhibit 10.28 to the Form 10-K filed by Solo Cup Company on March 17, 2011)
 
 
†10.26
Security Agreement dated July 2, 2009 made by Solo Cup Company, Solo Cup Operating Corporation and the other subsidiaries of Solo Cup Company listed on the signature pages thereof to Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.38 to the Form 8-K filed by Solo Cup Company on July 9, 2009)


97

Exhibit Number
Exhibit Description
†10.27
ABL Debenture dated July 2, 2009 between Bank of America, N.A., as agent, and Solo Cup (UK) Limited, Insulpak Holdings Limited and Solo Cup Europe Limited (incorporated by reference to Exhibit 10.39 to the Form 8-K filed by Solo Cup Company on July 9, 2009)
 
 
†10.30
Amended and Restated Credit Agreement dated as of December 15, 2010 by and among Solo Cup Canada Inc., as the Borrower, the other persons party thereto that are designated as Credit Parties, GE Canada Finance Holding Company, for itself, as a Lender and as Agent for all Lenders, and the other financial institutions party thereto, as Lenders (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by Solo Cup Company on December 20, 2010)
 
 
†10.31
Amended and Restated Guarantee and Security Agreement dated as of December 15, 2010 by Solo Cup Canada Inc., as the Borrower, in favor of GE Canada Finance Holding Company, as Agent (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by Solo Cup Company on December 20, 2010)
 
 
21
List of Subsidiaries of Solo Cup Company, a Delaware corporation
 
 
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2
Certification of Principal Financial and Accounting 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 and Accounting Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101.INS &
XBRL Instance Document.
 
 
101.SCH &
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL &
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF &
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB &
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE &
XBRL Taxonomy Extension Presentation Linkbase Document.

† Previously filed

* Indicates a management contract or a compensatory plan or agreement.

 & XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.


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