10-Q 1 sweetheart2003q01-10q.txt FY03 Q1 10Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Thirteen Weeks Ended December 29, 2002 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to_________ Commission file number 33-91600 SWEETHEART HOLDINGS INC.* (Exact name of registrant as specified in its charter) Delaware 06-1281287 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 10100 Reisterstown Road, Owings Mills, Maryland 21117 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 410/363-1111 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the Registrant's common stock as of February 10, 2003: Sweetheart Holdings Inc. Class A Common Stock, $0.01 par value- 1,046,000 shares Sweetheart Holdings Inc. Class B Common Stock, $0.01 par value- 4,393,200 shares * The Registrant is the guarantor of the 12.0% Senior Subordinated Notes due 2003 of Sweetheart Cup Company Inc., a wholly owned subsidiary of the Registrant. ================================================================================ PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS SWEETHEART HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)

(Unaudited) ~~June~~December 3029, September 3029, 2002 ~~2001~~2002 ---------------- ----------------- Assets Current assets: Cash and cash equivalents $ 89,~~020~~695 $ 118,~~616~~035 Cash in escrow ~~131~~7 8- Receivables, less allowances of $43,~~747~~731 and $3,~~395~~741 ~~162~~142,~~092~~141 ~~170~~152,~~122~~541 Inventories ~~206~~199,~~571~~001 ~~225~~219,~~021~~427 Deferred income taxes 2320,~~507~~873 2420,~~185~~841 Assets held for sale 5,275 75,~~368~~275 Other current assets 3334,~~972~~688 3235,~~645~~736 ------------ ------------- Total current assets ~~439~~411,~~568~~680 ~~470~~441,~~965~~855 Property, plant and equipment, net ~~257~~248,~~308~~123 ~~260~~252,~~666~~491 Deferred income taxes 3431,~~109~~602 3029,~~349~~879 Spare parts 13,~~415~~525 1213,~~077~~428 Goodwill, ~~net~~ 41,~~737~~232 4341,~~593~~232 Due from SF Holdings 17,962 17,~~898~~962 Other assets 2422,~~903~~802 23,~~959~~996 ------------ ------------- Total assets $ ~~829~~786,~~002~~926 $ ~~859~~820,~~507~~843 ============ ============= Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ ~~104~~72,~~761~~615 $ 96102,~~072~~986 Accrued payroll and related costs 4136,~~994~~466 4638,~~892~~009 Other current liabilities 4950,~~865~~463 5044,~~257~~000 Current portion of deferred gain on sale of assets 10,203 10,~~275~~203 Current portion of long-term debt 9119,~~914~~866 16119,~~942~~853 ------------ ------------- Total current liabilities ~~216~~289,~~737~~613 ~~220~~315,~~438~~051 Commitments and contingencies (See Notes) ~~Deferred income taxes 4,334 4,334~~ Long-term debt ~~421~~309,~~591~~529 ~~423~~317,~~878~~448 Deferred gain on sale of assets 7570,~~435~~332 8372,~~672~~883 Other liabilities 6168,~~286~~991 6865,~~923~~948 ------------ ------------- Total liabilities ~~779~~738,~~383~~465 ~~801~~771,~~245~~330 ------------ ------------- Minority interest in subsidiary 2,~~243~~290 2,~~130~~276 ------------ ------------- Shareholder's equity: Class A Common Stock - Par value $.01 per share; 1,100,000 shares authorized; 1,046,000 shares issued and outstanding 10 10 Class B Common Stock - Par value $.01 per share; 4,600,000 shares authorized; 4,393,200 shares issued and outstanding 44 44 Additional paid-in capital 101,~~150~~183 101,~~259~~173 Accumulated deficit (4439,~~559~~149) (3740,~~429~~577) Accumulated other comprehensive loss (915,~~269~~917) (713,~~752~~413) ------------ ------------- Total shareholder's equity 4746,~~376~~171 5647,~~132~~237 ------------ ------------- Total liabilities and shareholder's equity $ ~~829~~786,~~002~~926 $~~859~~ 820,~~507~~843 ============ =============

See accompanying Notes to Consolidated Financial Statements. 2 SWEETHEART HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS) (Unaudited) (In thousands)

For the For the ~~For the For the~~ Thirteen Thirteen ~~Thirty-nine Thirty-nine~~ weeks ended weeks ended ~~weeks~~December ~~ended weeks ended June 30~~29, ~~June~~December ~~24, June~~ 30, ~~June 24,~~ 2002 2001 ~~2002 2001~~ ------------- ---~~----------~~ ------------- ----~~---------~~ Net sales $ ~~340~~320,~~245~~345 $ ~~342~~320,~~072~~875 ~~$ 957,491 $ 961,368~~ Cost of sales ~~299~~284,~~635~~477 ~~291~~280,~~412~~444 ~~847,772 838,070~~ ---------- --~~--------~~ ---------- ---~~-------~~ Gross profit 4035,~~610~~868 5040,~~660~~431 ~~109,719 123,298~~ Selling, general and administrative expenses 2826,~~082~~196 2429,~~443~~062 ~~86,005 82,641~~ Other ~~expense (~~income), net ~~8,877~~ (~~894~~2,195) ~~5,323~~ (73,~~013~~785) ---------- --~~--------~~ ---------- ---~~-------~~ Operating income 311,~~651~~867 2715,~~111~~154 ~~18,391 47,670~~ Interest expense, net of interest income of $~~61,~~37 ~~$-, $151~~ and $4532 9,~~454~~464 9,~~635~~186 ~~28,234 29,329~~ ---------- --~~--------~~ ---------- ---~~-------~~ Income ~~(loss)~~ before income tax, and minority interest ~~and~~2,403 ~~extraordinary loss (~~5,~~803)~~968 ~~17,476 (9,843) 18,341~~ Income tax ~~(benefit)~~ expense (961 2,~~320)~~407 ~~6,843 (3,905) 7,248~~ Minority interest in subsidiary 4014 5733 ~~113 57~~ ---------- --~~--------~~ ---------- ---~~-------~~ ~~Income~~Net ~~(loss) before extraordinary loss (3,523) 10,576 (6,051) 11,036 Extraordinary loss on debt extinguishment (net of~~ income ~~tax benefit of~~ $~~(719))~~ ~~- -~~ 1,~~079~~428 ~~- ---------- ---------- ---------- ---------- Net income (loss)~~ $ (3,~~523)~~528 ~~$ 10,576 $ (7,130) $ 11,036~~ ========== ==~~========~~ ========== ===~~=======~~ Other comprehensive income (loss): Net income ~~(loss)~~ $ (31,~~523)~~428 $ 103,~~576~~528 ~~$ (7,130) $ 11,036~~ Foreign currency translation ~~Adjustment~~adjustment (~~196~~167) ~~524~~ (~~176~~139) 1 Minimum pension liability adjustment (net of income tax of $(~~146),~~ $~~285~~1, ~~$(894~~558) ~~(219)~~and ~~427~~ ($1,~~341~~561)) (2,~~348~~337) ~~and $~~(12,~~565~~342)) ---------- --~~--------~~ ---------- ---~~-------~~ Comprehensive income (loss) $ (31,~~938~~076) $ 111,~~527~~047 ~~$ (8,647) $ 8,689~~ ========== ==~~========~~ ========== ===~~=======~~

See accompanying Notes to Consolidated Financial Statements. 3 SWEETHEART HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)

For the For the ~~Thirty-nine~~Thirteen weeks ~~Thirty-nine~~ended Thirteen weeks ended ~~June~~December 3029, ~~ended~~December ~~June 24~~30, 2002 2001 ---------------------- ----------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ~~(loss)~~ $ (71,~~130)~~428 $ 113,~~036~~528 Adjustments to reconcile net income ~~(loss)~~ to net cash provided by operating activities: Depreciation and amortization 267,~~723~~841 228,~~948~~679 Amortization of deferred gain (72,~~689~~551) (72,~~707~~568) ~~Deferred income tax expense - 5,059 (~~Gain) ~~loss~~ on sale of assets - (3,~~107~~045) 78 Changes in operating assets and liabilities: Receivables 810,~~030~~400 (74,~~434)~~320 Inventories 1820,~~450~~426 712,~~352~~947 Other current assets (1,~~326)~~048 (~~4,087~~221) Other assets ~~(6,765)~~87 ~~2,347~~31 Accounts payable 8(30,~~689~~371) (1219,~~705~~804) Accrued payroll and related costs (41,~~898~~543) (93,~~103~~744) Other current liabilities (26,~~744)~~463 25,~~107~~363 Other liabilities (101,~~421~~263) (3,~~877~~774) Other, net ~~1,046~~462 (~~356~~50) ------------ ----------- Net cash provided by operating activities 1812,~~858~~427 51,~~658~~662 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (172,~~589~~492) (217,~~690~~912) ~~Payment~~Proceeds ~~for~~from ~~business~~sale ~~acquisition~~of ~~- (18~~property,~~827)~~ ~~Due~~plant ~~to/from~~and SFequipment ~~Holdings~~- ~~(64) 502 Proceeds from sale of assets~~ 5,~~280~~233 ~~369~~ ------------ ----------- Net cash used in investing activities (122,~~373~~492) (392,~~646~~679) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net ~~borrowing~~(repayments) ~~under~~borrowings ~~credit facilities 191,522 42,394 Repayment~~ under credit facilities (~~196~~5,~~144~~965) -3,307 Repayments of other debt (52,~~336~~026) (51,~~736~~527) Debt issuance costs (277) - Increase in cash in escrow (~~4,581~~94) (~~764~~5,998) Decrease in cash in escrow ~~4,458~~87 -765 ------------ ----------- Net cash (used in) ~~provided by~~ financing activities (108,~~081~~275) 35(3,~~894~~453) ------------ ----------- NET INCREASE (DECREASE) ~~INCREASE~~ IN CASH AND CASH EQUIVALENTS 1,660 (34,~~596~~470) ~~1,906~~ CASH AND CASH EQUIVALENTS, beginning of period 8,035 11,616 ~~4,828~~ ------------ ----------- CASH AND CASH EQUIVALENTS, end of period $ 89,~~020~~695 $ 67,~~734~~146 ============ =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 193,~~890~~367 $ 233,~~202~~179 ============ =========== Income taxes paid $ ~~808~~13 $ ~~619~~893 ============ ===========

See accompanying Notes to Consolidated Financial Statements. 4 SWEETHEART HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION As used in these notes, unless the context otherwise requires, the "Company" shall refer to Sweetheart Holdings Inc. ("Sweetheart Holdings") and its subsidiaries, including Sweetheart Cup Company Inc. ("Sweetheart Cup"). On March 25, 2002, pursuant to an Agreement and Plan of Merger, The Fonda Group, Inc. ("Fonda") was merged (the "Merger") with and into Sweetheart Cup, with Sweetheart Cup as the surviving entity. In connection with the Merger, all of the assets and operations of Fonda were assigned to, and all liabilities of Fonda were assumed by, Sweetheart Cup by operation of law and all of the outstanding shares of Fonda were cancelled. Sweetheart Cup, the surviving entity, is a wholly owned subsidiary of Sweetheart Holdings which is a wholly owned subsidiary of SF Holdings Group, Inc. ("SF Holdings"). Pre-merger, Sweetheart Holdings and Fonda were under common control, and therefore, the transaction has been accounted for in a manner similar to a pooling-of-interests. The accompanying consolidated financial statements for the thirteen weeks ended December 30, 2001 have been restated. The information included in the foregoing interim financial statements of the Company is unaudited but, in the opinion of management, includes all adjustments (consisting only of normal recurring adjustments and accruals) which the Company considers necessary for a fair presentation of the operating results for these periods. Results for the interim periods are not necessarily indicative of results for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended September 29, 2002. (2) RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and applies to all goodwill and other intangible assets recognized in an entity's balance sheet regardless of when these assets were originally recognized. SFAS No. 142 requires that goodwill and certain intangibles with an indefinite life not be amortized, but subject to an impairment test on an annual basis. The Company has adopted SFAS No. 142 effective September 30, 2002 and has ceased amortization of goodwill as of that date. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of leases. This statement amends SFAS. No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies. SFAS No. 143 is effective for years beginning after June 15, 2002. The Company adopted SFAS No. 143 effective September 30, 2002. The adoption of SFAS No. 143 did not have an impact on the consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principals Board Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). This statement also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The 5 Company has adopted SFAS No. 144 effective September 30, 2002. The adoption of SFAS No. 144 did not have an impact on the consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, Recission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement addresses, among other items, the classification of gains and losses from extinguishment of debt. In accordance with the statement, any gain or loss on extinguishment of debt that does not meet the criteria in APB No. 30 will no longer be classified as an extraordinary item for all periods presented. This statement is effective for fiscal years beginning after May 15, 2002. The Company has adopted SFAS No. 145 effective September 30, 2002. The adoption of SFAS No. 145 did not have an impact on the consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 replaces Emerging Issues Task Force Issue 94-3, requiring a company to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. (3) INVENTORIES The components of inventories are as follows (in thousands): (Unaudited) December 29, September 29, 2002 2002 ---------------- ----------------- Raw materials and supplies $ 54,306 $ 57,305 Finished products 133,591 150,925 Work in progress 11,104 11,197 ----------- ------------ Total inventories $ 199,001 $ 219,427 =========== ============ (4) GOODWILL In accordance with SFAS No. 142, prior period earnings were not restated. A reconciliation of the previously reported net income during the thirteen weeks ended December 30, 2001 to the amounts adjusted for the reduction of goodwill amortization expense, net of related income tax effect, is as follows (in thousands): For the Thirteen For the Thirteen weeks ended weeks ended December 29, December 30, 2002 2001 -------------------- -------------------- Net income, as reported $ 1,428 $ 3,528 Add back: goodwill amortization, net of tax - 302 --------- -------- Net income, adjusted $ 1,428 $ 3,830 ========= ======== The Company has adopted SFAS No. 142 effective September 30, 2002. SFAS No. 142 requires the discontinuance of amortization of goodwill and intangible assets with indefinite useful lives, but requires instead that they be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. In addition, SFAS No. 142 includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test as of September 30, 2002 no later than March 30, 2003. Any transitional impairment loss would be recognized as a cumulative effect of a change in accounting principle in the statement of income in the thirteen weeks ended March 30, 2003. 6 As of December 29, 2002, the Company has unamortized goodwill of $41.2 million and intangible assets of $2.6 million. Goodwill amortization was $0.5 million during the thirteen weeks ended December 30, 2001. Amortization expense related to intangible assets was $0.2 million during the thirteen weeks ended December 29, 2002 and $0.3 million during the thirteen weeks ended December 30, 2001 and is expected to range from approximately $0.2 million to $0.3 million each year between Fiscal 2004 to Fiscal 2008. Changes to goodwill and intangible assets during the thirteen weeks ended December 29, 2002, including the effects of adopting the new accounting standard, follow (in thousands): Intangible Goodwill Assets ---------------- ---------------- Balance at September 30, 2002, net of accumulated amortization $ 41,232 $ 2,812 Additions during the period - 13 Amortization expense - (218) ---------- --------- Balance at December 29, 2002, net of accumulated amortization $ 41,232 $ 2,607 ========== ========= (5) DEBT On October 1, 2002, the Company entered into a loan agreement with the City of Chicago to borrow $2.0 million. The loan bears no interest and is payable in equal installments of $100,000 commencing on February 1, 2004 and every six months thereafter. The proceeds from the loan were received on January 2, 2003 and the Company recorded a liability as of that date. On November 21, 2002, as amended on January 16, 2003 and further amended on January 27, 2003, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-4 relating to a proposed offer to exchange newly issued $110 million senior subordinated notes due 2007 for all of the $110 million Senior Subordinated Notes and a consent solicitation to eliminate and/or amend certain restrictive covenants and other provisions governing the $110 million Senior Subordinated Notes. The Company believes that the exchange offer and consent solicitation will provide it with the necessary time to execute its business plan and to further evaluate its strategic alternatives. If the Company is unable to complete the exchange offer and consent solicitation or refinance, repay or extend the $110 million Senior Subordinated Notes prior to March 1, 2003, its Senior Credit Facility, unless otherwise amended, will become due and payable. (6) RELATED PARTY TRANSACTIONS All of the affiliates (other than Fibre Marketing Group, LLC ("Fibre Marketing"), the successor of Fibre Marketing Group, Inc., a waste recovery business in which the Company has a 25% interest and Mehiel Enterprises, Inc., a company owned by a director, Chris Mehiel, of the Company, has a 75% interest) referenced below are directly or indirectly under the common ownership of the Company's Chairman and Chief Executive Officer, Dennis Mehiel. The Company believes that the transactions entered into with related parties were negotiated on terms which are at least as favorable as it could have obtained from unrelated third parties and were negotiated on an arm's length basis. Pursuant to a Management Services Agreement, as amended, SF Holdings is entitled to receive from the Company an aggregate annual fee of $1.85 million, payable semi-annually, and is reimbursed for out-of-pocket expenses. Under the agreement, SF Holdings has the right, subject to the direction of the Company's Board of Directors, to manage the Company's day to day operations. At December 29, 2002 and December 30, 2001, the Company has a loan receivable from its Chief Executive Officer of $0.3 million plus accrued interest at 5.06%. During the thirteen weeks ended December 29, 2002, the Company forgave $13,872 of interest associated with the loan to its Chief Executive Officer. This loan is payable upon demand. At December 29, 2002 and December 30, 2001, the Company has a loan receivable from its 7 Chief Operating Officer of $0.1 million and $0.2 million, respectively, plus accrued interest at 5.39%. On November 1, 2001, Fibre Marketing issued promissory notes to the Company for $1.2 million in the aggregate, in exchange for outstanding accounts receivable from Fibre Marketing, at an annual interest rate of 7.0% payable in 36 monthly installments. As of December 29, 2002 and December 30, 2001, $0.8 million and $1.2 million, respectively, is due to the Company. During the thirteen weeks ended December 29, 2002, the Company purchased $2.9 million of corrugated containers from Box USA Holdings, Inc. ("Box USA"), a converter and seller of interior packaging, corrugated sheets and corrugated containers, in which the Company's Chief Executive Officer beneficially owns more than 10% of its outstanding capital stock. During the thirteen weeks ended December 29, 2002, the Company purchased $0.2 million of travel services from Emerald Lady, Inc, a company wholly owned by the Company's Chief Executive Officer ("Emerald Lady"). Included in accounts payable as of December 29, 2002 is $0.3 million due to Box USA. Other purchases from affiliates during the thirteen weeks ended December 29, 2002 were not significant. During the thirteen weeks ended December 29, 2002, the Company sold $2.0 million of scrap paper and plastic to Fibre Marketing. Included in accounts receivable as of December 29, 2002 is $1.1 million due from Fibre Marketing. Other sales to affiliates during the thirteen weeks ended December 29, 2002 were not significant. During the thirteen weeks ended December 30, 2001, the Company purchased $2.6 million of corrugated containers from Box USA and $0.3 million of travel services from Emerald Lady. Included in accounts payable as of December 30, 2001 is $0.5 million due to Box USA. Other purchases from affiliates during the thirteen weeks ended December 30, 2001 were not significant. During the thirteen weeks ended December 30, 2001, the Company sold $1.8 million of scrap paper and plastic to Fibre Marketing. Included in accounts receivable as of December 30, 2001 is $0.9 million due from Fibre Marketing. Other sales to affiliates during the thirteen weeks ended December 30, 2001 were not significant. During Fiscal 2001, the Company began leasing a facility in North Andover, Massachusetts from D&L Andover Property, LLC, an entity in which the Company's Chief Executive Officer indirectly owns 50%. During the thirteen weeks ended December 29, 2002 and December 30, 2001, rental payments under this lease were $0.4 million, respectively. Annual rental payments under the 20-year lease are $1.5 million in the first year, escalating at a rate of 2% each year thereafter. During Fiscal 2000, the Company entered into a lease agreement with D&L Development, LLC, an entity in which the Company's Chief Executive Officer indirectly owns 47%, to lease a warehouse facility in Hampstead, Maryland. During the thirteen weeks ended December 29, 2002 and December 30, 2001, rental payments under this lease were $0.9 million, respectively. Annual rental payments under the 20-year lease are $3.7 million for the first 10 years of the lease and $3.8 million annually, thereafter. During Fiscal 1998, the Company purchased a 38.2% ownership interest in Fibre Marketing from a director of the Company for $0.2 million. During Fiscal 2000, the Company sold a 13.2% interest in Fibre Marketing to Mehiel Enterprises, Inc. for $0.1 million, retaining a 25% ownership interest in Fibre Marketing. On July 17, 2000, Box USA transferred 50% of its interest in Fibre Marketing to Mehiel Enterprises, Inc. Mehiel Enterprises, Inc. owns a 75% interest in Fibre Marketing. The Company accounts for its ownership interest in Fibre Marketing using the equity method. The Company leases a building in Jacksonville, Florida from the Company's Chief Executive Officer. Annual payments under the lease are $0.2 million plus annual increases based on changes in the Consumer Price Index ("CPI") through December 31, 2014. In addition, the Chief Executive Officer can require the Company to purchase the facility for $1.5 million, subject to a CPI-based escalation, until July 31, 2006. In Fiscal 1998, the Company terminated its operations at this facility and is currently subleasing the entire facility. Rent expense, net of sublease income on the portion of the premises subleased was insignificant and $0.1 million during the thirteen weeks ended December 29, 2002 and December 30, 2001, respectively. 8 (7) SF HOLDINGS STOCK OPTION PLAN During Fiscal 2001, SF Holdings granted options to purchase shares of its common stock to certain employees of the Company. The options vest over a period of three years. Certain of the exercise prices of the options were below the fair market value of SF Holdings' common stock at the date of the grant. During the vesting period, these discounts of $0.3 million are being amortized as compensation expense and credited to additional paid-in capital by the Company. Amortization expense relating to SF Holdings' stock options was $10,000 and $24,000 for the thirteen weeks ended December 29, 2002 and December 30, 2001, respectively. (8) ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss are as follows (in thousands): (Unaudited) December 29, September 29, 2002 2002 -------------- --------------- Foreign currency translation adjustment $ (2,890) $ (2,723) Minimum pension liability adjustment (13,027) (10,690) --------- --------- Accumulated other comprehensive loss $(15,917) $(13,413) ========= ========= (9) BUSINESS INTERRUPTION CLAIM During Fiscal 2001, the Company experienced a casualty loss at its Somerville, Massachusetts facility. Since January 2001 through September 29, 2002, the Company incurred $11.6 million of expenses associated with this casualty loss. As of September 29, 2002, the Company received $12.5 million reimbursement under the casualty and business interruption claim. The $0.9 million of proceeds in excess of the expenses, represents the net proceeds from the business interruption claim, which were recorded as a reduction to cost of sales during the fourth quarter of Fiscal 2002. During October 2002, the Company and its insurance provider agreed to a final settlement of this claim whereby the Company would receive an additional $3.8 million of business interruption proceeds. As December 27, 2002, this amount was received and recorded as a reduction of cost of sales, net of $0.2 million of expenses. (10) OTHER INCOME, NET During the thirteen weeks ended December 29, 2002, the Company realized $2.6 million due to the amortization of the deferred gain in conjunction with a sale-leaseback transaction. In Fiscal 2000, the Company sold certain production equipment in connection with a sale-leaseback transaction (the "Sale-Leaseback Transaction"). This gain were partially offset by $0.3 million of costs associated with the rationalization, consolidation and process improvement of the Company's manufacturing facilities. During the thirteen weeks ended December 30, 2001, the Company realized $2.6 million due to the amortization of the deferred gain in conjunction with a sale-leaseback transaction. Also, during the thirteen weeks ended December 30, 2001, the Company recognized a $3.0 million gain in association with the sale of a manufacturing facility in Manchester, New Hampshire. These gains were partially offset by $1.5 million of costs associated with the rationalization, consolidation and process improvement of the Company's manufacturing facilities. (11) CONTINGENCIES The Company is subject to legal proceedings and other claims arising in the ordinary course of its business. 9 The Company maintains insurance coverage of types and in amounts which it believes to be adequate. The Company believes that it is not presently a party to any litigation, the outcome of which could reasonably be expected to have a material adverse effect on its financial condition or results of operations. (12) SWEETHEART CUP COMPANY INC. All of the outstanding stock of Sweetheart Cup is owned by Sweetheart Holdings and thereby Sweetheart Holdings is the only guarantor of the $110 million Senior Subordinated Notes, as amended. The guarantee is full and unconditional. The following financial information for Sweetheart Cup and its subsidiaries, Sweetheart Holdings and the Company is presented in accordance with Rule 3-10 of Regulation S-K (in thousands):

Consolidated Balance Sheet ~~June~~December 3029, 2002 ---------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- --------------- Assets Current assets: Cash and cash equivalents $ 89,~~020~~695 $ - $ - $ 89,~~020~~695 Cash in escrow ~~131~~7 - - ~~131~~7 Receivables ~~208~~189,~~333~~851 - (4647,~~241~~710) ~~162~~142,~~092~~141 Raw materials inventory 4754,~~679~~306 - - 4754,~~679~~306 Work in progress inventory 10133,~~029~~591 - - 10133,~~029~~591 Finished goods inventory ~~148~~11,~~863~~104 - - ~~148~~11,~~863~~104 Assets held for sale - 5,275 - 5,275 Other current assets 5755,~~479~~561 2,~~517~~584 (2,~~517~~584) 5755,~~479~~561 ----------- ----------- ------------ ------------- Total current assets ~~480~~454,~~534~~115 7,~~792~~859 (4850,~~758~~294) ~~439~~411,~~568~~680 Property, plant and equipment, net ~~257~~248,~~308~~123 - - ~~257~~248,~~308~~123 Deferred income taxes 42,938 (21,073) 9,737 31,602 Other assets ~~143~~95,~~164~~521 107,~~592~~521 (~~118~~107,~~630~~521) ~~132~~95,~~126~~521 ----------- ----------- ------------ ------------- Total assets $ ~~881~~840,~~006~~697 $ ~~115~~94,~~384~~307 $ (~~167~~148,~~388~~078) $ ~~829~~786,~~002~~926 =========== =========== ============ ============= Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ ~~104~~72,~~761~~615 $ - $ - $ ~~104~~72,~~761~~615 Other current liabilities ~~114~~99,~~493~~716 - (2,~~517~~584) ~~111~~97,~~976~~132 Current portion of long-term debt 119,866 - - 119,866 ----------- ----------- ------------ ------------- Total current liabilities ~~219~~292,~~254~~197 - (2,~~517~~584) ~~216~~289,~~737~~613 Long-term debt ~~421~~309,~~591~~529 4647,~~241~~710 (4647,~~241~~710) ~~421~~309,~~591~~529 Other liabilities ~~223~~201,~~921~~343 - (8262,~~866~~020) ~~141~~139,~~055~~323 ----------- ----------- ------------ ------------- Total liabilities ~~864~~803,~~766~~069 4647,~~241~~710 (~~131~~112,~~624~~314) ~~779~~738,~~383~~465 ----------- ----------- ------------ ------------- Minority interest 2,~~243~~290 - - 2,~~243~~290 ----------- ----------- ------------ ------------- Shareholder's equity: Class A ~~common~~Common ~~stock~~Stock - 10 - 10 Class B ~~common~~Common ~~stock~~Stock - 44 - 44 Additional paid-in capital ~~100~~123,~~660~~688 ~~101~~78,~~090~~095 (100,600) 101,~~150~~183 Accumulated deficit (7772,~~394~~433) (3231,~~001~~552) 64,836 (4439,~~559~~149) Accumulated other comprehensive loss (915,~~269~~917) - - (915,~~269~~917) ----------- ----------- ------------ ------------- Total shareholder's equity 1335,~~997~~338 6946,~~143~~597 (35,764) 4746,~~376~~171 ----------- ----------- ------------ ------------- Total liabilities and shareholder's equity $ ~~881~~840,~~006~~697 $ ~~115~~94,~~384~~307 $ (~~167~~148,~~388~~078) $ ~~829~~786,~~002~~926 =========== =========== ============ =============

Consolidated Balance Sheet September 3029, ~~2001~~2002 ---------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- --------------- Assets Current assets: Cash and cash equivalents $ 118,~~616~~035 $ - $ - $ 118,~~616~~035 Cash in escrow 8- - - 8- Receivables ~~216~~199,~~688~~512 9- (46,~~575~~971) ~~170~~152,~~122~~541 Raw materials inventory 5557,~~955~~305 - - 5557,~~955~~305 Work in progress inventory 1011,~~769~~197 - - 1011,~~769~~197 Finished goods inventory ~~158~~150,~~297~~925 - - ~~158~~150,~~297~~925 Assets held for sale - 75,~~368~~275 - 75,~~368~~275 Other current assets 56,~~830~~577 -2,551 -(2,551) 56,~~830~~577 ----------- ----------- ------------ ------------- Total current assets ~~510~~483,~~163~~551 7,~~377~~826 (4649,~~575~~522) ~~470~~441,~~965~~855 Property, plant and equipment, net ~~182~~252,~~117~~491 ~~102~~- - 252,~~768~~491 Deferred income taxes 41,070 (2420,~~219~~927) ~~260~~9,~~666~~736 29,879 Other assets ~~143~~96,~~120~~618 21106,~~496~~450 (36106,~~740~~450) ~~127~~96,~~876~~618 ----------- ----------- ------------ ------------- Total assets $ ~~835~~873,~~400~~730 $ ~~131~~93,~~641~~349 $ (~~107~~146,~~534~~236) $ ~~859~~820,~~507~~843 =========== =========== ============ ============= Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ 89102,~~840~~986 $ ~~6,232~~- $ - $ 96102,~~072~~986 Other current liabilities ~~110~~94,~~839~~763 ~~14,769~~- (12,~~242~~551) ~~124~~92,~~366~~212 Current portion of long-term debt 119,853 - - 119,853 ----------- ----------- ------------ ------------- Total current liabilities ~~200~~317,~~679~~602 ~~21,001~~- (12,~~242~~551) ~~220~~315,~~438~~051 Long-term debt ~~423~~317,~~878~~448 4546,~~333~~971 (4546,~~333~~971) ~~423~~317,~~878~~448 Other liabilities ~~182~~199,~~124~~781 - (2560,~~195~~950) ~~156~~138,~~929~~831 ----------- ----------- ------------ ------------- Total liabilities ~~806~~834,~~681~~831 6646,~~334~~971 (71110,~~770~~472) ~~801~~771,~~245~~330 ----------- ----------- ------------ ------------- Minority interest 2,~~130~~276 - - 2,~~130~~276 ----------- ----------- ------------ ------------- Shareholder's equity: Class A ~~common~~Common ~~stock~~Stock - 10 - 10 Class B ~~common~~Common ~~stock~~Stock - 44 - 44 Additional paid-in capital ~~100~~123,~~769~~678 ~~101~~78,~~090~~095 (100,600) 101,~~259~~173 Accumulated deficit (6673,~~428~~642) (3531,~~837~~771) 64,836 (3740,~~429~~577) Accumulated other comprehensive loss (713,~~752~~413) - - (713,~~752~~413) ----------- ----------- ------------ ------------- Total shareholder's equity 2636,~~589~~623 6546,~~307~~378 (35,764) 5647,~~132~~237 ----------- ----------- ------------ ------------- Total liabilities and shareholder's equity $ ~~835~~873,~~400~~730 $ ~~131~~93,~~641~~349 $ (~~107~~146,~~534~~236) $ ~~859~~820,~~507~~843 =========== =========== ============ =============

Consolidated Statement of ~~Operations~~Income For the Thirteen Weeks Ended ~~June~~December 3029, 2002 ---------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- --------------- Net sales $ ~~340~~320,~~245~~345 $ - $ - $ ~~340~~320,~~245~~345 Cost of sales ~~299~~284,~~635~~477 - - ~~299~~284,~~635~~477 ----------- ----------- ------------ ------------- Gross profit 4035,~~610~~868 - - 4035,~~610~~868 Selling, general and administrative expenses 2826,~~081~~196 1- - 2826,~~082~~196 Other ~~expense~~income, net 8(2,~~877~~195) - - 8(2,~~877~~195) ----------- ----------- ------------ ------------- Operating income ~~(loss) 3~~11,~~652~~867 ~~(1)~~- - 311,~~651~~867 Interest expense (income), net 9,~~482~~829 (28365) - 9,~~454~~464 ----------- ----------- ------------ ------------- Income ~~(loss)~~ before income tax and minority interest (52,~~830)~~038 27365 - (52,~~803)~~403 Income tax ~~(benefit)~~ expense ~~(2,331)~~815 11146 - ~~(2,320)~~961 Minority interest in subsidiary 4014 - - 4014 ----------- ----------- ------------ ------------- Net income ~~(loss)~~ $ (31,~~539)~~209 $ 16219 $ - $ (31,~~523)~~428 =========== =========== ============ ============= Other comprehensive income (loss): Net income ~~(loss)~~ $ (31,~~539)~~209 $ 16219 $ - $ (31,~~523)~~428 Foreign currency translation adjustment (~~196~~167) - - (~~196~~167) Minimum pension liability adjustment (net of income ~~taxes~~tax of $(~~146~~$1,558)) (~~219~~2,337) - - (~~219~~2,337) ----------- ----------- ------------ ------------- Comprehensive income (loss) $ (31,~~954~~295) $ 16219 $ - $ (31,~~938~~076) =========== =========== ============ =============

Consolidated Statement of ~~Operations~~Income For the Thirteen Weeks Ended ~~June~~December 2430, 2001 ---------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- --------------- Net sales $ ~~342~~320,~~072~~875 $ 5957,~~796~~896 $ (5957,~~796~~896) $ ~~342~~320,~~072~~875 Cost of sales ~~297~~285,~~118~~988 5453,~~802~~063 (6058,~~508~~607) ~~291~~280,~~412~~444 ----------- ----------- ------------ ------------- Gross profit 4434,~~954~~887 4,~~994~~833 ~~712~~711 5040,~~660~~431 Selling, general and administrative expenses 2328,~~966~~605 ~~477~~457 - 2429,~~443~~062 Other income, net (14,~~606~~496) - ~~712~~711 (~~894~~3,785) ----------- ----------- ------------ ------------- Operating income 2210,~~594~~778 4,~~517~~376 - 2715,~~111~~154 Interest expense, net 87,~~460~~765 1,~~175~~421 - 9,~~635~~186 ----------- ----------- ------------ ------------- Income before income tax ~~expense~~ and minority interest 143,~~134~~013 32,~~342~~955 - 175,~~476~~968 Income tax expense 51,~~506~~226 1,~~337~~181 - 62,~~843~~407 Minority interest in subsidiary 5733 - - 5733 ----------- ----------- ------------ ------------- Net income $ 81,~~571~~754 $ 21,~~005~~774 $ - $ 103,~~576~~528 =========== =========== ============ ============= Other comprehensive income (loss): Net income $ 81,~~571~~754 $ 21,~~005~~774 $ - $ 103,~~576~~528 Foreign currency translation adjustment ~~524~~(139) - - ~~524~~(139) Minimum pension liability adjustment (net of income ~~taxes~~tax of $~~285~~(1,561)) ~~427~~(2,342) - - ~~427~~(2,342) ----------- ----------- ------------ ------------- Comprehensive income (loss) $ ~~9,522~~(727) $ 21,~~005~~774 $ - $ 111,~~527~~047 =========== =========== ============ =============

Consolidated Statement of ~~Operations~~Cash Flows For the ~~Thirty-nine~~Thirteen Weeks Ended ~~June~~December 3029, 2002 ---------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net ~~sales~~cash $provided ~~957,491~~by $operating ~~116,485~~activities $ ~~(116~~12,~~485)~~427 $ ~~957,491~~- ~~Cost~~$ of- ~~sales~~$ ~~858~~12,~~722~~427 ~~106,760 (117,710) 847,772~~ ----------- ----------- ------------ ------------- ~~Gross~~CASH ~~profit~~FLOWS ~~98,769~~FROM ~~9,725~~INVESTING ~~1,225~~ACTIVITIES ~~109,719~~Additions ~~Selling~~to property, ~~general~~plant and ~~administrative~~equipment ~~expenses 85~~(2,~~073~~492) ~~932~~ - ~~86,005 Other expense, net 4,098~~ - 1(2,~~225~~492) ~~5,323~~ ----------- ----------- ------------ ------------- ~~Operating~~Net ~~income~~cash ~~9,598~~used ~~8,793~~in -investing ~~18,391~~activities ~~Interest expense~~(2,492) ~~net~~- ~~25,835~~- (2,~~399~~492) - ~~28,234~~ ---------- ----------- ------------ ------------- ~~Income~~CASH ~~(loss)~~FLOWS ~~before~~FROM ~~income~~FINANCING ~~tax,~~ACTIVITIES ~~minority~~Net ~~interest~~repayments ~~and~~under ~~extraordinary~~credit ~~loss~~facilities (165,~~237~~965) ~~6,394~~- - (95,~~843~~965) ~~Income~~Repayment ~~tax~~of ~~(benefit)~~other ~~expense~~debt (62,~~463~~026) - - (2,~~558~~026) Debt issuance costs (277) - - (~~3,905~~277) ~~Minority~~Increase ~~interest~~in cash escrow (94) - - (94) Decrease in ~~subsidiary~~cash ~~113~~escrow 87 - - ~~113~~87 ----------- ----------- ------------ ------------- ~~Income~~Net ~~(loss)~~cash ~~before~~used ~~extraordinary~~in ~~loss~~financing activities (98,~~887~~275) ~~3,836~~- - (68,~~051~~275) ~~Extraordinary~~----------- ~~loss~~----------- on------------ ~~debt~~------------- ~~extinguishment~~NET ~~(net~~INCREASE ofIN ~~income~~CASH ~~tax~~AND ~~benefit~~CASH ofEQUIVALENTS ~~$(719))~~ 1,~~079~~660 - - 1,~~079~~660 CASH AND CASH EQUIVALENTS, beginning of period 8,035 - - 8,035 ----------- ----------- ------------ ------------- ~~Net~~CASH ~~income~~AND ~~(loss)~~CASH EQUIVALENTS, end of period $ ~~(10~~9,~~966)~~695 $ ~~3,836~~- $ - $ (79,~~130)~~695 =========== =========== ============ ============= ~~Other~~SUPPLEMENTAL ~~comprehensive~~CASH ~~income~~FLOW ~~(loss)~~DISCLOSURES: ~~Net~~Interest ~~income~~paid ~~(loss)~~ $ ~~(10,966) $~~ 3,~~836~~367 $ - $ ~~(7,130) Foreign currency translation adjustment (176)~~ - ~~- (176) Minimum pension liability adjustment (net of income taxes of~~ $~~(894))~~ (13,~~341)~~367 -=========== -=========== ~~(1,341)~~============ ~~----------~~============= ~~----------~~Income ~~-----------~~taxes ~~----------~~paid ~~Comprehensive income (loss)~~ $ ~~(12,483)~~13 $ ~~3,836~~- $ - $ ~~(8,647)~~13 =========== =========== ============ =============

Consolidated Statement of ~~Operations~~Cash Flows For the ~~Thirty-nine~~Thirteen Weeks Ended ~~June~~December 2430, 2001 ---------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net ~~sales~~cash provided by operating activities $ ~~961~~1,~~368~~662 $ ~~176~~1,~~011~~170 $ (~~176~~1,~~011~~170) $ ~~961~~1,~~368~~662 ~~Cost~~----------- of----------- ~~sales~~------------ ~~854~~------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property,~~867~~ ~~161~~plant and equipment ( 7,~~348~~912) - - (~~178~~ 7,~~145~~912) ~~838~~Proceeds from sale of property,~~070~~ plant and equipment 5,233 - - 5,233 ----------- ----------- ------------ ------------- ~~Gross~~Net ~~profit~~cash ~~106,501~~used 14in investing activities (2,~~663~~679) - - (2,~~134~~679) ~~123~~----------- ----------- ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings under credit facilities 3,~~298~~307 ~~Selling~~- - 3,307 ~~general~~Repayment ~~and~~of ~~administrative~~intercompany ~~expenses~~equipment 81financing - (1,~~129~~170) 1,~~512~~170 - 82Repayments of other debt (1,~~641~~527) ~~Other~~- ~~income~~- (1,527) ~~net~~Increase in cash escrow (95,~~147~~998) - ~~2,134~~- (75,~~013~~998) Decrease in cash escrow 765 - - 765 ----------- ----------- ------------ ------------- ~~Operating~~Net ~~income~~cash ~~34,519~~used ~~13,151~~in -financing 47activities (3,~~670~~453) ~~Interest expense~~(1,170) ~~net 26~~1,~~252~~170 (3,~~077~~453) - ~~29,329~~ ---------- ----------- ------------ ------------- ~~Income~~NET ~~before~~DECREASE ~~income~~IN ~~tax~~CASH ~~expense~~AND ~~and~~CASH ~~minority~~EQUIVALENTS ~~interest 8~~(4,~~267~~470) ~~10,074~~- - 18(4,~~341~~470) ~~Income~~CASH ~~tax~~AND ~~expense~~CASH 3EQUIVALENTS,~~218~~ ~~4,030~~beginning -of 7period 11,~~248~~616 ~~Minority interest in subsidiary 57~~ - - 5711,616 ----------- ----------- ------------ ------------- ~~Net~~CASH ~~income~~AND $CASH 4EQUIVALENTS,~~992~~ end of period $ 67,~~044~~146 $ - $ 11- $ 7,~~036~~146 =========== =========== ============ ============= ~~Other~~SUPPLEMENTAL ~~comprehensive~~CASH ~~income~~FLOW DISCLOSURES: ~~Net~~Interest ~~income~~paid $ 43,~~992~~179 $ ~~6,044~~- $ - $ 113,~~036~~179 ~~Foreign~~=========== ~~currency~~=========== ~~translation~~============ ~~adjustment~~============= 1Income ~~- - 1 Minimum pension liability adjustment (net of income~~ taxes ofpaid $~~(1,565))~~ ~~(2,348)~~893 -$ - ~~(2,348) ---------- ---------- ----------- ---------- Comprehensive income~~ $ ~~2,645 $ 6,044 $~~ - $ ~~8,689~~893 =========== =========== ============ =============

(13) SUBSEQUENT EVENT On January 16, 2003, the Company entered into an agreement for the sale of the Somerville, Massachusetts facility for a purchase price of approximately $10.1 million. This facility is classified as an asset held for sale. The closing is expected to occur on or before January 16, 2004. There can be no assurance that the sale will be consummated. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Forward-looking statements in this filing, including those in the Notes to Consolidated Financial Statements, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties and actual results could differ materially. Such risks and uncertainties include, but are not limited to, general economic and business conditions, competitive market pricing, increases in raw material costs, energy costs and other manufacturing costs, fluctuations in demand the Company's products, potential equipment malfunctions and pending litigation. General The Company believes that it is one of the largest producers and marketers of disposable foodservice and food packaging products in North America. The Company sells a broad line of disposable paper, plastic and foam foodservice and food packaging products at all major price points under both branded and private labels to institutional foodservice, consumer foodservice and food packaging customers. The Company markets its products under its Sweetheart(R), Lily(R), Trophy(R), Jazz(R), Preference(TM), Go Cup(R), Silent Service(R), Centerpiece(R), Basix(R), Guildware(R), Simple Elegance(R), Sensations(R), Hoffmaster(R), Paper Art(R), and Touch of Color(R) brands. 15 The Company's product offerings cover a broad range within the industry, including (i) paper, plastic and foam foodservice products, primarily cups, lids, plates, bowls, plastic cutlery, food trays and food containers; (ii) tissue and specialty foodservice products, primarily napkins, table covers, placemats and lunch bags; and (iii) food packaging products, primarily containers for the dairy and food processing industries. To enhance product sales, the Company designs, manufactures and leases container filling and lidding equipment to dairies and other food processors to package food items in the Company's containers at customers' plants. Types of products packaged in the Company's machines include: ice cream, factory-filled jacketed ice cream cones, cottage cheese, yogurt and squeeze-up desserts. The Company also sells paper converting equipment used primarily in the manufacture of paper cups and food containers. The Company sells its products to institutional foodservice and consumer customers, including large national accounts, located throughout the United States, Canada and Mexico. The Company has developed and maintained long-term relationships with many of its customers. The Company's institutional foodservice customers include (i) major foodservice distributors, (ii) national accounts, including quick service restaurants and catering services, and (iii) schools, hospitals and (iv) other major institutions. The Company's consumer customers include (i) supermarkets, (ii) mass merchandisers, (iii) warehouse clubs, (iv) party good stores and (v) other retailers. The Company's food packaging customers include (i) national and regional dairy and (ii) food companies. The Company's business is seasonal with a majority of its net cash flows from operations realized during the last six months of the fiscal year. Sales for such periods reflect the high seasonal demands of the summer months when outdoor and away-from-home consumption increases. In the event that the Company's cash flows from operations is insufficient to provide working capital necessary to fund its requirements, the Company will need to borrow under its credit facility or seek other sources of capital. The Company believes that funds available under such credit facility together with cash generated from operations, will be adequate to provide for cash requirements for the next twelve months. On March 25, 2002, pursuant to an Agreement and Plan of Merger, Fonda was merged with and into Sweetheart Cup, with Sweetheart Cup as the surviving entity. In connection with the Merger, all of the assets and operations of Fonda were assigned to, and all liabilities of Fonda were assumed by, Sweetheart Cup by operation of law and all of the outstanding shares of Fonda were cancelled. Sweetheart Cup is a wholly owned subsidiary of Sweetheart Holdings which is a wholly owned subsidiary of SF Holdings. Sweetheart Holdings and Fonda were under common control, and therefore, the transaction has been accounted for in a manner similar to a pooling-of-interests. The accompanying financial information for the thirteen weeks ended December 30, 2001 has been restated. Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, receivables reserves, inventory reserves, goodwill, income taxes and contingencies. Management bases its estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Revenue recognition / receivable reserves - Revenue is recognized upon shipment of product and when collectability is reasonably assured. Also, the Company rents filling equipment to certain of its customers and recognizes this income over the life of the lease. The Company's sales are evidenced and the sales price fixed based upon either a purchase order, contract or buying agreement with the customer. The Company's freight terms are either FOB shipping point or freight prepaid by the customer. The customer may also be eligible for promotional incentives or rebates. The Company at the time of sale records a reserve for promotional allowances, rebates and other discounts based on historical experience, which are charged to net sales. 16 Raw materials are critical components of the Company's cost structure. The prices for these raw materials may fluctuate. When raw material prices decrease, selling prices have historically decreased. The actual impact from raw material price changes is affected by a number of factors including the level of inventories at the time of a price change, the specific timing and frequency of price changes, and the lead and lag time that generally accompanies the implementation of both raw materials and subsequent selling price changes. In the event that raw material prices decrease over a period of several months, the Company may suffer margin erosion on the sale of such inventory. Inventory reserves - The Company establishes reserves for its inventory to reflect those conditions when the cost of the inventory is not expected to be recovered. The Company reviews such circumstances when products are not expected to be saleable based on standards established by the Company's 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. Goodwill - Goodwill represents the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired. Goodwill is not being amortized commencing with the thirteen weeks ended December 29, 2002 in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. The initial transitional goodwill impairment test will be completed, as required, by March 30, 2003 and any transitional impairment loss reflected as a cumulative effect of a change in accounting principle in the thirteen weeks ended March 30, 2003. Income taxes - The Company applies an asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The recoverability of deferred tax assets is dependent upon the Company's 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. The Company reviews its internal forecasted sales and pre-tax earnings estimates to make its assessment about the utilization of deferred tax assets. In the event, the Company determines that the future taxable income will not be sufficient to utilize the deferred tax asset, a valuation allowance is recorded. If that assessment changes, a charge or a benefit would be recorded on the statement of income. Contingencies - The Company is subject to litigation in the ordinary course of business and also to certain other contingencies. The Company records legal fees and other expenses related to litigation and contingencies as incurred. Additionally, the Company assesses, in consultation with its counsel, the need to record a liability for litigation and contingencies on a case-by-case basis. Reserves are recorded when the Company, in consultation with counsel, determine that a loss related to a matter is both probable and reasonably estimable. Selling, general and administrative expenses consist primarily of salaries, benefits, promotional and advertising costs, rent, depreciation of equipment and broker fees. Recent Developments On October 1, 2002, the Company entered into a loan agreement with the City of Chicago to borrow $2.0 million. The loan bears no interest and is payable in equal installments of $100,000 commencing on February 1, 2004 and every six months thereafter. The proceeds from the loan were received on January 2, 2003 and the Company recorded a liability as of that date. On November 21, 2002, as amended on January 16, 2003 and further amended on January 27, 2003, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-4 relating to a proposed offer to exchange newly issued $110 million senior subordinated notes due 2007 for all of the $110 million Senior Subordinated Notes and a consent solicitation to eliminate and/or amend certain restrictive covenants and other provisions governing the $110 million Senior Subordinated Notes. The Company believes that the exchange offer and consent solicitation will provide it with the necessary time to execute its business plan and to further evaluate its strategic alternatives. If the Company is unable to complete the exchange offer and consent 17 solicitation or refinance, repay or extend the $110 million Senior Subordinated Notes prior to March 1, 2003, its Senior Credit Facility, unless otherwise amended, will become due and payable. The Company is evaluating various strategic options which may include a restructuring of its debt and capital structure, including, among other things, the public sale or private placement of debt or equity securities, joint venture transactions, sales of assets or the business, new borrowings, the refinancing of the Company's existing debt agreements, open market purchases, tender offers or exchange offers and consent solicitations of the Company's outstanding securities. There can be no assurances that any of these strategic options will be consummated. In this regard, the Company is considering the sale of the business or the sale of certain brands and related assets. These brands and related assets generated net sales and earning before interest, taxes and deprecation for the fiscal year ended September 29, 2002 of approximately $220 million and $25 million, respectively. There can be no assurances that the Company will receive acceptable offers or that the Company will proceed with any such sale. During Fiscal 2001, the Company experienced a casualty loss at its Somerville, Massachusetts facility. Since January 2001 through September 29, 2002, the Company incurred $11.6 million of expenses associated with this casualty loss. As of September 29, 2002, the Company received $12.5 million reimbursement under the casualty and business interruption claim. The $0.9 million of proceeds in excess of the expenses, represents the net proceeds from the business interruption claim, which were recorded as a reduction to cost of sales during the fourth quarter of Fiscal 2002. During October 2002, the Company and its insurance provider agreed to a final settlement of this claim whereby the Company would receive an additional $3.8 million of business interruption proceeds. As December 27, 2002, this amount was received and recorded as a reduction of cost of sales, net of $0.2 million of expenses. On January 16, 2003, the Company has entered into an agreement for the sale of the Somerville, Massachusetts facility for a purchase price of approximately $10.1 million. This facility is classified as an asset held for sale. The closing is expected to occur on or before January 16, 2004. There can be no assurance that the sale will be consummated. Thirteen Weeks Ended December 29, 2002 Compared to Thirteen Weeks Ended December 30, 2001 (Unaudited) Net sales decreased $0.6 million, or 0.2%, to $320.3 million for the thirteen weeks ended December 29, 2002 compared to $320.9 million for the thirteen weeks ended December 30, 2001, reflecting a 0.9% decrease in sales volume and a 0.7% increase in average realized sales prices. Sales volume decreased as a result of lower demand from consumer customers which was partially offset by increased demand from institutional customers. Average realized sales prices increased as a result of increased raw material costs and a change in product mix. Gross profit decreased $4.5 million, or 11.1%, to $35.9 million for the thirteen weeks ended December 29, 2002 compared to $40.4 million for the thirteen weeks ended December 30, 2001. As a percentage of net sales, gross profit decreased to 11.2% for the thirteen weeks ended December 29, 2002 from 12.6% for the thirteen weeks ended December 30, 2001. Gross profit decreased as a result of raw materials' costs increasing at faster rates than average realized selling prices combined with a shift towards a lower margin product mix. Selling, general and administrative expenses decreased $2.9 million, or 10.0%, to $26.2 million for the thirteen weeks ended December 29, 2002 compared to $29.1 million for the thirteen weeks ended December 30, 2001. This decrease resulted primarily from (i) a $1.3 million reduction in salaries and related fringe benefits which was partially due to the elimination of 34 positions in Fiscal 2002, (ii) $0.8 million lower deprecation, (iii) $0.6 million lower bad debt expense, (iv) $0.5 million decrease in goodwill amortization due to the adoption of SFAS No. 142. Other income, net decreased $1.6 million, or 42.1%, to $2.2 million for the thirteen weeks ended December 29, 2002 compared to $3.8 million for the thirteen weeks ended December 30, 2001. This decrease is primarily attributable to the $3.0 million gain recognized in the thirteen weeks ended December 30, 2001 associated with the sale of the Company's manufacturing facility in Manchester, New Hampshire. During the thirteen weeks ended 18 December 29, 2002, the Company incurred $1.6 million in lower costs in connection with the rationalization, consolidation and improvement of the Company's manufacturing facilities. Operating income decreased $3.3 million, or 21.7%, to $11.9 million for the thirteen weeks ended December 29, 2002 compared to income of $15.2 million for the thirteen weeks ended December 30, 2001, due to the reasons stated above. Interest expense, net increased $0.3 million, or 3.3%, to $9.5 million for the thirteen weeks ended December 29, 2002 compared to $9.2 million for the thirteen weeks ended December 30, 2001. This increase is attributed to increased amortization expense associated with the amortization of debt issuance costs and the increase in interest on the $110 Senior Subordinated Notes from 10.5% to 12.0% which was effective March 1, 2002. These increases were partially offset by lower interest rates and lower average balances under the credit facilities. Income tax expense decreased $1.4 million, or 58.3%, to $1.0 million for the thirteen weeks ended December 29, 2002 compared to an expense of $2.4 million for the thirteen weeks ended December 30, 2001 as a result of a lower pre-tax income. The effective rates for the thirteen weeks ended December 29, 2002 and December 30, 2001 were 40%, respectively. Minority interest in subsidiary decreased $19,000, or 57.6%, to $14,000 for the thirteen weeks ended December 29, 2002 compared to $33,000 for the thirteen weeks ended December 30, 2001. This amount represents the Company's 20% ownership of Global Cup, S.A. De C.V. and its subsidiaries' ("Global Cup") income. Net income decreased $2.1 million, or 60.0%, to $1.4 million for the thirteen weeks ended December 29, 2002 compared to $3.5 million for the thirteen weeks ended December 30, 2001, due to the reasons stated above. Liquidity And Capital Resources Historically, the Company has relied on cash flows from operations and revolving credit borrowings to finance its working capital requirements and capital expenditures. In the thirteen weeks ended December 29, 2002, the Company funded its capital expenditures from a combination of cash generated from operations and revolving credit borrowings. During the remainder of Fiscal 2003, the Company intends to continue to rely on this combination of funding and asset sales for its capital expenditures. Following the terrorist attacks of September 11, 2001, the Company experienced a decline in sales prices and volumes due to a number of factors, including a significant reduction in business and leisure travel and a reduction in foodservice and away-from-home dining. In addition to these factors affecting our sales, our implementation of certain consolidation initiatives caused temporary inefficiencies within our manufacturing operations, which increased our cost structure and reduced our gross margin during recent periods. As a result of these factors, together with difficult market conditions, the Company has been unable to refinance the $110 million Senior Subordinated Notes on terms acceptable to the Company. Unless current market conditions change significantly, the Company may not have sufficient capital to refinance the $110 million Senior Subordinated Notes when they mature on September 1, 2003. Moreover, if the Company is unable to complete the exchange offer and consent solicitation or refinance, repay or extend the $110 million Senior Subordinated Notes prior to March 1, 2003, its Senior Credit Facility, unless otherwise amended, will become due and payable. On November 21, 2002, as amended on January 16, 2003 and further amended on January 27, 2003, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-4 relating to a proposed offer to exchange newly issued $110 million senior subordinated notes due 2007 for all of the $110 million Senior Subordinated Notes and a consent solicitation to eliminate and/or amend certain restrictive covenants and other provisions governing the $110 million Senior Subordinated Notes. The Company believes that the exchange offer and consent solicitation will provide it with the necessary time to execute its business plan and to further evaluate its strategic alternatives. If the Company is unable to complete the exchange offer and consent solicitation or refinance, repay or extend the $110 million Senior Subordinated Notes prior to March 1, 2003, its Senior Credit Facility, unless otherwise amended, will become due and payable. 19 Net cash provided by operating activities for the thirteen weeks ended December 29, 2002 was $12.4 million compared to $1.7 million for the thirteen weeks ended December 30, 2001. This increase is primarily due to a reduction in inventories and decreased account receivable balances which resulted from lower sales. These increases were partially offset by a reduction in accounts payable. Net cash used in investing activities for the thirteen weeks ended December 29, 2002 was $2.5 million compared to $2.7 million for the thirteen weeks ended December 30, 2001. This decrease is primarily due to lower capital spending and the receipt of net proceeds from the sale of the Manchester, New Hampshire facility in the thirteen weeks ended December 30, 2001. Net cash used in financing activities for the thirteen weeks ended December 29, 2002 was $8.3 million compared to $3.5 million for the thirteen weeks ended December 30, 2001. This increase is primarily due to lower borrowings under the Senior Credit Facility. Working capital decreased $4.7 million to $122.1 million at December 29, 2002 from $126.8 million at September 29, 2002. This decrease resulted from current assets decreasing $30.2 million and the current liabilities decreasing $25.5 million. The decrease in current assets resulted primarily from a reduction in accounts receivables due to lower sales and a reduction in inventories due to a decrease in production. The decrease in current liabilities resulted primarily from a reduction in accounts payables due to lower inventories. Capital expenditures for the thirteen weeks ended December 29, 2002 were $2.5 million compared to $7.9 million for the thirteen weeks ended December 30, 2001. Capital expenditures for the thirteen weeks ended December 29, 2002 included $1.7 million for new production equipment; $0.6 million associated with the implementation of the Company's consolidation program; and $0.2 million primarily for routine capital improvements. Funding for the capital expenditures for the thirteen weeks ended December 29, 2002 was primarily provided by cash generated from operations and revolving credit borrowings. During the remainder of Fiscal 2003, the Company intends to continue to rely on this combination of funding and asset sales for its capital expenditures. On October 1, 2002, the Company entered into a loan agreement with the City of Chicago to borrow $2.0 million. The loan bears no interest and is payable in equal installments of $100,000 commencing on February 1, 2004 and every six months thereafter. The proceeds from the loan were received on January 2, 2003 and the Company recorded a liability as of that date. On June 10, 2002, the Company entered into a loan agreement with the Department of Business and Economic Development, a principal department of the State of Maryland, to borrow $2.0 million (the "Maryland Loan"). The Maryland Loan bears interest at a rate ranging from 3.0% to 8.0% per annum depending on certain employment rates at the Company's Owings Mills, Maryland facility. The Maryland Loan is payable in quarterly installments through March 1, 2007. As of December 29, 2002 and September 29, 2002, $1.8 million and $1.9 million was outstanding at an annual interest rate of 3.0%, respectively. During the term of the loan, the rate is subject to a review by the Department of Business and Economic Development by January 31 of each year. The Company has a Senior Credit Facility with Bank of America, N.A., as agent. The Senior Credit Facility has a maturity date of March 25, 2007; however, in the event that the Company has not refinanced, repaid or extended the $110 million Senior Subordinated Notes prior to March 1, 2003, the Senior Credit Facility will become due on that date. The Senior Credit Facility allows for a maximum credit borrowing of $235 million subject to borrowing base limitations and satisfaction of other conditions of borrowing. The revolving borrowings have a maximum of $215 million. The term loans have a maximum of $25 million and are payable monthly through March 2005. Borrowings under the Senior Credit Facility, at the Company's election, bear interest at either (i) a bank's base rate revolving loan reference rate plus 0.5% or (ii) LIBOR plus 2.5%. For December 29, 2002, the weighted average annual interest rate for the Senior Credit Facility was 4.21%. The indebtness of Sweetheart Cup under the Senior Credit Facility is guaranteed by Sweetheart Holdings and secured by a first priority perfect security interest in accounts receivable, inventory, general intangibles and certain other assets. The fee for outstanding letters of credit is 2.00% per annum and there is a commitment fee of 0.375% per annum on the daily average unused amount of the commitments. As of December 29, 2002, $29.6 million was available under the Senior Credit Facility. As of December 29, 2002, LIBOR was 1.36% and the bank's base rate was 4.75%. The Senior Credit Facility contains various covenants that limit, or restrict, among other things, 20 indebtedness, dividends, leases, capital expenditures and the use of proceeds from asset sales and certain other business activities. Additionally, the Company must maintain on a consolidated basis, certain specified ratios at specified times, including, without limitation, maintenance of minimum fixed charge coverage ratio. The Company is currently in compliance with all covenants under the Senior Credit Facility. The Senior Credit Facility provides for partial mandatory prepayments upon the sale of equipment collateral unless net proceeds are used to purchase replacement collateral and full repayment upon any change of control (as defined in the loan agreement governing the Senior Credit Facility). The Company's Canadian subsidiary has a credit agreement (the "Canadian Credit Facility") which provides for a term loan and a credit facility with a maximum credit borrowing of Cdn $30 million (approximately US $19.1 million) subject to borrowing base limitations and satisfaction of other conditions of borrowing. The term borrowings are payable quarterly through May 2004. Both the revolving credit and term loan borrowings have a final maturity date of June 15, 2004. The Canadian Credit Facility is secured by all existing and thereafter acquired real and personal tangible assets of the Company's Canadian subsidiary and net proceeds on the sale of any of the foregoing. Borrowings under the Canadian Credit Facility bear interest at an index rate plus 1.75% with respect to the revolving credit facility and an index rate plus 2.00% with respect to the term loan borrowings. For December 29, 2002, the weighted average annual interest rate for the Canadian Credit Facility was 4.39%. As of December 29, 2002, Cdn $3.5 million (approximately US $2.2 million) was available under the revolving facility and the term loan balance was Cdn $11.8 million (approximately US $7.5 million) under the Canadian Credit Facility. In connection with a sale-leaseback transaction, on June 15, 2000, the Company sold certain production equipment located in Owings Mills, Maryland, Chicago, Illinois and Dallas, Texas to several owner participants for a fair market value of $212.3 million. Pursuant to a lease dated as of June 1, 2000 (the "Lease") between Sweetheart Cup and State Street Bank and Trust Company of Connecticut, National Association ("State Street"), as trustee, Sweetheart Cup leases the production equipment sold in connection with the sales lease-back transaction from State Street as owner trustee for several owner participants, through November 9, 2010. Sweetheart Cup has the option to renew the Lease for up to four consecutive renewal terms of two years each. Sweetheart Cup also has the option to purchase such equipment for fair market value either at the conclusion of the Lease term or November 21, 2006. The Company's obligations under the Lease are collateralized by substantially all of the property, plant and equipment owned by the Company as of June 15, 2000. The Lease contains various covenants, which prohibit, or limit, among other things, dividend payments, equity repurchases or redemption, the incurrence of additional indebtedness and certain other business activities. The Company is accounting for the sale-leaseback transaction as an operating lease, expensing $31.5 million annual rental payments and removing the property, plant and equipment sold from its balance sheet. A deferred gain of $107.0 million was realized from this sale and will be amortized over 125 months, which is the term of the Lease. Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor with respect to the $110 million Senior Subordinated Notes which are due September 1, 2003. Interest on the $110 million Senior Subordinated Notes is payable semi-annually in arrears on March 1 and September 1. The $110 million Senior Subordinated Notes began to accrue interest at 12% per annum as of March 1, 2002. The $110 million Senior Subordinated Notes are subject to redemption at the option of the Company, in whole or in part, at the redemption price (expressed as percentages of the principal amount), plus accrued interest to the redemption date, at a call premium of 100%. The $110 million Senior Subordinated Notes are subordinated in right of payment to the prior payment in full of all of the Company's senior debt, including borrowings under the Senior Credit Facility, and are pari passu with the $120 million 9 1/2% Senior Subordinated Notes due 2007. In addition, the obligations under the June 1, 2000 lease between Sweetheart Cup and State Street Bank and Trust Company of Connecticut are secured by a significant portion of the Company's existing property, plant and equipment. The $110 million Senior Subordinated Notes contain various covenants which prohibit, or limit, among other things, asset sales, change of control, dividend payments, equity repurchases or redemption, the incurrence of additional indebtedness, the issuance of disqualified stock, certain transactions with affiliates, the creation of additional liens and certain other business activities. In Fiscal 1997, the Company issued the $120 million 9 1/2% Senior Subordinated Notes with interest payable semi-annually. Payment of the principal and interest is subordinate in right to payment of all of the Company's senior debt, including borrowings under the Senior Credit Facility. The Company may, at its election, redeem the $120 million 9 1/2% Senior Subordinated Notes at any time after March 1, 2002 at a redemption price equal to a percentage (104.750% after March 1, 2002 and declining in annual steps to 100% after March 1, 2005) of the principal amount thereof plus accrued interest. The $120 million 9 1/2% Senior Subordinated Notes provide that 21 upon the occurrence of a change of control (as defined therein), the holders thereof will have the option to require the redemption of the notes at a redemption price equal to 101% of the principal amount thereof plus accrued interest. The $120 million 9 1/2% Senior Subordinated Notes are subordinated in right of payment to the prior payment in full of all of the Company's senior debt, including borrowings under the Senior Credit Facility and are pari passu with the $110 million Senior Subordinated Notes. In addition, the obligations under the June 1, 2000 lease between Sweetheart Cup and State Street Bank and Trust Company of Connecticut are secured by a significant portion of the Company's existing property, plant and equipment. The $120 million 9 1/2% Senior Subordinated Notes contain various covenants which prohibit, or limit, among other things, asset sales, change of control, dividend payments, equity repurchases or redemption, the incurrence of additional indebtedness, the issuance of disqualified stock, certain transaction with affiliates, the creation of additional liens and certain other business activities. During Fiscal 2001, the Company experienced a casualty loss at its Somerville, Massachusetts facility. Since January 2001 through September 29, 2002, the Company incurred $11.6 million of expenses associated with this casualty loss. As of September 29, 2002, the Company received $12.5 million reimbursement under the casualty and business interruption claim. The $0.9 million of proceeds in excess of the expenses, represents the net proceeds from the business interruption claim, which were recorded as a reduction to cost of sales during the fourth quarter of Fiscal 2002. During October 2002, the Company and its insurance provider agreed to a final settlement of this claim whereby the Company would receive an additional $3.8 million of business interruption proceeds. As December 27, 2002, this amount was received and recorded as a reduction of cost of sales, net of $0.2 million of expenses. On January 16, 2003, the Company has entered into an agreement for the sale of the Somerville, Massachusetts facility for a purchase price of approximately $10.1 million. This facility is classified as an asset held for sale. The closing is expected to occur on or before January 16, 2004. There can be no assurance that the sale will be consummated. The Company is subject to legal proceedings and other claims arising in the ordinary course of its business. The Company maintains insurance coverage of types and in amounts which it believes to be adequate and believes that it is not presently a party to any litigation, the outcome of which could reasonably be expected to have a material adverse effect on its financial condition or results of operations. Management believes that cash generated by operations, funds generated from asset sales and amounts available under the Company's credit facilities should be sufficient to meet the Company's expected operating needs, planned capital expenditures, payments in conjunction with the Company's lease commitments and debt service requirements in the next twelve months. The Company is evaluating various strategic options which may include a restructuring of its debt and capital structure, including, among other things, the public sale or private placement of debt or equity securities, joint venture transactions, sales of assets or the business, new borrowings, the refinancing of the Company's existing debt agreements, open market purchases, tender offers or exchange offers and consent solicitations of the Company's outstanding securities. There can be no assurances that any of these strategic options will be consummated. In this regard, the Company is considering the sale of the business or the sale of certain brands and related assets. These brands and related assets generated net sales and earning before interest, taxes and deprecation for the fiscal year ended September 29, 2002 of approximately $220 million and $25 million, respectively. There can be no assurances that the Company will receive acceptable offers or that the Company will proceed with any such sale. Net Operating Loss Carryforwards As of September 29, 2002, the Company had approximately $56 million of net operating loss carryforwards for federal income tax purposes of which $25 million will expire in 2018 and the remaining $31 million will expire in 2022. Although future earnings cannot be predicted with certainty, management currently believes that realization of the net deferred tax asset is more likely than not. 22 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with its variable rate debt. All borrowing under the Senior Credit Facility and Canadian Credit Facility, each of which contains a revolving and term credit facility, bear interest at a variable rate. Borrowings under the Senior Credit Facility, at the Company's election, bear interest at either (i) a bank's base rate revolving loan reference rate plus 0.5% or (ii) LIBOR plus 2.5%. Borrowings under the Canadian Credit Facility bear interest at an index rate plus 1.75% with respect to the revolving credit borrowings and an index rate plus 2.00% with respect to the term loan borrowings. As of December 29, 2002, the outstanding indebtedness under the Senior Credit Facility was $179.5 million and the Canadian Credit Facility was $14.2 million in U.S. dollars. As of December 29, 2002, $29.6 million was available under the Senior Credit Facility and Cdn $3.5 million (approximately US $2.2 million) was available under Canadian Credit Facility. Based upon these amounts, the annual net income would change by approximately $1.2 million for each one percentage point change in the interest rates applicable to the variable rate debt. The level of the exposure to interest rate movements may fluctuate significantly as a result of changes in the amount of indebtedness outstanding under the revolving credit facilities. PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer (b) Reports on Form 8-K: None. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, its duly authorized officer and principal financial officer. SWEETHEART HOLDINGS INC. (registrant) Date: February 10, 2003 By: /s/ Hans H. Heinsen ----------------- ------------------- Hans H. Heinsen Senior Vice President - Finance, Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) 24 SECTION 302 10-Q CERTIFICATION I, Dennis Mehiel, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sweetheart Holdings Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures 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 the quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures base on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditor and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regards to significant deficiencies and material weakness. Date: February 10, 2003 SWEETHEART HOLDINGS INC. ----------------- (Registrant) By: /s/ DENNIS MEHIEL ------------------ Dennis Mehiel Chairman and Chief Executive Officer 25 SECTION 302 10-Q CERTIFICATION I, Hans H. Heinsen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sweetheart Holdings Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures 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 the quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures base on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditor and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regards to significant deficiencies and material weakness. Date: February 10, 2003 SWEETHEART HOLDINGS INC. ----------------- (Registrant) By: /s/ HANS H. HEINSEN -------------------- Hans H. Heinsen Senior Vice President - Finance, Chief Financial Officer (Principal Financial and Accounting Officer) 26

Consolidated Statement of Cash Flows For the Thirty-nine Weeks Ended June 30, 2002 ---------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities $ 18,858 $ 88,148 $ (88,148) $ 18,858 ---------- ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (17,589) - - (17,589) Due to/from SF Holdings (64) - - (64) Proceeds from sale of assets 5,280 - - 5,280 ---------- ---------- ----------- ---------- Net cash used in investing activities (12,373) - - (12,373) ---------- ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings under credit facilities 191,522 - - 191,522 Repayments under credit facilities (196,144) - - (196,144) Repayments of other debt (5,336) - - (5,336) Repayment of intercompany equipment financing - (88,148) 88,148 - Increase in cash escrow, net (4,581) - - (4,581) Decrease in cash escrow, net 4,458 - - 4,458 ---------- ---------- ----------- ---------- Net cash used in financing activities (10,081) (88,148) 88,148 (10,081) ---------- ---------- ----------- ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS (3,596) - - (3,596) CASH AND CASH EQUIVALENTS, beginning of period 11,616 - - 11,616 ---------- ---------- ----------- ---------- CASH AND CASH EQUIVALENTS, end of period $ 8,020 $ - $ - $ 8,020 ========== ========== =========== ========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 19,890 $ - $ - $ 19,890 ========== ========== =========== ========== Income taxes paid $ 808 $ - $ - $ 808 ========== ========== =========== ==========

Consolidated Statement of Cash Flows For the Thirty-nine Weeks Ended June 24, 2001 ---------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities $ 5,658 $ 12,525 $ (12,525) $ 5,658 ---------- ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (21,690) - - (21,690) Payment for business acquisition (18,827) - - (18,827) Due to/from SF Holdings 502 - - 502 Proceeds from sale of assets 369 - - 369 ---------- ---------- ----------- ---------- Net cash used in investing activities (39,646) - - (39,646) ---------- ---------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings under credit facilities 42,394 - - 42,394 Repayments of other debt (5,736) - - (5,736) Repayment of intercompany equipment financing - (12,525) 12,525 - Increase in cash in escrow (764) - - (764) ---------- ---------- ----------- ---------- Net cash provided by financing activities 35,894 (12,525) 12,525 35,894 ---------- ---------- ----------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,906 - - 1,906 CASH AND CASH EQUIVALENTS, beginning of period 4,828 - - 4,828 ---------- ---------- ----------- ---------- CASH AND CASH EQUIVALENTS, end of period $ 6,734 $ - $ - $ 6,734 ========== ========= =========== ========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 23,202 $ - $ - $ 23,202 ========== ========== =========== ========== Income taxes paid $ 619 $ - $ - $ 619 ========== ========== =========== ==========

Filing Compare · SWEETHEART HOLDINGS INC \DE\