10-Q 1 sweetheart2003q03-10q.txt FY03 Q3 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 Thirty-nine Weeks Ended June 29, 2003 [ ] 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 August 5, 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 $16.2 million 12.0% Senior Subordinated Notes due September 1, 2003 and $93.8 million 12.0% Senior Notes due July 15, 2004, respectively, 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) ~~March~~June 3029, September 29, 2003 2002 ------------- --------------- Assets Current assets: Cash and cash equivalents $ 510,~~600~~119 $ 8,035 Cash in escrow 571 - Receivables, less allowances of $4,~~115~~496 and $3,741 ~~152~~153,~~298~~023 152,541 Inventories ~~216~~234,~~460~~730 219,427 Deferred income taxes 21,446 20,841 Assets held for sale 5,275 5,275 Other current assets 30,~~392~~068 35,736 ----------- ----------- Total current assets ~~431~~454,~~476~~732 441,855 Property, plant and equipment, net ~~244~~243,~~892~~672 252,491 Deferred income taxes 3228,~~392~~203 29,879 Spare parts 13,~~530~~493 13,428 Goodwill 41,232 41,232 Due from SF Holdings 17,712 17,962 Other assets 23,~~226~~966 23,996 ----------- ----------- Total assets $ ~~804~~823,~~460~~010 $ 820,843 =========== =========== Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ ~~105~~104,~~457~~761 $ 102,986 Accrued payroll and related costs 3940,~~382~~403 38,009 Other current liabilities 3846,~~290~~128 44,000 Current portion of deferred gain on sale of assets 10,100 10,203 Current portion of long-term debt 2641,~~688~~439 119,853 ----------- ----------- Total current liabilities ~~219~~242,~~917~~831 315,051 ~~Commitments and contingencies (See Notes)~~ Long-term debt ~~406~~392,~~054~~166 317,448 Deferred gain on sale of assets 6764,~~105~~579 72,883 Other liabilities 6569,~~923~~153 65,948 ----------- ----------- Total liabilities ~~758~~768,~~999~~729 771,330 ----------- ----------- Minority interest in subsidiary 2,~~322~~357 2,276 ----------- ----------- Commitments and contingencies (See Notes) 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 ~~10 10~~ authorized; 4,393,200 shares issued and outstanding 44 44 Additional paid-in capital ~~101~~100,~~193~~954 101,173 Accumulated deficit (4233,~~584~~656) (40,577) Accumulated other comprehensive loss (15,~~524~~428) (13,413) ----------- ----------- Total shareholder's equity 4351,~~139~~924 47,237 ----------- ----------- Total liabilities and shareholder's equity $ ~~804~~823,~~460~~010 $ 820,843 =========== ===========

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

For the For the For the For the Thirteen Thirteen ~~Twenty~~Thirty-~~six~~nine ~~Twenty~~Thirty-~~six~~nine weeks ended weeks ended weeks ended weeks ended ~~March~~June 3029, ~~March~~June 3130, ~~March~~June 3029, ~~March~~June 3130, 2003 2002 2003 2002 -----------~~----~~ -----------~~----~~ -----------~~----~~ -----------~~----~~ Net sales $ ~~293~~345,~~344~~850 $ ~~296~~340,~~371~~245 $ ~~613~~959,~~689~~539 $ ~~617~~957,~~246~~491 Cost of sales ~~262~~294,~~616~~493 ~~267~~299,~~693~~635 ~~547~~841,~~093~~586 ~~548~~847,~~137~~772 ---------- ---------- ---------- ---------- Gross profit 3051,~~728~~357 2840,~~678~~610 66117,~~596~~953 ~~69,~~109,719 Selling, general and administrative expenses 28,~~001~~092 28,~~598~~082 5482,~~197~~289 5786,~~660~~005 Other (income) expense, net (12,~~035~~446) ~~494~~8,877 (35,~~230~~676) (35,~~291)~~323 ---------- ---------- ---------- ---------- Operating income ~~(loss)~~25,711 3,~~762~~651 ~~(414) 15~~41,~~629~~340 1418,~~740~~391 Interest expense, net of interest income of $4030, $5761, $77107 and $89151 910,~~433~~296 9,~~594~~454 1829,~~897~~193 1828,~~780~~234 Loss on debt extinguishment -475 ~~1,798~~ - 475 1,798 ---------- ---------- ---------- ---------- ~~Loss~~Income (loss) before income tax ~~benefit~~ and minority interest 14,940 (5,~~671~~803) (11,~~806)~~672 (311,~~268~~641) ~~(5,838)~~ Income tax expense (benefit) 5,977 (2,~~268~~320) (4,~~711)~~670 (14,~~307~~624) ~~(2,304)~~ Minority interest in subsidiary 3235 40 4681 73113 ---------- ---------- ---------- ---------- Net income (loss ) $ (38,~~435)~~928 $ (73,~~135~~523) $ (26,~~007)~~921 $ (37,~~607~~130) ========== ========== ========== ========== Other comprehensive income (loss): Net income (loss ) $ (38,~~435)~~928 $ (73,~~135~~523) $ (26,~~007)~~921 $ (37,~~607~~130) Foreign currency translation adjustment 1,397 (~~341~~196) ~~159~~889 (~~508~~176) 20 Minimum pension liability adjustment (net of income taxes of $~~489~~(867), $~~813~~(146), $(1,~~069~~936) and $(~~748~~894)) ~~734~~ (1,~~220~~301) (1219) (2,~~603~~904) (1,~~122~~341) ---------- ---------- ---------- ---------- Comprehensive income (loss ) $ (39,~~042)~~024 $ (53,~~756~~938) $ (4,~~118)~~906 $ (48,~~709~~647) ========== ========== ========== ==========

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 ~~Twenty~~Thirty-~~six~~nine weeks ~~Twenty~~Thirty-~~six~~nine weeks ended ~~March~~June 3029, ended ~~March~~June 3130, 2003 2002 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (26,~~007)~~921 $ (37,~~607~~130) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1524,~~792~~400 1826,~~133~~723 Amortization of deferred gain (57,~~093~~618) (57,~~137~~689) Loss (gain) on sale of assets ~~606~~443 (3,~~189~~107) Changes in operating assets and liabilities: Receivables ~~243~~(482) 138,~~708~~030 Inventories 2(15,~~967~~303) 1718,~~872~~450 Other current assets 5,~~344~~668 (1,~~885~~326) Other assets (13,~~783)~~727 (56,~~126~~765) Accounts payable 21,~~471~~775 198,~~840~~689 Accrued payroll and related costs 12,~~373~~394 (4,~~299~~898) Other current liabilities (52,~~710)~~128 (52,~~203~~744) Other liabilities (21,~~696~~634) (810,~~604~~421) Other, net ~~(209)~~781 ~~150~~1,046 ------------ ------------ Net cash provided by operating activities 1123,~~298~~200 3218,~~653~~858 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (59,~~934~~300) (1317,~~783~~589) Due from / to SF Holdings 250 (64) Proceeds from sale of investment 329 - Proceeds from sale of property, plant and equipment 435 5,~~262~~280 ------------ ------------ Net cash used in investing activities (58,~~680~~686) (812,~~521~~373) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net (repayments) borrowings under credit facilities (~~1,520~~85) ~~173~~191,~~804~~522 Repayment under credit facilities - (196,144) Repayments of other debt (46,~~049~~079) (35,~~050~~336) Debt issuance costs (26,~~479~~195) - Increase in cash in escrow (~~226~~379) (54,~~253~~581) Decrease in cash in escrow ~~221~~308 ~~781~~4,458 ------------ ------------ Net cash used in financing activities (812,~~053~~430) (2910,~~862~~081) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,~~435)~~084 (53,~~730~~596) CASH AND CASH EQUIVALENTS, beginning of period 8,035 11,616 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 510,~~600~~119 $ 58,~~886~~020 ============ ============ SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 1618,~~351~~702 $ 1719,~~958~~890 ============ ============ Income taxes (received) paid $ (2,~~703~~692) $ ~~890~~808 ============ ============

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"). The Company is a wholly owned subsidiary of SF Holdings Group, Inc. ("SF Holdings"). 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 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. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test no later than March 30, 2003. The transitional goodwill impairment test was completed, as required, by March 30, 2003. The carrying value of goodwill did not exceed its fair value and, as a result, no transitional impairment loss was required. 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. 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. The 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 and has restated the financial statements for all periods presented to no longer classify losses on extinguishment of debt as an extraordinary item. 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 applied prospectively to exit or disposal activities initiated after December 31, 2002. 5 In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based Compensation. SFAS No. 148 amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has implemented SFAS No. 148. Due to the insignificant effect on the consolidated financial statements, interim disclosure is not required. (3) INVENTORIES The components of inventories are as follows (in thousands): June 29, September 29, 2003 2002 ---------- ------------- Raw materials and supplies $ 67,126 $ 57,305 Finished products 157,240 150,925 Work in progress 10,364 11,197 ---------- ---------- Total inventories $ 234,730 $ 219,427 ========== ========== (4) GOODWILL In accordance with SFAS No. 142, prior period losses were not restated. A reconciliation of the previously reported net loss during the thirteen and thirty-nine weeks ended June 30, 2002 to the amounts adjusted for the cessation of goodwill amortization expense, net of related income tax effect, is as follows (in thousands):

As of June 29, 2003, the Company has unamortized goodwill of $41.2 million and intangible assets of $2.2 million. During the thirteen and thirty-nine weeks ended June 30, 2002, goodwill amortization was $0.5 million and $1.5 million, respectively. During the thirteen weeks ended June 29, 2003 and June 30, 2002, amortization expense related to intangible assets was $0.3 million, respectively. During the thirty-nine weeks ended June 29, 2003 and June 30, 2002, amortization expense related to intangible assets was $0.7 million and $0.8 million, respectively. Amortization expense is expected to range from approximately $0.9 million to $1.0 million each fiscal year for Fiscal 2004 through Fiscal 2008. 6 Changes to goodwill and intangible assets during the thirty-nine weeks ended June 29, 2003, including the effects of adopting the new accounting standard are as, follows (in thousands): Intangible Goodwill Assets ---------- ---------- Balance at September 30, 2002, net of accumulated amortization $ 41,232 $ 2,812 Additions during the period - 63 Amortization expense - (655) -------- --------- Balance at June 29, 2003, net of accumulated amortization $ 41,232 $ 2,220 ======== ========= (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 loan matures on the later of August 1, 2014 or the date on which all amounts outstanding under the loan agreement have been paid in full. On April 8, 2003, Sweetheart Cup consummated its offer to exchange (the "Exchange Offer") its newly issued 12.0% Senior Notes due July 15, 2004 ("New Notes") for all of its outstanding 12.0% Senior Subordinated Notes ("the Senior Subordinated Notes") and solicitation of consents of holders of the Senior Subordinated Notes to the proposed amendments to the indenture governing the Senior Subordinated Notes (the "Consent Solicitation"). Sweetheart Cup, Sweetheart Holdings, as guarantor, and Wells Fargo Bank Minnesota, N.A., as trustee, executed the indenture governing the New Notes and $93.8 million in aggregate principal amount of New Notes were issued under the indenture in exchange for a like amount of the Senior Subordinated Notes. Payment of the consent payments to all holders of the Senior Subordinated Notes who timely tendered was made in April 2003 to the trustee. As a result of the Exchange Offer, $93.8 million of the Senior Subordinated Notes is classified as long-term debt in the accompanying June 29, 2003 consolidated balance sheet. During the thirteen weeks ended June 29, 2003, the Company recorded a $0.5 million loss on debt extinguishment in connection with the Exchange Offer which consisted of the write-off of deferred financing costs incurred. As a result of the Consent Solicitation, the amendment to the indenture governing the Senior Subordinated Notes became effective as of April 8, 2003. The amendment primarily eliminated substantially all of the restrictive covenants other than the change of control covenant. The aggregate principal amount of the Senior Subordinated Notes that remains outstanding following the Exchange Offer is $16.2 million which is due September 1, 2003. The Company's senior credit facility with Bank of America, N.A. (the "Senior Credit Facility") was amended on February 28, 2003 to require, among other things, the date by which the refinancing, repayment or extension of the New Notes must occur shall be December 31, 2003. If the Company is unable to refinance, repay or extend the New Notes prior to December 31, 2003, the 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) 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 7 Directors, to manage the Company's day to day operations. At June 30, 2002, the Company had a loan receivable from its Chief Executive Officer of $0.3 million plus accrued interest at 5.06%. During the thirty-nine weeks ended June 29, 2003, the Company's Chief Executive Officer repaid the outstanding loan receivable. During the thirty-nine weeks ended June 29, 2003 and June 30, 2002, the Company forgave $13,872 and $16,021, respectively, of interest associated with the loan to its Chief Executive Officer. At June 30, 2002, the Company had a loan receivable from its Chief Operating Officer of $0.2 million plus accrued interest at 5.39%. On February 28, 2003, the loan receivable was amended and the rate changed to the federal funds rate. At June 29, 2003, the loan receivable is $0.1 million plus accrued interest. During Fiscal 1998, the Company purchased a 38.2% ownership interest in Fibre Marketing from a director of the Company. During Fiscal 2000, the Company sold a 13.2% interest in Fibre Marketing to Mehiel Enterprises, Inc., retaining a 25.0% ownership interest in Fibre Marketing. On July 17, 2000, 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, transferred 50.0% of its interest in Fibre Marketing to Mehiel Enterprises, Inc. Mehiel Enterprises, Inc. owns a 63.2% interest in Fibre Marketing. The Company accounted for its ownership interest in Fibre Marketing using the equity method. During the thirteen weeks ended June 29, 2003, the Company sold its 25% interest in Fibre Marketing to an unrelated third party for $0.3 million which generated a gain of $0.2 million. 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 June 30, 2002, $1.0 million was due to the Company. During the thirty-nine weeks ended June 29, 2003, Fibre Marketing repaid the remaining balance of the outstanding promissory notes. During the thirty-nine weeks ended June 29, 2003, the Company purchased $9.7 million of corrugated containers from Box USA. During the thirty-nine weeks ended June 29, 2003, the Company purchased $1.0 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 June 29, 2003 is $0.5 million due to Box USA. Other purchases from affiliates during the thirty-nine weeks ended June 29, 2003 were not significant. During the thirty-nine weeks ended June 29, 2003, the Company sold $6.6 million of scrap paper and plastic to Fibre Marketing. Included in accounts receivable as of June 29, 2003 is $0.9 million due from Fibre Marketing. Other sales to affiliates during the thirty-nine weeks ended June 29, 2003 were not significant. During the thirty-nine weeks ended June 30, 2002, the Company purchased $8.2 million of corrugated containers from Box USA and $0.8 million of travel services from Emerald Lady. Included in accounts payable as of June 30, 2002 is $1.2 million due to Box USA. Other purchases from affiliates during the thirty-nine weeks ended June 30, 2002 were not significant. During the thirty-nine weeks ended June 30, 2002, the Company sold $5.5 million of scrap paper and plastic to Fibre Marketing. Included in accounts receivable as of June 30, 2002 is $1.2 million due from Fibre Marketing. Other sales to affiliates during the thirty-nine weeks ended June 30, 2002 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 thirty-nine weeks ended June 29, 2003 and June 30, 2002, rental payments under this lease were $1.2 million and $1.1 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 thirty-nine weeks ended June 29, 2003 and June 30, 2002, rental payments under this lease were $2.8 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. 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 8 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 not significant during the thirty-nine weeks ended June 29, 2003 and was $0.1 million during the thirty-nine weeks ended June 30, 2002, respectively. (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 $29,000 and $47,000 for the thirty-nine weeks ended June 29, 2003 and June 30, 2002, respectively. (8) ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss are as follows (in thousands): June 29, September 29, 2003 2002 ----------- --------------- Foreign currency translation adjustment $ (1,834) $ (2,723) Minimum pension liability adjustment (13,594) (10,690) ---------- ---------- Accumulated other comprehensive loss $ (15,428) $ (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 of December 27, 2002, this amount had been received and recorded as a reduction of cost of sales, net of $0.2 million of expenses. (10) OTHER INCOME, NET During the thirty-nine weeks ended June 29, 2003, the Company realized $7.6 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"). In addition, the Company realized $1.1 million from foreign currency transactions gains and $0.2 million from the sale of its 25% interest in Fibre Marketing. These gains were partially offset by (i) $0.8 million of net losses from the sale of obsolete equipment, (ii) $0.8 million of costs associated with the opening of a mid-west distribution center, (iii) $0.7 million of costs associated with the rationalization, consolidation and improvement of the Company's manufacturing facilities, (iv) $0.6 million of costs associated with the maintenance of non-operational facilities and (v) $0.4 million of costs associated with the establishment of new information systems. During the thirty-nine weeks ended June 30, 2002, the Company realized $7.7 million due to the 9 amortization of the deferred gain in conjunction with the Sale-Leaseback Transaction. Also, during the thirty-nine weeks ended June 30, 2002, the Company recognized a $3.0 million gain associated with the sale of the Company's manufacturing facility in Manchester, New Hampshire. These gains were offset by a $5.4 million write-off of the management services agreement between Sweetheart Holdings and SF Holdings, which had been assigned and assumed by The Fonda Group, Inc., a company formerly under the common control of the Chief Executive Officer, in 1998 and the Company's write-off of $2.6 million of assets related to business initiatives which were abandoned subsequent to the Merger. Additionally, the Company incurred $7.6 million of costs in connection with the rationalization, consolidation and improvement of the Company's manufacturing facilities. Included in the $7.6 million of costs is a $1.6 million restructuring reserve which the Company established in conjunction with a workforce reduction program as a result of the Company's consolidation initiatives. The workforce reduction program was approved by management on June 19, 2002 and announced to employees on June 28, 2002. Severance payments of $1.6 million were paid in the fourth quarter of Fiscal 2002 and the first three quarters of Fiscal 2003. (11) CONTINGENCIES 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. 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 Senior Subordinated Notes, as amended, and the New Notes. 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): 10

Consolidated Balance Sheet ~~March~~June 3029, 2003 ---------------------------------------------------------~~---------~~ Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated -------------- -------------- --------------- ---------------- Assets Current assets: Cash and cash equivalents $ 510,~~600~~119 $ - $ - $ 510,~~600~~119 Cash in escrow 571 - - 571 Receivables ~~200~~201,~~756~~989 - (48,~~458~~966) ~~152~~153,~~298~~023 Raw materials inventory 5667,~~975~~126 - - 5667,~~975~~126 Work in progress inventory 10,~~445~~364 - - 10,~~445~~364 Finished goods inventory ~~149~~157,~~040~~240 - - ~~149~~157,~~040~~240 Assets held for sale - 5,275 - 5,275 Other current assets 5251,~~178~~514 2,~~282~~653 (2,~~622~~653) 51,~~838~~514 ----------- ---------- ------------ ----------- Total current assets ~~474~~498,~~999~~423 7,~~557~~928 (51,~~080~~619) ~~431~~454,~~476~~732 Property, plant and equipment, net ~~244~~243,~~892~~672 - - ~~244~~243,~~892~~672 Deferred income taxes 4339,~~530~~909 (2021,~~875~~443) 9,737 3228,~~392~~203 Other assets 9596,~~700~~403 ~~108~~109,~~581~~634 (~~108~~109,~~581~~634) 9596,~~700~~403 ----------- ---------- ------------ ----------- Total assets $ ~~859~~878,~~121~~407 $ 9596,~~263~~119 $ (~~149~~151,~~924~~516) $ ~~804~~823,~~460~~010 =========== ========== ============ =========== Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ ~~105~~104,~~457~~761 $ - $ - $ ~~105~~104,~~457~~761 Other current liabilities 9099,~~390~~284 - (2,~~618~~653) 8796,~~772~~631 Current portion of long-term debt 2641,~~688~~439 - - 2641,~~688~~439 ----------- ---------- ------------ ----------- Total current liabilities ~~222~~245,~~535~~484 - (2,~~618~~653) ~~219~~242,~~917~~831 Long-term debt ~~406~~392,~~054~~166 48,~~458~~966 (48,~~458~~966) ~~406~~392,~~054~~166 Other liabilities ~~196~~197,~~112~~865 - (6364,~~084~~133) 133,~~028~~732 ----------- ---------- ------------ ----------- Total liabilities ~~824~~835,~~701~~515 48,~~458~~966 (~~114~~115,~~160~~752) ~~758~~768,~~999~~729 ----------- ---------- ------------ ----------- Minority interest in subsidiary 2,~~322~~357 - - 2,~~322~~357 ----------- ---------- ------------ ----------- Shareholder's equity: Class A Common Stock - 10 - 10 Class B Common Stock - 44 - 44 Additional paid-in capital 123,~~698~~458 78,~~095~~096 (100,600) ~~101~~100,~~193~~954 Accumulated deficit (7667,~~076~~495) (3130,~~344~~997) 64,836 (4233,~~584~~656) Accumulated other comprehensive loss (15,~~524~~428) - - (15,~~524~~428) ----------- ---------- ------------ ----------- Total shareholder's equity 3240,~~098~~535 4647,~~805~~153 (35,764) 4351,~~139~~924 ----------- ---------- ------------ ----------- Total liabilities and shareholder's equity $ ~~859~~878,~~121~~407 $ 9596,~~263~~119 $ (~~149~~151,~~924~~516) $ ~~804~~823,~~460~~010 =========== ========== ============ ===========

Consolidated Balance Sheet September 29, 2002 ---------------------------------------------------------~~---------~~ Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated -------------- -------------- --------------- ---------------- Assets Current assets: Cash and cash equivalents $ 8,035 $ - $ - $ 8,035 Cash in escrow - - - - Receivables 199,512 - (46,971) 152,541 Raw materials inventory 57,305 - - 57,305 Work in progress inventory 11,197 - - 11,197 Finished goods inventory 150,925 - - 150,925 Assets held for sale - 5,275 - 5,275 Other current assets 56,577 2,551 (2,551) 56,577 ----------- ---------- ------------ ----------- Total current assets 483,551 7,826 (49,522) 441,855 Property, plant and equipment, net 252,491 - - 252,491 Deferred income taxes 41,070 (20,927) 9,736 29,879 Other assets 96,618 106,450 (106,450) 96,618 ----------- ---------- ------------ ----------- Total assets $ 873,730 $ 93,349 $ (146,236) $ 820,843 =========== ========== ============ =========== Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ 102,986 $ - $ - $ 102,986 Other current liabilities 94,763 - (2,551) 92,212 Current portion of long-term debt 119,853 - - 119,853 ----------- ---------- ------------ ----------- Total current liabilities 317,602 - (2,551) 315,051 Long-term debt 317,448 46,971 (46,971) 317,448 Other liabilities 199,781 - (60,950) 138,831 ----------- ---------- ------------ ----------- Total liabilities 834,831 46,971 (110,472) 771,330 ----------- ---------- ------------ ----------- Minority interest in subsidiary 2,276 - - 2,276 ----------- ---------- ------------ ----------- Shareholder's equity: Class A Common Stock - 10 - 10 Class B Common Stock - 44 - 44 Additional paid-in capital 123,678 78,095 (100,600) 101,173 Accumulated deficit (73,642) (31,771) 64,836 (40,577) Accumulated other comprehensive loss (13,413) - - (13,413) ----------- ---------- ------------ ----------- Total shareholder's equity 36,623 46,378 (35,764) 47,237 ----------- ---------- ------------ ----------- Total liabilities and shareholder's equity $ 873,730 $ 93,349 $ (146,236) $ 820,843 =========== ========== ============ ===========

Consolidated Statement of Operations For the Thirteen Weeks Ended ~~March~~June 3029, 2003 ---------------------------------------------------------~~---------~~ Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated -------------- -------------- --------------- ---------------- Net sales $ ~~293~~345,~~344~~850 $ - $ - $ ~~293~~345,~~344~~850 Cost of sales ~~262~~294,~~616~~493 - - ~~262~~294,~~616~~493 ----------- ---------- ------------ ----------- Gross profit 3051,~~728~~357 - - 3051,~~728~~357 Selling, general and administrative expenses 28,~~001~~092 - - 28,~~001~~092 Other income, net (12,~~035~~446) - - (12,~~035~~446) ----------- ---------- ------------ ----------- Operating income 325,~~762~~711 - - 325,~~762~~711 Interest expense, net 910,~~779~~876 (~~346~~580) - 910,~~433~~296 Loss on debt extinguishment 475 - - 475 ---------- ---------- ------------ ----------- Income ~~(loss)~~ before income tax ~~expense (benefit)~~ and minority interest (614,~~017)~~360 ~~346~~580 - (514,~~671)~~940 Income tax ~~(benefit)~~ expense (25,~~406)~~744 ~~138~~233 - (25,~~268)~~977 Minority interest in subsidiary 3235 - - 3235 ----------- ---------- ------------ ----------- Net income ~~(loss)~~ $ (38,~~643)~~581 $ ~~208~~347 $ - $ (38,~~435)~~928 =========== ========== ============ =========== Other comprehensive income ~~(loss)~~: Net income ~~(loss)~~ $ (38,~~643)~~581 $ ~~208~~347 $ - $ (38,~~435)~~928 Foreign currency translation adjustment ~~(341)~~1,397 - - ~~(341)~~1,397 Minimum pension liability adjustment (net of income taxes of $~~489~~(867)) ~~734~~(1,301) - - ~~734~~(1,301) ----------- ---------- ------------ ----------- Comprehensive income ~~(loss)~~ $ (38,~~250)~~677 $ ~~208~~347 $ - $ (39,~~042)~~024 =========== ========== ============ ===========

Consolidated Statement of Operations For the Thirteen Weeks Ended ~~March~~June 3130, 2002 ---------------------------------------------------------~~---------~~ Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated -------------- -------------- --------------- ---------------- Net sales $ ~~296~~340,~~371~~245 $ ~~58,589~~- $ (- ~~58,589)~~ $ ~~296~~340,~~371~~245 Cost of sales ~~273~~299,~~099~~635 ~~53,697~~- ~~(59,103)~~- ~~267~~299,~~693~~635 ----------- ---------- ------------ ----------- Gross profit 2340,~~272~~610 ~~4,892~~- ~~514~~- 2840,~~678~~610 Selling, general and administrative expenses 28,~~124~~081 ~~474~~1 - 28,~~598~~082 Other ~~(income)~~ expense, net ~~(20)~~8,877 - ~~514~~- ~~494~~8,877 ----------- ---------- ------------ ----------- Operating income (loss) (43,~~832~~652 (1) ~~4,418~~ - ~~(414)~~3,651 Interest expense (income), net 89,~~588~~482 ~~1,006~~(28) - 9,~~594~~454 ~~Loss on debt extinguishment 1,798~~ - - ~~1,798~~ --------~~---~~ ---------- ------------ ----------- Income (loss) before income tax expense (benefit) and minority interest (155,~~218~~830) ~~3,412~~27 - (115,~~806~~803) Income tax (benefit) expense (62,~~077~~331) ~~1,366~~11 - (42,~~711~~320) Minority interest in subsidiary 40 - - 40 ----------- ---------- ------------ ----------- Net income (loss) $ (93,~~181~~539) $ ~~2,046~~16 $ - $ (73,~~135~~523) =========== ========== ============ =========== Other comprehensive income (loss): Net income (loss) $ (93,~~181~~539) $ ~~2,046~~16 $ - $ (73,~~135~~523) Foreign currency translation adjustment ~~159~~(196) - - ~~159~~(196) Minimum pension liability adjustment (net of income taxes of $~~813~~(146)) ~~1,220~~(219) - - ~~1,220~~(219) ----------- ---------- ------------ ----------- Comprehensive income (loss) $ (73,~~802~~954) $ ~~2,046~~16 $ - $ (53,~~756~~938) =========== ========== ============ ===========

Consolidated Statement of Operations For the ~~Twenty~~Thirty-~~six~~nine Weeks Ended ~~March~~June 3029, 2003 ---------------------------------------------------------~~---------~~ Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated -------------- -------------- --------------- ---------------- Net sales $ ~~613~~959,~~689~~539 $ - $ - $ ~~613~~959,~~689~~539 Cost of sales ~~547~~841,~~093~~586 - - ~~547~~841,~~093~~586 ----------- ---------- ------------ ----------- Gross profit 66117,~~596~~953 - - 66117,~~596~~953 Selling, general and administrative expenses 5482,~~197~~289 - - 5482,~~197~~289 Other income, net (35,~~230~~676) - - (35,~~230~~676) ----------- ---------- ------------ ----------- Operating income 1541,~~629~~340 - - 1541,~~629~~340 Interest expense, net 1930,~~608~~484 (~~711~~1,291) - 1829,~~897~~193 Loss on debt extinguishment 475 - 475 - ---------- ---------- ------------ ----------- Income ~~(loss)~~ before income tax ~~expense (benefit)~~ and minority interest (310,~~979)~~381 ~~711~~1,291 - (311,~~268)~~672 Income tax ~~(benefit)~~ expense (14,~~591)~~153 ~~284~~517 - (14,~~307)~~670 Minority interest in subsidiary 4681 - - 4681 ----------- ---------- ------------ ----------- Net income ~~(loss)~~ $ (26,~~434)~~147 $ ~~427~~774 $ - $ (26,~~007)~~921 =========== ========== ============ =========== Other comprehensive income ~~(loss)~~: Net income ~~(loss)~~ $ (26,~~434)~~147 $ ~~427~~774 $ - $ (26,~~007)~~921 Foreign currency translation adjustment ~~(508)~~889 - - ~~(508)~~889 Minimum pension liability adjustment (net of income taxes of $(1,~~069~~936)) (12,~~603~~904) - - (12,~~603~~904) ----------- ---------- ------------ ----------- Comprehensive income ~~(loss)~~ $ (4,~~545)~~132 $ ~~427~~774 $ - $ (4,~~118)~~906 =========== ========== ============ ===========

Consolidated Statement of Operations For the ~~Twenty~~Thirty-~~six~~nine Weeks Ended ~~March~~June 3130, 2002 ---------------------------------------------------------~~---------~~ Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated -------------- -------------- --------------- ---------------- Net sales $ ~~617~~957,~~246~~491 $ 116,485 $ (116,485) $ ~~617~~957,~~246~~491 Cost of sales ~~559~~858,~~087~~722 106,760 (117,710) ~~548~~847,~~137~~772 ----------- ---------- ------------ ----------- Gross profit 5898,~~159~~769 9,725 1,225 ~~69,~~109,719 Selling, general and administrative expenses 5685,~~729~~073 ~~931~~932 - 5786,~~660~~005 Other ~~income~~expense, net (4,~~516)~~098 - 1,225 (35,~~291)~~323 ----------- ---------- ------------ ----------- Operating income 59,~~946~~598 8,~~794~~793 - 1418,~~740~~391 Interest expense, net 1625,~~353~~835 2,~~427~~399 - 1828,~~780~~234 Loss on debt extinguishment 1,798 - - 1,798 ----------- ---------- ------------ ----------- Income (loss) before income tax expense (benefit) and minority interest (1218,~~205~~035) 6,~~367~~394 - (511,~~838~~641) Income tax (benefit) expense (47,~~851~~182) 2,~~547~~558 - (24,~~304~~624) Minority interest in subsidiary 73113 - - 73113 ----------- ---------- ------------ ----------- Net income (loss) $ (710,~~427~~966) $ 3,~~820~~836 $ - $ (37,~~607~~130) =========== ========== ============ =========== Other comprehensive income (loss): Net income (loss) $ (710,~~427~~966) $ 3,~~820~~836 $ - $ (37,~~607~~130) Foreign currency translation adjustment 20(176) - - 20(176) Minimum pension liability adjustment (net of income taxes of $(~~748~~894)) (1,~~122~~341) - - (1,~~122~~341) ----------- ---------- ------------ ----------- Comprehensive income (loss) $ (812,~~529~~483) $ 3,~~820~~836 $ - $ (48,~~709~~647) =========== ========== ============ ===========

Consolidated Statement of Cash Flows For the ~~Twenty~~Thirty-~~six~~nine Weeks Ended ~~March~~June 3029, 2003 ---------------------------------------------------------~~---------~~ Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated -------------- -------------- --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities $ 1123,~~298~~200 $ - $ - $ 1123,~~298~~200 ----------- ---------- ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (59,~~934~~300) - - (59,~~934~~300) Due from / to SF Holdings 250 - - 250 Proceeds from sale of ~~assets~~investment 4329 - - 4329 Proceeds from sale of property, plant and equipment 35 - - 35 ---------- ---------- ------------ ----------- Net cash used in investing activities (58,~~680~~686) - - (58,~~680~~686) ----------- ---------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net repayments under credit facilities (~~1,520~~85) - - (~~1,520~~85) Repayments of other debt (46,~~049~~079) - - (46,~~049~~079) Debt issuance costs (26,~~479~~195) - - (26,~~479~~195) Increase in cash escrow (~~226~~379) - - (~~226~~379) Decrease in cash escrow ~~221~~308 - - ~~221~~308 ----------- ---------- ------------ ----------- Net cash used in financing activities (812,~~053~~430) - - (812,~~053~~430) ----------- ---------- ------------ ----------- NET ~~DECREASE~~INCREASE IN CASH AND CASH EQUIVALENTS (2,~~435)~~084 - - (2,~~435)~~084 CASH AND CASH EQUIVALENTS, beginning of period 8,035 - - 8,035 ----------- ---------- ------------ ----------- CASH AND CASH EQUIVALENTS, end of period $ 510,~~600~~119 $ - $ - $ 510,~~600~~119 =========== ========== ============ =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 1618,~~351~~702 $ - $ - $ 1618,~~351~~702 =========== ========== ============ =========== Income taxes ~~paid~~received $ (2,~~703~~692) $ - $ - $ (2,~~703~~692) =========== ========== ============ ===========

Consolidated Statement of Cash Flows For the ~~Twenty~~Thirty-~~six~~nine Weeks Ended ~~March~~June 3130, 2002 ---------------------------------------------------------~~---------~~ Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated -------------- -------------- --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities $ 3218,~~653~~858 $ 88,148 $ (88,148) $ 3218,~~653~~858 ----------- ---------- ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (1317,~~783~~589) - - (1317,~~783~~589) Due from / to SF Holdings (64) - - (64) Proceeds from sale of ~~assets~~property, plant and equipment 5,~~262~~280 - - 5,~~262~~280 ----------- ---------- ------------ ----------- Net cash used in investing activities (812,~~521~~373) - - (812,~~521~~373) ----------- ---------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings under credit facilities ~~173~~191,~~804~~522 - - ~~173~~191,~~804~~522 Repayment under credit facilities (196,144) - - (196,144) Repayments of other debt (35,~~050~~336) - - (35,~~050~~336) Repayment of intercompany equipment financing - (88,148) 88,148 - Increase in cash escrow (54,~~253~~581) - - (54,~~253~~581) Decrease in cash escrow ~~781~~4,458 - - ~~781~~4,458 ----------- ---------- ------------ ----------- Net cash used in financing activities (2910,~~862~~081) (88,148) 88,148 (2910,~~862~~081) ----------- ---------- ------------ ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (53,~~730~~596) - - (53,~~730~~596) CASH AND CASH EQUIVALENTS, beginning of period 11,616 - - 11,616 ----------- ---------- ------------ ----------- CASH AND CASH EQUIVALENTS, end of period $ 58,~~886~~020 $ - $ - $ 58,~~886~~020 =========== ========== ============ =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 1719,~~958~~890 $ - $ - $ 1719,~~958~~890 =========== ========== ============ =========== Income taxes paid $ ~~890~~808 $ - $ - $ ~~890~~808 =========== ========== ============ ===========

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. 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; 18 (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. The types of products that are 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. 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. Raw materials - 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 19 reserve for these products is equal to all or a portion of the cost of the inventory based on the specific facts and circumstances. The Company 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 thirty-nine weeks ended June 29, 2003 in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. The initial transitional goodwill impairment test was completed, as required, by March 30, 2003. The carrying value of goodwill did not exceed its fair value and; as a result, no transitional impairment loss was required. 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. Thirteen Weeks Ended June 29, 2003 Compared to Thirteen Weeks Ended June 30, 2002 Net sales increased $5.7 million, or 1.7%, to $345.9 million for the thirteen weeks ended June 29, 2003 compared to $340.2 million for the thirteen weeks ended June 30, 2002, reflecting a 2.3% decrease in sales volume and a 4.0% increase in average realized sales price. Sales volume decreased primarily as a result of lower demand from consumer customers. Average realized sales prices increased as a result of pricing increases associated with higher raw material costs and a change in product mix. Gross profit increased $10.8 million, or 26.6%, to $51.4 million for the thirteen weeks ended June 29, 2003 compared to $40.6 million for the thirteen weeks ended June 30, 2002. As a percentage of net sales, gross profit increased to 14.9% for the thirteen weeks ended June 29, 2003 from 11.9% for the thirteen weeks ended June 30, 2002. The increase in gross profit is primarily due to improved labor utilization resulting from the Company's rationalization, consolidation and improvement of its manufacturing facilities. The benefits from improved manufacturing efficiencies were partially offset by average selling prices increasing at a slower rate than increasing raw material costs. Selling, general and administrative expenses was $28.1 million for the thirteen weeks ended June 29, 2003 and June 30, 2002, respectively. In general, these expenses remained constant due to a (i) $0.6 million decrease in salaries and related fringe benefits which was partially due to a workforce reduction program initiated in Fiscal 2002, (ii) $0.5 million decrease in depreciation expense resulting from the full depreciation of certain computer equipment and (iii) $0.5 million decrease in goodwill amortization due to the adoption of SFAS No. 142. These favorable changes were partially offset by a $1.2 million increase in promotional and advertising expenses. Other (income) expense, net changed $11.3 million, or 127.0%, to income of $2.4 million for the thirteen weeks ended June 29, 2003 compared to an expense of $8.9 million for the thirteen weeks ended June 30, 2002. During the thirteen weeks ended June 29, 2003, the Company realized (i) $2.5 million due to the amortization of the deferred gain in conjunction with the Fiscal 2000 sale-leaseback transaction (the "Sale-Leaseback Transaction"), (ii) 20 $0.7 million of gains from foreign currency transactions, (iii) $0.4 million of costs associated with the establishment of new information systems, (iv) $0.2 million of costs associated with the maintenance of non-operational facilities, (v) $0.1 million of costs associated with the opening of the mid-west distribution center and (vi) $0.1 million of net losses from the sale of obsolete equipment. As compared to the thirteen weeks ended June 30, 2002, the Company realized (i) $2.5 million due to the amortization of the deferred gain in conjunction with the Sale-Leaseback Transaction, (ii) a $4.6 million write-off of the management services agreement between Sweetheart Holdings Inc. ("Sweetheart Holdings") and SF Holdings Group, Inc. ("SF Holdings"), which had been assigned and assumed by The Fonda Group, Inc. ("Fonda") in 1998, (iii) $3.3 million of costs incurred in connection with the rationalization, consolidation and improvement of the Company's manufacturing facilities, (iv) a $2.6 million write-off of assets related to certain business initiatives which were abandoned subsequent to the merger of Sweetheart Cup Company Inc. ("Sweetheart Cup") and Fonda and (v) a $0.5 million expense related to the purchase of the final insurance annuity associated with a lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084. Operating income increased $22.0 million, or 594.6%, to income of $25.7 million for the thirteen weeks ended June 29, 2003 compared to $3.7 million for the thirteen weeks ended June 30, 2002, due to the reasons stated above. Interest expense, net increased $0.8 million, or 8.4%, to $10.3 million for the thirteen weeks ended June 29, 2003 compared to $9.5 million for the thirteen weeks ended June 30, 2002. This increase is primarily due to the amortization of fees associated with the Company's exchange offer of its Senior Subordinated Notes due September 2003 which was partially offset by lower interest rates on the Senior Credit Facility. Loss on debt extinguishment was $0.5 million for the thirteen weeks ended June 29, 2003 resulting from the write-off of deferred financing costs associated with the April 8, 2003 debt exchange offering. Income tax expense (benefit) changed $8.3 million, to an expense of $6.0 million for the thirteen weeks ended June 29, 2003 compared to a benefit of $2.3 million for the thirteen weeks ended June 30, 2002 as a result of a pre-tax profit for the thirteen weeks ended June 29, 2003 as compared to a pretax loss for the thirteen weeks ended June 30, 2002. The effective rates for the thirteen weeks ended June 29, 2003 and the thirteen weeks ended June 30, 2002 were 40%, respectively. Minority interest in subsidiary decreased $5,000, or 13.0%, to $35,000 for the thirteen weeks ended June 29, 2003 compared to $40,000 for the thirteen weeks ended June 30, 2002. This amount represents the 20% ownership of Global Cup, S.A. De C.V. and its subsidiaries' ("Global Cup") income. Net income (loss) increased $12.4 million, or 354.3%, to income of $8.9 million for the thirteen weeks ended June 29, 2003 compared to a loss of $3.5 million for the thirteen weeks ended June 30, 2002, due to the reasons stated above. Thirty-nine Weeks Ended June 29, 2003 Compared to Thirty-nine Weeks Ended June 30, 2002 Net sales increased $2.0 million, or 0.2%, to $959.5 million for the thirty-nine weeks ended June 29, 2003 compared to $957.5 million for the thirty-nine weeks ended June 30, 2002, reflecting a 1.6% decrease in sales volume and a 1.8% increase in average realized sales price. 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 pricing increases associated with higher raw material costs and a change in product mix. Gross profit increased $8.3 million, or 7.6%, to $118.0 million for the thirty-nine weeks ended June 29, 2003 compared to $109.7 million for the thirty-nine weeks ended June 30, 2002. As a percentage of net sales, gross profit increased to 12.3% for the thirty-nine weeks ended June 29, 2003 from 11.5% for the thirty-nine weeks ended June 30, 2002. This increase in gross profit is primarily due to improved labor utilization and manufacturing efficiencies resulting from the Company's rationalization, consolidation and improvement of its manufacturing facilities. Selling, general and administrative expenses decreased $3.7 million, or 4.3%, to $82.3 million for the 21 thirty-nine weeks ended June 29, 2003 compared to $86.0 million for the thirty-nine weeks ended June 30, 2002. This decrease is primarily due to a (i) $2.1 million decrease in depreciation expense resulting from the full depreciation of certain computer equipment, (ii) $1.5 million decrease in goodwill amortization due to the adoption of SFAS No. 142, (iii) $1.5 million decrease in salaries and related fringe benefits due to a workforce reduction program initiated in Fiscal 2002, (iv) $0.7 million decrease in supply expenses, (v) $0.5 million decrease due to customer bankruptcy filings in Fiscal 2002. These favorable changes were partially offset by a $2.6 million increase in promotional and advertising expenses. Other (income) expense, net changed $11.0 million, or 207.6%, to income of $5.7 million for the thirty-nine weeks ended June 29, 2003 compared to an expense of $5.3 million for the thirty-nine weeks ended June 30, 2002. During the thirty-nine weeks ended June 29, 2003, the Company realized (i) $7.6 million due to the amortization of the deferred gain in conjunction with the Sale-Leaseback Transaction, (ii) $1.1 million of gains from foreign currency transactions and (iii) $0.2 million from a gain on the sale of its 25% interest in Fibre Marketing Group, LLC. These gains were partially offset by (i) $0.8 million of net losses from the sale of obsolete equipment (ii) $0.8 million of costs associated with the opening of the mid-west distribution center, (iii) $0.7 million of costs associated with the rationalization, consolidation and improvement of the Company's manufacturing facilities, (iv) $0.6 million of costs associated with the maintenance of non-operational facilities and (v) $0.4 million of costs associated with the establishment of new information systems. As compared to the thirty-nine weeks ended June 30, 2002, the Company realized $7.7 million due to the amortization of the deferred gain in conjunction with the Sale-Leaseback Transaction and $3.0 million from a gain associated with the sale of a manufacturing facility in Manchester, New Hampshire. These gains were partially offset by (i) a $5.4 million write off of the management services agreement between Sweetheart Holdings and SF Holdings, which had been assigned and assumed by Fonda in Fiscal 1998, (ii) a write-off of $2.6 million of assets related to business initiatives which were abandoned subsequent to the Merger, (iii) $7.6 million of costs in connection with the rationalization, consolidation and improvement of the Company's manufacturing facilities. Operating income increased $22.9 million, or 124.5%, to income of $41.3 million for the thirty-nine weeks ended June 29, 2003 compared to $18.4 million for the thirty-nine weeks ended June 30, 2002, due to the reasons stated above. Interest expense, net increased $1.0 million, or 3.6%, to $29.2 million for the thirty-nine weeks ended June 29, 2003 compared to $28.2 million for the thirty-nine weeks ended June 30, 2002. This increase is primarily due to the amortization of fees associated with the Company's exchange offer and increase in coupon interest effective March 1, 2002 of the Senior Subordinated Notes due September 2003. These increases were partially offset by lower interest rates on the Senior Credit Facility. Loss on debt extinguishment decreased $1.3 million, or 72.2%, to $0.5 million for the thirty-nine weeks ended June 29, 2003 resulting from the write-off of deferred financing costs associated with the April 8, 2003 debt exchange offering compared to $1.8 million for the thirty-nine weeks ended June 30, 2002 resulting from the write-off of the deferred financing costs from the refinancing of the Company's Senior Credit Facility. Income tax expense (benefit) changed $9.3 million, to an expense of $4.7 million for thirty-nine weeks ended June 29, 2003 compared to a benefit of $4.6 million for the thirty-nine weeks ended June 30, 2002 as a result of a pre-tax profit for the thirty-nine weeks ended June 29, 2003 as compared to a pretax loss for the thirty-nine weeks ended June 30, 2002. The effective rates for the thirty-nine weeks ended June 29, 2003 and the thirty-nine weeks ended June 30, 2002 were 40%, respectively. Minority interest in subsidiary was $0.1 million for the thirty-nine weeks ended June 29, 2003 and June 30, 2002, respectively. This amount represents the 20% ownership of Global Cup's income. Net income (loss) increased $14.0 million, or 197.2%, to income of $6.9 million for the thirty-nine weeks ended June 29, 2003 compared to a loss of $7.1 million for the thirty-nine weeks ended June 30, 2002, 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 22 finance its working capital requirements and capital expenditures. In the thirty-nine weeks ended June 29, 2003, 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. Net cash provided by operating activities for the thirty-nine weeks ended June 29, 2003 was $23.2 million compared to $18.9 million for the thirty-nine weeks ended June 30, 2002. This increase is primarily due to improved earnings during the thirty-nine weeks ended June 29, 2003 compared to the thirty-nine weeks ended June 30, 2002. This increase was partially offset by an increase in inventories. Net cash used in investing activities for the thirty-nine weeks ended June 29, 2003 was $8.7 million compared to $12.4 million for the thirty-nine weeks ended June 30, 2002. This decrease is primarily due to lower capital spending which is offset in part by the receipt of net proceeds from the sale of the Manchester, New Hampshire facility during the thirty-nine weeks ended June 30, 2002. Net cash used in financing activities for the thirty-nine weeks ended June 29, 2003 was $12.4 million compared to $10.1 million for the thirty-nine weeks ended June 30, 2002. This increase is primarily due to lower borrowings under the Senior Credit Facility and increased debt issuance costs. Working capital increased $85.1 million to $211.9 million at June 29, 2003 from $126.8 million at September 29, 2002. This increase resulted from current liabilities decreasing $72.2 million and current assets increasing $12.9 million. The decrease in current liabilities resulted primarily from a reclassification of $93.8 million of New Notes from current to long-term debt. The increase in current assets resulted primarily from an increase in inventories which was offset by the collection of a tax receivable. Capital expenditures for the thirty-nine weeks ended June 29, 2003 were $9.3 million compared to $17.6 million for the thirty-nine weeks ended June 30, 2002. Capital expenditures for the thirty-nine weeks ended June 29, 2003 included $7.3 million for new production equipment; $0.9 million associated with the implementation of the Company's consolidation program; and $1.1 million primarily for routine capital improvements. Funding for the capital expenditures for the thirty-nine weeks ended June 29, 2003 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 loan matures on the later of August 1, 2014 or the date on which all amounts outstanding under the loan agreement have been paid in full. 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 June 29, 2003 and September 29, 2002, $1.6 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"). 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 New Notes prior to December 31, 2003, the Senior Credit Facility, unless otherwise amended, will become due and payable 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 June 29, 2003, the weighted average annual interest rate for the Senior Credit Facility was 4.07%. 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 23 commitment fee of 0.375% per annum on the daily average unused amount of the commitments. As of June 29, 2003, $45.4 million was available under the Senior Credit Facility. As of June 29, 2003, LIBOR was 1.32% and the bank's base rate was 4.50%. The Senior Credit Facility contains various covenants that limit, or restrict, among other things, 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 $22.2 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 June 29, 2003, the weighted average annual interest rate for the Canadian Credit Facility was 4.80%. As of June 29, 2003, Cdn $1.8 million (approximately US $1.3 million) was available under the revolving facility and the term loan balance was Cdn $10.7 million (approximately US $7.9 million) under the Canadian Credit Facility. Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor with respect to the 12.0% Senior Subordinated Notes (the "Senior Subordinated Notes") which are due September 1, 2003. Interest on the Senior Subordinated Notes is payable semi-annually in arrears on March 1 and September 1. The Senior Subordinated Notes began to accrue interest at 12.0% per annum as of March 1, 2002. The 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 Senior Subordinated Notes are general unsecured obligations of Sweetheart Cup and 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 the New Notes, and are pari passu with the $120 million 9 1/2% Senior Subordinated Notes due 2007. On April 8, 2003, Sweetheart Cup consummated its offer to exchange (the "Exchange Offer") its newly issued 12.0% Senior Notes due July 15, 2004 (the "New Notes") for all of its outstanding Senior Subordinated Notes and solicitation of consents of holders of the Senior Subordinated Notes to the proposed amendments to the indenture governing the Senior Subordinated Notes (the "Consent Solicitation"). Sweetheart Cup, Sweetheart Holdings, as guarantor, and Wells Fargo Bank Minnesota, N.A., as trustee, executed the indenture governing the New Notes and $93.8 million in aggregate principal amount of New Notes were issued under the indenture in exchange for a like amount of the Senior Subordinated Notes. Payment of the consent payments to all holders of the Senior Subordinated Notes who timely tendered was made in April 2003 to the trustee. As a result of the Exchange Offer, $93.8 million of the Senior Subordinated Notes is classified as long-term debt in the accompanying June 29, 2003 consolidated balance sheet. As a result of the Consent Solicitation, the amendment to the indenture governing the Senior Subordinated Notes became effective as of April 8, 2003. The amendment primarily eliminated substantially all of the restrictive covenants other than the change of control covenant. At June 29, 2003, the aggregate principal amount of the Senior Subordinated Notes that remain outstanding following the Exchange Offer is $16.2 million which is due September 1, 2003. Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor with respect to the $93.8 million of New Notes which are due July 15, 2004. Interest is payable quarterly on January 15, April 15, July 15, and October 15 of each year, beginning on July 15, 2003. The New Notes accrue interest at 12.0% per annum. The New 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 New Notes are general unsecured obligations of Sweetheart Cup and are senior in right of payment to the 24 Company's subordinated indebtedness, including the Senior Subordinated Notes and the $120 million 9 1/2% Senior Subordinated Notes due 2007. The New Notes are pari passu in right of payment with the Company's existing and future senior indebtedness, including borrowings under the Senior Credit Facility. The New 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 $120 million of 9 1/2% Senior Subordinated Notes which are due February 27, 2007. Interest is payable semi-annually. Payment of the principal and interest is subordinate in right to payment of all of the Company's senior debt, including the New Notes and borrowings under the Senior Credit Facility and is pari passu with the Senior Subordinated Notes.. 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 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 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. In connection with the 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 Sale-Leaseback 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. The following summarizes the Company's contractual obligations at June 29, 2003, and the effect such obligations are expected to have on its liquidity and cash flows in future periods (in 000's):

Payments Due In Fiscal ----------------------------------------------------------------~~-----------~~ 2004 2005 2006 2007 2008 Thereafter ----------- ---------- ---------- ----------- ---------- ------------ Long-term debt $ ~~116~~114,~~455~~760 $ 4,~~295~~397 $ 612 $ ~~288~~290,~~549~~115 $ 200 $ 1,000 Non-cancelable operating leases 5354,~~870~~042 51,~~468~~640 48,~~709~~843 46,~~853~~984 53,~~356~~436 189,~~698~~737 Capital leases ~~123~~124 97 - - - - --------- -------- -------- --------- -------- ---------- Total obligations $ ~~170~~168,~~448~~926 $ 5556,~~860~~134 $ 49,~~321~~455 $ ~~335~~337,~~402~~099 $ 53,~~556~~636 $ 190,~~698~~737 ========= ======== ======== ========= ======== ==========

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 25 expenses. 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. 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 (other than the payment of principal under the New Notes) in the next twelve months. The Company will need to refinance, repay or extend the New Notes by July 15, 2004 and, the Senior Credit Facility, unless otherwise amended, will become due and payable if the Company is unable to refinance, repay or extend the New Notes by December 31,2003. 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 its 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. 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 June 29, 2003, the outstanding indebtedness under the Senior Credit Facility was $179.3 million and the Canadian Credit Facility was $16.7 million in U.S. dollars. As of June 29, 2003, $45.4 million was available under the Senior Credit Facility and Cdn $1.8 million (approximately US $1.3 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. 26 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. 27 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: August 5, 2003 By: /s/ Hans H. Heinsen -------------- ------------------- Hans H. Heinsen Senior Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) 28 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 5, 2003 SWEETHEART HOLDINGS INC. -------------- (Registrant) By: /s/ DENNIS MEHIEL ------------------ Dennis Mehiel Chairman and Chief Executive Officer 29 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 5, 2003 SWEETHEART HOLDINGS INC. -------------- (Registrant) By: /s/ HANS H. HEINSEN -------------------- Hans H. Heinsen Senior Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 30

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