Solo Cup finishes restatements, will develop 3-year plan; says liquidity OK

By Paul Deckelman

New York, Oct. 17 - Solo Cup Co. said it has completed a wide-ranging restatement of financial results going as far back as 2001 - and now that this distraction is out of the way, company executives said Tuesday, the Highland Park, Ill.-based manufacturer of disposable cups and plates can devote its full focus to running its business in what its chief executive officer termed a "challenging" environment, while it draws up its three-year business plan, expected to be unveiled around year-end.

Solo meantime remains in the good graces of its bondholders and bank lenders by filing the restated results.

Restatements back to 2001

The restatements bring to a close a process that has been going on for more than two months, when Solo said that it would be forced to delay its filing of financial results for the company's fiscal second quarter ended July 2 due to the previous discovery of certain accounting irregularities in that second quarter and previous periods. These related mostly to the timely recognition of customer credits, accounts payable, accrued expenses and the valuation of tangible and intangible assets.

Besides finally filing the fiscal 2006 second quarter data with the Securities and Exchange Commission on Monday, Solo also restated the consolidated financials for the year's first quarter, and for the 2003 through 2005 fiscal years, as well as the quarterly reports of those years. The restatements even applied to some financial data previously filed for 2001 and 2002.

Solo's interim chief financial officer, Eric A. Simonsen, said that the company's review of its results found 12 accounting errors, and "in one instance, the error appears intentional." The party responsible no longer works for the company. He said that Solo had instituted changes to prevent a repeat of the problems.

Bondholders, lender mollified

"Importantly," CEO Robert M. Korzenski told analysts on a conference call, "that restatement satisfies the terms of the indenture" for Solo's $325 million of 8½% senior subordinated notes due 2014.

When Solo first announced back in mid-August that it would be delaying the filing of the latest-quarter 10-Q report, it received formal notice from the bonds' indenture trustee that such a delay would put the company in breach of the indenture, which gave Solo a two-month window, through Monday, in which to cure the situation or be considered in default, with the notes possibly liable to acceleration should the trustee or enough of the holders press for immediate repayment

Solo is also keeping its nose clean with its bank lenders, who were also in a position to claim default because of the accounting errors and the restatement review.

Solo opened talks with its first- and second-lien credit facility lenders about a month ago aimed at obtaining covenant amendments and/or waivers that would keep the company out of default on its facilities, which include a $150 million senior secured revolving credit facility due 2010, a $637 million senior secured term loan B due 2011, and a $80 million senior secured second-lien term loan due 2012.

Korzenski said that last Friday, the company and the lenders had reached agreement on waivers and amendments, good through Jan. 2.

"Between now and January," the CEO said, "we will be finalizing a new three-year business plan, which will be a key component in our discussion with our lenders, and obviously, in how we run our business."

Answers in December

Simonsen declined to speculate in answer to a query during the question-and-answer portion of the conference call on whether the company anticipates any difficulty in meeting the covenant requirements when the waiver expires on Jan. 2.

And Simonson and Korzenski were similarly vague when asked whether Solo would undertake any steps to boost liquidity, which currently stands at $23 million of cash on hand and $36 million of revolver availability.

The CEO said that Solo "has taken, and continue[s] to take, a number of steps to maximize our near-term liquidity. We are also evaluating additional opportunities, such as sales of non-strategic assets, and alternative financing strategies."

Solo has excess manufacturing and distribution properties, rendered redundant by its merger two years ago with what was then Sweetheart Cup, and such assets could in theory be put up for sale. But the executives on the conference call declined to be more specific about the company's plans in this regard - or in a number of other areas - saying that such possibilities would be talked about when Solo finally unveils its three-year plan in December.

'Challenging' environment impacts results

In the fiscal second quarter, Solo reported net sales of $670.3 million, an increase of $23.4 million or 3.6% from net sales of $646.9 million, as restated, for the year-earlier period. The increase reflects generally higher prices - imposed in response to higher prices for resins and other plastics ingredients - partially offset by lower unit sales volumes.

While the company's gross profit for the quarter was $92 million, an increase of $9.8 million, or 12%, from year-earlier gross profit of $82.1 million, as restated, its net loss of $299.4 million was far wider than a year-earlier net loss of $2.8 million, as restated, although Korzenski and Simonsen noted that latest-period net loss reflects a non-cash charge of $228.5 million for the impairment of goodwill and a non-cash charge of $105 million to income tax expense to increase the valuation allowance for deferred tax assets.

Besides what he called the "challenging" industry environment, which includes higher raw-materials prices, Korzenski also spoke at length of Solo's difficulty in capturing all of the synergies which are on paper available to it as a result of the Sweetheart merger. While the company has realized many of these, he said, a glaring problem remains the failure so far to fully integrate Solo's and Sweetheart's separate information-technology networks.

"We have not been able to master one order [combining Sweetheart and Solo product lines for large customers], one invoice and one truck [making deliveries of both lines to customers]," the CEO lamented. However, he said that the company expects to roll out a new consolidated IT system in the 2007 first quarter which in theory should enable it to reap considerable streamlining of operations from the two product lines, resulting in savings.

Korzenski said he expects the current difficult conditions in the paper products and packaging industry "to continue for the balance of the year. At the same time, with the restatement now behind us, we are working with our advisors and investors to address the multiple business improvement opportunities we see for the company, which we expect will position it for enhanced profit improvement and growth."

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