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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
                [X]Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                  For the fiscal year ended September 27, 1998
           [ ]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                         (I.R.S. Employer
    incorporation or organization)                        Identification No.)

 10100 Reisterstown Road, Owings Mills, Maryland                        21117
     (Address of principal executive office)                          (Zip Code)

        Registrant's telephone number, including area code: 410/363-1111

 Securities of the Registrant registered pursuant to
                            Section 12(b) of the Act:            None

 Securities of the Registrant registered pursuant to
                            Section 12(g) of the Act:            None


         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   [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the  registrant's  knowledge,  in  definitive  proxy or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [X]

         The aggregate  market value of the voting stock of the Registrant  held
by  non-affiliates  of the Registrant as of December 18, 1998:  Not  Applicable.
There is no market for the Common Stock of the Registrant.

         The number of shares outstanding of the Registrant's common stock as of
December 18, 1998:

          Sweetheart  Holdings  Inc.  Class A Common  Stock,  $0.01  par value -
          1,046,000 shares
          Sweetheart  Holdings  Inc.  Class B Common  Stock,  $0.01  par value -
          4,393,200 shares

* The  Registrant is the  guarantor of the 9 5/8% Senior  Secured Notes due 2000
and the 10 1/2% Senior Subordinated Notes due 2003  (collectively,  the "Notes")
of Sweetheart Cup Company Inc., a wholly owned subsidiary of the Registrant.

                                                                    Page 1 of 58


<PAGE>

                                     PART I

Item 1.    BUSINESS

General

         Sweetheart  Holdings Inc.  ("Sweetheart  Holdings"),  together with its
wholly owned  subsidiary  Sweetheart  Cup Company Inc.  ("Sweetheart  Cup",  and
collectively  with  Sweetheart   Holdings  and  its  other   subsidiaries,   the
"Company"),  is one of the largest  producers  of plastic  and paper  disposable
foodservice and food packaging  products in North America.  In Fiscal Year 1998,
the Company had net sales of approximately $844 million. The Company's principal
products  include  cups for both hot and cold  drinks,  lids,  food  containers,
bowls, plates, straws, cutlery and containers for the food and dairy industries.
The brand names for the  Company's  principal  products  include  Sweetheart(R),
Lily(R),  Trophy(R),  Jazz(R) and  Preference(TM) for cups and plates and Silent
Service(R),  Centerpiece(R),  Guildware(R),  and  Simple  Elegance(R)  for  foam
dinnerware and plastic cutlery. In addition,  the Company designs,  manufactures
and  leases  container  filling  equipment  for use by  dairies  and other  food
processors.  This equipment is specifically  designed by the Company to fill and
seal the Company's containers in customers' plants.

         On August 30, 1993, a group of investors  (the  "Investors")  including
American  Industrial  Partners Capital Fund, L.P.  ("AIP")  acquired  Sweetheart
Holdings (the  "Acquisition").  The  Company's  business is the successor to the
businesses  of  Maryland  Cup  Corporation,  which was founded in 1911 and was a
major supplier of paper and plastic  disposable  foodservice  and food packaging
products, and Lily-Tulip, Inc., which had been acquired and merged by Fort James
Corporation  (formerly Fort Howard  Corporation)  ("Fort  James").  On March 12,
1998, the then existing  shareholders (the "Original  Shareholders") sold 48% of
their voting stock and 100% of their  non-voting  stock, or 90% of the Company's
total  outstanding  stock,  to SF  Holdings  Group,  Inc.  ("SF  Holdings").  In
conjunction with this transaction (the "SF Holdings  Investment"),  AIP assigned
the Management Services Agreement, as amended, to SF Holdings which assigned its
interest to The Fonda Group,  Inc.  ("Fonda"),  a wholly owned  subsidiary of SF
Holdings. See "Certain  Relationships and Related  Transactions".  The Company's
Canadian operations are conducted through Lily Cups, Inc. ("Lily Canada").

On October 22, 1998, the Company's  Board of Directors  approved a change in the
Company's  fiscal year from  September 30 to the 52 or 53 week period  ending on
the last  Sunday in  September.  This  change is  effective  for the Fiscal Year
ending in September 1998. Therefore, the fiscal 1998 period from October 1, 1997
through September 27, 1998 is herinafter  defined as "Fiscal Year 1998".  Fiscal
years 1997, 1996, 1995, 1994 and prior are shown as the historical  periods from
October  1  through  September  30 of  the  respective  fiscal  years,  and  are
herinafter defined as "Fiscal Year 1997, "Fiscal Year 1996", "Fiscal Year 1995",
and "Fiscal Year 1994", respectively.


Products

         The  Company  sells its  products  to two  principal  customer  groups:
foodservice  and  food  packaging.   Foodservice  customers  primarily  purchase
disposable hot and cold drink cups,  lids, food  containers,  plates,  bowls and
cutlery.  Products  are sold  directly  and  through  distributors  to fast food
chains, full service restaurants,  hospitals, airlines, theaters, school systems
and other institutional  customers.  Food packaging customers primarily purchase
paper and plastic containers for the dairy and food processing industries.  Food
packaging  customers  also lease  filling and  packaging  machines  designed and
manufactured  by the  Company  that fill and seal the  Company's  containers  in
customers' plants. Through Lily Canada, the Company manufactures and markets its
products in Canada to national accounts and distributors.


                                       2

<PAGE>

         Foodservice.  The  Company's  foodservice  business  consists  of three
categories: beverage service, tabletop service and carryout service. Foodservice
is the Company's  largest customer group,  accounting for  approximately  82% of
gross sales  during  Fiscal Year 1998.  Management  believes  the Company is the
largest manufacturer of disposable foodservice products in North America.

         Beverage  service  products,  which  consist of paper and plastic cups,
lids and straws,  represent  the largest  part of the  Company's  United  States
operations.  The largest single product type within this category is cups, which
are offered in various sizes  (ranging from 3 to 64 ounces) and for both hot and
cold beverages. Brand names of the Company's principal beverage service products
include Sweetheart(R), Lily(R), Trophy(R), Preference(TM),  Jazz(R), Gallery(R),
Clarity(R) and Lumina(R).

         Tabletop  service  products  include paper and plastic  plates,  bowls,
portion cups and cutlery.  These  products are sold  primarily to fast-food  and
mid-scale  restaurants,  health care institutions,  airlines and educational and
institutional  foodservices.  The Company's tabletop products include its Silent
Service(R), Centerpiece(R), Basix(R), Guildware(R) and Simple Elegance(R) brands
of foam dinnerware and plastic cutlery.

         The Company's  carry-out  service products consist of paper and plastic
tubs, containers, lids and hinged plastic containers. The Company believes it is
one of the largest manufacturers of paper tubs for chicken, popcorn and take-out
foods in North America.

         Foodservice   customers  include  large  national  accounts,   such  as
fast-food chains and catering services,  which represented  approximately 49% of
foodservice sales in Fiscal Year 1998. Other customers include distributors, who
sell to other  end-users,  such as independent  restaurants,  school systems and
hospitals.   The  Company's  national  accounts  include  ARAMARK   Corporation,
McDonald's,  and Wendy's  International Inc., and its major distributor accounts
include Alliant, Bunzl and SYSCO Corporation.

         Food Packaging.  The Company's food packaging  customers purchase paper
and plastic containers and lids for ice cream, frozen novelty products, cultured
foods (including sour cream,  yogurt,  cottage cheese and snack dip) and plastic
containers for single-serving chilled juice products. Other products include the
Company's  Flex-E-Form(R)   straight-wall  paper  manufacturing  technology  and
Flex-Guard(R),  a spiral  wound  tamper-evident  lid.  Sales  to food  packaging
customers  accounted for  approximately  11% of the Company's gross sales during
Fiscal Year 1998. Management believes the Company is the second largest supplier
(in terms of sales) of containers for frozen dessert and cultured dairy products
in the food packaging industry in North America.

         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 their plants.  The Company's
filling  and  lidding  equipment  is leased to  customers  under the trade names
Auto-Pak(TM),  Flex-E-Fill(R) and FoodPac(R).  This equipment is manufactured in
the Company's machine shop and assembly plant located in Owings Mills, Maryland.
Types  of  products  packaged  in the  Company's  machines  include  ice  cream,
factory-filled  jacketed ice cream cones, cottage cheese, yogurt, and squeeze-up
desserts.

         Food packaging customers include national and regional dairies and food
companies,  including Ben & Jerry's Homemade, Inc., Blue Bell Creameries,  L.P.,
The Kroger Co., and Prairie Farms Diary, Inc.

         Canadian  Operations.  The  Company  operates  in Canada  through  Lily
Canada,  which  has been  manufacturing  and  marketing  foodservice  disposable
products since 1947. Lily Canada is one of the largest  providers of foodservice
disposable  products in the Canadian  market,  primarily as a consequence of its
large  portfolio  of national  account  customers.  Sales by Lily Canada  during
Fiscal Year 1998 constituted approximately 7% of the Company's gross sales.


Marketing and Sales

         The Company  focuses its marketing  efforts on both the distributor and
end-user customer. The Company tailors programs,  consisting of products, price,
promotional and merchandising  materials,  training


                                       3

<PAGE>

and  sales/marketing  coverage to effectively  meet the specific needs of target
customers and markets.  The Company sells these programs  through a direct sales
organization.  The Company  supports  this process  through the  development  of
innovative new products,  materials and processes,  while  leveraging its strong
brand  recognition  and  national  network  of  manufacturing  and  distribution
centers.


Production

         The Company's plants operate on a variety of  manufacturing  schedules.
Paper  operations  generally  run five days per week at 24 hours  per day,  with
Saturday  scheduled  as an  overtime  day when needed to meet  customer  demand.
Plastic operations generally run seven days per week at 24 hours per day. Due to
customer demand, the Company's plant utilization is substantially  higher during
late spring and summer than during fall and winter.
See "Properties".


Raw Materials and Suppliers

         Raw materials are critical  components of the Company's cost structure.
Principal  raw  materials  for the  Company's  paper  operations  include  solid
bleached  sulfate  paperboard   obtained  directly  from  major  North  American
manufacturers,  along  with wax,  adhesives,  coating  and inks.  Paperboard  is
purchased in "jumbo" rolls and then printed and converted  into smaller rolls or
blanks for processing  into final  products.  The principal raw material for the
Company's plastic operations is plastic resin (polystyrene,  polypropylene,  and
high and low density  polyethylene)  purchased directly from major petrochemical
companies  and other resin  suppliers.  Resin is processed and formed into cups,
cutlery,  meal  service  products,  straws,  lids and  containers.  The  Company
manufactures foam products by extruding sheets of plastic foam material that are
converted into cups and plates.

         The Company  purchases a substantial  portion of its  requirements  for
paperboard  and  resin  from  several  suppliers.  The  Company  has a number of
potential suppliers for substantially all of its raw materials and believes that
current  sources  of  supply  for its raw  materials  are  adequate  to meet its
requirements.


Competition

         All of the  markets  in  which  the  Company  sells  its  products  are
extremely competitive. Because of the low barriers to entry for new competitors,
the level of competition has been and may continue to be intense as new entrants
attempt  to  gain  market  share.  The  Company's   competitors   include  large
multinational  companies  as well as regional  manufacturers,  some of whom have
greater financial and other resources than the Company.  The marketplace for the
Company's  products is fragmented and includes  competitors  that compete across
the full line of the Company's products, as well as those that compete against a
limited number of the Company's products. A few of the Company's competitors are
also vertically integrated into the production of paper or plastic raw materials
and have greater access to financial and other resources.  The Company's primary
competitors in its foodservice customer base include Dart Container Corporation,
Fort James,  Solo Cup Co.,  International  Paper Food Service Group, and Tenneco
Inc.  Major  competitors in its food  packaging  customer base include  Cardinal
Plastics,  Inc., Landis Plastics,  Inc., Norse Dairy Systems,  Inc., Polytainer,
Ltd. and Sealright Co., Inc.

         The Company believes  customers  principally  evaluate service,  price,
product  quality  and  graphics  capability  when  considering  the  purchase of
products.


Customers

         The Company  markets its products  primarily to customers in the United
States and Canada.  During Fiscal Year 1998, sales to the Company's five largest
customers represented approximately 31.3 % of its net sales. One customer of the
Company,  McDonald's,  accounted  for  12.1%  of net  sales.  See  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity  and  Capital


                                       4

<PAGE>

Resources".  The loss of one or more large national  customers  could  adversely
affect the Company's  operating  results.  The Company has strong  relationships
with its major national accounts which have been developed over many years.


Environmental Matters

         The  Company  and its  operations  are  subject  to  comprehensive  and
frequently  changing  Federal,   state,  foreign  and  local  environmental  and
occupational  health  and  safety  laws  and  regulations,  including  laws  and
regulations governing emissions of air pollutants, discharges of waste and storm
water, and the disposal of hazardous wastes. The Company is subject to liability
for the investigation and remediation of environmental  contamination (including
contamination  caused by other  parties) at properties  that it owns or operates
and at other properties where the Company or its predecessors  have arranged for
disposal of hazardous substances. As a result, the Company is involved from time
to time in  administrative  and judicial  proceedings and inquiries  relating to
environmental  matters. The Company believes that there are currently no pending
investigations  at the  Company's  plants and sites  relating  to  environmental
matters.  However,  there  can be no  assurance  that  the  Company  will not be
involved  in any such  proceeding  in the  future  and that any amount of future
clean up costs and other environmental liabilities will not be material.

         The  Company   cannot   predict  what   environmental   legislation  or
regulations  will be enacted  in the  future,  how  existing  or future  laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist.  Enactment of more  stringent laws or regulations or more
strict  interpretation  of existing laws and regulations may require  additional
expenditures by the Company, some of which could be material.

         The  Clean  Air Act  mandates  the  phase  out of  certain  refrigerant
compounds,   which  will   require  the  Company  to  upgrade  or  retrofit  air
conditioning  and chilling  systems  during the next few years.  The Company has
decided  to replace  units as they  become  inefficient  or  unserviceable.  The
Company  anticipates the cost of upgrading such systems to be approximately $1.5
million.

         Some of the Company's facilities contain asbestos. Although there is no
current legal  requirement to remove such  asbestos,  the Company has an ongoing
monitoring and  maintenance  program to maintain  and/or remove such asbestos as
appropriate  to prevent the release of friable  asbestos.  The Company  does not
believe the costs  associated with such program will be material to its business
or financial condition.

         On September 14, 1998, the Company  received a request for  information
from the United  States  Environmental  Protection  Agency  ("EPA")  pursuant to
Section 114 of the federal  Clean Air Act, as amended.  The EPA notice  requests
certain  information from the Company  concerning air emissions and the issuance
of construction  permits for equipment operating at the Company's Kostner Avenue
facility in Chicago, Illinois. The Company is currently cooperating with the EPA
and reviewing its potential  liability,  if any. While the Company has no reason
to believe the final outcome of this matter will have a material  adverse effect
on the Company's financial  condition or results of operations,  given the early
stage of this matter,  no assurance can be given about its ultimate  effect,  if
any, on the Company.


Technology and Research

         The Company  maintains  facilities for the  development of new products
and product line extensions in Owings Mills,  Maryland.  The Company maintains a
staff of engineers and  technicians  who are  responsible  for product  quality,
process control,  improvement of existing products,  development of new products
and processes and technical  assistance in adhering to  environmental  rules and
regulations.  The  Company is  continually  striving  to expand its  proprietary
manufacturing  technology,  further automate its manufacturing  operations,  and
develop improved manufacturing processes and product designs.


                                       5

<PAGE>

Employees

         At  September  27,  1998,  the  Company  employed  approximately  6,700
persons,   of  whom   approximately   5,700   persons  were  hourly   employees.
Approximately  93% of the  employees  are  located at  facilities  in the United
States. The Company currently has collective  bargaining agreements in effect at
its facilities in Springfield,  Missouri,  Augusta,  Georgia and Toronto, Canada
(collectively, the "Sweetheart CBAs"). The Sweetheart CBAs cover all production,
maintenance and distribution  hourly-paid  employees at each respective facility
and contain  standard  provisions  relating to, among other  things,  management
rights,  grievance,  procedures,  strikes  and  lockouts,  seniority,  and union
rights.  As of September 27, 1998,  approximately  17% of the  Company's  hourly
employees were covered by the Sweetheart  CBAs. The current  expiration dates of
the  Springfield,  Augusta and Toronto CBAs are March 4, 2001,  October 31, 1999
and November 30, 2000, respectively. The Company considers its relationship with
its employees to be good.


                                       6

<PAGE>

Item 2.     PROPERTIES

         The Company  has  manufacturing  and  distribution  facilities  located
throughout  the United States and Canada.  All of the Company's  facilities  are
well  maintained,  in good  operating  condition  and suitable for the Company's
operations.   The  table  below  provides  summary  information   regarding  the
properties owned or leased by the Company.

<TABLE>
<CAPTION>
                                                                                            Size
                                                      Type of             Owned/        (Approximate
                   Location                           Facility (1)        Leased        square feet)
                   --------                           ------------        ------        ------------
<S>                                                                                            <C>
Augusta, Georgia ...........................          M/W                   O                  339,000

Conyers, Georgia (2 facilities).............          M/W                   O                  350,000
                                                      W                     O                  555,000

Chicago, Illinois (2 facilities)............          M/W                   O                  902,000
                                                      W                     L                  587,000

Dallas, Texas ..............................          M/W                   O                1,316,000

Manchester, New Hampshire...................          M/W                   O                  160,000

North Las Vegas, Nevada (2 facilities)......          M/W                   L                  128,000
                                                      W                     L                   12,000

Ontario, California.........................          W(2)                  L                  400,000

Owings Mills, Maryland (3 facilities).......          M/W                   O                1,533,000
                                                      W                     O                  267,000
                                                      W                     O                  406,000

Somerville, Massachusetts...................          M/W                   O                  193,000

Springfield, Missouri (2 facilities)........          M/W                   O                  925,000
                                                      W                     L                  415,000

Wilmington, Massachusetts...................          W                     L                  407,000

Toronto, Ontario (2 facilities).............          M/W                   O                  185,000
                                                      M/W                   O                  207,000
</TABLE>

--------
(1)  M-Manufacturing;  W-Warehouse;  M/W-Manufacturing  and  Warehouse  in  same
facility.
(2) Leased as of September  1998,  replacing a 249,000 square foot facility also
located in Ontario, CA.

         The  Company  also leases a warehouse  in  Augusta,  Georgia  which was
closed  in the  latter  part of Fiscal  Year  1997.  The  Company  is  currently
subleasing  such  property  to a third  party  through  March 31,  2001 and will
continue to actively seek to sublet the property  through the lease  termination
date, March 31, 2008. The Company's Riverside  California facility was closed in
the latter part of Fiscal Year 1997 and was sold in August 1998.


                                       7

<PAGE>

Item 3.     LEGAL PROCEEDINGS

         Aldridge.  A lawsuit  entitled  Aldridge  v.  Lily-Tulip,  Inc.  Salary
Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil Action
No. CV 187-084,  was initially filed in state court in Georgia in April 1987 and
is currently  pending against the Company in federal court.  The remaining issue
involved  in the case is a claim  that the  Company  wrongfully  terminated  the
Lily-Tulip,  Inc.  Salary  Retirement  Plan (the  "Plan")  in  violation  of the
Employee  Retirement  Income  Security Act of 1974,  as amended  ("ERISA").  The
relief  sought  by  plaintiffs  is  to  have  the  plan   termination   declared
ineffective.  In  December  1994,  the United  States  Court of Appeals  for the
Eleventh  Circuit (the "Circuit  Court")  ruled that the Plan was  terminated on
December 31, 1986.  Following that decision,  the plaintiffs  sought a rehearing
which was denied,  and  subsequently  filed a petition for a writ of  certiorari
with the United States Supreme Court,  which was also denied.  Following remand,
in March 1996 the United  States  District  Court for the  Southern  District of
Georgia  (the  "District  Court")  entered a judgment  in favor of the  Company.
Following denial of a motion for  reconsideration,  the plaintiffs in April 1997
filed an appeal with the  Circuit  Court.  On May 21,  1998,  the Circuit  Court
affirmed the judgment  entered in favor of the  Company.  On June 10, 1998,  the
plaintiffs  petitioned  the Circuit  Court for a rehearing of their appeal which
petition  was  denied on July 29,  1998.  Plaintiffs  have filed a motion in the
District Court for attorney's fees. No amount has been specified in such motion.
In October  1998,  plaintiffs  filed a Petition  for Writ of  Certiorari  to the
United States Supreme Court.

         Management of the Company  believes that it will ultimately  prevail on
the remaining material issues in the Aldridge litigation.  Due to the complexity
involved in connection with the claims asserted in this case, the Company cannot
determine  at  present  with any  certainty  the  amount of  damages it would be
required  to pay should the  plaintiffs  prevail;  accordingly,  there can be no
assurance  that such  amounts  would not have a material  adverse  effect on the
Company's  financial position or results of operation.  See Note 17 of the Notes
to Consolidated Financial Statements.

         Fort James Corporation. A patent infringement action seeking injunctive
relief and damages  relating  to the  Company's  production  and sale of certain
paper plates  entitled Fort James  Corporation  v.  Sweetheart Cup Company Inc.,
Civil Action No.  97-C-1221,  was filed in the United States  District Court for
the Eastern  District of Wisconsin on November  21, 1997.  The Company  filed an
Answer to the Complaint  denying liability and asserting various defenses to the
claims. Discovery proceedings are in progress. In the opinion of management, the
ultimate  liability,  if any,  should not have a material  adverse effect on the
Company's financial position or results of operations.

         Other.  The Company is also  involved in a number of legal  proceedings
arising in the ordinary course of business,  none of which is expected to have a
material adverse effect on the Company's business or financial condition.


Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

           NONE

                                     PART II


Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Sweetheart  Cup is a wholly owned  subsidiary of  Sweetheart  Holdings,
which is a  privately-held  corporation.  No  equity  securities  of  Sweetheart
Holdings  or  Sweetheart  Cup  are  publicly  traded  or  registered  under  the
Securities  Exchange  Act of 1934,  as amended,  and there is no public  trading
market for the stock. On March 12, 1998, the Original  Shareholders  sold 48% of
their voting stock and 100% of their  non-voting  stock, or 90% of the Company's
total outstanding  stock, to SF Holdings.  On December 12, 1998, Mr. McLaughlin,
the Company's former Chief Executive Officer, sold his remaining 3,120 shares of
Class A Common stock to Fonda.


                                       8

<PAGE>

         Payment of cash dividends is restricted under the instruments governing
the Company's  indebtedness.  The Company has not paid cash dividends  since the
date of the  Acquisition  in  1993,  and  does not  anticipate  paying  any cash
dividends in the foreseeable future.

         As of December 18, 1998, there were ten holders of Sweetheart Holdings'
Class A Common  Stock and one  holder  of  Sweetheart  Holdings'  Class B Common
Stock.


Item 6.     SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

         Set forth below are  selected  historical  consolidated  financial  and
other  data of the  Company  at the dates and for the Fiscal  Years  shown.  The
selected  historical  consolidated  financial data at September 27, 1998 and for
Fiscal  Year 1998 is are derived  from this  historical  consolidated  financial
statements  of the  Company and  subsidiaries  for such  periods  that have been
audited by Deloitte & Touche, LLP, independent auditors,  and have been included
elsewhere  herein.  The  selected  historical  consolidated  financial  data  at
September  30, 1997 and for the Fiscal Years 1997 and 1996 are derived from this
historical consolidated financial statements of the Company and subsidiaries for
such periods that have been audited by Arthur Andersen,  LLP, independent public
accountants,   and  have  been  included  elsewhere  herein.  See  Item  8.  The
consolidated historical financial data at September 30, 1996, September 30, 1995
and  September 30, 1994 and for the Fiscal Years 1995 and 1994 have been derived
from the historical audited consolidated financial statements for such periods.

         On June 1, 1998,  the  Company  changed  its method of  accounting  for
inventories from the last-in  first-out (LIFO) method to the first-in  first-out
(FIFO) method. Management believes that the FIFO method is preferable because it
more accurately  presents the Company's  financial  position as it reflects more
recent costs at the balance sheet date and more accurately matches revenues with
costs reported during the period  presented.  The financial  statements of prior
periods  have  been  restated  to  apply  the  FIFO  method  of  accounting  for
inventories  retroactively.  This restatement had no impact on retained earnings
as of September 30, 1993. Net income increased or (decreased) by $(0.1) million,
$(1.1) million, $(7.4) million, $12.6 million and $(8.1) million in Fiscal Years
1998, 1997, 1996, 1995 and 1994, respectively.

<TABLE>
<CAPTION>
                                                                                       Fiscal Years
                                ------------------------------------------------------------------------------------
(Dollars in thousands)               1998             1997             1996             1995              1994
                                 --------------  ---------------  ---------------  ---------------   ---------------
Operating Data:
<S>                                <C>             <C>              <C>               <C>              <C>
Net sales                          $843,502        $886,017         $959,818          $986,618         $898,528
Cost of sales                       787,706         822,818          859,029           853,571          791,646
                                    -------         -------          -------           -------          -------
Gross profit                         55,796          63,199          100,789           133,047          106,882
Selling, general and                 68,818          66,792           61,788            66,089           67,712
administrative
Loss on asset disposal and
  impairment                          5,000          24,550               --                --               --
Restructuring expense                   897           9,680               --                --               --
Other (income) expense, net          12,400             (73)           4,271            (1,197)            (411)
                                  ---------      ------------      ---------         ----------       ----------
Operating income (loss)             (31,319)        (37,750)          34,730            68,155           39,581
Interest expense, net                42,955          40,265           37,517            37,410           37,248
                                  ---------       ---------        ---------        ----------        ---------
Income (loss) before taxes          (74,274)        (78,015)          (2,787)           30,745            2,333
Income tax benefit (expense)         29,711          31,206            1,115           (12,312)          (1,069)
Cumulative effect of an
accounting                            1,511              --               --                --               --
   change
Extraordinary loss                       --             940               --                --               --
                                 -----------     ----------       ------------     ------------      ------------
Net income (loss)                  $(46,074)       $(47,749)         $(1,672)          $18,433           $1,264
                                   =========       =========         ========          =======           ======
Dividends per share                      --              --               --                --               --
Balance Sheet Data (at end of
period):
  Fixed assets                     $355,224        $382,491         $427,833          $417,563         $400,176
  Total assets                      665,626         715,589          757,839           749,445          714,959
  Total long-term debt              422,438         430,499          385,579           369,181          369,749
  Shareholders' equity               18,983          70,670          118,552           120,328          101,865
</TABLE>


                                       9

<PAGE>

Item 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION

         Forward-looking  statements  in this  filing,  including  those  in the
footnotes  to the  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,  energy  and other  manufacturing  costs,
fluctuations  in  demand  for  the  Company's   products,   potential  equipment
malfunctions and pending litigation.


General

         Sweetheart  Cup was  formed as the  result of the  acquisition  by Fort
James  of  Maryland  Cup  Corporation  in 1983  and  Lily-Tulip,  Inc.  in 1986.
Sweetheart  Holdings was incorporated as a separate company in 1989 on behalf of
Fort Howard and other  investors,  including  management,  to acquire all of the
U.S. and Canadian disposable  foodservice and food packaging  operations of Fort
James. As a result of the increase in leverage arising from the 1989 acquisition
from Fort James and the increased  operating costs relating to the establishment
of Sweetheart Holdings as an independent business, the Company faced substantial
capital  constraints,  which reduced the Company's  manufacturing  and operating
efficiencies.

         On August 30, 1993,  the Investors  acquired  Sweetheart  Holdings.  In
connection  with the  Acquisition,  Sweetheart  Cup (i)  issued  $190.0  million
aggregate  principal amount of 9 5/8% Senior Secured Notes due 2000 (the "Senior
Secured Notes") and $110.0 million aggregate  principal amount of 10 1/2% Senior
Subordinated Notes due 2003 (the "Senior Subordinated Notes" and with the Senior
Secured Notes, the "Sweetheart Notes"),  (ii) incurred borrowings under a Credit
Agreement  dated  as of  August  30,  1993,  among  Sweetheart  Cup,  Sweetheart
Holdings,  various  banks and Bankers  Trust  Company,  as agent,  (iii)  repaid
existing indebtedness of Sweetheart Holdings and Sweetheart Cup, and (iv) issued
equity  securities  of  Sweetheart  Holdings to the  Investors.  Pursuant to the
Acquisition,  the Company's  outstanding  indebtedness  and interest expense was
substantially  reduced,  giving the Company  greater  financial  flexibility  to
pursue its operating strategy.

         On  October  6,  1993,  the  manufacturing   assets  and  manufacturing
employees  of  Sweetheart  Cup  located in  Illinois,  Massachusetts,  Maryland,
Missouri,  and New Hampshire  were  transferred  to Sweetheart  Holdings.  These
assets were  transferred  subject to the mortgage and liens  granted in favor of
the trustee under the Senior  Secured  Notes  Indenture and were pledged to such
trustee to secure Sweetheart Holdings'  obligations under its secured guarantee.
This  transfer  had no effect on the  holders  of the  Senior  Secured or Senior
Subordinated Notes.

         On March 12, 1998, the Original  Shareholders  sold 48% of their voting
stock  and  100%  of  their  non-voting  stock,  or 90% of the  Company's  total
outstanding  stock,  to  SF  Holdings.  In  conjunction  with  the  SF  Holdings
Investment,  AIP assigned the Management Services  Agreement,  as amended, to SF
Holdings which  assigned its interest to Fonda, a wholly owned  subsidiary of SF
Holdings.

         On October 22, 1998, the Company's Board of Directors approved a change
in the Company's  fiscal year end from  September 30 to the 52 or 53 week period
ending on the last Sunday in September. This change is effective for Fiscal Year
1998 which is from October 1, 1997 through  September 27, 1998. The Fiscal Years
1997  and 1996 are  shown as the  historical  periods  from  October  1  through
September 30 of the respective fiscal years.


                                       10

<PAGE>

         The  Company  markets  its  products  to  two  major  customer  groups:
Foodservice and food packaging.  Foodservice customers purchase products such as
disposable hot and cold drink cups,  lids, food  containers,  plates,  bowls and
cutlery.   Foodservice   customers  include  fast  food  chains,   full  service
restaurants,  hospitals,  airlines,  theaters and other institutional customers.
During Fiscal Year 1998, the Company sold its bakery operations, which impact on
operations and earnings is discussed below.  Food packaging  customers  purchase
paper and plastic containers for the dairy and food processing industries.  Food
packaging also designs,  manufactures and leases filling and packaging  machines
that fill and seal the Company's containers in customers' plants.


Fiscal Year 1998 Compared to Fiscal Year 1997

         Net sales decreased $42.5 million, or 4.8%, to $843.5 million in Fiscal
Year 1998 compared to $886.0 million in Fiscal Year 1997. The December 1997 sale
of  the  bakery  business  resulted  in  a  $27.9  million  decrease  in  sales.
Additionally,  the  change  in the  Company's  fiscal  year  end  shortened  the
Company's  1998 fiscal period by three days. The Company's net sales during such
three day  period  totaled  $8.1  million.  Excluding  the  impact of the bakery
business sale and the shortened  reporting  period,  net sales decreased by $6.5
million, or 0.8%, reflecting a 2.2% increase in domestic sales volume and a 3.1%
average  decrease in domestic sales price.  Price has been  negatively  impacted
both by competition in the marketplace and by declining raw material prices. The
benefit  of lower raw  material  prices  is  generally  passed on to  customers.
Foodservice  sales volume  increased 2.5% primarily as a result of the Company's
focus on revenue growth with key  customers.  Food  packaging  volume  decreased
0.1%.  Canadian net sales  increased  $1.4  million,  or 2.5%,  primarily due to
volume increases associated with promotional programs offered by major customers
in the second quarter of Fiscal Year 1998.

         Gross profit  decreased  $7.4  million,  or 11.7%,  to $55.8 million in
Fiscal Year 1998  compared to $63.2 million in Fiscal Year 1997. As a percentage
of net sales,  gross  profit  decreased to 6.6% in Fiscal Year 1998 from 7.1% in
Fiscal Year 1997. This decrease is partially attributable to charges relating to
the  Company's  initiative  to  eliminate  certain  slow-moving  and low  demand
inventory  items which were recognized in the third quarter of Fiscal Year 1998.
In  addition,  gross  profit was  negatively  impacted by the sale of the bakery
business.

         Selling, general and administrative expenses increased $2.0 million, or
3.0%,  to $68.8  million in Fiscal Year 1998 compared to $66.8 million in Fiscal
Year 1997. As a percentage  of net sales,  selling,  general and  administrative
expenses  increased  to 8.2% in Fiscal  Year 1998 from 7.5% in Fiscal Year 1997.
The Company incurred  increased  expenses primarily as a result of (i) increased
sales and marketing  costs  associated  with the  Company's  focus on increasing
sales  volume  with key  customers,  (ii)  costs  associated  with the year 2000
compliance  program,  (iii)  maintenance and depreciation on the new MIS system,
and (iv) expenses associated with employee  relocation charges.  These increased
expenses were partially  offset in the third and fourth  quarters of Fiscal Year
1998 by cost savings as a result of headcount reductions and related spending as
discussed below.

         Restructuring  expense  decreased  to $0.9  million in Fiscal Year 1998
compared to $9.7 million in Fiscal Year 1997. In March 1998, the Company reduced
its workforce and, in connection therewith,  recognized charges of $5.1 million,
primarily  for  severance  and  related  costs.  This  charge was offset by $4.2
million of the  restructuring  reserves as of  September  30,  1997,  which were
adjusted  due to a change in the  restructuring  plan as a result of a change in
senior management in connection with the SF Holdings Investment.  See Note 15 of
the Notes to Consolidated Financial Statements.

         Asset impairment  expense decreased to $5.0 million in Fiscal Year 1998
compared  to $24.5  million in Fiscal  Year 1997.  In March  1998,  the  Company
decided to rationalize certain product lines. As a result, the Company evaluated
the  recoverability  of the  carrying  value of the  equipment  and other assets
utilized for


                                       11

<PAGE>

such product  lines,  which  resulted in a $5.0 million charge to write down the
assets to their fair market  value.  The Company  believes  these  product  line
rationalizations  will not  have a  material  adverse  effect  on the  Company's
results of operations or financial  condition.  The Fiscal Year 1997 charges are
more fully  described  in the Fiscal  Year 1997 to Fiscal  Year 1996  comparison
below. See Note 15 of the Notes to Consolidated Financial Statements.

         Other (income) expense, net was $12.4 million of expense in Fiscal Year
1998  compared  to $0.1  million of income in Fiscal  Year 1997.  In Fiscal Year
1998, the Company recognized certain nonrecurring charges,  consisting primarily
of $4.4 million of  financial  advisory  and legal fees  associated  with the SF
Holdings  Investment,  $3.7  million of  severance  expenses  as a result of the
termination of certain officers of the Company pursuant to executive  separation
agreements  and  retention  plans for certain key  executives,  $3.4  million of
expense based on actuarial  estimates  associated with pending  litigation,  and
asset  write downs of $1.8  million  associated  with the sale of the  Riverside
facility.  These  expenses  were offset in part by the $3.3  million gain on the
sale of the bakery business.

         Operating  loss  decreased $6.5 million to $31.3 million in Fiscal Year
1998 compared to $37.8 million in Fiscal Year 1997 due to the reasons  described
above.

         Interest expense  increased $2.7 million,  or 6.7%, to $43.0 million in
Fiscal Year 1998  compared to $40.3 million in Fiscal Year 1997 due primarily to
higher average use of revolving credit borrowings and incremental  interest paid
on the portion of the U.S.  Credit  Facility  used to  refinance  the SRC Series
1994-1 A-V Notes (the "SRC Notes").

         Income tax benefit  decreased  $1.5 million to $29.7  million in Fiscal
Year 1998 compared to $31.2 million in the Fiscal Year 1997.  The effective rate
for the 1998 and 1997 Fiscal Years was 40%.

         Cumulative  effect of a change in  accounting  principle was an expense
recorded to write-off  previously  capitalized  costs as explained in Note 15 of
the Notes to Consolidated Financial Statements.

         Net loss  decreased  $1.6 million,  or 3.5%, to $46.1 million in Fiscal
Year 1998  compared  to $47.7  million  in Fiscal  Year 1997 due to the  reasons
described above.


Fiscal Year 1997 Compared to Fiscal Year 1996

         Net sales decreased $73.8 million, or 7.7%, to $886.0 million in Fiscal
Year 1997  compared to $959.8  million in Fiscal Year 1996.  The decrease in net
sales  reflects a 2.9%  decrease in  domestic  sales  volume and a 4.4%  average
decrease in domestic  sales price.  Foodservice  selling  prices  decreased 4.5%
while food packaging  selling prices  decreased 3.5%.  Price has been negatively
impacted by declining raw material prices and by competition in the marketplace.
The benefits of lower raw material prices are generally  passed on to customers.
Foodservice  sales  volume  decreased  1.7% while food  packaging  sales  volume
decreased  11.5%.  The  decrease  in  foodservice   sales  volume  is  primarily
attributable  to  decreases  in the national  and  clubstore  markets  offset by
increases in foodservice  distributor  accounts.  The decrease in food packaging
sales volume is primarily attributable to decreases in demand experienced by key
accounts  in their  customer  base in both the  cultured  and  frozen  segments.
Canadian net sales decreased 2.1% compared to the prior period.

         Gross profit  decreased  $37.6 million,  or 37.3%,  to $63.2 million in
Fiscal Year 1997 compared to $100.8 million in Fiscal Year 1996. As a percentage
of net sales,  gross profit  decreased to 7.1% in Fiscal Year 1997 from 10.5% in
Fiscal Year 1996.  The Company has  implemented  initiatives  which have reduced
variable  manufacturing  costs to offset  price  conditions  in the  marketplace
described  above.  As a result,  raw  material  and labor  costs  have been held
constant as a percentage of sales  despite  lower  selling  prices to customers.
Although  overhead  spending  was  contained  at  1996  levels,  this  cost as a
percentage


                                       12

<PAGE>

of sales has increased. In addition,  year-to-date results have been impacted by
changes  in  overhead  absorption  relating  to  planned  inventory  reductions.
Overhead  costs are  allocated  and absorbed into  inventory  when  inventory is
produced and expensed when  inventory is sold. As a result,  profit  comparisons
can be  materially  affected  when a change in inventory  levels during a period
differs  significantly from the change in the prior period. In Fiscal Year 1996,
inventory  levels  increased,  resulting  in an  absorption  of fixed costs into
inventory.  In Fiscal Year 1997, inventory levels declined,  and the fixed costs
associated  with  inventories  sold  were  recognized.  This has  resulted  in a
period-to-period unfavorable impact on gross profit of $10.5 million.

         Selling, general and administrative expenses increased $5.0 million, or
8.1% to $66.8  million in Fiscal Year 1997  compared to $61.8  million in Fiscal
Year 1996. As a percentage  of net sales,  selling,  general and  administrative
expenses  increased  to 7.5% in Fiscal  Year 1997 from 6.4% in Fiscal Year 1996.
Approximately   $3.0  million  of  the  increase   relates  to  maintenance  and
depreciation on the new MIS system, while the remainder reflects increased sales
and marketing  costs  associated  with the Company's  focus on increasing  sales
volume  with key  customers  and normal  inflation  in the wage base.  All other
selling,  general  and  administrative  expenses  were held below  prior  period
levels.

         Loss on asset  disposal and impairment of $24.6 million was recorded in
the fourth  quarter of Fiscal Year 1997  relating to the review of the  carrying
value  of  the  Company's  long-lived  assets.  See  Note  15 of  the  Notes  to
Consolidated Financial Statements.

         Restructuring  expense  of $9.7  million  was  recorded  in the  fourth
quarter of Fiscal Year 1997  relating to plant  closures  and other  expenses as
part of the Company's  strategic  planning process.  See Note 15 of the Notes to
Consolidated Financial Statements.


         Other (income)  expense,  net increased $4.4 million to $0.1 million of
income in Fiscal Year 1997  compared  to $4.3  million of expense in Fiscal Year
1996. Fiscal Year 1996 was unfavorably impacted by one-time expenses incurred by
the  Company   relating  to  an   investigation   of  the  Company's   strategic
alternatives.

         Operating  profit  (loss)  decreased  $72.5  million to a $37.8 million
operating loss in Fiscal Year 1997 compared to $34.7 of operating  income in the
same period in Fiscal Year 1996 due to the reasons described above.

         Interest expense  increased $2.8 million,  or 7.3%, to $40.3 million in
Fiscal Year 1997  compared to $37.5 million in Fiscal Year 1996 due primarily to
higher average usage of revolving borrowings.

         Income tax benefit  increased  $30.1 million to $31.2 million in Fiscal
Year 1998 compared to $1.1 million in Fiscal Year 1997.  The effective  rate for
the 1998 and 1997 Fiscal Years was 40%.

         Extraordinary  loss of $0.9  million  (net of $0.6  million  in  income
taxes) was  recorded in the fourth  quarter of Fiscal Year 1997  relating to the
write-off of deferred  financing fees associated with a portion of the Company's
debt, which was refinanced subsequent to September 30, 1997.

         Net loss  increased  $46.0 million to $47.7 million in Fiscal Year 1997
compared  to net loss of $1.7  million  in Fiscal  Year 1996 due to the  reasons
described above.


Liquidity And Capital Resources

         Historically,  the Company has relied on cash flow from  operations and
revolving  credit  borrowings to finance its working  capital  requirements  and
capital expenditures.  In Fiscal Year 1998,


                                       13

<PAGE>

the Company began to fund a majority of its capital  expenditures  from the sale
of assets.  The  Company  expects  to  continue  to fund a majority  of its 1999
capital expenditures from the sale of assets.

         Net cash used in  operating  activities  in Fiscal  Year 1998 was $17.8
million  compared  to $3.2  million in Fiscal  Year  1997.  The net cash used in
operating  activities  in both  periods  was due  principally  to the net losses
recorded in such periods which reflect both market  conditions and  nonrecurring
charges.

         Working capital  decreased $54.1 million to $106.1 million at September
27, 1998 from $160.2  million at September  30, 1997.  This  decrease  consisted
primarily  of a $29.0  million  decrease in  restricted  cash as a result of the
refinancing of the SRC Notes, a $14.2 million  decrease in bakery assets,  which
were sold in December 1997, a $7.9 million  decrease in escrow cash utilized for
capital expenditures, and a $7.3 million increase in accounts payable due to the
Company's efforts to achieve more favorable vendor terms.

         Capital  expenditures  for Fiscal Year 1998 were $37.5 million compared
to $47.8 million in Fiscal Year 1997.  Capital  expenditures in Fiscal Year 1998
included  $12.0  million  for new  production  equipment  and $3.9  million  for
management  information  systems,  with the  remaining  consisting  primarily of
routine  capital  improvements.  Funding for the 1998 capital  expenditures  was
provided by $14.7 million of net proceeds from the sale of the bakery  business,
$6.8 million from the sale of the Riverside,  CA  manufacturing  facility,  $0.9
million from the sale of other property,  plant and equipment, and $15.1 million
from cash in escrow  related  to asset  sales in Fiscal  Year  1997.  During the
current fiscal period,  the Company has and will continue to rely principally on
proceeds  from  the  sale of  property,  plant  and  equipment  to fund  capital
expenditures.  As of September  27,  1998,  the Company had $5.5 million of such
proceeds on deposit in escrow.  The Company  does not  anticipate  any  material
capital  expenditures  in the next twelve months other than those funded through
asset sales.

         In the  fourth  quarter  of Fiscal  Year 1997,  the  Company  completed
negotiations for a three-year renewal of its supply arrangement with its largest
customer,  McDonald's.  The Company  committed  to convert  McDonald's  cold cup
volume to a new raw material  substrate (from wax to double-sided  polyethylene)
over the life of the supply arrangement.  The Company has incurred,  and expects
to incur in Fiscal Years 1999 and 2000, capital expenditures in conjunction with
this raw material substrate conversion.

         On October 24, 1997, the Company refinanced its then existing revolving
credit facility and other  indebtedness  and entered into a new revolving credit
facility, as amended, in an amount of up to $135.0 million, subject to borrowing
base limitations (the "U.S. Credit Facility").  Borrowings under the U.S. Credit
Facility mature on September 30, 2000 and as of September 27, 1998, $8.8 million
was available.  Borrowings  under the U.S.  Credit  Facility bear  interest,  at
Sweetheart's  election, at a rate equal to (i) LIBOR plus 2.25% or (ii) a bank's
base rate plus 1.00%,  plus  certain  other fees.  The U.S.  Credit  Facility is
secured by accounts receivable,  inventory,  equipment,  intellectual  property,
general intangibles and the net proceeds on the sale of any of the foregoing.

         On June 15, 1998,  Lily Canada  refinanced  its then existing term loan
and  revolving  credit  facility and entered into a new term loan and  revolving
credit  facility  agreement which provides for a term loan facility of up to Cdn
$10.0  million and a revolving  credit  facility of up to Cdn $10.0 million (the
"Canadian  Credit  Facility").  Term loan  borrowings  under the Canadian Credit
Facility are payable  quarterly through May 2001 and revolving credit borrowings
and term loan  borrowings  have a final  maturity  date of June 15, 2001.  As of
September 27, 1998, Cdn $5.4 million  (approximately $3.6 million) was available
under such facility. The Canadian Credit Facility is secured by all the existing
and after acquired real and personal, tangible assets of Lily Canada and the net
proceeds on the sale of any of the  foregoing.  Borrowings  bear  interest at an
index rate of 2.25% with  respect to the  revolving  credit  borrowings,  and an
index rate of 2.50% with respect to the term loan borrowings.


                                       14

<PAGE>

         The Company may, at its  election,  redeem the Senior  Secured Notes at
any time at a  redemption  price equal to a percentage  (currently  101.604% and
declining to 100% after August 31, 1999) of the principal  amount,  plus accrued
interest. The Senior Secured Notes are secured by mortgages on the real property
owned  by  the  Company.  Payment  of  principal  and  interest  of  the  Senior
Subordinated  Notes  is  subordinate  to the  Senior  Indebtedness  (as  defined
therein),  which includes the U.S. Credit Facility and the Senior Secured Notes.
The Company may, at its election,  redeem the Senior  Subordinated  Notes at any
time at a  redemption  price  equal  to a  percentage  (currently  103.938%  and
declining in annual  increments  to 100% after August 31, 2001) of the principal
amount,  plus  accrued  interest.  The  Sweetheart  Notes  provide that upon the
occurrence of a Change of Control (as defined therein) the holders will have the
option to require the redemption of the Sweetheart  Notes at a redemption  price
equal to 101% of the principal amount, plus accrued interest.

         The  instruments  governing  the  indebtedness  of the Company  contain
customary  covenants  and  events  of  default,  including  without  limitation,
restrictions on, subject to defined  exceptions,  the payment of dividends,  the
incurrence of additional  indebtedness,  investment  activities and transactions
with affiliates.

         Management   believes  that  cash  generated  by  operations,   amounts
available under the Company's  credit  facilities and funds generated from asset
sales will be sufficient to meet the Company's expected operating needs, planned
capital expenditures and debt service requirements through September 30, 1999.


Year 2000

         Many of the Company's  computer  systems may be unable to process dates
beyond   December   31,  1999.   This  could   result  in  system   failures  or
miscalculations  which  could  have  material  adverse  effect on the  Company's
business,  financial  condition  or  results  of  operations.  The  Company  has
implemented a Year 2000 compliance program intended to identify the programs and
infrastructures  that could be  effected  by Year 2000  issues and  resolve  the
problems that were identified on a timely basis.

         The  Company  has  completed  the  assessment  phase,  in  which it has
identified  potential  Year 2000 issues with respect to  information  technology
systems,  as well as equipment that  interfaces  with vendors and third parties,
and developed a compliance  project for its  hardware,  operating  systems,  and
application  systems.  The Company is  scheduled  to complete  the  hardware and
operating  systems  conversion  plans  by  January  1999.  With  respect  to the
application  phase,  the  Company  is  compliant  in its  order  management  and
warehousing systems. Manufacturing and planning systems are in final testing and
are  expected  to be  compliant  by April 1999 and January  1999,  respectively.
Financial, corporate and in-house developed systems are scheduled for compliance
by July 1999.  The Company  has  completed  its  internal  assessment  phase for
technology  embedded  within  equipment and is awaiting  responses  from certain
vendors.   Sweetheart  believes  a  significant  portion  of  its  manufacturing
equipment is not affected by Year 2000 issues due to its operations  use, or was
compliant when purchased. The Company has or is in the process of contacting key
vendors and business partners,  to ensure that key business transactions will be
Year 2000  compliant.  Furthermore,  in the event the  Company is unable to meet
certain key  operational  dates,  it believes  its already  compliant  Year 2000
systems for planning,  order management and warehouse management,  together with
its manual  systems,  would allow the Company to ship  products to customers and
engage in other critical business functions.

         The  Company  estimates  the cost of its Year 2000  program  to be $2.7
million, of which $1.2 million had been spent through September 27, 1998. Future
expenditures  will be funded from cash flow from operations or borrowings  under
credit  facilities.  However,  there can be no  assurance  that the Company will
identify  all Year 2000  issues in its  computer  systems  in  advance  of their
occurrence  or


                                       15

<PAGE>

that they will be able to successfully  remedy all problems that are discovered.
Failure by the Company and/or its significant  vendors and customers to complete
Year 2000 compliance  programs in a timely manner could have a material  adverse
effect on the Company's business, financial condition and results of operations.
In addition,  the revenue stream and financial  stability of existing  customers
may be adversely  impacted by Year 2000 problems which could cause  fluctuations
in the Company's revenues and operating profitability.


Net Operating Loss Carryforwards

         As of September 27, 1998 the Company had approximately  $202 million of
net operating loss ("NOL")  carryforwards  for federal income tax purposes which
expire at  various  dates  through  2018.  Although  the  Company  expects  that
sufficient taxable income will be generated in the future to realize these NOLs,
there can be no  assurance  future  taxable  income will be generated to utilize
such NOLs.


Impact of Recently Issued Accounting Standards

         The impact of recently issued accounting standards is discussed in Note
1 of the Notes to the Consolidated Financial Statements.


Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               The response to this item is  submitted as a separate  section of
this report, beginning on page 30.


Item 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE

           On April 29, 1998, Deloitte & Touche LLP was appointed as independent
auditors for the Company,  replacing Arthur Andersen LLP. The decision to change
accountants was approved by the Company's Board of Directors. The Company had no
disagreements with Arthur Andersen LLP in the six months ended March 31, 1998 or
its fiscal years ended September 30, 1997 and 1996.


                                       16

<PAGE>

                                    PART III

Item 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth below are the names,  ages and  positions  of the  directors,
executive  officers and key employees of Sweetheart  Holdings and Sweetheart Cup
as of December 18, 1998. All directors hold office until the next annual meeting
of  shareholders  and until their  successors  are duly  elected and  qualified.
Officers serve at the discretion of the Board of Directors.

<TABLE>
<CAPTION>
Name                              Age         Position
----                              ---         --------
<S>                               <C>
Dennis Mehiel                     56          Chairman and Chief Executive Officer of Sweetheart  Holdings and
                                              Sweetheart Cup

Thomas Uleau                      53          President,  Chief  Operating  Officer and Director of Sweetheart
                                              Holdings and Sweetheart Cup

W. Richard Bingham                62          Director of Sweetheart Holdings and Sweetheart Cup

Lawrence W. Ward, Jr.             46          Director of Sweetheart Holdings and Sweetheart Cup

Theodore C. Rogers                64          Director of Sweetheart Holdings and Sweetheart Cup

Michael Hastings                  51          Senior  Vice  President  - Sales  and  Marketing  of  Sweetheart
                                              Holdings and Sweetheart Cup

Hans H. Heinsen                   45          Senior Vice President - Finance and Chief  Financial  Officer of
                                              Sweetheart Holdings and Sweetheart Cup

Charles E. Busse                  60          Vice   President  -  Research  and   Engineering  of  Sweetheart
                                              Holdings and Sweetheart Cup

Daniel M. Carson                  52          Vice  President - General  Counsel and  Corporate  Secretary  of
                                              Sweetheart Holdings and Sweetheart Cup

William H. Haas                   57          Vice  President - Sales of  Sweetheart  Holdings and  Sweetheart
                                              Cup

Rick Schneider                    49          Vice  President  -  Manufacturing  of  Sweetheart  Holdings  and
                                              Sweetheart Cup

Jeffrey Seidman                   44          Vice  President - Human  Resources  of  Sweetheart  Holdings and
                                              Sweetheart Cup

Roger A. Lindahl                  41          Treasurer of Sweetheart Holdings and Sweetheart Cup
</TABLE>


         Mr. Mehiel has been Chairman of the Board and Chief  Executive  Officer
of Sweetheart  Holdings and  Sweetheart Cup since March 1998. Mr. Mehiel is also
Chairman and Chief  Executive  Officer of SF Holdings and its subsidiary  Fonda.
Since 1966, he has been  Chairman of Four M Corporation  ("Four M"), a converter
and seller of interior  packaging,  corrugated sheets and corrugated  containers
which he co-founded, and since 1977 (except during a leave of absence from April
1994 through July 1995) he has been the Chief  Executive  Officer of Four M. Mr.
Mehiel is also the  Chairman  of Box USA of New  Jersey,  Inc.  ("Box  USA"),  a
manufacturer of corrugated containers,  and Chairman and Chief Executive Officer
of Creative  Expressions  Group  ("CEG"),  an  affiliate  of Fonda and seller of
disposable party goods products.

         Mr. Uleau has been President, Chief Operating Officer and a Director of
Sweetheart  Holdings  and  Sweetheart  Cup since March 1998.  Mr.  Uleau is also
President,  Chief Operating  Officer and a Director of SF Holdings and Executive
Vice  President  of Fonda.  He has been a director of Fonda since 1988.  He also
served in a variety of executive  officer  positions at Fonda since 1988. He has
been  Executive  Vice  President of CEG since 1996. He served as Executive  Vice
President and Chief  Financial  Officer of Four M from 1989 through 1993 and its
Chief Operating Officer in 1994. He is also currently a director of Four M, CEG,
and Box USA.


                                       17

<PAGE>

         Mr.  Bingham has been a Director of Sweetheart  Holdings and Sweetheart
Cup Company since August 1993.  He  co-founded  AIPM and has been a Director and
officer  of the firm since  1989.  He is also a general  partner of AIP-LP.  Mr.
Bingham also has served as a Director of SF Holdings since March, 1998. Prior to
joining AIPM, Mr. Bingham was Director of the Corporate  Finance  Department,  a
member of the Board,  and Director of Mergers & Acquisitions  at Lehman Brothers
Kuhn Loeb Inc.  Mr.  Bingham  also  currently  serves as a  Director  of Bucyrus
International,  Great Lakes  Carbon  Corporation,  RBX Group,  Inc.,  Standadyne
Automotive Corporation and Deerfield Associates.

         Mr.  Rogers has been a Director of Sweetheart  Holdings and  Sweetheart
Cup since August 1993. He co-founded AIPM and has been a director and officer of
the firm since 1989. He is also a general partner of AIP-LP. From 1980-1987,  he
served as Chairman,  President  and Chief  Executive  Officer of NL  Industries,
Inc., a petroleum service and chemical  company.  Prior to 1980, he served as an
executive of Armco Inc., a diversified steel company,  where he managed numerous
manufacturing  operations in the United States and Mexico Mr. Rogers is a former
director of Allied Stores  Corporation,  Allied-Signal Inc., Parsons Corporation
and  Southwest  Bancshares.  He is  currently  a  director  of Mcorp.  and Derby
International Corporation.

         Mr. Ward has been a Director of Sweetheart  Holdings and Sweetheart Cup
since March 1998.  Mr.  Ward has been a Principal  with AIP since May 1992.  Mr.
Ward served as Chief Financial Officer of Sweetheart Holdings and Sweetheart Cup
from June 1996  through  November  1996.  Mr.  Ward also  currently  serves as a
Director  of Bucyrus  International,  Inc.,  Easco,  Inc.,  Great  Lakes  Carbon
Corporation, RBX Group Inc. and Stanadyne Automotive Corporation.

         Mr.  Hastings has served as Senior Vice President - Sales and Marketing
for Sweetheart  Holdings and  Sweetheart  Cup since March 1998. Mr.  Hastings is
also Senior Vice President of Fonda. Prior to joining the Company,  Mr. Hastings
served as President of the Fonda Division of Fonda, which he joined in May 1995.
From December 1990 to April 1995, Mr. Hastings served as Vice President of Sales
and  Marketing  and as a member of the Board of  Directors  of Anchor  Packaging
Company,  a  manufacturer  of  institutional  films  and  thermoformed   plastic
packaging.  Prior to joining Anchor Packaging Company, Mr. Hastings was employed
for over 25 years in a variety of positions in the paper and plastic industries,
including  sales,  marketing  and plant  operations  management  at Scott  Paper
Company and Thompson Industries.

         Mr.  Heinsen  has served as Senior  Vice  President - Finance and Chief
Financial  Officer of Sweetheart  Holdings and  Sweetheart Cup since March 1998.
Mr. Heinsen also serves as Senior Vice President,  Chief  Financial  Officer and
Treasurer  of SF  Holdings  since  February  1998,  Senior  Vice  President  and
Treasurer of Fonda since February 1997,  Chief Financial  Officer of Fonda since
June 1996 and Chief  Financial  Officer  of CEG since  November  1998.  Prior to
joining  Fonda,  Mr.  Heinsen  spent 21 years in a variety of corporate  finance
positions with The Chase Manhattan Bank, N.A.

         Mr. Busse has served as Vice  President - Research and  Engineering  of
Sweetheart  Holdings and Sweetheart Cup and their  predecessors  since 1983. Mr.
Busse has held several  other  positions  with the Company and its  predecessors
since 1963.

         Mr. Carson has served as Vice President - General Counsel and Corporate
Secretary  of  Sweetheart  Holdings  since  October  1993 and has served as Vice
President - General  Counsel,  and Corporate  Secretary of Sweetheart Cup and as
Corporate  Secretary of Sweetheart  Holdings  since  February 1993. He served as
Assistant  General  Counsel and Director of U.S. Legal Affairs of Avon Products,
Inc., a consumer products company,  from September 1991 to February 1993 and was
Of Counsel to Bell,  Boyd & Lloyd  (Chicago,  Illinois) from June 1991 to August
1991.  From May 1981 until June 1991, Mr. Carson was Associate  General  Counsel
for Continental Can Company, Inc., a packaging and paper products company.

         Mr. Haas has served as Vice  President - Sales for  Sweetheart  Cup and
their  predecessors  since 1985,  and as Vice  President - Sales for  Sweetheart
Holdings since October 1998. Prior to joining the Company, Mr. Haas was employed
for more than 20 years by Carnation  Co.,  Inc.,  a food  products  company,  in
various  sales and sales  management  capacities  and by Nabisco,  Inc.,  a food
products company, as Director of National Account Sales.


                                       18

<PAGE>

         Mr.   Schneider  has  served  as  Vice  President  -  Manufacturing  of
Sweetheart  Holdings and Sweetheart Cup since October 1994. From October 1986 to
September  1994, Mr.  Schneider  served in various  manufacturing  capacities in
Owings Mills including,  Production Staff Manager, Operations Manager, and Plant
Manager.  Prior to joining Sweetheart,  Mr. Schneider was employed for ten years
by Boise Cascade Composite Can Division in a variety of manufacturing positions.

         Mr.  Seidman  has  served  as  Vice  President  -  Human  Resources  of
Sweetheart  Holdings and Sweetheart Cup since September  1998.  Prior to joining
the  Company,  he was  with  Fonda  from  1995 to 1998,  where  he held  various
positions   including  Vice  President  of  Human   Resources  and  Director  of
Operations.  Prior to Fonda,  he was  employed by Scott  Paper in various  human
resources positions since 1989.

         Mr.  Lindahl  has  served  as  Treasurer  of  Sweetheart  Holdings  and
Sweetheart  Cup since October 1994.  From November,  1989 to October,  1994, Mr.
Lindahl  served as Assistant  Treasurer of Sweetheart  Cup.  Prior to 1989,  Mr.
Lindahl  was  employed  by Fort  James  and  Bull  Information  Systems  and its
predecessors.


Compensation of Directors

         The directors of Sweetheart  Holdings and Sweetheart Cup do not receive
any direct  compensation from such companies for serving as a director.  Certain
directors of Sweetheart  Holdings and Sweetheart Cup are employees of Sweetheart
Holdings and  Sweetheart  Cup and receive  compensation  as such, and others are
employees of AIPM and Fonda, to which  Sweetheart Cup pays fees for advisory and
management  services.  See  "Certain  Relationships  and Related  Transactions".
Directors are reimbursed for expenses incurred while serving on the Board.


                                       19

<PAGE>

Item 11.    EXECUTIVE COMPENSATION

            The  following   table  sets  forth   information   concerning   the
compensation  for  Fiscal  Years  1998,  1997 and 1996,  of the chief  executive
officer and the four most  highly  compensated  officers  and key  employees  of
Sweetheart  Holdings and  Sweetheart  Cup  (collectively,  the "named  executive
officers").  The Company has concluded that the aggregate  amount of perquisites
and other personal benefits paid to each of the named executive officers did not
exceed the lesser of (i) 10% of such officer's total annual salary and bonus and
(ii) $50,000. Thus, such amounts are not reflected in the following table.

                                            Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                    Long-Term
                                                   Annual Compensation            Compensation
                                                                                     Awards
----------------------------------------- --------------------------------------- --------------  --------------
                                                                                  # of Options      All Other
           Name and Principal                Fiscal       Salary        Bonus        Granted      Compensation
                Position                     Period        ($)         ($) (1)         (2)             ($)
----------------------------------------- ------------- -----------  ------------ --------------  --------------
Dennis Mehiel
<S>                                          <C>       <C>         <C>          <C>             <C>
   Chairman and Chief Executive  Officer     1998(3)   188,775           --           --                --
   of     Sweetheart     Holdings    and     1997           --           --           --                --
   Sweetheart Cup                            1996           --           --           --                --

William F. McLaughlin
   President    and   Chief    Executive     1998(4)   239,102           --           --         2,413,876(5)
   Officer of  Sweetheart  Holdings  and     1997      491,667           --       10,000           129,805(6)
   Sweetheart Cup                            1996      400,000      498,000           --            18,207(7)

Thomas Uleau
   President,  Chief  Operating  Officer     1998(8)   144,414          --           --             34,451(9)
   and Director of  Sweetheart  Holdings     1997          --           --           --                  --
   and Sweetheart Cup                        1996          --           --           --                  --

Charles E. Busse
   Vice   President   -   Research   and     1998      175,848           --           --           352,642(10)
   Engineering  of  Sweetheart  Holdings     1997      177,900           --           --           123,375(11)
   and Sweetheart Cup                        1996      176,325       63,766           --             5,369(12)

William H. Haas
   Vice    President    -    Sales    of     1998      177,923           --           --           443,348(13)
   Sweetheart  Holdings  and  Sweetheart     1997      180,000           --           --           364,443(14)
   Cup                                       1996      178,313       89,640          600            35,235(15)

Joseph A. Lucas
   Vice  President  and General  Manager     1998(16)  172,981           --           --           357,485(17)
   - Packaging  of  Sweetheart  Holdings     1997      175,000           --           --           138,554(18)
   and Sweetheart Cup                        1996      174,150       87,150           --            65,997(19)

(1)   Amounts shown were paid pursuant to the Company's Management Incentive Plans.
(2)   All such grants were made pursuant to the 1994 Stock Option and Purchase Plan.
(3)   Mr. Mehiel became Chairman and Chief Executive Officer effective March 12, 1998.
      Amounts shown here were paid during the remainder of Fiscal Year 1998.
(4)   Mr. McLaughlin resigned as Chief Executive Officer effective March 12, 1998.
(5)   Reflects   $2,407,557  paid  under  a  Separation   Agreement,   $5,250
      contributed  under the 401(k) Plan,  $1,002 of life insurance  premiums
      paid by the Company and $67 of long-term  disability insurance


                                       20

<PAGE>

      premiums paid by the Company.
(6)   Reflects  $125,000 paid under the Special Incentive  Agreement,  $4,500
      contributed  under  the the  Sweetheart  401(k)  Retirement  Plan  (the
      "401(k) Plan") (to which the Company contributes an amount equal to 50%
      of  the  participant's  contributions  not  in  excess  of  6%  of  the
      participant's  eligible  earnings) and $305 of life insurance  premiums
      paid by the Company.
(7)   Reflects  $10,989 paid for relocation  expenses, $6,000 contributed under
      the 401(k) Plan and $1,218 of life insurance premiums paid by the Company.
(8)   Mr.  Uleau  became  President,  Chief  Operating  Officer and  Director
      effective  March 12,  1998.  Amounts  shown  here were paid  during the
      remainder of Fiscal Year 1998.
(9)   Reflects $29,167 paid for relocation expenses, $2,785 contributed under
      the 401(k) Plan, $2,376 of life insurance  premiums paid by the Company
      and  $123  of  long-term  disability  insurance  premiums  paid  by the
      Company.
(10)  Reflects  $190,077 paid under the Executive  Retention  Plan,  $118,600
      paid under the  Special  Incentive  Agreement,  $35,458  paid under the
      Stock Option Repurchase Plan, $4,750 paid under the 401(k) Plan, $3,651
      of life insurance  premiums paid by the Company,  and $106 of long-term
      disability premiums paid by the Company.
(11)  Reflects $118,600 paid under the Special Incentive  Agreement, $4,500
      paid under the 401(k) Plan and $275 of life insurance premiums paid
      by the Company.
(12)  Reflects  $4,271  contributed  under the 401(k)  Plan and $1,098 of life
      insurance  premiums  paid by the Company.
(13)  Reflects  $196,019 paid under the Executive  Retention  Plan,  $120,000
      paid under the Special Incentive Agreement, $67,631 paid for relocation
      expenses,  $52,378 paid under the Stock Option  Repurchase Plan, $4,750
      paid under the 401(k) Plan,  $2,462 of life insurance  premiums paid by
      the Company,  and $108 of  long-term  disability  premiums  paid by the
      Company.
(14)  Reflects $239,664 paid for relocation expenses, $120,000 paid under the
      Special Incentive  Agreement,  $4,500 contributed under the 401(k) Plan
      and $279 of life insurance premiums paid by the Company.
(15)  Reflects  $30,000 paid for relocation  expenses,  $4,219  contributed
      under the 401(k) Plan and $1,016 of life insurance premiums paid by the Company.
(16)  Mr. Lucas resigned from the Company effective November 6, 1998.
(17)  Reflects  $193,394 paid under the Executive  Retention  Plan,  $116,667
      paid under the  Special  Incentive  Agreement,  $40,161  paid under the
      Stock Option Repurchase Plan, $4,750 paid under the 401(k) Plan, $2,408
      of life insurance  premiums paid by the Company,  and $105 of long-term
      disability premiums paid by the Company.
(18)  Reflects $116,667 paid under the Special Incentive  Agreement,  $17,113
      paid for  relocation  expenses,  $4,500  paid under the 401(k) Plan and
      $274 of life insurance premiums paid by the Company.
(19)  Reflects  $59,026 paid for relocation  expenses,  $5,873  contributed
      under the 401(k) Plan and $1,098 of life insurance premiums paid by the Company.
</TABLE>


McLaughlin Employment Agreement

         The  Company  entered  into an  employment  agreement  with  William F.
McLaughlin  dated as of May 15, 1994 (the  "McLaughlin  Agreement")  pursuant to
which the  Company  employed  Mr.  McLaughlin  to serve as  president  and chief
executive  officer of the Company.  On January 15, 1998, Mr.  McLaughlin and the
Company entered into an agreement whereby Mr. McLaughlin's  employment and other
executive  compensation  contracts were  terminated and replaced by a Separation
Agreement,  a copy of which is filed as an exhibit to this  report on Form 10-K.
Mr. McLaughlin resigned from the Company effective March 12, 1998.


                                       21

<PAGE>

Employment Contracts

         Messrs.  Haas,  Lucas,  Busse and Carson each entered into an executive
retention agreement with the Company dated October 1, 1997 which provides for an
incentive  payment to the executive if he remains  employed by the Company for a
period of two years.  Payment of the  incentive  is  accelerated  under  certain
circumstances,  including a sale of more than fifty  percent of the equity value
of the Company,  which acceleration was triggered by the SF Holdings Investment.
The  amount  of  the  incentive  is one  year's  base  salary  for  each  of the
executives.  Messrs.  Haas and Carson entered into an relocation  agreement with
the Company dated December 19, 1997 which provides for  reimbursement  of losses
up to a specified  amount by individual  in the event of a termination  of their
employment  under  certain  specified  circumstances  and for reasons other than
cause, including a change of control or a sale of more than fifty percent of the
equity value of the Company.

Stock Option Plan

         On March 12, 1998,  all  outstanding  options to purchase  stock of the
Company  were cashed out in full  pursuant  to the  agreement  governing  the SF
Holdings  Investment.  There are currently no options to purchase either Class A
or Class B common stock outstanding.

Employee Benefit Plans

         A majority  of the  Company's  employees  ("participants")  are covered
under a 401(k) defined  contribution plan. The Company's annual contributions to
this  defined   contribution   plan   represent  a  50%  match  on   participant
contributions. The Company's match is limited to participant contributions up to
6% of  participant  salaries.  In  addition,  the  Company  is  allowed  to make
discretionary  contributions.  Certain  Sweetheart  employees  are covered under
defined  benefit plans.  Benefits under these plans are generally based on fixed
amounts for each year of service.

         The Company sponsors various defined benefit postretirement health care
plans that cover  substantially  all  full-time  employees.  The plans,  in most
cases,  pay stated  percentages of most medical  expenses  incurred by retirees,
after  subtracting  payments by Medicare or other  providers  and after a stated
deductible has been met.  Participants  generally become eligible after reaching
age 60 with ten  years of  service.  The  majority  of the  Company's  plans are
contributory, with retiree contributions adjusted annually. The Company does not
fund the plans.

           None of the executive officers of the Company is covered under any of
the Company's  defined  benefit  plans.  Rather,  such persons are covered under
defined contribution plans only.


                                       22
<PAGE>


Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership  of  Sweetheart  Holdings  common stock as of December 18,
1998,  by  holders  having  beneficial  ownership  of more than five  percent of
Sweetheart  Holdings  common  stock  by  each  of the  directors  of  Sweetheart
Holdings,  by each of the named  executive  officers  and by all  directors  and
executive  officers of Sweetheart  Holdings as a group.  All of the  outstanding
common stock of Sweetheart Cup is owned by Sweetheart Holdings.

<TABLE>
<CAPTION>
                                                           Class A Common Stock             Class B Common Stock
                                                        ---------------------------      --------------------------
Name of Beneficial Owner                                 Number of         Percent         Number of       Percent
------------------------                                   Shares          of Class         Shares         of Class
                                                        -------------     -----------    -------------    ----------
<S>                                                       <C>                <C>          <C>               <C>
American Industrial Partners Capital Fund, L.P. ........  280,189            26.8%            --               --
         One Maritime Plaza
         Suite 2525
         San Francisco, CA 94111

Mellon  Bank,  N.A.,  as Trustee for First Plaza Group
Trust (1) ..............................................  182,000            17.4             --               --
         One Mellon Bank Center
         Pittsburgh, PA 15258

Leeway & Co., as nominee  for the AT&T Master  Pension
Trust (2) ..............................................   78,000             7.5             --               --
         c/o State Street Bank & Trust Co.
         Master Trust Division - W6C
         1 Enterprise Drive
         North Quincy, MA 02171

SF Holdings Group, Inc.(3) .............................  502,080            48.0         4,393,200         100.0%
         115 Stevens Avenue
         Valhalla, NY  10595

W.  Richard  Bingham (3) ...............................  280,189            26.8             --               --

Theodore C. Rogers (3) .................................  280,189            26.8             --               --

Lawrence W. Ward, Jr. ..................................       26              *              --               --

Dennis Mehiel (4) ......................................  399,656            38.2         3,496,987          79.6

Directors and executive officers as a group
(13 persons) (5)  ......... ............................  687,402            65.7         3,562,885          81.1
</TABLE>
--------------------------------------
*  Less than 1%.

     (1) Mellon Bank,  N.A., acts as the trustee (the "Trustee") for First Plaza
Group  Trust  ("First  Plaza"),  a trust  under and for the  benefit  of certain
employee   benefit  plans  of  General   Motors   Corporation   ("GM")  and  its
subsidiaries.  These  shares may be deemed to be owned  beneficially  by General
Motors Investment Management Corporation  ("GMIMCo"),  a wholly-owned subsidiary
of GM. GMIMCo's principal business is providing investment advice and investment
management services with respect to the assets of certain


                                       23

<PAGE>

employee benefit plans of GM and its subsidiaries and with respect to the assets
of certain  direct and  indirect  subsidiaries  of GM and  associated  entities.
GMIMCo is serving as First  Plaza's  investment  manager  with  respect to these
shares and in that  capacity  it has the sole power to direct the  Trustee as to
the voting and  disposition  of these shares.  Because of the Trustee's  limited
role, beneficial ownership of the shares by the Trustee is disclaimed.

(2) State  Street Bank & Trust Co. acts as trustee for a trust under and for the
benefit of certain employee benefit plans of American  Telephone & Telegraph Co.
("AT&T")  and  its  subsidiaries.  These  shares  may  be  deemed  to  be  owned
beneficially by the AT&T Master Pension Trust (the "Trust").

(3) All of such shares are held of record by AIP. Messrs. Bingham and Rogers are
general  partners of the general partner of AIP and share  investment and voting
power with respect to the securities  owned by AIP. The business  address of Mr.
Bingham is One Maritime  Plaza,  Suite 2525,  San Francisco,  CA 94111,  and the
business  address of Mr.  Rogers is 551 Fifth Avenue,  Suite 3800,  New York, NY
10176.

(4) All of such  shares are held of record by SF  Holdings  of which Mr.  Mehiel
beneficially owns 79.6% of the outstanding common stock. The business address of
Mr. Mehiel is 115 Stevens Avenue, Valhalla, NY, 10595.

(5) All of such shares are held of record by either AIP or SF Holdings.


Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Stockholders' Agreement

         Pursuant to the terms and conditions of the SF Holdings Investment, the
Company's  Board  of  Directors  consists  of five  members,  three  of whom are
nominated  by the  Original  Shareholders  and two of whom are  nominated  by SF
Holdings.  Pursuant  to  the  Company's  by-laws,  significant  actions  by  the
Company's  Board require the vote of four  directors and include,  among others:
(i) a merger,  consolidation  or other  combination  of the Company with or into
another  entity,  (ii) the sale of all or a material  portion  of the  Company's
assets,  (iii)  entering into of any new line of business,  (iv) the issuance or
repurchase of any equity securities,  (v) the incurrence of any indebtedness for
money borrowed or the refinancing of any existing indebtedness, (vi) approval of
the  annual  business  plans  and  operating  budgets,   (vii)  the  termination
indebtedness  or  modification  of any of the terms of the  Management  Services
Agreement,  (viii)  the  amendment  or  modification  of any  provisions  of the
certificate  of  incorporation,  (ix)  the  selection  of  the  Company's  chief
executive officer,  chief operating officer and chief financial officer, (x) any
change of  accountants  and (xi) the  removal of any  officers  of the  Company.
Additionally,  pursuant to a certain management services agreement,  as amended,
The Fonda Group,  Inc.,  an affiliate  of SF  Holdings,  manages the  day-to-day
operations of the Company subject to the direction of the Board of Directors.

         The  Original  Shareholders,  after March 12,  2003,  have the right to
exchange  their  shares of Class A Common  Stock  for  warrants  (the  "Exchange
Warrants")  to  purchase,  for nominal  consideration,  shares of Class C Common
Stock of SF Holdings  representing 10% of the total outstanding shares of common
stock of SF Holdings at the  consummation  of the SF  Holdings  Investment  on a
fully  diluted  basis.  SF Holdings has the right to cause such exchange and has
the right thereafter to repurchase the Exchange  Warrants,  in whole or in part,
for an aggregate call price of $50.0  million,  subject to increase at 12.5% per
annum  until  March 12,  2003.  Upon  occurrence  of a merger (as defined in the
Company's Stockholders'  Agreement),  the Original Shareholders will be required
to exchange their shares of Class A Common Stock for the Exchange  Warrants.  In
addition, in the event SF Holdings proposes to sell shares of Class A or Class B
Common Stock in an amount greater than 30% of the  outstanding  shares of common
stock,  the Original  Shareholders  will have the right to  participate  in such
sale.  In the event SF Holdings  proposes  to sell shares


                                       24

<PAGE>

of  common  stock in an amount  greater  than 30% of the  outstanding  shares of
common  stock,  then SF  Holdings  will have the right to require  the  Original
Shareholders  to sell  all,  but not less than  all,  of their  shares of common
stock.

Management Services Agreement with SF Holdings

         Pursuant to the Management Services Agreement,  as amended, SF Holdings
and AIPM, which manages AIP-LP,  are entitled to receive an aggregate annual fee
of $1.85 million,  payable  semi-annually  45 days after the scheduled  interest
payment dates for the Notes, 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 day to day  operations  of the
Company.  AIPM provides substantial ongoing financial and management services to
the Company.  Fees are split between SF Holdings and AIPM,  respectively,  50/50
during the first year following the SF Holdings  Investment  (which  occurred on
March 12, 1998),  60/40 during the second year, 70/30 during the third year, and
are paid 100% to SF Holdings thereafter.  SF Holdings has assigned substantially
all of its interests  under this  agreement to Fonda,  but retains  $200,000 per
year of fees for administrative services.

         In  addition,  in Fiscal  Year 1996,  the Company  reimbursed  AIPM for
$950,000  of  expenses  incurred  in  connection  with an  investigation  of the
Company's strategic alternatives.


Transactions with Affiliates

         The Company purchases  corrugated  containers from Four M, an affiliate
of the Company. Purchases totaled $1.8 million in Fiscal Year 1998, and were not
material in the preceding fiscal periods. The Company believes that the terms on
which it  purchased  such  products  are at least as favorable as those it could
otherwise have obtained from unrelated  third parties and were  negotiated on an
arm's length basis.


                                     PART IV


Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
           FORM 8-K


(a) The following documents are filed as a part of this report:

     1. The  financial  statements  listed in the  "Index  to  Consolidated
Financial Statements."

     2. The  financial  statement  schedule  listed in the  "Index to  Financial
Statement Schedules."

     3.  Exhibits

          3.1       Certificate  of  Incorporation  of Sweetheart  Holdings Inc.
                    (incorporated by reference from Exhibit 3.1 of the Company's
                    report on Form  10-K  dated  December  22,  1993 (the  "1993
                    10-K")).
          3.3       Certificate  of  Amendment to the  Restated  Certificate  of
                    Incorporation  of Sweetheart  Holdings Inc.  dated March 11,
                    1998  (incorporated  by  reference  from  Exhibit 3.3 of the
                    Company's report on Form 10-Q dated May 15, 1998).


                                       25
<PAGE>

          3.4       Amended and Restated  By-Laws of  Sweetheart  Holdings  Inc.
                    dated March 12, 1998 (incorporated by reference from Exhibit
                    3.4 of the  Company's  report  on Form  10-Q  dated  May 15,
                    1998).
          4.1       Indenture for the Senior  Secured  Notes between  Sweetheart
                    Cup Company  Inc.  and United  States  Trust  Company of New
                    York, as Trustee (incorporated by reference from Exhibit 4.1
                    of  Sweetheart  Holdings  Inc.'s  Report  on Form 8-K  dated
                    October 6, 1993 (the "1993 8-K")).
          4.2       Indenture   for  the  Senior   Subordinated   Notes  between
                    Sweetheart Cup Company Inc. and U.S. Trust Company of Texas,
                    N.A., as Trustee (incorporated by reference from Exhibit 4.2
                    on the 1993 8-K).
          10.1      Employment  Agreement dated May 15, 1994 between  Sweetheart
                    Holdings  Inc. and William F.  McLaughlin  (incorporated  by
                    reference from Exhibit 10.4 of the Company's  report on Form
                    10-Q dated August 12, 1994).
          10.2      Receivables   Purchase   Agreement  between  Sweetheart  Cup
                    Company Inc. and Sweetheart  Receivables  Corporation  dated
                    September 20, 1994  (incorporated  by reference from Exhibit
                    10.5 of the Company's  report on Form 10-K dated December 9,
                    1994 (the "1994 10-K")).
          10.3      Indenture   and   Security    Agreement   among   Sweetheart
                    Receivables  Corporation,  Sweetheart  Cup Company  Inc. and
                    Manufacturers  and Traders Trust Company dated September 20,
                    1994  (incorporated  by  reference  from Exhibit 10.6 of the
                    1994 10-K).
          10.4      Supplemental  Indenture  for Series  1994-1 A-V Notes  among
                    Sweetheart Receivables  Corporation,  Sweetheart Cup Company
                    Inc.  and  Manufacturers  and Traders  Trust  Company  dated
                    September 20, 1994  (incorporated  by reference from Exhibit
                    10.7 of the 1994 10-K).
          10.5      Credit  Agreement  among  Sweetheart  Inc.,  Sweetheart  Cup
                    Company Inc.,  various banks and Bankers Trust  Company,  as
                    Agent (the "Credit  Agreement")  (incorporated  by reference
                    from Exhibit 28.1 of the 1993 8-K).  10.6 First Amendment to
                    the Credit  Agreement dated July 22, 1994  (incorporated  by
                    reference from Exhibit 10.9 of the 1994 10-K).
          10.11     $2,500,000  Manchester,  New  Hampshire  Industrial  Revenue
                    Bonds,  Series 1979:  Loan Agreement and Assignment in Trust
                    dated as of June 1, 1979 between the Industrial  Development
                    Authority  of the State of New  Hampshire  and  Maryland Cup
                    Corporation   and  State  Street  Bank  and  Trust  Company,
                    Trustee;  and  Assumption  Agreement  dated as of August 26,
                    1983 by MC Acquisition Corp. (incorporated by reference from
                    Exhibit 10.10 of the Registration Statement).
          10.12     Term and Revolving Credit Facilities Agreement,  dated as of
                    December 20, 1989, among Lily Canada,  BT Bank of Canada and
                    The Bank of Nova Scotia and Amendment Agreement, dated as of
                    August 30,  1993  between  Lily  Canada and The Bank of Nova
                    Scotia  (incorporated  by reference from Exhibit 10.8 of the
                    1993 10-K).
          10.13     Asset Sale  Agreement  dated as of  October 6, 1993  between
                    Sweetheart  Holdings  Inc. and  Sweetheart  Cup Company Inc.
                    (incorporated   by  reference   from  Exhibit  10.1  of  the
                    Company's report on Form 10-Q dated February 11, 1994).
          10.14     Bill of Sale,  Assignment and Assumption  Agreement dated as
                    of October 6, 1993  between  Sweetheart  Holdings  Inc.  and
                    Sweetheart Cup Company Inc.  (incorporated by reference from
                    Exhibit  10.2 of the  Company's  report on Form  10-Q  dated
                    February 11, 1994).
          10.15     Wraparound  Note  dated  as  of  October  6,  1993  made  by
                    Sweetheart  Holdings  Inc. to  Sweetheart  Cup Company  Inc.
                    (incorporated   by  reference   from  Exhibit  10.3  of  the
                    Company's report on Form 10-Q dated February 11, 1994).
          10.16     Asset  Distribution  Agreement  dated as of  October 6, 1993
                    between Sweetheart  Holdings Inc. and Sweetheart Cup Company
                    Inc.  (incorporated  by  reference  from Exhibit 10.4 of the
                    Company's report on Form 10-Q dated February 11, 1994).
          10.17     Manufacturing  Agreement dated as of October 6, 1993 between
                    Sweetheart  Holdings  Inc. and  Sweetheart  Cup Company Inc.
                    (the "Manufacturing  Agreement")  (incorporated by


                                       26
<PAGE>

                    reference from Exhibit 10.5 of the Company's  report on Form
                    10-Q dated February 11, 1994).
          10.18     First  Amendment to  Manufacturing  Agreement dated February
                    25, 1994  (incorporated  by reference  from Exhibit 10.21 of
                    the 1994 10-K).
          10.19     Patent/Know-How  License  Agreement  dated as of  October 6,
                    1993 between  Sweetheart  Holdings Inc. and  Sweetheart  Cup
                    Company Inc. (incorporated by reference from Exhibit 10.6 of
                    the Company's report on Form 10-Q dated February 11, 1994).
          10.20     Sweetheart  Holdings  Inc.  Stock Option and  Purchase  Plan
                    dated  December 17, 1993  (incorporated  by  reference  from
                    Exhibit 10.26 of the 1994 10-K).
          10.21     Sweetheart Holdings Inc. Management  Incentive Plan dated as
                    of January 27, 1995  (incorporated by reference from Exhibit
                    10.1 of the Company's  report on Form 10-Q dated February 9,
                    1995).
          10.22     Sweetheart  Cup Company Inc.  Severance Pay Plan  (Effective
                    July 1, 1994)  (incorporated  by reference from Exhibit 10.2
                    of the  Company's  report on Form  10-Q  dated  February  9,
                    1995).
          10.23     Sweetheart Cup Company Inc. Deferred Compensation Plan dated
                    as of January  27,  1995  (incorporated  by  reference  from
                    Exhibit  10.3 of the  Company's  report on Form  10-Q  dated
                    February 9, 1995).
          10.24     Registration  Statement on Form S-8 dated April 17, 1995 for
                    the Sweetheart Cup Company Inc.  Deferred  Compensation Plan
                    (incorporated   by  reference   from  Exhibit  10.1  of  the
                    Company's report on Form 10-Q dated May 11, 1995).
          10.26     Second  Amendment to the Credit Agreement dated September 6,
                    1996  (incorporated  by reference  from Exhibit 10.26 of the
                    Company's  report on Form 10-K dated  December 20, 1996 (the
                    "1996 10-K")).
          10.27     Loan  Agreement  dated  August  1, 1996  between  Sweetheart
                    Holdings  Inc.  and the  State  of  Maryland  Department  of
                    Business and Economic Development (incorporated by reference
                    from Exhibit 10.27 of the 1996 10-K).
          10.28     Special Incentive Agreement between Sweetheart Holdings Inc.
                    and its subsidiary,  Sweetheart Cup Company Inc. and William
                    F.  McLaughlin  dated  December  9,  1996  (incorporated  by
                    reference from Exhibit 10.28 of the 1996 10-K).
          10.29     Special Incentive Agreement between Sweetheart Holdings Inc.
                    and its  subsidiary,  Sweetheart Cup Company Inc. and Joseph
                    A. Lucas dated November 18, 1996  (incorporated by reference
                    from Exhibit 10.29 of the 1996 10-K).
          10.30     Special Incentive Agreement between Sweetheart Holdings Inc.
                    and its subsidiary,  Sweetheart Cup Company Inc. and William
                    H. Haas dated November 18, 1996  (incorporated  by reference
                    from Exhibit 10.30 of the 1996 10-K).
          10.31     Special Incentive Agreement between Sweetheart Holdings Inc.
                    and its  subsidiary,  Sweetheart Cup Company Inc. and Daniel
                    M. Carson dated November 18, 1996 (incorporated by reference
                    from  Exhibit  10.31  of  the  1996  10-K).
          10.32     Special Incentive Agreement between Sweetheart Holdings Inc.
                    and its subsidiary,  Sweetheart Cup Company Inc. and Charles
                    E. Busse dated November 18, 1996  (incorporated by reference
                    from Exhibit 10.32 of the 1996 10-K).
          10.33     Promissory Note dated September 24, 1996 between  Sweetheart
                    Holdings  Inc.  and the  State  of  Maryland  Department  of
                    Business  and  Economic  Development  (relating  to the Loan
                    Agreement   filed  as  exhibit   10.27  to  the  1996  10-K,
                    incorporated   by  reference   from  Exhibit  10.33  of  the
                    Company's report on Form 10-Q dated February 11, 1997).
          10.34     Third  Amendment  to Credit  Agreement  dated June 17,  1997
                    (incorporated   by  reference  from  Exhibit  10.34  of  the
                    Company's report on Form 10-Q dated August 5, 1997).
          10.35     Amended  and  Restated  Loan and  Security  Agreement  dated
                    October  24,  1997  between  Sweetheart   Holdings  Inc.  as
                    borrower and  BankAmerica  Business  Credit,  Inc., as Agent
                    (incorporated   by  reference  from  Exhibit  10.35  of  the
                    Company's  report on Form 10-K dated  December 30, 1997 (the
                    "1997 10-K")).
          10.36     Special Incentive Agreement between Sweetheart Holdings Inc.
                    and its subsidiary,


                                       27
<PAGE>

                    Sweetheart  Cup  Company  Inc.  and  James R.  Mullen  dated
                    November 18, 1996  (incorporated  by reference  from Exhibit
                    10.36 of the 1997 10-K).
          10.37     Employment  Agreement dated March 1, 1997 between Sweetheart
                    Holdings  Inc.  and  William F.  Spengler  (incorporated  by
                    reference from Exhibit 10.37 of the 1997 10-K).
          10.38     Executive  Retention  Agreement between Sweetheart  Holdings
                    Inc.  and its  subsidiary,  Sweetheart  Cup Company Inc. and
                    William F. McLaughlin dated October 1, 1997 (incorporated by
                    reference from Exhibit 10.38 of the 1997 10-K)
          10.39     Executive  Retention  Agreement between Sweetheart  Holdings
                    Inc.  and its  subsidiary,  Sweetheart  Cup Company Inc. and
                    William  H. Haas  dated  October  1, 1997  (incorporated  by
                    reference from Exhibit 10.39 of the 1997 10-K).
          10.40     Executive  Retention  Agreement between Sweetheart  Holdings
                    Inc.  and its  subsidiary,  Sweetheart  Cup Company Inc. and
                    William F. Spengler dated October 1, 1997  (incorporated  by
                    reference from Exhibit 10.40 of the 1997 10-K).
          10.41     Executive  Retention  Agreement between Sweetheart  Holdings
                    Inc.  and its  subsidiary,  Sweetheart  Cup Company Inc. and
                    Daniel M.  Carson  dated  October 1, 1997  (incorporated  by
                    reference from Exhibit 10.41 of the 1997 10-K).
          10.42     Executive  Retention  Agreement between Sweetheart  Holdings
                    Inc.  and its  subsidiary,  Sweetheart  Cup Company Inc. and
                    James R.  Mullen  dated  October  1, 1997  (incorporated  by
                    reference from Exhibit 10.42 of the 1997 10-K).
          10.43     Employee  Relocation  Agreement between Sweetheart  Holdings
                    Inc.  and its  subsidiary,  Sweetheart  Cup Company Inc. and
                    William F. McLaughlin dated December 19, 1997  (incorporated
                    by reference from Exhibit 10.43 of the 1997 10-K).
          10.44     Employee  Relocation  Agreement between Sweetheart  Holdings
                    Inc.  and its  subsidiary,  Sweetheart  Cup Company Inc. and
                    James R. Mullen  dated  December 19, 1997  (incorporated  by
                    reference from Exhibit 10.44 of the 1997 10-K).
          10.45     Employee  Relocation  Agreement between Sweetheart  Holdings
                    Inc.  and its  subsidiary,  Sweetheart  Cup Company Inc. and
                    Daniel M. Carson dated  December 19, 1997  (incorporated  by
                    reference from Exhibit 10.45 of the 1997 10-K).
          10.46     Employee  Relocation  Agreement between Sweetheart  Holdings
                    Inc.  and its  subsidiary,  Sweetheart  Cup Company Inc. and
                    William H. Haas dated  December  19, 1997  (incorporated  by
                    reference from Exhibit 10.46 of the 1997 10-K).
          10.47     Second Restated  Management  Services  Agreement dated March
                    12, 1998  (incorporated  by reference  from Exhibit 10.47 of
                    the Company's report on Form 10-Q dated May 15, 1998).
          10.48     Amendment No. 1 to the Second Restated  Management  Services
                    Agreement  dated March 12, 1998  (incorporated  by reference
                    from  Exhibit  10.48 of the  Company's  report  on Form 10-Q
                    dated May 15, 1998).
          10.49     Amendment  No.  2 to  the  Amended  and  Restated  Loan  and
                    Security  Agreement  dated March 10, 1998  (incorporated  by
                    reference from Exhibit 10.49 of the Company's report on Form
                    10-Q dated May 15, 1998).
          10.50     Amendment  No.  3 to  the  Amended  and  Restated  Loan  and
                    Security  Agreement  dated  May 12,  1998  (incorporated  by
                    reference from Exhibit 10.50 of the Company's report on Form
                    10-Q dated May 15, 1998).
          10.51     Credit Agreement dated as of June 15, 1998 between Lily Cups
                    Inc. as Borrower and General Electric Capital Canada Inc. as
                    Lender  (incorporated by reference from Exhibit 10.51 of the
                    Company's report on Form 10-Q dated August 14, 1998).
          10.52     Security  Agreement  made as of June 15, 1998  between  Lily
                    Cups Inc.  as Grantor and General  Electric  Capital  Canada
                    Inc. as Lender (incorporated by reference from Exhibit 10.52
                    of the Company's report on Form 10-Q dated August 14, 1998).
          10.53     Separation  Agreement between  Sweetheart  Holdings Inc. and
                    its subsidiary,  Sweetheart Cup Company Inc., and William F.
                    McLaughlin dated January 19, 1998.
          10.54     Consent and Amendment No. 4 to the Amended and Restated Loan
                    and Security Agreement dated November 1, 1998.
          10.55     Executive  Retention  Agreement between Sweetheart  Holdings
                    Inc.  and its  subsidiary,


                                       28

<PAGE>

                    Sweetheart  Cup  Company  Inc.  and  Charles E. Busse  dated
                    October 1, 1997.
          10.56     Executive  Retention  Agreement between Sweetheart  Holdings
                    Inc.  and its  subsidiary,  Sweetheart  Cup Company Inc. and
                    Joseph A. Lucas dated October 1, 1997.
          16.0      Letter from Arthur  Andersen LLP in accordance with Item 304
                    (a)(3) of Regulation  S-K  (incorporated  by reference  from
                    Exhibit 16.0 to the Company's report on Form 8-K dated April
                    29, 1998).
          18.0      Preferability Letter (incorporated by reference from Exhibit
                    18.0 of the  Company's  report on Form 10-Q dated August 14,
                    1998).
          21.1      Subsidiaries of the Company  (incorporated by reference from
                    Exhibit 21.1 of the 1994 10-K).
          27.0      September 27, 1998 Financial Data Schedule

(b)  Current Reports on Form 8-K

         A  change  in the  Company's  fiscal  year  end was  filed as an Item 8
disclosure on October 30, 1998.


                                       29

<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                       Page
                                                                                       ----

<S>                                                                                    <C>
Independent Auditors' Report                                                           31


Report of Independent Public Accountants                                               32


Consolidated Balance Sheets as of September 27, 1998
         and September 30, 1997                                                        33


Consolidated Statements of Operations for Fiscal Years 1998, 1997 and 1996             34


Consolidated Statements of Cash Flows for Fiscal Years 1998, 1997 and 1996             35


Consolidated Statements of Shareholders' Equity for Fiscal
              Years 1998, 1997 and 1996                                                36


Notes to Consolidated Financial Statements                                             37
</TABLE>


                                       30

<PAGE>

INDEPENDENT AUDITORS' REPORT


To the Board of Directors of
Sweetheart Holdings Inc.:


We have  audited  the  accompanying  consolidated  balance  sheet of  Sweetheart
Holdings Inc. and Subsidiaries (the "Company") as of September 27, 1998, and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for the year then ended. These consolidated  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  based on our  audit.  The
consolidated  financial  statements of the Company for the years ended September
30, 1997 and 1996 were audited by other auditors whose report, dated December 8,
1997  (except  with  respect  to the  matter in Note 1, as to which the date was
December 3, 1998), expressed an unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards.
These standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion,  the 1998 consolidated  financial  statements present fairly, in
all material respects, the financial position of the Company as of September 27,
1998 and the  results  of its  operations  and its cash  flows for the year then
ended in conformity with generally accepted accounting principles.

As discussed in Note 1 to the  consolidated  financial  statements,  in 1998 the
Company   changed  its  method  for   accounting   for   inventories   from  the
last-in-first-out  method to the  first-in  first-out  method and  retroactively
restated the 1997 and 1996  consolidated  financial  statements  for the change.
Also,  as discussed in Note 15 to the  consolidated  financial  statements,  the
Company changed its method for accounting for reengineering  costs in connection
with software installation.


/s/ DELOITTE & TOUCHE LLP
Baltimore, Maryland
December 10, 1998


                                       31

<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Sweetheart Holdings Inc.:


We have  audited the  accompanying  consolidated  balance  sheets of  SWEETHEART
HOLDINGS INC. (a Delaware corporation) AND SUBSIDIARIES as of September 30, 1997
and the related consolidated statements of operations,  shareholders' equity and
cash  flows for the  Fiscal  Years  ended  September  30,  1997 and 1996.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Sweetheart  Holdings Inc. and
Subsidiaries  as of September 30, 1997,  and the  consolidated  results of their
operations  and their cash flows for the Fiscal Years ended  September  30, 1997
and 1996 in conformity with generally accepted accounting principles.

As  explained  in Note 1 to the  financial  statements,  the  Company  has given
retroactive effect to the change in accounting for inventory  valuation from the
last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO") method.


                                                         /s/ ARTHUR ANDERSEN LLP

Baltimore, Maryland
December 8, 1997
   (except with respect to
   the matter discussed in
   Note 1 - Inventories, as
   to which the date is 
   December 3, 1998)


                                       32
<PAGE>

                                     SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                         (In thousands, except share data)


<TABLE>
<CAPTION>
                                                                                       September 27,     September 30,
                                                                                            1998           1997 (a)
                                                                                       ---------------  ----------------
                                          Assets
                                          ------
         Current assets:
<S>                                                                                            <C>               <C>
           Cash and cash equivalents                                                           $1,367            $2,650
           Restricted cash                                                                         --            29,016
           Cash in escrow                                                                       5,464            13,323
           Receivables, less allowances of $1,817 and $1,740, respectively                     85,248            85,774
           Inventories                                                                        133,065           142,277
           Deferred income taxes                                                               11,506             2,471
           Assets held for sale, net                                                               --             8,466
           Spare parts                                                                         19,278            20,868
                                                                                               ------            ------
                Total current assets                                                          255,928           304,845
                                                                                              -------           -------

           Property, plant and equipment, net                                                 355,224           382,491

           Deferred income taxes                                                               41,395            15,098
           Other assets                                                                        13,079            13,155
                                                                                               ------            ------

                Total assets                                                                 $665,626          $715,589
                                                                                             ========          ========

                           Liabilities and Shareholders' Equity
                           ------------------------------------
Current liabilities:
            Accounts payable                                                                  $66,205           $58,933
            Accrued payroll and related costs                                                  39,324            40,528
            Other current liabilities                                                          40,866            43,815
            Current portion of long-term debt                                                   3,445             1,369
                                                                                                -----             -----
                Total current liabilities                                                     149,840           144,645
                                                                                              -------           -------

            Long-term debt                                                                    422,438           430,499
            Other non-current liabilities                                                      74,365            69,775

         Shareholders' equity:
            Common stock - Par value $.01 per share;  3,000,000 shares authorized;
            1,046,000 shares issued and outstanding                                                --           101,100
            Class A Common  Stock - Par value  $.01 per  share;  1,100,000  shares
            authorized; 1,046,000 shares issued and outstanding                               101,100                --
            Class B Common  Stock - Par value  $.01 per  share;  4,600,000  shares
            authorized; 4,393,200 shares issued and outstanding                                    44                --
            Cumulative translation adjustment                                                  (1,569)             (507)
            Minimum pension liability adjustment                                               (4,922)               --
            Accumulated deficit                                                               (75,670)          (29,552)
            Note receivable related to purchase of common stock                                    --              (371)
                                                                                              --------          -------
                 Total shareholders' equity                                                    18,983            70,670
                                                                                               ------           -------

            Total liabilities and shareholders' equity                                       $665,626          $715,589
                                                                                             ========          ========

          (a)  Prior  period   balances  have  been  restated  (see  Note  1  to Consolidated Financial Statements).

              The accompanying  notes are an integral part of these consolidated financial statements.
</TABLE>


                                       33
<PAGE>

                                     SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                                  (In thousands)

<TABLE>
<CAPTION>


                                                                       Fiscal Years
                                             -------------------------------------------------------

                                                      1998               1997 (a)           1996 (a)
                                             -------------------------------------------------------
<S>                                                 <C>                <C>                <C>

Net sales                                            $843,502           $886,017           $959,818
Cost of sales                                         787,706            822,818            859,029
                                                      -------            -------            -------

         Gross profit                                  55,796             63,199            100,789

Selling, general, and administrative                   68,818             66,792             61,788
Loss on asset disposal and impairment                   5,000             24,550                  -
Restructuring charges                                     897              9,680                  -
Other expense (income), net                            12,400                (73)             4,271
                                                      -------            -------            -------

         Operating income (loss)                      (31,319)           (37,750)            34,730

Interest expense, net of interest income
     of $755, $1,547 and $1,315 in 1998,
     1997 and 1996, respectively                       42,955             40,265             37,517
                                                       ------             ------             ------

         Loss  before  income tax  benefit,
         cumulative     effect     of    an           (74,274)           (78,015)            (2,787)
         accounting change  and
         extraordinary loss

Income tax benefit                                    (29,711)           (31,206)            (1,115)
                                                      -------            -------            -------

         Loss before  cumulative  effect of
         an    accounting     change    and
         extraordinary loss                           (44,563)           (46,809)            (1,672)

Cumulative  effect of an accounting  change
   (net of income taxes of $1,000)                      1,511                  -                  -
Extraordinary loss on debt
     extinguishment (net of income taxes
     of $627)                                               -                940                  -
                                                      -------            -------            -------

         Net loss                                   $ (46,074)          $(47,749)           $(1,672)
                                                    =========          =========           ========

          (a)  Prior  period   balances  have  been  restated  (see  Note  1  to Consolidated Financial Statements).

              The accompanying  notes are an integral part of these consolidated financial statements.

</TABLE>


                                       34

<PAGE>

                                      SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (In thousands)

<TABLE>
<CAPTION>

                                                                       Fiscal Years
                                                   ------------------------------------------------------
                                                           1998              1997               1996
                                                   ------------------------------------------------------
<S>                                                        <C>                 <C>             <C>

Cash flows from operating activities:
Net loss                                                   $(46,074)          $(47,749)         $(1,672)
Adjustments  to  reconcile  net  loss to net cash
provided by (used in) operating activities:
     Depreciation and amortization                           46,738             47,723           43,373
     Asset impairment expense                                 5,000             24,550                -
     Extraordinary loss, net of tax                               -                940                -
     Cumulative effect of an accounting
          change, net of tax                                  1,511                  -                -
     Deferred income taxes                                  (29,711)           (31,206)          (2,279)
     Gain on sale of bakery                                  (4,245)                 -                -
Changes in operating assets and liabilities:
     Receivables                                                526             (1,341)           14,103
     Inventories                                              9,212             25,790            (8,542)
     Accounts payable                                         7,272            (11,541)            5,259
     Other, net                                              (8,023)           (10,408)           (6,734)
                                                            -------           --------           -------
     Net cash provided by (used in)
       operating activities                                 (17,794)            (3,242)           43,508
                                                           --------            -------            ------

Cash flows from investing activities:
Additions to property, plant, and
  equipment                                                 (37,534)           (47,757)          (50,236)
Proceeds from sale of bakery                                 14,718
Proceeds from sales of property,
  plant, and equipment                                        7,719             17,843                 -
                                                             ------             ------             -----
     Net cash used in investing activities                  (15,097)           (29,914)          (50,236)
                                                           --------           --------          --------

Cash flows from financing activities:
Proceeds from debt                                            6,813                  -                 -
Repayment of debt                                           (65,375)                 -                 -
Net borrowings under revolving credit facilities             54,433             44,852            15,925
Payment of financing fees                                    (1,509)                 -                 -
Payment received on common stock
  note receivable                                               371                 52                77
Increase in restricted cash                                  29,016               (146)          (12,904)
Increase in cash in escrow                                    7,859            (13,323)                -
                                                             ------             ------             -----
     Net cash provided by financing activities               31,608             31,435             3,098
                                                             ------             ------             -----

Net decrease in cash and cash equivalents                    (1,283)            (1,721)           (3,630)

Cash and cash equivalents, beginning
  of period                                                   2,650              4,371             8,001
                                                              -----              -----             -----

Cash and cash equivalents, end of period                     $1,367             $2,650            $4,371
                                                             ======             ======            ======

Supplemental cash flow disclosures:
    Interest paid                                           $39,866            $38,818           $35,767
                                                            =======            =======           =======
    Income taxes paid                                        $  711               $  -            $2,226
                                                             ======               ====            ======

              The accompanying  notes are an integral part of these consolidated financial statements.
</TABLE>


                                       35

<PAGE>

                                     SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                                    (In thousands)



<TABLE>
<CAPTION>

                                                                                  Minimum     Retained
                                            Class A    Class B      Cumulative    Pension     Earnings/                    Total
                              Common Stock  Common   Common Stock  Translation   Liability   (Accumulated     Note     Shareholders'
                                             Stock                  Adjustment   Adjustment    Deficit)    Receivable      Equity
                              ------------------------------------------------------------------------------------------------------
<S>                                     <C>         <C>         <C>          <C>         <C>           <C>          <C>

Balance,  September 30, 1995,
  as previously reported        $ 101,100   $      -    $       -   $     (141)  $       -    $  15,346     $    (500)   $ 115,805

Cumulative  effect  on  prior
  years      of      applying
  retrocactively    the   new
  method  of  accounting  for
  inventory valuation                   -          -            -            -           -        4,523             -        4,523
                                ---------   --------    ---------   ----------   ---------    ---------      --------    ---------

Balance,  September 30, 1995,
  as restated                     101,100          -            -         (141)          -       19,869          (500)     120,328

Net loss                                -          -            -            -           -       (1,672)            -       (1,672)
Payment   received   on  note
  receivable                            -          -            -            -           -            -            77           77
Translation adjustment                  -          -            -         (181)          -            -             -         (181)
                                ---------   --------    ---------   ----------   ---------    ---------      --------    ---------

Balance, September 30, 1996       101,100          -            -         (322)          -       18,197          (423)     118,552

Net loss                                -          -            -            -           -      (47,749)            -      (47,749)
Payment   received   on  note
  receivable                            -          -            -            -           -            -            52           52
Translation adjustment                  -          -            -         (185)          -            -             -         (185)
                                ---------   --------    ---------   ----------   ---------    ---------      --------    ---------

Balance, September 30, 1997       101,100          -            -         (507)          -      (29,552)         (371)      70,670

Net loss                                -          -            -            -           -      (46,074)            -      (46,074)
Stock dividend                          -          -           44            -           -          (44)            -            -
Common stock exchange            (101,100)   101,100            -            -           -            -             -            -
Payment   received   on  note
  receivable                            -          -            -            -           -            -           371          371
Minimum   pension   liability
  adjustment                            -          -            -            -      (4,922)           -             -       (4,922)
Translation adjustment                  -          -            -       (1,062)          -            -             -       (1,062)
                                ---------   --------    ---------   ----------   ---------    ---------      --------    ---------

Balance, September 27, 1998     $       -   $101,100    $      44   $   (1,569)  $  (4,922)   $ (75,670)     $      -    $  18,983
                                =========   ========    =========   ==========   =========    =========      ========    =========

              The accompanying  notes are an integral part of these consolidated financial statements.
</TABLE>


                                       36
<PAGE>

                    SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
                    -----------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


         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").


1.  SIGNIFICANT ACCOUNTING POLICIES

         Fiscal year end - On October 22, 1998, the Company's Board of Directors
approved a change in the Company's  fiscal year from the year ended September 30
to the 52 or 53 week period ending on the last Sunday in September.  This change
is  effective  for the period from October 1, 1997  through  September  27, 1998
("Fiscal  Year  1998").  The  fiscal  1997 and  1996  periods  are  shown as the
historical  periods from October 1 through September 30 of the respective fiscal
years ("Fiscal Year 1997" and "Fiscal Year 1996", respectively).

         Principles of Consolidation and Translation - The financial  statements
include the accounts of the Company and its subsidiaries on a consolidated basis
as of September 27, 1998 and September 30, 1997 and for Fiscal Years 1998,  1997
and 1996. For all fiscal years presented,  the consolidated financial statements
include the  accounts of the  Company's  United  States  operations  (Sweetheart
Holdings  and  its  domestic   subsidiaries,   Sweetheart   Cup  and  Sweetheart
Receivables  Corporation) and Lily Cups Inc., a Canadian subsidiary.  Assets and
liabilities  of Lily Cups Inc. are translated at the rates of exchange in effect
at the balance sheet date.  Income  amounts are translated at the average of the
monthly  exchange  rates.  The cumulative  effect of translation  adjustments is
deferred and classified as a cumulative translation adjustment.  All significant
intercompany and intergroup accounts and transactions have been eliminated.

         Cash, including Cash Equivalents,  Restricted Cash and Cash in Escrow -
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash overdrafts are reclassified to
accounts  payable  and  accrued  payroll and  related  costs.  Cash  received as
proceeds from the sale of assets is restricted to qualified capital expenditures
under  the  indentures  governing  the  Senior  Secured  Notes  and  the  Senior
Subordinated  Notes (see Note 10), and is held in escrow with the trustee  until
utilized.  The balance of cash in escrow was $5.5  million and $13.3  million at
September 27, 1998 and September 30, 1997,  respectively.  Cash balances related
to Sweetheart  Receivables  Corporation ("SRC") were restricted from transfer to
other entities within the Company. The restricted cash balance, along with other
consideration,  was used to  reacquire  the SRC  notes in the first  quarter  of
Fiscal Year 1998. See Note 10. The balance of restricted  cash was $29.0 million
at September 30, 1997.

         Inventories - Effective June 1, 1998, the Company changed its method of
accounting  for  inventories  from the last-in  first-out  (LIFO)  method to the
first-in  first-out (FIFO) method.  Management  believes that the FIFO method is
preferable because it more accurately  presents the Company's financial position
as it reflects more recent costs at the balance  sheet date and more  accurately
matches revenues with costs reported during the period presented.  The financial
statements  of prior  periods  have been  restated  to apply the FIFO  method of
accounting for inventories retroactively.  The effect of this restatement was to
increase retained earnings as of September 30, 1995 by $4.5 million.  Net income
decreased by $0.1  million,  $1.1 million and $7.4 million in Fiscal Years 1998,
1997 and 1996, respectively.

         Assets held for sale - Property,  plant,  and  equipment for the Bakery
division was reclassified as held for sale at September 30, 1997 and was sold on
November 30, 1997. See Note 14.

         Property,  Plant and  Equipment  -  Property,  plant and  equipment  is
recorded at cost,  less  accumulated  depreciation,  and is  depreciated  on the
straight-line  method over the  estimated  useful lives of


                                       37

<PAGE>

the assets, with the exception of property,  plant, and equipment acquired prior
to January 1, 1991, which is depreciated on the declining balance method.

         The asset lives of buildings and fixtures range between 12 and 50 years
and have an average useful life of 38 years.  The asset lives of equipment range
between 5 and 18 years and have an average useful life of 13 years.

         Income  Taxes  -  Deferred  income  taxes  are  provided  to  recognize
temporary differences between the financial reporting basis and the tax basis of
the  Company's  assets and  liabilities.  The  principal  differences  relate to
depreciation expense and pension and postretirement benefits.

         No  deferred   income  taxes  have  been  provided  on  the  cumulative
undistributed  earnings of the Canadian  subsidiary  of  Sweetheart  Cup.  Those
earnings  (approximately  $12.8 million) are considered  permanently  reinvested
under Accounting Principles Bulletin No. 23.

         Reclassifications   -  Certain   prior   period   balances   have  been
reclassified to conform with current presentation.

         Impact of  Recently  Issued  Accounting  Standards - During  1997,  the
Financial   Accounting   Standards   Board   issued  SFAS  No.  130,   Reporting
Comprehensive  Income  and  SFAS  No.  131,  Disclosures  about  Segments  of an
Enterprise and Related  Information.  In February 1998, the FASB issued SFAS No.
132, Employers' Disclosure about Pensions and Other Postretirement Benefits. The
Company is in the process of evaluating the new statements,  which are effective
for Fiscal Year 1999. The adoption of these statements is not expected to have a
material effect on the Company's financial statements.

         In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities.  SFAS No. 133
establishes accounting and reporting standards for derivative  instruments,  and
requires that an entity recognize all derivatives at fair value in the statement
of  financial  position.  The  Company is in the process of  evaluating  the new
statement, which is effective for Fiscal Year 2000.

         Use  of  Estimates  -  The  preparation  of  financial   statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the  reporting  Fiscal  Years.  Actual  results  could  differ from those
estimates.


2.  INVENTORIES

         The components of inventories are as follows (in thousands):

<TABLE>
<CAPTION>

                                                   September 27,          September 30,
                                                       1998                   1997
                                                  ----------------       ----------------
<S>                                          <C>                      <C>

          Components-
               Raw materials and supplies                 $27,661                $30,907
               Finished  products                          96,943                103,669
               Work in progress                             8,461                  7,701
                                                           ------                  -----
                                                         $133,065               $142,277
                                                         ========               ========

</TABLE>



                                       38
<PAGE>

3.  PROPERTY, PLANT AND EQUIPMENT, NET

         The Company's major classes of property,  plant and equipment,  net are
as follows (in thousands):

<TABLE>
<CAPTION>

                                                   September 27,                    September 30,
                                                        1998                             1997
                                              -------------------------          ---------------------
<S>                                       <C>                              <C>


     Land                                           $     19,111                       $     23,801
     Buildings                                            79,774                             83,040
     Machinery and equipment                             414,273                            397,522
     Construction in progress                             26,561                             23,636
                                                    ------------                       ------------

              Total                                      539,719                            527,999
                                                    ------------                       ------------

     Accumulated depreciation                           (184,495)                          (145,508)
                                                    ------------                      -------------

     Property, plant and equipment, net             $    355,224                       $    382,491
                                                    ============                       ============


</TABLE>

4.  OTHER ASSETS

         The components of long term other assets are as follows (in thousands):


<TABLE>
<CAPTION>

                                                   September 27,                    September 30,
                                                        1998                             1997
                                              -------------------------          ---------------------
<S>                                     <C>                              <C>


     Debt issuance costs, net of
          accumulated amortization                 $    6,426                         $    8,159
     Intangible pension asset
          (see Note 7)                                  2,256                                860
     Prepaid assets                                     2,016                              2,423
     Other                                              2,381                              1,713
                                                   ----------                         ----------

              Total long-term                      $   13,079                         $   13,155
                                                   ==========                         ==========

</TABLE>

         Amortization of debt issuance costs totaled $2.8 million,  $5.2 million
and $3.6  million for Fiscal  Years 1998,  1997 and 1996,  respectively,  and is
included in interest  expense  except as noted as  follows.  During  Fiscal Year
1997, the Company accelerated $1.6 million of amortization for the debt issuance
costs related to the SRC Notes and the 1993 Credit Agreement, both of which were
refinanced  in Fiscal  Year  1998.  (See Note  10).  This  charge is shown as an
extraordinary  loss (net of $0.6  million of income  taxes) on the  consolidated
statement of operations.


                                       39

<PAGE>

5.  OTHER CURRENT LIABILITIES

         The  components  of  other  current  liabilities  are  as  follows  (in
thousands):

<TABLE>
<CAPTION>

                                                   September 27,                    September 30,
                                                        1998                             1997
                                              -------------------------          ---------------------
<S>                                     <C>                               <C>

     Sales allowances                              $     8,146                        $     7,052
     Restructuring costs                                 1,637                             13,201
     Taxes other than income taxes                       3,591                              2,841
     Litigation, claims and assessments
          (see Note 17)                                 18,903                             15,445
     Interest payable                                    3,925                              2,806
     Other                                               4,664                              2,470
                                                   -----------                        -----------

              Total                                $    40,866                        $    43,815
                                                   ===========                        ===========
</TABLE>


6.  OTHER NON-CURRENT LIABILITIES

         The  components  of other  non-current  liabilities  are as follows (in
thousands):

<TABLE>
<CAPTION>

                                                   September 27,                    September 30,
                                                        1998                             1997
                                              -------------------------          ---------------------
<S>                                      <C>                               <C>


     Post retirement health care benefits
          (see Note 8)                             $    57,564                        $    57,983
     Pensions (see Note 7)                              15,960                              9,761
     Other                                                 841                              2,031
                                                   -----------                        -----------

              Total                                $    74,365                        $    69,775
                                                   ===========                        ===========

</TABLE>


                                       40
<PAGE>

7.  EMPLOYEE BENEFIT PLANS

         A majority of the employees ("participants") are covered under a 401(k)
defined  contribution  plan. The Company's annual  contributions to this defined
contribution  plan  represent  a 50%  match on  participant  contributions.  The
Company's match is limited to participant  contributions up to 6% of participant
salaries.   In   addition,   the  Company  is  allowed  to  make   discretionary
contributions.  Costs charged against  operations for this defined  contribution
plan were $3.4  million,  $3.6  million and $3.7  million for Fiscal Years 1998,
1997 and 1996, respectively. Certain employees are covered under defined benefit
plans.  Benefits  under the plans are generally  based on fixed amounts for each
period of service.

         The  components  of net pension  expense for domestic  defined  benefit
plans are as follows (in thousands):

<TABLE>
<CAPTION>

                                                    Fiscal Year
                        -------------------------------------------------------------------
                                1998                   1997                  1996
                        ---------------------- ---------------------- ---------------------
<S>                                         <C>                     <C>


Service cost                 $       989           $     1,111           $     1,078
Interest cost                      3,881                 3,720                 3,545
Projected return
   on assets                         249                (3,212)               (2,874)
Net amortization                  (3,869)                  262                   188
                             -----------            ----------            ----------

     Net pension
       expense               $    1,250             $    1,881            $    1,937
                             ==========             ==========            ==========

</TABLE>


         The status of defined  benefit  pension plans using data as of the most
recent actuarial valuation dates is as follows (in thousands):

<TABLE>
<CAPTION>

                                                   September 27, 1998              September 30, 1997
                                                 -----------------------          ----------------------
<S>                                                                        <C>

     Actuarial present value of
          benefit obligations -
              Vested benefits                          $   55,418                       $   41,616
              Nonvested benefits                            3,235                           11,094
                                                       ----------                       ----------
     Accumulated and projected
          benefit obligation                               58,653                           52,710
     Plan assets at fair value                             38,600                           39,243
                                                       ----------                       ----------

              Funded status                               (20,053)                         (13,467)

     Unrecognized prior service cost                        2,256                            1,529
     Unrecognized net loss                                  8,004                              473
     Adjustment required to recognize
          minimum liability                               (10,459)                            (860)
                                                       ----------                       ----------
              Net pension liability                    $  (20,252)                      $  (12,325)
                                                       ==========                       ==========

</TABLE>


                                       41
<PAGE>

         As required by SFAS No. 87,  "Employers'  Accounting for Pensions," the
Company  recognized  additional  pension  liabilities  of $10.5 million and $0.9
million as of September 27, 1998 and September 30, 1997, respectively,  of which
$2.3 million and $0.9 million were recognized as other assets, respectively.  Of
the  Fiscal  Year  1998  amount,  $8.2  million  was  recognized  as a charge to
Shareholders' equity ($4.9 million net of tax).

         Actuarial  assumptions  used in calculating the above amounts include a
10%  return on plan  assets  for  Fiscal  Years  1998 and 1997,  a 7.0% and 7.5%
discount rate on benefit  obligations as of September 27, 1998 and September 30,
1997,  respectively,  and a 7.0% and 7.5%  weighted  average  discount  rate for
Fiscal Years 1998 and 1997, respectively.


8.  POSTRETIREMENT HEALTH CARE PLANS

         The Company sponsors various defined benefit postretirement health care
plans that cover  substantially  all  full-time  employees.  The plans,  in most
cases,  pay stated  percentages of most medical  expenses  incurred by retirees,
after  subtracting  payments by Medicare or other  providers  and after a stated
deductible has been met.  Participants  generally become eligible after reaching
age 60 with ten years of participation.  The majority of the Company's plans are
contributory, with retiree contributions adjusted annually. The Company does not
fund the plans.

         The   following   table   analyzes   the   plans'   unfunded,   accrued
postretirement  health care cost liability as reflected on the balance sheet (in
thousands):

<TABLE>
<CAPTION>

                                                September 27,                    September 30,
                                                     1998                            1997
                                            -----------------------          ----------------------
<S>                                                                    <C>


Accumulated Postretirement Benefit
     Obligation:
     Retirees                                    $    30,655                      $    24,936
     Other fully eligible participants                 5,401                            5,731
     Other active participants                        12,715                           12,166
                                                 -----------                      -----------

                                                      48,771                           42,833

     Unrecognized prior service cost                   4,098                            4,861
     Unrecognized actuarial gain                       7,796                           13,389
                                                 -----------                      -----------
     Accrued postretirement health care
         cost liability                          $    60,665                      $    61,083
                                                 ===========                      ===========

</TABLE>



                                       42
<PAGE>

The  components  of net  postretirement  health  care  cost are as  follows  (in
thousands):

<TABLE>
<CAPTION>

                                                       Fiscal Year
                           ---------------------------------------------------------------------
                                   1998                   1997                    1996
                           ---------------------- ---------------------- -----------------------
<S>                                            <C>                     <C>

Service cost-
  benefits attributed to
  service during the period      $     898              $     859              $   1,533
Interest cost on
  accumulated post-
  retirement benefit
  obligation                         3,056                  3,098                  3,868
Net amortization and
  deferral                          (1,410)                (1,326)                  (187)
                                 ---------              ---------              ---------
     Net postretirement
       health care cost          $   2,544              $   2,631              $   5,214
                                 =========              =========              =========

</TABLE>

         The weighted  average discount rate used in determining the accumulated
postretirement  benefit  obligation was 7.0%, and 7.5% at September 27, 1998 and
September  30,  1997,  respectively.  Net  postretirement  health  care cost was
computed  using a weighted  average  discount rate of 7.0% for Fiscal Year 1998,
8.0% for Fiscal Year 1997,  and 7.75% for Fiscal Year 1996.  For  measuring  the
expected postretirement benefit obligation,  a 9% annual rate of increase in the
per capita claims cost was assumed for 1998. This rate is assumed to decrease by
1.0% per year to an  ultimate  rate of 5.0%.  The  health  care cost  trend rate
assumption  has a significant  effect on the amounts  reported.  To  illustrate,
increasing the assumed  health care cost trend rates by one percentage  point in
each year would increase the accumulated postretirement benefit obligation as of
September 27, 1998 and September 30, 1997 by approximately $1.5 million and $2.2
million,  respectively,  and the  aggregate  of the  service and  interest  cost
components of net postretirement health care cost by approximately $0.2 million,
$0.2  million  and  $0.4   million  for  Fiscal  Years  1998,   1997  and  1996,
respectively.


                                       43
<PAGE>

9.  INCOME TAXES

         The  income  tax  benefit   includes  the  following   components   (in
thousands):

<TABLE>
<CAPTION>

                                                    Fiscal Year
                        -------------------------------------------------------------------
                                1998                   1997                  1996
                        ---------------------- ---------------------- ----------------------
<S>                                          <C>                    <C>

Current-
   Federal                     $       -              $       -              $      -
   State                               -                      -                     -
   Foreign                             -                      -                (1,164)
                               ---------              ---------              --------

    Total current                      -                      -                (1,164)
                               ---------              ---------              --------

Deferred -
   Federal                        25,588                 26,794                 1,995
   State                           3,656                  3,828                   284
   Foreign                           467                    584                     -
                               ---------              ---------              --------

    Total deferred                29,711                 31,206                 2,279
                               ---------              ---------              --------

                               $  29,711              $  31,206             $   1,115
                               =========              =========             =========

</TABLE>

         The effective tax rate varied from the U.S. Federal tax rate of 35% for
Fiscal Years 1998, 1997 and 1996 as a result of the following:

<TABLE>
<CAPTION>

                                                                    Fiscal Years
                                      ---------------------------------------------------------------------------
                                              1998                      1997                       1996
                                      ----------------------    ----------------------    -----------------------
<S>                                                         <C>                        <C>


U.S. Federal tax rate                            35%                       35%                       35%
State income taxes, net of
   U.S. Federal tax impact                        4                         4                         4
Other, net                                        1                         1                         1
                                             ------                    ------                    ------

       Effective tax rate                        40%                       40%                       40%
                                               =====                     =====                    ======

</TABLE>

         At September 27, 1998, the Company had deferred tax liabilities of $137
million,  of which $17 million are current in nature, and deferred tax assets of
$190  million,  of which $28 million are current in nature.  Deferred tax assets
and liabilities  have been netted as a current asset and a non-current  asset in
the  accompanying   Consolidated   Balance  Sheets.   The  principal   temporary
differences included above are depreciation, a $64 million liability,  inventory
adjustments,  a $17 million liability,  net operating loss carryforwards,  a $79
million asset,  postretirement health and pension benefits, a $30 million asset,
other  employee  benefits,  a $11  million  asset and $14  million  of other net
miscellaneous asset items.

         At September 30, 1998, the Company had deferred tax liabilities of $164
million,  of which $32 million are current in nature, and deferred tax assets of
$182  million,  of which $35 million are current in nature.  Deferred tax assets
and liabilities have been netted as a current asset and non-current asset in the
accompanying  Consolidated  Balance Sheets. The principal temporary  differences
included above are depreciation, a $75 million liability, inventory adjustments,
a $19 million liability, net operating loss carryforwards,  a $67 million asset,
postretirement health and pension benefits, a $28 million asset, and $17 million
of other net miscellaneous  items.  Although future earnings cannot be predicted
with  certainty,  management  currently  believes  that  realization  of the net
deferred tax asset is more likely than not.



                                       44
<PAGE>

         The  Company  has net  operating  loss  carryforwards  for  income  tax
purposes of approximately $202 million,  of which $5 million expire in 2004, $51
million  expire in 2005, $25 million expire in 2006, $13 million expire in 2007,
$28 million expire in 2008, $45 million expire in 2012 and $35 million expire in
2018.


10.  LONG-TERM OBLIGATIONS

         Long-term  debt,  including  amounts  payable  within  one year,  is as
follows (in thousands):

<TABLE>
<CAPTION>

                                                                   September 27,        September 30,
                                                                        1998                 1997
                                                                  -----------------    -----------------
<S>                                                                                 <C>


Sweetheart Cup
--------------
Senior Secured Notes, at 9.625%,  interest  payable  semiannually
on March 1 and September 1 of each year, due on September
1, 2000.                                                                  $190,000           $190,000

Senior Subordinated Notes, at 10.50%,  interest payable  semiannually
on March 1 and September 1 of each year, due on
   September 1, 2003.                                                      110,000            110,000

Revolving Loan at Bank of America's  prime rate plus 1.00%, or
Bank of America's Eurodollar rate plus 2.25%, subject to
   certain limitations, due on August 1, 2000.                             113,708                  -

Revolving Loan at Bankers Trust                                                  -             60,000

Sweetheart Receivables Corporation
----------------------------------
Sweetheart  Receivables  Corporation  Series  1994-1  A-V  Trade
   Receivables-Backed Notes.                                                     -             60,000

Lily Cups Inc.
--------------
Term and revolving facilities                                                9,675              8,168

Bonds
-----
Industrial revenue bond with the State of New Hampshire                      2,500              2,500

Other industrial revenue bonds                                                   -              1,200
                                                                         ---------              -----

                                                                           425,883              431,868
                                                                           -------              -------

Less - Current portion of long-term debt                                    (3,445)              (1,369)
                                                                           -------              -------

                                                                          $422,438             $430,499
                                                                          ========             ========


</TABLE>


                                       45
<PAGE>

The aggregate  annual  maturities of long-term debt at September 27, 1998 are as
follows (in thousands):

                  1999                                                $    3,445
                  2000                                                   304,653
                  2001                                                     7,785
                  2002                                                         -
                  2003                                                   110,000
                  2004 and thereafter                                          -
                                                                 ---------------
                                                                        $425,883

         1997 Amended and Restated  Credit  Agreement - On October 24, 1997, the
Company entered into the 1997 Amended and Restated Credit Agreement,  as amended
through  November 4, 1998,  which provides for a $135 million  Revolving  Credit
Facility (the "U.S. Credit Facility"), with BankAmerica Business Credit as Agent
and various other  financial  institutions.  Borrowings  bear  interest,  at the
Company's  election,  at a rate equal to LIBOR plus 2.25% or a bank's  base rate
plus 1%. The average interest rate in Fiscal Year 1998 was 9.0%.

         Availability  under  the  U.S.  Credit  Facility  is  determined  by  a
calculation  based on eligible  inventory and accounts  receivable as defined by
the credit  agreement.  As of  September  27,  1998,  there was $8.8  million of
unutilized availability under the U.S. Credit Facility. Up to $15 million of the
U.S. Credit  Facility may be utilized to issue letters of credit.  The letter of
credit fee is 1.75% per annum,  plus out of pocket  fees and  expense.  The U.S.
Credit  Facility also  provides for the payment of a commitment  fee of 0.5% per
annum on the daily average unused amount of the commitments  under the Facility.
As of September 27, 1998, unused letters of credit totaled $9.0 million.

         Loans  made  pursuant  to the U.S.  Credit  Facility  can be  borrowed,
repaid, and reborrowed from time to time until final maturity on August 1, 2000.
The U.S. Credit Facility  provides for partial  mandatory  prepayments  upon the
issuance of equity by Sweetheart  Holdings or any of its subsidiaries,  and full
repayment upon any change of control (as defined in the Agreement).

         The  indebtedness  of Sweetheart Cup under the U.S.  Credit Facility is
guaranteed  by  Sweetheart  Holdings and secured by a first  priority  perfected
security  interest  in  inventory,  spare  parts,  accounts  receivable  and all
proceeds of the foregoing of Sweetheart Cup, a first priority security interest,
shared with the holders of the Senior  Secured Notes,  in Shared  Collateral (as
defined in the 1993 Credit  Agreement  to include  primarily  all capital  stock
owned by Sweetheart  Holdings and Sweetheart Cup and of each of their respective
present and future direct subsidiaries, all intercompany indebtedness payable to
Sweetheart Holdings or Sweetheart Cup by Sweetheart Holdings,  Sweetheart Cup or
their respective present and future subsidiaries, and any proceeds from business
interruption  insurance),  and a second priority  perfected security interest in
the Senior Secured Note collateral as described below.

         The U.S. Credit  Facility  contains  various  covenants which limit, or
restrict,  among  other  things,   indebtedness,   dividends,   leases,  capital
expenditures,  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 U.S. Credit Facility, as amended.

         Senior Secured Notes and Senior  Subordinated Notes - Sweetheart Cup is
the  obligor  with  respect  to $190  million of Senior  Secured  Notes and $110
million of Senior  Subordinated  Notes.  The Senior  Secured  Notes were  issued
pursuant  to  an  Indenture  among  Sweetheart  Cup,  Sweetheart  Holdings,   as
Guarantor,  and United States Trust Company of New York, as Trustee (the "Senior
Secured Indenture").


                                       46
<PAGE>

The  Senior   Secured  Notes  bear   interest  at  9.625%  per  annum,   payable
semi-annually  in  arrears  on March 1 and  September  1 each year to holders of
record on February 15 or August 15 next preceding the interest payment date. The
Senior Secured Notes mature on September 1, 2000.

         The Senior Secured Notes are subject to redemption at the option of the
Company, in whole or in part, at the redemption prices (expressed as percentages
of the principal  amount),  plus accrued  interest to the  redemption  date, for
redemptions  during the twelve  month period  beginning  September 1 as follows:
1998 - 101.604%, and 1999 - 100.000%.

         The Senior  Secured  Notes are secured by a first  priority lien on the
Senior  Secured Note  collateral  (which  includes all material  properties  and
equipment  and  substantially  all of the other  assets of  Sweetheart  Cup, but
excludes  collateral under the 1993 Credit  Agreement,  the capital stock of its
subsidiaries,  and intercompany indebtedness) and by a second lien on collateral
under the 1993 Credit Agreement (primarily accounts receivable,  inventory,  and
proceeds  thereof as described  above).  The Senior Secured Notes and borrowings
under the U.S.  Credit  Facility are also jointly  secured by Shared  Collateral
(comprised of pledges of the capital stock of Lily Canada,  the capital stock of
any direct  subsidiaries  formed or acquired in the future,  future intercompany
notes, and the proceeds of business interruption insurance).

         The Senior  Subordinated  Notes were issued  pursuant  to an  Indenture
among Sweetheart Cup, Sweetheart Holdings, as Guarantor,  and U.S. Trust Company
of Texas,  N.A., as Trustee (the "Senior  Subordinated  Indenture").  The Senior
Subordinated Notes bear interest at 10.50% per annum,  payable  semi-annually in
arrears  on March 1 and  September  1 each  year to  holders  of  record  on the
February 15 or August 15 next  preceding the interest  payment date.  The Senior
Subordinated Notes mature on September 1, 2003.

         The Senior  Subordinated  Notes are subject to redemption at the option
of the Company,  in whole or in part,  at the  redemption  prices  (expressed as
percentages of the principal  amount),  plus accrued  interest to the redemption
date, for redemptions  during the twelve month period  beginning  September 1 as
follows:  1998 -  103.938%,  1999 -  102.625%,  2000 -  101.313%,  and  2001 and
thereafter - 100.000%.

         The Senior  Subordinated  Notes are  subordinate in right of payment to
the prior payment in full of all Senior Secured Notes,  all borrowings under the
U.S. Credit Facility, and all other indebtedness not otherwise prohibited.

         The Sweetheart  Notes contain  various  covenants  which  prohibit,  or
limit, among other things,  asset sales,  change of control,  dividend payments,
equity  repurchases or redemptions,  the incurrence of additional  indebtedness,
the issuance of disqualified stock,  certain  transactions with affiliates,  the
creation of additional liens, and certain other business activities.

         1993 Credit  Agreement - On August 30, 1993,  the Company  entered into
the 1993 Credit  Agreement with Bankers Trust Company,  which provided for a $40
million Term Loan and a $75 million Revolving Loan Facility. The Company prepaid
the $40 million Term Loan on September 20, 1994 in connection  with the issuance
of the Sweetheart  Receivables  Corporation 1994-1 A-V Trade  Receivables-Backed
Notes (the "SRC Notes") and it may not be reborrowed.  The 1993 Credit Agreement
was amended and restated,  as described in the 1997 Amended and Restated  Credit
Agreement above.

         Sweetheart   Receivables    Corporation   Series   1994-1   A-V   Trade
Receivables-Backed Notes - On September 20, 1994, SRC issued and sold to Bankers
Trust as Placement Agent,  $60 million of the SRC Notes,  under an indenture and
security  agreement.  The  proceeds  of the SRC  Notes  were  used  to  purchase
substantially  all of the receivables of Sweetheart Cup on the closing date. The
SRC Notes were repurchased when the Company entered into the U.S.
Credit Facility on October 24, 1997, as described above.


                                       47
<PAGE>

         Canadian  Credit  Facility - On June 15, 1998,  Lily Cups Inc.  entered
into a Credit Agreement with General Electric Capital Canada Inc. (the "Canadian
Credit Facility"). The Canadian Credit Facility refinanced Lily Cups Inc.'s then
outstanding  debt into a new term loan and revolving  credit facility  agreement
which provides for a term loan facility of up to Cdn $10 million and a revolving
credit  facility  of up to Cdn $10  million.  Term  loan  borrowings  under  the
Canadian Credit Facility are payable  quarterly  through May 2001, and revolving
credit and term loan borrowings have a final maturity date of June 15, 2001. The
Canadian  Credit Facility is secured by all existing and after acquired real and
personal,  tangible assets of Lily Cups Inc. and net proceeds on the sale of any
of the foregoing. Borrowings under the Canadian Credit Facility bear interest at
an index rate plus 2.25% with respect to the revolving credit borrowings, and an
index rate plus 2.50% with respect to the term loan borrowings.  As of September
27, 1998, Cdn $5.4 million  (approximately $3.6 million) was available under the
Canadian Credit Facility.


11.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

         The  carrying  amounts of  financial  instruments  included  in current
assets and current liabilities approximate their estimated fair value because of
the  relatively   short   maturities  of  these   instruments.   Long-term  debt
instruments,   other  than  the  Company's   Senior  Secured  Notes  and  Senior
Subordinated  Notes,  have variable  interest  rates that  fluctuate  along with
current market  conditions,  and thus the carrying value approximates their fair
value.

         The  fair  value of the  Company's  Senior  Secured  Notes  and  Senior
Subordinated  Notes is  estimated  to be $40.0  million  lower than the carrying
value at September 27, 1998 and $1.5 million  higher than the carrying  value at
September  30, 1997.  The Fiscal Year 1998  difference in market value is due to
volatility  in the  non-investment  grade  market in the latter half of calendar
1998, as well as the recent financial results of the Company.


12.  LEASE COMMITMENTS

         The Company  leases  certain  transportation  vehicles,  warehouse  and
office  facilities,  and  machinery  and  equipment  under both  cancelable  and
non-cancelable  operating leases,  most of which expire within ten years and may
be renewed by the Company.  Rent expense under such  arrangements  totaled $16.6
million,  $16.8 million and $15.6 million for Fiscal Years 1998,  1997 and 1996,
respectively.  Future minimum rental commitments under non-cancelable  operating
leases in effect at September 27, 1998 are as follows (in thousand of dollars):

                  Fiscal 1999                                            $16,744
                  Fiscal 2000                                             14,830
                  Fiscal 2001                                             12,098
                  Fiscal 2002                                              8,729
                  Fiscal 2003                                              5,897
                  Fiscal 2004 and thereafter                              24,295
                                                                          ------

                                                                         $82,593


13.  SHAREHOLDERS' EQUITY

         Prior to March 12, 1998, Sweetheart Holdings had a single-class capital
structure  consisting of



                                       48
<PAGE>

3,000,000  shares of common stock,  par value $.01 per share, of which 1,046,000
shares were issued and outstanding.  Of the outstanding  shares,  1,040,000 were
issued in conjunction with the acquisition of the Company on August 30, 1993. In
fiscal 1994, the Company sold an additional  6,000 shares of stock, for which it
received  approximately  $100,000 in cash and a $500,000  promissory  note.  The
promissory  note which was reflected as a reduction to  shareholders'  equity in
the  consolidated  balance sheet at September 30, 1997 was paid in full on March
12, 1998.

         On March 12, 1998, the  stockholders of the Company  consummated the SF
Holdings Investment. In connection with this transaction, the Board of Directors
of Sweetheart  Holdings  authorized  two new classes of common stock:  1,100,000
shares of Class A Common Stock, $0.01 par value, and 4,600,000 shares of Class B
Common Stock,  $0.01 par value.  On March 11, 1998, the  shareholders  of record
exchanged  their  shares of common stock for a new Class A Common Stock in a one
for one stock  exchange.  In addition,  a stock  dividend of 4.2 shares of a new
Class B Common  Stock was  declared to the  shareholders  of record on March 11,
1998. SF Holdings acquired from the Company's  stockholders 48% of the Company's
outstanding  Class A  Common  Stock  and all of the  outstanding  Class B Common
Stock.  As a result,  SF Holdings  holds 90% of the total number of  outstanding
shares of both classes of the Company's common stock.

         Upon  consummation  of the SF Holdings  Investment,  the Company's then
existing  stockholders  nominated  three of the Company's  five directors and SF
Holdings nominated two directors. Pursuant to the Company's by-laws, significant
actions by the Company's  Board of Directors  require the vote of four directors
and include,  among others: (i) a merger,  consolidation or other combination of
the  Company  with or into  another  entity,  (ii) the sale of all or a material
portion  of the  Company's  assets,  (iii)  entering  into  of any  new  line of
business,  (iv) the issuance or  repurchase  of any equity  securities,  (v) the
incurrence of any  indebtedness  for money  borrowed or the  refinancing  of any
existing indebtedness,  (vi) approval of the annual business plans and operating
budgets, (vii) the termination  indebtedness or modification of any of the terms
of the Management  Services  Agreement,  (viii) the amendment or modification of
any provisions of the  certificate of  incorporation,  (ix) the selection of the
Company's chief executive  officer,  chief operating officer and chief financial
officer,  (x) any change of accountants  and (xi) the removal of any officers of
the Company. Additionally,  pursuant to a certain management services agreement,
as amended,  The Fonda Group,  Inc.,  an  affiliate of SF Holdings,  manages the
day-to-day  operations  of the Company  subject to the direction of the Board of
Directors.

         The Class A and Class B Common Stock have the same powers,  preferences
and rights,  except that the Class B Common Stock has no voting rights.  Class A
and Class B Common  Stock share the profits and losses  generated by the Company
on a pro-rata basis.  Each  outstanding  Class A Common Share is entitled to one
vote on any matter submitted to a vote of stockholders. The Class A Common Stock
has no cumulative  voting  rights.  Subject to Delaware law and  limitations  in
certain debt instruments  (Senior Secured Notes,  Senior Subordinated Notes, and
borrowings under the 1993 Credit Agreement), common shareholders are entitled to
receive  such  dividends  as may be declared by  Sweetheart  Holdings'  Board of
Directors out of funds legally available thereof. In the event of a liquidation,
dissolution  or winding  up of  Sweetheart  Holdings,  common  shareholders  are
entitled to share ratably in all assets remaining after payment or provision for
payment of debts or other liabilities of Sweetheart Holdings.

         In addition,  the  shareholders of the Company prior to the SF Holdings
Investment (the "Original  Shareholders"),  after March 12, 2003, have the right
to exchange  their shares of Class A Common Stock for  warrants  (the  "Exchange
Warrants")  to  purchase,  for nominal  consideration,  shares of Class C Common
Stock of SF Holdings  representing 10% of the total outstanding shares of common
stock of SF Holdings at the  consummation  of the SF  Holdings  Investment  on a
fully  diluted  basis.  SF Holdings has the right to cause such exchange and has
the right to  thereafter  to repurchase  the Exchange  Warrants,  in whole or in
part, for an aggregate call price of $50.0 million, subject to increase at 12.5%
per annum until March 12,


                                       49
<PAGE>

2003.  Upon  occurrence of a merger (as defined in the  Company's  stockholders'
agreement),  the Original Shareholders will be required to exchange their shares
of Class A Common Stock for the Exchange Warrants.  In addition, in the event SF
Holdings proposes to sell shares of Class A or Class B Common Stock in an amount
greater  than 30% of the  outstanding  shares  of  common  stock,  the  Original
Shareholders  will have the right to  participate  in such sale. In the event SF
Holdings  proposes to sell shares of common stock in an amount  greater than 30%
of the outstanding  shares of common stock, then SF Holdings will have the right
to require  the  Original  Shareholders  to sell all,  but not less than all, of
their shares of common stock.

         The Board of Directors of Sweetheart Holdings approved the Stock Option
and Purchase Plan (the "Plan")  during  fiscal year 1994 which  provides for the
granting of nonqualified  and incentive stock options as defined by the Internal
Revenue  Code.  The Plan is  administered  by the  Compensation  Committee  (the
"Committee")  of the Board of  Directors.  The  Committee  has the  authority to
select  participants,  grant  stock  purchase  options,  and make all  necessary
determinations  for the administration of the Plan. The exercise price per share
of common  stock under each option is fixed by the  Committee at the time of the
grant of the option and is equal to at least 100% of the fair market  value of a
share of common  stock on the date of grant,  but not less than $100 per  share.
The Committee  determines the term of each option which may not exceed ten years
from the date of grant of the option.  The Plan  provides for the issuance of up
to 103,000 shares of common stock in connection  with the stock options  granted
under the Plan.  Options that are canceled or expire  unexercised  are available
for  future  grants.  All  options  are  granted  via  approval  of the Board of
Directors.  In  conjunction  with  the  SF  Holdings  Investment,   all  options
outstanding as of March 12, 1998 were cashed out in full and canceled.


14.  OTHER EXPENSE (INCOME)

         In the  fourth  quarter  of Fiscal  Year  1998,  the  Company  sold its
Riverside facility. In connection therewith, the Company recognized $1.8 million
of asset write-down charges.  Additionally,  in the fourth quarter,  the Company
recognized $3.4 million of expense based on actuarial estimates  associated with
pending litigation.

         In  March  1998,  the  Company  recognized  certain  one-time  charges,
consisting  primarily  of $4.4  million  of  financial  advisory  and legal fees
associated  with the SF  Holdings  Investment  and  $3.7  million  of  severance
expenses  as a result of the  termination  of certain  officers  of the  Company
pursuant to executive separation  agreements and retention plans for certain key
executives.

         On November  30,  1997,  the Company  entered into an agreement to sell
assets of its bakery operation to Ace Baking Company Limited Partnership. Assets
sold included  property,  plant, and equipment,  which have been reclassified to
assets  held for sale,  and  inventories.  Consideration  of $22.3  million  was
received, including $20.3 million of cash, and a $2 million non-interest bearing
note. A gain of $3.3  million was  recognized  as "Other  income" in Fiscal Year
1998. Bakery operations represented 3% of net sales in Fiscal Year 1997.


15.  NON-RECURRING CHARGES

         In the quarter ended March 31, 1998,  the Company  reduced its salaried
workforce  by  approximately  15% and  hourly  workforce  by less  than  5%.  In
connection with such plans,  the Company  recognized $5.1 million of charges for
severance and related costs, of which $1.4 million of cash  expenditures  remain
unpaid as of September 27, 1998. The Company anticipates  substantial completion
of this restructuring within the next twelve months.



                                       50
<PAGE>

         In the quarter ended March 31, 1998, the Company decided to rationalize
certain product lines. As a result,  the Company evaluated the recoverability of
the carrying  value of the equipment and other assets  utilized for such product
lines, which resulted in a $5.0 million charge to write down the assets to their
fair market value.

         In the  quarter  ended  September  30,  1997,  the  Company  adopted  a
restructuring   plan   designed   to  improve   efficiency   and   enhance   its
competitiveness.   Restructuring   charges  of  $9.7  million  were  recognized,
consisting  of cash charges  primarily  related to severance  costs,  as well as
costs to close and exit the Riverside facility. Including the unspent portion of
these  charges,  the Company had total  restructuring  reserves of $13.2 million
classified  as "Other  current  liabilities"  as of September  30, 1997.  During
Fiscal Year 1998, the Company paid $8.8 million of severance,  plant closure and
related  costs.  In  addition,  $4.2  million of the  restructuring  reserve was
adjusted  due to a change in the  restructuring  plan as a result of a change in
senior management in connection with the SF Holdings Investment. As of September
27, 1998, the restructuring plan is substantially  complete,  and the balance in
the restructuring reserve is $0.2 million.

         During the quarter ended December 31, 1997, the Company recorded a $1.5
million expense as a cumulative effect of change in accounting principle (net of
$1.0  million of income  taxes)  relating to the  implementation  of EITF 97-13,
which  requires  companies to expense any previously  capitalized  reengineering
costs in connection with software installation.

         As a result of market  conditions  experienced  by the  Company and the
decision to close  facilities  as  described  above,  the Company  reviewed  the
carrying value of its long-lived assets in Fiscal Year 1997. Certain assets were
identified which would be disposed of, abandoned or become obsolete prior to the
end of  their  accounting  useful  lives,  and  were  written-down  accordingly,
resulting in a pre-tax  non-cash  charge  totaling  $24.6 million in Fiscal Year
1997.  The loss on asset  disposal and impairment had no impact on the Company's
cash flow or its  ability to generate  cash flow in the  future.  As a result of
this  charge,  depreciation  expense  related to these  assets will  decrease in
future periods.


16.  RELATED-PARTY TRANSACTIONS

         Pursuant to the Management Services Agreement,  as amended, SF Holdings
and AIPM, which manages AIP-LP,  are entitled to receive an aggregate annual fee
of $1.85 million,  payable  semi-annually  45 days after the scheduled  interest
payment dates for the Notes, 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 day to day  operations  of the
Company.  AIPM provides substantial ongoing financial and management services to
the Company. Fees are split to SF Holdings and AIPM, respectively,  50/50 during
the first year  following  the SF Holdings  Investment,  60/40 during the second
year, 70/30 during the third year, and are paid 100% to SF Holdings  thereafter.
SF Holdings has assigned substantially all of its interests under this agreement
to Fonda, but retains $200,000 per year of fees for administrative services.

         In  addition,  in Fiscal  Year 1996,  the Company  reimbursed  AIPM for
$950,000  of  expenses  incurred  in  connection  with an  investigation  of the
Company's strategic alternatives.

         The Company purchases corrugated containers from its affiliate, Four M.
Purchases  totaled  $1.8  million in Fiscal Year 1998,  of which $0.4 million is
payable as of September 27, 1998, and were not material in the preceding  Fiscal
Years.  The Company  believes that the terms on which it purchased such products
are at  least as  favorable  as those it  could  otherwise  have  obtained  from
unrelated third parties and were negotiated on an arm's length basis.



                                       51
<PAGE>

17.  BUSINESS SEGMENT AND MAJOR CUSTOMERS

         The Company  operates in a single industry which is the manufacture and
distribution  of paper and  plastic  related  products in  foodservice  and food
packaging disposables.  Sales to a major customer accounted for 12.1%, 13.7% and
13.6% for Fiscal Years 1998, 1997 and 1996, respectively.


18.  CONTINGENCIES

         A lawsuit entitled Aldridge v. Lily-Tulip,  Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084,
was  initially  filed in state  court in Georgia in April 1987 and is  currently
pending  against the Company in federal court.  The remaining  issue involved in
the case is a claim that the Company wrongfully terminated the Lily-Tulip,  Inc.
Salary  Retirement  Plan (the "Plan") in  violation  of the Employee  Retirement
Income  Security  Act of 1974,  as  amended  ("ERISA").  The  relief  sought  by
plaintiffs is to have the plan  termination  declared  ineffective.  In December
1994, the United States Court of Appeals for the Eleventh  Circuit (the "Circuit
Court") ruled that the Plan was terminated on December 31, 1986.  Following that
decision,  the plaintiffs sought a rehearing which was denied,  and subsequently
filed a petition for a writ of certiorari  with the United States Supreme Court,
which  was also  denied.  Following  remand,  in March  1996 the  United  States
District  Court for the  Southern  District of Georgia  (the  "District  Court")
entered a judgment  in favor of the  Company.  Following  denial of a motion for
reconsideration,  the  plaintiffs in April 1997 filed an appeal with the Circuit
Court. On May 21, 1998, the Circuit Court affirmed the judgment entered in favor
of the Company.  On June 10, 1998, the  plaintiffs  petitioned the Circuit Court
for a rehearing  of their  appeal  which  petition  was denied on July 29, 1998.
Plaintiffs  have filed a motion in the District  Court for  attorney's  fees. No
amount has been specified in such motion.  In October 1998,  plaintiffs  filed a
Petition for Writ of Certiorari to the United States Supreme Court.

         Management  believes  that the Company will  ultimately  prevail on the
remaining  material  issues in the Aldridge  litigation.  Due to the  complexity
involved in connection with the claims asserted in this case, the Company cannot
determine  at  present  with any  certainty  the  amount of  damages it would be
required  to pay should the  plaintiffs  prevail;  accordingly,  there can be no
assurance  that such  amount  would not have a  material  adverse  effect on the
Company's financial position or results of operations.

         A patent  infringement  action  seeking  injunctive  relief and damages
relating to the Company's  production and sale of certain paper plates  entitled
Fort  James  Corporation  v.  Sweetheart  Cup  Company  Inc.,  Civil  Action No.
97-C-1221,  was  filed in the  United  States  District  Court  for the  Eastern
District of Wisconsin on November 21, 1997.  The Company  filed an Answer to the
Complaint  denying  liability  and  asserting  various  defenses  to the claims.
Discovery  proceedings  are in  progress.  In the  opinion  of  management,  the
ultimate  liability,  if any, will not materially affect the Company's financial
position or results of operations.

         The  Company is subject to a variety  of  environmental  and  pollution
control laws and  regulations  in all  jurisdictions  in which it operates.  The
Company is also involved in various other claims and lawsuits  incidental to its
business. In the opinion of management, the ultimate liabilities,  if any, after
considering  the  reserves  established  relating  to  these  matters,  will not
materially affect the Company's financial position or results of operations.


19. SUMMARIZED FINANCIAL INFORMATION FOR SWEETHEART CUP COMPANY INC.


                                       52
<PAGE>

         The following  tables  provide  summarized  financial  information  for
Sweetheart Cup and subsidiaries (in thousands):

                               September 27,      September 30,
                                   1998               1997
                             ------------------ ------------------

Current assets                      $257,399           $301,448
Noncurrent assets                    437,264            436,195
Current liabilities                  122,516            116,886
Noncurrent liabilities               562,828            563,066


         Prior year amounts below have been reclassified as noted in Note 1:

<TABLE>
<CAPTION>

                                                 Fiscal Years
                             -------------------------------------------------------
                                   1998              1997               1996
                             ------------------ ------------------ -----------------
<S>                                           <C>                <C>


Net sales                           $843,502          $886,017           $959,818
Gross profit                          32,664            35,331             83,193
Income (loss) from
  continuing operations
  before cumulative effect
   of an accounting change
   and extraordinary loss            (41,593)          (37,221)            12,827
Net income (loss)                    (42,999)          (38,161)            12,827


</TABLE>




                                       53

<PAGE>

                     INDEX TO FINANCIAL STATEMENT SCHEDULES


                                                                           Page
                                                                           ----

Independent Auditors' Report                                                55

Report of Independent Public Accountants                                    56

Schedule II - Valuation and Qualifying Accounts                             57



                                       54
<PAGE>

INDEPENDENT AUDITORS' REPORT



To the Board of Directors of
Sweetheart Holdings Inc.:


We have audited the  consolidated  financial  statements of Sweetheart  Holdings
Inc. and  Subsidiaries  (the  "Company")  as of  September  27, 1998 and for the
fiscal year ended  September 27, 1998,  and have issued our report thereon dated
December  10,  1998;  such  consolidated  financial  statements  and  report are
included in this Form 10-K. The schedule listed in the accompanying index is the
responsibility of the Company's management.  Our responsibility is to express an
opinion based on our audit. In our opinion,  such financial  statement schedule,
when considered in relation to the basic financial  statements taken as a whole,
presents fairly in all material respects the information set forth therein.



/s/DELOITTE & TOUCHE LLP
Baltimore, Maryland
December 10, 1998





                                       55
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors of
Sweetheart Holdings Inc.:


We have audited in accordance with generally  accepted auditing  standards,  the
consolidated balance sheet as of September 30, 1997 and the related consolidated
statements  of  operations,  shareholders'  equity and cash flows for the Fiscal
Years  ended  September  30,  1997  and 1996 of  Sweetheart  Holdings  Inc.  and
Subsidiaries  included  in this Form 10-K and have  issued our  reports  thereon
dated December 8, 1997 (except with respect to the matter  discussed in Note 1 -
Inventories as to which the date is December 3, 1998).  Our audits were made for
the purpose of forming an opinion on the basic consolidated financial statements
taken  as a  whole.  The  schedule  listed  in  the  accompanying  index  is the
responsibility  of the  Company's  management  and is presented  for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the  auditing  procedures  applied  in  the  audits  of the  basic  consolidated
financial statements and, in our opinion, fairly states in all material respects
the  financial  data  required to be set forth  therein in relation to the basic
consolidated financial statements taken as a whole.



                                                        /s/ ARTHUR ANDERSEN LLP

Baltimore, Maryland
December 8, 1997
   (except with respect to the
   matter discussed in Note 1 -
   Inventories, as to which the
   date is December 3, 1998)



                                       56
<PAGE>

                                                      SCHEDULE II


                                     SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
                                         VALUATION AND QUALIFYING ACCOUNTS
                                              (Dollars in thousands)


<TABLE>
<CAPTION>


                                                             Additions
                                                    -----------------------------
                                      Balance at     Charged to       Charged
                                      beginning       costs and      to other                        Balance at
         Classifications                  of        expenses (1)   accounts (2)    Deductions (3)      end of
                                        period                                                         period
                                     -------------  -------------- --------------  ----------------  ------------
<S>                                               <C>           <C>              <C>              <C>


Allowance for Doubtful Accounts:
Fiscal Year 1998                          $  1,740            $769           $ (4)            $ 688     $   1,817
Fiscal Year 1997                             2,466             446              51            1,223         1,740
Fiscal Year 1996                             2,524             369              46              473         2,466


</TABLE>

--------------------
(1)      Provision for doubtful accounts.
(2)      Includes  recoveries on accounts  previously  written off,  translation
         adjustments and reclassifications.
(3)      Accounts written off.



                                       57
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned,  thereunto duly authorized, in the City of Owings
Mills, State of Maryland, on December 18, 1998.

                            SWEETHEART HOLDINGS INC.
                            (Registrant)

                            By: /s/  DENNIS MEHIEL
                                -----------------------------------------
                                     Dennis Mehiel
                                     Chief Executive Officer and Chairman of the
                                     Board



         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
         this report has been  signed on December  18,  1998,  by the  following
         persons in the capacities indicated:


                             Signature                       Capacity
                             ---------                       --------


         /s/  DENNIS MEHIEL                           Chief Executive Officer
        -----------------------------                 and Chairman of the Board
               Dennis Mehiel



         /s/  THOMAS ULEAU                            President, Chief Operating
        -----------------------------                 Officer and Director
              Thomas Uleau



         /s/  W. RICHARD BINGHAM                      Director
        -----------------------------
              W. Richard Bingham



         /s/  THEODORE C. ROGERS                      Director
        -----------------------------
              Theodore C. Rogers



         /s/  LAWRENCE W. WARD, JR.                   Director
        -----------------------------
              Lawrence W. Ward, Jr.



         /s/  HANS H. HEINSEN                         Senior Vice  President  -
        -----------------------------                 Finance  and Chief
              Hans H. Heinsen                         Financial Officer
                                                      (Principal Financial
                                                      Officer  and  Principal
                                                      Accounting Officer)



                                       58