10-Q 1 sweetheart2004q01-10q.txt QUARTERLY REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Thirteen Weeks Ended December 28, 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 February 10, 2004: 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 $100 million of 9 1/2% Senior Secured Notes due 2007 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)~~December ~~June 29~~28, September 2928, 2003 ~~2002~~2003 ---------------- ---------------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 10,~~119~~064 $ 810,~~035~~447 Cash in escrow 7196 -77 Receivables, less allowances of $43,~~496~~973 and $3,~~741~~881 ~~153~~149,~~023~~035 ~~152~~158,~~541~~491 Inventories ~~234~~216,~~730~~803 ~~219~~220,~~427~~433 Deferred income taxes 2124,~~446~~168 2024,~~841~~207 Assets held for sale 5,275 5,275 Other current assets 30,~~068~~885 3531,~~736~~665 ----------- ----------- Total current assets ~~454~~436,~~732~~326 ~~441~~450,~~855~~595 Property, plant and equipment, net ~~243~~240,~~672~~151 ~~252~~240,~~491~~975 Deferred income taxes 2821,~~203~~323 2922,~~879~~022 Spare parts 13,~~493~~789 13,~~428~~310 Goodwill 41,232 41,232 Due from SF Holdings 17,~~712~~960 17,~~962~~960 Other assets 23,~~966~~078 2322,~~996~~152 ------------ ----------- Total assets $ ~~823~~793,~~010~~859 $ ~~820~~808,~~843~~246 =========== =========== Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ ~~104~~101,~~761~~000 $ ~~102~~121,~~986~~619 Accrued payroll and related costs 40,~~403~~948 3844,~~009~~192 Other current liabilities 4639,~~128~~566 4439,~~000~~855 Current portion of deferred gain on sale of assets 10,100 10,~~203~~100 Current portion of long-term debt 4116,~~439~~649 ~~119~~116,~~853~~948 ----------- ----------- Total current liabilities ~~242~~208,~~831~~263 ~~315~~332,~~051~~714 Long-term debt ~~392~~399,~~166~~630 ~~317~~286,~~448~~931 Deferred gain on sale of assets 6459,~~579~~529 7262,~~883~~054 Other liabilities 6967,~~153~~250 6569,~~948~~772 ----------- ----------- Total liabilities ~~768~~734,~~729~~672 ~~771~~751,~~330~~471 ----------- ----------- Minority interest in subsidiary 2,~~357~~442 2,~~276~~403 ----------- ----------- 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 authorized; 4,393,200 shares issued and outstanding 44 44 Additional paid-in capital ~~100~~101,~~954~~212 101,~~173~~212 Accumulated deficit (3324,~~656~~816) (4025,~~577~~532) Accumulated other comprehensive loss (1519,~~428~~705) (1321,~~413~~362) ----------- ----------- Total shareholder's equity 5156,~~924~~745 4754,~~237~~372 ----------- ----------- Total liabilities and shareholder's equity $ ~~823~~793,~~010~~859 $ ~~820~~808,~~843~~246 =========== ===========

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

For the ~~For~~Thirteen ~~the~~ For the ~~For the~~ Thirteen ~~Thirteen Thirty-nine Thirty-nine~~ weeks ended weeks ended ~~weeks~~December ~~ended weeks ended June 29~~28, ~~June~~December ~~30, June~~ 29, ~~June 30,~~ 2003 2002 ~~2003 2002~~ ----------- -----~~------~~ ----------- -----~~------~~ Net sales $ ~~345~~321,~~850~~561 $ ~~340~~320,~~245~~345 ~~$ 959,539 $ 957,491~~ Cost of sales ~~294~~279,~~493~~859 ~~299~~284,~~635~~477 ~~841,586 847,772~~ ---------- -~~---------~~ ---------- -~~---------~~ Gross profit 5141,~~357~~702 4035,~~610~~868 ~~117,953 109,719~~ Selling, general and administrative expenses 28,~~092~~981 2826,~~082~~196 ~~82,289 86,005~~ Other (income~~) expense~~, net (21,~~446~~270) ~~8,877~~ (52,~~676~~195) ~~5,323~~ ---------- -~~---------~~ ---------- -~~---------~~ Operating income 2513,~~711~~991 311,~~651~~867 ~~41,340~~Loss 18on debt extinguishment 2,~~391~~354 - Interest expense, net of interest income of $~~30,~~91 ~~$61, $107~~ and $~~151~~37 10,~~296~~380 9,~~454~~464 ~~29,193 28,234 Loss on debt extinguishment 475~~ - ~~475 1,798~~ ---------- ---------- -~~---------~~ ~~----------~~ Income ~~(loss)~~ before income tax and minority interest 141,~~940~~257 (52,~~803)~~403 ~~11,672 (11,641)~~ Income tax expense ~~(benefit)~~502 ~~5,977~~961 ~~(2,320) 4,670 (4,624)~~ Minority interest in subsidiary 3539 4014 ~~81 113~~ ---------- -~~---------~~ ---------- -~~---------~~ Net income ~~(loss )~~ $ ~~8,928~~716 $ (31,~~523)~~428 ~~$ 6,921 $ (7,130)~~ ========== =~~=========~~ ========== =~~=========~~ Other comprehensive income (loss): Net income ~~(loss )~~ $ ~~8,928~~716 $ (31,~~523)~~428 ~~$ 6,921 $ (7,130)~~ Foreign currency translation adjustment ~~1,397~~68 (~~196~~167) ~~889 (176)~~ Minimum pension liability adjustment (net of income ~~taxes~~tax of $~~(867)~~1,059 ~~$(146),~~and $($1,~~936~~558) ~~and $(894~~)) (1,~~301)~~589 (~~219) (~~2,~~904~~337) ~~(1,341)~~ ---------- -~~---------~~ ---------- -~~---------~~ Comprehensive income (loss ) $ 92,~~024~~373 $ (31,~~938~~076) ~~$ 4,906 $ (8,647)~~ ========== =~~=========~~ ========== =~~=========~~

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

For the Thirteen For the ~~Thirty-nine~~Thirteen weeks ~~Thirty-nine~~ended weeks ended ~~June~~December 2928, ~~ended~~December ~~June 30~~29, 2003 2002 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ~~(loss)~~ $ ~~6,921~~716 $ (71,~~130)~~428 Adjustments to reconcile net income ~~(loss)~~ to net cash (used in) provided by operating activities: Depreciation and amortization 248,~~400~~439 267,~~723~~841 Amortization of deferred gain (72,~~618~~525) (72,~~689~~551) ~~Loss~~Gain ~~(gain)~~ on sale of ~~assets~~property, ~~443~~plant and equipment (~~3,107~~16) - Loss on debt extinguishment 2,354 - Changes in operating assets and liabilities: Receivables ~~(482)~~9,456 810,~~030~~400 Inventories ~~(15~~3,~~303)~~630 1820,~~450~~426 Other current assets ~~5,668~~780 (1,~~326)~~048 Other assets ~~3,727~~ (61,~~765~~232) 87 Accounts payable 1(20,~~775~~619) 8(30,~~689~~371) Accrued payroll and related costs 2(3,~~394~~244) (41,~~898~~543) Other current liabilities ~~2,128~~ (~~2,744~~287) 6,463 Other liabilities 128 (1,~~634~~263) ~~(10,421)~~ Other, net ~~781~~(169) ~~1,046~~462 ------------ ------------ Net cash (used in) provided by operating activities 23(2,~~200~~589) 1812,~~858~~427 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (94,~~300~~907) (172,~~589~~492) ~~Due from / to SF Holdings 250 (64)~~ Proceeds from sale of ~~investment 329 - Proceeds from sale of~~ property, plant and equipment 3517 ~~5,280~~- ------------ ------------ Net cash used in investing activities (84,~~686~~890) (122,~~373~~492) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net (repayments) ~~borrowings~~ under revolving credit facilities (856,195) ~~191~~(5,~~522~~965) ~~Repayment~~Repayments ~~under~~of ~~credit~~12.0% ~~facilities~~Senior -Notes (~~196~~93,~~144~~825) - Repayments of other debt (68,~~079~~120) (52,~~336~~026) Borrowings under the 91/2% Senior Secured Notes 100,000 - Borrowings under the 91/2% Junior Subordinated Note 20,000 - Debt issuance costs (64,~~195~~745) -(277) Increase in cash in escrow (~~379~~239) (~~4,581~~94) Decrease in cash in escrow ~~308~~220 ~~4,458~~87 ------------ ------------ Net cash provided by (used in) financing activities ~~(12~~7,~~430)~~096 (108,~~081~~275) ------------ ------------ NET ~~INCREASE~~ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ~~2,084~~ (~~3,596~~383) 1,660 CASH AND CASH EQUIVALENTS, beginning of period 10,447 8,035 ~~11,616~~ ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 10,~~119~~064 $ 89,~~020~~695 ============ ============ SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 187,~~702~~904 $ 193,~~890~~367 ============ ============ Income taxes (received) paid $ (~~2,692~~18) $ ~~808~~13 ============ ============

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 28, 2003. On December 22, 2003, SF Holdings executed a definitive agreement for its acquisition by Solo Cup Company of Highland Park, Illinois ("Solo"). The consummation of the transaction is subject to customary conditions and regulatory approvals, including, but not limited to, Solo's receipt of financing. In connection with the transaction, all of the outstanding indebteness of the Company will be repurchased or redeemed. (2) EQUITY BASED COMPENSATION 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. Amortization expense relating to SF Holdings' stock options was $10,000 for the thirteen weeks ended December 29, 2002. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for SF Holdings stock options granted to employees of the Company. Had compensation costs for SF Holdings stock options been determined based on fair value at the option grant dates, in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, the Company's net income during the thirteen weeks ended December 28, 2003 and December 29, 2002, respectively, would have changed to the pro forma amount indicated below (in thousands): For the For the Thirteen weeks ended Thirteen weeks ended December 28, December 29, Net income (loss): 2003 2002 -------------------- --------------------- As reported $ 716 $ 1,428 Pro forma $ 716 $ 1,426 The weighted average fair value of the SF Holdings stock options was $0.4 million in Fiscal 2001 estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions: dividend yield of zero, risk-free interest rate of 2.75% and expected life of option grants of three years. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future pro forma effects. 5 (3) INVENTORIES The components of inventories are as follows (in thousands): December 28, September 28, 2003 2003 ---------------- ------------------- Raw materials and supplies $ 57,477 $ 63,048 Finished products 149,694 147,075 Work in progress 9,632 10,310 ---------- ---------- Total inventories $ 216,803 $ 220,433 ========== ========== (4) DEBT On December 8, 2003 and December 16, 2003, Sweetheart Cup consummated in aggregate a $120 million debt refinancing, comprised of the issuance of a $20 million 9 1/2% junior subordinated note due 2008 to International Paper Company (the "9 1/2% Junior Subordinated Note") and $100 million of 9 1/2% senior secured notes due 2007 to institutional investors (the "9 1/2% Senior Secured Notes"), respectively. The proceeds from these offerings were used to repay a portion of the senior credit facility with Bank of America, N.A. (the "Senior Credit Facility"), and the balance has been used to redeem all of the outstanding $93.8 million of 12.0% Senior Notes due July 15, 2004 (the "12.0% Senior Notes") and to pay related fees and expenses, and for general corporate purposes. On December 16, 2003, the 12.0% Senior Notes were redeemed. During the thirteen weeks ended December 28, 2003, the Company recorded a $2.4 million loss on debt extinguishment which consisted of the write-off of unamortized deferred financing costs incurred in connection with the redemption of the 12.0% Senior Notes. Sweetheart Cup is the obligor with respect to the 9 1/2% Junior Subordinated Note. Interest on the 9 1/2% Junior Subordinated Note is payable semi-annually on November 15 and May 15 of each year, commencing on May 15, 2004. Sweetheart Cup may defer interest due on any interest payment date and such deferred interest shall become part of the principal amount due under such note; provided, however, that Sweetheart Cup may not defer such interest occurring on or after November 15, 2004 if payment in cash on such interest payment date is not prohibited under any of Sweetheart Cup's existing indebtedness and the payment to be made pursuant to a certain warrant agreement with New Cup, LLC has bee paid in cash. Sweetheart Cup may redeem all or any of the 9 1/2% Junior Subordinated Note, in whole or in part, at any time on or after December 8, 2003, upon notice of at least 10 days but not more than 20 days before a redemption date, at a redemption price of 100% of principal amount plus accrued and unpaid interest. The 9 1/2% Junior Subordinated Note is 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. The 9 1/2% Junior Subordinated Note contains various covenants which prohibit, or limit, among other things, change of control, asset sales, dividend payments, equity repurchases or redemption, the incurrence of additional indebtedness, make any restrictive investments, the issuance of disqualified stock, the creation of additional liens, certain transactions with affiliates, and certain other business activities. Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor with respect to the 9 1/2% Senior Secured Notes. Interest on the 9 1/2% Senior Secured Notes is payable quarterly on January 15, April 15, July 15, and October 15, commencing on April 15, 2004. Sweetheart Cup may redeem, at any time, all or a part of the 9 1/2% Senior Secured Notes upon notice not less than 30 days not more than 60 days prior to the redemption date, at a redemption price of 102% of principal amount plus accrued and unpaid interest on the 9 1/2% Senior Secured Notes redeemed to the applicable redemption date, declining to 100% six months prior to the maturity of the notes. The 9 1/2% Senior Secured Notes are senior secured obligations of Sweetheart Cup and rank equally with its existing and future senior debt, and senior to its existing and future subordinated debt. The 9 1/2% Senior Secured Notes and related guarantees are secured by a first priority lien on certain of Sweetheart Cup's property, plant and equipment, subject to certain permitted liens, located in Appleton Wisconsin, Augusta, Georgia, Glens Falls, New York, Goshen, Indiana, Oshkosh, Wisconsin, St. Albans, Vermont, El Cajon, California, Indianapolis, Indiana, Lakeland, Florida, and Williamsburg, Pennsylvania. The 9 1/2% Senior Secured Notes contain various covenants which prohibit, or limit, among other things, change of control, asset sales, dividend payments, equity repurchases or redemption, the incurrence of additional indebtedness, make any restrictive investments, the issuance of disqualified 6 stock, the creation of additional liens, certain transactions with affiliates, and certain other business activities. The Senior Credit Facility was amended on December 16, 2003, to, among other things, change the maturity date to August 1, 2006 and permanently reduce the maximum revolving credit borrowings to $205.0 million. (5) 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 and which is no longer an affiliate of the Company) 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 this agreement, SF Holdings has the right, subject to the direction of the Company's Board of Directors, to manage the Company's day to day operations. The outstanding balance due to SF Holdings was $3.1 million at December 28, 2003 and $1.2 million at December 29, 2002, respectively. At December 29, 2002, the Company had a loan receivable from its Chief Executive Officer of $0.3 million plus accrued interest at 5.06%. In Fiscal 2003, the Company's Chief Executive Officer repaid the outstanding loan receivable. During the thirteen weeks ended December 29, 2002, the Company forgave $13,872 of interest associated with the loan to its Chief Executive Officer. At December 29, 2002, the Company had a loan receivable from its Chief Operating Officer of $0.1 million plus accrued interest at 5.39%. On February 28, 2003, the loan receivable was amended and the interest rate changed to the federal funds rate. At December 28, 2003, the loan receivable is $0.1 million plus accrued interest. 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 September 29, 2002, $0.9 million was due to the Company. In Fiscal 2003, Fibre Marketing repaid the remaining balance of the outstanding promissory notes. During the thirteen weeks ended December 28, 2003, the Company purchased $3.5 million of corrugated containers from Box USA Holdings, Inc. ("Box USA"), a converter and seller of interior packaging, corrugated sheets and corrugated containers, in which the Company's Chief Executive Officer beneficially owns more than 10% of its outstanding capital stock. During the thirteen weeks ended December 28, 2003, the Company purchased $0.4 million of travel services from Emerald Lady, Inc, a company wholly owned by the Company's Chief Executive Officer ("Emerald Lady"). Included in accounts payable as of December 28, 2003 is $0.1 million due to Box USA. During the thirteen weeks ended December 28, 2003, the Company sold $2.1 million of scrap paper and plastic to Fibre Marketing. Included in accounts receivable as of December 28, 2003 is $0.5 million due from Fibre Marketing. In Fiscal 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. During the thirteen weeks ended December 29, 2002, the Company purchased $2.9 million of corrugated containers from Box USA. During the thirteen weeks ended December 29, 2002, the Company purchased $0.2 million of travel services from Emerald Lady. Included in accounts payable as of December 29, 2002 is $0.3 million due to Box USA. During the thirteen weeks ended December 29, 2002, the Company sold $2.0 million of scrap paper and plastic to Fibre Marketing. Included in accounts receivable as of December 29, 2002 is $1.1 million due from Fibre Marketing. 7 In Fiscal 2001, the Company began leasing a facility in North Andover, Massachusetts from D&L Andover Property, LLC, an entity in which the Company's Chief Executive Officer indirectly owns 50%. During the thirteen weeks ended December 28, 2003 and December 29, 2002, rental payments under this lease were $0.4 million, respectively. Annual rental payments under the 20-year lease are $1.5 million in the first year, escalating at a rate of 2% each year thereafter. In Fiscal 2000, the Company entered into a lease agreement with D&L Development, LLC, an entity in which the Company's Chief Executive Officer indirectly owns 47%, to lease a warehouse facility in Hampstead, Maryland. During the thirteen weeks ended December 28, 2003 and December 29, 2002, rental payments under this lease were $0.9 million, respectively. Annual rental payments under the 20-year lease are $3.7 million for the first 10 years of the lease and $3.8 million annually, thereafter. The Company leases a building in Jacksonville, Florida from the Company's Chief Executive Officer. Annual payments under the lease are $0.2 million plus annual increases based on changes in the Consumer Price Index ("CPI") through December 31, 2014. In addition, the Company's 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 $5,000 and $10,000 during the thirteen weeks ended December 28, 2003 and December 29, 2002, respectively. (6) ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss are as follows (in thousands): December 28, September 28, 2003 2003 ---------------- ----------------- Foreign currency translation adjustment $ (2,460) $ (2,528) Minimum pension liability adjustment (17,245) (18,834) ----------- ---------- Accumulated other comprehensive loss $ (19,705) $ (21,362) ========== ========== (7) OTHER INCOME, NET During the thirteen weeks ended December 28, 2003, the Company realized $2.5 million due to the amortization of the deferred gain in conjunction with a sale-leaseback transaction. In addition, the Company realized $0.1 million from foreign currency transactions gains. These gains were partially offset by (i) $0.8 million of costs associated with the Company's evaluation of strategic options, including, among other things, the sale of assets or the business, (ii) $0.4 million of costs associated with the settlement of a disputed lease, (iii) $0.1 million of costs associated with the maintenance of non-operational facilities. During the thirteen weeks ended December 29, 2002, the Company realized $2.6 million due to the amortization of the deferred gain in conjunction with a sale-leaseback transaction. This gain was partially offset by $0.3 million of costs associated with the rationalization, consolidation and improvement of the Company's manufacturing facilities. (8) 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. 8 (9) 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 9 1/2% Senior Secured 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):

~~For~~Consolidated ~~the~~Balance ~~For~~Sheet ~~the~~December ~~For~~28, ~~the~~2003 ~~For~~--------------------------------------------------------- ~~the~~Sweetheart ~~Thirteen~~Sweetheart ~~Thirteen~~Sweetheart ~~Thirty~~Holdings Holdings Cup Holdings Elimination Consolidated -~~nine~~----------- ~~Thirty~~-~~nine~~----------- ~~weeks~~------------- ~~ended~~-------------- ~~weeks~~Assets ~~ended~~Current ~~weeks~~assets: ~~ended~~Cash ~~weeks~~and ~~ended~~cash ~~June~~equivalents 29$ 10,064 ~~June~~$ 30- $ - $ 10,064 ~~June~~Cash 29in escrow 96 - - 96 Receivables 199,546 ~~June~~- 30(50,511) ~~2003~~149,035 ~~2002~~Raw ~~2003~~materials ~~2002~~inventory 57,477 - - 57,477 Work in progress inventory 9,632 - - 9,632 Finished goods inventory 149,694 - - 149,694 Assets held for sale - 5,275 - 5,275 Other current assets 55,053 2,723 (2,723) 55,053 ----------- ----------- ------------ ------------- ~~Net~~Total current assets 481,562 7,998 (53,234) 436,326 Property, plant and equipment, net 240,151 - - 240,151 Deferred income taxes 33,272 (~~loss~~21,685) 9,736 as21,323 ~~reported~~Other $assets 896,~~928~~059 $111,712 (3111,~~523~~712) 96,059 ----------- ----------- ------------ ------------- Total assets $ 6851,~~921~~044 $ 98,025 $ (7155,~~130~~210) ~~Add~~$ ~~back~~793,859 =========== =========== ============ ============= Liabilities and Shareholder's Equity Current liabilities: ~~goodwill~~Accounts ~~amortization~~payable $ 101,000 ~~net~~$ - $ - $ 101,000 Other current liabilities 93,337 - (2,723) 90,614 Current portion of ~~tax~~long-term debt 16,649 - ~~302~~- 16,649 ----------- ~~906~~----------- ------------ ------------- Total current liabilities 210,986 - (2,723) 208,263 Long-term debt 399,630 50,511 (50,511) 399,630 Other liabilities 192,991 - (66,212) 126,779 ----------- ----------- ~~Net~~------------ ~~income~~------------- Total liabilities 803,607 50,511 (119,446) 734,672 ----------- ----------- ------------ ------------- Minority interest 2,442 - - 2,442 ----------- ----------- ------------ ------------- Shareholder's equity: Class A Common Stock - 10 - 10 Class B Common Stock - 44 - 44 Additional paid-in capital 123,717 78,095 (100,600) 101,212 Accumulated deficit (59,017) (30,635) 64,836 (24,816) Accumulated other comprehensive loss (19,705) - - (19,705) as----------- ~~adjusted~~----------- $------------ 8------------- Total shareholder's equity 44,~~928~~995 $47,514 (335,~~221~~764) 56,745 ----------- ----------- ------------ ------------- Total liabilities and shareholder's equity $ 6851,~~921~~044 $ 98,025 $ (6155,~~224~~210) $ 793,859 =========== =========== ============ =============

Consolidated Balance Sheet ~~June~~September 2928, 2003 --------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- -------------- Assets Current assets: Cash and cash equivalents $ 10,~~119~~447 $ - $ - $ 10,~~119~~447 Cash in escrow 7177 - - 7177 Receivables ~~201~~208,~~989~~229 - (4849,~~966~~738) ~~153~~158,~~023~~491 Raw materials inventory 6763,~~126~~048 - - 6763,~~126~~048 Work in progress inventory 10,~~364~~310 - - 10,~~364~~310 Finished goods inventory ~~157~~147,~~240~~075 - - ~~157~~147,~~240~~075 Assets held for sale - 5,275 - 5,275 Other current assets 5155,~~514~~872 2,~~653~~688 (2,~~653~~688) 5155,~~514~~872 ----------- ----------- ------------ ------------- Total current assets ~~498~~495,~~423~~058 7,~~928~~963 (5152,~~619~~426) ~~454~~450,~~732~~595 Property, plant and equipment, net ~~243~~240,~~672~~975 - - ~~243~~240,~~672~~975 Deferred income taxes 3933,~~909~~852 (21,~~443~~566) 9,~~737~~736 2822,~~203~~022 Other assets 9694,~~403~~654 ~~109~~110,~~634~~677 (~~109~~110,~~634~~677) 9694,~~403~~654 ----------- ----------- ------------ ------------- Total assets $ ~~878~~864,~~407~~539 $ 9697,~~119~~074 $ (~~151~~153,~~516~~367) $ ~~823~~808,~~010~~246 =========== =========== ============ ============= Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ ~~104~~121,~~761~~619 $ - $ - $ ~~104~~121,~~761~~619 Other current liabilities 9996,~~284~~835 - (2,~~653~~688) 9694,~~631~~147 Current portion of long-term debt 41116,~~439~~948 - - 41116,~~439~~948 ----------- ----------- ------------ ------------- Total current liabilities ~~245~~335,~~484~~402 - (2,~~653~~688) ~~242~~332,~~831~~714 Long-term debt ~~392~~286,~~166~~931 4849,~~966~~738 (4849,~~966~~738) ~~392~~286,~~166~~931 Other liabilities 197,~~865~~003 - (6465,~~133~~177) ~~133~~131,~~732~~826 ----------- ----------- ------------ ------------- Total liabilities ~~835~~819,~~515~~336 4849,~~966~~738 (~~115~~117,~~752~~603) ~~768~~751,~~729~~471 ----------- ----------- ------------ ------------- Minority interest ~~in subsidiary~~ 2,~~357~~403 - - 2,~~357~~403 ----------- ----------- ------------ ------------- Shareholder's equity: Class A Common Stock - 10 - 10 Class B Common Stock - 44 - 44 Additional paid-in capital 123,~~458~~717 78,~~096~~095 (100,600) ~~100~~101,~~954~~212 Accumulated deficit (6759,~~495~~555) (30,~~997~~813) 64,836 (3325,~~656~~532) Accumulated other comprehensive loss (1521,~~428~~362) - - (1521,~~428~~362) ----------- ----------- ------------ ------------- Total shareholder's equity 4042,~~535~~800 47,~~153~~336 (35,764) 5154,~~924~~372 ----------- ----------- ------------ ------------- Total liabilities and shareholder's equity $ ~~878~~864,~~407~~539 $ 9697,~~119~~074 $ (~~151~~153,~~516~~367) $ ~~823~~808,~~010~~246 =========== =========== ============ =============

Consolidated ~~Balance~~Statement ~~Sheet~~of ~~September~~Income 29For the Thirteen Weeks Ended December 28, ~~2002~~2003 --------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- -------------- ~~Assets~~Net ~~Current~~sales ~~assets: Cash and cash equivalents~~ $ 8321,~~035~~561 $ - $ - $ 8321,~~035~~561 ~~Cash~~Cost inof ~~escrow~~sales ~~- - - - Receivables 199~~279,~~512~~859 - ~~(46,971) 152,541 Raw materials inventory 57,305~~ - ~~- 57~~279,~~305~~859 ~~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~~Gross ~~current~~profit ~~assets 483~~41,~~551~~702 ~~7,826~~- ~~(49,522)~~- ~~441~~41,~~855~~702 ~~Property~~Selling, ~~plant~~general and ~~equipment,~~administrative ~~net~~expenses ~~252~~28,~~491~~981 - - ~~252~~28,~~491~~981 ~~Deferred~~Other income ~~taxes 41~~,~~070~~ net (201,~~927~~270) ~~9,736~~- ~~29,879~~- ~~Other assets 96,618 106,450~~ (~~106~~1,~~450~~270) ~~96,618~~ ----------- ----------- ------------ ------------- ~~Total~~Operating ~~assets~~income ~~$ 873~~13,~~730~~991 $- ~~93,349~~- ~~$ (146~~13,~~236)~~991 $Loss ~~820,843~~on ~~==========~~debt ~~=========~~extinguishment ~~=========== ========== Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ 102~~2,~~986~~354 $ - $ - ~~$ 102~~2,~~986~~354 ~~Other~~Interest ~~current~~expense ~~liabilities 94,763 -~~ (~~2,551~~income) 92,~~212~~ ~~Current~~net ~~portion of long-term debt 119~~10,~~853~~677 -(297) - ~~119~~10,~~853~~380 ----------- ----------- ------------ ------------- ~~Total~~Income ~~current~~before ~~liabilities~~income ~~317,602~~tax -and ~~(2,551)~~minority ~~315,051~~interest ~~Long-term~~960 ~~debt~~297 ~~317,448~~- 461,~~971~~257 ~~(46,971)~~Income ~~317,448~~tax ~~Other~~expense ~~liabilities~~383 ~~199,781~~119 - ~~(60,950)~~502 ~~138,831~~Minority interest in subsidiary 39 -~~---------~~ -~~--------~~ 39 ----------- ----------- ~~Total liabilities 834,831 46,971 (110,472) 771,330~~ ---------- --~~-------~~ ----------- --~~--------~~ ~~Minority~~Net ~~interest~~income in$ ~~subsidiary~~538 ~~2,276~~$ -178 -$ ~~2,276~~ -~~---------~~ ~~---------~~$ ~~-----------~~716 ~~----------~~=========== ~~Shareholder's~~=========== ~~equity:~~============ ~~Class~~============= AOther ~~Common~~comprehensive ~~Stock~~income: -Net 10income -$ 10538 ~~Class~~$ B178 ~~Common~~$ ~~Stock~~ - 44$ -716 44Foreign ~~Additional~~currency ~~paid-in~~translation ~~capital~~adjustment ~~123,678~~68 ~~78,095~~- ~~(100,600)~~- ~~101,173~~68 ~~Accumulated~~Minimum ~~deficit~~pension ~~(73,642)~~liability ~~(31,771)~~adjustment ~~64,836~~ (~~40,577)~~net ~~Accumulated~~of ~~other~~income ~~comprehensive~~tax ~~loss~~of ~~(13~~$1,~~413~~059) 1,589 - - ~~(13~~1,~~413)~~589 ---------- -~~--------~~ ----------- ---------- ~~Total shareholder's equity 36,623 46,378 (35,764) 47,237~~ --~~--------~~ --------- ----~~-------~~ ~~----------~~Comprehensive ~~Total~~income ~~liabilities and shareholder's equity~~ $ ~~873~~2,~~730~~195 $ ~~93,349~~178 $ ~~(146,236)~~- $ ~~820~~2,~~843~~373 =========== =========== ============ =============

Consolidated Statement of ~~Operations~~Income For the Thirteen Weeks Ended ~~June~~December 29, ~~2003~~2002 --------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- -------------- Net sales $ ~~345~~320,~~850~~345 $ - $ - $ ~~345~~320,~~850~~345 Cost of sales ~~294~~284,~~493~~477 - - ~~294~~284,~~493~~477 ----------- ----------- ------------ -------------- Gross profit 5135,~~357~~868 - - 5135,~~357~~868 Selling, general and administrative expenses 2826,~~092~~196 - - 2826,~~092~~196 Other income, net (2,~~446~~195) - - (2,~~446~~195) ----------- ----------- ------------ ------------- Operating income 2511,~~711~~867 - - 2511,~~711~~867 Interest expense (income), net 109,~~876~~829 (~~580~~365) - 109,~~296~~464 ~~Loss on debt extinguishment 475~~ - - ~~475~~ ---------- ----------- ------------ ------------- Income before income tax and minority interest 142,~~360~~038 ~~580~~365 - 142,~~940~~403 Income tax expense ~~5,744~~815 ~~233~~146 - ~~5,977~~961 Minority interest in subsidiary 3514 - - 3514 ----------- ----------- ------------ ------------- Net income $ 81,~~581~~209 $ ~~347~~219 $ - $ 81,~~928~~428 =========== =========== ============ ============= Other comprehensive income (loss): Net income $ 81,~~581~~209 $ ~~347~~219 $ - $ 81,~~928~~428 Foreign currency translation adjustment ~~1,397~~(167) - - ~~1,397~~(167) Minimum pension liability adjustment (net of income ~~taxes~~tax of $(~~867~~$1,558)) (12,~~301~~337) - - (12,~~301~~337) ----------- ----------- ------------ ------------- Comprehensive income (loss) $ 8(1,~~677~~295) $ ~~347~~219 $ - $ 9(1,~~024~~076) =========== =========== ============ =============

Consolidated Statement of ~~Operations~~Cash Flows For the Thirteen Weeks Ended ~~June~~December 3028, ~~2002~~2003 --------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------- ------------ ------------- -------------- ~~Net~~CASH ~~sales~~FLOWS $FROM ~~340,245~~OPERATING $ACTIVITIES -Net $cash -used $in ~~340,245~~operating ~~Cost~~activities of$ ~~sales 299~~(2,~~635~~589) $ - $ - ~~299~~$ (2,~~635~~589) ----------- ----------- ------------ ------------- ~~Gross~~CASH ~~profit~~FLOWS 40FROM INVESTING ACTIVITIES Additions to property,~~610~~ plant and equipment (4,907) - - 40(4,~~610~~907) ~~Selling~~Proceeds from sale of property, ~~general~~plant and ~~administrative~~equipment ~~expenses~~17 ~~28,081~~- 1- 17 ----------- ~~28,082~~----------- ~~Other~~------------ ~~expense,~~------------- ~~net~~Net 8cash used in investing activities (4,~~877~~890) - - 8(4,~~877~~890) ----------- ----------- ------------ ------------- ~~Operating~~CASH ~~income~~FLOWS FROM FINANCING ACTIVITIES Net repayments under revolving credit facilities (~~loss~~6,195) 3- - (6,~~652~~195) Repayment of 12.0% Senior Notes (193,825) - 3- (93,~~651~~825) ~~Interest~~Repayment ~~expense~~of other debt (~~income~~8,120) - - (8,120) ~~net~~Borrowings under the 9 1/2% Senior Secured Notes 100,~~482~~000 - - 100,000 Borrowings under the 9 1/2% Junior Subordinated Note 20,000 - - 20,000 Debt issuance costs (284,745) - 9- (4,~~454~~745) Increase in cash escrow (239) - - (239) Decrease in cash escrow 220 - - 220 ----------- ----------- ------------ ------------- ~~Income~~Net ~~(loss)~~cash ~~before~~provided ~~income~~by ~~tax~~financing ~~expense~~activities ~~(benefit)~~7,096 ~~and~~- ~~minority~~- ~~interest (5~~7,~~830)~~096 27----------- ----------- ~~(5,803)~~------------ ~~Income~~------------- ~~tax~~NET ~~(benefit)~~DECREASE ~~expense~~IN CASH AND CASH EQUIVALENTS (~~2,331~~383) 11- - (~~2,320~~383) ~~Minority~~CASH ~~interest~~AND inCASH ~~subsidiary~~EQUIVALENTS, 40beginning of period 10,447 - - 4010,447 ----------- ----------- ------------ ------------- ~~Net~~CASH ~~income~~AND ~~(loss)~~CASH EQUIVALENTS, end of period $ (310,~~539)~~064 $ 16- $ - $ (310,~~523)~~064 =========== =========== ============ ============= ~~Other~~SUPPLEMENTAL ~~comprehensive~~CASH ~~income~~FLOW ~~(loss)~~DISCLOSURES: ~~Net~~Interest ~~income~~paid ~~(loss)~~ $ (37,~~539)~~904 $ 16- $ - $ (37,~~523)~~904 ~~Foreign~~=========== ~~currency~~=========== ~~translation~~============ ~~adjustment~~============= ~~(196)~~Income ~~- - (196) Minimum pension liability adjustment(net of income~~ taxes ofreceived $~~(146))~~ (~~219~~18) -$ - ~~(219) ---------- --------- ----------- ---------- Comprehensive income (loss)~~ $ ~~(3,954) $ 16 $~~ - $ (~~3,938~~18) =========== =========== ============ =============

Consolidated Statement of ~~Operations~~Cash Flows For the ~~Thirty-nine~~Thirteen Weeks Ended ~~June~~December 29, ~~2003~~2002 --------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- -------------- ~~Net~~CASH ~~sales~~FLOWS $FROM ~~959,539~~OPERATING $ACTIVITIES -Net $cash -provided $by ~~959,539~~operating ~~Cost~~activities of$ ~~sales 841~~12,~~586~~427 $ - $ - ~~841~~$ 12,~~586~~427 ----------- ----------- ------------ ------------- ~~Gross~~CASH ~~profit~~FLOWS ~~117,953~~FROM -INVESTING -ACTIVITIES ~~117,953~~Additions ~~Selling~~to property, ~~general~~plant and ~~administrative~~equipment ~~expenses 82~~(2,~~289~~492) - - 82(2,~~289~~492) ~~Other~~----------- ~~income,~~----------- ~~net~~------------ ------------- Net cash used in investing activities (52,~~676~~492) - - (52,~~676~~492) ----------- ----------- ------------ ------------- ~~Operating~~CASH ~~income~~FLOWS 41FROM FINANCING ACTIVITIES Net repayments under revolving credit facilities (5,~~340~~965) - - 41(5,~~340~~965) ~~Interest~~Repayment ~~expense,~~of ~~net~~other ~~30,484~~debt (12,~~291~~026) - 29- (2,~~193~~026) ~~Loss~~Debt onissuance ~~debt~~costs ~~extinguishment~~(277) ~~475~~- - ~~475~~(277) Increase in cash escrow (94) - - (94) Decrease in cash escrow 87 - - 87 ----------- ----------- ------------ ------------- ~~Income~~Net ~~before~~cash ~~income~~used ~~tax~~in ~~and~~financing ~~minority~~activities ~~interest 10~~(8,~~381~~275) ~~1,291~~ - ~~11,672 Income tax expense 4,153 517~~ - 4(8,~~670~~275) ~~Minority interest in subsidiary 81~~ - - 81 ---------- ----------- ------------ ------------- ~~Net~~NET ~~income~~INCREASE IN CASH AND CASH EQUIVALENTS 1,660 - - 1,660 CASH AND CASH EQUIVALENTS, beginning of period 8,035 - - 8,035 CASH AND CASH EQUIVALENTS, end of period $ 69,~~147~~695 $ ~~774~~- $ - $ 69,~~921~~695 =========== =========== ============ ============= ~~Other~~SUPPLEMENTAL ~~comprehensive~~CASH ~~income~~FLOW DISCLOSURES: ~~Net~~Interest ~~income~~paid $ 63,~~147~~367 $ ~~774~~- $ - $ 63,~~921~~367 ~~Foreign~~=========== ~~currency~~=========== ~~translation~~============ ~~adjustment~~============= ~~889~~Income ~~- - 889 Minimum pension liability adjustment (net of income~~ taxes ofpaid $~~(1,936))~~ ~~(2,904)~~13 -$ - ~~(2,904) ---------- --------- ----------- ---------- Comprehensive income~~ $ ~~4,132 $ 774 $~~ - $ ~~4,906~~13 =========== =========== ============ =============

(10) SUBSEQUENT EVENT On January 15, 2004, the agreement for the sale of the Company's Somerville, Massachusetts facility was amended to, among other things, adjust the purchase price to $9.5 million. The closing of this sale occurred on February 3, 2004. 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 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(TM), Basix(R), Guildware(R), Simple Elegance(R), Sensations(R), Hoffmaster(R), Paper Art(R), and Touch of Color(R) brands. 14 The Company's product offerings cover a broad range within the industry, including (i) paper, plastic and foam foodservice products, primarily cups, lids, plates, bowls, plastic cutlery, food trays and food containers; (ii) tissue and specialty foodservice products, primarily napkins, table covers, placemats and lunch bags; and (iii) food packaging products, primarily containers for the dairy and food processing industries. To enhance product sales, the Company designs, manufactures and leases container filling and lidding equipment to dairies and other food processors to package food items in the Company's containers at customers' plants. Types of products packaged in the Company's machines include: ice cream, factory-filled jacketed ice cream cones, cottage cheese, yogurt, sour cream 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 maintains 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 restaurant chains and catering companies, 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 dairies 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 reserves 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. 15 Inventory reserves - The Company establishes reserves for its inventory to reflect those conditions when the cost of the inventory is not expected to be recovered. The Company reviews such circumstances when products are not expected to be saleable based on standards established by the Company's quality assurance standards. The reserve for these products is equal to all or a portion of the cost of the inventory based on the specific facts and circumstances. The Company monitors 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. The carrying value of goodwill is subject to an impairment test on an annual basis or when facts and circumstances suggest that it may be impaired. 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 income statement. 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, determines that a loss related to a matter is both probable and reasonably estimable. Selling, general and administrative expenses - Selling, general and administrative expenses consist primarily of salaries, benefits, promotional and advertising costs, rent, depreciation of equipment and broker fees. Recent Developments On January 15, 2004, the agreement for the sale of the Company's Somerville, Massachusetts facility was amended to, among other things, adjust the purchase price to $9.5 million. The closing of this sale occurred on February 3, 2004. On December 22, 2003, SF Holdings Group, Inc., the parent company of the Company, executed a definitive agreement for its acquisition by Solo Cup Company of Highland Park, Illinois ("Solo"). The consummation of the transaction is subject to customary conditions and regulatory approvals, including, but not limited to, Solo's receipt of financing. In connection with the transaction, all of the outstanding indebteness of the Company will be repurchased or redeemed. On December 8, 2003 and December 16, 2003, Sweetheart Cup consummated in aggregate a $120 million debt refinancing, comprised of the issuance of a $20 million 9 1/2% junior subordinated note due 2008 to International Paper Company (the "9 1/2% Junior Subordinated Note") and $100 million of 9 1/2% Senior Secured Notes due 2007 to institutional investors (the "9 1/2% Senior Secured Notes") , respectively. The proceeds from these offerings were used to repay a portion of the senior credit facility with Bank of America, N.A. (the "Senior Credit Facility"), and the balance has been used to redeem all of the outstanding $93.8 million of 12.0% Senior Notes due July 15, 2004 (the "12.0% Senior Notes") and to pay related fees and expenses, and for general corporate purposes. On December 16, 2003, the 12.0% Senior Notes were redeemed. During the thirteen weeks ended December 28, 2003, the Company recorded a $2.4 million loss on debt extinguishment which consisted of the write-off of unamortized deferred financing incurred costs in connection with the early redemption of the 12.0% Senior Notes. 16 Sweetheart Cup is the obligor with respect to the 9 1/2% Junior Subordinated Note. Interest on the 9 1/2% Junior Subordinated Note is payable semi-annually on November 15 and May 15 of each year, commencing on May 15, 2004. Sweetheart Cup may defer interest due on any interest payment date and such deferred interest shall become part of the principal amount due under such note; provided, however, that Sweetheart Cup may not defer such interest occurring on or after November 15, 2004 if payment in cash on such interest payment date is not prohibited under any of Sweetheart Cup's existing indebtedness and the payment to be made pursuant to a certain warrant agreement with New Cup, LLC has bee paid in cash. Sweetheart Cup may redeem all or any of the 9 1/2% Junior Subordinated Note, in whole or in part, at any time on or after December 8, 2003, upon notice of at least 10 days but not more than 20 days before a redemption date, at a redemption price of 100% of principal amount plus accrued and unpaid interest. The 9 1/2% Junior Subordinated Note is 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. The 9 1/2% Junior Subordinated Note contains various covenants which prohibit, or limit, among other things, change of control, asset sales, dividend payments, equity repurchases or redemption, the incurrence of additional indebtedness, make any restrictive investments, the issuance of disqualified stock, the creation of additional liens, certain transactions with affiliates, and certain other business activities. Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor with respect to the 9 1/2% Senior Secured Notes. Interest on the 9 1/2% Senior Secured Notes is payable quarterly on January 15, April 15, July 15, and October 15, commencing on April 15, 2004. Sweetheart Cup may redeem, at any time, all or a part of the 9 1/2% Senior Secured Notes upon notice not less than 30 days not more than 60 days prior to the redemption date, at a redemption price of 102% of principal amount plus accrued and unpaid interest on the 9 1/2% Senior Secured Notes redeemed to the applicable redemption date, declining to 100% six months prior to the maturity of the notes. The 9 1/2% Senior Secured Notes are senior secured obligations of Sweetheart Cup and rank equally with its existing and future senior debt, and senior to its existing and future subordinated debt. The 9 1/2% Senior Secured Notes and related guarantees are secured by a first priority lien on certain of Sweetheart Cup's property, plant and equipment, subject to certain permitted liens, located in Appleton Wisconsin, Augusta, Georgia, Glens Falls, New York, Goshen, Indiana, Oshkosh, Wisconsin, St. Albans, Vermont, El Cajon, California, Indianapolis, Indiana, Lakeland, Florida, and Williamsburg, Pennsylvania. The 9 1/2% Senior Secured Notes contain various covenants which prohibit, or limit, among other things, change of control, asset sales, dividend payments, equity repurchases or redemption, the incurrence of additional indebtedness, make any restrictive investments, the issuance of disqualified stock, the creation of additional liens, certain transactions with affiliates, and certain other business activities. The Senior Credit Facility was amended on December 16, 2003, to, among other things, change the maturity date to August 1, 2006 and permanently reduce the maximum revolving credit borrowings to $205.0 million. Thirteen Weeks Ended December 28, 2003 Compared to Thirteen Weeks Ended December 29, 2002 Net sales increased $1.2 million, or 0.4%, to $321.5 million for the thirteen weeks ended December 28, 2003 compared to $320.3 million for the thirteen weeks ended December 29, 2002, reflecting a 3.5% increase in average realized sales prices and a 3.1% decrease in sales volume. In Fiscal 2003, the Company announced several price increases to food service customers which have resulted in higher average sales prices during the thirteen weeks ended December 28, 2003. As a direct consequence of the implementation of such price increases, the Company has experience a slight decrease in sales volume. Gross profit increased $5.8 million, or 16.2%, to $41.7 million for the thirteen weeks ended December 28, 2003 compared to $35.9 million for the thirteen weeks ended December 29, 2002. As a percentage of net sales, gross profit increased to 13.0% for the thirteen weeks ended December 28, 2003 from 11.2% for the thirteen weeks ended December 29, 2002. Gross profit increased as a result of an increase in average realized sales prices and lower raw material costs. Selling, general and administrative expenses increased $2.8 million, or 10.7%, to $29.0 million for the thirteen weeks ended December 28, 2003 compared to $26.2 million for the thirteen weeks ended December 29, 2002. This increase resulted primarily from (i) a $1.5 million increase in salaries, fringe benefits and other administrative costs, (ii) a $0.5 million increase in legal expenses and (iii) a $0.7 million increase in selling, broker, and promotional costs. These increases were partially offset by a $0.4 million decrease in depreciation expense. 17 Other income, net decreased $0.9 million, or 40.9%, to $1.3 million for the thirteen weeks ended December 28, 2003 compared to $2.2 million for the thirteen weeks ended December 29, 2002. During the thirteen weeks ended December 28, 2003, the Company realized $2.5 million due to the amortization of the deferred gain in conjunction with a sale-leaseback transaction. In addition, the Company realized $0.1 million from foreign currency transactions gains. These gains were partially offset by (i) $0.8 million of costs associated with the Company's evaluation of strategic options, including, among other things, the sale of assets or the business, (ii) $0.4 million of costs associated with the settlement of a disputed lease and (iii) $0.1 million of costs associated with the maintenance of non-operational facilities. During the thirteen weeks ended December 29, 2002, the Company realized $2.6 million due to the amortization of the deferred gain in conjunction with a sale-leaseback transaction. This gain was partially offset by $0.3 million of costs associated with the rationalization, consolidation and improvement of the Company's manufacturing facilities. Operating income increased $2.1 million, or 17.6%, to $14.0 million for the thirteen weeks ended December 28, 2003 compared to income of to $11.9 million for the thirteen weeks ended December 29, 2002, due to the reasons stated above. Loss on debt extinguishment was $2.4 million for the thirteen weeks ended December 28, 2003 due to the write-off of unamortized deferred financing fees associated with the redemption of the 12.0% Senior Notes. Interest expense, net increased $0.9 million, or 9.5%, to $10.4 million for the thirteen weeks ended December 28, 2003 compared to $9.5 million for the thirteen weeks ended December 29, 2002. This increase is primarily attributed to increased amortization expense associated with the amortization of debt issuance costs. Income tax expense decreased $0.5 million, or 50.0%, to $0.5 million for the thirteen weeks ended December 28, 2003 compared to $1.0 million for the thirteen weeks ended December 29, 2002 as a result of a lower pre-tax income. The effective rates for the thirteen weeks ended December 28, 2003 and December 29, 2002 were 40%. Minority interest in subsidiary increased $25,000, to $39,000 for the thirteen weeks ended December 28, 2003 compared to $14,000 for the thirteen weeks ended December 29, 2002. This amount represents the Company's 20% ownership of Global Cup, S.A. De C.V. 's income. Net income decreased $0.7 million, or 50.0%, to $0.7 million for the thirteen weeks ended December 28, 2003 compared to $1.4 million for the thirteen weeks ended December 29, 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 finance its working capital requirements and capital expenditures. During the thirteen weeks ended December 28, 2003, the Company funded its capital expenditures primarily from borrowings under its revolving credit facility. The Company expects to fund its capital expenditures for the remainder of Fiscal 2004 from a combination of cash generated from operations, funds generated from asset sales and revolving credit borrowings. Net cash used in operating activities during the thirteen weeks ended December 28, 2003 was $2.6 million compared to net cash provided by operating activities of $12.4 million during the thirteen weeks ended December 29, 2002. This decrease primarily resulted from inventories remaining relatively constant during the thirteen weeks ended December 28, 2003 as compared to a significant decrease in inventories during the thirteen weeks ended December 29, 2002. Net cash used in investing activities during the thirteen weeks ended December 28, 2003 was $4.9 million compared to $2.5 million during the thirteen weeks ended December 29, 2002. This increase is primarily due to increased capital expenditures during the thirteen weeks ended December 28, 2003. Net cash provided by financing activities during the thirteen weeks ended December 28, 2003 was $7.1 million compared to net cash used in financing activities of $8.3 million during the thirteen weeks ended December 29, 2002. This increase resulted primarily from net proceeds received from the issuance of the 9 1/2% Senior 18 Secured Notes and the 9 1/2% Junior Subordinated Note which was partially offset by the repayment of the 12.0% Senior Notes and a portion of the Senior Credit Facility and higher debt issuance costs. Working capital increased $110.2 million to $228.1 million at December 28, 2003 from $117.9 million at September 28, 2003. This increase resulted from current liabilities decreasing $124.5 million which was offset by current assets decreasing $14.3 million. The decrease in current liabilities resulted primarily from a decrease in accounts payable and a decrease in the current portion of long-term debt due to the refinancing of the 12.0% Senior Notes. Capital expenditures during the thirteen weeks ended December 28, 2003 were $4.9 million compared to $2.5 million during the thirteen weeks ended December 29, 2002. Capital expenditures during the thirteen weeks ended December 28, 2003 included $3.3 million for new production equipment and $1.6 million for primarily routine capital improvements. Funding during the thirteen weeks ended December 28, 2003 for capital expenditures was primarily provided by cash from revolving credit borrowings. For the remainder of Fiscal 2004, the Company intends to rely on cash provided by operations, the sale of assets and revolving credit borrowings for its capital expenditures. Sweetheart Cup is the obligor with respect to the 9 1/2% Junior Subordinated Note. Interest on the 9 1/2% Junior Subordinated Note is payable semi-annually on November 15 and May 15 of each year, commencing on May 15, 2004. Sweetheart Cup may defer interest due on any interest payment date and such deferred interest shall become part of the principal amount due under such note; provided, however, that Sweetheart Cup may not defer such interest occurring on or after November 15, 2004 if payment in cash on such interest payment date is not prohibited under any of Sweetheart Cup's existing indebtedness and the payment to be made pursuant to a certain warrant agreement with New Cup, LLC has bee paid in cash. Sweetheart Cup may redeem all or any of the 9 1/2% Junior Subordinated Note, in whole or in part, at any time on or after December 8, 2003, upon notice of at least 10 days but not more than 20 days before a redemption date, at a redemption price of 100% of principal amount plus accrued and unpaid interest. The 9 1/2% Junior Subordinated Note is 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. The 9 1/2% Junior Subordinated Note contains various covenants which prohibit, or limit, among other things, change of control, asset sales, dividend payments, equity repurchases or redemption, the incurrence of additional indebtedness, make any restrictive investments, the issuance of disqualified stock, the creation of additional liens, certain transactions with affiliates, and certain other business activities. Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor with respect to the 9 1/2% Senior Secured Notes. Interest on the 9 1/2% Senior Secured Notes is payable quarterly on January 15, April 15, July 15, and October 15, commencing on April 15, 2004. Sweetheart Cup may redeem, at any time, all or a part of the 9 1/2% Senior Secured Notes upon notice not less than 30 days not more than 60 days prior to the redemption date, at a redemption price of 102% of principal amount plus accrued and unpaid interest on the 9 1/2% Senior Secured Notes redeemed to the applicable redemption date, declining to 100% six months prior to the maturity of the notes. The 9 1/2% Senior Secured Notes are senior secured obligations of Sweetheart Cup and will rank equally with its existing and future senior debt, and senior to its existing and future subordinated debt. The 9 1/2% Senior Secured Notes and related guarantees are secured by a first priority lien on certain of Sweetheart Cup's property, plant and equipment, subject to certain permitted liens, located in Appleton Wisconsin, Augusta, Georgia, Glens Falls, New York, Goshen, Indiana, Oshkosh, Wisconsin, St. Albans, Vermont, El Cajon, California, Indianapolis, Indiana, Lakeland, Florida, and Williamsburg, Pennsylvania. The 9 1/2% Senior Secured Notes contain various covenants which prohibit, or limit, among other things, change of control, asset sales, dividend payments, equity repurchases or redemption, the incurrence of additional indebtedness, make any restrictive investments, the issuance of disqualified stock, the creation of additional liens, certain transactions with affiliates, and certain other business activities. 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 19 employment rates at the Company's Owings Mills, Maryland facility. The Maryland Loan is payable in quarterly installments through March 1, 2007. The Senior Credit Facility was amended on December 16, 2003 to, among other things, change the maturity date to August 1, 2006 and permanently reduce the maximum revolving credit borrowings to $205.0 million. 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%. During the thirteen weeks ended December 28, 2003, the weighted average annual interest rate for the Senior Credit Facility was 3.64%. The indebtness of Sweetheart Cup under the Senior Credit Facility is guaranteed by Sweetheart Holdings and secured by a first priority perfect security interest in accounts receivable, inventory, general intangibles and certain other assets. The fee for outstanding letters of credit is 2.00% per annum and there is a commitment fee of 0.375% per annum on the daily average unused amount of the commitments. As of December 28, 2003, $46.7 million was available under the Senior Credit Facility. As of December 28, 2003, LIBOR was 1.12% 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 $23.0 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. During the thirteen weeks ended December 28, 2003, the weighted average annual interest rate for the Canadian Credit Facility was 4.85%. As of December 28, 2003, Cdn $1.0 million (approximately US $0.8 million) was available under the revolving facility and the term loan balance was Cdn $9.6 million (approximately US $7.4 million) under the Canadian Credit Facility. In Fiscal 1997, the Company issued $120.0 million 9 1/2% Senior Subordinated Notes due March 1, 2007 with interest payable semi-annually (the "9 1/2% Senior Subordinated Notes"). Payment of the principal and interest is subordinate in right to payment of all of the Company's senior debt, including borrowings under the Senior Credit Facility. the Company may, at its election, redeem the 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 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 9 1/2% Senior Subordinated Notes are subordinated in right of payment to the prior payment in full of all of the Company's senior debt, including borrowings under the Senior Credit Facility. In addition, the obligations under the June 1, 2000 lease between the Company and State Street are secured by a significant portion of the Company's existing property, plant and equipment. The 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 a sale-leaseback transaction, on June 15, 2000, the Company sold certain production equipment located in Owings Mills, Maryland, Chicago, Illinois and Dallas, Texas to several owner participants for a fair market value of $212.3 million. Pursuant to a lease dated as of June 1, 2000 (the "Lease") between Sweetheart Cup and State Street, as trustee, Sweetheart Cup leases the production equipment sold in connection with the sales lease-back transaction from State Street as owner trustee for several owner participants, through November 9, 2010. Sweetheart Cup has the option to renew the Lease for up to four consecutive renewal terms of 20 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 December 28, 2003, and the effect such obligations are expected to have on its liquidity and cash flows in future periods (in 000's):

~~Consolidated~~Payments ~~Statement~~Due ofin ~~Operations~~Fiscal ~~For the Thirty~~-~~nine Weeks Ended June 30, 2002~~ --------------------------------------------------------- ~~Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated~~ ------------ ------------ -- Total 2004 2005 2006 2007 2008 2009 Thereafter ----------- -------- ------ ~~Net sales $ 957,491 $ 116,485 $ (116,485) $ 957,491 Cost of sales 858,722 106,760 (117,710) 847,772~~ --- -------- --------- -------- -------- ---------- ~~Gross~~Non-cancelable ~~profit~~operating ~~98,769~~leases ~~9,725~~$ 1437,~~225~~672 ~~109,719~~$ ~~Selling~~43,274 ~~general~~$ ~~and~~52,979 ~~administrative~~$ ~~expenses 85~~49,~~073~~975 ~~932~~$ ~~- 86~~47,~~005~~677 ~~Other~~$ ~~expense~~46,170 ~~net~~$ 445,~~098~~198 -$ 1152,~~225~~399 ~~5,323~~ Long-~~---------~~term ~~---------~~debt ~~----------- ---------- Operating income 9~~416,~~598~~089 816,~~793~~426 ~~- 18~~124,~~391~~611 ~~Interest~~612 ~~expense~~253,240 ~~net 25~~20,~~835~~200 ~~2,399~~200 -800 ~~28,234~~Capital ~~Loss~~leases on190 ~~debt~~93 ~~extinguishment~~97 ~~1,798~~- - - ~~1,798~~- - --------- --------- ----------- ---------- ~~Income (loss) before income tax expense (benefit) and minority interest (18,035) 6,394~~ - ~~(11,641) Income tax (benefit) expense (7,182) 2,558~~ - ~~(4,624) Minority interest in subsidiary 113~~ - - ~~113~~ -----~~-----~~ --------- --------~~---~~ ---------- ~~Net~~Total ~~income~~obligations ~~(loss)~~$ 853,951 $ ~~(10~~59,~~966)~~793 $ 3177,~~836~~687 $ -50,587 $ (7300,~~130)~~917 $ 66,370 $ 45,398 $ 153,199 ========== ========= =========== ========== Other comprehensive income (loss): Net income (loss) $ (10,966) $ 3,836 $ - $ (7,130) Foreign currency translation adjustment (176) - - (176) Minimum pension liability adjustment (net of income taxes of $(894)) (1,341) - - (1,341) ---------- --------- ----------- ---------- Comprehensive income (loss) $ (12,483) $ 3,836 $ - $ (8,647) ========== ========= ========~~===~~ ==========

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 the Company believes to be adequate and believes that the Company 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 and amounts available under the Company's credit facilities and funds generated from asset sales should be sufficient to meet the Company's expected operating needs, planned capital expenditures, payments in conjunction with the Company's lease commitments and debt service requirements in the next twelve months. Net Operating Loss Carryforwards As of September 28, 2003, the Company had approximately $43 million of net operating loss carryforwards for federal income tax purposes of which $20 million will expire in 2018 and the remaining $23 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 December 28, 2003, the outstanding indebtedness under the Senior Credit Facility was $152.7 million and Canadian Credit Facility was $15.9 million in U.S. dollars. As of December 28, 2003, $46.7 million was available under the Senior Credit Facility and Cdn $1.0 million (approximately US $0.8 million) was available under the Canadian Credit Facility. Based upon these amounts, the annual net income would change by approximately $1.0 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. 21 Item 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures: The Company carried out an evaluation, under the supervision and the participation of its management, of the effectiveness of its disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end the period covered by this report. Based on this evaluation, the Company's chief executive officer and chief financial officer have concluded that its disclosure controls and procedures were effective at the end of the period covered by this report. (b) Change in internal control over financial reporting: There were no significant changes in the Company's internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer (b) Reports on Form 8-K: A report on Form 8-K was filed on December 5, 2003 under Item 5 and Item 12. A report on Form 8-K was filed on December 24, 2003 under Item 5. A report on Form 8-K was filed on February 6, 2004 under Item 5 and Item 12. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, its duly authorized officer and principal financial officer. SWEETHEART HOLDINGS INC. (registrant) Date: February 10, 2004 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) 23 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 quarter 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: February 10, 2004 SWEETHEART HOLDINGS INC. ----------------- (Registrant) By: /s/ DENNIS MEHIEL ------------------ Dennis Mehiel Chairman and Chief Executive Officer 24 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 quarter 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: February 10, 2004 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) 25

Consolidated Statement of Cash Flows For the Thirty-nine Weeks Ended June 29, 2003 --------------------------------------------------------- Sweetheart Sweetheart Sweetheart Holdings Holdings Cup Holdings Elimination Consolidated ------------ ------------ ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities $ 23,200 $ - $ - $ 23,200 ---------- --------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (9,300) - - (9,300) Due from / to SF Holdings 250 - - 250 Proceeds from sale of investment 329 - - 329 Proceeds from sale of property, plant and equipment 35 - - 35 ---------- --------- ----------- ---------- Net cash used in investing activities (8,686) - - (8,686) ---------- --------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net repayments under credit facilities (85) - - (85) Repayments of other debt (6,079) - - (6,079) Debt issuance costs (6,195) - - (6,195) Increase in cash escrow (379) - - (379) Decrease in cash escrow 308 - - 308 ---------- --------- ----------- ---------- Net cash used in financing activities (12,430) - - (12,430) ---------- --------- ----------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 2,084 - - 2,084 CASH AND CASH EQUIVALENTS, beginning of period 8,035 - - 8,035 ---------- --------- ----------- ---------- CASH AND CASH EQUIVALENTS, end of period $ 10,119 $ - $ - $ 10,119 ========== ========= =========== ========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 18,702 $ - $ - $ 18,702 ========== ========= =========== ========== Income taxes received $ (2,692) $ - $ - $ (2,692) ========== ========= =========== ==========

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

Payments Due In Fiscal ---------------------------------------------------------------- 2004 2005 2006 2007 2008 Thereafter ---------- -------- -------- --------- -------- ----------- Long-term debt $ 114,760 $ 4,397 $ 612 $ 290,115 $ 200 $ 1,000 Non-cancelable operating leases 54,042 51,640 48,843 46,984 53,436 189,737 Capital leases 124 97 - - - - --------- -------- -------- --------- -------- ---------- Total obligations $ 168,926 $ 56,134 $ 49,455 $ 337,099 $ 53,636 $ 190,737 ========= ======== ======== ========= ======== ==========

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