Solo Cup CO
•   difficulties and unanticipated expenses related to completing the integration of information systems and internal controls, technologies, books and records, uniform standards, environmental management systems, and other controls, procedures and policies;        •   the ability to utilize anticipated resources for integration and implementation activities over the next three years to achieve the anticipated cost savings;        •   increases in other expenses, operating losses or problems unrelated to the acquisition may offset the cost savings and other synergies from the acquisition; and        •   our ability to avoid labor disruptions in connection with the realignment or closure of facilities.    9    Our significant debt could adversely affect our financial health.  We have a significant amount of debt. As of January 1, 2006, we had total debt of $1,043.3 million, of which $325.0 million consisted of our 8.5% Senior Subordinated notes and $710.3 million consisted of borrowings under our credit facilities.  Our high level of debt could have important consequences to our note holders, including the following:        •   requiring that we use a large portion of our cash flow to pay principal and interest on the notes, the credit facilities and our other debt, which will 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 with respect to the 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 funds, dispose of assets or pay cash dividends.  In addition, a substantial portion of our debt bears interest at variable rates. If market interest rates increase, debt service on our variable-rate debt will rise, which would adversely affect our cash flow. Although our credit facilities require us to employ hedging strategies such that not less than 50% of our total debt carries a fixed rate of interest for a period of three years following the consummation of the transactions (through February 2007), any hedging agreements put in place may not offer complete protection from this risk. Additionally, the remaining portion of the credit facilities is not hedged and, therefore, is subject to changes in interest rates.  We also may incur substantial additional debt in the future. Although the indenture governing the notes and the terms of our credit facilities contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions, and debt incurred in compliance with these restrictions could be substantial. In addition, we may refinance all or a portion of our debt, including borrowings under our credit facilities, and incur more debt as a result. As of January 1, 2006, our credit facilities permitted additional borrowing of up to $83.7 million (after giving effect to outstanding letters of credit). In March 2006, the Company received a commitment to enter into a senior secured second lien term loan facility of $80.0 million. If we incur new debt, the significant risks described above would intensify.  If we do not adequately manage, integrate and implement our order management and enterprise resource planning systems, our ability to manage and grow our business could be adversely affected.  We will need to continue to improve existing and implement new operational and financial systems, procedures and controls to manage our business effectively in the future. As a result, we have recently licensed enterprise resource planning software and have begun a process to expand and upgrade our enterprise resource planning systems. Any delay in the implementation of, or disruption in the transition to our new or enhanced systems, procedures or controls, could harm our ability to accurately forecast sales demand, manage our supply chain, achieve accuracy in the conversion of electronic data and records, and report financial and management information on a timely and accurate basis. In addition, as we add additional functionality, new problems could arise that we have not foreseen. Such problems could adversely impact our ability to timely provide quotes, fulfill customer orders, ship products, implement pricing programs, bill and track our customers, fulfill contractual obligations, and otherwise run our business. Failure to properly or adequately address these issues could result in the diversion of management’s attention and resources, impact our ability to manage our business, and have a material adverse effect on our business, results of operations or cash flows.    10    Further consolidation in the foodservice and retail industries may adversely affect our profitability.  Broadline distributors, mass merchandisers, warehouse clubs and many of our other customers have consolidated. If, as we expect, this trend continues, our customers will likely seek more favorable terms, including pricing, for their purchases of our products, which will limit our ability to raise prices. Sales on terms less favorable to us than our current terms will have an adverse effect on our profitability.  We could be adversely affected by raw material availability and pricing.  Our principal raw materials include resins and paperboard. Periods of short supply for these raw materials may occur. In addition, prices for our raw materials fluctuate. For example, the weighted average market index price, as disclosed by Chemical Data, Inc. (“CDI”), for the primary resins we use in our products increased by 15.3% in 2005. When raw material prices decrease, our selling prices have historically decreased. When raw material prices increase, our selling prices have historically also increased, although often with a time lag. The impact of raw material price changes is affected by a number of factors, including the level of inventories at the time of price changes, the specific timing and frequency of price changes and the lead and lag time that generally accompanies 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, our profitability may be adversely affected, which could have a material adverse effect on our business, financial condition or results of operations. In the event raw material prices increase over a period of several months, profit margins may be reduced. We have not historically employed hedging strategies to limit our exposure to fluctuations in raw material prices on any meaningful level. To the extent that our supply of raw materials becomes restricted and we cannot locate or substitute adequate alternative sources, our profitability also may be adversely affected. We cannot predict whether our customer preferences for the materials used in our products will change over time or what raw materials will be used in the future.  We are subject to extensive environmental regulation and significant potential environmental liabilities.  Our operations are subject to comprehensive and frequently changing federal, state, foreign and local environmental and occupational health and safety laws and regulations, including laws and regulations governing emissions of air pollutants, discharges of waste and storm water, the management of hazardous substances and the disposal of hazardous waste. 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 that we formerly owned or operated and at other properties where we or our predecessors have 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 and remedial efforts relating to environmental matters could entail material costs or otherwise result in material liabilities. Any amount of future clean up costs and other environmental liabilities could also be material. We need to conduct our operations in compliance with the environmental permits granted by federal, state and local 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 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.    11    Our international operations expose us to risks related to conducting business in multiple jurisdictions outside the United States.  The Company’s international operations consist of operating subsidiaries in five countries as well as international export sales originating both in the U.S and our international subsidiaries. The international scope of our operations may lead to volatile financial results and difficulties in managing our business. The Company generated 14.0% of its net sales outside the United States for the year ended January 1, 2006. We anticipate that international sales may grow as a percentage of net sales. We have committed resources to expanding our international operations and sales channels and these efforts may not be successful. International sales and operations are subject to a number of risks, including the following:        •   exchange rate fluctuations and limitations on convertibility;        •   social and political turmoil, official 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;        •   the need to comply 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 currency exchange rate fluctuations results primarily from the 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 subsidiaries outside the United States 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 subsidiaries outside the United States 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 or results of operations could be materially and adversely affected.  If we are unable to improve existing products and develop new products, our sales and industry position may suffer.  We believe that our future success will depend, in part, on our ability to continue making innovations to our existing products and to develop, manufacture and market new products. This will depend, in part, on the success of our research and development and engineering efforts, our ability to expand or modify our manufacturing capacity and the extent to which we 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 could be adversely affected. This, in turn, could materially adversely affect our business, financial condition or results of operations.  The loss of the services of our key management and personnel could adversely affect our business.  We believe that our ability to successfully implement our business strategy and to operate profitably depends on the continued employment of some members of our senior management team. If these members of the management team become unable or unwilling to continue in their present positions, our business, financial condition or results of operations could be materially adversely affected. In addition, our continued growth depends on our ability to attract and retain experienced key employees.    12    We are controlled by the stockholders of Solo Cup Investment Corporation, the interests of which may conflict with the interests of our note holders.  All of our outstanding capital stock is owned by our parent company, Solo Cup Investment Corporation (“SCIC”). Holders of SCC Holding Company LLC’s voting interests control 100% of the outstanding common stock of SCIC, and affiliates of Vestar Capital Partners (“Vestar”) holds 99.6% of the outstanding convertible participating preferred stock (“CPPS”) of SCIC, with the remaining balance of the CPPS held by members of our management.   The CPPS is currently convertible at any time, at the option of the holders, into 32.7% of the common stock of SCIC. The CPPS is entitled to vote on all matters, voting together with the holders of common stock as a single class. Holders of a majority of the outstanding shares of CPPS, voting as a separate class, are entitled to elect two individuals to the board of directors of SCIC and the Company. Upon the occurrence of certain specified events, holders of the securities subject to redemption would be entitled to elect persons constituting a majority of the board of directors of SCIC. These events consist of the following:        •   specified events of default;        •   if SCIC substantially underperforms based on financial covenants, including minimum EBITDA targets and maximum leverage ratios, or        •   if SCIC fails to redeem the CPPS or other equity securities issued pursuant thereto held by Vestar and certain transferees on or prior to the seventh anniversary of the issue date of the CPPS.  If Vestar acquires control of SCIC, the indenture provision regarding a change of control would not be triggered; therefore, the Company would not be obligated to offer to repurchase the notes under those circumstances.  The interests of SCC Holding Company LLC and the holders of SCIC’s CPPS, including Vestar, could conflict with the interests of our note holders. 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 note holder. SCIC’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 the notes. In addition, SCC Holding Company LLC or its affiliates and Vestar or its affiliates may in the future own businesses that directly compete with ours. While we are subject to certain provisions of the Sarbanes-Oxley Act of 2002, 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 or results of operations.  We have a number of large customers that account for a significant portion of our net sales. For the 2005 fiscal year, our five largest customers represented approximately 14.7% of net sales, with no one customer accounting for more than 5.5% of net sales. The loss of one or more of our large customers could have a material adverse effect on our business, financial condition or results of operations. In line with industry practice, we generally do not enter into long-term sales agreements with customers.  Prolonged work stoppages at plants with union employees could adversely affect our results and jeopardize our business and financial position.  As of January 1, 2006, approximately 13% of our employees were covered by one or more collective bargaining agreements. This percentage may increase in the future. These collective bargaining agreements have staggered expirations over the next three years. Although we consider our employee relations to be generally good, a prolonged work stoppage or strike at any facility with union employees could have a material adverse effect on our business, financial condition or results of operations. In addition, upon the expiration of existing collective bargaining agreements, new agreements may not be reached without union action and any new agreements may not be on terms satisfactory to us.    13    We may make other acquisitions and consequently face integration, management diversion and other risks.  We may pursue additional acquisitions in the future. Any future acquisitions could be of significant size and may involve either domestic or international parties. To acquire and integrate a separate organization would divert management attention from other business activities. This diversion, together with other difficulties we may encounter in integrating an acquired business, could have a material adverse effect on our business, financial condition or results of operations. Moreover, we may not realize any of the anticipated benefits of an acquisition and integration costs may exceed anticipated amounts. In connection with future acquisitions, we may also assume the liabilities of the businesses we acquire. These liabilities could materially and adversely affect our business and financial condition.  We may not be able to adequately protect our intellectual property and other proprietary rights.  We rely on a combination of contractual provisions, confidentiality procedures and agreements, and patent, trademark, copyright, unfair competition, trade secrecy and other intellectual property 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 or results of operations. Furthermore, we cannot assure you that any pending patent application or trademark application held 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 that our products infringe their intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, or 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 or results of operations. Any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property and proprietary rights, could subject us to significant liabilities, require us to seek licenses on unfavorable terms, prevent us from manufacturing or selling products and require us to redesign or, in the case of trademark claims, rename our products, any of which could have a material adverse effect on our business, financial condition or results of operations.    14
Facilities   Location    Function    Owned/Leased    Size (Approximate Square Footage)  California   El Cajon (2 facilities)   Manufacture   Leased   183,700     Rialto   Distribution Center   Leased   870,000  Georgia   Augusta   Manufacture   Owned   369,000     Conyers (2 facilities)   Manufacture/ Distribution Center   Owned / Leased   906,000     Jonesboro   Distribution Center   Leased   305,000  Idaho   Twin Falls   Manufacture   Owned   130,000  Illinois   Chicago   Manufacture   Owned   869,000     Highland Park   Executive Office/ Manufacture   Owned   317,000     University Park   Distribution Center   Leased   1,508,000     Urbana   Manufacture   Owned   313,000     Wheeling   Manufacture   Owned   333,000  Indiana   Indianapolis   Distribution Center   Leased   735,000  Maryland   Aberdeen   Distribution Center   Leased   205,030     Federalsburg   Manufacture   Owned   450,000     Hampstead   Distribution Center   Leased   1,034,000     Havre de Grace   Distribution Center   Owned   502,000     Owings Mills (2 facilities)   Manufacture/Distribution Center   Owned / Owned   1,753,000  Massachusetts   Leominster   Manufacture   Owned   144,000     North Andover   Manufacture   Leased   249,000  Missouri   Springfield   Manufacture   Owned   942,000  Nevada   North Las Vegas   Manufacture   Leased   195,000  New Mexico   Belen   Manufacture   Owned   175,000  Oklahoma   Ada   Manufacture   Owned   267,000  Texas   Dallas   Manufacture/ Distribution Center   Owned   1,304,000     Dallas (2 facilities)   Distribution Center   Leased   455,000  Wisconsin   Appleton   Manufacture   Owned   271,000     Appleton (2 facilities)   Distribution Center   Leased   118,000     Oshkosh   Manufacture/Distribution Center   Owned   486,000    15                 Facilities   Location    Function    Owned/Leased    Size (Approximate Square Footage)  Non–U.S.   Mississauga, Ontario, Canada   Distribution Center/Office   Leased   262,000     Toronto, Ontario, Canada   Manufacture/Distribution Center   Owned   400,000     Japan—Fuji   Manufacture   Owned   51,000      Japan—Jirocho (2 facilities)   Manufacture/Distribution Center   Leased   124,000     Japan—Kumamoto   Manufacture   Owned   141,000     Japan—Kumamoto   Distribution Center   Leased   38,000     Japan—Shiga   Manufacture   Owned   93,000     Japan—Shiga   Distribution Center   Leased   5,000     Cuautitlan, Mexico (4 facilities)   Manufacture/Distribution Center   2 Owned/2 Leased   105,500     Panama (3 facilities)   Manufacture / Distribution   2 Owned/1 Leased   182,500     United Kingdom (4 facilities)   Manufacture/Distribution Center   Leased (1)   287,000    (1) At one of these facilities we own a building on leased land.  We also utilize a small number of third party warehouses on a pay for use basis.   Item 3. Legal Proceedings.  We are involved in various claims and legal actions arising from time to time in the ordinary course of business. While we cannot predict the outcome of these claims and actions with certainty, management believes that we are not party to any pending legal proceedings, the ultimate disposition of which would have a material adverse effect on the Company’s business, consolidated financial position, results of operations, or liquidity.   Item 4. Submission of Matters to a Vote of Security Holders.  None.    16     Part II   Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.  There is no public trading market for our common stock. SCIC, the Company’s parent company, is the owner of record of all of our common stock. We do not have any equity compensation plans under which our securities may be issued. See Note 15 to the Company’s consolidated financial statements in Item 8 of this Form 10-K for information regarding SCIC’s equity compensation plan.  Since our formation in January 2004, we have not paid dividends on our Solo Delaware common stock and we do not anticipate paying cash dividends in the foreseeable future. In addition, our bank credit facilities and the indenture governing our 8.5% Senior Subordinated Notes due 2014 restrict our ability to pay dividends on our common stock.    17
Year EndedJanuary 1,2006                 Year Ended December 31,           2004(1)     2003(4)     2002(4)     2001(4)    (In millions)                                 Statement of Operations Data:                             Net sales    $ 2,437.7     $ 2,116.4     $ 879.7     $ 836.6     $ 779.5     Cost of goods sold      2,110.6       1,813.2       768.7       710.5       652.7                                                Gross profit      327.1       303.2       111.0       126.1       126.8     Selling, general and administrative expenses      265.2       233.6       100.7       102.1       100.4     Contract dispute resolution      —         25.4       —         —         —       Other operating (income) expense, net      (5.7 )     (7.6 )     (1.6 )     (4.3 )     8.0                                                Operating income      67.6       51.8       11.9       28.3       18.4     Prepayment penalties      —         30.7       —         3.0       —       Loss on debt extinguishment      —         0.9       —         —         —       Interest expense, net      72.6       55.5       14.4       12.2       13.0     Other (income) expense      5.9       (2.7 )     (3.1 )     (4.6 )     (0.5 )   Income tax provision (benefit) (2)      (2.3 )     17.1       3.2       0.8       2.0     Minority interest      (0.4 )     0.2       0.1       (0.3 )     (0.2 )   Cumulative effect of changes in accounting principles (net of tax)      —         —         —         0.2       0.2                                                Net income (loss)    $ (8.2 )   $ (49.9 )   $ (2.7 )   $ 17.0     $ 3.9                                               Balance Sheet Data:                             Cash and cash equivalents    $ 12.1     $ 15.9     $ 3.3     $ 12.6     $ 2.4     Working capital      477.2       401.5       62.7       73.4       86.3     Property, plant and equipment, net      756.2       828.8       299.3       302.3       305.5     Total assets      1,857.8       1,903.8       629.6       623.3       609.7     Total debt, including current maturities      1,043.3       1,018.1       253.0       235.5       255.0     Total shareholders’ equity      411.3       427.2       250.7       258.5       252.1    Other Financial Data:                             Net cash provided by (used in) operating activities    $ 2.7     $ (23.8 )   $ 29.6     $ 71.3     $ 55.2     Net cash used in investing activities      (30.9 )     (906.6 )     (44.7 )     (29.6 )     (52.2 )   Net cash provided by (used in) financing activities      24.5       944.7       3.6       (31.6 )     (14.8 )   Capital expenditures      53.1       42.2       34.7       47.9       28.6     Depreciation and amortization      104.1       93.7       41.7       38.1       44.7     Interest expense, net      72.6       55.5       14.4       12.2       13.0     Cash dividends declared (3)      —         13.8       9.2       9.2       7.2      (1) Amounts for the year ended December 31, 2004 include the results of SF Holdings from February 22, 2004 to January 2, 2005.    (2) Solo Illinois was subject to taxation under subchapter S of the Internal Revenue Code in the United States. Effective January 1, 2004, Solo Illinois became subject to taxation under subchapter C of the Internal Revenue Code in the United States and, consequently, federal income tax liabilities of Solo Illinois that previously flowed through to the pre-acquisition shareholders are included as liabilities of Solo Illinois after December 31, 2003.    (3) The cash dividends declared in 2004 represent $13.8 million payable to shareholders of the Class A and Class B common stock of Solo Illinois, which was retired in February 2004.    (4) The financial information as of December 31, 2003 and for all prior periods present the financial position and results of operations of Solo Illinois, which are the same operations as those of the Company under a different capital structure.       18
Results of Operations for the 2005, 2004 and 2003 Fiscal Years                                                         Fiscal Year 2005 vs. 2004     Fiscal Year 2004 vs. 2003         Fiscal Year     Favorable / (Unfavorable)         2005     2004     2003     $     %     $     %     Net sales    $ 2,437,738     $ 2,116,437     $ 879,693     $ 321,301     15.2 %   $ 1,236,744     140.6 %   Cost of goods sold      2,110,646       1,813,260       768,666       (297,386 )   (16.4 )     (1,044,594 )   (135.9 )                                                          Gross profit      327,092       303,177       111,027       23,915     7.9       192,150     173.1              Selling, general and administrative expenses      265,165       233,617       100,701       (31,548 )   (13.5 )     (132,916 )   (132.0 )   Contract dispute resolution      —         25,389       —         25,389     *       (25,389 )   *     Gain on sale of property, plant and equipment      (5,683 )     (7,584 )     (1,616 )     (1,901 )   (25.1 )     5,968     369.3                                                            Operating income      67,610       51,755       11,942       15,855     30.6       39,813     333.4              Interest expense, net      72,550       55,490       14,419       (17,060 )   (30.7 )     (41,071 )   (284.8 )   Prepayment penalties      —         30,690       —         30,690     *       (30,690 )   *     Loss on debt extinguishment      —         916       —         916     *       (916 )   *     Foreign currency exchange (gain) loss, net      4,262       (3,224 )     (2,760 )     (7,486 )   (232.2 )     464     16.8     Other (income) expense, net      1,673       489       (309 )     (1,184 )   (242.1 )     (798 )   (258.3 )                                                          Income (loss) before income taxes and minority interest       (10,875 )     (32,606 )     592       21,731     66.6       (33,198 )   *              Income tax (benefit) provision      (2,287 )     17,112       3,175       19,399     113.4       (13,937 )   (439.0 )   Minority interest      (409 )     214       129       623     291.1       (85 )   (65.9 )                                                          Net loss    $ (8,179 )   $ (49,932 )   $ (2,712 )   $ 41,753     83.6 %   $ (47,220 )   *                                                             * Not meaningful  Fiscal Year 2005 Compared to Fiscal Year 2004  Amounts for Fiscal Year 2004 include the results of SF Holdings from February 22, 2004 to January 2, 2005. Therefore, our discussion of 2005 results compared to 2004 results are partially driven by the effect of including SF Holdings’ results for 12 months in 2005 versus 10 months in 2004.  Net sales  Net sales increased $321.3 million, or 15.2%, to $2,437.7 million for Fiscal Year 2005 compared to $2,116.4 million for Fiscal Year 2004. This includes an increase of $185.8 million representing two additional months of SF Holdings’ sales in 2005 versus 2004. The remaining increase in net sales of $135.5 million, or 6.4%, reflects a 6.0% increase in average realized sales price and a 0.4% increase in sales volume as compared to the prior year. The increase in average realized sales price reflects the impact of pricing increases implemented in response to higher raw material costs.  Gross profit  Gross profit increased $23.9 million, or 7.9%, to $327.1 million for Fiscal Year 2005 compared to $303.2 million for Fiscal Year 2004. This includes a $21.4 million increase resulting from the SF Holdings Acquisition. Excluding the effect of the SF Holdings Acquisition, gross profit increased $2.5 million. As a percentage of net sales, gross profit decreased 0.9% to 13.4% in 2005 versus 14.3% in 2004 impacted by our inability to pass through all raw material and transportation cost increases to our customers due to competitive pressure.    20    Selling, general and administrative expenses  Selling, general and administrative expenses increased $31.5 million, or 13.5%, to $265.2 million in Fiscal Year 2005 compared to $233.6 million in Fiscal Year 2004. This includes an increase of $15.6 million representing two additional months of SF Holdings’ expenses in 2005 versus 2004. Included in selling, general and administrative expenses are integration costs related to the SF Holdings Acquisition. Integration costs were approximately $25.2 million for Fiscal Year 2005 compared to $30.1 million for Fiscal Year 2004. Excluding the change in integration costs and the impact of SF Holdings described above, the increase in selling, general and administrative expenses of $20.8 million primarily reflects additional professional fees associated with our information technology efforts combined with increased marketing funds principally for our consumer-based customers.  Contract dispute resolution  In 2004, contract dispute resolution costs of $25.4 million represent the results of a settlement with our former logistics provider. This amount includes agreed-upon payments totaling $11.75 million, $4.4 million of receivables forgiven and $9.3 million of litigation-related expenses and contract execution costs.  Gain on sale of property, plant and equipment  Gain on sale of property, plant and equipment was $5.7 million in Fiscal Year 2005 compared to $7.6 million in Fiscal Year 2004. The current year includes a $6.8 million gain on the sale of land and buildings related to facilities previously closed as part of the consolidation of manufacturing, distribution and warehousing operations, while the prior year includes gains on the sale of undeveloped land located in Santa Paula, California and Ada, Oklahoma.  Interest expense, net  Interest expense, net increased $17.1 million, or 30.7%, to $72.6 million for Fiscal Year 2005 compared to $55.5 million for Fiscal Year 2004. This resulted from (i) two additional months of interest expense in 2005 associated with the debt issued in connection with the SF Holdings Acquisition, (ii) additional interest on the term loan under the Senior Credit Facility due to higher interest rates, partially offset by lower average outstanding balances, and (iii) additional interest on the revolving credit facility under the Senior Credit Facility due to higher interest rates and a higher average outstanding balance.  Prepayment penalties  Prepayment penalties were $30.7 million for Fiscal Year 2004. The prepayment fees resulted from the early extinguishment of the 7.08% senior notes due 2011 and the 3.67% Yen-denominated senior notes due 2008.  Loss on debt extinguishment  Loss on debt extinguishment was $0.9 million for Fiscal Year 2004. This loss was due to the write off of debt issuance costs resulting from the extinguishment of the 7.08% senior notes due 2011 and the 3.67% Yen-denominated senior notes due 2008.  Income tax provision  Income tax provision was a benefit of $2.3 million in Fiscal Year 2005 compared to a provision of $17.1 million in Fiscal Year 2004. This change was primarily due to the change in tax filing status of Solo Illinois, effective as of January 1, 2004, from a subchapter S corporation to a subchapter C corporation under the U.S. Internal Revenue Code. This change resulted in the recognition of $28.3 million in net deferred tax liabilities and related deferred income tax expense in Fiscal Year 2004. This expense was partially offset by an $11.4 million tax benefit of Fiscal Year 2004 operating losses.    21    Fiscal Year 2004 Compared to Fiscal Year 2003  Amounts for Fiscal Year 2004 include the results of SF Holdings from February 22, 2004 to January 2, 2005. Therefore, our discussion of 2004 results compared to 2003 results is primarily driven by the effect of including SF Holdings results from the acquisition date.  Net sales  Net sales increased $1,236.7 million, or 140.6%, to $2,116.4 million for Fiscal Year 2004 compared to $879.7 million for Fiscal Year 2003. Net sales increased $1,158.9 million due to increased sales volume as a direct result of the SF Holdings Acquisition. The remaining increase in net sales of $77.8 million, or 8.8%, reflected a 7.0% increase in average realized sales price and a 1.8% increase in sales volume as compared to Fiscal Year 2003. The increase in average realized sales price reflects a favorable shift in product mix combined with the impact of price increases implemented in response to higher raw material costs.  Gross profit  Gross profit increased $192.2 million, or 173.1%, to $303.2 million for Fiscal Year 2004 compared to $111.0 million for Fiscal Year 2003. As a percentage of net sales, gross profit increased 1.7% to 14.3% in Fiscal Year 2004 versus 12.6% in Fiscal Year 2003. Gross profit increased $171.1 million as a direct result of the SF Holdings Acquisition. The remaining increase in gross profit of $21.1 million was primarily the result of a shift to a more favorable product mix combined with higher average realized sales prices partially offset by higher raw material costs and increased transportation costs.  Selling, general and administrative expenses  Selling, general and administrative expenses increased $132.9 million, or 132.0%, to $233.6 million in Fiscal Year 2004 compared to $100.7 million in Fiscal Year 2003. This increase includes $89.9 million of expenses associated with the operations of SF Holdings. The remaining increase of $43.0 million resulted primarily from (i) $30.1 million of costs associated with the integration of support functions and systems of SF Holdings in connection with the acquisition, (ii) $8.7 million of costs associated with higher employee salaries, primarily related to the transfer of employees from the acquired companies to Solo Illinois, and higher health insurance costs, and (iii) $2.8 million of management fees to SCIC.  Contract dispute resolution  In Fiscal Year 2004, contract dispute resolution costs of $25.4 million represent the results of a settlement with our former logistics provider. This amount includes agreed-upon payments totaling $11.75 million, $4.4 million of receivables forgiven and $9.3 million of litigation-related expenses and contract execution costs.  Gain on sale of property, plant and equipment  Gain on sale of property, plant and equipment was $7.6 million in Fiscal Year 2004 compared to $1.6 million in Fiscal Year 2003. The increase was primarily due to the 2004 gain on sale of undeveloped land located in Santa Paula, California and Ada, Oklahoma.  Interest expense, net  Interest expense, net increased $41.1 million, or 284.8%, to $55.5 million for the year ended December 31, 2004 compared to $14.4 million for Fiscal Year 2003. This increase was primarily driven by higher debt balances in Fiscal Year 2004 used to fund the SF Holdings Acquisition. Total long-term debt increased $805.7 million to $1,014.5 million at December 31, 2004, compared to $208.8 million at December 31, 2003.  Prepayment penalties  Prepayment penalties were $30.7 million for Fiscal Year 2004. The prepayment fees resulted from the early extinguishment of the 7.08% senior notes due 2011 and the 3.67% Yen-denominated senior notes due 2008.  Loss on debt extinguishment  Loss on debt extinguishment was $0.9 million for Fiscal Year 2004. This loss was due to the write off of debt issuance costs resulting from the extinguishment of the 7.08% senior notes due 2011 and the 3.67% Yen-denominated senior notes due 2008.    22    Income tax provision  Income tax provision was $17.1 million in Fiscal Year 2004 compared to $3.2 million in Fiscal Year 2003. This increase was primarily due to the change in tax filing status of Solo Illinois from a subchapter S corporation to a subchapter C corporation under the Internal Revenue Code in the United States effective as of January 1, 2004. This change resulted in the recognition of $28.3 million in net deferred tax liabilities and related income tax expense in Fiscal Year 2004. This increase was partially offset by an $11.4 million tax benefit of Fiscal Year 2004 operating losses.  Liquidity and Capital Resources  Historically, we have relied on cash flows from operations and our revolving credit borrowings to finance our working capital requirements and capital expenditures. During the first half of 2005, because of escalating resin prices and increased sales and production going into the summer months, we relied significantly more on the revolving credit facilities. However, during the second half of 2005, the outstanding balance on our revolving credit facility under the Senior Credit Facility was decreased by $55.3 million as cash flows from operations improved from the end of the second quarter of 2005.  Operating Cash Flows  Net cash provided by operating activities during Fiscal Year 2005 was $2.7 million compared to net cash used in operating activities of $23.8 million during Fiscal Year 2004. The year over year change primarily resulted from a lower net loss in Fiscal Year 2005 of $8.2 million. We recognized a $49.9 million net loss in Fiscal Year 2004, which was driven by (i) $30.7 million of prepayment penalties for the extinguishment of debt in conjunction with the SF Holdings Acquisition, (ii) $25.4 million of expense for the resolution of a contract dispute, and (iii) $30.1 million of expense related to the integration of SF Holdings. Net cash provided by operating activities during Fiscal Year 2005 included agreed-upon payments of $11.75 million resulting from the February 2005 contract dispute settlement and related payments of approximately $3.5 million for attorney fees and contract execution costs.  Working capital increased $75.7 million to $477.2 million at January 1, 2006 from $401.5 million at December 31, 2004. Working capital increased as a result of increased inventory levels and increased accounts receivable, partially offset by a decrease in accrued expenses and other current liabilities. The activity in inventory and accounts payable was primarily driven by higher raw material costs combined with our planned inventory build designed to meet customer demand as we rationalized facilities. Accounts receivable activity was driven by higher net sales during the fourth quarter of 2005 compared to the fourth quarter of 2004. The decrease in accrued expenses and other current liabilities was primarily the effect of $14.1 million accrued as of December 31, 2004 for the contract dispute resolution with our former logistics provider, which was paid in 2005.  Investing Cash Flows  Net cash used in investing activities during Fiscal Year 2005 was $30.9 million compared to $906.6 million during Fiscal Year 2004. In Fiscal Year 2005, net cash used was primarily the result of $53.1 million of capital expenditures offset by proceeds received in conjunction with the sale of facilities closed through the integration process. In Fiscal Year 2004, net cash used included $872.1 million for the SF Holdings Acquisition.  Capital expenditures during Fiscal Year 2005 were $53.1 million compared to $42.2 million during Fiscal Year 2004. Capital expenditures during Fiscal Year 2005 included $20.1 million for new production equipment, $24.1 million for integration related projects, $1.9 million for routine capital improvements, $4.3 million for renovations and equipment conversions, $1.9 million for building and land improvements, and $0.8 million for various other projects. Capital expenditures were primarily funded by borrowings under our revolving credit facilities.    23    Financing Cash Flows  Net cash provided by financing activities during Fiscal Year 2005 was $24.5 million compared to $944.7 million during Fiscal Year 2004. In Fiscal Year 2005, net cash provided by financing activities was primarily from borrowings under our revolving credit facilities and was partially offset by repayments of our term loans. In Fiscal Year 2005, net borrowings under the domestic revolving credit facility increased $33.0 million. The increased funding was used to support working capital requirements resulting from increased sales in addition to increased inventory levels necessitated by our manufacturing facilities integration.  In Fiscal Year 2004, net cash provided by financing activities primarily came from borrowings used to finance the SF Holdings Acquisition, including the 8.5% senior subordinated notes and proceeds from the sale of common stock, and was partially offset by the extinguishment of pre-acquisition debt, payment of debt issuance costs and payment of dividends. On February 27, 2004, we extinguished $160.0 million of 7.08% senior notes due June 30, 2011 and $44.2 million of 3.67% Yen-denominated senior notes due July 16, 2008, resulting in prepayment penalties of $26.9 million and $3.8 million, respectively.  The following is a summary of long-term debt at January 1, 2006 and December 31, 2004 (in thousands):                    January 1, 2006     December 31, 2004   Senior Credit Facility – Term Loan    $ 638,625    $ 645,125   Senior Credit Facility – Revolver      61,700      28,700   8.5% Senior Subordinated Notes      325,000      325,000   Canadian Credit Facility – Term Loan      9,514      11,214   Canadian Credit Facility – Revolver      449      1,010   Capital lease obligations      2,447      3,476                   Total long-term debt      1,037,735      1,014,525   Less: current maturities of long-term debt      8,726      9,778                   Total long-term debt, less current maturities    $ 1,029,009    $ 1,004,747                  The following is a summary of our committed revolving credit facilities at January 1, 2006 (in thousands):                          Commitment Amount     Amounts Outstanding     Letters of Credit (1)     Unused Capacity(2)   Senior Credit Facility:                       Revolving facility    $ 150,000    $ 61,700    $ 16,155    $ 72,145   Canadian Credit Facility:                       Revolving facility      11,981      449      —        11,532                                    $ 161,981    $ 62,149    $ 16,155    $ 83,677                                  (1) Availability of the credit facilities is reduced by letters of credit issued under the facilities.      (2) As of March 28, 2006, the total unused capacity of our revolving credit facilities was $47.2 million.    24    Canadian Credit Facility  On September 24, 2004, Solo Cup Canada Inc. (formerly known as Lily Cups Inc.), a Canadian subsidiary of the Company, entered into a credit agreement (“Canadian Credit Facility”) which provides for a term loan and a revolving credit facility with a maximum credit borrowing of CAD $30.0 million (approximately US $23.8 million) subject to borrowing base limitations and satisfaction of other conditions of borrowing. The term borrowings have 11 mandatory quarterly repayments of CAD $0.482 million every January 1, April 1, July 1 and October 1 beginning January 1, 2005, with a final payment of CAD $8.2 million due September 24, 2007. Both the revolving credit and term loan borrowings have a final maturity date of September 24, 2007. The Canadian Credit Facility is secured by all existing and thereafter acquired real and personal tangible assets of Solo Cup Canada Inc. Borrowings under the revolving credit facility bear interest at the Canadian prime rate plus 0.50% or the Canadian bankers acceptance rate plus 1.75%, at our option. Term loan borrowings bear interest at the Canadian prime rate plus 0.75% or the Canadian bankers acceptance rate plus 2.00%, at our option. As of January 1, 2006, borrowings under the revolving credit facility and the term loan carried effective interest rates of 5.11% and 5.36%, respectively. As of January 1, 2006, CAD $13.4 million (approximately US $11.5 million) was available under the revolving facility and the term loan balance was CAD $11.1 million (approximately US $9.5 million).  Senior Credit Facility  On February 27, 2004, we entered into credit facilities comprised of a $150.0 million revolving credit facility maturing in 2010 and a $650.0 million term loan facility maturing in 2011 (“Senior Credit Facility”). The revolver is principally used for working capital purposes, and the term loan was used to finance the SF Holdings acquisition and related transactions.  On March 31, 2005, we entered into an agreement (“Amendment No. 1”) to amend the Senior Credit Facility. Amendment No. 1 changed the borrowing margin used to calculate interest on the term loans under the Senior Credit Facility. For purposes of calculating interest, term loans under the Senior Credit Facility are designated as Eurodollar rate loans or, in certain circumstances, base rate loans. Under the original agreement, Eurodollar rate loans bore interest at the British Bankers Association Interest Settlement Rate for deposits in dollars plus a borrowing margin. Base rate loans bore interest at (a) the greater of (i) the rate most recently announced by Bank of America as its “prime rate” or (ii) the Federal Funds Rate plus  1/2 of 1% per annum, plus (b) a borrowing margin. The margin for term loans was a range based on the Company’s leverage ratio. For Eurodollar rate loans, the range was 2.25% to 2.50%. For base rate loans, the range was 1.25% to 1.50%. The terms of Amendment No. 1 provided that the borrowing margin for term loans be 2.00% on Eurodollar rate loans and 1.00% on base rate loans.  On October 14, 2005, we entered into an agreement (“Amendment No. 2”) to amend the Senior Credit Facility, as amended by Amendment No. 1, dated as of March 31, 2005. Amendment No. 2 changed the borrowing margin used to calculate interest on the term loans under the Senior Credit Facility. Amendment No. 2 established two different levels for determining the applicable borrowing margin interest rate that the Company would pay on its term loan based upon the respective ratings the Company receives from Moody’s and Standard & Poor’s. Level 1 is 2.25% for Eurodollar rate loans and 1.25% for base rate loans, when Moody’s rating on the Company is at least B1 and Standard & Poor’s rating is at least B+. Level 2 is 2.50% for Eurodollar rate loans and 1.50% for base rate loans, when Moody’s rating on the Company is below B1 and Standard & Poor’s rating is below B+. If the Company only receives a change in rating from one agency or if the agencies’ ratings are split across pricing levels 1 and 2, then the Company will pay interest at level 2 pricing. Prior to Amendment No. 2, on October 6, 2005, Moody’s changed its rating on the Company from B1 to B2; therefore, the Company began paying level 2 pricing effective with Amendment No. 2.  As of January 1, 2006, the weighted average annual interest rate applicable to Eurodollar rate loans was 6.45% and the weighted average annual interest rate applicable to base rate loans was 9.00%. During the fiscal year ended January 1, 2006, the weighted average annual interest rate for the Senior Credit Facility was 6.57%.  Amendment No. 1 also changed the schedule for quarterly principal payments. The original agreement provided scheduled principal payments of $1.625 million per quarter through February 27, 2006, $6.25 million per quarter from May 27, 2006 through February 27, 2008, and $12.5 million per quarter from May 27, 2008 through November 27, 2010, with a balloon payment of $449.5 million due on February 27, 2011. The terms of Amendment No. 1 provide for scheduled principal payments of $1.625 million per quarter through November 27, 2010, with a balloon payment of $606.125 million due on February 27, 2011. All mandatory quarterly prepayments have been made to date.    25    Amendment No. 2 also revised the ratios of the financial covenants that the Company is required to maintain by allowing lower ratios of Consolidated EBITDA to Consolidated Cash Interest Expense in certain quarters, and by allowing higher ratios of Average Total Debt to Consolidated EBITDA in certain quarters (all as such capitalized terms are defined in the original Senior Credit Facility), in each case as set forth in the amendment filed as Exhibit 99.1 in Form 8-K, dated October 14, 2005. We are currently in compliance with all covenants under the Senior Credit Facility.  A commitment fee of 0.50% on the unused portion of the revolving credit facility is payable on a quarterly basis.  We may make optional prepayments to either the revolving credit facility or the term loan in million dollar increments with a minimum prepayment of $10.0 million.  We are required to make a mandatory annual prepayment of the term loan facility and the revolving credit facility in an amount equal to 50.0% of excess cash flow, as defined, when the consolidated leverage ratio, as defined, is 3.5x or greater, or 25.0% of excess cash flow when the Company’s consolidated leverage ratio is less than 3.5x. In addition, we are required to make a mandatory prepayment of the term loan facility and the revolving credit facility with, among other things: (i) 100.0% of the net cash proceeds of any property or asset sale, subject to certain exceptions and reinvestment requirements; (ii) 100.0% of the net cash proceeds of any extraordinary receipts, as defined, subject to certain exceptions and reinvestment requirements; (iii) 100.0% of the net cash proceeds of certain debt issuances, subject to certain exceptions; and (iv) 50.0% of the net cash proceeds from the issuance of additional equity interests when the consolidated leverage ratio is 3.5x or greater, or 25.0% of such proceeds when the consolidated leverage ratio is less than 3.5x. Mandatory prepayments will be applied first to the term loans on a pro rata basis, and thereafter to the revolving loans. For Fiscal Year 2005, we were not required to make a mandatory annual prepayment or any prepayments based on excess cash flow, dispositions of assets or extraordinary receipts.  Our obligations under the credit facilities are guaranteed by our parent, SCIC, and each existing direct and indirect subsidiary of SCIC other than the Company, subject to certain exceptions. In addition, each significant domestic subsidiary of the Company subsequently formed is required to guarantee those obligations.  The Senior Credit Facility is secured by:        (1) all present and future property and assets, real and personal, of the Company, its restricted subsidiaries, and each guarantor, subject to certain exceptions;        (2) a pledge of 100.0% of the stock of each of SCIC’s present and future direct and indirect domestic subsidiaries and a lien on 66.0% of the stock of each controlled foreign corporation subsidiary, as defined;        (3) all present and future intercompany debt of the Company, its restricted subsidiaries, and each guarantor; and        (4) all proceeds of the assets described in clauses (1), (2) and (3) above. Under the Senior Credit Facility, the Company is required to meet certain restrictive financial covenants, including a maximum consolidated leverage ratio, minimum consolidated interest coverage ratio and maximum capital expenditures. The Senior Credit Facility also contains other various covenants that limit, or restrict, the Company’s ability to, among other things:        •   incur additional indebtedness, including guarantees;        •   create, incur, assume or permit to exist liens on property and assets;        •   make loans and investments and enter into acquisitions and joint ventures;        •   engage in sales, transfers and other dispositions of the Company’s property or assets;        •   prepay, redeem or repurchase the Company’s debt, or amend or modify the terms of certain material debt or certain other agreements;        •   declare or pay dividends to, make distributions to, or make redemptions and repurchases from, equity holders; and        •   restrict the ability of the Company’s subsidiaries to pay dividends and make distributions.    26    The Senior Credit Facility requires us to fix the interest rate for a portion of the borrowings. Accordingly, on March 10, 2004, we entered into an interest rate swap agreement to hedge the cash flows associated with the interest payments on $180.0 million of the Eurodollar rate based borrowings at an average rate of 2.375% plus applicable margin through March 31, 2007. In June 2005, we entered into a forward-starting receive-variable, pay-fixed interest rate swap with a notional amount of $50.0 million. This swap agreement is effective March 31, 2007 through March 31, 2010. On March 31, 2005, we entered into an interest rate cap agreement with a total notional amount of $35.0 million. Under this interest rate cap agreement, we receive variable interest rate payments when the three-month Eurodollar rises above 5.0%. This interest rate cap agreement is in effect through March 31, 2006.  8.5% Senior Subordinated Notes  On February 27, 2004, we issued $325.0 million of 8.5% Senior Subordinated Notes due February 15, 2014 (the “Notes”), with interest paid semi-annually every February 15 and August 15. Under the indenture governing the Notes, subject to exceptions, we must meet a minimum fixed charge coverage ratio to incur additional indebtedness.  Prior to February 15, 2007, we may, on any one or more occasions, redeem up to 35% of the aggregate principal amount of the Notes issued under the indenture at a redemption price of 108.5% of the principal amount thereof, plus accrued and unpaid interest, from the net proceeds of one or more equity offerings. Otherwise, the Notes are not redeemable until February 15, 2009. Starting on February 15, 2009, we have the option to redeem all or a portion of the Notes at a redemption price equal to a percentage of the principal amount thereof plus accrued and unpaid interest. In the event of this kind of an optional redemption, the redemption price as a percentage of the principal amount would be:            Period    Redemption price     For the twelve-month period beginning February 15, 2009    104.250 %   For the twelve-month period beginning February 15, 2010    102.833 %   For the twelve-month period beginning February 15, 2011    101.417 %   February 16, 2012 and thereafter    100.000 %  The 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 Notes at a redemption price equal to 101.0% of the principal amount thereof plus accrued interest. The indenture governing the 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 indebtedness,        •   the issuance of disqualified stock,        •   certain transactions with affiliates,        •   the creation of additional liens, and        •   certain other business activities.  Short-term debt  At January 1, 2006, we had approximately 654 million yen (approximately US $5.5 million) of short-term borrowings with Japanese banks. These short-term borrowings have various termination dates and have no restrictive covenants. The interest rate on these borrowings ranges between 0.71% and 1.38% as of January 1, 2006.    27    Contractual obligations  The following summarizes our contractual obligations at January 1, 2006, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):                                       Payments due in fiscal       Total    2006    2007    2008    2009    2010    Thereafter   Long-term debt obligations    $ 1,035,288    $ 8,155    $ 14,808    $ 6,500    $ 6,500    $ 6,500    $ 992,825   Capital lease obligations (1)      2,447      571      542      471      398      317      148   Non-cancelable operating leases      301,574      31,302      26,114      22,167      20,626      18,663      182,702   Purchase obligations (2)      468,719      250,969      174,000      43,750      —        —        —                                                        Total    $ 1,808,028    $ 290,997    $ 215,464    $ 72,888    $ 27,524    $ 25,480    $ 1,175,675                                                       (1) We have capital leases of approximately 288.4 million yen (approximately $2.4 million) of which approximately 67.3 million yen (approximately $0.6 million) is classified as current.    (2) Purchase obligations for raw materials are commitments for projected needs to be utilized in the normal course of business. Arrangements are considered purchase obligations if a contract specified all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and appropriate timing of the transaction. Purchase orders made in the ordinary course of business are excluded from the above table.  Other Contingencies  The Company has entered into agreements with the State of Illinois (“State”) and the City of Chicago (“City”) relating to the acquisition and development of certain property of the Company located in the City. Pursuant to these agreements, the State and City provided certain grants to the Company, paid certain costs on behalf of the Company and undertook certain obligations relating to the property. Under these agreements, the Company is required to fulfill certain obligations relating to the property, which, if not fulfilled, could result in the Company being required to repay the amounts granted or paid by the City and the State.  Outlook  Management believes that cash generated by operations, amounts available under credit facilities and funds generated from asset sales should be sufficient to meet our expected operating needs, planned capital expenditures, payments in conjunction with our lease commitments and debt service requirements over the next twelve months. We expect that our 2006 capital expenditures will be approximately $50 to $55 million and contributions to our defined benefit plans will be approximately $14 million.  In March 2006, we received a commitment for a senior secured second lien term loan facility of $80.0 million (“Second Lien Facility”). Effective March 27, 2006, the Company and SCIC entered into Amendment No. 3 to the Senior Credit Facility (“Amendment No. 3”). Amendment No. 3 was necessary to permit the Company to enter into the Second Lien Facility. Amendment No. 3 also revised the ratios of the financial covenants that the Company is required to maintain by allowing lower ratios in certain quarters of Consolidated EBITDA to Consolidated Cash Interest Expense, and by allowing higher ratios in certain quarters of Average Total Debt to Consolidated EBITDA (all as such capitalized terms are defined in the original Senior Credit Facility). The continued effectiveness of Amendment No. 3 is contingent upon the Company executing the Second Lien Facility by April 15, 2006.  The Second Lien Facility loan proceeds will be used to reduce amounts outstanding under the domestic revolving credit facility under the Senior Credit Facility. As of March 28, 2006, the total unused capacity of our domestic revolving credit facility under the Senior Credit Facility was $40.4 million. Amounts available under the domestic revolving credit facility under the Senior Credit Facility will be used to fund increased working capital requirements caused primarily by significant increases in raw material prices and fuel prices. The Second Lien Facility will have a floating interest rate and the principal will be due upon maturity in 2012.  For 2006, we expect that raw materials and energy-related costs, particularly with respect to transportation and production costs, will likely continue to be a source of uncertainty for our industry.  Off-balance sheet arrangements  During September 2005, we entered into an agreement for the sale and leaseback of three properties, including one plant and two warehouses. One of the leases expired in December 2005 and the other two expire in December 2006. Net property, plant and equipment was reduced by the carrying values of the properties sold, which amounted to approximately $6.2 million. The net cash proceeds received from the sale were approximately $15.3 million; $6.8 million of this resulting gain was recognized in September 2005 and $2.3 million was recorded as a deferred credit. The remaining deferred credit as of January 1, 2006 of $1.8 million is included in other long-term liabilities and is being amortized to income as an offset to rent expense.    28    In addition, we have letters of credit that are obtained to ensure the performance and payment to third parties in accordance with specified terms and conditions. Under the Senior Credit Facility, we have the ability to issue up to $40.0 million in letters of credit, and all issued letters of credit are secured by the facility. As of January 1, 2006, approximately $16.2 million of standby letters of credit were outstanding under the facility. These standby letters of credit are used to support our workers’ compensation insurance programs. We are not required to provide cash collateral for letters of credit issued, but must adhere to the financial covenants set forth in the Senior Credit Facility indenture.  Net Operating Loss Carryforwards  As of January 1, 2006, we had approximately $238.1 million of U.S. federal tax net operating loss carryforwards that expire between 2016 and 2025. Approximately $103.5 million of such carryforwards are subject to the provisions of Internal Revenue Code Section 382. Although future earnings cannot be predicted with certainty, management currently believes that realization of the net deferred tax assets is more likely than not.  Critical Accounting Estimates  In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we must 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 Board of Directors and the Board of Directors has reviewed this disclosure.  The Company’s significant accounting policies are described in Note 2 to the consolidated financial statements in Item 8. 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: (i) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made and (ii) 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:  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 management to make judgments about the future financial condition of our customers.  Deterioration in the financial condition of any key customer or a significant slowdown 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 provides 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 determined that a smaller or larger balance of the allowance for uncollectible 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. Certain customer discounts and allowances are earned and payable to customers if a specified level of annual sales volume is met. We record such customer discounts and allowances based on the estimated and probable sales volume for the annual period. The amounts are recorded as a reduction of net sales based on the actual customers’ sales volume during the period. If actual annual sales volume differs from management estimates, gross margin and operating income could be affected.    29    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 reserves. We establish reserves for our inventory to reflect those conditions when the cost of the inventory is not expected to be recovered. We review such circumstances when products are not expected to be saleable based on criteria established by our quality assurance standards. The reserve for these products is equal to all or a portion of the cost of the inventory based on the specific facts and circumstances. We monitor inventory levels on a regular basis and record changes in inventory reserves as part of costs of goods sold.  Income taxes. We account for income taxes in accordance with the asset and liability method under Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for 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. We review our internal forecasted sales and pre-tax earnings estimates to make our assessment about the utilization of deferred tax assets. In the event we determine that our future taxable income will not be sufficient to utilize the deferred tax asset, a valuation allowance will be recorded. If that assessment changes, a charge or a benefit would be recorded in the statement of operations.  Impact of Recently Issued Accounting Standards  In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs-an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 amends Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We will adopt SFAS No. 151 at the beginning of our 2006 fiscal year. We do not expect the adoption of this statement to have a material effect on the Company’s consolidated financial position and results of operations.  In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes Accounting Principles Board Opinion 25 (“APB 25”). Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. For nonpublic companies, as defined, the effective date of SFAS 123R is the beginning of the first annual reporting period that begins after December 15, 2005, which is the first quarter 2006 for calendar year companies, although early adoption is allowed. We will adopt SFAS 123R in the first quarter of 2006 under the “prospective” method. Under the provisions of SFAS 123, we calculated our pro forma disclosure using the minimum value method, which excludes any effect of volatility on value; therefore, the prospective method of adopting SFAS 123R is required. Under the “prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted, modified, repurchased or cancelled after that date. As it relates to our existing stock options, we believe that the adoption of SFAS 123R will not have a material effect on our consolidated balance sheet, statement of operations or cash flows. See Note 15 to our consolidated financial statements for further information on stock-based compensation plans.    30
SOLO CUP COMPANY AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS  (In thousands, except share and per share amounts)                    January 1,2006     December 31,2004  Assets             Current assets:             Cash and cash equivalents    $ 12,087     $ 15,855   Cash in escrow      15,000       15,000   Accounts receivable:             Trade, less allowance for doubtful accounts of $7,081 and $6,295      252,046       222,546   Other      24,126       26,954   Inventories      380,720       352,377   Spare parts      36,712       31,556   Deferred income taxes      44,056       52,594   Prepaid expenses      11,577       12,222   Other current assets      5,875       3,433                    Total current assets      782,199       732,537       Property, plant and equipment, net      756,185       828,750   Spare parts      12,389       11,067   Goodwill      240,030       239,768   Intangible assets      28,065       37,512   Restricted cash      —         1,905   Deferred financing fees, net      26,790       29,619   Other assets      12,105       22,628                    Total assets    $ 1,857,763     $ 1,903,786                   Liabilities and Shareholder’s Equity             Current liabilities:             Accounts payable    $ 163,599     $ 150,483   Accrued payroll and related costs      54,371       68,391   Accrued customer allowances      29,289       30,868   Accrued expenses and other current liabilities      40,826       62,496   Short-term debt      5,546       3,603   Current maturities of long-term debt      8,726       9,778   Income taxes payable      2,667       5,419                    Total current liabilities      305,024       331,038       Long-term debt, less current maturities      1,029,009       1,004,747   Deferred income taxes      28,059       58,430   Pensions and other postretirement benefits      74,374       76,275   Other liabilities      10,008       5,073                    Total liabilities      1,446,474       1,475,563       Minority interest      —         1,073   Shareholder’s equity:             Common stock – Par value $0.01 per share; 1,000 shares authorized; 100 shares issued and outstanding at January 1, 2006 and December 31, 2004      —         —     Additional paid-in capital      258,049       259,080   Retained earnings      153,302       161,481   Accumulated other comprehensive income (loss)      (62 )     6,589                    Total shareholder’s equity      411,289       427,150                    Total liabilities and shareholder’s equity    $ 1,857,763     $ 1,903,786                   See accompanying notes to consolidated financial statements.    33    SOLO CUP COMPANY AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands)                          Year ended January 1, 2006     Years ended December 31,           2004     2003     Net sales    $ 2,437,738     $ 2,116,437     $ 879,693     Cost of goods sold      2,110,646       1,813,260       768,666                                Gross profit      327,092       303,177       111,027     Selling, general and administrative expenses      265,165       233,617       100,701     Contract dispute resolution      —         25,389       —       Gain on sale of property, plant and equipment      (5,683 )     (7,584 )     (1,616 )                              Operating income      67,610       51,755       11,942     Interest expense, net of interest income of $304, $247 and $2,040      72,550       55,490       14,419     Prepayment penalties      —         30,690       —       Loss on debt extinguishment      —         916       —       Foreign currency exchange (gain) loss, net      4,262       (3,224 )     (2,760 )   Other (income) expense, net      1,673       489       (309 )                              Income (loss) before income taxes and minority interest       (10,875 )     (32,606 )     592     Income tax (benefit) provision      (2,287 )     17,112       3,175     Minority interest      (409 )     214       129                                Net loss    $ (8,179 )   $ (49,932 )   $ (2,712 )                             See accompanying notes to consolidated financial statements.    34    SOLO CUP COMPANY AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY  (In thousands, except share amounts)                                               Common Stock    Class A Common Stock      Class B Common Stock      Additionalpaid-in capital      Retained earnings      Accumulatedothercomprehensive income (loss)      Totalshareholders’ equity        Shares   Amount   Shares     Amount     Shares     Amount             Balance at December 31, 2002   —     $ —     10,367,626     $ 103     57,474     $ 1     $ 24,965     $ 237,167     $ (3,765 )   $ 258,471                 Net loss   —       —     —         —       —         —         —         (2,712 )     —         (2,712 )   Dividends declared   —       —     —         —       —         —         —         (9,211 )     —         (9,211 )   Minimum pension liability, net of tax of $(31)   —       —     —         —       —         —         —         —         (96 )     (96 )   Foreign currency translation adjustment   —       —     —         —       —         —         —         —         4,210       4,210                                                                             Balance at December 31, 2003   —     $ —     10,367,626     $ 103     57,474     $ 1     $ 24,965     $ 225,244     $ 349     $ 250,662                 Net loss   —       —     —         —       —         —         —         (49,932 )     —         (49,932 )   Dividends declared   —       —     —         —       —         —         —         (13,831 )     —         (13,831 )   Retirement of common stock - Solo Illinois.   —       —     (10,367,626 )     (103 )   (57,474 )     (1 )     (24,965 )     —         —         (25,069 )   Issuance of common stock - Solo Delaware   100     —     —         —       —         —         254,696       —         —         254,696     Contributed capital from parent   —       —     —         —       —         —         4,121       —         —         4,121     Compensation expense on CPUs   —       —     —         —       —         —         263       —         —         263     Minimum pension liability, net of tax of $(2,182)   —       —     —         —       —         —         —         —         (3,843 )     (3,843 )   Unrealized investment gain, net of tax of $302   —       —     —         —       —         —         —         —         435       435     Unrealized gain on cash flow hedge, net of tax of $1,599   —       —     —         —       —         —         —         —         2,552       2,552     Foreign currency translation adjustment   —       —     —         —       —         —         —         —         7,096       7,096                                                                             Balance at December 31, 2004   100   $ —     —       $  —       —       $ —       $ 259,080     $ 161,481     $ 6,589     $ 427,150                 Net loss   —       —     —         —       —         —         —         (8,179 )     —         (8,179 )   Contributed capital from parent   —       —     —         —       —         —         100       —         —         100     Compensation expense on CPUs   —       —     —         —       —         —         136       —         —         136     Return of capital to parent   —       —     —         —       —         —         (1,267 )     —         —         (1,267 )   Minimum pension liability, net of tax of $(3,563)   —       —     —         —       —         —         —         —         (1,965 )     (1,965 )   Unrealized investment gain, net of tax of $167   —       —     —         —       —         —         —         —         243       243     Unrealized gain on cash flow hedge, net of tax of $682   —       —     —         —       —         —         —         —         1,089       1,089     Foreign currency translation adjustment   —       —     —         —       —         —         —         —         (6,018 )     (6,018 )                                                                           Balance at January 1, 2006   100   $ —     —       $  —       —       $ —       $ 258,049     $ 153,302     $ (62 )   $ 411,289                                                                            See accompanying notes to consolidated financial statements.    35    SOLO CUP COMPANY AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)                          Year endedJanuary 1, 2006     Years ended December 31,           2004     2003     CASH FLOWS FROM OPERATING ACTIVITIES                   Net loss    $ (8,179 )   $ (49,932 )   $ (2,712 )   Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                   Depreciation and amortization      104,091       93,697       41,734     Deferred finance fee amortization      4,548       3,538       —       Gain on sale of property, plant and equipment      (5,683 )     (7,584 )     (1,616 )   Asset impairment      1,867       —         —       Loss on debt extinguishment      —         916       —       Minority interest      (409 )     214       129     Deferred income taxes      (9,102 )     12,240       1,542     Foreign currency (gain) loss      4,262       (3,224 )     (2,760 )   Changes in operating assets and liabilities (net of business acquisitions):                   Accounts receivable, net      (30,296 )     (21,386 )     7,661     Inventories      (33,522 )     (35,756 )     2,749     Prepaid expenses and other current assets      (3,505 )     (4,011 )     3,632     Other assets      10,035       (7,392 )     —       Accounts payable      13,825       (36,060 )     (21,186 )   Accrued expenses and other current liabilities      (40,638 )     34,119       2,444     Other liabilities      (5,513 )     (1,580 )     (1,446 )   Other, net      930       (1,568 )     (558 )                              Net cash (used in) provided by operating activities      2,711       (23,769 )     29,613          CASH FLOWS FROM INVESTING ACTIVITIES                   Payment for business acquisitions, net of cash acquired      (368 )     (872,090 )     (5,039 )   Increase in cash in escrow      —         (4,997 )     (10,003 )   Purchase of property, plant and equipment      (53,140 )     (42,238 )     (34,671 )   Proceeds from sale of property, plant and equipment      22,630       12,754       5,049                                Net cash used in investing activities      (30,878 )     (906,571 )     (44,664 )        CASH FLOWS FROM FINANCING ACTIVITIES                   Net borrowings under revolving credit facilities      32,501       16,710       13,000     Net (repayments) borrowings under the Securitization Facility      —         (22,800 )     2,800     Borrowings under the term notes      —         661,214       —       Borrowings under the 8.5% Senior Subordinated Notes      —         325,000       —       Proceeds from sale of common stock      —         229,627       —       Contribution of capital from parent      100       838       —       Return of capital to parent      (1,267 )     —         —       Repayments of the Senior Notes      —         (160,000 )     —       Repayments of the 3.67% Yen-denominated Senior Notes      —         (44,828 )     —       Repayments of the interest rate swap      —         (1,656 )     —       Repayments of the term notes      (8,494 )     (4,875 )     —       Net borrowings (repayments) of other debt      1,844       (5,542 )     (2,786 )   Debt issuance costs      (1,715 )     (33,157 )     —       Decrease (increase) in restricted cash      1,905       234       (239 )   Dividends paid      (387 )     (16,097 )     (9,145 )                              Net cash provided by financing activities      24,487       944,668       3,630          Effect of exchange rate changes on cash      (88 )     (1,742 )     2,063                                NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS      (3,768 )     12,586       (9,358 )   CASH AND CASH EQUIVALENTS, beginning of year      15,855       3,269       12,627                                CASH AND CASH EQUIVALENTS, end of year    $ 12,087     $ 15,855     $ 3,269                                SUPPLEMENTAL CASH FLOW DISCLOSURES:                   Interest paid, net of amounts capitalized    $ 69,852     $ 38,717     $ 13,286     Income taxes paid      7,404       2,524       1,044    See accompanying notes to consolidated financial statements.    36    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (1) Nature, Formation and Organization of Business  Solo Cup Company (“Solo Delaware” or the “Company”) 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., a Delaware corporation, and its subsidiaries (“SF Holdings”), which includes Sweetheart Cup Company Inc. (“Sweetheart”). Solo Delaware is a holding company, the material assets of which are 100% of the capital stock of Solo Illinois and 100% of the capital stock of SF Holdings. Solo Delaware is a wholly owned subsidiary of Solo Cup Investment Corporation, a Delaware corporation (“SCIC”). SCC Holding Company LLC, a Delaware limited liability company (“SCC Holding”) and Vestar Capital Partners (“Vestar”) own 67.2% and 32.7% of SCIC, respectively. Company management holds the remaining 0.1% of SCIC.  Solo Cup Company traces its origins to a predecessor company, Solo Illinois, established in 1936. Sweetheart’s operating history dates from the founding of a predecessor company in 1911.  Effective February 22, 2004, Solo Illinois became a wholly owned subsidiary of Solo Delaware. The consolidated financial statements presented herein for 2003 present the results of operations and cash flows of Solo Illinois, which are the same operations as those of the Company under a different capital structure.  On February 27, 2004, with an effective date of February 22, 2004, the Company acquired 100.0% of the outstanding capital stock of SF Holdings (the “SF Holdings Acquisition”). For the year ended December 31, 2004, the consolidated financial position and results of operations for the Company include the accounts of SF Holdings from February 22, 2004.  Prior to these transactions, the Company had no operations other than in connection with its formation and the authorization of these transactions.  In June 2005, the Company’s Board of Directors approved a change in the Company’s fiscal year from the year ended December 31 to the 52- or 53-week period ending on the last Sunday in December except that Fiscal Year 2005 ended on January 1, 2006. All subsequent fiscal years will end on the last Sunday in December.  In September 2005, Sweetheart Cup Company Inc. changed its name to Solo Cup Operating Corporation. In October 2005, Solo Illinois merged with and into Solo Cup Operating Corporation (“SCOC”), and SCOC was the surviving corporation.  Solo Cup Company is a global producer and marketer of disposable foodservice products and has served the industry for almost 70 years. The Company manufactures a broad product line of cups, lids, food containers, plates, bowls, straws, cutlery, napkins and tablecovers in the industry, with a majority of its products available in plastic, paper and foam. The Company operates manufacturing facilities and distribution centers in North America, Japan, the United Kingdom and Panama, and sells its products worldwide.      (2) Summary of Significant Accounting Policies        (a) Principles of Consolidation  The consolidated financial statements include the accounts of Solo Cup Company and its subsidiaries. As of January 1, 2006, all of Solo Cup Company’s subsidiaries are wholly owned. 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 shareholders’ equity as a component of     37    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     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.  Certain prior year amounts have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on previously reported net income (loss).        (b) Cash and Cash Equivalents  Cash equivalents consist of highly liquid securities with original maturities of thirty days or less. The Company has entered into an agreement with and received grants from the State of Illinois relating to the development of certain properties and training personnel. The grants received are restricted from withdrawal or usage for any purpose other than that stated in the agreement. Restricted cash related to grants was $1.9 million at December 31, 2004.        (c) Accounts Receivable  Accounts receivable are stated net of allowances for doubtful accounts and discounts and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on a specific analysis of collectibility and historical write-off experience. Account balances are charged off against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote.        (d) Inventories  Inventories are stated at the lower of cost or market, using the first-in, first-out (FIFO) method.        (e) Vendor Incentives  Certain vendor incentives are earned only if a specified level of annual purchases is achieved. The Company records 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.        (f) Property, Plant and Equipment  Property, plant and equipment are stated at cost. Plant and equipment 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. The estimated useful life for building and improvements and machinery and equipment under capital leases is the lesser of the lease term or estimated asset useful life. Costs for repairs and maintenance are expensed as incurred. Gains and losses on the sales of property, plant and equipment are recorded as a component of operating income.  The Company capitalizes interest costs, when appropriate, as a component of construction in progress.    38    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (g) Spare Parts  The Company capitalizes spare parts purchases and expenses them as the parts are used. Prior to October 2, 2005, the Company expensed spare parts purchased for the Solo Illinois legacy plants. In the fourth quarter of 2005, the Company recognized a $5.8 million reduction to cost of goods sold as the result of capitalizing the inventory of spare parts on hand at the beginning of that period.        (h) 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, but instead are tested for impairment at least annually in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142. SFAS No. 142 also requires that intangible assets with limited lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company completed its annual impairment evaluation in the fourth quarter of 2005, 2004 and 2003, which indicated that goodwill and intangible assets were not impaired.        (i) Deferred Financing Fees  Deferred financing fees include costs incurred to obtain financing from lenders. Debt issuance costs are capitalized as deferred financing fees and amortized using the effective interest method over the term of the related debt. Amortization of deferred financing fees in 2005 and 2004 was $4.5 million and $3.5 million, respectively.        (j) Preproduction Design and Development Costs  Design and development costs for products to be sold under long-term supply arrangements are expensed as incurred, with the exception of costs for molds, dies, and other tools that the Company will own or have non-cancelable rights to use in producing the products under long-term supply arrangements. These costs are capitalized and depreciated as equipment.        (k) Impairment of Long-lived Assets  Long-lived assets, such as property, plant, and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to 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, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet or disclosed in the notes to the consolidated financial statements and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated (Note 3). The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the Consolidated Balance Sheets.        (l) Deferred Rent  Certain of the Company’s operating leases provide for scheduled changes in base rentals over their terms. For these leases, the Company recognizes the total rental amounts due over the lease terms on a straight-line basis and, accordingly, has established corresponding deferred rent liabilities for the differences between the amounts recognized as expense and the amounts     39    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     paid. As of January 1, 2006 and December 31, 2004, deferred rent of $4.9 million and $4.2 million, respectively, is included in other liabilities and other current liabilities, respectively, on the Company’s Consolidated Balance Sheets.        (m) Income Taxes  Prior to January 1, 2004, Solo Illinois’ U.S. earnings were subject to taxation under the provisions of Subchapter S of the Internal Revenue Code. Accordingly, the related Federal income taxes were the responsibility of Solo Illinois’ shareholders. However, Solo Illinois was responsible for payment of certain state and foreign income taxes. As of January 1, 2004, Solo Illinois elected to be treated as a Subchapter C corporation, which is subject to U.S. federal and state income taxes.  The Company accounts for income taxes in accordance with the asset and liability method under SFAS No. 109, “Accounting for 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 that includes the enactment date.        (n) Derivative Instruments and Hedging Activities  The Company records all derivative instruments on the consolidated balance sheet at their respective fair values.  The Company uses interest rate derivative contracts (swaps or caps) to manage exposure relating to variability in interest payments on its outstanding debt. At inception of the derivative contract, the Company designates the derivative as a cash flow hedge or a fair value hedge and assesses 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 the Consolidated Balance Sheets in other assets or other liabilities, as applicable, and are classified as short-term or long-term based on the scheduled maturity of the instrument.        (o) Financial Instruments  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 debt approximate their fair values at January 1, 2006 and December 31, 2004, due to their short-term maturities.  The fair value of the Company’s floating rate debt at January 1, 2006 and December 31, 2004 approximated its carrying value due to the Company’s ability to borrow at comparable rates in the open market. The Company’s fixed rate debt had a carrying value of $325.0 million and an estimated fair value of $284.4 million at the end of 2005. At the end of 2004, the Company’s fixed rate debt had a carrying value of $325.0 million and an estimated fair value of $334.8 million. The fair value of the fixed rate debt was determined based on estimates from financial institutions for instruments with similar characteristics.  See information regarding the fair value of derivative financial instruments at Note 10.    40    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (p) Revenue Recognition  The Company recognizes all of its revenue through the sale of manufactured products and records 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.  The Company records certain costs that relate to promotional programs and incentive cash rebates as a reduction of sales.        (q) Research and Development and Advertising Costs  Research and development and advertising costs are expensed as incurred. Research and development costs amounted to $0.7 million, $1.0 million and $1.2 million for the years ended January 1, 2006, December 31, 2004, and December 31, 2003, respectively. Advertising costs amounted to $4.1 million, $8.0 million and $1.4 million for the years ended January 1, 2006, December 31, 2004, and December 31, 2003, respectively.        (r) Use of Estimates  The preparation of the consolidated financial statements requires management of the Company 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 significant estimation include, but are not limited to, the following: the realizable value of accounts receivable, inventories, and deferred tax assets; the carrying value of property, plant, and equipment, goodwill, and intangible and other assets; the measurement of assets and obligations related to employee benefit plans; the determination of the fair value of derivative instruments and debt; and provisions for discounts and rebates provided to customers. Actual results may differ from those estimates.        (s) Stock-Based Compensation  The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Under APB No. 25, compensation expense is based on the difference, if any, on the measurement date, between the estimated fair value of the underlying stock and the exercise price of options to purchase that stock. The compensation expense is amortized on a straight-line basis over the vesting period of the options. For performance-based options, compensation expense is recognized periodically based on changes in the fair value of the stock relative to the exercise price of the option, the ratable vesting schedule, and management’s estimate regarding the Company’s ability to meet the performance criteria.  The following table illustrates the effect on net loss assuming the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to all awards of common stock options (in thousands):                     For the year endedJanuary 1, 2006     For the year endedDecember 31, 2004     Net loss, as reported    $ (8,179 )   $ (49,932 )   Add: Total stock-based employee compensation expense included in net loss, net of related tax effects      84       162     Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects      (1,970 )     (1,977 )                      Pro forma net loss    $ (10,065 )   $ (51,747 )                       41    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:                 Risk-free interest rate    3.8 %    Expected dividend yield      —     Stock volatility    —        Weighted-average fair value of options granted    $ 10.98   Expected life in years    7            In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes “APB 25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. For nonpublic companies, as defined, the effective date of SFAS 123R is the beginning of the first annual reporting period that begins after December 15, 2005, which is the first quarter 2006 for calendar year companies, although early adoption is allowed. The Company will adopt SFAS 123R in the first quarter of 2006 under the “prospective” method. Under the provisions of SFAS 123, the Company calculated its pro forma disclosure using the minimum value method, which excludes any effect of volatility on value; therefore, the prospective method of adopting SFAS 123R is required. Under the “prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted, modified, repurchased or cancelled after that date. See Note 15 for further information on stock-based compensation plans. As it relates to the Company’s existing stock options, management believes that the adoption of this statement will not have a material effect on the Company’s consolidated financial position and results of operations.        (t) Recently Issued Accounting Standards  In November 2004, the FASB issued SFAS No. 151, “Inventory Costs-an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 amends Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company will adopt SFAS No. 151 at the beginning of its 2006 fiscal year. Management does not expect the adoption of this statement to have a material effect on the Company’s consolidated financial position and results of operations.    42    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (3) Acquisitions  On February 27, 2004, with an effective date of February 22, 2004, the Company consummated the purchase of 100.0% of the issued and outstanding capital stock of SF Holdings (the “SF Holdings Acquisition”). SF Holdings and its subsidiaries are one of the largest converters and marketers of plastic and paper disposable foodservice and food packaging products in North America. The results of operations of SF Holdings from February 22, 2004 are included in the consolidated financial statements of the Company.  The aggregate purchase price was $917.2 million of which $15.0 million is being held in an escrow account pending the final working capital adjustment and resolution of claims for indemnification. The $15.0 million held in escrow is not included in the allocation of the cost of the assets acquired and liabilities assumed as it represents contingent consideration for which the contingency has not been resolved. The consideration was applied to the purchase of all common stock and common stock equivalents of SF Holdings, as well as the repayment of all outstanding debt of SF Holdings and the repurchase and cancellation of its preferred stock. In addition, the Company purchased from a lessor certain leased manufacturing equipment and other assets that SF Holdings uses in its operations for an aggregate purchase price of $209.1 million, plus $8.0 million of accrued rent on the leases and the payment of documentation expenses. These amounts are included in the $917.2 million of aggregate consideration paid.  The funding of the SF Holdings Acquisition was made through bank financing, bonds and private investment. The SF Holdings Acquisition resulted in goodwill of $144.6 million that is not tax deductible and $45.0 million of acquired intangible assets with a weighted average useful life of approximately five years. These intangible assets consisted of trademarks and trade names of $22.2 million with an estimated useful life of five years, Trophy® manufacturing technology valued at $21.1 million with an estimated useful life of five years, and $1.7 million of other intangible assets previously established by the acquired company with an estimated useful life of three years.  The following are the amounts assigned to the acquired assets and liabilities (in millions):             Purchase price    $ 917.2     Less cash in escrow      (15.0 )              Adjusted purchase price    $ 902.2                Cash    $ 30.4     Accounts receivable      131.2     Inventories      211.6     Other current assets      51.0     Property, plant and equipment      570.3     Intangible assets      45.0     Other long-term assets      18.6                Total assets    $ 1,058.1                Current liabilities    $ 204.5     Other long-term liabilities      96.0                Total liabilities    $ 300.5                Excess of purchase price over assets and liabilities acquired    $ 144.6               The finalization of the purchase price is primarily pending adjustments to working capital and resolution of claims for indemnification.    43    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    The following are the pro forma results assuming that the acquisition had occurred as of January 1, 2003 (in thousands):                    For the year endedDecember 31, 2004     For the year endedDecember 31, 2003   Net sales    $ 2,283,959     $ 2,188,830                    Net income (loss)    $ (8,673 )   $ 12,295                   In a subsequent transaction, on May 20, 2004, SF Holdings and Sweetheart purchased the remaining issued and outstanding 20.0% interest in Global Cup, S.A. de C.V. (“Global Cup”) for $2.9 million. The purchase resulted in $0.4 million of goodwill.  On July 6, 2004, the Company consummated the purchase of certain assets and liabilities of Erving Paper Products, Inc. (“Erving”) located in Green Bay, Wisconsin. Erving specializes in and provides foodservice distributors with high quality paper products, which include: placemats, banquet rolls, table covers, white and color napkins, seasonal designs and specialty prints. The aggregate purchase price of $2.6 million was paid in cash. The purchase resulted in $0.7 million of goodwill.  The pro forma effects of these two acquisitions are not significant.  Assets Held for Sale   In the fourth quarter of 2005, management committed to a plan to sell the property for a plant closed in connection with the integration of SF Holdings. The net book value of approximately $2.5 million is classified in other current assets in the Company’s Consolidated Balance Sheet as of January 1, 2006.   In the first half of 2005, management committed to a plan to sell the property for three plants closed in connection with the integration of SF Holdings. One of these three plants was sold and leased back in September 2005 (Note 9). In the fourth quarter of 2005, the Company recognized an impairment loss of $1.3 million to adjust the carrying value of one of these plants. Impairment losses on assets held for sale are included in other (income) expense, net in the Company’s Consolidated Statement of Operations. The remaining net book value of approximately $1.6 million is classified in other current assets in the Company’s Consolidated Balance Sheet as of January 1, 2006.  In the third quarter of 2004, management committed to a plan to sell the property for a plant closed in connection with the integration of SF Holdings. The net book value of approximately $1.9 million is classified in other current assets in the Company’s Consolidated Balance Sheets as of December 31, 2004. In the fourth quarter of 2005, the Company recognized an impairment loss of $0.5 million to adjust the carrying value of the property to $1.4 million representing its estimated fair value less cost to sell.    44    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (4) Inventories  Inventories at January 1, 2006 and December 31, 2004, consist of the following (in thousands):                   January 1,2006    December 31,2004   Finished goods    $ 276,456    $ 259,919   Work in process      15,490      13,569   Raw materials and supplies      88,774      78,889                   Total inventories    $ 380,720    $ 352,377                      (5) Property, Plant and Equipment  Property, plant and equipment at January 1, 2006 and December 31, 2004 consists of the following (in thousands):                      January 1, 2006     December 31,2004     Land    $ 49,306     $ 54,152     Buildings and improvements      296,903       319,531     Machinery and equipment      918,724       887,875     Construction in progress      20,810       21,394                        Total property, plant and equipment      1,285,743       1,282,952     Less - accumulated depreciation      (529,558 )     (454,202 )                      Property, plant and equipment, net    $ 756,185     $ 828,750                       Depreciation of property, plant and equipment for the years ended January 1, 2006, December 31, 2004, and December 31, 2003 was $94.8 million, $85.8 million, and $41.7 million, respectively. The Company capitalized approximately $1,059,000, $691,000, and $293,000 of interest related to construction in progress for the years ended January 1, 2006, December 31, 2004, and December 31, 2003, respectively.      (6) Goodwill and Intangible Assets  The changes in the carrying value of goodwill by business segment were as follows (in thousands):                             NorthAmerica     Europe     Asia-Pacific     Total     Balance at December 31, 2003    $ 56,298     $ 38,362     $ 216     $ 94,876     Acquisition of SF Holdings      141,992       —         —         141,992     Purchase of Global Cup minority interest      350       —         —         350     Translation adjustment      (255 )     2,795       10       2,550                                        Balance at December 31, 2004      198,385       41,157       226       239,768     SF Holdings Acquisition      2,599       —         —         2,599     Erving Paper Products acquisition      672       —         —         672     Translation adjustment      1,255       (4,235 )     (29 )     (3,009 )                                      Balance at January 1, 2006    $ 202,911     $ 36,922     $ 197     $ 240,030                                         45    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    The gross carrying amount of non-amortizable intangible assets in the Asia-Pacific business segment as of January 1, 2006 and December 31, 2004 was $0.1 million and $0.3 million, respectively. The following are the carrying values of amortizable intangible assets in the North America business segment (in thousands):                         January 1, 2006    December 31, 2004       Gross CarryingAmount    AccumulatedAmortization    Gross CarryingAmount    AccumulatedAmortization   Trademarks and trade names    $ 22,200    $ 8,155    $ 22,200    $ 3,700   Manufacturing technology      21,100      7,737      21,100      3,517   Patents, licenses and other      1,771      1,193      1,760      629                                    $ 45,071    $ 17,085    $ 45,060    $ 7,846                                Amortization expense related to amortizable intangible assets was $9.2 million during the year ended January 1, 2006 and $7.8 million for the year ended December 31, 2004. The estimated annual amortization expense of intangibles presently owned by the Company is approximately $9.0 million in 2006, $8.7 million in 2007, $8.7 million in 2008, $1.5 million in 2009, and zero in 2010.  Pension plan intangibles of $747,000 are included in other assets in the Consolidated Balance Sheet at December 31, 2004 (Note 11).      (7) Income Taxes  The Company’s deferred tax assets and liabilities as of January 1, 2006 and December 31, 2004 are as follows (in thousands):                      January 1, 2006      December 31, 2004     Deferred tax assets attributable to:              Net operating loss and other carryforwards    $ 97,193     $ 72,814     Pensions and other postretirement benefits      33,216       30,835     Inventory      17,383       10,116     Employee benefit accruals      11,362       15,600     Accounts receivable allowances      11,557       15,220     Contract dispute resolution      —         5,437     Sales reserves      1,324       2,629     Other accruals      12,158       7,173                        Gross deferred tax assets      184,193       159,824     Valuation allowance      (5,116 )     (8,570 )                      Net deferred tax assets      179,077       151,254         Deferred tax liabilities attributable to:              Property, plant and equipment      131,476       125,397     Intangible assets      27,328       26,727     Unrealized gains      4,276       4,966                        Gross deferred tax liabilities      163,080       157,090                        Net deferred tax assets (liabilities)    $ 15,997     $ (5,836 )                       46    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    As of January 1, 2004, Solo Illinois revoked its subchapter S status and became a subchapter C Corporation subject to United States federal and state income tax at the corporate level. Consequently, for the year-ended December 31, 2004, the Company, pursuant to generally accepted accounting principles in the United States, recorded a $28.3 million non-cash tax expense to establish a $28.3 million net deferred income tax liability for the future tax consequences attributable to differences between the financial statement and income tax bases of Solo Illinois’ assets and liabilities as of January 1, 2004. For the year-ended January 1, 2006, the Company recorded an additional $0.3 million in tax expense related to the above.  As of January 1, 2006, the Company had approximately $238.1 million of U.S. federal tax net operating loss carryforwards that expire between 2016 and 2025 of which $103.5 million of such carryforwards are subject to the provisions of Internal Revenue Code Section 382. Based on expected levels of future earnings, reversals of existing deferred tax liabilities and certain tax planning strategies, management currently believes that realization of the net deferred tax assets related to these federal net operating loss carryforwards is more likely than not.  The Company establishes 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. The Company had a valuation allowance of $5.1 million as of January 1, 2006 and $8.6 million as of December 31, 2004, as it is more likely than not that certain foreign and state net operating loss carryforwards and other deferred tax assets will not be fully utilized. For the year-ended January 1, 2006, the Company’s valuation allowance decreased by $3.3 million mainly due to a $6.5 million decrease in the valuation allowance established related to certain deferred tax assets in connection with the SF Holdings Acquisition and a $3.3 million increase related to the utilization of certain foreign net operating loss carryforwards.  Sources of income (loss) before income taxes and minority interest and the components of income tax expense (benefit) for the years ended January 1, 2006, December 31, 2004, and December 31, 2003 are as follows (in thousands):                         For the year endedJanuary 1, 2006     For the year endedDecember 31,           2004     2003     Income (loss) before income taxes and minority interest:                   Domestic    $ (23,800 )   $ (47,877 )   $ (8,414 )   Foreign      12,925       15,271       9,006                                Total    $ (10,875 )   $ (32,606 )   $ 592                                Income tax (benefit) expense:                   Current:                   Domestic    $ 461     $  —       $  —       Foreign      6,354       4,872       1,869                                Total current    $ 6,815     $ 4,872     $ 1,869          Deferred:                   Domestic    $ (8,836 )   $ 10,193     $  —       State      408       700       —       Foreign      (674 )     1,347       1,306                                Total deferred    $ (9,102 )   $ 12,240     $ 1,306                                Total income tax (benefit) expense    $ (2,287 )   $ 17,112     $ 3,175                                 47    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    Prior to January 1, 2004, Solo Illinois was subject to taxation under the provisions of subchapter S of the Internal Revenue Code in the United States and, as a result, the federal and certain state income tax liabilities of the Company were the responsibility of its shareholders. Therefore, income tax expense recognized in the consolidated financial statements for the year ended December 31, 2003 relates primarily to foreign operations.  The American Jobs Creation Act of 2004 (the “Act”) was enacted in October of 2004. The Act provided for a temporary incentive for U.S. multinational corporations to repatriate accumulated income earned abroad by providing an 85% exclusion from taxable income for certain dividends from controlled foreign corporations. During 2005, as a result of this special temporary tax incentive, the Company distributed $8.2 million from its wholly owned subsidiary, Solo Cup Asia Pacific, and $2.9 million from its wholly owned subsidiary, Solo Cup Panama, S.A. For the year ended January 1, 2006, income tax expense reflects a $0.7 million expense related to the repatriation of earnings under the provisions of the Act.  It is still the Company’s intention to permanently reinvest undistributed earnings in its foreign subsidiaries; therefore, no provision has been made for future income taxes on the undistributed earnings of certain foreign subsidiaries, as they are considered indefinitely reinvested in these operations. As of January 1, 2006, such aggregated earnings were $34.6 million.  The following reconciles the expected federal statutory income tax expense (benefit) based on income (loss) before income taxes and minority interest with the Company’s actual tax expense (benefit) (in thousands):                          For the year endedJanuary 1, 2006     For the year endedDecember 31,           2004     2003     Income tax expense (benefit) at U.S. statutory rate    $ (3,806 )   $ (11,412 )   $ 208     Effect of change to C-Corporation      306       28,329       —       Effect of U.S. S-Corporation election      —         —         2,945     Foreign rate differential      (568 )     1,654       333     State taxes, net of federal benefit      265       (1,455 )     —       Change in valuation allowance      3,293       (393 )     (311 )   Foreign tax benefit of non-U.S. liquidation      (2,345 )     —         —       Foreign dividend repatriation      710       —         —       Other      (142 )     389       —                                  Income tax expense (benefit)    $ (2,287 )   $ 17,112     $ 3,175                                 48    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (8) Debt  Short-term debt consisted of 654 million yen ($5.5 million) and 370 million yen ($3.6 million) of short-term (90 day) borrowings with Japanese banks under uncommitted facilities at January 1, 2006 and December 31, 2004, respectively. These short-term borrowings have various termination dates and have no restrictive covenants. The interest rate on these borrowings ranges between 0.71% and 1.38% as of January 1, 2006.  A summary of long-term debt at January 1, 2006 and December 31, 2004 is as follows (in thousands):                   January 1,2006    December 31,2004   Senior Credit Facility - Term Loan    $ 638,625    $ 645,125   Senior Credit Facility - Revolver      61,700      28,700   8.5% Senior Subordinated Notes      325,000      325,000   Canadian Credit Facility - Term Loan      9,514      11,214   Canadian Credit Facility - Revolver      449      1,010   Capital lease obligations (Note 9)      2,447      3,476                   Total debt      1,037,735      1,014,525   Less – current maturities of long-term debt      8,726      9,778                   Total long-term debt    $ 1,029,009    $ 1,004,747                  Scheduled maturities of long-term debt at January 1, 2006, excluding capital lease obligations, are as follows (in thousands):            2006    $ 8,155   2007      14,808   2008      6,500   2009      6,500   2010      6,500   Thereafter      992,825               $ 1,035,288           Canadian Credit Facility  On September 24, 2004, Solo Cup Canada Inc. (formerly known as Lily Cups Inc.), a Canadian subsidiary of the Company, entered into a credit agreement (“Canadian Credit Facility”) which provides for a term loan and a revolving credit facility with a maximum credit borrowing of CAD $30.0 million (approximately US $23.8 million) subject to borrowing base limitations and satisfaction of other conditions of borrowing. The term borrowings have 11 mandatory quarterly repayments of CAD $0.482 million every January 1, April 1, July 1 and October 1 beginning January 1, 2005, with a final payment of CAD $8.2 million due September 24, 2007. Both the revolving credit and term loan borrowings have a final maturity date of September 24, 2007. The Canadian Credit Facility is secured by all existing and thereafter acquired real and personal tangible assets of Lily Cups Inc. Borrowings under the revolving credit facility bear interest at the Canadian prime rate plus 0.50% or the Canadian bankers acceptance rate plus 1.75%, at the Company’s option. Term loan borrowings bear interest at the Canadian prime rate plus 0.75% or the Canadian bankers acceptance rate plus 2.00%, at the Company’s option. As of January 1, 2006, borrowings under the revolving credit facility and the term loan carried effective interest rates of 5.11% and 5.36%, respectively. The balance of the revolving facility and term loan were CAD $0.5 million (approximately US $0.4 million) and CAD $11.1 million (approximately US $9.5 million) as of     49    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     January 1, 2006, respectively. As of December 31, 2004, the balance of the revolving facility and term loan were CAD $1.2 million (approximately US $1.0 million) and CAD $13.5 million (approximately US $11.2 million), respectively. As of January 1, 2006, CAD $13.4 million (approximately US $11.5 million) was available under the revolving credit facility.  Senior Credit Facility  On February 27, 2004, the Company entered into credit facilities (the “Senior Credit Facility”) comprised of a $150.0 million revolving credit facility maturing in 2010 and a $650.0 million term loan facility maturing in 2011. The revolver is principally used for working capital purposes, and the term loan was used to finance the acquisition and related transactions. For purposes of calculating interest, loans under the credit facility are designated as Eurodollar rate loans or, in certain circumstances, base rate loans. Eurodollar rate loans bear interest at the British Bankers Association Interest Settlement Rate for deposits in dollars plus a borrowing margin as described below. Interest on Eurodollar rate loans is payable at the end of the applicable interest period of one, two, three or six months, but not less frequently than quarterly. Base rate loans bear interest at (a) the greater of (i) the rate most recently announced by Bank of America as its “prime rate” or (ii) the Federal Funds Rate plus ½ of 1% per annum, plus (b) a borrowing margin as described below. The margin varies from 2.0% to 2.75% on Eurodollar rate loans and from 1.0% to 1.75% on base rate loans, depending on the Company’s leverage ratio.  On March 31, 2005, the Company and SCIC entered into an agreement (“Amendment No. 1”) to amend the term loan facility under the Senior Credit Facility. Amendment No. 1 changed the borrowing margin used to calculate interest on the term loans under the Senior Credit Facility. The margin for term loans was a range based on the Company’s leverage ratio. For Eurodollar rate loans, the borrowing margin was changed to 2.00% from a range of 2.25% to 2.50%. For base rate loans, the borrowing margin was changed to 1.00% from a range of 1.25% to 1.50%.  On October 14, 2005, the Company and SCIC entered into an agreement (“Amendment No. 2”) to the Senior Credit Facility, as amended by Amendment No. 1. Amendment No. 2 established two different levels for determining the applicable borrowing margin interest rate that the Company would pay on its term loan based upon the respective ratings the Company receives from Moody’s and Standard & Poor’s. Level 1 is 2.25% for Eurodollar rate loans and 1.25% for base rate loans when Moody’s rating on the Company is at least B1 and Standard & Poor’s rating is at least B+. Level 2 is 2.50% for Eurodollar rate loans and 1.50% for base rate loans when Moody’s rating on the Company is below B1 and Standard & Poor’s rating is below B+. If the Company only receives a change in rating from one agency or if the agencies’ ratings are split across pricing levels 1 and 2, then the Company will pay interest at level 2 pricing. On October 6, 2005, Moody’s changed its rating on the Company from B1 to B2. As of January 1, 2006, the borrowing margin is level 2 pricing.  As of January 1, 2006, the weighted average annual interest rate applicable to Eurodollar rate loans was 6.45% and the weighted average annual interest rate applicable to base rate loans was 9.00%. During the year ended January 1, 2006, the weighted average annual interest rate for the credit facilities was 6.57%. A commitment fee of 0.50% on the unused portion of the credit facilities is payable on a quarterly basis. As of January 1, 2006, $72.1 million was available under the Senior Credit Facility.  The Company’s obligations under the credit facilities are guaranteed by its parent, SCIC, and each existing direct and indirect subsidiary of SCIC other than the Company, subject to certain exceptions. In addition, each significant domestic subsidiary of the Company subsequently formed is required to guarantee these obligations.    50    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    The Senior Credit Facility is secured by (i) all present and future property and assets, real and personal, of the Company, its restricted subsidiaries, and each guarantor, subject to certain restrictions; (ii) a pledge of 100.0% of the stock of each of SCIC’s present and future direct and indirect domestic subsidiaries and a lien on 66.0% of the stock of each controlled foreign corporation subsidiary, as defined; (iii) all present and future intercompany debt of the Company, its restricted subsidiaries, and each guarantor; and (iv) all proceeds of the foregoing. Under the Senior Credit Facility, the Company is required to meet certain restrictive financial covenants, including a maximum consolidated leverage ratio, minimum consolidated interest coverage ratio and maximum capital expenditures. The Senior Credit Facility also contains other various covenants that limit, or restrict, among other things, indebtedness, liens on property and assets, loans and investments, acquisitions, dispositions of property or assets, debt modifications, dividend declarations, and certain other business activities.  Under Amendment No. 2, certain financial covenant ratios that the Company is required to maintain were modified. The ratio of Consolidated EBITDA to Consolidated Cash Interest Expense was lowered, and the ratio of Average Total Debt to Consolidated EBITDA was raised, in certain quarters (all as such capitalized terms are defined in the original Senior Credit Facility). The Company is currently in compliance with all covenants under the Senior Credit Facility. At January 1, 2006, the interest rate on the term loan facility was 6.44% and 8.07% on the revolving credit facility.  The Company may make optional prepayments to either the credit facility or the term loan in million dollar increments with a minimum prepayment of $10.0 million. The Company is required to make mandatory quarterly prepayments for the term loan. Under Amendment No. 1, the schedule for quarterly principal repayments was modified. The terms of Amendment No. 1 provide for scheduled principal repayments of $1.625 million per quarter through November 27, 2010, with a balloon payment of $606.125 million due on February 27, 2011. All mandatory quarterly prepayments have been made to date.  The Company is required to make a mandatory annual prepayment of the term loan facility and the revolving credit facility in an amount equal to 50.0% of excess cash flow, as defined in the term loan documentation, when the consolidated leverage ratio is 3.5x or greater, or 25.0% of excess cash flow when the Company’s consolidated leverage ratio is less than 3.5x. In addition, the Company is required to make a mandatory prepayment of the term loan facility and the revolving credit facility with, among other things: (i) 100.0% of the net cash proceeds of any property or asset sale, subject to certain exceptions and reinvestment requirements; (ii) 100.0% of the net cash proceeds of any extraordinary receipts, as defined in the term loan documentation, such as tax refunds, pension plan reversions, proceeds of insurance or condemnation awards, subject to certain exceptions and reinvestment requirements; (iii) 100.0% of the net cash proceeds of certain debt issuances, subject to certain exceptions; and (iv) 50.0% of the net cash proceeds from the issuance of additional equity interests when the consolidated leverage ratio is 3.5x or greater, or 25.0% of such proceeds when the consolidated leverage ratio is less than 3.5x. Mandatory prepayments will be applied first to the term loans on a pro rata basis, and thereafter to the revolving loans. For the year ended January 1, 2006, the Company was not required to make a mandatory annual prepayment or any prepayments based on excess cash flow, disposition of assets or extraordinary receipts.  The Senior Credit Facility requires the Company to fix the interest rate for a portion of the borrowings. Currently the Company uses derivative instruments in order to fix the interest rate on the required portion of borrowings (Note 10).    51    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    8.5% Senior Subordinated Notes  On February 27, 2004, the Company issued $325.0 million of 8.5% Senior Subordinated Notes due February 15, 2014 (the “Notes”) with interest paid semi-annually every February 15 and August 15. The Company has made all scheduled interest payments to date. Under the indenture governing the Notes, subject to exceptions, the Company must meet a minimum fixed charge coverage ratio to incur additional indebtedness. Prior to February 15, 2007, we may, on any one or more occasions, redeem up to 35% of the aggregate principal amount of the Notes issued under the indenture at a redemption price of 108.5% of the principal amount thereof, plus accrued and unpaid interest from the net proceeds of one or more equity offerings. Otherwise, the Notes are not redeemable until February 15, 2009. Starting on February 15, 2009, the Company has the option to redeem all or a portion of the Notes at a redemption price equal to a percentage of the principal amount thereof plus accrued interest. If redeemed during the twelve-month period beginning on February 15, 2009, the applicable percentage is 104.25%, 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 100.0% of the principal amount. The 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 101.0% of the principal amount thereof plus accrued interest. The indenture governing the 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 indebtedness, the issuance of disqualified stock, certain transactions with affiliates, the creation of additional liens and certain other business activities.  Debt Extinguishment  As of February 27, 2004, all of the outstanding debt of the Company, excluding the yen-denominated short-term bank borrowings and capital lease obligations, were repaid and the agreements were terminated. As a result of the early extinguishment of debt, the Company incurred a $0.9 million loss from the write off of deferred finance fees. The following sets forth the payments made in connection with the termination of these debt instruments (in thousands):                            Principal    PrepaymentPenalties    Interest    ForeignExchangeLoss    Total   Interest rate swap    $ 1,656    $  —      $  —      $  —      $ 1,656   Securitization facility      27,800      —        34      —        27,834   364-day revolving credit agreement      29,500      —        —        —        29,500   7.08% Senior Notes      160,000      26,920      1,713      —        188,633   3.67% Yen-denominated Senior Notes      44,170      3,770      228      679      48,847                                        Total    $ 263,126    $ 30,690    $ 1,975    $ 679    $ 296,470                                         52    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (9) Leases  At January 1, 2006 and December 31, 2004, the gross amount of machinery and equipment and related accumulated amortization related to assets held under capital leases were as follows (in thousands):                      January 1, 2006      December 31, 2004     Machinery and equipment    $ 6,068     $ 6,892     Less accumulated amortization      (3,573 )     (3,398 )                         $ 2,495     $ 3,494                       Capital lease obligations were $2.4 million and $3.5 million as of January 1, 2006 and December 31, 2004, respectively. As of January 1, 2006, capital lease obligations consist of various machines with leases expiring between 2008 and 2012. Amortization of assets held under capital leases is included in depreciation expense. Such amortization expense was $623,000, $664,000, and $762,000, for the years ended January 1, 2006, December 31, 2004 and December 31, 2003, respectively.  The Company also has several noncancelable operating leases that expire over the next 18 years and provide for renewal terms. These include property leases with escalation clauses averaging 2% to 5% annually, three of which expired in 2005 and three of which expire in 2007. The Company also leases certain machinery, office equipment and vehicles.  During September 2005, the Company entered into an agreement for the sale and leaseback of three properties, including one plant and two warehouses. One of the leases expired in December 2005 and the other two expire in December 2006. Net property, plant and equipment was reduced by the carrying values of the properties sold, which amounted to approximately $6.2 million. The net cash proceeds received from the sale were approximately $15.3 million; $6.8 million of the resulting gain was recognized in September 2005 and $2.3 million was recorded as a deferred credit. The remaining deferred credit as of January 1, 2006 of $1.8 million is included in other long-term liabilities and is being amortized to income as an offset to rent expense. The leases are classified as operating leases in accordance with SFAS No. 13, “Accounting for Leases.”  Future minimum lease payments under capital leases and noncancelable operating leases as of January 1, 2006 are as follows (in thousands):                    Capital Leases     Operating Leases   For the fiscal year:             2006    $ 648    $ 31,302   2007      618      26,114   2008      538      22,167   2009      456      20,626   2010      363      18,663   Thereafter      169      182,702                   Total minimum lease payments      2,792    $ 301,574                 Less amounts representing interest      345                      Present value of minimum payments on capital leases    $ 2,447                     Total rental expense for operating leases, including rentals on month-to-month leases, was $36.1 million, $34.7 million, and $12.0 million, for the years ended January 1, 2006, December 31, 2004, and December 31, 2003, respectively.    53    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (10) Derivative Instruments and Hedging Activities  The Senior Credit Facility, as amended, requires the Company to fix the interest rate for a portion of the borrowings. Accordingly, on March 10, 2004, to limit the variability of a portion of the interest payments under the Senior Credit Facility, the Company entered into receive-variable, pay-fixed interest rate swaps with a total notional amount of $180.0 million. Under these interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments; thereby fixing the rate on a portion of the outstanding debt. The variable rate of interest received is the Eurodollar rate. The fixed rate of interest paid is 2.375% to 2.376%. The swap agreements extend through March 31, 2007. The fair value of these swap agreements was $5.2 million and $4.2 million as of January 1, 2006 and December 31, 2004, respectively. They are accounted for as cash flow hedges and their fair value is included in other assets in the Company’s Consolidated Balance Sheet. On June 23, 2005, the Company entered into a forward-starting receive-variable, pay-fixed interest rate swap with a notional amount of $50.0 million. The variable rate of interest received is the Eurodollar rate. The fixed rate of interest paid is 4.25%. The swap agreement is effective March 31, 2007 through March 31, 2010. As of January 1, 2006, the fair value of this swap agreement was approximately $0.7 million. It is accounted for as a cash flow hedge and its fair value is included in other assets in the Company’s Consolidated Balance Sheet.  On March 31, 2005, the Company entered into an interest rate cap agreement with a notional amount of $35.0 million. Under this agreement, the Company receives variable interest rate payments when the three-month Eurodollar rate rises above 5.0%. This interest rate cap agreement is in effect through March 31, 2006. The interest rate cap is accounted for as a cash flow hedge and its fair value was approximately $0 as of January 1, 2006.  On June 30, 2005, the Company entered into another interest rate cap agreement with a notional amount of $15.0 million. Under this agreement, the Company would receive variable interest rate payments when the three-month Eurodollar rate rises above 4.0%. This interest rate cap agreement expired on September 30, 2005.      (11) Pensions and Other Postretirement Benefits  The Company sponsors noncontributory defined benefit pension plans that cover all Solo Cup Japan Co. Ltd. and 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. The Company’s funding policy is to contribute amounts necessary to satisfy the amounts required by local laws and regulations. Plan assets for the Solo Cup Japan and Solo Cup Europe pension plans are held in retirement trust funds with investments primarily in common stock, corporate bonds and government securities.  In connection with the SF Holdings Acquisition, the Company assumed the defined benefit pension plans and postretirement health care plans of SF Holdings. 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. The benefits for participants in certain of these non-union pension plans are frozen. The Company’s policy has been to fund annually the minimum contributions required by applicable regulations. The postretirement health care plans, in most cases, pay 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. Participants generally become eligible after reaching age 60 with ten years of service. The majority of such plans are contributory, with retiree contributions adjusted annually.  The Company uses a September 30 measurement date for the majority of its plans.    54    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    The following table sets forth the change in benefit obligation for the Company’s benefit plans (in thousands):                             Pension Benefits     Other Postretirement Benefits         January 1,2006     December 31,2004     January 1,2006     December 31,2004    Change in benefit obligation:                        Benefit obligation at beginning of year    $ 127,901     $ 23,317     $ 35,261     $  —       Service cost      1,947       1,552       825       1,089     Interest cost      7,083       5,928       2,140       2,603     Amendments      —         821       —         (26,834 )   SF Holdings Acquisition (1)      —         96,929       —         52,398     Actuarial loss      11,461       571       2,950       9,759     Foreign exchange      (2,563 )     3,089       33       113     Plan participant contributions      —         104       —         —       Benefits paid      (6,287 )     (4,410 )     (5,115 )     (3,867 )                                      Benefit obligation at end of year    $ 139,542     $ 127,901     $ 36,094     $ 35,261                                       Change in plan assets:                        Fair value of plan assets at beginning of year    $ 91,026     $ 14,127     $  —       $  —       Actual return on plan assets      13,118       417       —         —       SF Holdings Acquisition (1)      —         74,104       —         —       Foreign exchange      (1,591 )     2,220       —         —       Employer contributions      6,545       4,491       5,104       3,867     Plan participant contributions      186       104       —         —       Other      (554 )     (27 )     —         —       Benefits paid      (6,335 )     (4,410 )     (5,104 )     (3,867 )                                      Fair value of plan assets at end of year    $ 102,395     $ 91,026     $  —       $  —                                          Funded status    $ (37,147 )   $ (36,875 )   $ (36,094 )   $ (35,261 )   Employer contributions from measurement date to year-end      2,500       1,271       1,200       1,400     Unrecognized prior service cost (benefit)      —         747       (22,704 )     (26,832 )   Unrecognized net actuarial loss      16,012       11,438       11,771       9,756                                        Net amount recognized    $ (18,635 )   $ (23,419 )   $ (45,827 )   $ (50,937 )                                       (1) These assets and liabilities were assumed in connection with the SF Holdings Acquisition.    55    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    The following sets forth the amounts recognized in the Consolidated Balance Sheets (in thousands):                             Pension Benefits     Other Postretirement Benefits          January 1, 2006     December 31,2004      January 1, 2006     December 31,2004     Accrued benefit liability    $ (34,554 )   $ (35,367 )   $ (45,827 )   $ (50,937 )   Prepaid asset      —         477       —         —       Intangible asset      —         747       —         —       Cumulative foreign currency translation      —         328       —         —       Accumulated other comprehensive loss      15,919       10,396       —         —                                          Net amount recognized    $ (18,635 )   $ (23,419 )   $ (45,827 )   $ (50,937 )                                     The accumulated benefit obligation for all defined benefit pension plans was approximately $139.5 million and $125.8 million at January 1, 2006 and December 31, 2004, respectively.  The following table presents aggregated information for individual pension plans with an accumulated benefit obligation in excess of plan assets as of January 1, 2006 and December 31, 2004, for which the Company recognized an additional minimum pension liability (in thousands):                    January 1, 2006     December 31, 2004   Projected benefit obligation    $ 133,416    $ 113,516   Accumulated benefit obligation      132,246      113,516   Fair value of plan assets      99,711      81,842  For the years ended January 1, 2006, December 31, 2004 and December 31, 2003, $2.0 million, $3.8 million and $0.1 million were charged to other comprehensive income for the additional minimum pension liability adjustments, net of tax. The minimum pension liability will change from year to year as a result of revisions to actuarial assumptions, experience gains or losses and settlement rate changes.  The following assumptions were used to determine the benefit obligations at fiscal year-end:                     PensionBenefits   Other Postretirement Benefits       2005   2004   2005   2004   Discount rate:                North America    5.25%   6.00%   5.25%   6.00%   Europe    4.70%   5.25%   —     —     Japan    1.70%   1.80%   —     —     Expected long-term rate of return on plan assets:                North America    7.50% - 8.00%   7.00% - 8.75%   —     —     Europe    5.86%   6.30%   —     —     Japan    2.40%   1.00%   —     —     Rate of compensation increase:                North America    3.50%   3.50%   —     —     Japan    1.90%   1.98%   —     —      56    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    Net periodic benefit cost for the Company’s pension and other postretirement benefit plans consists of the following (in thousands):                          For the year ended January 1, 2006     For the year ended December 31,           2004     2003    Pension Benefits                   Service cost    $ 1,947     $ 1,552     $ 490     Interest cost      7,083       5,928       816     Expected return on plan assets      (6,756 )     (6,005 )     (529 )   Amortization of transition asset      —         108       97     Amortization of prior service cost (1)      748       74       —       Amortization of net loss      522       318       318                                Net periodic benefit cost    $ 3,544     $ 1,975     $ 1,192                               Other Postretirement Benefits                   Service cost    $ 825     $ 1,089          Interest cost      2,140       2,603          Amortization of prior service cost      (4,127 )     (3 )        Amortization of net loss      907       —                                    Net periodic benefit cost (income)    $ (255 )   $ 3,689                                   (1) For the year ended January 1, 2006, amortization of prior service cost includes a curtailment charge of $659,000 related to the closing of a plant, which will result in the termination of employees’ services earlier than expected.  The following assumptions were used to determine the net periodic benefit cost for each fiscal year:                       Pension Benefits   Other Postretirement Benefits         2005   2004   2005     2004     Discount rate:                  North America    6.00%   6.00%   6.00 %   6.00 %   Europe    5.25%   5.40%   —       —       Japan    1.80%   1.70%   —       —       Expected long-term rate of return on plan assets:                  North America    7.00% - 8.75%   7.00% - 8.75%   —       —       Europe    6.30%   6.40%   —       —       Japan    1.00%   —     —       —       Rate of compensation increase:                  North America    3.50%   3.50%   —       —       Japan    1.98%   1.72%   —       —      The expected long-term 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 their measurement dates.  For measurement purposes, the assumed health care cost trend rates were as follows:           Health care cost trend rate assumed for 2006    10.0%   Rate to which the cost trend rate is assumed to decline    5.0% – 5.5%   Year that the rate reaches the ultimate trend rate    2011 – 2012    57    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    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    $ 233    $ (197 )   Effect on postretirement benefit obligation    $ 3,219    $ (2,746 )  The Company’s pension plans’ weighted-average asset allocations, by asset category, were as follows:                   Plan Assets at     Asset Category     January 1, 2006      December 31, 2004     Equity securities    68.3 %   66.4 %   Debt securities    28.0     30.0     Other    3.7     3.6                    Total    100.0 %   100.0 %                 The Company’s investment policies are designed to provide for growth of capital with a moderate level of volatility. The weighted-average asset target allocations for the majority of the pension plan assets are 60% in equity securities and 40% in debt securities.  The Company expects to contribute $11 million to its pension plans and $3 million to its other postretirement benefit plans in 2006.  The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):                    Pension Benefits     OtherPostretirement Benefits   2006    $ 6,838    $ 3,011   2007      7,301      3,006   2008      7,489      2,998   2009      7,315      2,841   2010      7,499      2,655   Years 2011–2015      41,259      11,863  Defined Contribution Plans  Substantially all U.S. employees of the former Solo Illinois and employees hired by SCOC after October 3, 2005, are covered by the Company’s employee profit-sharing plan. The amount of Company profit-sharing contributions is at the discretion of the Company’s board of directors. During 1998, the profit-sharing plan was amended to qualify under Section 401(k) of the Internal Revenue Code. The amended plan allows employees to contribute up to 20% of their qualified gross wages as defined in the plan, and the Company currently matches 50% of the employees’ contributions to this plan up to 4% of eligible compensation as defined. Charges for employer contributions to the 401(k) and profit-sharing plan were $1.8 million, $1.4 million and $3.2 million for the years ended January 1, 2006, December 31, 2004 and December 31, 2003, respectively, and are recorded in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations.    58    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    In conjunction with the SF Holdings acquisition, the Company acquired a 401(k) defined contribution plan that covers a majority of SF Holdings’ employees. For employees in this plan, the Company provides a matching contribution of 100% on the first 2% of a participant’s salary and 50% on the next 4% of a participant’s salary. The Company’s match for employees in this plan is currently limited to participant contributions up to 6% of the participants’ salaries. In addition, the Company is allowed to make discretionary contributions. Charges for employer contributions to this 401(k) plan were $4.7 million in the year ended January 1, 2006 and $4.4 million for the period from February 22, 2004 to January 2, 2005, and are recorded in cost of goods sold and selling, general and administrative expenses in the accompanying Consolidated Statements of Operations.  The Company also participates in a multi-employer pension plan sponsored by SF Holdings for certain of its union employees. Contributions to this plan at a defined rate per hour worked were $1.2 million and $1.0 million in 2005 and 2004, respectively.      (12) Shareholders’ Equity  On February 27, 2004, the Company received net proceeds of $229.6 million from the issuance of 100 shares of Common Stock to SCIC and the retirement of all outstanding shares of Solo Illinois’ Class A and Class B common stock. In order to fund this purchase of stock in the Company, SCIC issued $240.0 million of convertible participating preferred stock (the “CPPS”) to a third-party investor. 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 will accumulate to the extent not paid, whether or not earned or declared. As of January 1, 2006, accrued and unpaid dividends were approximately $47.5 million. SCIC 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, and is subject to other accelerated redemption clauses. The Company, at its option and election, may redeem in whole or in part the outstanding shares of CPPS or other securities issued by SCIC on or after the third anniversary through the seventh anniversary of its issuance. The CPPS may be converted into common shares of SCIC at any time, subject to certain limitations, at the option of the holders. Mandatory conversion occurs upon the closing of an Initial Public Offering. The Company provides no guarantees with respect to these obligations of SCIC.  During 2004, $4.1 million of capital was contributed to the Company by SCIC. This includes $0.8 million of proceeds that were received by SCIC from certain Company employees upon the issuance of SCIC’s CPPS. The remaining $3.3 million represents the issuance of 3,283 Convertible Preferred Units (“CPUs”) to certain Company employees in settlement of deferred compensation liabilities (Note 15). In the second quarter of 2005, as the result of an employee’s separation from the Company, $1.3 million of this capital contribution was returned to SCIC as a dividend and 1,267 of CPUs were canceled. In 2005, 2004 and 2003, the Company paid dividends to shareholders of Solo Illinois common stock of $0.4 million, $16.1 million and $9.1 million, respectively.  In 2005, an additional $0.1 million of capital was contributed to the Company by SCIC, reflecting proceeds that were received by SCIC from a Company employee upon the issuance of SCIC’s CPPS.      (13) Minority Interest in Subsidiary  In 2004, the Company’s consolidated financial statements reflect the minority interest in the Company’s subsidiaries, Sanyo Pax Operations Company, Ltd. (“Sanyo Pax”) and Global Cup S.A de C.V. (“Global Cup”). Global Cup was acquired along with the SF Holdings Acquisition in February of 2004. In the third quarter of 2004, the Company purchased all shares held by minority owners in Global Cup.    59    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    In August 2005, the Company liquidated its subsidiary Sanyo Pax and the remaining assets were distributed to the Company’s wholly owned subsidiary, Solo Cup Asia Pacific.  In 2005, the minority interest of $(409,000) reflected on the Consolidated Statement of Operations represents the loss attributable to the minority shareholders of Sanyo Pax. In 2004, the minority interest of $214,000 represents income attributable to the minority shareholders of Sanyo Pax and Global Cup. In 2003, the minority interest of $129,000 represents the income attributable to the minority shareholders of Sanyo Pax.  The $1.1 million minority interest in subsidiary, reflected on the Consolidated Balance Sheet as of December 31, 2004 consists of the investment by the minority shareholders and the minority interest in undistributed income (loss) of the subsidiaries. The minority ownership interest of Sanyo Pax was 2.12% and 4.50% as of December 31, 2004 and 2003, respectively.      (14) Accumulated Other Comprehensive Income (Loss)                         For the year endedJanuary 1, 2006     For the year endedDecember 31, 2004     For the year endedDecember 31, 2003     Net loss    $ (8,179 )   $ (49,932 )   $ (2,712 )   Foreign currency translation adjustment      (6,018 )     7,096       4,210          Minimum pension liability, net of tax benefit of $3,563, $2,182, and $31      (1,965 )     (3,843 )     (96 )   Unrealized investment gain, net of tax of $167 and $302      243       435       —       Unrealized gain on cash flow hedge, net of tax of $682 and $1,599      1,089       2,552       —                                  Comprehensive income (loss)    $ (14,830 )   $ (43,692 )   $ 1,402                               The components of accumulated other comprehensive income (loss) are as follows (in thousands):                     January 1,2006     December 31,2004     Foreign currency translation adjustments    $ 4,486     $ 10,504     Minimum pension liability adjustments, net of tax      (8,867 )     (6,902 )   Unrealized investment gain, net of tax      678       435     Unrealized gain on cash flow hedge, net of tax      3,641       2,552                        Accumulated other comprehensive income (loss)    $ (62 )   $ 6,589                         60    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (15) Stock-Based Compensation  SCIC, the Company’s parent, has a management investment and incentive compensation plan for certain key employees of the Company. Under this plan, SCIC has reserved 1,450,000 shares of SCIC common stock, and 5,000 shares of CPPS for issuance (Note 12). The accounting impact of this plan is recorded in the financial statements of the Company as the plan relates to employees of the Company.  CPUs  During the second quarter of 2004, SCIC issued 3,283 CPUs to certain Company employees in settlement of $3.3 million of deferred compensation liabilities. The fair value of the CPUs granted by SCIC was linked to the fair market value of one share of CPPS. For CPUs, compensation expense is recognized periodically based on changes in the fair value of the CPU relative to the grant-date fair value of the CPU. During the year ended January 1, 2006, the Company recorded compensation expense and additional paid-in capital of $136 thousand reflecting dividends declared by SCIC on those instruments.  CPUs do not have voting rights and are in certain circumstances convertible to SCIC common stock or CPPS. The issuance of CPUs by SCIC in settlement of deferred compensation liabilities of the Company totaling $3.3 million was recorded as additional paid-in capital in 2004. In the second quarter of 2005, as the result of an employee’s separation from the company, 1,267 of CPUs were canceled.  Stock Options  The following shows stock option activity for the two years ended January 1, 2006:                      Shares under optionTime-based     Shares under optionPerformance-based     Total sharesunder option     December 31, 2003    —       —       —       Granted with exercise price equal to fair value    749,558     499,699     1,249,257                          December 31, 2004    749,558     499,699     1,249,257     Granted with exercise price equal to fair value    94,240     62,820     157,060     Forfeited    (48,931 )   (32,620 )   (81,551 )                        January 1, 2006    794,867     529,899     1,324,766                         During 2004, SCIC granted to employees of the Company 1,249,257 options to purchase shares of SCIC common stock with an exercise price equal to the fair market value of the common stock at the date of grant of $47.32. Included in these grants were 499,699 options that are conditional upon the Company achieving certain defined performance targets. The time-based options vest over a period of four years and the performance-based options vest over a period of five years. All options expire 10 years after the grant date. During 2005, SCIC granted to employees of the Company 157,060 options to purchase shares of SCIC common stock with an exercise price of $47.32. Included in these grants were 62,820 performance-based options and 94,240 time-based options. These options have the same terms and conditions as the options granted in 2004. During 2005, 48,931 time-based options and 32,620 performance-based options were forfeited. No options have been exercised to date. As of January 1, 2006, 175,157 time-based options were exercisable and none of the performance-based options were exercisable.    61    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (16) Related-party Transactions  Robert L. Hulseman, who is John F. Hulseman’s brother and the husband of Sheila M. Hulseman, and who is the Chairman and Chief Executive Officer of the Company, received salary and benefits of $1.1 million for each of the years ended January 1, 2006, December 31, 2005 and December 31, 2004. John F. Hulseman, who is Robert L. Hulseman’s brother and the husband of Georgia S. Hulseman, and who is the Vice Chairman of the Company, received salary and benefits of $1.1 million for each of the years ended January 1, 2006, December 31, 2005 and December 31, 2004. Robert L. and John F. Hulseman each hold 50.0% of the voting membership interests of SCC Holding, which owns 67.2% of the voting stock of SCIC. In addition, Robert L., Sheila M., John F., and Georgia S. Hulseman and Ronald L. Whaley, the Company’s President and Chief Operating Officer, are directors of the Company. The Company does not pay any directors fees.  Pursuant to the Stockholders Agreement dated February 27, 2004 by and among the Company, SCIC, Vestar Capital Partners (“Vestar”) and other parties (see exhibit 10.18 to the Company’s Registration Statement on Form S-4, File No. 333-116843), Vestar may designate two directors of the Company. In 2004, Daniel S. O’Connell and Norman W. Alpert were elected to the board. John R. Woodard replaced Norman W. Alpert in February 2006. Mr. O’Connell and Mr. Woodard are both employees and equity owners of Vestar Capital Partners (“Vestar”). Vestar owns CPPS representing 32.7% of the voting stock of SCIC.  In the first quarter of 2004, the Company and SCIC entered into a management agreement with SCC Holding providing for, among other things, the payment by SCIC of an annual advisory fee of $2.5 million to SCC Holding. In addition, SCC Holding and Vestar entered into a stockholders’ agreement relating to their ownership of voting stock of SCIC. Robert L. Hulseman and John F. Hulseman, as a result of their ownership of voting and non-voting membership interests in SCC Holding, have economic interests of 0.2758% and 0.8512%, respectively, in SCC Holding. Ten children of Robert L. and Sheila M. Hulseman each have economic interests in SCC Holding, either directly or as beneficiaries of trusts, of 4.9765%; and six children of John F. and Georgia S. Hulseman each have economic interests in SCC Holding, either directly or as beneficiaries of trusts, of 8.1859% (in the case of two of the children), 8.1841% (in the case of three of the children) and 8.1849% (in the case of the remaining child).  In the first quarter of 2004, SCIC paid to Vestar a one-time $4.0 million advisory fee and reimbursed specified out of pocket expenses of Vestar. SCIC also entered into a management agreement with Vestar pursuant to which SCIC will pay Vestar an $800,000 annual advisory fee, plus reimbursement of its expenses. Vestar also is party to a registration rights agreement with SCIC and SCC Holding. In addition, Vestar and SCC Holding entered into a stockholders’ agreement relating to, among other things, their ownership of voting stock of SCIC.  The Company incurred $3.3 million and $2.8 million of advisory fees to SCIC pursuant to the management agreements described above in 2005 and 2004, respectively.  The Company retains as consultants from time to time various children of Robert L. and Sheila M. Hulseman and of John F. and Georgia S. Hulseman. These consultants receive consulting fees from the Company and have received health insurance benefits at the Company’s expense. During 2005, the Company retained as consultants six children of Robert L. and Sheila M. Hulseman and five children of John F. and Georgia S. Hulseman. During Fiscal Years 2005, 2004 and 2003, the total amounts paid by the Company in connection with these consulting arrangements was $206,000, $184,000 and $176,000, respectively.  The Company employs three children and one son-in-law of Robert L. and Sheila M. Hulseman and two children of John F. and Georgia S. Hulseman. During Fiscal Years 2005, 2004 and 2003, the total amounts paid by the Company to these employees were $1.8 million, $1.7 million and $1.8 million, respectively.    62    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    The consulting and salary amounts above are included in selling, general and administrative expenses in the Consolidated Statements of Operations. At January 1, 2006 and December 31, 2004, no amounts were payable for the consulting fees, salaries and benefits discussed above.  On August 4, 1999, the Company extended an interest-free loan in the amount of $1.7 million to Mr. Whaley pursuant to his previous employment agreement. The employment agreement provides for the loan to be repaid from the net proceeds of Mr. Whaley’s annual bonuses through the term of the agreement, which expires August 3, 2009. To the extent that Mr. Whaley’s annual bonus falls below the amount corresponding to the annual prorated portion of the initial principal amount of the loan, the employment agreement provides that the loan will be forgiven as if a bonus in the amount of that annual prorated portion had been paid. As of January 1, 2006 and December 31, 2004, the outstanding principal amount of the loan was approximately $639,000 and $852,000, respectively, and this amount is included in other assets in the Consolidated Balance Sheets.  During fiscal years 2005, 2004 and 2003, the Company paid dividends to shareholders of Solo Illinois common stock of $0.4 million, $16.1 million and $9.1 million, respectively. Dividends payable at December 31, 2004 were $0.4 million and are included in accrued expenses and other current liabilities in the Consolidated Balance Sheet.  During each of the last three fiscal years, the Company performed various functions free of charge on behalf of the holders of Solo Illinois’s voting and nonvoting stock, comprising Robert L. and John F. Hulseman and their respective children, including preparation of personal income tax returns and accounting and tax return preparation for the Solo Cup Foundation. The Company has maintained those arrangements on behalf of these individuals and their family members during 2005 and 2004.      (17) Commitments and Contingencies  The Company has entered into agreements with the State of Illinois (“State”) and the City of Chicago (“City”) relating to the acquisition and development of certain property of the Company located in the City. Pursuant to these agreements, the State and City provided certain grants to the Company, paid certain costs on behalf of the Company and undertook certain obligations relating to the property. Under these agreements, the Company is required to fulfill certain obligations relating to the property, which, if not fulfilled, could result in the Company being required to repay the amounts granted or paid by the City and the State.  The Company is involved in various claims and legal actions arising from time to time in the ordinary course of business.  Management believes that the ultimate disposition of the various matters discussed above would not have a material adverse effect on the Company’s business, consolidated financial position, results of operations, or liquidity.  The Company also has certain purchase obligations for raw materials, which are commitments for projected needs to be utilized in the normal course of business. These are contracts that specify all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and appropriate timing of the transaction.    63    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (18) Contract Dispute Resolution  In November 2001, Solo Illinois entered into an outsourcing agreement (the “Agreement”) with its former logistics provider, DSC Logistics, Inc. (“DSC”), pursuant to which DSC was to provide customary warehouse and transportation services for Solo Illinois. After the Agreement was executed, disputes arose as to aspects of the Agreement, and Solo Illinois and DSC have been parties to litigation and arbitration. On February 16, 2005, Solo Illinois and DSC entered into a settlement agreement (the “Settlement Agreement”) which terminated the Agreement prior to its stated termination date. Pursuant to the terms of the Settlement Agreement, Solo Illinois transitioned its distribution center and transportation services, including attendant real estate, equipment and personnel, where possible, back into its operations during 2005. In February 2005, as part of the transition, Solo Illinois purchased certain assets from DSC, for which Solo Illinois paid DSC $1.2 million. The Settlement Agreement required Solo Illinois to assume certain leases from DSC and pay DSC $11.75 million during 2005. The Settlement Agreement also includes mutual releases from both parties and requires the parties to dismiss all related outstanding litigation and arbitration claims.  In addition to the agreed-upon payments totaling $11.75 million, the Company forgave $4.4 million of accounts receivable from DSC. During 2004, the Company incurred legal expenses and contract execution costs of $9.3 million related to the litigation, arbitration and the settlement. The net effect of the resolution of this matter on the Company’s Consolidated Statement of Operations for the year ended December 31, 2004, was a pre-tax charge of $25.4 million ($15.6 million net of income taxes). As of December 31, 2004, the remaining liability of $15.3 million was classified in accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheet.      (19) Segments  The Company reports the results of its segments in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company manages and evaluates its operations in three reportable segments: North America, Europe and Asia-Pacific. All of these segments produce a broad array of disposable food service products, which are available in paper, plastic and foam. The operating segments are managed separately based on the products and requirements of the different markets. North America includes all U.S. entities, Canada, Mexico, Corporate and Puerto Rico; Europe includes all U.K. entities and Denmark; and Asia-Pacific includes all Japanese entities and Australia; Other includes Panama.  The accounting policies of the operating segments are the same as those described in Note 2. Segment operating results are measured based on operating income (loss). Intersegment net sales are accounted for on an arm’s length pricing basis.  No individual customer accounted for greater than 10% of consolidated net sales in fiscal years 2005, 2004 or 2003. It is not practical for the Company to report revenues from external customers for each product and service or each group of similar products.    64    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         (In thousands)    NorthAmerica    Europe    Asia-Pacific    Other    TotalSegments    Eliminations     Total   Year ended January 1, 2006                                 Revenues from external customers    $ 2,265,365    82,236    99,045    11,993    2,458,639    (20,901 )   $ 2,437,738   Intersegment net sales      20,159    —      162    580    20,901    (20,901 )     —     Operating income (loss)      60,258    3,317    3,380    588    67,543    67       67,610   Depreciation and amortization      99,046    3,580    5,345    668    108,639    —         108,639   Capital expenditures      47,419    968    4,362    391    53,140    —         53,140   Property, plant and equipment, net      702,974    19,204    31,598    2,409    756,185    —         756,185   Total assets at year end      1,750,501    81,072    61,980    8,925    1,902,478    (44,715 )     1,857,763            Year ended December 31, 2004                                 Revenues from external customers    $ 1,943,738    75,583    102,456    11,833    2,133,610    (17,173 )   $ 2,116,437   Intersegment net sales      15,261    —      110    1,802    17,173    (17,173 )     —     Operating income      40,384    5,156    5,531    784    51,855    (100 )     51,755   Depreciation and amortization      87,101    3,752    5,664    718    97,235    —         97,235   Capital expenditures      37,240    768    3,645    585    42,238    —         42,238   Property, plant and equipment, net      763,229    24,174    38,660    2,687    828,750    —         828,750   Total assets at year end      1,771,207    90,269    78,762    11,822    1,952,060    (48,274 )     1,903,786            Year ended December 31, 2003                                 Revenues from external customers    $ 725,330    62,562    94,895    11,020    893,807    (14,114 )   $ 879,693   Intersegment net sales      12,516    —      138    1,460    14,114    (14,114 )     —     Operating income      2,570    5,052    4,150    333    12,105    (163 )     11,942   Depreciation and amortization      30,746    3,586    6,613    789    41,734    —         41,734   Capital expenditures      28,633    1,427    4,446    165    34,671    —         34,671   Property, plant and equipment, net      231,574    25,439    39,144    3,127    299,284    —         299,284   Total assets at year end      589,122    85,992    80,555    10,911    766,580    (136,970 )     629,610  Geographic information:  Net sales from external customers by customer location are determined based on where the Company’s products were delivered. Long-lived assets include property, plant and equipment, net; goodwill; intangible assets, net; and certain other non-current assets.    65    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          Year endedJanuary 1, 2006      Years Ended December 31,    (In thousands)      2004     2003     United States    $ 2,095,156     $ 1,771,698     $ 643,862     Other countries      342,582       344,739       235,831                                Net sales    $ 2,437,738     $ 2,116,437     $ 879,693                                         January 1, 2006     December 31,           2004     2003     United States    $ 939,852     $ 1,022,661     $ 296,488     Other countries      127,172       140,393       108,295                                Total long-lived assets    $ 1,067,024     $ 1,163,054     $ 404,783                                         Year endedJanuary 1, 2006      Years Ended December 31,    (In thousands)      2004     2003     Revenues:                   Total segment and other net sales    $ 2,458,639     $ 2,133,610     $ 893,807     Elimination of intersegment net sales      (20,901 )     (17,173 )     (14,114 )                              Net sales    $ 2,437,738     $ 2,116,437     $ 879,693                                Operating income:                   Total segment and other operating income    $ 67,543     $ 51,855     $ 12,105     Elimination of intersegment operating income      67       (100 )     (163 )   Interest expense      (72,854 )     (86,427 )     (16,459 )   Interest income      304       247       2,040     Loss on debt extinguishments      —         (916 )     —       Foreign currency exchange gain (loss), net      (4,262 )     3,224       2,760     Other, net      (1,673 )     (489 )     309                                Income (loss) before income taxes and minority interest    $ (10,875 )   $ (32,606 )   $ 592                                          January 1, 2006      December 31, 2004                         Assets:                   Total segment and other assets    $ 1,902,478     $ 1,952,060          Eliminations of intersegment receivables      (44,715 )     (48,274 )                                Total assets    $ 1,857,763     $ 1,903,786                                   66    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    Net sales by customer group for the years ended January 1, 2006, December 31, 2004, and December 31, 2003 were as follows (in thousands):                       Year endedJanuary 1, 2006     Years Ended December 31,          2004    2003   Foodservice    $ 1,934,575    $ 1,727,423    $ 719,024   Consumer      503,163      389,014      160,669                          Net sales    $ 2,437,738    $ 2,116,437    $ 879,693                             (20) Valuation and Qualifying Accounts  Valuation and qualifying accounts are comprised of allowance for doubtful accounts, allowance for discounts and deductions and inventory obsolescence reserves. The changes in these accounts for the years ended January 1, 2006, December 31, 2004, and December 31, 2003 were as follows (in thousands):                               Beginning balance    Charged toincome    Charged tootheraccounts(1)(2)(3)     Deductions      Ending balance   Allowance for doubtful accounts                            2005    $ 6,295    $ 1,840    $ 281     $ (1,335 )   $ 7,081   2004      3,900      340      3,112       (1,057 )     6,295   2003      3,500      778      79       (457 )     3,900          Allowance for discounts and deductions                            2005    $ 25,587    $ 11,264    $ (386 )   $ (20,582 )   $ 15,883   2004      10,488      6,908      9,050       (859 )     25,587   2003      8,781      1,707      —         —         10,488          Inventory obsolescence reserves                            2005    $ 12,995    $ 1,778    $ 4,813     $ (5,347 )   $ 14,239   2004      1,570      1,554      13,697       (3,826 )     12,995   2003      1,510      1,019      30       (989 )     1,570    (1) Charged to other accounts include recoveries received and cumulative translation adjustment for translation of foreign accounts.    (2) In 2004, charged to other accounts includes the impact of the acquisition of SF Holdings of $4.2 million of allowance for doubtful accounts (partially offset by the reversal of reserves established for the Company’s former logistics provider), $8.9 million of allowance for discounts and deductions and $13.5 million of inventory obsolescence reserves.    (3) In 2005, charged to other accounts includes the impact of the acquisition of SF Holdings of $4.4 million of inventory obsolescence reserves.    67    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (21) Selected Quarterly Financial Data (Unaudited)                                                 Quarter Ended    (In millions)    Mar. 31,2005     July 3,2005    Oct. 2,2005    Jan. 1,2006     Total     Mar. 31,2004     Jun. 30,2004    Sep. 30,2004    Dec. 31,2004     Total     Net sales    $ 546.1     $ 654.5    $ 618.2    $ 618.9     $ 2,437.7     $ 327.3     $ 597.9    $ 600.6    $ 590.6     $ 2,116.4     Gross profit      48.5       94.0      91.1      93.5       327.1       36.9       85.2      97.2      83.9       303.2     Income (loss) before income taxes and minority interest      (31.0 )     6.7      16.0      (2.6 )     (10.9 )     (48.1 )     10.4      20.4      (15.3 )     (32.6 )   Net income (loss)    $ (18.5 )   $ 3.9    $ 9.2    $ (2.8 )   $ (8.2 )   $ (58.7 )   $ 6.2    $ 12.1    $ (9.5 )   $ (49.9 )      (22) Subsequent Events  In March 2006, we received a commitment for a senior secured second lien term loan facility of $80.0 million (“Second Lien Facility”). Effective March 27, 2006, the Company and SCIC entered into Amendment No. 3 to the Senior Credit Facility (“Amendment No. 3”). Amendment No. 3 was necessary to permit the Company to enter into the Second Lien Facility. Amendment No. 3 also revised the ratios of the financial covenants that the Company is required to maintain by allowing lower ratios in certain quarters of Consolidated EBITDA to Consolidated Cash Interest Expense, and by allowing higher ratios in certain quarters of Average Total Debt to Consolidated EBITDA (all as such capitalized terms are defined in the original Senior Credit Facility). The continued effectiveness of Amendment No. 3 is contingent upon the Company executing the Second Lien Facility by April 15, 2006.  The Second Lien Facility loan proceeds will be used to reduce amounts outstanding under the domestic revolving credit facility under the Senior Credit Facility. The Second Lien Facility will have a floating interest rate and the principal will be due upon maturity in 2012.    68    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (23) Guarantors  On February 27, 2004, with an effective date of February 22, 2004, the Company acquired SF Holdings. The Company partially funded this acquisition through the issuance of the 8.5% Senior Subordinated Notes. The 8.5% Senior Subordinated Notes are fully and unconditionally guaranteed, on a joint and several basis, by certain of the Company’s subsidiaries. The consolidated guarantors include the following: Solo Management Company, P.R. SOLO CUP, INC., SF Holdings Group, Inc., Solo Cup Operating Corporation (formerly known as Sweetheart Cup Company Inc.), Lily-Canada Holding Corporation, Solo Cup (UK) Limited, Insulpak Holdings Limited and Solo Cup Europe Limited. The following financial information presents the guarantors and non-guarantors of the 8.5% Senior Subordinated Notes, in accordance with Rule 3-10 of Regulation S-X:                             Condensed Consolidated Balance Sheet January 1, 2006 (In thousands)         Guarantor     Non Guarantor    Eliminations     Consolidated    Assets                        Current assets:                        Cash and cash equivalents    $ 7,038     $ 5,049    $  —       $ 12,087     Cash in escrow      15,000       —        —         15,000     Accounts receivable:                        Trade      212,758       39,288      —         252,046     Other      36,401       —        (12,275 )     24,126     Inventories      355,320       25,996      (596 )     380,720     Deferred income taxes      42,192       1,864      —         44,056     Other current assets      48,898       5,266      —         54,164                                       Total current assets      717,607       77,463      (12,871 )     782,199           Property, plant and equipment, net      686,968       69,217      —         756,185     Goodwill and intangible assets      267,604       491      —         268,095     Other assets      97,602       3,960      (50,278 )     51,284                                       Total assets    $ 1,769,781     $ 151,131    $ (63,149 )   $ 1,857,763                                      Liabilities and Shareholder’s Equity                        Current liabilities:                        Accounts payable    $ 141,277     $ 34,637    $ (12,315 )   $ 163,599     Accrued expenses and other current liabilities      113,632       13,521      —         127,153     Short-term debt      —         5,546      —         5,546     Current maturities of long-term debt      6,500       2,226      —         8,726                                       Total current liabilities      261,409       55,930      (12,315 )     305,024           Long-term debt, less current maturities      1,018,825       10,184      —         1,029,009     Deferred income taxes      24,258       3,801      —         28,059     Other liabilities      62,052       22,330      —         84,382                                       Total liabilities      1,366,544       92,245      (12,315 )     1,446,474                                       Shareholder’s equity:                        Common stock      —         2,114      (2,114 )     —       Additional paid-in capital      258,049       39,168      (39,168 )     258,049     Retained earnings      148,661       14,193      (9,552 )     153,302     Accumulated other comprehensive loss      (3,473 )     3,411      —         (62 )                                     Total shareholder’s equity      403,237       58,886      (50,834 )     411,289                                       Total liabilities and shareholder’s equity    $ 1,769,781     $ 151,131    $ (63,149 )   $ 1,857,763                                        69    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                           Condensed Consolidated Balance Sheet December 31, 2004 (In thousands)       Guarantor    Non Guarantor    Eliminations     Consolidated  Assets                       Current assets:                       Cash and cash equivalents    $ 9,541    $ 6,314    $  —       $ 15,855   Cash in escrow      15,000      —        —         15,000   Accounts receivable:                       Trade      183,583      38,963      —         222,546   Other      31,606      2,385      (7,037 )     26,954   Inventories      332,725      19,820      (168 )     352,377   Deferred income taxes      51,333      1,261      —         52,594   Other current assets      40,884      6,327      —         47,211                                  Total current assets      664,672      75,070      (7,205 )     732,537         Property, plant and equipment, net      758,204      70,546      —         828,750   Goodwill and intangible assets      274,047      3,233      —         277,280   Restricted cash      1,905      —        —         1,905   Other assets      110,923      4,147      (51,756 )     63,314                                  Total assets    $ 1,809,751    $ 152,996    $ (58,961 )   $ 1,903,786                                 Liabilities and Shareholder’s Equity                       Current liabilities:                       Accounts payable    $ 131,621    $ 25,903    $ (7,041 )   $ 150,483   Accrued expenses and other current liabilities      150,725      16,449      —         167,174   Short-term debt      —        3,603      —         3,603   Current maturities of long-term debt      6,500      3,278      —         9,778                                  Total current liabilities      288,846      49,233      (7,041 )     331,038         Long-term debt, less current maturities      975,992      28,755      —         1,004,747   Deferred income taxes      56,405      2,025      —         58,430   Other liabilities      73,419      7,929      —         81,348                                  Total liabilities      1,394,662      87,942      (7,041 )     1,475,563         Minority interest      —        1,073      —         1,073         Shareholder’s equity:                       Common stock      —        2,114      (2,114 )     —     Additional paid-in capital      259,080      40,769      (40,769 )     259,080   Retained earnings      153,887      16,631      (9,037 )     161,481   Accumulated other comprehensive loss      2,122      4,467      —         6,589                                  Total shareholder’s equity      415,089      63,981      (51,920 )     427,150                                  Total liabilities and shareholder’s equity    $ 1,809,751    $ 152,996    $ (58,961 )   $ 1,903,786                                   70    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              Consolidated Statement of Operations For the Year Ended January 1, 2006 (In thousands)         Guarantor     Non Guarantor     Eliminations     Consolidated     Net sales    $ 2,238,709     $ 267,209     $ (68,180 )   $ 2,437,738     Cost of goods sold      1,942,215       235,356       (66,925 )     2,110,646                                        Gross profit      296,494       31,853       (1,255 )     327,092           Selling, general and administrative expenses      246,179       19,726       (740 )     265,165     (Gain) loss on sale of property, plant and equipment      (5,868 )     185       —         (5,683 )                                      Operating income      56,183       11,942       (515 )     67,610           Interest expense, net      70,848       1,702       —         72,550     Foreign currency exchange gain, net      5,464       (1,202 )     —         4,262     Other (income) expense, net      (7,572 )     9,245       —         1,673                                        Income (loss) before income taxes and minority interest      (12,557 )     2,197       (515 )     (10,875 )         Income tax (benefit) provision      (7,331 )     5,044       —         (2,287 )   Minority interest      —         (409 )     —         (409 )                                      Net loss    $ (5,226 )   $ (2,438 )   $ (515 )   $ (8,179 )                                              Consolidated Statement of Operations For the Year Ended December 31, 2004 (In thousands)         Guarantor     Non Guarantor     Eliminations     Consolidated     Net sales    $ 1,931,916     $ 208,208     $ (23,687 )   $ 2,116,437     Cost of goods sold      1,661,718       175,148       (23,606 )     1,813,260                                        Gross profit      270,198       33,060       (81 )     303,177           Selling, general and administrative expenses      213,947       19,692       (22 )     233,617     Contract dispute resolution      25,389       —         —         25,389     (Gain) loss on sale of property, plant and equipment      (7,724 )     138       2       (7,584 )                                      Operating income      38,586       13,230       (61 )     51,755           Interest expense      54,389       2,024       (676 )     55,737     Interest income      (888 )     (35 )     676       (247 )   Prepayment penalties      30,690       —         —         30,690     Loss on debt extinguishment      916       —         —         916     Foreign currency exchange gain, net      (2,260 )     (964 )     —         (3,224 )   Other (income) expense, net      (1,393 )     565       1,317       489                                        Income (loss) before income taxes and minority interest      (42,868 )     11,640       (1,378 )     (32,606 )         Income tax provision      12,122       4,990       —         17,112     Minority interest      —         214       —         214                                        Net income (loss)    $ (54,990 )   $ 6,436     $ (1,378 )   $ (49,932 )                                       71    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              Consolidated Statement of Operations For the Year Ended December 31, 2003 (In thousands)         Guarantor     Non Guarantor     Eliminations     Consolidated     Net sales    $ 770,909     $ 116,487     $ (7,703 )   $ 879,693     Cost of goods sold      677,682       98,503       (7,519 )     768,666                                        Gross profit      93,227       17,984       (184 )     111,027           Selling, general and administrative expenses      87,687       13,152       (138 )     100,701     (Gain) loss on sale of property, plant and equipment      (1,629 )     13       —         (1,616 )                                      Operating income      7,169       4,819       (46 )     11,942           Interest expense      16,330       897       (768 )     16,459     Interest income      (2,807 )     (1 )     768       (2,040 )   Foreign currency exchange gain, net      (2,760 )     —         —         (2,760 )   Other (income) expense, net      (2 )     (307 )     —         (309 )                                      Income (loss) before income taxes and minority interest      (3,592 )     4,230       (46 )     592           Income tax provision      1,303       1,872       —         3,175     Minority interest      —         129       —         129                                        Net income (loss)    $ (4,895 )   $ 2,229     $ (46 )   $ (2,712 )                                       72    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          Consolidated Statement of Cash Flows For the Year Ended January 1, 2006 (In thousands)         Guarantors     Non-Guarantors     Consolidated     CASH FLOWS FROM OPERATING ACTIVITIES                        Net cash (used in) provided by operating activities    $ (4,368 )   $ 7,079     $ 2,711          CASH FLOWS FROM INVESTING ACTIVITIES                        Payment for business acquisitions, net of cash acquired      —         (368 )     (368 )   Purchase of property, plant and equipment      (44,778 )     (8,362 )     (53,140 )   Proceeds from sale of property, plant and equipment      21,651       979       22,630                                Net cash used in investing activities      (23,127 )     (7,751 )     (30,878 )        CASH FLOWS FROM FINANCING ACTIVITIES                        Net borrowings under revolving credit facilities      32,973       (472 )     32,501     Contribution of capital from parent      100       —         100     Return of capital to parent      (1,267 )     —         (1,267 )   Repayments of the term notes      (6,494 )     (2,000 )     (8,494 )   Net borrowings of other debt      —         1,844       1,844     Debt issuance costs      (1,702 )     (13 )     (1,715 )   Dividends paid      (387 )     —         (387 )   Decrease in restricted cash      1,905       —         1,905                                Net cash provided by (used in) financing activities      25,128       (641 )     24,487          Effect of exchange rate changes on cash      (136 )     48       (88 )                              NET DECREASE IN CASH AND CASH EQUIVALENTS      (2,503 )     (1,265 )     (3,768 )        Cash and cash equivalents, beginning of year      9,541       6,314       15,855                                Cash and cash equivalents, end of year    $ 7,038     $ 5,049     $ 12,087                                 73    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          Consolidated Statement of Cash Flows For the Year Ended December 31, 2004 (In thousands)         Guarantors     Non-Guarantors     Consolidated     CASH FLOWS FROM OPERATING ACTIVITIES                        Net cash (used in) provided by operating activities    $ (36,892 )   $ 13,123     $ (23,769 )        CASH FLOWS FROM INVESTING ACTIVITIES                        Payment for business acquisitions, net of cash acquired      (876,090 )     4,000       (872,090 )   Purchase of property, plant and equipment      (36,157 )     (6,081 )     (42,238 )   Proceeds from sale of property, plant and equipment      12,376       378       12,754     Increase in cash in escrow      (4,997 )     —         (4,997 )                              Net cash used in investing activities      (904,868 )     (1,703 )     (906,571 )        CASH FLOWS FROM FINANCING ACTIVITIES                        Net borrowings under revolving credit facilities      28,676       (11,966 )     16,710     Net borrowings under the Securitization facility      (22,800 )     —         (22,800 )   Borrowings under the term notes      650,000       11,214       661,214     Borrowings under the 8.5% Senior Subordinated Notes      325,000       —         325,000     Proceeds from sale of common stock      229,627       —         229,627     Contribution of capital from parent      838       —         838     Repayments of the 7.08% Senior Notes      (160,000 )     —         (160,000 )   Repayments of the 3.67% Yen-denominated Senior Notes      (44,828 )     —         (44,828 )   Repayments of interest rate swap      (1,656 )     —         (1,656 )   Repayments of the term notes      (4,875 )     —         (4,875 )   Repayments of other debt      —         (5,542 )     (5,542 )   Debt issuance costs      (32,905 )     (252 )     (33,157 )   Dividends paid      (16,097 )     —         (16,097 )   Decrease in restricted cash      234       —         234                                Net cash provided by (used in) financing activities      951,214       (6,546 )     944,668          Effect of exchange rate changes on cash      (1,900 )     158       (1,742 )                              NET INCREASE IN CASH AND CASH EQUIVALENTS      7,554       5,032       12,586          Cash and cash equivalents, beginning of year      1,987       1,282       3,269                                Cash and cash equivalents, end of year    $ 9,541     $ 6,314     $ 15,855                                 74    SOLO CUP COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          Consolidated Statement of Cash Flows For the Year Ended December 31, 2003 (In thousands)         Guarantors     Non-Guarantors     Consolidated     CASH FLOWS FROM OPERATING ACTIVITIES                        Net cash provided by operating activities    $ 24,645     $ 4,968     $ 29,613          CASH FLOWS FROM INVESTING ACTIVITIES                        Purchase of property, plant and equipment      (30,059 )     (4,612 )     (34,671 )   Proceeds from sale of property, plant and equipment      2,062       2,987       5,049     Payment for business acquisitions, net of cash acquired      (5,039 )     —         (5,039 )   Increase in cash in escrow      (10,003 )     —         (10,003 )                              Net cash used in investing activities      (43,039 )     (1,625 )     (44,664 )        CASH FLOWS FROM FINANCING ACTIVITIES                        Net borrowings under revolving credit facilities      13,000       —         13,000     Net borrowings under the Securitization facility      2,800       —         2,800     Repayments of other debt      (75 )     (2,711 )     (2,786 )   Dividends paid      (9,145 )     —         (9,145 )   Decrease in restricted cash      (239 )     —         (239 )                              Net cash provided by (used in) financing activities      6,341       (2,711 )     3,630          Effect of exchange rate changes on cash      3,271       (1,208 )     2,063                                NET DECREASE IN CASH AND CASH EQUIVALENTS      (8,782 )     (576 )     (9,358 )        Cash and cash equivalents, beginning of year      10,769       1,858       12,627                                Cash and cash equivalents, end of year    $ 1,987     $ 1,282     $ 3,269                                 75
(a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s chief executive officer, chief operating officer and chief financial officer, has evaluated the effectiveness of the Company’s 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 (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s chief executive officer, chief operating officer and chief financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting on a timely basis, information required to be disclosed by the Company in the reports that it files under the Exchange Act.      (b) Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended January 1, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.   Item 9B. Other Information.  None.     76     Part III   Item 10. Directors and Executive Officers of the Registrant.  The following table sets forth the name, age and position of our executive officers and directors as of March 10, 2006.             Name    Age     Position   Robert L. Hulseman    73    Chairman, Chief Executive Officer and Director   John F. Hulseman    75    Vice Chairman and Director   Ronald L. Whaley    52    President, Chief Operating Officer and Director (1)   Robert M. Korzenski    51    Executive Vice President – Sales and Marketing   Susan H. Marks    42    Executive Vice President and Chief Financial Officer   Kathleen C. Wolf    61    Executive Vice President – Administration (1)   Hans H. Heinsen    52    Executive Vice President – International   Thomas Pasqualini    48    Executive Vice President – Supply Chain (1)   Jan Stern Reed    46    Executive Vice President, General Counsel and Secretary   Anil P. Shah    54    Executive Vice President – Operations (1)   Sheila M. Hulseman    70    Director   Georgia S. Hulseman    73    Director   Daniel S. O’Connell    52    Director   John R. Woodard    41    Director      (1) On March 28, 2006, the Company announced that Mr. Shah and Ms. Wolf would be leaving the Company. Thomas Pasqualini will be assuming the responsibilities currently performed by Mr. Shah, and Ronald L. Whaley will be assuming the responsibilities on an interim basis currently performed by Ms. Wolf.  Robert L. Hulseman is a director and has served as Chairman and Chief Executive Officer of the Company since January 2004. 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 Cup Company in 1950. Mr. Hulseman is also the husband of Sheila M. Hulseman, the brother of John F. Hulseman and the brother-in-law of Georgia S. Hulseman.  John F. Hulseman is a director and has served as Vice Chairman of the Company since January 2004. Mr. Hulseman served as a director of Solo Illinois from March 1955 to June 2005. He served as President of Solo Illinois from January 1998 to January 2004, as Vice Chairman of Solo Illinois from January 2004 to June 2005, and as Secretary of Solo Illinois from January 1999 to November 2004. Mr. Hulseman began his career in the disposable foodservice and food packaging products industry with Solo Cup Company in 1950. Mr. Hulseman is also the husband of Georgia S. Hulseman, the brother of Robert L. Hulseman and the brother-in-law of Sheila M. Hulseman.  Ronald L. Whaley is a director and President and Chief Operating Officer of the Company, having served in these capacities since January 2004. He served as President and Chief Operating Officer of Solo Illinois from January 2004 to October 2005. Prior to that, Mr. Whaley served as Solo Illinois’ Chief Operating Officer and Chief Financial Officer from November 2003 to January 2004, as Chief Operations Officer and Chief Financial Officer from August 2001 to November 2003 and as Chief Financial Officer and Executive Vice President from January 1999 to August 2001. Mr. Whaley has been a director of Solo Illinois since April 1987.  Robert M. Korzenski has served as Executive Vice President – Sales and Marketing of the Company since February 2005. Prior to that, he served as Senior Vice President – Integration; Hoffmaster-Fonda Brands of Solo Cup Company 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 as President and Chief Operating Officer of The Fonda Group, Inc. from March 1998 until March 2002. Prior to that, he was Senior Vice President of The Fonda Group, Inc. since January 1997 and President of the Hoffmaster division since its acquisition by The Fonda Group, Inc. in March 1995.    77    Susan H. Marks has served as Chief Financial Officer and Executive Vice President of the registrant since January 2004, and also held the positions of Treasurer from June 2005 to March 2006, and Assistant Secretary from February 2004 to June 2005. She served as Chief Financial Officer and Executive Vice President of Solo Illinois from January 2004 to October 2005. From July 2002 to January 2004, Ms. Marks served as Senior Vice President, Global Finance, of Solo Illinois. From February 1999 to July 2002, Ms. Marks was the Vice President/Controller of Solo Illinois. Prior to joining Solo Illinois, Ms. Marks served as the Chief Financial Officer of MST Analytics, Inc., a supplier of semiconductor gas monitoring system products, from October 1998 until January 1999.  Kathleen C. Wolf  has served as Executive Vice President – Administration of the Company since June 2005 and from January 2005 to June 2005, as Executive Vice President/Human Resources of the Company. Ms. Wolf served as Executive Vice President/Human Resources of Solo Illinois from January 2004 to October 2005. From July 2002 to January 2004, she served as Senior Vice President, Global Human Resources, of Solo Illinois and prior to that she was Vice President, Human Resources beginning in March 2001. Prior to joining Solo Illinois, Ms. Wolf worked for Equity Residential Properties Trust, a real estate investment trust, as Senior Vice President, Human Resources and Administration, from 1997 to March 2000.  Hans H. Heinsen has served as Executive Vice President – International of the Company since April 2005. Prior to that time, he served as Senior Vice President and Treasurer of the Company and Solo Illinois from February 2004 to April 2005 and as Senior Vice President-Finance and Chief Financial Officer of Sweetheart from March 1998 to February 2004. From June 1996 to March 2002, he was Chief Financial Officer of The Fonda Group, Inc., which became an affiliate of Sweetheart in March 1998. Prior to joining Fonda, Mr. Heinsen spent 21 years in a variety of corporate finance positions with The Chase Manhattan Bank, N.A.  Thomas Pasqualini has served as Executive Vice President – Global Supply Chain of the Company since June 2005. From July 2004 to June 2005, he served as Senior Vice President – Global Supply Chain and from February 2004 to July 2004, he served as Senior Vice President - Integration: Sweetheart Brands of the Company and of Solo Illinois. From August 2002 to February 2004, Mr. Pasqualini served as Senior Vice President - Manufacturing and Logistics of Sweetheart. For five years prior to that, he was Vice President of Logistics and Distribution and director of Distribution at Sweetheart.  Jan Stern Reed has served as Executive Vice President, General Counsel and Secretary of the Company since June 2005. From December 2004 to June 2005, she served as Senior Vice President, General Counsel and Secretary of the Company. Prior to joining the Company, Ms. Reed served as Associate General Counsel and Corporate Secretary for Baxter International Inc., 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.  Anil R. Shah has served as Executive Vice President – Operations of the Company since June 2005 and from January 2004 to June 2005 as Senior Vice President/Operations. Mr. Shah served as Senior Vice President – Operations, of Solo Illinois from July 2002 to January 2004. From September 1999 to July 2002, Mr. Shah served as Vice President of Thermoforming of Solo Illinois. Prior to joining Solo Illinois, Mr. Shah worked at Owens-Illinois, Inc., a manufacturer of glass and plastic packaging products, as a regional manager in charge of manufacturing operations and new product development, from November 1995 to September 1999.  Sheila M. Hulseman is a director of the Company, having served in that capacity since January 2004. Ms. Hulseman served as a director of Solo Illinois from April 1989 to June 2005. Ms. Hulseman is also the wife of Robert L. Hulseman and the sister-in-law of John F. Hulseman and Georgia S. Hulseman.  Georgia S. Hulseman is a director of the Company, having served in that capacity since January 2004. Ms. Hulseman served as a director of Solo Illinois from April 1989 to June 2005. Ms. Hulseman is also the wife of John F. Hulseman and the sister-in-law of Robert L. Hulseman and Sheila M. Hulseman.    78    Daniel S. O’Connell is a director of the Company, having served in that capacity since February 2004. Mr. O’Connell founded Vestar Capital Partners in April 1988 and has served as its Chief Executive Officer since that time. Prior to founding Vestar Capital Partners, 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 Birds Eye Foods, Inc., Argo-Tech Corporation, Sunrise Medical, Inc. and St. John Knits International, Inc. In addition, he is a trustee of Brown University and is on the Advisory Board of the Yale University School of Management.  John R. Woodard is a director of the Company, having served in that capacity since February 2006. Mr. Woodard is a Managing Director of Vestar Capital Partners and jointly chairs Vestar’s industrial practice. Mr. Woodard joined Vestar Capital Partners in 1998. Prior to that time he served as a Managing Director in the private equity practice of The Blackstone Group, an investment and advisory firm from March 1996 to February 1998. From April 1990 to March 1996, Mr. Woodard was a Vice President of Vestar Capital Partners. Mr. Woodard is currently a director of Consolidated Container Holdings, LLC, Argo-Tech Corporation and Duff & Phelps, LLC.  The Board of Directors of the Company has determined that it is in the Company’s best interests to have the entire Board of Directors act as the Company’s audit committee. Accordingly, it does not have a separately designated standing audit committee or other committee performing a similar function. In addition, the board has determined that Ronald Whaley qualifies as an “audit committee financial expert,” as defined by the Securities and Exchange Commission (the “SEC”). Mr. Whaley is not “independent,” as defined by the SEC in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.  The Company adopted a revised Code of Business Conduct effective January 3, 2006 that applies to all of its employees, including its Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer and Controller. The Code of Business Conduct is filed as an exhibit to this Form 10-K. In addition, the Company makes available free of charge on its website, www.solocup.com, under the heading “Working at Solo,” a copy of its Code of Business Conduct.    79
Annual Compensation      Long-TermCompensation Number ofsecuritiesunderlyingoptionsgranted          Name and Principal Position    Year    Salary    Bonus     Other        All OtherCompensation     Robert L. HulsemanChairman and ChiefExecutive Officer    200520042003    $$$ 1,100,0001,100,0001,100,000    $$$ —  —  —         $$$ 62,52157,16155,963 (1)(1)(1)   —  —  —      $$$ 7,928—  —   (2)             John F. HulsemanVice Chairman    200520042003    $$$ 1,100,0001,100,0001,100,000    $$$ —  —  —         $$$ 30,32629,90028,957 (3)(3)(3)   —  —  —      $$$ —  —  —                 Ronald L. WhaleyPresident and ChiefOperating Officer    200520042003    $$$ 920,250875,000750,000    $$$ 343,932837,900837,560 (4) (7)   $$$ 351,906215,443232,684 (5)(6)(8)   —  376,953—      $$$ 9,1829,1829,182 (2)(2)(2)           Susan H. MarksExecutive Vice Presidentand Chief Financial Officer    200520042003    $$$ 419,250370,833268,750    $$$ —  248,43084,580   (10)   $$$ 55,70968,23611,377 (9)(9)(9)   —  125,651—      $$$ 2,4222,4232,423 (2)(2)(2)           Kathleen C. WolfExecutive Vice President /Administration    200520042003    $$$ 368,100335,875212,690    $$$ —  229,32075,690   (12)   $$$ 47,56557,10717,969 (11)(11)(11)   —  94,238—      $$$ 7,4628,4638,463 (2)(2)(2)    (1) Represents $27,006 in 2003 and $27,261 in each of 2004 and 2005 for an automobile allowance; personal tax and accounting services valued at $25,000 for each of 2003, 2004 and 2005; $3,957 in 2003, $4,900 in 2004 and $5,326 in 2005 of paid health insurance premiums; and $4,934 of tax gross ups in 2005.    (2) Represents whole life insurance premiums paid on behalf of Mr. Hulseman, Mr. Whaley, Ms. Marks and Ms. Wolf.    (3) Represents personal tax and accounting services valued at $25,000 for each of 2003, 2004 and 2005; and $3,957 in 2003, $4,900 in 2004 and $5,326 in 2005 of paid health insurance premiums.    (4) On August 4, 1999, we extended an interest free loan in the amount of $1.7 million to Mr. Whaley pursuant to his previous employment agreement. The employment agreement provides for the loan to be repaid out of the net proceeds of Mr. Whaley’s annual bonuses through August 3, 2009. To the extent that Mr. Whaley’s annual bonus falls below the amount corresponding to the annual prorated portion of the initial principal amount of the loan (as was the case in 2005), the employment agreement provides that the loan will be forgiven as if a bonus in the amount of that annual prorated portion had been paid. The amount shown in the table above represents the amount of the loan forgiven for 2005.    80      (5) For 2005, represents $102,974 of reimbursement for vacation expenses; $82,565 of tax gross-ups; $29,591 reflecting the market rate of interest on an interest-free loan granted to Mr. Whaley (see Item 13. Certain Relationships and Related Transactions); a $20,757 automobile allowance; $4,000 granted as a scholarship for Mr. Whaley’s child pursuant to the Company’s policy of granting higher education scholarships to children of employees who have worked for more than five years at the Company; $5,326 of paid health insurance premiums; $2,518 of reimbursement for health club fees; and $104,175 for personal use of a chartered aircraft.    (6) For 2004, represents $88,572 of reimbursement for vacation expenses; $75,250 of tax gross-ups; $21,039 reflecting the market rate of interest on an interest-free loan granted to Mr. Whaley (see Item 13. Certain Relationships and Related Transactions); a $19,688 automobile allowance; $4,000 granted as a scholarship for Mr. Whaley’s child pursuant to the Company’s policy of granting higher education scholarships to children of employees who have worked for more than five years at the Company; $4,962 of paid health insurance premiums; and $1,932 of reimbursement for health club fees.    (7) For 2003, represents a $343,958 performance-based annual bonus earned in the year ended December 31, 2003 and a deferred benefit in the amount of $493,602 accrued during the year ended December 31, 2003.    (8) For 2003, represents $96,304 of reimbursement for vacation expenses; $85,797 of tax gross-ups; $19,910 reflecting the market rate of interest on an interest-free loan granted to Mr. Whaley (see Item 13. Certain Relationships and Related Transactions); a $19,862 automobile allowance; $5,000 granted as a scholarship for Mr. Whaley’s child pursuant to the Company’s policy of granting higher education scholarships to children of employees who have worked for more than five years at the Company; $4,063 of paid health insurance premiums; and $1,748 of reimbursement for health club fees.    (9) Represents $34,388 in 2004 and $26,223 in 2005 of reimbursement for vacation expenses; $5,804 in 2003, $6,026 in 2004 and $4,208 in 2005 of an automobile allowance; $4,063 in 2003, $4,962 in 2004 and $5,326 in 2005 of paid health insurance premiums; $1,510 in 2003, $22,860 in 2004 and $18,800 in 2005 of tax gross-ups; and $1,152 of reimbursement for health club fees in 2005.    (10) For 2003, represents a $63,375 performance-based annual bonus earned in the year ended December 31, 2003 and a deferred benefit in the amount of $21,205 accrued during the year ended December 31, 2003.    (11) Represents $21,663 in 2004 and $13,011 in 2005 of reimbursement for vacation expenses; $10,459 in 2003, $13,862 in 2004 and $14,707 in 2005 for an automobile allowance; $2,235 in 2003, $2,679 in 2004 and $4,194 in 2005 of paid health insurance premiums; $5,275 in 2003, $18,903 in 2004 and $14,388 in 2005 of tax gross-ups; and $1,265 of reimbursement for health club fees in 2005.    (12) For 2003, represents a $58,500 performance-based annual bonus earned in the year ended December 31, 2003 and a deferred benefit in the amount of $17,190 accrued during the year ended December 31, 2003.  There were no individual grants of stock options made to the named executive officers in 2005 under SCIC’s Management Investment and Incentive Compensation Plan.    81    The following table contains information relating to the number of exercisable stock options held by the named executive officers, as well as the number and value of their unexercised options as of January 1, 2006.                    Number of securities underlyingunexercised options at January 1, 2006    Value of unexercisedin-the-money options atJanuary 1, 2006 (1)   Name    Exercisable    Unexercisable      Robert L. Hulseman    —      —      —     John F. Hulseman    —      —      —     Ronald L. Whaley    113,086    263,867    —     Susan H. Marks    37,695    87,956    —     Kathleen C. Wolf    28,271    65,967    —      (1) At January 1, 2006, there were no exercisable or unexercisable options in-the-money.  Director Compensation  The Company does not pay any compensation to its directors; however, it does reimburse reasonable expenses for attending board meetings.  Employment Agreements  SCIC and Solo Illinois entered into employment agreements with Ronald L. Whaley, Susan H. Marks and Kathleen C. Wolf, as described below.  Under his February 27, 2004 employment agreement, Mr. Whaley will be employed as Chief Operating Officer and President for a term of five years, which term will automatically be extended for successive one-year periods commencing at the end of the initial term unless earlier terminated by SCIC or Mr. Whaley. In addition to base salary, which is reviewed annually and can be increased but not decreased, Mr. Whaley is eligible to receive an annual bonus equal to a percentage of annual salary based on the achievement of target EBITDA levels and debt reduction amounts with a target bonus equal to 95% of his base salary.  Upon a termination of employment due to death or disability, SCIC will pay to Mr. Whaley all accrued and unpaid base salary and bonus and a pro rated annual bonus for the year in which the termination occurs.  If Mr. Whaley terminates his employment for “good reason” or SCIC terminates Mr. Whaley’s employment without “cause,” SCIC will pay to Mr. Whaley all accrued and unpaid base salary and bonus, a pro rated annual bonus for the year in which the termination occurs, and a lump sum severance amount equal to two times (or, if such termination of employment occurs within 60 days prior to or two years following a change of control, three times) the sum of his annual base salary and target bonus. Additionally, SCIC will provide Mr. Whaley with continued coverage under SCIC’s welfare benefit programs for one year or until Mr. Whaley obtains similar coverage by a new employer.  Ms. Marks and Ms. Wolf are each party to employment agreements dated April 14, 2004. Each employment agreement has a term of three years, which term will automatically be extended for successive one-year periods commencing at the end of the initial term unless earlier terminated by SCIC or the executive. In addition to base salary (which is reviewed annually and can be increased but not decreased), each executive is eligible to receive an annual bonus equal to 65% percent of her annual salary based on the achievement of target EBITDA levels and debt reduction amounts.    82    Upon a termination of employment due to death or disability, SCIC will pay to the executive all accrued and unpaid base salary and bonus, and a pro rated annual bonus for the year in which the termination occurs.  If the executive terminates his employment for “good reason” or SCIC terminates the executive’s employment without “cause,” as such terms are defined in the employment agreements, SCIC 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) one and one-half times annual base salary. Additionally, SCIC will provide the executive with continued coverage under SCIC’s welfare benefit programs for the above-described severance period or until the executive obtains similar coverage by a new employer.  During 2004, Mr. Whaley, Ms. Marks and Ms. Wolf, converted amounts formerly accrued to deferred compensation accounts pursuant to the executive’s prior employment agreement with Solo Illinois into convertible preferred units (“CPUs”) issued under SCIC’s Management Investment and Incentive Compensation Plan. The CPUs are subject to all of the terms and conditions of the plan and a Convertible Preferred Unit Award Agreement between the executive and the Company. During 2004, Mr. Whaley converted his deferred compensation account into 1,907 CPUs, Ms. Marks converted her deferred compensation account into 32 CPUs, and Ms. Wolf converted her deferred compensation account into 27 CPUs. The CPUs are held for the account of the executive and generally entitle the executive to dividend equivalent rights as well as the right to participate in certain distributions, sales proceeds, redemption events and conversion rights to the same extent as the holders of SCIC’s convertible participating preferred shares. Upon a change in control or other liquidity event (or termination of an executive’s employment prior to a liquidity event), as such terms are defined in the plan, the executive will be entitled to receive a distribution of the CPUs, together with any accrued dividend equivalents, held for the account of the executive. Such distribution will generally be made in the form of SCIC’s convertible participating preferred shares on a one-for-one basis, or in the form of SCIC’s common stock, cash, or other marketable securities to the extent that the convertible participating preferred shares of SCIC are so converted in connection with the change in control or other liquidity event.  Compensation Committee Interlocks and Insider Participation  For the fiscal year ended January 1, 2006, the entire board of directors of the Company determined executive compensation. None of our executive officers served as a director or member of the compensation committee or other board committee performing equivalent functions of another corporation.    83
Common Stock      Convertible Participating Preferred Stock      Stock OptionsExercisable Within 60 Days   Name of Beneficial Owner    SharesBeneficiallyOwned     Percent of ClassBeneficiallyOwned     SharesBeneficiallyOwned    Percent ofClassBeneficiallyOwned       SCC Holding Company LLC(1)    10,425,100     100.0 %(2)   —      —       —     Vestar Capital Partners IV, L.P. and affiliates(3)    5,071,200 (4)   32.7 %(4)   240,000    99.6 %   —     Robert L. Hulseman(5)    10,425,100     100.0 %(2)   —      —       —     Ronald L. Whaley(6)    113,086 (7)     *   —      —       113,086   John F. Hulseman(5)    10,425,100     100.0 %(2)   —      —       —     Susan H. Marks(6)    39,111 (8)     *   67      *   37,695   Kathleen C. Wolf(6)    31,969 (8)     *   175      *   28,271   Sheila M. Hulseman(9)    10,425,100     100.0 %(2)   —      —       —     Georgia M. Hulseman(10)    10,425,100     100.0 %(2)   —      —       —     Daniel S. O’Connell(3)    5,071,200 (4)   32.7 %(4)   240,000    99.6 %   —     John R. Woodard(3)    5,071,200 (4)   32.7 %(4)   240,000    99.6 %   —     All directors and executive officers as a group (14 persons)(3)(4)(5)(8)(9)(10)    15,801,520 (11)   100.0 %   240,842    100.0 %   287,428    * Indicates less than 1% ownership.    (1) Each of Robert L. and John F. Hulseman hold 50% of the voting membership interests of SCC Holding Company LLC.    (2) If the issued and outstanding shares of CPPS convert into shares of common stock, this percentage would decrease to 67.2%.    (3)  Vestar Capital Partners IV, L.P. owns 216,071 shares of CPPS, Vestar Cup Investment, LLC owns 18,929 shares of CPPS and Vestar Cup Investment II, LLC owns 5,000 shares of CPPS. Vestar Capital Partners IV, L.P. is the managing member of both Vestar Cup Investment, LLC and Vestar Cup Investment II, LLC. Vestar Capital Partners IV, L.P. 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     84          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. John R. Woodard serves as a Managing Director of Vestar Associates Corporation IV, Vestar Cup Investment II, LLC and Vestar Cup Investment, LLC. In their roles as directors and/or officers of these entities, Mr. O’Connell, and Mr. Woodard may be deemed to share beneficial ownership of Vestar Capital Partners IV, L.P.’s shares of SCIC common stock and CPPS. Each of Mr. O’Connell and Mr. Woodard disclaims beneficial ownership of those shares except to the extent of his pecuniary interest therein. The address of Vestar Capital Partners IV, L.P. is 245 Park Avenue, 41st Floor, New York, New York 10167.    (4) Represents beneficial ownership of shares of common stock issuable upon conversion of the CPPS.    (5) Each of Robert L. and John F. Hulseman hold 50% of the voting membership interests of SCC Holding Company LLC and, as a result, may be deemed to beneficially own the shares of SCIC common stock held by SCC Holding Company LLC. Each of Robert L. and John F. Hulseman disclaims beneficial ownership of those shares except to the extent of his pecuniary interest therein.    (6) In 2004, Mr. Whaley, Ms. Marks and Ms. Wolf converted amounts formerly accrued to their deferred compensation accounts with Solo Illinois pursuant to their prior employment agreements into CPUs, with terms and conditions as set forth in the executive’s CPU award agreement, as follows: Mr. Whaley—1,907; Ms. Marks – 32; and Ms. Wolf – 27. These units are not reflected as shares owned in the table above. See Item 11. Executive Compensation. for additional detail.    (7) Includes beneficial ownership of shares of common stock issuable upon exercise of stock options exercisable within 60 days of March 10, 2006.    (8) Includes beneficial ownership of shares of common stock issuable upon exercise of stock options exercisable within 60 days of March 10, 2006 and shares of common stock issuable upon conversion of CPPS.    (9) Consists of shares owned by Robert L. Hulseman, Sheila M. Hulseman’s husband, which may be deemed to be beneficially owned by her. Sheila M. Hulseman disclaims beneficial ownership of those shares except to the extent of her pecuniary interest therein.    (10) Consists of shares owned by John F. Hulseman, Georgia M. Hulseman’s husband, which may be deemed to be beneficially owned by her. Georgia M. Hulseman disclaims beneficial ownership of those shares except to the extent of her pecuniary interest therein.    (11) Includes 5,088,992 shares of common stock issuable upon conversion of the CPPS.    85
Daniel S. O’Connell and John R. Woodard, two of the seven directors of each of SCIC and Solo Delaware were appointed by Vestar pursuant to the terms of the convertible participating preferred stock owned by Vestar. Mr. O’Connell is the President, Chief Executive Officer and sole director of Vestar Associates Corporation IV, the general partner of Vestar Associates IV, L.P., the general partner of Vestar Capital Partners IV, L.P. Mr. Woodard serves as a Managing Director of Vestar Cup Investment, LLC, Vestar Cup Investment II, LLC and Vestar Associates Corporation IV. In February 2006, John R. Woodard replaced Norman W. Alpert as a Vestar-appointed director. Mr. Alpert serves as a managing Director of Vestar Capital Partners.  In connection with its $240.0 million equity investment, Vestar entered into a preferred stock purchase agreement with SCIC; a stockholders’ agreement with SCIC, Solo Cup Company, SCC Holding Company LLC and other stockholders of SCIC; a registration rights agreement with SCIC and SCC Holding Company LLC and other stockholders of SCIC; and a management agreement with SCIC and Solo Cup Company. Pursuant to the management agreement, SCIC and Solo Delaware paid Vestar in 2005 an annual advisory fee of $800,000, plus $62,857 for reimbursement of its out-of-pocket expenses.  On August 4, 1999, we extended an interest free loan in the amount of $1.7 million to Ronald L. Whaley, our President and Chief Operating Officer, pursuant to his previous employment agreement. The employment agreement provides for the loan to be repaid out of the net proceeds of Mr. Whaley’s annual bonuses through August 3, 2009. To the extent that Mr. Whaley’s annual bonus falls below the amount corresponding to the annual prorated portion of the initial principal amount of the loan, the employment agreement provides that the loan will be forgiven as if a bonus in the amount of that annual prorated portion had been paid. As of January 1, 2006, the outstanding principal amount of the loan was $639,000. The largest outstanding principal balance of the loan during fiscal year 2005 was $852,000.  The Company from time to time provides funds to Mr. Whaley with respect to business expenses. To the extent such amounts exceed business expenses actually incurred, they are deemed advances to be repaid to the Company.  During 2005, Solo Delaware performed various functions free of charge on behalf of the holders of Solo Illinois’s voting and nonvoting stock, comprising Robert L. and John F. Hulseman and their respective children, including preparation of personal income tax returns and accounting and tax return preparation for the Solo Cup Foundation. The amounts attributed to these services are included in the amounts listed as benefits in the Summary Compensation Table in Item 11. Executive Compensation.  In 2005, the Company paid $25,194 for materials and services from entities owned by members of the Hulseman family.    87
For the year ended January 1, 2006     For the year ended December 31, 2004   Audit Fees (1)    $ 1,880    $ 1,896   Audit Related Fees (2)      190      4,241   Tax Fees (3)      17      158   All Other Fees      —        —                     Total    $ 2,087    $ 6,295                    (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.    (2) Audit Related Fees consisted of services that are traditionally performed by the independent auditor, including employee benefit plan audits and due diligence related to mergers, acquisitions and other matters, as well as the S-4 registration statement.    (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 Board of Directors reviews all relationships between KPMG LLP and Solo Cup Company, 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.    88     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,” beginning on page 32 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 92 of this document.        89     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      By:    /s/ Susan H. Marks      Susan H. Marks Chief Financial Officer and Executive Vice President   (Principal Financial and Accounting Officer and Duly Authorized Officer)  Date: March 29, 2006  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/ Robert L. Hulseman Robert L. Hulseman Chairman of the Board, Chief Executive Officer andDirector (Principal Executive Officer)       Date: March 29, 2006        By:    /s/ Ronald L. Whaley Ronald L. Whaley President, Chief Operating Officer and Director      Date: March 29, 2006        By:    /s/ Susan H. Marks Susan H. Marks Chief Financial Officer and Executive Vice President (Principal Financial and Accounting Officer)      Date: March 29, 2006        By:    /s/ Sheila M. Hulseman Sheila M. Hulseman Director      Date: March 29, 2006        By:    /s/ Daniel S. O’Connell Daniel S. O’Connell Director      Date: March 29, 2006       By:    /s/ John R. Woodard John R. Woodard Director      Date: March 29, 2006    90    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.    91     INDEX OF EXHIBITS FILED WITH OR  INCORPORATED BY REFERENCE INTO  FORM 10-K OF SOLO CUP COMPANY  FOR THE YEAR ENDED JANUARY 1, 2006          ExhibitNumber     Description  2.1    Agreement and Plan of Merger, dated as of December 22, 2003, by and among Solo Cup Company, Solo Acquisition Corp. and SF Holdings Group, Inc. (incorporated by reference from Exhibit 2.1 to the Form S-4 filed on June 24, 2004).     2.2    Amendment No. 1, dated as of February 27, 2004, to the Agreement and Plan of Merger, dated as of December 22, 2003, by and among Solo Cup Company, Solo Acquisition Corp. and SF Holdings Group, Inc. (incorporated by reference from Exhibit 2.2 to the Form S-4 filed on June 24, 2004).     3.1    Amended and Restated Certificate of Incorporation of Solo Cup Company, a Delaware corporation (incorporated by reference from Exhibit 3.1 to the Form S-4 filed on June 24, 2004).     3.2    Second Amended and Restated By-laws of Solo Cup Company, a Delaware corporation (incorporated by reference from Exhibit 99.1 to the Form 8-K filed on June 24, 2005).     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 from Exhibit 4.2 to the Form S-4 filed on June 24, 2004).     4.2    Form of 81/2% Senior Subordinated Notes (incorporated by reference from Exhibit 4.2 to the Form S-4 filed 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 from Exhibit 4.4 to the Form S-4 filed on June 24, 2004).     4.4    Certificate of Designations of Convertible Participating Preferred Stock of Solo Cup Investment Corporation (incorporated by reference from Exhibit 4.5 to the Form S-4 filed on June 24, 2004).     4.5    Certificate of Designations of Redeemable Preferred Stock of Solo Cup Investment Corporation (incorporated by reference from Exhibit 4.6 to the Form S-4 filed on June 24, 2004).     10.1    Solo Cup Investment Corporation 2004 Management Investment and Incentive Compensation Plan (incorporated by reference from Exhibit 10.1 to the Form S-4 filed on June 24, 2004).*    92             10.2    Amendment No. 1, dated as of December 13, 2005, to the Solo Cup Investment Corporation 2004 Management Investment and Incentive Compensation Plan.*     10.3    Form of Solo Cup Investment Corporation Stock Option Award Agreement under the 2004 Management Investment and Incentive Compensation Plan (incorporated by reference from Exhibit 10.2 to the Form S-4 filed on June 24, 2004).*     10.4    Form of Convertible Preferred Unit Award Agreement (incorporated by reference from Exhibit 10.3 to the Form S-4 filed on June 24, 2004).*     10.5    Plan Document and Summary Plan Description for Solo Management Company Benefit Plan (incorporated by reference from Exhibit 10.4 to the Form S-4 filed on June 24, 2004).*     10.6    Employment Agreement, dated as of February 27, 2004, among Solo Cup Investment Corporation, Solo Cup Company, an Illinois corporation, and Ronald L. Whaley (incorporated by reference from Exhibit 10.5 to the Form S-4 filed on June 24, 2004).*     10.7    Employment Agreement, dated as of April 14, 2004, among Solo Cup Investment Corporation, Solo Cup Company, an Illinois corporation, and Hans H. Heinsen (incorporated by reference from Exhibit 10.8 to the Form S-4 filed on June 24, 2004).*     10.8    Employment Agreement, dated as of April 14, 2004, among Solo Cup Investment Corporation, Solo Cup Company, an Illinois corporation, and Susan H. Marks (incorporated by reference from Exhibit 10.10 to the Form S-4 filed on June 24, 2004).*     10.9    Employment Agreement, dated as of April 14, 2004, among Solo Cup Investment Corporation, Solo Cup Company, an Illinois corporation, and Robert M. Korzenski (incorporated by reference from Exhibit 10.11 to the Form S-4 filed on June 24, 2004).*     10.10    Employment Agreement, dated as of April 14, 2004, among Solo Cup Investment Corporation, Solo Cup Company, an Illinois corporation, and Thomas Pasqualini (incorporated by reference from Exhibit 10.12 to the Form S-4 filed on June 24, 2004).*     10.11    Employment Agreement, dated as of April 14, 2004, among Solo Cup Investment Corporation, Solo Cup Company, an Illinois corporation, and Anil R. Shah (incorporated by reference from Exhibit 10.13 to the Form S-4 filed on June 24, 2004).*     10.12    Employment Agreement, dated as of April 14, 2004, among Solo Cup Investment Corporation, Solo Cup Company, an Illinois corporation, and Kathleen C. Wolf (incorporated by reference from Exhibit 10.14 to the Form S-4 filed on June 24, 2004).*    93             10.13    Credit Agreement, dated as of February 27, 2004, among Solo Cup Company, a Delaware corporation, Solo Cup Investment Corporation, Bank of America, N.A., as Administrative Agent and Swing Line Lender and as an L/C Issuer, Banc of America Securities LLC and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Book Running Managers, Citicorp North America, Inc., as Syndication Agent, Harris Trust and Savings Bank, as Documentation Agent and as an L/C Issuer, and various lending parties named therein (incorporated by reference from Exhibit 10.15 to the Form S-4 filed on June 24, 2004).     10.14    Amendment No. 1, dated as of March 31, 2005, to the Credit Agreement, dated as of February 27, 2004, among Solo Cup Company, a Delaware corporation, Solo Cup Investment Corporation, Bank of America, N.A., as Administrative Agent and Swing Line Lender and as an L/C Issuer, Banc of America Securities LLC and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Book Running Managers, Citicorp North America, Inc., as Syndication Agent, Harris Trust and Savings Bank, as Documentation Agent and as an L/C Issuer, and various lending parties named therein (incorporated by reference from Exhibit 99.1 to the Form 8-K filed on April 6, 2005).     10.15    Amendment No. 2, dated as of October 14, 2005, to the Credit Agreement, dated as of February 27, 2004, as amended, among Solo Cup Company, a Delaware corporation, Solo Cup Investment Corporation, Bank of America, N.A., as Administrative Agent and Swing Line Lender and as an L/C Issuer, Banc of America Securities LLC and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Book Running Managers, Citicorp North America, Inc., as Syndication Agent, Harris Trust and Savings Bank, as Documentation Agent and as an L/C Issuer, and various lending parties named therein (incorporated by reference from Exhibit 99.1 to the Form 8-K filed on October 17, 2005).     10.16    Amendment No. 3, dated as of March 27, 2006, to the Credit Agreement, dated as of February 27, 2004, as amended, among Solo Cup Company, a Delaware corporation, Solo Cup Investment Corporation, Bank of America, N.A., as Administrative Agent and Swing Line Lender and as an L/C Issuer, Banc of America Securities LLC and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Book Running Managers, Citicorp North America, Inc., as Syndication Agent, Harris Trust and Savings Bank, as Documentation Agent and as an L/C Issuer, and various lending parties named therein.     10.17    Management Agreement, dated as of February 27, 2004, among Solo Cup Investment Corporation, Solo Cup Company, a Delaware corporation, and Vestar Capital Partners (incorporated by reference from Exhibit 10.16 to the Form S-4 filed on June 24, 2004).     10.18    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 from Exhibit 10.17 to the Form S-4 filed on June 24, 2004).     10.19    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, Solo Cup Company, a Delaware corporation, and Ronald L. Whaley (Patrick H. Bye, Hans H. Heinsen, Robert M. Korzenski, Stephen R. LaHood, Susan H. Marks, Thomas Pasqualini, Anil R. Shah and Kathleen C. Wolf 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) (incorporated by reference from Exhibit 10.18 to the Form S-4 filed on June 24, 2004).     10.20    Form of Joinder to Stockholders’ Agreement (incorporated by reference from Exhibit 10.19 to the Form S-4 filed 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, Vestar Cup Investment II, LLC, and Ronald L. Whaley (Patrick H. Bye, Hans H. Heinsen, Robert M. Korzenski, Stephen R. LaHood, Susan H. Marks, Thomas Pasqualini, Anil R. Shah and Kathleen C. Wolf 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 10.21) (incorporated by reference from Exhibit 10.20 to the Form S-4 filed on June 24, 2004).    94             10.22    Form of Joinder to Registration Rights Agreement (incorporated by reference from Exhibit 10.21 to the Form S-4 filed on June 24, 2004).     10.23    Agreement entered into as of the first day of January 2002, by and between Solo Cup Company, an Illinois corporation, and DSC Logistics, Inc. (incorporated by reference from Exhibit 10.24 to the Form S-4 filed on June 24, 2004).     10.24    Credit Agreement dated as of September 24, 2004 between Lily Cups Inc. as Borrower and GE Canada Finance Holding Company as Agent and Lender (incorporated by reference from Exhibit 4.7 to the Form 10-Q filed on November 5, 2004).     10.25    Employment Agreement, dated as of November 30, 2004, among Solo Cup Investment Corporation, Solo Cup Company, an Illinois corporation, and Jan Stern Reed (incorporated by reference from Exhibit 99.1 to the Form 8-K filed on December 3, 2004).*     10.26    Settlement Agreement, dated as of February 16, 2005, between Solo Cup Company, an Illinois corporation, and DSC Logistics, Inc., an Indiana corporation (incorporated by reference from Exhibit 99.1 to the Form 8-K filed on February 18, 2005).     14.1    Solo Cup Company’s Code of Business Conduct.     21    List of Subsidiaries of Solo Cup Company, a Delaware corporation.     31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     31.2    Certification of Chief Operating Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     31.3    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     32.1    Certification of Chief 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 Chief Operating Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     32.3    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    * Indicates a management contract or a compensatory plan or agreement.    95      EX-10.2 2 dex102.htm AMENDMENT NO. 1, DATED AS OF DECEMBER 13, 2005   Amendment No. 1, dated as of December 13, 2005   Exhibit 10.2  Amendment No. 1  to  Solo Cup Investment Corporation  2004 Management Investment and Incentive Compensation Plan  This Amendment No. 1 to the Solo Cup Investment Corporation (“SCIC”) 2004 Management Investment and Incentive Compensation Plan (the “Plan”) is made as of the date the Board of Directors of SCIC adopt such amendment.  1. Paragraph 6 “Shares Reserved Under the Plan” is hereby amended by deleting the first sentence in its entirety and replacing it with the following:  “The total number of Common Shares authorized for issuance under the Plan is 1,350,000 shares and, together with the Common Shares underlying the CPUs, 1,450,000, subject to adjustment as set forth in Section 9 below.”  2. Except as expressly amended above, all other terms and conditions of the Plan are in full force and effect.      EX-10.16 3 dex1016.htm AMENDMENT NO.3 AND WAIVER TO THE CREDIT AGREEMENT   Amendment No.3 and Waiver to the Credit Agreement   Exhibit 10.16  EXECUTION COPY  AMENDMENT NO. 3 AND WAIVER TO THE CREDIT AGREEMENT  Dated as of March 27, 2006  AMENDMENT NO. 3 AND WAIVER TO THE CREDIT AGREEMENT (this “Amendment and Waiver”) among SOLO CUP COMPANY, a Delaware corporation (the “Borrower”), SOLO CUP INVESTMENT CORPORATION, a Delaware corporation (“Holdings”), the banks, financial institutions and other institutional lenders party to the Credit Agreement referred to below from time to time (collectively, the “Lenders”) and BANK OF AMERICA, N.A., as administrative agent for the Lenders (in such capacity, the “Administrative Agent”).  PRELIMINARY STATEMENTS:  (1) WHEREAS, the Borrower, Holdings, the Lenders, CITICORP NORTH AMERICA, INC., as syndication agent, HARRIS TRUST AND SAVINGS BANK, as documentation agent and as an L/C Issuer and BANK OF AMERICA, N.A., as Administrative Agent, Swing Line Lender and as an L/C Issuer have entered into a Credit Agreement dated as of February 27, 2004 (such Credit Agreement, as amended, supplemented or otherwise modified up to but not including the date hereof, the “Credit Agreement”; capitalized terms not otherwise defined in this Amendment and Waiver will have the same meanings as specified in the Credit Agreement);  (2) WHEREAS, the Borrower has requested that the Lenders amend the Credit Agreement and waive certain provisions of the Credit Agreement as described below; and  (3) WHEREAS, the Lenders have agreed, subject to the terms and conditions hereinafter set forth, to amend the Credit Agreement and waive certain provisions of the Credit Agreement in certain respects as set forth below.  NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the sufficiency and receipt of all of which is hereby acknowledged, the parties hereto hereby agree as follows:  SECTION 1. Amendments to Credit Agreement. The Credit Agreement is, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 3, hereby amended as follows:  (a) Section 1.01 of the Credit Agreement is hereby amended by adding the following new definitions in the appropriate alphabetical order:  “Intercreditor Agreement” means the Intercreditor Agreement, dated as of March 31, 2006, between the Administrative Agent and the Second Lien Administrative Agent and acknowledged by the Borrower, as amended, supplemented or otherwise modified to the extent permitted under the Loan Documents.  “Permitted Sale and Leaseback Transactions” means with respect to Holdings or any Subsidiary, any arrangement, directly or indirectly, with any Person whereby Holdings or such Subsidiary shall sell or transfer any of the manufacturing facilities of Holdings and its Subsidiaries located in Owing Mills and/or Dallas and thereafter rent or lease such manufacturing facilities that it intends to use for the same purpose or purposes as such manufacturing facilities being sold or transferred.  “Second Lien Administrative Agent” means the “Administrative Agent” under and as defined in the Second Lien Credit Agreement.  “Second Lien Credit Agreement” means the Second Lien Credit Agreement, dated as of March 31, 2006, among the Borrower, Holdings, the lenders from time to time party thereto and Bank of America, as administrative agent, as amended, supplemented or otherwise modified to the extent permitted under the Loan Documents.  “Second Lien Facility” means the second senior secured lien term loan facility of the Borrower in an aggregate principal amount of $80,000,000, as evidenced by the Second Lien Loan Documents.  “Second Lien Loan Documents” means the “Loan Documents” as defined in the Second Lien Credit Agreement, as amended, supplemented or otherwise modified to the extent permitted under the Loan Documents.  Project Java – Amendment No. 3    “Second Lien Obligations” means the “Obligations” under and as defined in the Second Lien Credit Agreement.  “Third Amendment” means the Amendment No. 3 and Waiver to this Agreement, dated as of March 27, 2006, among the Borrower, Holdings, the Administrative Agent and the Lenders party thereto.  “Third Amendment Effective Date” has the meaning specified in Section 3 of the Third Amendment.  (b) Section 1.01 of the Credit Agreement is hereby further amended by adding a proviso to the end of the definition of “Average Total Debt” to read in full as follows:  “; provided, further, that for the 365 days immediately preceding the Third Amendment Effective Date and solely in respect of the computation after the Third Amendment Effective Date of the financial covenants set forth in Section 7.10 hereof, the average daily Outstanding Amount of all Revolving Credit Loans, Swing Line Loans and L/C Borrowings shall be deemed to have been zero.”  (c) Section 1.01 of the Credit Agreement is hereby further amended by deleting in the definition of “Inventory Reduction Charges” the amount “$30,000,00” appearing therein and by replacing it with the amount “$30,000,000”.  (d) Section 1.01 of the Credit Agreement is hereby further amended by amending and restating the definition of “Loan Documents” to read in full as follows:  “Loan Documents” means, collectively, (a) for purposes of this Agreement and the Notes and any amendment, supplement or other modification hereof or thereof and for all other purposes other than for purposes of the Guaranty and the Collateral Documents, (i) this Agreement, (ii) the Notes, (iii) the Guaranty, (iv) the Collateral Documents, (v) the Fee Letter, (vi) the Intercreditor Agreement and (vii) each Issuer Document and (b) for purposes of the Guaranty and the Collateral Documents, (i) this Agreement, (ii) the Notes, (iii) the Guaranty, (iv) the Collateral Documents, (v) each Issuer Document, (vi) the Fee Letter, (vii) the Intercreditor Agreement and (viii) each Secured Hedge Agreement.  (e) Section 2.05(b)(ii) of the Credit Agreement is hereby amended by adding at the end thereof the following proviso:  “; provided, still further, that notwithstanding the foregoing, at the request of the Borrower, any Net Cash Proceeds from any Permitted Sale and Leaseback Transaction may be used to prepay the Second Lien Facility rather than any Loans hereunder, so long as (x) before and after giving effect to such prepayment no Default or Event of Default shall have occurred and be continuing and (y) on the date of such prepayment, after giving pro forma effect thereto, the Consolidated Leverage Ratio shall be less than 5.00:1.00.”  (f) Section 2.05(b)(iv) of the Credit Agreement is hereby amended by adding at the end thereof the following proviso:  “; provided, however, that notwithstanding the foregoing, at the request of the Borrower, (A) any such Net Cash Proceeds from any Permitted Refinancing Subordinated Indebtedness of Holdings or any of its Subsidiaries may be used to prepay the Second Lien Facility rather than any Loans hereunder and (B) any Net Cash Proceeds from any Indebtedness incurred pursuant to Section 7.02(b)(O) hereof may be used to prepay the Second Lien Facility rather than any Loans hereunder, in each case, so long as (x) before and after giving effect to such prepayment no Default or Event of Default shall have occurred and be continuing and (y) on the date of such prepayment, after giving pro forma effect thereto, the Consolidated Leverage Ratio shall be less than 4.50:1.00.”    2  Project Java – Amendment No. 3    (g) Section 7.01(a) of the Credit Agreement is hereby amended by adding the phrase “, and Liens pursuant to any of the Second Lien Loan Documents securing any Second Lien Obligations and Liens securing any Indebtedness permitted to be incurred pursuant to Section 7.02(b)(O) hereof, in each case subject to the provisions of the Intercreditor Agreement” immediately prior to the semi-colon at the end of such clause.  (h) Section 7.02(b)(A) of the Credit Agreement is hereby amended by adding the phrase “and Indebtedness arising under the Second Lien Loan Documents in an aggregate principal amount not to exceed $80,000,000” immediately prior to the semi-colon at the end of such clause.  (i) Section 7.02(b) of the Credit Agreement is hereby further amended by deleting the word “and” appearing at the end of Section 7.02(b)(M), by deleting the “.” appearing at the end of Section 7.02(b)(N) and by replacing it with the phrase “; and”, and by adding a new subsection (O) to read in full as follows:  “(O) additional Indebtedness under the Loan Documents incurred after the Third Amendment Effective Date, in an aggregate principal amount not to exceed $80,000,000; provided that (x) before and after giving effect to the issuance or incurrence of such Indebtedness, no Default or Event of Default shall have occurred and be continuing, (y) the proceeds of such Indebtedness shall be used to prepay the Term Loans (as defined in the Second Lien Credit Agreement), and (z) the holders of such Indebtedness shall have become a party to the Intercreditor Agreement.”  (j) Section 7.02(b)(K) of the Credit Agreement is hereby amended by adding the parenthetical “(including, without limitation, as to subordination)” after the words “Administrative Agent” appearing therein.  (k) Section 7.03(l) of the Credit Agreement is hereby amended by adding the phrase “, Section 7.02(b)(K)” immediately prior to the word “or” appearing therein.  (l) Section 7.05 of the Credit Agreement is hereby amended by deleting the word “and” appearing at the end of Section 7.05(o), by deleting the “.” appearing at the end of Section 7.05(p) and be replacing it with the phrase “; and”, and by adding a new subsection (q) to read in full as follows:  “(q) (x) any Permitted Sale and Leaseback Transactions, and (y) the Disposition of the portion of Excess Cash Flow that is not required to be used pursuant to Section 2.05(b)(i) to prepay the Loans to the extent such portion of Excess Cash Flow shall be used to prepay the Term Loans (as defined in the Second Lien Credit Agreement); provided that, before and after giving effect to such Permitted Sale and Leaseback Transaction or such Disposition, no Default or Event of Default shall have occurred and be continuing.”  (m) Section 7.05 of the Credit Agreement is hereby further amended by replacing the phrase “Section 7.05(p)” in the proviso thereto with the phrase “Section 7.05(q)”.  (n) Section 7.09 of the Credit Agreement is hereby amended by replacing the parenthetical in the second line thereof with the following:  “(other than this Agreement, any other Loan Document, any Second Lien Loan Document or any documentation in respect of Indebtedness permitted to be incurred pursuant to Section 7.02(b)(O) hereof)”  (o) Section 7.10(a) of the Credit Agreement is hereby amended by replacing the table therein in its entirety with the following:                 Fiscal Year    March 31    June 30    September 30    December 31   2006    2.25 : 1.00    2.25 : 1.00    2.25 : 1.00    2.25 : 1.00         2007    2.25 : 1.00    2.25 : 1.00    2.25 : 1.00    2.25 : 1.00         2008    2.25 : 1.00    2.25 : 1.00    2.25 : 1.00    2.75 : 1.00         2009    2.75 : 1.00    2.75 : 1.00    2.75 : 1.00    3.25 : 1.00         2010    3.50 : 1.00    3.50 : 1.00    3.50 : 1.00    3.50 : 1.00         2011    3.50 : 1.00    —      —      —      3  Project Java – Amendment No. 3    (p) Section 7.10(b) of the Credit Agreement is hereby amended by replacing the table therein in its entirety with the following:                 Fiscal Year    March 31    June 30    September 30    December 31   2006    5.75 : 1.00    5.75 : 1.00    5.75 : 1.00    5.50 : 1.00         2007    5.50 : 1.00    5.50 : 1.00    5.50 : 1.00    5.00 : 1.00         2008    5.00 : 1.00    5.00 : 1.00    5.00 : 1.00    4.00 : 1.00         2009    4.00 : 1.00    4.00 : 1.00    4.00 : 1.00    3.50 : 1.00         2010    3.50 : 1.00    3.50 : 1.00    3.50 : 1.00    3.50 : 1.00         2011    3.50 : 1.00    —      —      —    (q) Section 7.13 of the Credit Agreement is hereby further amended by adding the following new sentence at the end thereof:  “Prepay, redeem, purchase, defease or otherwise satisfy prior to the scheduled maturity thereof in any manner, or make any payments under the Second Lien Facility, except the payment, prepayment or refinancing thereof (x) with the proceeds of any Permitted Refinancing Subordinated Indebtedness or with the proceeds of any Indebtedness incurred pursuant to Section 7.02(b)(O); provided, that (i) before and after giving effect to such payment, prepayment or refinancing, no Default or Event of Default shall have occurred and be continuing, and (ii) on the date of such payment, prepayment or refinancing, after giving pro forma effect thereto, the Consolidated Leverage Ratio shall be less than 4.50:1.00, (y) with the portion of Excess Cash Flow that is not required to be used pursuant to Section 2.05(b)(i) to prepay the Loans or with the proceeds of any Permitted Sale and Leaseback Transaction; provided, that on the date of such payment, prepayment or refinancing, after giving pro forma effect thereto, the Consolidated Leverage Ratio shall be less than 5.00:1.00 and (z) to the extent permitted by the Intercreditor Agreement.”  (r) Section 7.18 of the Credit Agreement is hereby amended by replacing the parenthetical in the first line thereof with the following:  “(other than the Indebtedness under the Loan Documents, the Second Lien Loan Documents or the documents evidencing the Indebtedness permitted to be incurred pursuant to Section 7.02(b)(O) hereof)”  (s) Article IX of the Credit Agreement is hereby amended by adding a new Section 9.14 at the end thereof to read as follows:  “SECTION 9.14. Intercreditor Agreement. Each of the Lenders hereby acknowledges that it has received and reviewed the Intercreditor Agreement and agrees to be bound by the terms thereof. Each Lender (and each Person that becomes a Lender hereunder pursuant to Section 11.07) hereby (a) acknowledges that Bank of America is acting under the Intercreditor Agreement in multiple capacities as the Administrative Agent, as well as the Second Lien Administrative Agent and (b) waives any conflict of interest, now contemplated or arising hereafter, in connection therewith. Each Lender (and each Person that becomes a Lender hereunder pursuant to Section 11.07) hereby authorizes and directs Bank of America to enter into the Intercreditor Agreement on behalf of such Lender and agrees that Bank of America, in its various capacities thereunder, may take such actions on its behalf as is contemplated by the terms of the Intercreditor Agreement, provided that such actions satisfy the requirements of this Agreement.”    4  Project Java – Amendment No. 3    (t) Article XI of the Credit Agreement is hereby amended by adding a new Section 11.20 at the end thereof to read as follows:  “Section 11.20. No Advisory or Fiduciary Responsibility. In connection with all aspects of each transaction contemplated hereby, the Borrower and each other Loan Party acknowledges and agrees, and acknowledges its Affiliates’ understanding, that: (i) the credit facilities provided for hereunder and any related arranging or other services in connection therewith (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document) are an arm’s-length commercial transaction between the Borrower, the other Loan Parties and their respective Affiliates, on the one hand, and the Agents and the Arrangers, on the other hand, and the Borrower and the other Loan Parties are capable of evaluating and understanding and understand and accept the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents (including any amendment, waiver or other modification hereof or thereof); (ii) in connection with the process leading to such transaction, each of the Agents and the Arrangers, each is and has been acting solely as a principal and except as expressly set forth herein and in the other Loan Documents is not the financial advisor, agent or fiduciary, for the Borrower, any other Loan Parties or any of their respective Affiliates, stockholders, creditors or employees or any other Person; (iii) neither the Administrative Agent nor any other Agent nor any Arranger has assumed or will assume an advisory, agency or fiduciary responsibility in favor of the Borrower or any other Loan Party with respect to any of the transactions contemplated hereby or the process leading thereto except as expressly set forth herein and in the other Loan Documents, including with respect to any amendment, waiver or other modification hereof or of any other Loan Document (irrespective of whether any Agent or any Arranger has advised or is currently advising the Borrower, the other Loan Parties or their respective Affiliates on other matters) and neither the Administrative Agent nor any the Arranger nor any Loan Party has any obligation to any Borrower, the other Loan Parties or their respective Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; (iv) the Administrative Agent, the other Agents, the Arrangers and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Borrower, the other Loan Parties and their respective Affiliates, and neither the Administrative Agent nor any other Agent nor any Arranger has any obligation to disclose any of such interests by virtue of any advisory, agency or fiduciary relationship; and (v) the Agents and the Arrangers have not provided and will not provide any legal, accounting, regulatory or tax advice with respect to any of the transactions contemplated hereby (including any amendment, waiver or other modification hereof or of any other Loan Document) and the Borrower and each other Loan Party has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate.”  SECTION 2. Waiver. For the period through April 20, 2006 (the “Waiver Termination Date”), the requirements of Section 7.02(b)(K)(x) of the Credit Agreement and the Collateral Documents as to the delivery to the Collateral Agent of any Pledged Debt is hereby waived in respect of the Pledged Debt listed on Schedule 1 hereto. For the period through the Waiver Termination Date, the requirements under the Collateral Documents as to the delivery to the Collateral Agent of updated information in respect of any After-Acquired Intellectual Property and as to the delivery to the Collateral Agent of any Intellectual Property Security Agreements or any IP Security Agreement Supplements is hereby waived in respect of the IP Rights listed on Schedule 2 hereto. On the Waiver Termination Date, without any further action by the Agents and the Lenders, all of the terms and provisions set forth in the Loan Documents with respect to Defaults thereunder that are waived hereunder and not cured prior to the Waiver Termination Date shall have the same force and effect as if this Amendment and Waiver had not been entered into by the parties hereto, and the Agents and the Lenders shall have all of the rights and remedies afforded to them under the Loan Documents with respect to any such Defaults as though no waiver had been granted by them hereunder.    5  Project Java – Amendment No. 3    SECTION 3. Conditions of Effectiveness. This Amendment and Waiver shall become effective as of the date first written above (the “Third Amendment Effective Date”) when (i) the Administrative Agent shall have received counterparts of (A) this Amendment and Waiver executed by the Borrower and the Required Lenders or, as to any of the Lenders, advice satisfactory to the Administrative Agent that such Lender has executed this Amendment and Waiver and (B) the Consent attached hereto executed by each of the Loan Parties (other than Holdings and the Borrower), (ii) the Borrower shall have paid all reasonable out-of-pocket costs and expenses (including the reasonable fees, charges and disbursements of counsel to the Administrative Agent invoiced to the Borrower in reasonable detail) incurred in connection with the Loan Documents (including this Amendment and Waiver) to the extent invoiced, (iii) no Default shall have occurred and be continuing, or would occur as a result of the transactions contemplated by this Amendment and Waiver, (iv) the Borrower shall pay, upon the effectiveness of the Second Lien Credit Agreement, for the benefit of each Lender executing this Amendment and Waiver on or before 5:00 p.m. Eastern time on March 28, 2006, a fee equal to 0.10% of the aggregate Revolving Credit Commitments and Term B1 Loans of each such Lender; provided that, notwithstanding the foregoing, this Amendment and Waiver shall be void and of no effect if the conditions to effectiveness to the Second Lien Credit Agreement shall not have been fulfilled or waived on or prior to April 15, 2006.  SECTION 4. Representations and Warranties of the Borrower. Each of Holdings and the Borrower represents and warrants as follows:  (a) The execution, delivery and performance by it of this Amendment and Waiver, the execution, delivery and performance of the Consent by the Loan Parties signatory thereto and the performance of each Loan Party of each Loan Document (as amended by the Amendment and Waiver) to which such Person is a party, are within such Loan Party’s corporate or other powers, have been duly authorized by all necessary corporate or other organizational action, and do not and will not (i) contravene the terms of any of such Person’s Organization Documents; (ii) conflict with or result in any material breach or contravention of, or the creation of any Lien under, or require any payment to be made under (A) any material Contractual Obligation to which such Person is a party or affecting the properties of such Person or any of its Subsidiaries other than as contemplated hereby or (B) any material order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; or (iii) violate in any material respect any Law applicable to such Loan Party or its properties.  (b) This Amendment and Waiver and the Consent attached hereto, when delivered hereunder, will have been duly executed and delivered by each Loan Party that is party thereto. This Amendment and Waiver and the Consent attached hereto, when so delivered, will constitute a legal, valid and binding obligation of such Loan Party, enforceable against each Loan Party that is party thereto in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally, and subject to equitable principles of general application.  (c) As of the Third Amendment Effective Date, after giving effect to this Amendment and Waiver, no Default or Event of Default has occurred or is in existence.  SECTION 5. Reference to and Effect on the Credit Agreement, the Notes and the Loan Documents. (a) On and after each of the Third Amendment Effective Date, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the Notes and each of the other Loan Documents to “the Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended by this Amendment and Waiver.  (b) The Credit Agreement, the Notes and each of the other Loan Documents, in each case as specifically amended by this Amendment and Waiver, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Each of Holdings and the Borrower hereby (a) confirms and continues the pledge and security interest in the Collateral granted by it pursuant to the Collateral Documents to which it is a party, and (b) acknowledges and agrees that the pledge and security interest in the Collateral granted by it pursuant to such Collateral Documents shall be in favor of the Collateral Agent and shall continue to secure the Obligations. Without limiting the generality of the foregoing, the Collateral Documents and all of the Collateral described therein do and shall continue to secure the payment of all Obligations (on the terms set forth in the Collateral Documents) of such Person under the Loan Documents, in each case as amended by this Amendment and Waiver.  (c) The execution, delivery and effectiveness of this Amendment and Waiver shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or the Administrative Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents.  SECTION 6. Costs, Expenses. The Borrower agrees to pay all reasonable out-of-pocket costs and expenses in accordance with the terms of Section 11.04 of the Credit Agreement.    6  Project Java – Amendment No. 3    SECTION 7. Execution in Counterparts. This Amendment and Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment and Waiver by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment and Waiver.  SECTION 8. Governing Law. This Amendment and Waiver shall be governed by, and construed in accordance with, the laws of the State of New York.    7  Project Java – Amendment No. 3    IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Waiver to be executed by their respective officers thereunto duly authorized, as of the date first above written.              SOLO CUP COMPANY             By:    /s/ Susan H. Marks              Name:   Susan H. Marks        Title:   Executive Vice President and Chief Financial Officer      SOLO CUP INVESTMENT CORPORATION             By:    /s/ Susan H. Marks              Name:   Susan H. Marks        Title:   Executive Vice President and Chief Financial Officer  Project Java – Amendment No. 3                        [Please type or print name of institution]             By:                   Name:           Title:     Project Java – Amendment No. 3    CONSENT AND CONFIRMATION  Dated as of March 27, 2006  Each of the undersigned hereby consents to the foregoing Amendment and Waiver and hereby confirms and agrees that (a) notwithstanding the effectiveness of such Amendment and Waiver, each Loan Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that, on and after the effectiveness of such Amendment and Waiver, each reference in the Loan Documents to the “Credit Agreement”, “thereunder”, “thereof” or words of like import shall mean and be a reference to the Credit Agreement, as amended by such Amendment and Waiver, (b) the pledge and security interest in the Collateral granted by it pursuant to the Collateral Documents to which it is a party is continued, (c) the pledge and security interest in the Collateral granted by it pursuant to such Collateral Documents shall be in favor of the Collateral Agent and shall continue to secure the Obligations and (d) the Collateral Documents to which each of the undersigned is a party and all of the Collateral described therein do, and shall continue to, secure the payment of all of the Secured Obligations (in each case, as defined therein) on the terms set forth in the Collateral Documents.              SOLO MANAGEMENT COMPANY             By:    /s/    Ronald L. Whaley              Name:   Ronald L. Whaley        Title:   President and Chief Operating Officer      P.R. SOLO CUP, INC.             By:    /s/    Ronald L. Whaley              Name:   Ronald L. Whaley        Title:   President      SF HOLDINGS GROUP, INC.             By:    /s/    Ronald L. Whaley              Name:   Ronald L. Whaley        Title:   President and Chief Operating Officer  Project Java – Amendment No. 3              SOLO CUP OPERATING CORPORATION             By:    /s/    Ronald L. Whaley              Name:   Ronald L. Whaley        Title:   President and Chief Operating Officer  LILY-CANADA HOLDING CORPORATION             By:    /s/    Ronald L. Whaley              Name:   Ronald L. Whaley        Title:   President  SOLO MANUFACTURING LLC             By:    /s/    Ronald L. Whaley              Name:   Ronald L. Whaley        Title:   President  Project Java – Amendment No. 3      EX-14.1 4 dex141.htm SOLO CUP COMPANY'S CODE OF BUSINESS CONDUCT   Solo Cup Company's Code of Business Conduct   Exhibit 14.1                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005     Page   1  of 22      Date: January 2006  SOLO CUP COMPANY  CODE OF BUSINESS CONDUCT  Solo Cup Company requires all of its employees to observe the highest ethical standards in the performance of their duties and to comply with all laws and regulations governing business transactions. All people will be treated with respect, dignity, honesty, professionalism and integrity.                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 2 of 22      Date: January 2006    Solo Cup Company  Code of Business Conduct           Questions and Answers    3      I. Conducting Business:       Competition and Antitrust Laws    5   Competitive Information    7   Trade Compliance: Import/Export Issues and Boycott Laws    7   Privacy    8   Advertising and Promotion of Products    9   Product Quality and Regulatory Compliance    9   The Government as Our Customer    9   Prohibition of Corrupt Practices    10   Supplier Relationships    11   Government Inquiries    11      II. Solo Cup Work Environment:       Workplace Harassment    11   Equal Opportunity and Diversity    12   Alcohol and Drug Free Workplace    12   Environment, Health and Safety    12   Minimum Hiring Age/Child Labor    13      III. Company Information, Resources and Financial Disclosure:       Accurate Books and Records, including Financial Disclosure    13   Company Property, Resources and Time    14   Confidential Information, including Proprietary Information and Trade Secrets    14   Patents, Trademarks and Copyrights    15   Electronic Media (e-mail, internet, etc.)       Use and Network Security    16   Records Retention and Storage    17      IV. Conflicts of Interest:       Conflicts of Interest    17   Receiving Gifts and Entertainment    18   Offering Gifts and Entertainment    19      V. Political Activities and Public Affairs:       Personal Political Activity    20  Political Contributions    21                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 3 of 22      Date: January 2006    QUESTIONS AND ANSWERS  What is this document? This document is intended to clearly and unambiguously state the policies of Solo Cup Company relating to ethical standards and business practices. It is designed to help everyone who works for Solo Cup Company comply with the Code of Business Conduct set forth above, and should be considered to be part of the Code. It explains what behaviors are required to follow the compliance and integrity rules that apply to their jobs and to know when and where to ask for help or advice.  These guidelines are to be applied to the conduct of every aspect of the global business of the Company. The Company does not lower its standards because competitors behave differently; we do not bend the rules because local customs or standards may be dissimilar.  Who should follow the Code? All employees worldwide who work for Solo Cup Company or any of its divisions, subsidiaries, operating groups or affiliated companies must adhere to the Code and the standards contained in this document. Solo Cup requires that all employees sign an acknowledgment confirming that they have received and understand the Code, and are complying with it. You should consult this document as needed or the Ethics Helpline when acting on behalf of Solo Cup Company and questions arise.  The executive officers of the Company are responsible for assuring consistent adherence to this Code. Each employee, however, is ultimately responsible for his or her own actions. All employees must acquaint themselves with the laws, regulations, standards, policies, procedures and restrictions applicable to their assigned duties and responsibilities, and conduct themselves accordingly. As an employee, if you fail to comply, you risk being disciplined or terminated. If you break the law, you also may be personally liable. Accordingly, whenever the legality or propriety of any proposed program or course of conduct is subject to question, it is incumbent upon the employee involved to obtain advice concerning these policies from their supervisor, their local Human Resources representative, a member of the executive management team, the Legal Department or the Ethics Helpline, as more fully described below.  Each employee is also individually responsible for reporting wrongdoing. If a law or Company policy has been broken, please report it promptly. See “Whom should I contact if I have a question or concern?” below.  What are a manager’s responsibilities? Those who supervise others have additional responsibilities under the Code to:        •   Set an example – lead by consistently acting with the highest integrity        •   Explain to their employees why compliance with the Code is required                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 4 of 22      Date: January 2006        •   Encourage discussion of business standards and ethics        •   Monitor compliance of the people they supervise        •   Respond promptly and properly to concerns raised by employees        •   Protect employees against reprisals when they raise ethical questions or concerns or report actions they feel may have violated this Code.  Will there be retaliation if I file a report? No. No one will be punished for a good faith report of a possible breach of the law, a regulation or Company policy. Any allegation of a reprisal should be reported through the Ethics Helpline, and will be investigated.  What should I do if I have a question or concern? If you have a question or concern, you should follow the procedures outlined below under “Whom should I contact if I have a question or concern?” One of the most important responsibilities each employee has at Solo Cup is the obligation to raise a concern about a possible violation of the Code or the law. In fact, if you become aware of a violation and do not report it, you will be subject to disciplinary action, up to and including discharge. Although it may seem difficult to raise such a concern, it is important to remember the potentially severe consequences that can result from remaining silent. Examples of such consequences include:        •   Serious damage to the health, safety and well-being of yourself, your fellow employees, the Company as a whole, our customers, our suppliers and the communities in which we do business        •   The loss of confidence in Solo Cup along with damage to its reputation        •   Potentially large fines, damage awards and other financial penalties against the Company; fines and/or prison sentences for individual employees.  Whom should I contact if I have a question or concern? You have several choices to get answers to your questions or to raise any concern about what might be a violation of the Code. You can and should discuss the issue or question with any of the following:        •   Your supervisor or manager        •   The next level of management, including your supervisor’s supervisor or the head of your department or location        •   A member of the executive management team        •   Your local human resources representative                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 5 of 22      Date: January 2006        •   The Company’s legal department        •   The Ethics Helpline  Although it is not required that you go to your supervisor or manager first, generally, he or she will be in the best position to resolve the issue quickly and therefore will be the place to start. However, if after raising a concern, the issue is not resolved, you should raise it with one of the other contacts listed above.  What is the Ethics Helpline? The Ethics Helpline is dedicated to receiving any reports you may have of a violation or potential violation of our Code of Business Conduct. Solo Cup has selected EthicsPoint, an independent third party, to provide you with a way to confidentially file a report either through a website or a toll-free telephone number. You have the option of remaining anonymous if you so choose. The toll-free telephone number for US/Canada is 1-866-294-9502. For further information, including international phone numbers and the website, please click on the EthicsPoint icon on Solo’s intranet or internet.  I. CONDUCTING BUSINESS  Competition and Antitrust Laws: Although competition law issues are fairly complex, it is helpful to keep in mind that the purpose of antitrust laws is to preserve fair and open competition in our free market economy. Solo Cup strictly adheres to what are known as “antitrust” laws in the U.S. and “competition” laws in other countries. These laws prohibit anticompetitive agreements, such as price-fixing and predatory efforts to eliminate competitors.  Facts about Competition Laws:        •   Competition laws vary around the world: Many countries, the European Union and individual states in the U.S. have laws prohibiting anticompetitive behavior.        •   Some competition laws – such as those in the U.S. and the EU – may apply when the conduct occurs outside the country’s borders.  Basic Rules to Know: Certain agreements almost always violate competition laws. Never talk with or exchange information with competitors to:        •   Fix prices – this can include setting minimum or maximum prices, or “stabilizing” prices.        •   Fix terms related to price, pricing formulas, trade promotions or credit terms.        •   Divide up markets, customers or territories.        •   Limit production.                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 6 of 22      Date: January 2006        •   Rig a competitive bidding process, including arrangements to submit falsified bids.        •   Boycott a competitor, supplier, customer or distributor.  Do not discuss competitive matters with any competitor – at any time or any place – without authorization of the Legal Department.  Other activities may raise competition law issues. Always consult with the Legal Department before:        •   Discussing joint ventures, mergers, acquisitions, marketing, purchasing or similar collaborative arrangements with competitors.        •   Establishing exclusive dealing arrangements (e.g. contracts that require a company to buy only from or sell only to a Solo Cup company).        •   Tying or bundling together different products or services (e.g. contracts that require a buyer who wants one product to also buy a second “tied” product).        •   Engaging in activities involving trade associations or setting industry standards.        •   Serving as a director or officer in a company that competes with us.        •   Setting resale prices with resellers (in the U.S. and some other countries).  Monopolizing, trying to monopolize markets and abusing a dominant position are illegal: Some competition laws make it illegal to monopolize or attempt to monopolize a market, while others regulate the conduct of companies that hold a “dominant position.” A company with a dominant position, for example, must not try to prevent others from entering the market, or to eliminate competition. Usually competitors set prices to cover their costs – below-cost pricing may appear to be “predatory.” If there is a reason to price below cost, this should be reviewed with the Legal Department to ensure that it is not predatory or in violation of any law.  Charging different prices to customers who are competitors may be illegal: In the U.S., a complex law called the “Robinson-Patman Act” in some cases prohibits charging different prices on sales of goods to customers who compete with one another. There are a number of exceptions to this law. Similar laws apply in many international jurisdictions. In the EU, differential pricing may raise issues where a company has a dominant position or where such pricing is done by agreement with a third party. Employees with authority to set prices need to learn the requirements of these laws and should consult the Legal Department for guidance.                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 7 of 22      Date: January 2006    Competitive Information: In any business, including Solo Cup’s, competitive information is valuable. It is always beneficial to learn as much as possible about our competitors, as well as our suppliers and our customers. However, we must be ethical about how we acquire that information, as some forms of information gathering are wrong and can violate the law.  Legitimate sources of competitive information include:        •   Publicly available information, such as newspapers, the internet and published sales materials        •   Talking with customers – but not to obtain confidential information        •   Customers giving you a competitor’s non-confidential proposal        •   Information shown at trade shows        •   Industry surveys by reputable consultants  Do NOT use the following:        •   A competitor’s confidential or proprietary information        •   Confidential or proprietary information in any form possessed by employees from prior employers        •   Confidential information about a competitor’s bid if you are involved in bidding, including Government contracts        •   Confidential information on a competitor that someone offers to sell  If you find that you are in possession of any confidential or proprietary competitor information, or if you are uncertain about whether it is appropriate for you to accept certain competitive information, consult the Legal Department.  Trade Compliance: Import/Export Issues and Boycott Laws: Every country has laws about importing and exporting goods and technology. Solo Cup and its agents and representatives must comply with all applicable import and export controls.  Export Controls: International organizations, such as the United Nations and the EU, as well as countries such as the United States, periodically impose prohibitions or other restrictions on export and trade dealings with certain countries, entities and individuals. Trade restrictions take many forms, including bans on:        •   Transactions involving sanctioned countries – includes exports to a sanctioned country; transshipments through a non-sanctioned country to a sanctioned country, or vice versa; imports from or dealings in property originating in a sanctioned country; travel to or from a sanctioned country; and financial transactions and dealings involving a sanctioned country.                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 8 of 22      Date: January 2006        •   Restricted products and technologies – exports can also include the transfer of services or technology (such as technical data or other information). Certain products, software and technologies require an export license even when they are shipped to a legitimate company in a friendly country for peaceful use.  Please consult the Legal Department if you require assistance on any such export issues.  U.S. Anti-Boycott Regulations: A boycott is an organized effort to coerce its “target” to take a specific action. Boycotts are “enforced” by refusing to buy, sell or use the target’s products and/or services. These laws were originally designed to respond to the boycott of Israel by certain Middle Eastern countries, but they apply to any boycott of countries friendly to the U.S. There are severe penalties for violations of these laws. Solo Cup is required to report to the U.S. Government and not to cooperate with any request concerning boycotts or related restrictive trade practices. You should immediately notify the Legal Department if you receive boycott-related requests for information, whether oral or written.  Import Compliance Issues: As a general rule, importation of Solo’s products is subject to various customs laws and regulations, including import duties, value added taxes and excise taxes that may be payable in relation to our products. Payment of these duties and taxes is contingent upon various issues, including, but not limited to: the classification of the goods by the importing country; the country of origin or country of manufacture of the goods; and the value of the intercompany or third party shipment.  Privacy: In our increasingly information-based society, individual customer, employee, medical, financial and other sensitive personal information must be adequately protected from unauthorized disclosure. Solo is committed to protecting personal information that it collects and maintains, as well as to compliance with all applicable privacy and data protection laws, regulations and treaties. Guidelines in this area include:        •   If you do not have a legitimate business reason to access personal information, you should never seek to do so.        •   If you do have a legitimate reason to access such information, you must use that information only for authorized business purposes and you should take steps to protect it against any unauthorized release or use, including keeping secure your paper and computer-based records.                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 9 of 22      Date: January 2006        •   Consult with the Legal Department before establishing or updating any system, process or procedure to collect, use disclose or transmit individual customer, employee or vender information, including medical or financial records or other sensitive personal information.  Advertising and promotion of products: Solo Cup’s reputation is a critical component of our success in maintaining the trust of our customers. To preserve our reputation as a responsible supplier whose products and services are desired for their features, innovation, quality and value, we must build trusting relationships through, among other things, the honest and fair description of our products. All advertising and sales activities must be accurate, fair and honest. Before we make a claim about a product, we must be able to substantiate it. All advertising and sales promotions must be approved by the Sales and Marketing Group.  Product quality and regulatory compliance: Maintaining the high quality of Solo Cup’s products is critical to our success. Quality is not just a manufacturing plant responsibility: the quality of our products starts with understanding the requirements of our customers, defining those requirements, and designing products to meet or exceed those requirements. Our quality and service standards are designed to ensure that our customers receive the right products at the right time. In addition, Solo Cup has established monitoring systems designed to detect potential product defects. All Solo Cup employees must comply with all Government requirements and all Company quality standards for products that the Company manufactures. This includes compliance with all applicable laws and regulations governing the manufacture and distribution of our products.  The Government as our customer: Special rules apply when a Government is our customer – rules that are in some cases very different than those that apply in dealing with a commercial customer. Violations can result in civil or criminal penalties. Solo employees who are involved in bidding on or providing service under a Government contract must know these rules.  Basic rules include:        •   Never seek or accept confidential bid information        •   Never offer or provide gifts, gratuities or entertainment without prior written approval of your supervisor and the Legal Department        •   Know and follow anti-kickback rules, including restrictions on gifts by those seeking business from the Government and Government contractors                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 10 of 22      Date: January 2006        •   Understand “most favored customer” pricing and verify compliance with the Pricing or Legal Departments        •   Conform strictly to the contract’s quantity, quality and testing requirements        •   Invoices must always be accurate, complete and in full compliance with all rules and regulations        •   Be truthful, accurate and complete in all representations and certifications        •   Know the Government’s rules and regulations with respect to the bid and the contracting processes        •   Don’t initiate any employment discussions with any current or former Government employee until first consulting with the Legal Department.  Prohibition of Corrupt Practices:  Improper Payments: The laws of virtually all countries in which Solo Cup operates, as well as important extra-territorial laws, such as the U.S. Foreign Corrupt Practices Act (“FCPS”) and similar laws, prohibit bribes to foreign Governments and other officials. Solo Cup employees should not offer anything of value to obtain any improper advantage in selling goods or representing the Company’s interests to governmental authorities. A violation is a serious criminal offense for both the Company and for the individuals involved, which can result in fines, loss of export privileges and imprisonment for individuals.  The following activities are prohibited and apply to all Solo employees:        •   Engaging in bribes, kickbacks, money laundering or other corrupt practices        •   Making improper payments through third parties        •   Making an unauthorized payment or gift – directly or through an agent – to a government official        •   Inducing a foreign official to do something illegal        •   Ignoring or fail to report any indication of improper payments, gifts or entertainment        •   Establishing an unrecorded fund for any purpose                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 11 of 22      Date: January 2006        • Making a false or misleading entry in Company books        • Looking the other way when there might be a violation  Supplier Relationships: Solo Cup bases its relationships with suppliers on lawful, efficient and fair practices. We also expect our suppliers to adhere to applicable legal requirements in their business relationships, including those with their employees, their local communities and their customers. Solo Cup has adopted a Supplier Code of Conduct which requires all Solo Cup suppliers to adhere to a set of guidelines outlined in that code. The quality of our supplier relationships often has a direct bearing on the quality of our customer relationships. Likewise, the quality of our suppliers’ products and services affects the quality of our own products.  To that end, Solo Cup employees must:        •   Provide a competitive opportunity for suppliers to earn a share of Solo Cup’s purchasing volume, including small businesses and businesses owned by the disadvantaged, minorities and women        •   Enlist supplier support in ensuring that Solo Cup consistently meets and exceeds customer expectations of quality, cost and delivery        •   Do business only with suppliers who comply with Solo’s Cup’s Supplier Code of Conduct.  Government Inquiries: Solo Cup’s business is regulated by a number of government agencies, including the Internal Revenue Service, Department of Labor, the Securities and Exchange Commission and the Federal Trade Commission. Occasionally, a government official may request information or make an inquiry about our activities. When this happens, we will cooperate with all reasonable requests for information. It is important never to mislead or make false statements to an investigator. Almost every government agency makes it a crime to knowingly submit false or incomplete information; therefore, all information given must be honest, accurate and complete. If you are approached by someone identifying himself or herself as a government official, contact the Legal Department before giving any information.  II. SOLO WORK ENVIRONMENT  Workplace harassment: Solo Cup is committed to providing a working environment free from intimidating, hostile or offensive actions or behavior to all employees. The Company prohibits sexual harassment of its employees in any form, as well as harassment in any way relating to matters such as race, color, creed, religion, national origin, ancestry, marital status, age, sexual orientation, veteran status, disability or any other legally protected basis. Unwelcome sexual                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 12 of 22      Date: January 2006    advances, requests for sexual favors and other verbal or physical conduct of a sexual nature are examples of behaviors that constitute sexual harassment and will not be tolerated. Further, racial, ethnic or religious slurs or other verbal or physical conduct or comments relating to an individual’s color, creed, national origin, ancestry, marital status, age, sexual orientation, veteran status, disability or any other legally protected basis constitute harassment and will not be tolerated.  Equal opportunity and diversity: Solo Cup is committed to the principle of Equal Employment Opportunity and its responsibility to extend that opportunity to all individuals. We recruit, hire, develop, promote, discipline and provide other conditions of employment without regard to a person’s race, color, religion, sex, age, national origin, sexual orientation, ancestry, veteran status, disability, citizenship, marital status, or any other legally-protected status. The Company also takes affirmative action to employ and advance both minorities and females.  Alcohol and drug free workplace: Solo Cup is committed to provide a safe, healthy and productive work environment for employees and to lessen the potential for on-the-job accidents, absenteeism, tardiness, poor job performance, inefficiency, poor morale and damage to Company property. In particular, Solo Cup is concerned about alcohol or substance abuse and/or the presence of alcohol or illegal substances on Solo Cup property, since such activity can have a serious adverse effect on safety, attendance, productivity and product quality. Solo Cup also recognizes the right of non-substance abusing employees to be free of the safety risks in an environment in which substance abuse is tolerated and to be free of the work related problems caused by drug or alcohol abuse which may have an impact on the non-user/abuser.  It is, therefore, the Company’s policy that the unlawful manufacture, transportation, distribution, dispensation, possession (including any traces of such substances), use, consumption, transfer or sale of a controlled substance or illegal drug or the abusive use of a legal or prescription drug is prohibited anywhere at any time, in the workplace, in Company vehicles, on or about Company property or elsewhere when employees are engaged in Company business. The carrying, possession or use of alcohol beverages or illegal substances by Solo Cup employees during their working hours on Solo Cup property or vehicles is also prohibited. The prohibition applies at all times, including during work breaks. The unlawful use of drugs includes (i) the use of illegal drugs and (ii) the illegal use of prescription drugs that are controlled substances in a manner inconsistent with their prescribed purpose.  Environment, Health and Safety: Solo Cup is committed to providing its employees with a safe and secure work environment. Safety is particularly important in manufacturing locations, which are subject to significant workplace safety regulations. Each work location has safety rules that must be followed. In addition, we must comply with all environmental, health and safety laws and regulations, both domestically and internationally, as applicable.                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 13 of 22      Date: January 2006    Minimum hiring age/child labor: Solo Cup does not produce or manufacture products using forced or indentured child labor. Regular, full-time employees at Solo Cup are at least 18 years of age. In some countries, part-time work, summer jobs, or apprenticeship programs may exist for younger individuals as part of a regulated or supervised program that balances the person’s educational and social development.  III. COMPANY INFORMATION, RESOURCES AND FINANCIAL DISCLOSURE  Accurate books and records, including financial disclosure: Accurate business records are crucial. Solo Cup is committed to providing full, accurate, timely and understandable information about the Company in all material respects, and in particular, with regard to its financial condition and results of operations. In meeting this commitment, the Company is required by securities laws to report in accordance with generally accepted accounting principles in the U.S. and to maintain books and records that accurately and fairly reflect all transactions.  Solo employees must help ensure that reporting of any business information – financial or otherwise – is accurate, complete and timely. Examples of business records that must be scrupulously maintained include costs, sales, shipments, time sheets, rebate information, bills, payroll and benefits records. In meeting this objective, all employees must:        •   Follow all laws, external accounting requirements and Company procedures for reporting financial and other business information        •   Never deliberately make a false or misleading entry in a report or record        •   Do not hide or fail to record any funds, assets or transactions        •   Never alter or destroy Company records, except as authorized by established Company policies and procedures  Senior financial officers and other managers responsible for accurate books and records, and accounting and disclosure of financial information have a special duty to ensure that these standards are met.                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 14 of 22      Date: January 2006    Company property, resources and time: Solo Cup provides us with a place to work and with the tools to do our jobs. In return, as Solo employees, we are expected to respect and protect company property, including, but not limited to:        •   Confidential information        •   Facilities        •   Office Supplies        •   Patents, trademarks and copyrights        •   Proprietary information and trade secrets        •   Inventory        •   Products        •   Computers        •   Equipment  This property may be used only for Company business, unless specifically otherwise approved by management.  Confidential information, including proprietary information and trade secrets: “Confidential” or “proprietary” information is a valuable asset. It includes facts, data, ideas, strategies and knowledge that have not been disclosed to the public. Because it is the product of the Company’s own hard work, various laws allow the Company to protect this information from use by outsiders. Confidential information that has commercial value to competitors or to others who have an interest in doing business with Solo Cup is also referred to as a “trade secret.” Some examples of confidential information, proprietary information and trade secrets include, but are not limited to:        •   Sales/Marketing        •   Customer lists and related information        •   Marketing strategies and plans        •   Identity of vendors        •   Customer pricing        •   Manufacturing        •   Manufacturing methods, techniques and processes        •   Plant layouts        •   Manufacturing forecasts        •   Standard Operating Procedures (SOPs)        •   Manufacturing failures        •   Financial        •   Pricing        •   Budget forecasts        •   Profit margins        •   Costs        •   Human Resources        •   Employment data        •   Personnel files        •   Wage and salary data        •   Employee medical records                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 15 of 22      Date: January 2006        •   Strategic        •   Planned business or product acquisitions or divestitures        •   Strategic plans        •   Technical        •   Design specifications        •   Research and development data        •   Prototypes        •   Engineering designs        •   Inventions        •   Computer programs        •   Data compilation        •   Supplier        •   Supplier lists        •   Pricing  Patents, trademarks and copyrights: In addition to the confidential information described above, one of Solo Cup’s most valuable assets is its intellectual property – its patents, trademarks and copyrights. It is Solo Cup’s policy to establish, protect, maintain and defend its rights in all commercially significant intellectual property and to use those rights in responsible ways. All Solo Cup employees must take steps to safeguard these assets. Some of the ways you can accomplish this goal are:        •   Identify and protect commercially significant Solo intellectual property        •   Consult with the Legal Department before (i) disclosing Solo Cup proprietary information; (ii) soliciting, accepting or using proprietary information of outsiders; or (iii) permitting third parties to use Solo intellectual property        •   Assert intellectual property rights only in a way consistent with the law        •   Understand your responsibilities to the Company regarding new inventions and ideas that you may develop while a Solo Cup employee, as described below        •   Respect valid patents, copyrighted materials and other protected intellectual property of others  It is the Company’s policy that any discoveries, inventions, improvements or works (including, without limitation, computer programs, manuscripts, reports or formulas), whether the same relates to a machine, apparatus, device, process, composition, product, article or other thing, which any employee may make design or develop while employed by the Company and which relates in any                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 16 of 22      Date: January 2006    manner to any phase of the business of the Company, must be promptly and fully disclosed by the employee to the Company. It is not relevant whether such invention, discovery, etc. was made, designed or developed by the employee directly in connection with his or her duties of employment.  Further, it is the Company’s policy that that all right, title and interest in and to any such invention, whether or not patented, discovery, improvement or work, both in the United States and any foreign country, shall belong to the Company as its sole and exclusive property. Both while in the employ of the Company and thereafter, each employee shall regard and treat the same as secret and confidential.  Electronic media (e-mail, internet, etc.) use and network security: Solo Cup employees’ use of electronic media should be used to serve the business interests of the Company. All employees with access to our electronic media – e-mail, voicemail, Intranet, internet, video and audio equipment, instant messaging, telephones, cellular phones, personal data assistants and the like, hardware, software, networks and the information that runs on them – must use responsibly and primarily for legitimate business purposes. Any personal use should be legal, reasonable and kept to a minimum. Solo Cup electronic media may not be used for an employee’s personal business ventures. Information should be protected through the use of IDs, and passwords. Good judgment should be used to guide our use of electronic media, but keep these rules in mind:        •   Do not engage in electronic communications that might be considered offensive, derogatory, defamatory, harassing, obscene or otherwise, vulgar        •   Do not use Company electronic communications systems to improperly disseminate copyrighted or licensed materials or proprietary information or download copyrighted information of others        •   Do not use Company electronic communications systems to transmit chain letters, advertisements or solicitations        •   Do not visit inappropriate internet sites        •   Do not turn off or disable your computer’s anti-virus software at anytime        •   Do not detach, decompress, run/launch, or install any software programs not authorized by Solo Cup for legitimate business purposes        •   Clearly identify any electronic communication containing confidential information by adding “Solo Cup Confidential” or “Private and Confidential” to the subject line or body of the e-mail                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 17 of 22      Date: January 2006        •   Do not store Solo Cup confidential information on a non-Solo Cup electronic media device such as a home computer, personal data assistant or cellular phone        •   Lock computers and personal data assistants when not in use and do not leave them unattended  Records retention and storage: Save business records, including electronic data, only for the time period specified in the Company’s record retention policy.  IV. CONFLICTS OF INTEREST, GIFTS AND ENTERTAINMENT  Conflicts of interest: A conflict of interest arises when your personal interests or activities influence, or appear to influence, your ability to act with loyalty and objectivity to the best interests of Solo Cup. Entering into a relationship or an arrangement that conflicts with your responsibility to Solo Cup must be avoided. Some situations that could cause a conflict of interest include:        •   Outside employment or affiliations        •   Jobs and affiliations of close relatives        •   Serving as a director of another business        •   Having a significant financial interest in an existing or potential competitor, a customer or a supplier.  When evaluating whether you are entering into a potential situation that could be a conflict of interest, use good judgment and ask yourself:        •   Would this investment/affiliation/activity affect any decisions I will make for Solo Cup?        •   How would this investment/affiliation/activity seem to others inside Solo Cup? Would my co-workers think it might affect how I do my job for the Company?        •   How would it look to someone outside, such as a customer, supplier or even the media?  If you think you may have a conflict of interest, or that others could possibly believe an activity or relationship in which you are engaged is a conflict of interest, you should seek guidance from and report the circumstances to your supervisor, the Ethics HelpLine or the Legal Department.                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 18 of 22      Date: January 2006    Receiving Gifts and Entertainment: “Gifts and Entertainment” means anything of value, including discounts, loans, cash, favorable terms on any product or service, prizes, services, transportation, use of another company’s vehicles or vacation facilities, stocks or other securities, participation in stock offerings, home improvements, tickets, and gift certificates. The potential list is endless — these are just examples.  Gifts and entertainment offered to Solo Cup employees and their close relatives fall into three categories:  Usually OK: Some gifts and entertainment are small enough that they do not require approval. Gifts or entertainment with a combined market value of $250 or less from any one source in a calendar year are in this category (as long as they do not fall into the “Always Wrong” category, below). This means that as long as the following do not total more than $250 from a single source in a calendar year they do not require approval:        •   Occasional meals with a business associate.        •   Ordinary sports, theatre and other cultural events.        •   Other reasonable and customary gifts and entertainment.  Similarly, accepting promotional items of nominal value, such as pens, calendars, and coffee mugs that are given to customers in general, does not require approval.  Always Wrong: Other types of gifts and entertainment are simply wrong, either in fact or in appearance, so that they are never permissible, and no one can approve these. A conflict of interest may arise from any gift or entertainment offered by a competitor; someone whose primary purpose is to obtain business from Solo Cup; or someone trying to influence your decision-making objectivity. Employees may never:        •   Accept any gift or entertainment that would be illegal or result in any violation of law.        •   Accept any gift of cash or cash equivalent (such as gift certificates, loans, stock, stock options).        •   Accept or request anything as a “quid pro quo,” or as part of an agreement to do anything in return for the gift or entertainment.        •   Participate in any entertainment that is unsavory, sexually oriented, or otherwise violates our commitment to mutual respect.        •   Participate in any activity that you know would cause the person giving the gift or entertainment to violate his or her own employer’s standards.                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 19 of 22      Date: January 2006    Always Ask: For anything that does not fit into the other categories, it may or may not be permissible to proceed; but you will need to get written approval from your supervisor and the Executive Vice President responsible for your area in the Company. Examples in this category include the following, when paid by a current or potential supplier or customer:        •   Gifts and entertainment from a single source with an annual fair market value over $250.        •   Special events — such as tickets to a World Series or Super Bowl game (these usually have a value of more than $250).        •   Travel or entertainment lasting more than a day.        •   In determining whether to approve something in the “Always Ask” category, supervisors and EVPs will use reasonable judgment and consider such issues as:        •   Whether the gift or entertainment would be likely to influence your objectivity        •   Whether there is a business purpose (for example, business will be discussed as part of the event in question)        •   What kind of precedent it would set for other employees        •   How it would appear to other employees or people outside the Company  What to Do if You Receive an Impermissible Gift: You must immediately inform the Legal Department and return any gift of cash or cash equivalent such as a bank check, money order, investment securities or negotiable instrument. For other types of gifts over the “Usually OK” amount, if your supervisor and EVP determine that returning the gifts is impractical or undesirable, you should turn the gifts over to your supervisor for Company use, sale or donation. Gifts such as a picture, desk set or the like may be used in your Company office with the written permission of your supervisor but will remain Company property. If appropriate, a letter should be sent to the donor explaining the Company’s policy with respect to gifts.  If you have questions or concerns about gifts and entertainment policies, contact your supervisor, local Human Resources representative, or the Legal Department.  Offering Gifts and Entertainment: Just as we have strict rules for receiving gifts and entertainment, we must also be careful how we offer them. Offering                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 20 of 22      Date: January 2006    social amenities or business courtesies of a nominal value such as modest gifts, meals and entertainment is common in the commercial world and is meant to create goodwill and enhance business relationships.  Using good judgment and moderation, occasionally exchanging entertainment or gifts of nominal value with a non-Governmental individual or entity is appropriate unless the recipient’s employer forbids the practice. Any courtesy should always comply with the policies of the recipient’s organization.  Some conduct is always off-limits — no exceptions. Never offer or provide a gift, entertainment or anything of value if it is:        •   Illegal.        •   Known to be in violation of the rules of the recipient’s organization.        •   Cash or other monetary instruments (such as bank checks, traveler’s checks, money orders, investment securities or negotiable instruments).        •   Unsavory, sexually oriented, or otherwise violates our commitment to mutual respect.        •   A “quid pro quo” (offered for something in return).        •   A gift over $1,000 — unless presented in a public presentation making it clear that the recipient is being given the gift, for example, pursuant to a sales incentive program that is known and acceptable to the recipient’s employer.        •   Not recorded properly on Company books.  Gifts and entertainment to Government officials raise special risks. Never offer, provide or approve such gifts, gratuities or entertainment without prior written approval of the Legal Department and your supervisor.  For more information on the risks of offering gifts and entertainment to Government officials, see these sections in this Code: “Political Activities and Public Affairs” and “Conducting Business: Prohibition of Corrupt Practices and The Government As Our Customer.”  V. POLITICAL ACTIVITIES AND PUBLIC AFFAIRS  Personal political activity: Solo Cup recognizes that good citizens are actively involved in public affairs. Personal political activity might include: supporting and contributing to candidates and political parties; seeking public office; volunteering                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 21 of 22      Date: January 2006    personal time to another’s political campaign; or contacting an elected official on an issue of personal importance. In these types of activities, Solo Cup employees must always make it clear that their views and actions are their own, and not those of the Company’s or made on behalf of the Company. In addition, employees are not to use Company time, property or equipment for personal political activities.  Political contributions: Every country has different laws regarding taking part in the political process. For example, the U.S. and certain other countries set strict limits on contributions by corporations to political parties and candidates, and violators are subject to very serious penalties. Employees may not make any direct or indirect political contribution or expenditures on behalf of Solo Cup unless authorized by the Legal Department in writing. Political contributions or expenditures over $5,000 also require the prior written approval of the President. This includes activities such as using Company funds to buy tickets for a political fund-raising event; lending personnel during working hours for a fund-raising activity; or paying for advertisements and other campaign expenses.  EMPLOYEE ACKNOWLEDGEMENT        •   I acknowledge that I have received and read the Solo Cup Company Code of Business Conduct and the related explanation summarizing Solo Cup policies.        •   I acknowledge that it is my responsibility to know, understand and comply with the Code as a condition of my employment with Solo Cup.        •   I understand that the Code applies to me and my job at Solo Cup, and I agree to comply with its terms.        •   I understand that my at-will employment status is not altered by agreeing to comply with the Code                         Employee Signature       Date                           TITLE OF POLICY: CODE OF BUSINESS CONDUCT POLICY    Policy No. 6005    Page 22 of 22      Date: January 2006        Print employee name and Solo location:              Return this acknowledgement to your local Human Resources representative. Human Resource representative will document receipt of this acknowledgement and retain it in the employee’s personnel file.  Date received by HR:                                                                   EX-21 5 dex21.htm LIST OF SUBSIDIARIES OF SOLO CUP COMPANY   List of Subsidiaries of Solo Cup Company   Exhibit 21  SUBSIDIARIES OF SOLO CUP COMPANY  The following is a list of subsidiaries of Solo Cup Company (a Delaware corporation) as of January 1, 2006.           Name or Organization    State or Country of Incorporation   SF Holdings Group, Inc.   Delaware   Solo Cup Operating Corporation (2) (3)   Delaware   Solo Manufacturing LLC   Delaware   S Credit Corporation   Illinois   P.R. Solo Cup, Inc.   Illinois   Solo Management Company   Illinois   Yugen Kaisha Solo Cup Asia Pacific   Japan   Solo Cup Japan Co., Ltd   Japan   Solo Cup Panama, S.A. (1)   Panama   SC Management de Mexico, S. de R. L. de C.V.   Mexico   Solo Cup (Australia) Pty Ltd   Australia   Solo Cup UK Limited   England and Wales   Insulpak Holdings Limited   England and Wales   Solo Cup Europe Limited   England and Wales   Lily-Canada Holding Corporation   Delaware   Solo Cup Canada Inc.   Canada   Solo Cup de Mexico, S.A. de C.V.   Mexico   Global Cup, S.A. de C.V.   Mexico   CEGI (Hong Kong) Limited   Hong Kong    (1) In April 2005, Solo Container De Panama, S.A. changed its name to Solo Cup Panama, S.A.    (2) In September 2005, Sweetheart Cup Company Inc. changed its name to Solo Cup Operating Corporation.    (3) In October 2005, Solo Cup Company, an Illinois corporation, was merged into Solo Cup Operating Corporation.      EX-31.1 6 dex311.htm SECTION 302 CEO CERTIFICATION   Section 302 CEO Certification   Exhibit 31.1  CERTIFICATIONS  I, Robert L. Hulseman, certify that:        1. I have reviewed this annual report on Form 10-K of Solo Cup Company;        2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;        3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;        4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:        (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;        (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and        (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and        5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):        (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and        (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.        Date: March 29, 2006          By:    /s/ Robert L. Hulseman  Robert L. Hulseman  Chairman, Chief Executive Officer and Director      EX-31.2 7 dex312.htm SECTION 302 COO CERTIFICATION   Section 302 COO Certification   Exhibit 31.2  CERTIFICATIONS  I, Ronald L. Whaley, certify that:        1. I have reviewed this annual report on Form 10-K of Solo Cup Company;        2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;        3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;        4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:        (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;        (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and        (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and        5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):        (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and        (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.        Date: March 29, 2006          By:    /s/ Ronald L. Whaley  Ronald L. Whaley  President, Chief Operating Officer and Director      EX-31.3 8 dex313.htm SECTION 302 CFO CERTIFICATION   Section 302 CFO Certification   Exhibit 31.3  CERTIFICATIONS  I, Susan H. Marks, certify that:        1. I have reviewed this annual report on Form 10-K of Solo Cup Company;        2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;        3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;        4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:        (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;        (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and        (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and        5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):        (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and        (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.        Date: March 29, 2006          By:    /s/ Susan H. Marks  Susan H. Marks  Executive Vice President and Chief Financial Officer  (Principal Financial and Accounting Officer)      EX-32.1 9 dex321.htm SECTION 906 CEO CERTIFICATION   Section 906 CEO Certification   Exhibit 32.1  CERTIFICATION PURSUANT TO  18 U.S.C. SECTION 1350,  AS ADOPTED PURSUANT TO  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In connection with the Annual Report of Solo Cup Company (the “Company”) on Form 10-K for the year ended January 1, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert L. Hulseman, as Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:        (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and        (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.         /s/ Robert L. Hulseman  Robert L. Hulseman  Chief Executive Officer  March 29, 2006      EX-32.2 10 dex322.htm SECTION 906 COO CERTIFICATION   Section 906 COO Certification   Exhibit 32.2  CERTIFICATION PURSUANT TO  18 U.S.C. SECTION 1350,  AS ADOPTED PURSUANT TO  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In connection with the Annual Report of Solo Cup Company (the “Company”) on Form 10-K for the year ended January 1, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ronald L. Whaley, as Chief Operating Officer of the Company, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:        (1) The Report fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and        (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.         /s/ Ronald L. Whaley  Ronald L. Whaley  Chief Operating Officer  March 29, 2006      EX-32.3 11 dex323.htm SECTION 906 CFO CERTIFICATION   Section 906 CFO Certification   Exhibit 32.3  CERTIFICATION PURSUANT TO  18 U.S.C. SECTION 1350,  AS ADOPTED PURSUANT TO  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In connection with the Annual Report of Solo Cup Company (the “Company”) on Form 10-K for the year ended January 1, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Susan H. Marks, as Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:        (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and        (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.         /s/ Susan H. Marks  Susan H. Marks  Chief Financial Officer  March 29, 2006      GRAPHIC 12 g75254img01.jpg GRAPHIC  begin 644 g75254img01.jpg M_]C_X``02D9)1@`!`@``9`!D``#_[``11'5C:WD``0`$````9```_^X`#D%D M;V)E`&3``````?_;`(0``0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$! 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