--------------------------------------------------------------------------------

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-K\A
                |X|Annual Report Pursuant to Section 13 or 15(d)
              of the Securities Exchange Act of 1934 (Fee required)

                  For the fiscal year ended September 30, 1997

           |_|Transition Report Pursuant to Section 13 or 15(d) of the
                Securities Exchange Act of 1934 (No fee required)
                        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 29, 1997:  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 29, 1997:
    Sweetheart Holdings Inc. Common Stock, $0.01 par value - 1,046,000 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 59


<PAGE>



                                     PART I


ITEM 1.    BUSINESS


GENERAL

         Sweetheart  Holdings  Inc.,  together with its wholly owned  subsidiary
Sweetheart Cup Company Inc.  (collectively with Sweetheart Holdings Inc. 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 the year ended September 30, 1997, the Company had net sales of $886 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,  Lily, Trophy,  Jazz and Preference for cups and plates and
Silent Service, Centerpiece,  Guildware, and Simple Elegance 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.

         The Company's  business is the successor to the  businesses of Maryland
Cup  Corporation  ("Maryland  Cup"),  which was  founded in 1911 and was a major
supplier  of  paper  and  plastic  disposable  foodservice  and  food  packaging
products,  and Lily-Tulip,  Inc.  ("Lily-Tulip"),  which began operations in the
early  1900s and was a major cup  producer  and  manufacturer  of food and dairy
packaging. Fort Howard Corporation ("Fort Howard") acquired Maryland Cup in 1983
and Lily-Tulip in 1986.  Sweetheart Holdings Inc. was incorporated as a separate
company in 1989 on behalf of Morgan Stanley Group Inc. ("MSG"),  Fort Howard and
other investors,  including  management,  in connection with Sweetheart Holdings
Inc.'s  acquisition  in  1989  of  all  of  the  U.S.  and  Canadian  disposable
foodservice  and  food  packaging  operations  of  Fort  Howard,  including  the
operations of Maryland Cup and Lily-Tulip (the "Fort Howard  acquisition").  The
Company's  Canadian  operations  are conducted  through Lily Cups,  Inc.  ("Lily
Canada").  On August 30, 1993, a group of investors (the "Investors")  including
American  Industrial  Partners Capital Fund, L.P.  ("AIP")  acquired  Sweetheart
Holdings Inc. (the "Acquisition").  For information with respect to an agreement
entered  into on  December  29,  1997 by AIP on behalf  of itself  and the other
stockholders with an affiliate of The Fonda Group, Inc., see Item 12.


FOODSERVICE AND FOOD PACKAGING PRODUCTS

         The Company operates in two principal  business lines:  Foodservice and
food packaging. Foodservice products include disposable hot and cold drink cups,
lids,  food  containers,  plates,  bowls,  cutlery  and ice cream  cones.  These
products are sold directly and through  distributors  to fast food chains,  full
service  restaurants,  hospitals,  airlines,  theaters  and other  institutional
customers.  Food packaging products include 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.  Through Lily Canada, the Company  manufactures
and markets its products in Canada to national accounts and distributors.

         Foodservice  Products.  The Company's  foodservice business consists of
three  end-use  categories:  beverage  service,  tabletop  service and  carryout
service.  Foodservice is the Company's  largest  product  group,  accounting for
approximately  80% of gross  sales  during the year ended  September  30,  1997.
Management believes that this level of gross sales makes the Company 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  segment 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 


                                       2


<PAGE>

beverages. Brand names of the Company's principal beverage service products
include Sweetheart, Lily, Trophy, Preference, Jazz, Gallery, Clarity and Lumina.

         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,  Centerpiece,  Basix,  Guildware  and  Simple  Elegance  brands of foam
dinnerware and plastic cutlery.

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

         The Company believes it is the largest producer in North America of ice
cream cones,  which are marketed  under the  Eat-It-All  and American Dream Cone
brand names. The Company  produces ice cream cones in its bakery  facilities and
offers several  varieties of ice cream cones,  including cake cones,  sugar roll
cones and waffle cones,  to national chains and wholesale  distributors  for its
foodservice  business.  The Company sold its bakery  operations  on November 30,
1997, as noted in Note 15 to the financial statements (Item 8).

         Foodservice Customers.  Foodservice products are sold directly to large
national  accounts,  such as  fast-food  chains  and  catering  services,  which
represented  approximately 52% of foodservice sales for the year ended September
30,  1997.  Foodservice  products are also sold  through  distributors  to other
end-users,  such as independent  restaurants,  school systems and hospitals. The
Company's national accounts include ARAMARK,  McDonald's,  and Wendy's,  and its
major distributor accounts include Alliant, ComSource, Network and Sysco.

         Food Packaging Products.  The Company's food packaging  operations sell
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  straight-wall paper manufacturing  technology
and  Flex-Guard,  a spiral wound  tamper-evident  lid.  Sales of food  packaging
products accounted for approximately 11% of the Company's gross sales during the
year ended  September  30, 1997.  Management  believes the Company is the second
largest  supplier (in terms of sales) of  containers  to the frozen  dessert and
cultured  dairy  products  segments  of 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 Company  containers at their plants. The Company's filling
and lidding  equipment  is leased to customers  under the trade names  Auto-Pak,
Flex-E-Fill  and  Food-Pak.  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,  squeeze-up desserts and ice
cream sandwiches.

         Food  Packaging  Customers.   Food  packaging  containers  and  filling
machines  are  marketed  directly  to  national  and  regional  dairies and food
companies.  Major customers of the Company's food packaging products include Ben
& Jerry's Ice Cream, Blue Bell, Borden and Prairie Farms.

         Canadian  Operations.  The  Company  operates  in Canada  through  Lily
Canada, which has been manufacturing and marketing foodservice disposables 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 the year
ended  September 30, 1997  constituted  approximately  6% of the Company's gross
sales.


                                       3


<PAGE>

MARKETING AND SALES

         The Company's  marketing efforts are directed to maintaining  firsthand
knowledge of customer needs and to structuring the Company's  manufacturing  and
sales efforts to provide superior products and services tailored to those needs.
The Company's  sales force allows it to service a large  distributor  and broker
network  that  permits  even small  accounts  to receive  appropriate  coverage.
Distribution facilities are maintained in close proximity to most major markets.

         The  Company's  sales effort is divided into separate  foodservice  and
food packaging sales forces.  The foodservice sales force targets the disposable
foodservice  product  market and is  organized  into  distribution  and national
account sales forces.  The distribution  sales force focuses on distributors and
smaller end users such as independent  restaurants,  schools and hospitals.  The
national account sales force focuses on national  foodservice accounts and major
bottlers,  concessionaires,  health care and contract food  providers.  The food
packaging sales force focuses on national and regional food processors.


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.


RAW MATERIALS

         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 domestic 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,   high  density
polyethylene and polyethylene  terphalate  glycol modified)  purchased  directly
from major petrochemical companies and other resin suppliers. Resin is processed
and formed into cups, cutlery, meal service products, straws and containers. The
Company  manufactures foam products by extruding sheets of plastic foam material
that are converted into cups and plates.  Principal raw materials for the bakery
operations include flour, sugar and shortening.

         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.

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


                                       4


<PAGE>

CUSTOMERS

         The Company  markets its products  primarily to customers in the United
States and  Canada.  During  the year ended  September  30,  1997,  sales to the
Company's  10  largest  customers  accounted  for  approximately  50.3%  of  the
Company's  revenues with one customer,  McDonald's,  accounting for 13.7% of net
sales.  The loss of one of 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.


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.


ENVIRONMENTAL MATTERS

         The Company's  operations  are subject to federal,  state,  foreign and
local environmental laws and regulations. Although the Company believes it is in
substantial compliance with such laws and regulations, the Company may from time
to  time  not be in full  compliance,  and is from  time  to  time  involved  in
administrative and judicial  proceedings and inquiries relating to environmental
matters.  The Company has expended,  and expects in the future to expend,  funds
for compliance with those laws and regulations and penalties for noncompliance.

         The  Clean  Air Act  mandates  the  phase  out of  certain  refrigerant
compounds,  which  will  require  the  Company to  upgrade  or  retrofit  or air
conditioning  and chilling  systems  during the next few years.  The Company has
decided  to replace  units as they  become  inefficient  or  unserviceable.  The
upgrade of existing systems would cost  approximately $4 million.  Approximately
$1 million has been spent on upgrading systems in the last five years, exclusive
of costs of $2.4  million to convert to a new foam  blowing  agent in 1993.  The
Company anticipates that future levels of expenditures for environmental matters
(exclusive  of  costs   relating  to  the  blowing  agent   conversion  and  the
retrofitting of air conditioning  and chilling systems  described above) will be
comparable;  however,  there can be no assurance that  expenditures  will not be
higher.

         As noted during the third quarter,  the Company  received a request for
information from the Environmental Protection Agency ("EPA") pursuant to Section
104 of the Comprehensive Environmental Response, Compensation, and Liability Act
and Section 3007 of the Resource  Conservation and Recovery Act,  concerning the
Lily-Tulip  Brown Fields Site (the "Site") in Old Town,  Maine. The Company also
received a demand from the City of Old Town for payment of the Company's alleged
share of the clean-up of the Site. The Company has agreed to settle these claims
by paying $40,000 in the first quarter of fiscal 1998.

         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.


                                       5


<PAGE>

EMPLOYEES AND EMPLOYEE RELATIONS

         At September 30, 1997, the Company employed approximately 8000 persons,
with  approximately  94% of those employees  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.  Approximately  990 of the Company's  United States hourly employees are
represented by a union. All hourly  employees  located in Canada are represented
by a union. The current expiration dates of the Springfield, Augusta and Toronto
CBAs are March 4, 2001,  October 31, 1998 and November  30, 2000,  respectively.
The Company anticipates that renewal negotiations regarding the Augusta CBA will
result in another three-year contact term. The Company believes its relationship
with its employees is good.


                                       6


<PAGE>


ITEM 2.     PROPERTIES

         The Company has 13  manufacturing  facilities  in the United States and
two in Canada. The Company owns or leases manufacturing and warehouse facilities
at the locations shown in the following table:


<TABLE>
<CAPTION>
                                                                                           Size
                                                     Type of            Owned/         (Approximate
                  Location                           Facility (1)       Leased         square feet)
                  --------                           ------------       ------         ------------

<S>                                                 <C>                  <C>                <C>
Atlanta, Georgia............................         M/W(2)                O                 106,000

Augusta, Georgia (2 facilities).............         M/W                   O                 339,000
                                                     W(3)                  L                 204,000

Conyers, Georgia............................         M/W                   O                 350,000
                                                     W                     O                 555,000

Chicago, Illinois (3 facilities)............         M/W                   O                 902,000
                                                     M(2)                  O                 120,000
                                                     W                     L                 587,000

Dallas, Texas (2 facilities)................         M/W                   O               1,316,000
                                                     M(2)                  O                  59,000

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(4)                  L                 249,000

Owings Mills, Maryland (3 facilities).......         M/W(5)                O               1,533,000
                                                     W                     O                 267,000
                                                     W                     O                 406,000

Riverside, California.......................         M/W(6)                O                 164,000

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

Scarborough, 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) Facility is a bakery.  The bakery operations were sold on November 30, 1997.
See Note 15 of the financial  statements  (Item 8) for details.  
(3) Facility is closed. The Company is currently subleasing 100% of the property
on a  short-term  lease and is actively  seeking to sublet the  remaining  space
through the lease termination date, March 31, 2008.
(4) Facility has been closed and  returned to the lessor.  The facility  will be
replaced  by a new  370,000 sq.  foot  warehousing  facility  which will also be
located in Ontario, CA.
(5) Facility includes a bakery which ceased operations on November 30, 1997.
(6) The Manufacturing  operations ceased on September 2, 1997, and the Warehouse
operations  will cease by May 31, 1998.  The facility will be sold. The facility
was closed in order to eliminate  anticipated  losses  resulting  from projected
lower revenues in the region supplied by this facility.


                                       7


<PAGE>

ITEM 3.     LEGAL PROCEEDINGS

         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 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 on its May 21,
1998 decision.

         Management of the Company  believes that it will ultimately  prevail on
the remaining 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 18 of the Notes
to Financial Statements.

         Fort James  Corporation.  A patent  infringement  action  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 has not yet filed an Answer to the
Complaint  and is  investigating  the  merits of the  claim.  In the  opinion of
management,  the ultimate  liability,  if any,  will not  materially  affect 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

           Each of the  then  current  members  of the  Board of  Directors  was
reelected at the December 10, 1996 Shareholder Meeting.  Jerry J. Jasinowski was
elected as Director of the Company commencing August 1, 1997.


                                     PART II


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

         Sweetheart Cup Company Inc. is a wholly-owned  subsidiary of Sweetheart
Holdings Inc.  Sweetheart  Holdings  Inc. is a  privately-held  corporation.  No
equity securities of Sweetheart Holdings Inc. or Sweetheart Cup Company Inc. are
publicly traded or registered under the Securities Exchange Act of 1934.


                                       8


<PAGE>


ITEM 6.     SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

         Set forth  below are  selected  historical  consolidated  and  combined
financial and other data of the Company at the dates and for the periods shown.

         The selected  historical  consolidated  financial data at September 30,
1997 and 1996,  and for the years ended  September  30, 1997,  1996 and 1995 are
derived from the 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 selected  consolidated  and combined  historical  financial  data at
September  30,  1994,  September  30,  1993 and August 29, 1993 and for the year
ended  September 30, 1994, the period from August 30, 1993 to September 30, 1993
and the period from  January 1, 1993 to August 29, 1993 have been  derived  from
the historical audited consolidated financial statements for such periods.

         Certain  prior  period  amounts  have been  reclassified  to conform to
current presentation.


<TABLE>
<CAPTION>
                                                                                       Period from     
                                                                                        August 30,     
                                                                                            to           Period from  
                                                Year ended September 30,                September       January 1, to 
                                                                                            30,          August 29,   
                                  1997           1996          1995         1994          1993            1993
                               (Successor)    (Successor)    (Successor)  (Successor)   (Successor)     (Predecessor)
                              --------------- -------------  -----------  -----------  --------------   -------------
                                                                 (Dollars in thousands)
<S>                             <C>             <C>           <C>          <C>             <C>            <C>
Operating Data:
Net sales                       $886,017        $959,818      $986,618     $898,528        $81,571        $591,258
Cost of sales                    821,021         846,719       874,593      778,163         71,963         522,615
                                 -------         -------       -------      -------         ------         -------
Gross profit                      64,996         113,099       112,025      120,365          9,608          68,643
Selling, general and              66,792          61,788        66,089       67,712          5,787          45,494
administrative
Loss on asset disposal and
  impairment                      24,550               -             -            -              -               -
Restructuring expense              9,680                                                         -                 -
                                                       -             -            -
Other (income) expense, net          (73)          4,271        (1,197)        (411)           177            (48)
                              ------------     ---------     ----------   ----------    ----------     -----------
Operating income (loss)          (35,953)         47,040        47,133       53,064          3,644          23,197
Interest expense, net             40,265          37,517        37,410       37,248          3,311          43,947
                               ---------       ---------    ----------    ---------      ---------       ---------
Income (loss) before taxes       (76,218)          9,523         9,723       15,816            333         (20,750)
Income tax benefit (expense)      30,487          (3,809)       (3,903)      (6,462)          (161)          6,641
Extraordinary loss                   940               -                                        -                -
                              ----------      ------------ -----------   -----------  ------------     ------------
                                                                     -            -
Net income (loss)                (46,671)          5,714         5,820        9,354            172         (14,109)
Accrued dividends on Class B
Common Stock                             -             -                                       -           4,200
                              ------------    ------------ -----------   -----------  ------------         -------
                                                                     -            -
Net income (loss) applicable
to       common shareholders    $(46,671)         $5,714        $5,820       $9,354           $172        $(18,309)
                                =========         ======        ======       ======           ====        =========
Dividends per share                    -               -             -            -              -               -

Balance Sheet Data
 (at end of period):
  Fixed assets                  $382,491        $427,833      $417,563     $400,176       $393,918        $450,362
  Total assets                   719,530         762,610       741,906      728,442        692,772         753,531
  Total long-term debt           430,499         385,579       369,181      369,749        354,032         587,501
  Shareholders' equity            74,611         121,415       115,805      109,955        100,548        (121,883)
(deficit)

</TABLE>


                                       9


<PAGE>

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

GENERAL

         Sweetheart Cup Company Inc. was formed as the result of the acquisition
by Fort  Howard  of  Maryland  Cup in 1983 and  Lily-Tulip  in 1986.  Sweetheart
Holdings Inc. was  incorporated as a separate  company in 1989 on behalf of Fort
Howard,  MSG and other investors,  including  management,  to acquire all of the
U.S. and Canadian disposable  foodservice and food packaging  operations of Fort
Howard.  As a  result  of  the  increase  in  leverage  arising  from  the  1989
acquisition  from Fort Howard and the increased  operating costs relating to the
establishment  of  Sweetheart  Holdings  Inc. 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 Inc. In
connection  with  the  Acquisition,  Sweetheart  Cup  Company  Inc.  (i)  issued
$190,000,000  aggregate principal amount of 9 5/8% Senior Secured Notes due 2000
(the "Senior Secured Notes") and $110,000,000  aggregate  principal amount of 10
1/2% Senior Subordinated Notes due 2003 (the "Senior Subordinated  Notes"), (ii)
incurred  borrowings under a Credit Agreement dated as of August 30, 1993, among
Sweetheart Cup Company Inc., Sweetheart Holdings Inc., various banks and Bankers
Trust  Company,  as  agent  (the  "Credit  Agreement"),  (iii)  repaid  existing
indebtedness  of Sweetheart  Holdings Inc. and  Sweetheart Cup Company Inc., and
(iv) issued  equity  securities of  Sweetheart  Holdings Inc. 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 Company Inc.  located in Illinois,  Massachusetts,
Maryland,  Missouri,  and New Hampshire were transferred to Sweetheart  Holdings
Inc. These assets were transferred  subject to the mortgage and liens granted in
favor of the  trustee  under the  Senior  Secured  Notes  Indenture.  Under such
Indenture, Sweetheart Cup Company Inc. and Sweetheart Holdings Inc. delivered to
such trustee a solvency letter and certain  officers'  certificates with respect
to the terms of the transfer. The transferred assets are pledged to such trustee
to secure Sweetheart Holdings Inc.'s obligations under its secured guarantee. In
connection  with this  transfer,  Sweetheart  Cup Company  Inc.  contracts  with
Sweetheart  Holdings Inc. to manufacture  certain  Sweetheart Cup Company Inc.'s
products.  This  transfer,  as  completed,  has no effect on the  holders of the
Senior Secured or Senior Subordinated Notes.

         The Company operates in two principal  business lines:  Foodservice and
food packaging. Foodservice products include disposable hot and cold drink cups,
lids,  food  containers,  plates,  bowls,  cutlery  and ice cream  cones.  These
products are sold directly and through  distributors  to fast food chains,  full
service  restaurants,  hospitals,  airlines,  theaters  and other  institutional
customers. During fiscal year 1995, the Company terminated its sales of products
to individuals through supermarkets and other retailers. The elimination of this
sales channel had no adverse effect on the Company's results of operations. Food
packaging  products include 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.


YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996

         Net sales  decreased to $886.0 million for the year ended September 30,
1997 from  $959.8  million  for the same  period in 1996,  a  decrease  of $73.8
million or 7.7%.  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 


                                       10


<PAGE>

been  negatively  impacted by falling 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%.  Sales volume  measures the dollar value of unit
sales,  assuming  constant prices between  periods.  The decrease in foodservice
sales  volume  is  primarily  attributable  to  decreases  in the  national  and
clubstore  market  segments  offset by higher  foodservice  distributor  account
volume. 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% from the
prior year.

         Cost of sales  decreased to $821.0 million for the year ended September
30,  1997 from $846.7  million for the same period in 1996,  a decrease of $25.7
million or 3.0%. As a percentage of net sales,  cost of sales increased to 92.7%
for the year ended  September  30,  1997 from 88.2% for the same period in 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  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 year period.  In 1996,  inventory levels increased,
resulting in an absorption  of fixed costs into  inventory.  In 1997,  inventory
levels  declined,  and the fixed costs  associated  with  inventories  sold were
recognized.  This has resulted in a year-to-year  unfavorable  impact on cost of
sales of $10.5 million.

         Gross profit  decreased to $65.0  million for the year ended  September
30,  1997 from $113.1  million for the same period in 1996,  a decrease of $48.1
million or 42.5%, due to the reasons described above.

         Selling, general and administrative expenses increased to $66.8 million
for the year ended  September 30, 1997 from $61.8 million for the same period in
1996,  an  increase  of $5.0  million  or 8.1%.  As a  percentage  of net sales,
selling,  general and  administrative  expenses  increased  to 7.5% for the year
ended September 30, 1997 from 6.4% for the same period in 1996. Approximately $3
million of the increase relates to expenditures on the new MIS system, while the
remainder reflects investment in the foodservice  distribution  selling activity
and  normal  inflation  in  the  wage  base.  All  other  selling,  general  and
administrative expenses were held below prior year levels.

         Loss on asset  disposal and impairment of $24.6 million was recorded in
the fourth  quarter of the year ended  September 30, 1997 relating to the review
of the carrying  value of the Company's  long-lived  assets.  See Note 14 of the
accompanying financial statements (Item 8).

         Restructuring  expense  of $9.7  million  was  recorded  in the  fourth
quarter  relating to plant  closures and other expenses as part of the Company's
strategic planning process. See Note 14 of the accompanying financial statements
(Item 8).

         Other (income) expense, net increased to $0.1 million of income for the
year ended  September  30, 1997 from $4.3 million of expense for the same period
in 1996, an increase of $4.4 million.  Fiscal 1996 was  unfavorably  impacted by
one-time  expenses  incurred by the Company  relating to an investigation of the
Company's strategic alternatives.

         Operating loss was $36.0 million for the year ended  September 30, 1997
compared to  operating  income of $47.0  million for the same period in 1996,  a
change of $83.0 million or 176.4%, due to the reasons described above.


                                       11


<PAGE>

         Interest  expense  increased  to  $40.3  million  for  the  year  ended
September  30, 1997 from $37.5  million for the same period in 1996, an increase
of $2.8 million or 7.3%,  due  primarily to higher  average  usage of short-term
borrowings.

         Income tax  benefit  (expense)  $30.5  million of benefit  for the year
ended September 30, 1997 compared to $3.8 million of expense for the same period
in 1996, a change of $34.3  million.  The effective tax rate for the years ended
September 30, 1997 and 1996 was 40.0%.

         Extraordinary  loss of $0.9  million  (net of $0.6  million  in  income
taxes) was recorded in the fourth  quarter of 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 was  $46.7  million  for the year  ended  September  30,  1997
compared to net income of $5.7  million for the same period in 1996, a change of
$52.4 million, due to the reasons described above.


YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995

         Net sales  decreased to $959.8 million for the year ended September 30,
1996 from  $986.6  million  for the same  period in 1995,  a  decrease  of $26.8
million or 2.7%.  The decrease in net sales reflects a 1.7% decrease in domestic
sales volume and a 1.0% decrease in domestic  sales price.  Foodservice  selling
prices  decreased  1.2% while  food  packaging  selling  prices  decreased  .5%.
Foodservice  sales  volume  decreased  1.4 % while food  packaging  sales volume
decreased 3.9%.  Sales volume measures the dollar value of unit sales,  assuming
constant  prices between  periods.  The decrease in foodservice  sales volume is
primarily  attributable  to decreases in the  distributor  and clubstore  market
segments  offset  by  higher  national  account  volume.  The  decrease  in food
packaging  sales  volume is primarily  due to the  withdrawal  of the  Company's
Contour-Pak  line from the food packaging  market and a decrease in the cultured
products and frozen novelty market segments.  Canadian sales increased 2.5% from
the prior year.

         Cost of sales  decreased to $846.7 million for the year ended September
30,  1996 from $874.6  million for the same period in 1995,  a decrease of $27.9
million or 3.2%. As a percentage of net sales,  cost of sales decreased to 88.2%
for the year ended  September  30,  1996 from 88.6% for the same period in 1995.
The decrease in cost of sales as a percentage  of net sales was due primarily to
significant  changes  between  the  periods  in  overhead  costs  absorbed  into
inventory.  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 affected  when a change in inventory  levels during a period
differs  from the  change in the prior year  period.  Finished  goods  inventory
levels  increased to $137.7 million at September 30, 1996 from $104.6 million at
September  30, 1995,  which  resulted in a favorable  impact on cost of sales of
$10.6 million relating to the absorption of fixed overhead costs.  Additionally,
the Company  realized a 10.4%  decrease  in material  costs from the prior year,
offset by an unfavorable shift in product mix.

         Gross profit  increased to $113.1 million for the year ended  September
30,  1996 from $112.0  million for the same period in 1995,  an increase of $1.1
million or 1.0%, due to the reasons described above.

         Selling, general and administrative expenses decreased to $61.8 million
for the year ended  September 30, 1996 from $66.1 million for the same period in
1995, a decrease of $4.3 million or 6.5%. As a percentage of net sales, selling,
general  and  administrative  expenses  decreased  to 6.4%  for the  year  ended
September 30, 1996 from 6.7% for the same period in 1995.


                                       12


<PAGE>

         Other  (income)  expense,  net decreased to $4.3 million of expense for
the year  ended  September  30,  1996 from $1.2  million  of income for the same
period in 1995, a decrease of $5.5  million.  This decrease was due primarily to
one-time  expenses  relating to the  investigation  of the  Company's  strategic
alternatives.

         Operating  income  decreased  to  $47.0  million  for  the  year  ended
September 30, 1996 from $47.1 million for the same period in 1995, a decrease of
$0.1 million or 0.2%, due to the reasons described above.

         Interest  expense  increased  to  $37.5  million  for  the  year  ended
September  30, 1996 from $37.4  million for the same period in 1995, an increase
of $0.1 million or 0.3%,  due  primarily to higher  average  usage of short-term
borrowings.

         Income  tax  expense  decreased  to $3.8  million  for the  year  ended
September  30, 1996 from $3.9 million for the same period in 1995, a decrease of
$0.1 million or 2.4%.  The effective  tax rate for the year ended  September 30,
1996 was 40.0% compared to 40.1% for the same period in 1995.

         Net income  decreased to $5.7 million for the year ended  September 30,
1996 from $5.8  million for the same period in 1995,  a decrease of $0.1 million
or 1.8%, due to the reasons described above.


LIQUIDITY AND CAPITAL RESOURCES

         The Company's  business is highly seasonal with the majority of its net
cash inflows from  operations  realized in the second and third  quarters of the
calendar year. The Company builds  inventory  throughout the year to satisfy the
high  seasonal  demands of the summer  months  when  away-from-home  consumption
increases.  As a result, the Company requires access to working capital lines to
meet its production requirements during periods of reduced cash flow.

         On September 28, 1996, the Company  received $1.2 million of loans from
the State of  Maryland  and County of  Baltimore  Departments  of  Business  and
Economic Development.  The loans bear interest at 6.0% per annum with a ten year
life and require repayment in equal quarterly  installments  starting January 1,
1998. The loans may convert to interest-free grants if the Company meets certain
headcount and capital spending criteria in the Maryland facility. As of December
29, 1997, the Company has met the necessary criteria for the grant conversion.

         For the year ended  September  30,  1997,  $44.2  million  of  domestic
revolving  loan  borrowings,   $2.2  million  of  Canadian   operating  facility
borrowings,  $17.8  million of proceeds  from sale and  leaseback  of  property,
plant, and equipment,  and a $1.7 million decrease in cash balances were used to
fund $47.8  million of net capital  additions,  the payment of $0.1  million for
industrial   revenue  bond  principal,   $1.4  million  of  Canadian  term  loan
reductions, a $0.1 million increase in restricted cash, a $13.3 million increase
in cash in escrow, and $3.2 million of cash used by operations. At September 30,
1997, the Company had approximately $7.4 million of combined  availability under
its domestic  revolving  loan and  Canadian  operating  facilities.  The maximum
combined  month end  outstanding  balance  of the  domestic  revolving  loan and
Canadian operating facilities during the year ended September 30, 1997 was $65.4
million,  while the average  balance  outstanding  totaled  approximately  $53.0
million.

         The  Company's  liquidity  during the  current  year has been  enhanced
because  it has not  been  subject  to  current  income  taxes  (other  than the
Alternative  Minimum Tax) due to the use of net operating loss carryforwards for
income tax  purposes.  At September 30, 1997,  the Company's net operating  loss


                                       13

<PAGE>

carryforwards  for tax  purposes  are  approximately  $170  million.  These  net
operating loss carryforwards will expire, if not used, beginning in 2004.

         Prior to October 24, 1997, Sweetheart Receivables  Corporation ("SRC"),
a wholly owned,  limited purpose,  finance subsidiary of the Company,  had $60.0
million  of Series  1994-1 A-V Trade  Receivables  Backed  Notes  (the  "Notes")
outstanding under an accounts receivable  securitization  program. These amounts
were  invested  by the Trustee on behalf of SRC and were only  available  to the
Company  under  limited  circumstances.  The  balance  of cash in SRC was  $29.0
million and $28.9 million at September 30, 1997 and 1996,  respectively,  and is
reported as restricted cash in the  consolidated  balance sheet.  The balance of
restricted cash fluctuated throughout the year based on the level of receivables
available to collateralize the Notes.

         In  connection  with the  issuance  of the  Notes,  certain  terms  and
conditions of the Credit Agreement were amended. The Revolving Loan Facility was
limited to 50% of eligible  inventory  of  Sweetheart  Cup Company Inc. (up to a
maximum of $150  million of  eligible  inventory).  In  addition,  the  combined
borrowing  outstanding  under the  Revolver  plus the Notes  less the  aggregate
amount of cash on deposit in certain SRC accounts  could not exceed $115 million
in aggregate.

         On October 24, 1997, the Company refinanced the Revolving Loan Facility
and the Notes with a new Loan and Security Agreement of $135 million.  Under the
terms of the new loan, the need to hold restricted cash under the SRC indentures
was  eliminated.  As a result,  $29 million of restricted cash on deposit at the
time of the refinancing was released. This cash was used to immediately pay down
the Notes. In addition, the terms of the new loan do not require the maintenance
of restricted cash, which significantly  improves  availability of the line into
the future. See Note 15 of the accompanying financial statements (Item 8).

         In the fourth quarter of 1997, the Company  completed  negotiations  of
its three-year contract renewal with its largest customer, McDonald's.  Although
this  agreement  results in a lower  selling  price and less total  volume,  the
Company  did retain a majority  of the North  American  volume for cold cups and
lids at McDonald's.  In addition,  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  contract.  This will  cause the  Company to
incur incremental capital expenditures.

         The Company's principal uses of cash for the next several years will be
capital   expenditures,   working   capital   requirements,   and  debt  service
requirements.   The  reduction  in  debt  service  requirements   following  the
Acquisition  has  provided  the  Company  with  increased  flexibility  to  make
discretionary  capital  expenditures  that  management  believes will provide an
attractive  return on investment.  During the year ended September 30, 1997, the
Company made capital  expenditures of approximately  $47.8 million.  New product
development (including conversion from wax to double-sided polyethylene for cold
cups) and cost reduction accounted for approximately 21% and 37%,  respectively,
of the total  fiscal  year  1997  expenditures.  Non-discretionary  expenditures
represented  the balance of the current year spending.  The Company  anticipates
increased capital spending levels in the future for similar  projects,  of which
approximately  $13 million has been  committed  for fiscal 1998 as of the filing
date.  In  addition,  the Company may be  required  to fund  various  contingent
liabilities at any time,  including  amounts accrued for litigation,  claims and
assessments reflected on the balance sheet as other current liabilities.

         Management  believes  that  cash  generated  by  operations  and  funds
available  from  working  capital  borrowings  under  the new Loan and  Security
Agreement  will be sufficient to meet the Company's  expected  operating  needs,
planned capital expenditures and debt service requirements.


                                       14


<PAGE>

NET OPERATING LOSS CARRYFORWARDS

         As of September 30, 1997 the Company had approximately  $170 million of
net operating loss ("NOL")  carryforwards  for federal income tax purposes.  The
Acquisition  resulted in a significant  limitation  on the Company's  ability to
utilize its NOL  carryforwards.  Although the Company has taken certain steps to
allow  utilization of the NOL  carryforwards  and anticipates that a substantial
portion of its NOL  carryforwards  will be  available to offset  future  taxable
income,  there  can be no  assurance  that  its NOL  carryforwards  will  become
available or that the Company will generate future taxable income.  Accordingly,
all or a portion of its NOL carryforwards  could expire unutilized,  which could
adversely affect the Company's ability to satisfy its obligations as they become
due.  The Company  believes  that future  taxable  income will be  generated  to
realize the  unreserved  portion,  due primarily to  management's  commitment to
revenue enhancing and cost reduction strategies.


YEAR 2000

         The Company utilizes software and related  technologies  throughout its
business  that will be  affected  by the date  change in the year  2000.  System
modifications  or  replacements  are  underway  or  planned  which will make all
computer  systems  in the  Company  compliant  with the year  2000  requirement.
Anticipated spending for these modifications will be expensed as incurred and is
not  expected  to have a material  impact on the  Company's  ongoing  results of
operations.


EFFECT OF INFLATION

         Inflation  will  increase the  Company's  costs,  including the cost of
borrowing and raw  materials.  Depending upon business  conditions,  the Company
attempts to increase  the sales price of its  products to mitigate the effect of
such increases. There can be no assurance that the Company will be successful in
increasing the prices of its products to offset all, or any portion, of any cost
increases.


FORWARD-LOOKING STATEMENTS

         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.


ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               The response to this item is  submitted as a separate  section of
this report, beginning on page 29.

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

            None.


                                       15


<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 Inc. and Sweetheart
Cup Company Inc. as of December 29, 1997.  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>         <C>                                                                
Burnell R. Roberts                70          Chairman of the Board and Director of  Sweetheart  Holdings Inc.
                                              and Sweetheart Cup Company Inc.

William F. McLaughlin             49          President,  Chief  Executive  Officer and Director of Sweetheart
                                              Holdings Inc. and Sweetheart Cup Company Inc.

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

 Jerry J. Jasinowski              58          Director of Sweetheart  Holdings Inc. and Sweetheart Cup Company
                                              Inc.

Peter W. C. Mather                62          Director of Sweetheart  Holdings Inc. and Sweetheart Cup Company
                                              Inc.

Theodore C. Rogers                63          Director of Sweetheart  Holdings Inc. and Sweetheart Cup Company
                                              Inc.

 William F. Spengler              43          Vice  President,   Finance  and  Chief   Financial   Officer  of
                                              Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.

Charles E. Busse                  59          Vice  President  of  Research  and   Engineering  of  Sweetheart
                                              Holdings Inc. and Sweetheart Cup Company Inc.

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

 James R. Mullen                  54          Vice  President of Human  Resources of Sweetheart  Holdings Inc.
                                              and Sweetheart Cup Company Inc.

Rickey Schneider                  48          Vice President of Manufacturing of Sweetheart  Holdings Inc. and
                                              Sweetheart Cup Company Inc.

Roger A. Lindahl                  40          Treasurer  of  Sweetheart   Holdings  Inc.  and  Sweetheart  Cup
                                              Company Inc.

Marguerite E. Davis               43          Vice President of Sweetheart Cup Company Inc.

William H. Haas                   56          Vice President of Sweetheart Cup Company Inc.

Joseph A. Lucas                   58          Vice President of Sweetheart Cup Company Inc.

Vincent J. Truant                 50          Vice President of Sweetheart Cup Company Inc.

</TABLE>


                                       16


<PAGE>



         Mr. Roberts is the former Chairman and Chief Executive  Officer of Mead
Corporation  ("Mead"),  a paper products and electronic  publishing company. Mr.
Roberts  joined  Mead in 1966 and  served in a variety of  positions,  including
Controller, Vice President of Finance and Executive Vice President. He was named
President  of Mead in 1981 and served as Chairman  and Chief  Executive  Officer
from 1982 until May 1992.  From May 1992 until May 1993, Mr. Roberts served as a
director  of Mead.  Mr.  Roberts has been a director of AIPM since he joined the
firm in January 1993, and is a limited partner of American Industrial  Partners,
L.P.  ("AIP-LP"),  the general partner of AIP. Mr. Roberts is also a director of
Rayonier  Inc.,  Armco Inc.,  Perkin Elmer  Corporation,  DPL Inc. and Universal
Protective Packaging Co.

         Mr.  McLaughlin has served as President and Chief Executive  Officer of
Sweetheart  Holdings Inc. and Sweetheart Cup Company Inc. since May 1994.  Prior
to joining  the  Company,  he was  Executive  Vice  President  of Nestle  Brands
Foodservice, a leading supplier of food and beverage products to the foodservice
industry.  Prior to 1991, he spent eight years in several  positions,  including
President of L.J. Minor Corporation,  a Nestle subsidiary and specialty producer
of flavors for the foodservice industry.

         Mr. Bingham  co-founded AIPM and has been a director and officer of the
firm since 1989. He is also a general  partner of AIP-LP.  Prior to  co-founding
AIPM, Mr. Bingham was a Managing  Director of Shearson Lehman Brothers from 1984
until late 1987.  Prior to joining  Shearson  Lehman  Brothers,  Mr. Bingham was
Director of the Corporate Finance Department, a member of the Board, and head of
Mergers &  Acquisitions  at Lehman  Brothers Kuhn Loeb Inc.  Prior  thereto,  he
directed  investment  banking  operations  at Kuhn Loeb & Company where he was a
Partner and member of the Board and Executive  Committee.  He formerly served on
the Boards of Avis  Inc.,  ITT Life  Insurance  Corporation  and  Valero  Energy
Corporation.

         Mr. Jasinowski was elected as director of the Company commencing August
1,  1997.  He  is  the  President  and  CEO  of  the  National   Association  of
Manufacturers,  the largest  broad-based  industrial  trade  association  in the
United States.  He became  president in 1990 after serving as the  association's
executive vice president and chief economist for ten years.  Mr.  Jasinowski has
also held several  governmental  positions,  including  assistant  secretary for
policy at the U.S. Department of Commerce.  Mr. Jasinowski is also a director of
Atwood Richards and Phoenix Home Life.

         Mr. Mather is the former Vice President Management Information Services
(MIS) of Air  Products  and  Chemicals  Inc.  (APCI),  an  industrial  gases and
chemical  company.  Mr. Mather joined APCI in 1967, was appointed Vice President
MIS in 1982,  and retired  from the  company in 1996.  Mr.  Mather is  currently
serving as Assistant Secretary of Commerce for the state of Oklahoma.

         Mr. Rogers  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 to 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.  Spengler  has  served  as Vice  President  of  Finance  and  Chief
Financial  Officer of Sweetheart  Holdings Inc. and  Sweetheart Cup Company Inc.
since March 14,  1997.  He worked 13 years for  Bristol-Myers  Squibb in various
financial positions,  including Director of Finance for a large segment of their
European  business.  Mr.  Spengler  also worked in senior  planning and business
development  roles at Bristol-Myers  Squibb.  Prior to joining  Sweetheart,  Mr.
Spengler worked at Black & Decker from 1993 to March of this year,  where he was
the Vice  President  of Finance  for three  different  divisions,  serving  most
recently as Vice President of Finance for the North American Power Tools group.

         Mr.  Busse has been  employed by  Sweetheart  Cup Company  Inc. and its
predecessors  since  1963 and has  served  as Vice  President  of  Research  and
Engineering of Sweetheart Cup Company Inc. since 1983.


                                       17


<PAGE>

         Mr. Carson has served as Vice President,  General Counsel and Corporate
Secretary of Sweetheart  Holdings  Inc. and  Sweetheart  Cup Company Inc.  since
October 1993 and has served as Vice President,  General  Counsel,  and Corporate
Secretary  of  Sweetheart  Cup  Company  Inc.  and  as  Corporate  Secretary  of
Sweetheart  Holdings Inc. 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.  Mullen  has  served  as  Vice  President  of  Human  Resources  of
Sweetheart  Holdings Inc. and Sweetheart Cup Company Inc. since June 1994.  From
October 1984 to October  1993,  Mr. Mullen was employed in two divisions of Sara
Lee  Corporation,  a  consumer  products  company,  as Vice  President  of Human
Resources.  Prior to October 1984, Mr. Mullen was employed by Frito-Lay,  a food
company, Xerox Corporation,  a document company, and General Dynamics, a defense
contractor.

         Mr.  Schneider  has served as Vice  President  of  Manufacturing  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,
producing cans and plastic bottles for the food and oil industry.  Mr. Schneider
held a number of manufacturing positions during his tenure.

         Mr.  Lindahl has served as Treasurer of  Sweetheart  Holdings  Inc. and
Sweetheart Cup Company Inc. since October 1994. From November,  1989 to October,
1994, Mr.  Lindahl served as Assistant  Treasurer of Sweetheart Cup Company Inc.
Prior to 1989,  Mr.  Lindahl was  employed by Fort Howard  Corporation,  a paper
company, and Bull Information Systems and its predecessors.

         Ms.  Davis  has  served  as Vice  President  of  National  Accounts  of
Sweetheart Cup Company Inc. since October,  1994. From 1990 to September,  1994,
Ms.  Davis  served as a Director of Marketing  for  Sweetheart  Cup Company Inc.
Prior to joining the Company,  Ms. Davis was employed for 15 years by the Quaker
Oats  Company,  a food  company,  in a number of marketing  management,  product
management, field sales and training program development positions.

         Mr. Haas has served as Vice  President of Foodservice  Distribution  of
Sweetheart Cup Company Inc. and its  predecessors  since 1985.  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.

         Mr. Lucas has served as Vice  President of Packaging of Sweetheart  Cup
Company  Inc.  since 1991.  Prior to joining the  Company,  he was  employed for
almost 28 years by  Continental  Can  Company  in various  positions,  including
President  of  Continental  White  Cap,  Inc.,  a  packaging  company,  and Vice
President of Sales and Marketing of Continental  White Cap, Inc. and Continental
Bondware, Inc.

         Mr.  Truant  has  served  as Vice  President  of  McDonald's  Sales  of
Sweetheart Cup Company Inc. since October,  1994. From April, 1989 to September,
1994,  Mr. Truant served as Vice  President of National  Accounts for Sweetheart
Cup Company.  Prior to joining the Company in 1983,  Mr.  Truant  served as Vice
President of Marketing for Century  Importers  Ltd., a Philip Morris  affiliate.
Mr.  Truant also held several sales and  marketing  positions at Miller  Brewing
Co.,  a  division  of  Philip  Morris,  and Eli  Lilly & Co.,  a  pharmaceutical
manufacturer.


                                       18

<PAGE>

COMPENSATION OF DIRECTORS

         Messrs.  Mather and Jasinowski have agreements with the Company whereby
they are  compensated on a quarterly  basis in the amount of $4,500 per quarter,
and  receive  $500  plus  expenses  for each  meeting  attended.  The  remaining
directors of Sweetheart  Holdings Inc. and Sweetheart Cup Company do not receive
any direct  compensation from such companies for serving as a director.  Certain
directors  of  Sweetheart  Holdings  Inc.  and  Sweetheart  Cup Company Inc. are
employees  of  Sweetheart  Holdings  Inc.  and  Sweetheart  Cup Company Inc. and
receive  compensation  as such,  and  others  are  employees  of AIPM,  to which
Sweetheart Cup Company Inc. pays fees for advisory and management services.  See
Item  13  "Certain  Relationships  and  Related  Transactions".   Directors  are
reimbursed for expenses incurred while serving on the Board.


ITEM 11.    EXECUTIVE COMPENSATION

            The  following   table  sets  forth   information   concerning   the
compensation for the years ended September 30, 1997, 1996 and 1995, of the chief
executive  officer  and  the  four  most  highly  compensated  officers  and key
employees  of  Sweetheart   Holdings  Inc.  and   Sweetheart  Cup  Company  Inc.
(collectively, the "named executive officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                  Long-Term
                                                 Annual Compensation            Compensation
                                                                                   Awards
---------------------------------------- ------------------------------------- ---------------- ---------------
                                                                                # of Options      All Other
          Name and Principal                Fiscal       Salary      Bonus         Granted       Compensation
               Position                      Year         ($)       ($) (1)          (2)             ($)
---------------------------------------- ------------- ----------- ----------- ---------------- ---------------

<S>                                         <C>           <C>         <C>           <C>             <C>        <C>
William F. McLaughlin
   President   and   Chief    Executive     1997          491,667           -       10,000          129,805    (3)
   Officer of Sweetheart  Holdings Inc.     1996          400,000     498,000          -             18,207    (4)
   and Sweetheart Cup Company Inc.          1995          400,000     684,522          -            222,838    (5)

William H. Haas
   Vice    President   of   Foodservice     1997          180,000           -          -            364,443    (6)
   Distribution   of   Sweetheart   Cup     1996          178,313      89,640          600           35,235    (7)
   Company Inc.                             1995          171,187     103,357          -              6,111    (8)

William F. Spengler  (9)
   Vice  President and Chief  Financial     1997          159,410     108,333        5,000          100,274    (10)
   Officer of Sweetheart  Holdings Inc.
   and Sweetheart Cup Company Inc.

Daniel M. Carson
   Vice President,  General Counsel and     1997          172,500           -          -            191,160    (11)
   Corporate  Secretary  of  Sweetheart     1996          170,625      60,133          -             49,214    (12)
   Holdings  Inc.  and  Sweetheart  Cup     1995          162,500      94,476          -              5,721    (13)
   Company Inc.

James R. Mullen
   Vice  President  of Human  Resources     1997          163,500           -          -            150,685    (14)
   of  Sweetheart   Holdings  Inc.  and     1996          162,000      56,996          -              7,445    (15)
   Sweetheart Cup Company Inc.              1995          152,500      77,009        1,500            1,562    (16)
</TABLE>


                                       19


<PAGE>

(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)  Reflects  $125,000  paid  under the  Special  Incentive  Agreement,  $4,500
     contributed under the 401(k) Plan and $305 of term life insurance  premiums
     paid by the Company.
(4)  Reflects $10,989 paid for relocation expenses, $6,000 contributed under the
     401(k) Plan and $1,218 of term life insurance premiums paid by the Company.
(5)  Reflects $113,563 paid for relocation expenses, $101,963 for the payment of
     taxes on relocation  expense  reimbursements,  $6,000 contributed under 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 $1,312 of term
     life insurance premiums paid by the Company.
(6)  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 term life insurance premiums paid by the Company.
(7)  Reflects $30,000 paid for relocation expenses, $4,219 contributed under the
     401(k) Plan and $1,016 of term life insurance premiums paid by the Company.
(8)  Reflects  $5,568  contributed  under the 401(k)  Plan and $543 of term life
     insurance premiums paid by the Company.
(9)  Mr. Spengler became Vice President,  Finance and Chief Financial Officer on
     March 14, 1997. Amounts shown here were paid during the remainder of fiscal
     year 1997.
(10) Reflects $100,000 paid under an initial  employment bonus, and $274 of term
     life insurance premiums paid by the Company
(11) Reflects  $128,994  paid for  relocation  expenses,  $57,500 paid under the
     Special  Incentive  Agreement $4,500  contributed under the 401(k) Plan and
     $166 of term life insurance premiums paid by the Company.
(12) Reflects $44,176 paid for relocation expenses, $4,376 contributed under the
     401(k) Plan and $662 of term life insurance premiums paid by the Company.
(13) Reflects  $5,123  contributed  under the 401(k)  Plan and $598 of term life
     insurance premiums paid by the Company.
(14) Reflects  $96,029  paid for  relocation  expenses,  $54,500  paid under the
     Special Incentive Agreement,  and $156 of term life insurance premiums paid
     by the Company.
(15) Reflects $2,525 paid for relocation expenses,  $4,309 contributed under the
     401(k) Plan, and $611 of term life insurance premiums paid by the Company.
(16) Reflects  $938  contributed  under  the  401(k)  Plan and $624 of term life
     insurance premiums paid by the Company.

    AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUE TABLE

              Name                      Unexercised Options (1)
                                           September 30, 1997
                                   Exercisable       Unexercisable
---------------------------------  -----------------------------------

William F. McLaughlin                  4,265           16,700

William H. Haas                          876            1,975

William F. Spengler                        0            5,000

Daniel M. Carson                         712            1,119

James R. Mullen                          333            1,167


         (1)  There is no  trading  value for the  Company's  stock as it is not
publicly traded.


                                       20


<PAGE>


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.  Pursuant to the  McLaughlin  Agreement,  Mr.
McLaughlin  is entitled to  participate  in,  among  other  things,  the Company
Management  Incentive  Plan, a Stock Option and Purchase  Plan and certain other
employee  benefit  plans and programs made  available to other  employees of the
Company.  Mr. McLaughlin also purchased 1,000 shares of Sweetheart Holdings Inc.
common stock for $100 per share and an additional 5,000 shares at the same price
in  exchange  for a 5-year  promissory  note at 6.43%  interest  per annum.  Mr.
McLaughlin's  employment  is  terminable  by the  Company at any time and by Mr.
McLaughlin upon 30 days prior notice. In the event of termination by the Company
for any reason  other than  cause,  the  Company  will be  obligated  to pay Mr.
McLaughlin's base salary for a period of twelve months following the termination
of his employment or until he secures other employment, whichever comes first.


SPENGLER EMPLOYMENT AGREEMENT

         The  Company  entered  into an  employment  agreement  with  William F.
Spengler on February 12, 1997 (the "Spengler  Agreement")  pursuant to which the
Company  employed  Mr.  Spengler to serve as Vice  President,  Finance and Chief
Financial  Officer of the  Company.  Pursuant  to the  Spengler  Agreement,  Mr.
Spengler  is  entitled  to  participate  in,  among  other  things,  the Company
Management  Incentive Plan ("MIP"), a Stock Option and Purchase Plan and certain
other employee  benefit plans and programs made available to other  employees of
the Company.  In the event of  termination of Mr.  Spengler's  employment by the
Company for any reason  other than for cause,  the Company  will be obligated to
pay Mr. Spengler's base salary for one year following termination and a pro-rata
bonus under the MIP for the portion of the fiscal  year  completed  prior to the
termination date.


EMPLOYMENT CONTRACTS

         Messrs. McLaughlin, Haas, Spengler, Carson and Mullen 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 change of  control  or a sale of more than
fifty  percent of the equity value of the Company.  The amount of the  incentive
for Messrs.  McLaughlin  and Spengler is two year's base salary,  and one year's
base salary for each of the other executives.  Messrs. McLaughlin,  Haas, Carson
and Mullen each  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.


COMPENSATION COMMITTEE

         The  Sweetheart  Holdings Inc.  Compensation  Committee of the Board of
Directors consisted of W. Richard Bingham,  Burnell R. Roberts,  and Theodore C.
Rogers, all of whom are Directors of the Company.  Mr. Roberts is an officer but
not an employee of the Company. Neither Mr. Bingham nor Mr. Rogers is an officer
or employee of the Company.


                                       21


<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 Inc. common stock as of December 29,
1997,  by  holders  having  beneficial  ownership  of more than five  percent of
Sweetheart  Holdings Inc. common stock and certain other principal  holders,  by
each of the  directors  of  Sweetheart  Holdings  Inc.,  by  each  of the  named
executive  officers and by all directors  and  executive  officers of Sweetheart
Holdings Inc. as a group.

<TABLE>
<CAPTION>
                                                                                          Common Stock
                                                                           ----------------------------------------

                                                                              Number of           Percent of Class
Name of Beneficial Owner                                                       Shares
------------------------                                                   ----------------       -----------------

<S>                                                                            <C>                      <C>
American Industrial Partners Capital Fund, L.P. .........................      538,825                  51.51%
         One Maritime Plaza
         Suite 2525
         San Francisco, CA 94111

Mellon Bank, N.A., as Trustee for First Plaza Group Trust (1) ...........      350,000                  33.46
         One Mellon Bank Center
         Pittsburgh, PA 15258

Leeway & Co., as nominee for the AT&T Master Pension Trust (2) ..........      150,000                  14.34
         c/o State Street Bank & Trust Co.
         Master Trust Division - W6C
         1 Enterprise Drive
         North Quincy, MA 02171

W. Richard Bingham (3) ..................................................      538,825                  51.51


Burnell R. Roberts (4) ..................................................         -                       -
Theodore C. Rogers (3) ..................................................      538,825                  51.51
Peter W.C. Mather........................................................         -                       -
Jerry J. Jasinowski......................................................         -                       -
William  F. McLaughlin...................................................        6,000                   0.57
William  F. Spengler.....................................................         -                       -
William  H. Haas.........................................................         -                       -
Daniel M. Carson.........................................................         -                       -
James R. Mullen..........................................................         -                       -
Directors and executive officers as a group (16 persons) (5).............      544,825                  52.08
----------
</TABLE>


                                       22


(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  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)  Mr.  Roberts  is a limited  partner  of the  general  partner  of AIP and a
     director of AIPM, but does not share  investment or voting  discretion with
     respect to the securities held by AIP.
(5)  All of such shares are held of record by AIP,  except for the 6,000  shares
     held by Mr. McLaughlin.

         All of the  outstanding  common stock of Sweetheart Cup Company Inc. is
owned by Sweetheart Holdings Inc.

         On  December  29,  1997,  AIP,  on  behalf  of  itself  and  the  other
stockholders of Sweetheart Holdings Inc. ("Holdings"), entered into an agreement
with Creative  Expressions Group, Inc. ("CEG"), an affiliate of The Fonda Group,
Inc.  ("Fonda"),  a manufacturer of disposable beverage service and food service
products.  Both CEG and Fonda are privately held companies  controlled by Dennis
Mehiel ("Mehiel").  Pursuant to the agreement,  SF Holdings, Inc. ("SFH"), a new
holding company formed by Mehiel,  will acquire from Holdings'  stockholders 48%
of Holdings outstanding common stock and all of a new class of non-voting common
stock,  giving SFH 90% of the total number of outstanding  Holdings  shares.  As
part of the  consideration  for these  shares,  SFH will issue its own preferred
stock to Holdings stockholders. Upon consummation of the transaction,  Holdings'
Board of Directors  will have five  members,  three of whom will be nominated by
Holdings'  existing  stockholders  and two of whom  will  be  nominated  by SFH.
Significant  actions by Holdings' Board will require the vote of four directors.
CEG will manage the day-to-day operations of Holdings and Sweetheart Cup Company
Inc.  with a view to  achieving  cost  savings  and  other  synergies  with  the
operations  of  Fonda.  In  this  connection,  Mehiel  and  Tom  Uleau,  Fonda's
president,  will assume  executive  roles.  Consummation  of the  transaction is
expected to occurred on March 12, 1998.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


STOCKHOLDERS' AGREEMENT

         In connection with the  Acquisition,  Sweetheart  Holdings Inc. and the
Investors entered into a Stockholders' Agreement pursuant to which the Investors
were granted certain registration rights and participation  rights.  Pursuant to
the  Stockholders'  Agreement,  each of First Plaza Group Trust and Leeway & Co.
has the right to elect an  individual to serve on the Board of Directors of each
of Sweetheart  Holdings 


                                       24


<PAGE>

Inc. and  Sweetheart  Cup Company Inc. so long as it holds any of the securities
issued  to it  pursuant  to the  Acquisition.  AIP has the  right to  elect  the
majority of the directors of Sweetheart Holdings Inc. and Sweetheart Cup Company
Inc.  until the earlier of (i) the  occurrence  of certain  events and (ii) such
time as AIP no longer holds any of the  securities  issued to it pursuant to the
Acquisition.


MANAGEMENT SERVICES AGREEMENT WITH AIPM

         AIP,  which is Sweetheart  Holdings  Inc.'s largest  stockholder,  is a
private  investment  partnership that makes equity  investments,  principally in
industrial and manufacturing companies in the United States. The firm was formed
in 1989. AIP is managed by AIPM, W. Richard Bingham and Theodore C. Rogers, each
general partners of AIP-LP.

         AIPM  receives  an annual fee of $1.85  million for  providing  general
management,  financial  and other  corporate  advisory  services to the Company,
payable semi-annually 45 days after the scheduled interest payment dates for the
Notes, and is reimbursed for out-of-pocket  expenses.  The fees are paid to AIPM
pursuant to a Management Services Agreement among AIPM, Sweetheart Holdings Inc.
and  Sweetheart  Cup  Company  Inc.  AIPM,  an  affiliate  of  the   controlling
shareholder of the Company, expects to provide substantial ongoing financial and
management  services  to the  Company  utilizing  the  extensive  operating  and
financial experience of the AIPM principals.

         In  addition,  for the year  ended  September  30,  1996,  the  Company
reimbursed  AIPM  for  $950,000  of  expenses  incurred  in  connection  with an
investigation of the Company's strategic alternatives.


                                     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 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")).

       3.2    By-laws of  Sweetheart  Holdings Inc.  (incorporated  by reference
              from Exhibit 3.3 of the 1993 10-K).

       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")).


                                       24


<PAGE>

       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).

       10.7   Management  Services  Agreement  dated as of August 30, 1993 among
              the  Sweetheart  Holdings  Inc.,  Sweetheart  Cup Company Inc. and
              American  Industrial   Partners  Management  Company,   Inc.  (the
              "Management Services  Agreement")  (incorporated by reference from
              Exhibit 28.2 of the 1993 8-K).

       10.8   Restated  Management  Services  Agreement  dated  August 31,  1993
              (incorporated by reference from Exhibit 10.11 of the 1994 10-K).

       10.9   $1,000,000  Rockdale  County,  Georgia  Industrial  Revenue Bonds,
              Series  1976:  Loan  Agreement  dated as of August 1, 1976 between
              Development Authority of Rockdale County, Georgia and Maryland Cup
              Corporation;  and  Trust  Indenture  dated as of  August  1,  1976
              between Development Authority of Rockdale County,  Georgia and The
              Citizens and Southern  National Bank, as Trustee  (incorporated by
              reference from Exhibit 10.8 of the Registration Statement).

       10.10  $1,000,000 City of Sparks, Nevada Industrial Revenue Bonds, Series
              1977:  Lease and  Agreement  dated as of February 1, 1977  between
              City of  Sparks,  Nevada  and  Sweetheart  Plastics,  Inc.;  Trust
              Indenture  dated as of  February 1, 1977  between  City of Sparks,
              Nevada  and First  National  Bank of  Nevada,  Reno,  Nevada;  and
              Guaranty  Agreement dated as of February 1, 1977 between  Maryland
              Cup  Corporation and First National Bank of Nevada,  Reno,  Nevada
              (incorporated  by reference from Exhibit 10.9 of the  Registration
              Statement).

       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  


                                       25


<PAGE>


              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 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).


                                       26


<PAGE>

       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).

       10.25  Separation  agreement between Sweetheart Cup Company Inc. and John
              R. Icke dated May 26, 1995 (incorporated by reference from Exhibit
              10.1 of the Company's report on Form 10-Q dated August 10, 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,  Sweetheart  Cup Company Inc. and James R. Mullen
              dated  November 18, 1996  (incorporated  by reference from Exhibit
              10.36 of the 1997 10-K).


                                       27


<PAGE>

       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).

       21.1   Subsidiaries  of  the  Company  (incorporated  by  reference  from
              Exhibit 21.1 of the 1994 10-K).

       27.0   September 30, 1997 Financial Data Schedule

(b)  Current Reports on Form 8-K

         None.


                                       28


<PAGE>


                          INDEX TO FINANCIAL STATEMENTS


                                                                       PAGE
                                                                       ----

Report of Independent Public Accountants                               30


Consolidated Balance Sheets as of September 30, 1997
         and September 30, 1996                                        31


Consolidated Statements of Operations for the years ended
         September 30, 1997, 1996 and 1995                             32


Consolidated Statements of Cash Flows for the years ended
         September 30, 1997, 1996 and 1995                             33


Consolidated Statements of Shareholders' Equity for the years ended
         September 30, 1997, 1996 and 1995                             34


Notes to Consolidated Financial Statements                             35


<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 1996 and the related  consolidated  statements of operations,  shareholders'
equity and cash flows for the years ended  September  30,  1997,  1996 and 1995.
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 1996, and the consolidated  results of
their  operations  and their cash flows for the years ended  September 30, 1997,
1996 and 1995 in conformity with generally accepted accounting principles.



                                                         /s/ ARTHUR ANDERSEN LLP

Baltimore, Maryland
December 8, 1997
   (except with respect to
   the matter discussed in
   Note 20, as to which the
   date is March 12, 1998)


                                       30


<PAGE>

                    SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        AS OF SEPTEMBER 30, 1997 AND 1996
                        (In thousands, except share data)

                                                               September 30,
                                                           1997           1996
                                                           ----           ----

                         Assets
Current assets:
  Cash and cash equivalents                             $   2,650     $   4,371
  Restricted cash                                          29,016        28,870
  Cash in escrow                                           13,323            --
  Receivables, less allowances of $1,740
  and $2,466, respectively                                 85,774        88,183
  Inventories                                             148,845       172,838
  Deferred income taxes                                     2,471         1,771
  Assets held for sale, net                                 8,466            --
  Other current assets                                     20,868        20,099
                                                        ---------     ---------
       Total current assets                               311,413       316,132
                                                        ---------     ---------

  Property, plant and equipment                           527,999       527,394
       Less - Accumulated depreciation                    145,508        99,561
                                                        ---------     ---------
       Net property, plant and equipment                  382,491       427,833
                                                        ---------     ---------

  Deferred income taxes                                    12,471            --
  Other assets                                             13,155        18,645
                                                        ---------     ---------

       Total assets                                     $ 719,530     $ 762,610
                                                        =========     =========

         Liabilities and Shareholders' Equity
 Current liabilities:
   Accounts payable                                     $  58,933     $  70,472
   Accrued payroll and related costs                       40,528        47,828
   Other current liabilities                               43,815        33,918
   Current portion of long-term debt                        1,369         1,535
                                                        ---------     ---------
       Total current liabilities                          144,645       153,753
                                                        ---------     ---------

   Long-term debt                                         430,499       385,579
   Deferred income taxes                                       --        17,803
   Other non-current liabilities                           69,775        84,060

Shareholders' equity:
   Common stock-
      Par value $.01 per share; 3,000,000 shares
      authorized; 1,046,000 shares issued and
      outstanding                                         101,100       101,100
   Cumulative translation adjustment                         (507)         (322)
   Retained earnings (accumulated deficit)                (25,611)       21,060
   Note receivable related to purchase of common
        stock                                                (371)         (423)
                                                        ---------     ---------
        Total shareholders' equity                         74,611       121,415
                                                        ---------     ---------

   Total liabilities and shareholders' equity           $ 719,530     $ 762,610
                                                        =========     =========


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


                                       31

<PAGE>


                    SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
                                 (In thousands)


                                              For the year ended September 30,
                                               1997       1996         1995
                                           -------------------------------------

Net sales                                  $ 886,017    $ 959,818    $ 986,618
Cost of sales                                821,021      846,719      874,593
                                           ---------    ---------    ---------

         Gross profit                         64,996      113,099      112,025

Selling, general, and administrative          66,792       61,788       66,089
Loss on asset disposal and impairment         24,550           --           --
Restructuring charges                          9,680           --           --
Other (income) expense, net                      (73)       4,271       (1,197)
                                           ---------    ---------    ---------

         Operating income (loss)             (35,953)      47,040       47,133

Interest expense, net                        (40,265)     (37,517)     (37,410)
                                           ---------    ---------    ---------

         Income (loss) before income
         taxes and extraordinary loss        (76,218)       9,523        9,723

Income tax expense (benefit)                 (30,487)       3,809        3,903
                                           ---------    ---------    ---------

         Income (loss) before
         extraordinary loss                  (45,731)       5,714        5,820

Extraordinary loss on debt
     extinguishment (net of income taxes
     of $627)                                    940           --           --
                                           ---------    ---------    ---------

         Net income (loss)                 $ (46,671)   $   5,714    $   5,820
                                           =========    =========    =========


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


                                       32

<PAGE>

                    SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
                                 (In thousands)


                                              For the year ended September 30,
                                                 1997        1996        1995
                                              ----------------------------------
Cash flows from operating activities:
Net income (loss)                             $ (46,671)  $   5,714   $   5,820
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
     Depreciation and amortization               47,723      43,373      37,741
     Asset impairment expense                    24,550          --          --
     Extraordinary loss, net of tax                 940          --          --
     Deferred income taxes                      (30,487)      2,645       3,144
Changes in operating assets and liabilities:
     Receivables                                 (1,341)     14,103     (17,863)
     Inventories                                 23,993     (20,878)     21,055
     Accounts payable                           (11,541)      5,259       4,852
     Other, net                                 (10,408)     (6,708)     (3,850)
                                              ---------   ---------   ---------
     Net cash provided by (used in)
       operating activities                      (3,242)     43,508      50,899
                                              ---------   ---------   ---------

Cash flows from investing activities:
Additions to property, plant, and
  equipment                                     (47,757)    (50,236)    (51,625)
Proceeds from sales of property,
  plant, and equipment                           17,843          --         111
                                              ---------   ---------   ---------
     Net cash used in investing                 (29,914)    (50,236)    (51,514)
     activities                                ---------   ---------   ---------
     

Cash flows from financing activities:
Proceeds from debt                              331,216     194,160     103,852
Repayment of debt                              (286,364)   (178,235)   (103,535)
Payment received on common stock
  note receivable                                    52          77          --
Increase in restricted cash                        (146)    (12,904)     (3,932)
Increase in cash in escrow                      (13,323)         --          --
                                              ---------   ---------   ---------
     Net cash provided by (used in)
         financing activities                    31,435       3,098      (3,615)
                                              ---------   ---------   ---------

Net decrease in cash and  cash                   (1,721)     (3,630)     (4,230)
equivalents

Cash and cash equivalents, beginning
  of year                                         4,371       8,001      12,231
                                              ---------   ---------   ---------

Cash and cash equivalents, end of year        $   2,650   $   4,371   $   8,001
                                              =========   =========   =========

Supplemental cash flow disclosures:
    Interest paid                             $  38,818   $  35,767   $  35,748
                                              =========   =========   =========
    Income taxes paid                         $      --   $   2,226   $   1,061
                                              =========   =========   =========

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


                                       33

<PAGE>

                    SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                          Cumulative                                    Total
                                          Common Stock    Translation     Retained        Note      Shareholders'
                                                          Adjustment      Earnings     Receivable      Equity
                                          ------------------------------------------------------------------------
<S>                                       <C>             <C>           <C>              <C>           <C>      
Balance, September 30, 1994                $101,100        $(171)        $  9,526         $(500)        $ 109,955

Net income                                       --           --            5,820            --             5,820
Translation adjustment                           --           30               --            --                30
                                           --------        -----         --------         -----         ---------

Balance, September 30, 1995                 101,100         (141)          15,346          (500)          115,805

Net income                                       --           --            5,714            --             5,714
Payment received on note receivable              --           --               --            77                77
Translation adjustment                           --         (181)              --            --              (181)
                                           --------        -----         --------         -----         ---------

Balance, September 30, 1996                 101,100         (322)          21,060          (423)          121,415

Net loss                                         --           --          (46,671)           --           (46,671)
Payment received on note receivable              --           --               --            52                52
Translation adjustment                           --         (185)              --            --              (185)
                                           --------        -----         --------         -----         ---------

Balance, September 30, 1997                $101,100        $(507)        $(25,611)        $(371)        $  74,611
                                           ========        =====         ========         =====         =========
</TABLE>

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


                                       34

<PAGE>

                    SWEETHEART HOLDINGS INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995

         As used in these  notes,  unless the context  otherwise  requires,  the
"Company"  shall  refer  to  Sweetheart  Holdings  Inc.  and  its  subsidiaries,
including Sweetheart Cup Company Inc.


(1)  SIGNIFICANT ACCOUNTING POLICIES

         (a)  Principles of Consolidation and Translation -

         The financial statements include all of the accounts of the Company and
its  subsidiaries on a consolidated  basis as of September 30, 1997 and 1996 and
for the  years  ended  September  30,  1997,  1996  and  1995.  For all  periods
presented,  the consolidated financial statements include all of the accounts of
the  Company's  United  States  operations  (Sweetheart  Holdings  Inc.  and its
domestic  subsidiaries,  Sweetheart Cup Company Inc. 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.

         (b)  Cash and Cash Equivalents -

         The Company considers all highly liquid  investments with a maturity of
three months or less when purchased to be cash equivalents.  Cash overdrafts are
reclassified  to accounts  payable and accrued  payroll and related costs.  Cash
balances  related to Sweetheart  Receivables  Corporation  are  restricted  from
transfer  to  other  entities  within  the  Company.  Restricted  cash is  shown
separately  on the  balance  sheet.  The  balance of  restricted  cash was $29.0
million and $28.9  million at September  30, 1997 and 1996,  respectively.  Cash
received as proceeds from the sale of assets is restricted to qualified  capital
expenditures under the Bond Indentures (see Note 10), and is held in escrow with
the trustee until  utilized.  The balance of cash in escrow was $13.3 million at
September 30, 1997.

         (c)  Inventories -

         Inventories  are carried at the lower of cost or market as described in
Note 2 Spare parts of $20.1 million at September 30, 1996 were reclassified from
inventories to other current assets.

         (d)  Assets held for sale -

         Property, plant, and equipment for the Bakery division was reclassified
as held for sale at September 30, 1997. The Bakery division was sold on November
30, 1997, as discussed in Note 15.

         (e)  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 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.


                                       35

<PAGE>


         (f)  Revenue Recognition -

         Sales of the  Company's  products  are  recorded  based on  shipment of
products.

         (g)  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,
pension and postretirement benefits and LIFO inventory.

         No  deferred   income  taxes  have  been  provided  on  the  cumulative
undistributed earnings of the Canadian subsidiary of Sweetheart Cup Company Inc.
Those  earnings   (approximately  $12.8  million)  are  considered   permanently
reinvested under Accounting Principles Bulletin No. 23. The incremental U.S. tax
costs (deferred taxes) of repatriating these earnings would not be material.

         (h)  Employee Benefit Plans (also see Note 7) -

         The  Company  has  various   defined   benefit   plans  and  a  defined
contribution   plan  for   substantially  all  employees  who  meet  eligibility
requirements.  Benefits  under the defined  benefit  plans are based on years of
service, and funding is in accordance with actuarial  requirements of the plans,
subject to  provisions  of the  Employee  Retirement  Income  Security  Act. The
Company makes contributions to the defined  contribution plan in accordance with
the plan's provisions.

         (i)  Postretirement Health Care Plans (also see Note 8) -

         The Company sponsors various defined benefit postretirement health care
plans that cover substantially all employees who meet eligibility  requirements.
These plans are not funded by the Company.

         (j)  Reclassifications -

         Certain  prior year  balances  have been  reclassified  to conform with
current presentation.

         (k)  Impact of Recently Issued Accounting Standards -

         In October 1996, the Company adopted Statement of Financial  Accounting
Standards  (SFAS)  No.  123,  Accounting  for Stock  Based  Compensation,  which
provides an  alternative  to APB Opinion No. 25,  Accounting for Stock Issued to
Employees in accounting for stock based  compensation  issued to employees.  The
Company has adopted only the  disclosure  provisions  of Statement  123, and the
impact was not material.

         In October 1996, the Company  adopted SFAS No. 121,  Accounting for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of,
which  requires  impairment  losses to be recorded on long-lived  assets used in
operations when indicators of impairment are present and the  undiscounted  cash
flows  estimated  to be  generated  by those  assets  are less than the  assets'
carrying  amount.  Statement 121 also  addresses the  accounting  for long-lived
assets that are  expected to be  disposed  of. The  adoption of SFAS 121 did not
have a material impact on net income. In the fourth quarter of fiscal year 1997,
the Company recorded a loss on asset disposal and impairment. See Note 14.

         During 1997, the Financial  Accounting  Standards Board issued SFAS No.
128,  Earnings per Share,  No. 129,  Disclosure  of  Information  about  Capital
Structure,  No. 130, Reporting  Comprehensive  Income, and No. 131,  Disclosures
about  Segments of an  Enterprise  and  Related  Information.  These  statements
address  presentation  and  disclosure  matters  and will  have no impact on the
Company's  financial position or results of operations.  These statements become
effective during the Company's fiscal years 1998 and 1999 and will be adopted as
applicable.


                                       36

<PAGE>

         On November 20, 1997,  the Emerging  Issues Task Force (EITF) reached a
consensus on Issue 97-13 regarding  reengineering costs. This consensus provides
guidance about what activities  constitute  business  process  reengineering  in
connection with the  development  and  installation of software for internal use
and  concludes  that  all  reengineering  costs,  including  those  incurred  in
connection  with a software  installation,  should be expensed as incurred.  The
Company has capitalized  costs such as those described above through fiscal year
1997,  and is  required  to  expense  these  costs  as a  cumulative  change  in
accounting  principle in the first quarter of fiscal year 1998.  The Company has
not yet calculated the impact of this requirement.

         (l)  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 periods. Actual results could differ from those estimates.


(2)  INVENTORIES

         The  components  of  inventories  and their  valuation  methods  are as
follows (in thousands):

                                                September 30,   September 30,
                                                    1997            1996
                                               --------------   -------------
 Components-
     Raw materials and supplies                  $ 32,302       $ 35,166
     Finished  products                           108,842        129,956
     Work in progress                               7,701          7,716
                                                 --------       --------
                                                 $148,845       $172,838
                                                 ========       ========

 Valued at lower of cost or market -
     First in, first out ("FIFO")                $ 15,300       $ 17,011
     Last in, first out ("LIFO")                  133,545        155,827
                                                 --------       --------

                                                 $148,845       $172,838
                                                 ========       ========

         Had  inventories  valued on the LIFO basis been stated on a FIFO basis,
inventories  would have been  $6,568,000 and  $3,999,000  lower than reported at
September 30, 1997 and 1996,  respectively.  Cost of sales on a FIFO basis would
have been higher by $2,569,000 and $11,538,000 for the years ended September 30,
1997 and  1996,  respectively,  and  lower  by  $21,022,000  for the year  ended
September 30, 1995.


                                       37

<PAGE>


(3)  PROPERTY, PLANT AND EQUIPMENT

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

                                             September 30,      September 30,
                                                  1997               1996
                                           -----------------   --------------

Land                                             $ 23,801         $ 26,008
Buildings                                          85,808           90,760
Machinery and equipment                           394,754          375,404
Construction in progress                           23,636           35,222
                                                 --------         --------
                                                                
         Total                                    527,999          527,394
                                                 --------         --------
                                                                
Accumulated depreciation                          145,508           99,561
                                                 --------         --------
                                                                
Net property, plant and equipment                $382,491         $427,833
                                                 ========         ========
                                                                
                                                          
(4)  OTHER ASSETS

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


                                              September 30,    September 30,
                                                   1997             1996
                                              ------------     ---------------

       Debt issuance costs, net of
            accumulated amortization          $    8,159         $   12,874
       Intangible pension asset
            (see Note 7)                             860              2,484
       Prepaid assets                              2,423              1,299
       Other                                       1,713              1,988
                                              ----------         ----------

                Total long-term               $   13,155         $   18,645
                                              ==========         ==========

         Amortization  of the above debt issuance  costs  totaled  approximately
$5.2  million,  $3.6 million and $3.5 million for the years ended  September 30,
1997, 1996 and 1995,  respectively,  of which $3.6 million of the 1997 costs are
included as interest expense in the accompanying statement of operations. During
the year ended  September  30,  1997,  the Company  accelerated  $1.6 million of
amortization  for the debt  issuance  costs  related to  Sweetheart  Receivables
Corporation  and the  1993  Credit  Agreement,  both of  which  were  refinanced
subsequent to year end (See Note 10).  This charge is shown as an  extraordinary
loss  (net of  $627,000  of  income  taxes)  on the  consolidated  statement  of
operations.


                                       38

<PAGE>

(5)  OTHER CURRENT LIABILITIES

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

<TABLE>
<CAPTION>
                                                   September 30,                    September 30,
                                                        1997                             1996
                                              -------------------------          ---------------------

<S>                                                <C>                                <C>        
       Sales allowances                            $     7,052                        $     6,023
       Restructuring costs                              13,201                              4,934
       Taxes other than income taxes                     2,841                              2,288
       Litigation, claims and assessments
            (see Note 16)                               15,445                             15,196
       Interest payable                                  2,806                              2,798
       Other                                             2,470                              2,679
                                                   -----------                        -----------

                Total                              $    43,815                        $    33,918
                                                   ===========                        ===========


(6)  OTHER NON CURRENT LIABILITIES

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

                                                   September 30,                    September 30,
                                                        1997                             1996
                                              -------------------------          ---------------------

       Post retirement health care benefits
            (see Note 8)                           $    57,983                        $    58,725
       Pensions                                          9,761                             13,620
       Other                                             2,031                             11,715
                                                   -----------                        -----------

                Total                              $    69,775                        $    84,060
                                                   ===========                        ===========

</TABLE>


                                       38


<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  approximately  $3,586,000,  $3,715,000  and  $3,681,000 for the years
ended September 30, 1997,  1996 and 1995,  respectively.  Certain  employees are
covered  under defined  benefit  plans.  Benefits  under the plans are generally
based on fixed amounts for each year of service.

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


<TABLE>
<CAPTION>
                             Year ended             Year ended            Year ended
                         September 30, 1997     September 30, 1996    September 30, 1995
                        ---------------------- --------------------------------------------

<S>                          <C>                    <C>                   <C>       
Service cost                 $    1,111             $    1,078            $      952
Interest cost                     3,720                  3,545                 3,230
Projected return
   on assets                     (3,212)                (2,874)               (1,637)
Net amortization                    262                    188                    16
                             ----------             ----------            ----------

     Net pension
       expense               $    1,881             $    1,937            $    2,561
                             ==========             ==========            ==========
</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 30,                    September 30,
                                                          1997                            1996
                                                 -----------------------          ----------------------

<S>                                                    <C>                              <C>
       Actuarial present value of
            benefit obligations -
                Vested benefits                        $   41,616                       $   37,231
                Nonvested benefits                         11,094                           10,741
                                                       ----------                       ----------
       Accumulated and projected
            benefit obligation                             52,710                           47,972
       Plan assets at fair value                           39,243                           31,023
                                                       ----------                       ----------

                Funded status                             (13,467)                         (16,949)

       Unrecognized prior service cost                      1,529                            2,484
       Unrecognized net gain                                  473                             (626)
       Adjustment required to recognize
            minimum liability                                (860)                          (2,484)
                                                       -----------                      -----------
                Net pension liability                  $  (12,325)                      $  (17,575)
                                                       ===========                      ===========

</TABLE>


                                       40


<PAGE>

         As required by SFAS No. 87,  "Employers'  Accounting for Pensions," the
Company recognized  additional pension liabilities of $860,000 and $2,484,000 as
of September 30, 1997 and 1996, respectively, and equal amounts as other assets.

         Actuarial  assumptions  used in calculating the above amounts include a
10% return on plan assets for the years  ended  September  30, 1997 and 1996,  a
7.5% discount rate on benefit  obligations  as of September 30, 1997, a weighted
average  discount  rate of 7.5% for the year ended  September  30,  1997, a 8.0%
discount  rate on benefit  obligations  as of September  30,  1996,  and a 7.75%
weighted  average discount rate for the first six months and 8.0% for the second
six months of the year ended September 30, 1996.

         Data with respect to the Lily Cups Inc., Canada defined benefit plan is
not material and is not included in the above data.


(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 one year of  participation.  The majority of the Company's plans are
contributory,  with retiree contributions  adjusted annually. The accounting for
the plans anticipates future  cost-sharing  changes to the written plan that are
consistent with the Company's announced policies.  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 30,                    September 30,
                                                     1997                            1996
                                            -----------------------          ----------------------

<S>                                              <C>                              <C>        
Accumulated Postretirement Benefit
     Obligation:
     Retirees                                    $    24,936                      $    25,596
     Other fully eligible participants                 5,731                            6,472
     Other active participants                        12,166                           17,577
                                                 -----------                      -----------

                                                      42,833                           49,645

     Unrecognized prior service cost                   4,861                            1,536
     Unrecognized actuarial gain                      13,389                           10,644
                                                 -----------                      -----------
     Accrued postretirement health care
         cost liability                          $    61,083                      $    61,825
                                                 ===========                      ===========
</TABLE>


                                       41


<PAGE>

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


<TABLE>
<CAPTION>
                             Year ended             Year ended            Year ended
                         September 30, 1997     September 30, 1996    September 30, 1995
                        ---------------------- --------------------------------------------

<S>                           <C>                    <C>                   <C>      
Service cost-
   benefits attributed
   to service during
   the period                 $     859              $   1,533             $   1,497
Interest cost on
   accumulated post-
   retirement benefit
   obligation                     3,098                  3,868                 4,134
Net amortization
   and deferral                  (1,326)                  (187)                 (118)
                              ----------             ----------            ----------
     Net postretirement
       health care cost       $   2,631              $   5,214             $   5,513
                              =========              =========             =========

</TABLE>

         The weighted  average discount rate used in determining the accumulated
postretirement  benefit  obligation was 7.5%, and 8.0% at September 30, 1997 and
1996,  respectively.  Net  postretirement  health care cost was computed using a
weighted  average  discount rate of 8.0% for the year ended  September 30, 1997,
7.75%  for the year  ended  September  30,  1996,  and  8.5% for the year  ended
September  30,  1995.   For  measuring  the  expected   postretirement   benefit
obligation,  a 10% annual  rate of  increase  in the per capita  claims cost was
assumed  for  1997.  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 30,
1997 and  September  30, 1996 by  approximately  $2.2 million and $2.8  million,
respectively,  and the aggregate of the service and interest cost  components of
net  postretirement  health care cost by approximately $0.2 million for the year
ended September 30, 1997, and $0.4 million for each of the years ended September
30, 1996 and 1995.


                                       42


<PAGE>

(9)  INCOME TAXES

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


<TABLE>
<CAPTION>
                             Year ended             Year ended            Year ended
                         September 30, 1997     September 30, 1996    September 30, 1995
                        ---------------------- --------------------------------------------

<S>                               <C>                    <C>                  <C>    
Current-
   Federal                     $       -              $       -            $       -
   State                               -                      -                    -
   Foreign                             -                 (1,164)                (759)
                               ---------              ----------           ----------

    Total current                      -                 (1,164)                (759)
                               ---------              ----------           ----------

Deferred -
   Federal                        26,165                 (2,315)              (2,829)
   State                           3,738                   (330)                (315)
   Foreign                           584                       -                   -
                               ----------             -----------          ----------

    Total deferred                30,487                 (2,645)              (3,144)
                               ---------              ----------           ----------

                               $  30,487              $  (3,809)           $  (3,903)
                               =========              ==========           ==========
</TABLE>

         The effective tax rate varied from the U.S. Federal tax rate of 35% for
the years ended September 30, 1997, 1996 and 1995 as a result of the following:

<TABLE>
<CAPTION>
                                         Year ended                 Year ended               Year ended
                                        September 30,             September 30,             September 30,
                                            1997                       1996                     1995
                                     --------------------      ---------------------    ----------------------

<S>                                            <C>                       <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 30, 1997, the Company had deferred tax liabilities of $167
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 a non-current  liability
in  the  accompanying  Consolidated  Balance  Sheets.  The  principal  temporary
differences  included  above are  depreciation,  a $75 million  liability,  LIFO
inventory,  a $22 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 asset items.

         The  Company  has net  operating  loss  carryforwards  for  income  tax
purposes of approximately $170 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, and $48 million expire in 2012.


                                       43


<PAGE>


(10)  LONG-TERM OBLIGATIONS

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

<TABLE>
<CAPTION>
                                                                                          September 30,         September 30,
                                                                                              1997                  1996
                                                                                         -------------------    -----------------

<S>                                                                                           <C>                 <C>     
(i) Sweetheart Cup Company Inc.

Senior Secured Notes, at 9.625%,  interest  payable  semiannually on March 1 and
   September 1 of each year, commencing March 1, 1994, due on September 1, 2000,
   and are subject to redemption on or after  September 1, 1997 at the option of
   the Company,  in whole or in part, at the  redemption  prices set forth below
   (expressed as percentages of the principal amount),  plus accrued interest to
   the redemption  date, for  redemptions  during the 12 month period  beginning
   September 1, of the
   following years:                                                                           $190,000            $190,000
         1997 -- 103.208%, 1998 -- 101.604%, and
         1999 -- 100.000%

Senior Subordinated Notes, at 10.50%,  interest payable  semiannually on March 1
   and September 1 of each year,  commencing  March 1, 1994, due on September 1,
   2003,  and are subject to  redemption  on or after  September  1, 1998 at the
   option of the  Company,  in whole or in part,  at the  redemption  prices set
   forth below (expressed as percentages of the principal amount),  plus accrued
   interest to the redemption  date,  for redemption  during the 12 month period
   beginning September 1, of the following years:
         1998 -- 103.938%, 1999 -- 102.625%,                                                   110,000             110,000
         2000 -- 101.313%, and 2001 and
         thereafter -- 100.000%


Revolving  Loan at Bankers  Trust's  prime rate plus 1.50%,  or Bankers  Trust's
   Eurodollar  rate  plus  2.50%,  subject  to  certain  limitations  as well as
   downward  adjustment for any interest period  beginning after October 1, 1994
   upon the satisfaction of certain financial criteria,  due on August 30, 1998  
   (interest  rates - 10.0% and 7.91%)                                                          60,000              15,800


(ii) Sweetheart Receivables Corporation

Sweetheart  Receivables  Corporation Series 1994-1 A-V Trade  Receivables-Backed
   Notes, a private placement,  at Telerate one month LIBOR plus .40%.  Interest
   payable monthly  commencing on October 17, 1994 through the Scheduled Pay-Out
   Period 


                                       44


<PAGE>

   starting  July  31,  1999  (interest  rates-6.06%  and 5.90% at September 30,
   1997 and 1996).                                                                              60,000              60,000
   

(iii)  Lily Cups Inc.

Term Facility, at Bank of Nova Scotia's prime rate plus 1.25% payable quarterly,
   due in equal annual repayments commencing October 31, 1994 and ending October
   31, 1998 (interest rates - 6.0% and 7.0% at  September 30, 1997 and 1996)               $     2,737         $     4,210

Operating Facility,  at Bank of Nova Scotia's prime rate plus 1.25%,  repaid and
   reborrowed  until  October  31,  1998,  subject  to  satisfaction  of certain
   conditions on the date of any such borrowing (interest  rates - 6.0% and 7.0%
   at September 30, 1997 and 1996)                                                               5,431               3,304
                                                                                           -----------         ------------
   

                                                                                               428,168              383,314
                                                                                           -----------         ------------

Less - Current portion of long-term debt                                                        (1,369)              (1,435)
                                                                                           ------------        -------------

                                                                                              $426,799             $381,879
                                                                                           ===========         ============
</TABLE>

         The aggregate annual maturities of long-term debt at September 30, 1997
are as follows (in thousands):

                  1998                                                $    1,369
                  1999                                                    66,799
                  2000                                                   250,000
                  2001                                                         -
                  2002                                                         -
                  2003 and thereafter                                    110,000
                                                                       ---------

                                                                        $428,168

         Long-term bonds consist of four industrial development bonds and a loan
from the State of Maryland with interest  rates ranging from 6.0% to 6.75%,  due
in varying  amounts through 2006. The aggregate  annual  maturities of long-term
bonds at September 30, 1997 are as follows (in thousands):

                  1998                                             $           -
                  1999                                                     2,500
                  2000                                                         -
                  2001                                                         -
                  2002                                                         -
                  2003 and thereafter                                      1,200
                                                                         -------

                                                                          $3,700


                                       45


<PAGE>

         The   maximum   month-end   balances   outstanding,   average   amounts
outstanding,  and the weighted average interest rates on the domestic  Revolving
Loan Facility and Canadian  Operating  Facility during the years ended September
30 were as follows (in thousands, except for interest rates):


<TABLE>
<CAPTION>
                                   Domestic Revolving Loan Facility         Canadian Operating Facility
                                   --------------------------------         ---------------------------
                                       1997                1996               1997               1996
                                 ------------------  -----------------  ------------------ ------------------

<S>                                        <C>                <C>                  <C>                <C>   
Maximum month-end balances
outstanding                                $60,000            $23,000              $6,123             $4,321
                                           =======            =======              ======             ======
Average amounts outstanding                $48,194             $8,660              $4,843             $3,564
                                           =======             ======              ======             ======
Weighted average interest rates
                                       8.52%              8.63%               6.10%              8.16%
                                       =====              =====               =====              =====
</TABLE>


The 1993 Credit  Agreement and the  Sweetheart  Receivables  Corporation  Series
1994-1  A-V  Trade   Receivables-Backed  Notes  were  refinanced  subsequent  to
September 30, 1997. See Note 15 for details.


1993 Credit Agreement

         On August 30, 1993, the Company entered into the 1993 Credit Agreement,
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 and it may not be reborrowed.  Additionally,
certain terms and conditions of the Credit Agreement were amended. The Revolving
Loan Facility is limited to 50% of eligible  inventory of Sweetheart Cup Company
Inc. (up to a maximum of $150 million of eligible inventory).  In addition,  the
combined   borrowings   outstanding  under  the  Revolver  plus  the  Sweetheart
Receivables  Corporation  1994-1  A-V Trade  Receivables-Backed  Notes  less the
aggregate  amount  of  cash  on  deposit  in  certain   Sweetheart   Receivables
Corporation  accounts may not exceed $115 million in  aggregate.  The  Revolving
Loan  borrowings  were $60.0  million at September 30, 1997 and $15.8 million at
September 30, 1996.

         The  borrowings  under the 1993  Credit  Agreement  bear  interest,  at
Sweetheart Cup Company Inc.'s option, at Bankers Trust Company's prime rate plus
1.50% or, subject to certain limitations,  at Bankers Trust Company's Eurodollar
rate plus 2.50%.  Interest  rates may be reduced by 0.25% as of October 1, 1994,
and on the first day of any fiscal quarter thereafter, depending upon Sweetheart
Cup Company Inc.'s ratios of cash flow coverage to interest  expense.  Up to $15
million of the  Revolving  Loan  Facility  may be utilized  to issue  Letters of
Credit. Approximately $9.7 million in Letters of Credit were issued on behalf of
Sweetheart  Cup Company Inc. as of September 30, 1997 and 1996.  The 1993 Credit
Agreement 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 Revolving  Loan
Facility  (approximately $104,600 and $299,600 for the years ended September 30,
1997 and 1996,  respectively,  as well as a 2.75%  per annum fee on  outstanding
Letters of Credit  (approximately  $254,000  and  $272,400  for the years  ended
September 30, 1997 and 1996, respectively).

         Loans made  pursuant to the  Revolving  Loan  Facility can be borrowed,
repaid,  and  reborrowed  from time to time until  final  maturity on August 30,
1998. The 1993 Credit Agreement provides for partial mandatory  prepayments upon
the issuance of equity by Sweetheart  Holdings Inc. or any of its  subsidiaries,
and full  repayment  upon any change of control  (as  defined in the 1993 Credit
Agreement).  The Revolving 


                                       46


<PAGE>

Loan Facility also requires a $20 million  clear-down  period between December 1
and January 31 of each year,  commencing  December 1, 1994,  whereby the average
unused  revolver  during any  consecutive  31-day period  within the  clear-down
period  must  average  $20  million;  failure to do so  results in an  immediate
reduction of the Revolving  Loan Facility by $20 million  effective  immediately
succeeding February 1.

         The  indebtedness  of Sweetheart Cup Company Inc. under the 1993 Credit
Agreement  is  guaranteed  by  Sweetheart  Holdings  Inc. and secured by a first
priority perfected security interest in inventory,  spare parts and all proceeds
of the  foregoing of  Sweetheart  Cup Company  Inc., 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 Inc. and Sweetheart Cup Company Inc.
and of each of their  respective  present and future  direct  subsidiaries,  all
intercompany  indebtedness payable to Sweetheart Holdings Inc. or Sweetheart Cup
Company Inc. by Sweetheart  Holdings Inc.,  Sweetheart Cup Company Inc. 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.

Senior Secured Notes and Senior Subordinated Notes

         Sweetheart Cup Company Inc. 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
Company Inc.,  Sweetheart  Holdings Inc., as Guarantor,  and United States Trust
Company of New York,  as Trustee (the "Senior  Secured  Indenture").  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 and were  issued in  denominations  of $1,000  and
integral multiples thereof.

         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 Company
Inc., 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 1993 Credit  Agreement  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 Secured Indenture contains 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.  The Senior
Secured  Notes may be  redeemed at the dates and prices  indicated  in the table
above.

         The Senior  Subordinated  Notes were issued  pursuant  to an  Indenture
among Sweetheart Cup Company Inc.,  Sweetheart Holdings Inc., 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 and were issued
in denominations of $1,000 and integral multiples thereof.


                                       47


<PAGE>

         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
1993 Credit Agreement, and all other indebtedness not otherwise prohibited. As a
result of the  subordination  provisions,  and in the event of an  insolvency or
liquidation  proceeding,  holders of the Senior Subordinated Notes may recover a
lesser percentage of their investment than other creditors of the Company.

         The Senior  Subordinated  Indenture  contains  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.  The  Senior  Subordinated  Notes may be  redeemed  at the dates and
prices indicated in the table above.

Sweetheart Receivables Corporation Series 1994-1 A-V
Trade Receivables-Backed Notes

         Sweetheart Cup Company Inc.  securitizes  its  receivables  through its
wholly owned limited purpose,  bankruptcy-remote finance subsidiary,  Sweetheart
Receivables  Corporation  ("SRC").  This  structure  is  intended  to  segregate
receivables  from  Sweetheart Cup Company Inc.'s other assets or liabilities and
achieve a lower cost of funds based on the credit quality of the receivables.

         On  September  20,  1994,  SRC  issued  and  sold to  Bankers  Trust as
Placement Agent, $60 million of Series 1994-1 A-V Trade Receivables-Backed Notes
(the "Notes"),  under an indenture and security  agreement.  The proceeds of the
notes were used to purchase  substantially  all of the receivables of Sweetheart
Cup Company Inc. on the closing date. SRC's share of the proceeds of collections
on those  receivables will be used to purchase newly generated  receivables from
Sweetheart Cup Company Inc. on an ongoing basis.

         SRC's  purchase of  receivables  from  Sweetheart  Cup Company  Inc. is
intended to be a "true sale" for bankruptcy law purposes and without recourse to
Sweetheart  Cup Company Inc.,  except that  Sweetheart  Cup Company Inc. will be
required to make payment to SRC for certain dilution of the receivables and will
remain  liable  for  making   payments  in   connection  of  certain   customary
representations and covenants.

         SRC grants the  Trustee,  Manufacturer's  and  Traders  Trust,  a first
perfected security interest in the receivables and certain other related assets,
subject to certain limited exceptions. The holders of the Notes have no recourse
to the assets of SRC in respect of obligations under the Notes.  Noteholders are
protected  by  over-collateralization  of  receivables  on the  Notes  requiring
certain  amounts to be set aside in an  equalization  account and four months of
interest set aside in the carrying  cost account by the Trustee.  These  amounts
may be  invested  by  SRC in  highly  rated  liquid  investments  such  as  A-1+
commercial  paper  and AAA  moneymarket  funds  as  rated  by  Standard  & Poors
Corporation.  These  amounts  are  shown on the  consolidated  balance  sheet as
restricted  cash.  Restricted  cash totaled  $29.0  million and $28.9 million at
September 30, 1997 and 1996, respectively. Sweetheart Cup Company Inc. retains a
promissory  note which pays interest  monthly at prime rate,  subject to certain
limitations, on these and other balances due from SRC.

         Sweetheart Cup Company Inc. acts as servicer of the  receivables  sold.
The interest rate is based on  Telerate's  one month LIBOR plus .40% and is paid
monthly.  The Notes have a first  scheduled  principal  payment date of July 31,
1999 and have a stated  maturity date of September  30, 2000.  There are certain
early voluntary and involuntary liquidation events.  Noteholders are entitled to
certain  breakage  payments  if the Notes are  prepaid in part or whole prior to
July 31, 1998.  The breakage  payment is equal to the present  value of the .40%
spread  for the  period  from the  prepayment  date  until the  first  scheduled
principal payment date, multiplied by the amount of principal prepayment.


                                       48


<PAGE>

         The SRC promissory  note and equity held by Sweetheart Cup Company Inc.
constitute Shared Collateral which is a first priority interest shared under the
Credit Agreement and Senior Secured Notes.

Canadian Credit Agreement

         On December 20, 1989, Lily Cups Inc.  entered into a Term and Revolving
Credit Facilities Agreement (the "Canadian Credit Agreement"), consisting of CDN
$14.0  million of Term  Advances  and CDN $6.0  million of  Operating  Advances.
Effective  August 30, 1993, the Canadian Credit  Agreement was  renegotiated and
extended  to provide  for equal  annual  repayments  on the  remaining  CDN $9.5
million Term Facility of CDN $1.9 million  beginning October 31, 1994 and ending
October 31, 1998 and to provide for an additional  CDN $1.0 million of Operating
Advances in  addition  to the CDN $6.0  million  Operating  Facility  previously
available. The renegotiated and extended Operating Facility provides for a final
repayment on October 31, 1998. Lily Cups Inc. has pledged  substantially all its
assets as collateral for the Canadian Credit Agreement. The Company is charged a
0.5% fee with respect to any unused balance  available under the Canadian Credit
Agreement as  renegotiated  and extended.  At September  30, 1997 and 1996,  the
available  capacity under the Canadian Credit Agreement was CDN $1.4 million and
CDN $2.4  million,  respectively  (U.S.  $1.0  million  and U.S.  $1.8  million,
respectively).


(11)  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following  methods and  assumptions  were used to estimate the fair
value of each class of financial instruments held by the Company:

         Current   assets  and  current   liabilities  -  The  carrying   amount
         approximates  fair  value  because  of  the  short  maturity  of  those
         instruments.

         Long-term bonds - The carrying amount  approximates fair value based on
the nature of the instrument.

         Long-term  debt - The fair value of the Company's  Senior Secured Notes
         and the Senior Subordinated Notes are based on the quoted market prices
         at the end of the fiscal  years.  The other  instruments  have variable
         interest rates that fluctuate along with current market conditions.

         The estimated  fair values of the Company's  financial  instruments  at
September 30 are as follows (in thousands):


<TABLE>
<CAPTION>
                                                      1997                                  1996
                                      ----------------------------------------------------------------------------
                                       Carrying Amount       Fair Value        Carrying Amount      Fair Value
                                      ------------------- ------------------ -------------------------------------

<S>                                        <C>                 <C>                <C>                 <C>      
Cash and cash equivalents                  $   2,650           $   2,650          $   4,371           $   4,371
Other current assets                         308,763             308,763            311,761             311,761
Current portion of long-term debt
     and bonds                                 1,369               1,369              1,535               1,535
Other current liabilities                    163,276             163,276            152,218             152,218
Long-term bonds                                3,700               3,700              3,700               3,700
Long-term debt                               426,799             428,271            381,879             388,792
</TABLE>

         The fair  value of the  Company's  long-term  debt is  estimated  to be
$1,472,000  higher than the carrying  value at September 30, 1997 and $6,913,000
higher than the  carrying  value at  September  30, 1996.  The  differences  are
primarily  the result of  fluctuations  in the  interest  rate market  since the
issuance of the Company's Senior Secured Notes and Senior Subordinated Notes.


(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
$16,756,000, $15,636,000 and $12,417,000 for the years ended September 30, 1997,
1996  and  1995,   respectively.   Future  minimum  rental   commitments   under
non-cancelable  operating  leases in effect at September 30, 1997 are as follows
(in thousand of dollars):


                  1998                                                   $12,116
                  1999                                                    11,207
                  2000                                                     9,083
                  2001                                                     7,533
                  2002                                                     6,767
                  2003 and thereafter                                     11,026
                                                                          ------

                                                                         $57,732


         Data with respect to Lily Cups Inc.'s rental  commitments for the years
1998 and thereafter is not material and is not included in the above table.


(13)  SHAREHOLDERS' EQUITY

         Sweetheart   Holdings  Inc.  has  a  single-class   capital   structure
consisting of 3,000,000  shares of common stock, par value $.01 per share. As of
August 30,  1993,  1,040,000  shares of  single-class  stock were issued to AIP,
First Plaza Group Trust (Mellon Bank,  N.A., as Trustee) and AT&T Master Pension
Trust  (Leeway and Company as nominee) for  approximately  $100.5  million.  All
outstanding  shares of  single-class  common  stock are  deemed  fully  paid and
nonassessable.   The  single-class   common  stock  is  neither  redeemable  nor
convertible,  and the holders  thereof have no preemptive or other  subscription
rights to purchase any securities of Sweetheart Holdings Inc. There currently is
no public market for this common stock.  During the third quarter of fiscal year
1994,  the Company issued 6,000  authorized  shares of common stock for $100 per
share.  The  Company  received  approximately  $100,000  in cash and a  $500,000
promissory  note  in  consideration  for  the  shares.  The  promissory  note is
reflected as a reduction to  shareholders'  equity in the  consolidated  balance
sheet.  There were 1,046,000 shares of single-class  common stock outstanding as
of September 30, 1997 and 1996.

         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  Inc.'s Board of Directors out of funds
legally available thereof. In the event of a liquidation, dissolution or winding
up of  Sweetheart  Holdings,  Inc.,  common  shareholders  are entitled to share
ratably in all assets  remaining after payment or provision 


                                       50


<PAGE>

for payment of debts or other  liabilities  of  Sweetheart  Holdings  Inc.  Each
outstanding  common  share is entitled to one vote on any matter  submitted to a
vote of stockholders.  This  single-class  common stock has no cumulative voting
rights.

         The Board of Directors of Sweetheart  Holdings Inc.  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.  Options  are  exercisable  in  equal
increments over fiscal years 1994,  1995,  1996, and 1997,  depending on certain
operating results of the Company.  Any options not exercisable  within the above
years are exercisable on the ninth anniversary of the grant of the option. Under
the  provisions  of the Plan,  the  Committee  may also grant  participants  the
short-term  option to purchase shares of common stock at a price per share equal
to not less than the fair market value of the common stock on the date of grant.
Short-term  options  expire 30 days  after the date of grant to the  extent  not
exercised.

         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.  The Company  granted 30,135
and 10,400 options during 1997 and 1996, respectively.  Options canceled totaled
11,035 and 6,140  during 1997 and 1996,  respectively.  At  September  30, 1997,
31,827  shares were  available for the granting of  additional  options.  As the
Company's  stock is privately  held, the value of the common stock is assumed to
be $100 per share at all  times  during  the  year.  Although  no  options  were
exercised  during  fiscal  year 1996,  and 13,818  shares  were  exercisable  at
September 30, 1997.


(14)  NON-RECURRING CHARGES

         The Company  incurred  non-recurring  charges in 1997  attributable  to
plant restructuring and an impairment of certain long-lived assets.

         In  the  fourth  quarter  of  fiscal  1997,   the  Company   adopted  a
restructuring   plan   designed   to  improve   efficiency   and   enhance   its
competitiveness. Restructuring charges consist of cash charges primarily related
to severance  costs, as well as costs to close and exit the Riverside  facility,
and cease paper  operations at the Springfield  facility,  substantially  all of
which  will  be  paid  in  fiscal  1998.  The  Company  anticipates  substantial
completion of this restructuring in fiscal 1998.

         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.  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.

         The  loss  on  asset  disposal  and  impairment  had no  impact  on the
Company's 1997 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.


                                       51


<PAGE>

(15)  SUBSEQUENT EVENTS

1997 Amended and Restated Credit Agreement

         On October 24,  1997,  the Company  entered  into the 1997  Amended and
Restated Credit  Agreement,  which provides for a $135 million  Revolving Credit
Facility  with Bank of  America  Business  Credit,  as Agent and  various  other
Financial Institutions. At closing on October 24, 1997, Bank of America Business
Credit acquired the outstanding amount of loans from Bankers Trust Company, made
under  the  1993  Credit  Agreement,  referred  to in Note 10.  The 1993  Credit
Agreement  was  Amended  and  Restated to  increase  the  facility  size to $135
million,  and include receivables as collateral,  which had previously been sold
to Sweetheart Receivables  Corporation as described in Note 10. The Company then
reacquired  the  receivables  at SRC with the  proceeds of the 1997  Amended and
Restated  Credit  Agreement,  enabling  SRC  repay  the  Sweetheart  Receivables
Corporation  1994-1 A-V Trade  Receivables-Backed  Notes with those proceeds and
existing  restricted cash.  Additionally,  certain other terms and conditions of
the Credit Agreement were amended.

Availability  under the Amended and Restated Credit  Agreement is limited to 60%
of eligible inventory constituting raw material and work-in-process,  and 65% of
eligible  inventory  constituting  finished goods, and 40% of eligible inventory
constituting  in-transit  inventory  of  Sweetheart  Cup Company  Inc.  (up to a
maximum of $100 million of eligible inventory).  Additionally, eligible accounts
from  customers,  subject to certain  restrictions,  are  allowed to 85%.  These
calculations are subject to an overall maximum 80% of account's not more than 60
days past due, plus 50% of book value of inventory.

         The  borrowings  under the 1997 Amended and Restated  Credit  Agreement
bear interest,  at Sweetheart  Cup Company  Inc.'s option,  at Bank of America's
prime rate plus 1.00% or, subject to certain  limitations,  at Bank of America's
Eurodollar  rate plus 2.25%.  Additionally,  the Company must pay certain  other
annual and on-going expenses to Bank of America,  as Agent. Up to $15 million of
the  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 1997 Amended
and Restated Credit  Agreement 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.

         Loans made  pursuant to the  Revolving  Loan  Facility can be borrowed,
repaid, and reborrowed from time to time until final maturity on August 1, 2000.
The 1997 Amended and Restated Credit  Agreement  provides for partial  mandatory
prepayments  upon the issuance of equity by  Sweetheart  Holdings Inc. or any of
its  subsidiaries,  and full repayment upon any change of control (as defined in
the Agreement).

         The  indebtedness of Sweetheart Cup Company Inc. under the 1997 Amended
and Restated  Credit  Agreement is guaranteed  by  Sweetheart  Holdings Inc. and
secured by a first  priority  perfected  security  interest in inventory,  spare
parts,  accounts  receivable and all proceeds of the foregoing of Sweetheart Cup
Company Inc., 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
Inc. and Sweetheart Cup Company Inc. and of each of their respective present and
future direct subsidiaries,  all intercompany indebtedness payable to Sweetheart
Holdings  Inc. or  Sweetheart  Cup Company  Inc. by  Sweetheart  Holdings  Inc.,
Sweetheart Cup Company Inc. 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  1997  Amended  and  Restated  Credit  Agreement  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


                                       52


<PAGE>

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 1997 Amended and
Restated Credit Agreement.

Bakery Sale

         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 $4.5  million will be  recognized  in fiscal year 1998.  Bakery
operations represented 3% of net sales in fiscal year 1997.


(16)  RELATED-PARTY TRANSACTIONS

         AIP, which is Sweetheart  Holdings Inc.'s largest  stockholder and is a
private investment  partnership which makes equity  investments,  principally in
industrial and manufacturing companies in the United States, is managed by AIPM,
an affiliate of AIP. AIPM receives an annual fee of approximately  $1.85 million
for  providing  general  management,  financial  and  other  corporate  advisory
services,  and is reimbursed for certain  out-of-pocket  expenses.  The fees are
paid to AIPM pursuant to a management services agreement among AIPM,  Sweetheart
Holdings Inc. and Sweetheart Cup Company Inc.

         In  addition,  for the year  ended  September  30,  1996,  the  Company
reimbursed  AIPM  for  $950,000  of  expenses  incurred  in  connection  with an
investigation of the Company's strategic alternatives.


(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 13.7%, 13.6% and
13.0% for the years ended September 30, 1997, 1996 and 1995, respectively.


(18)  CONTINGENCIES

         A lawsuit entitled Aldridge v. Lily-Tulip,  Inc. Salary Retirement Plan
Benefits  Committee and Fort Howard Cup Corporation 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").  In December 1994, the United States Circuit 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  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.

         Management  believes  that the Company will  ultimately  prevail on the
remaining issues in the Aldridge  litigation.  Due to the complexity involved in
connection with the claims  asserted in this case, the 


                                       53


<PAGE>

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.

         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.

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



                               September 30,      September 30,
                                   1997               1996
                             ------------------ ------------------

Current assets                      $562,731           $572,259
Noncurrent assets                    176,382            174,006
Current liabilities                  114,415            127,728
Noncurrent liabilities               563,065            519,635


         Prior year  amounts  below have been  reclassified  as noted in Note 1,
item (j):


                                For the            For the            For the
                              year ended          year ended         year ended
                             September 30,      September 30,      September 30,
                                 1997                1996               1995
                           ------------------ ----------------------------------

Net sales                         $886,017           $959,818           $986,618
Gross profit                        37,128             95,503             71,873

Income (loss) from
  continuing operations
  before extraordinary loss        (36,143)            20,213                766
Net income (loss)                  (37,083)            20,213                766


(20)  SUBSEQUENT EVENT

         On March 12,  1998,  the  stockholders  of the Company  consummated  an
agreement with SF Holdings Group, Inc. ("Buyer") and Creative Expressions Group,
Inc., an affiliate of Buyer.  Pursuant to the agreement  Buyer acquired from the
Company's  stockholders 48% of the Company's outstanding common stock and all of
a new class of  non-convertible,  non-voting  common stock, as a result of which
Buyer holds 90% of the total number of outstanding shares of both classes of the
Company's  common stock.  Upon  


                                       55


<PAGE>

consummation of the transaction,  the Company's existing stockholders  nominated
three of the  Company's  five  directors  and  Buyer  nominated  two  directors.
Significant actions by the Company's Board of Directors will require the vote of
four directors. Additionally,  pursuant to the agreement, The Fonda Group, Inc.,
affiliate  of Buyer,  manages the  day-to-day  operations  of the  Company.  The
Company  incurred  $2.6  million  of  severance  expenses  as a  result  of  the
termination  of certain  officers of the Company  pursuant to certain  executive
separation  agreements.  The Company also incurred  financial advisory and legal
expenses of approximately $4.4 million in connection with the transaction.


(21)  UNAUDITED SUBSEQUENT EVENT

         In the quarter  ended March 31, 1998,  the Company  recognized  certain
one-time charges, consisting primarily of $4.4 million of financial advisory and
legal fees  associated  with the  investment  by SF Holdings 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.

         In the quarter ended March 31, 1998,  the Company  reduced its salaried
workforce by approximately 15% and hourly workforce by less than 5%, and decided
to rationalize certain product lines, and in connection  therewith,  disposed of
the  associated  property and  equipment.  In  connection  with such plans,  the
Company  recognized $10.5 million of charges for severance and asset disposition
costs, of which $5.0 million of cash expenditures  remain unpaid as of March 31,
1998.  The Company  anticipates  substantial  completion  of this  restructuring
within the next twelve months.

         Subsequent to the close of the bakery business as described in Note 15,
the Company revised its estimate of the gain on such sale to $3.5 million, which
has been reflected in the Company's unaudited  financial  statements for the six
months ended March 31, 1998.


<PAGE>

                     INDEX TO FINANCIAL STATEMENT SCHEDULES

                                                                        PAGE
                                                                        ----

Report of Independent Public Accountants                                  57

Schedule II - Valuation and Qualifying Accounts                           58


                                       56


<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  financial  statements 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 20, as to which the
date is March 12,  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 20, as to which the
   date is March 12, 1998)


                                       57


<PAGE>


                                                                     SCHEDULE II


                    SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                             (DOLLARS IN THOUSANDS)



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

<S>                                      <C>              <C>              <C>             <C>        <C>    
Allowance for Doubtful Accounts:
Year ended September 30, 1997            $ 2,466          $  446           $  51           $ 1,223    $ 1,740
Year ended September 30, 1996              2,524             369              46               473      2,466
Year ended September 30, 1995              2,468             556               9               509      2,524

</TABLE>

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


                                       58


<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 July 10, 1998.

                                               SWEETHEART HOLDINGS INC.
                                               (Registrant)

                                               By: /S/  DENNIS MEHIEL
                                                        -------------
                                                        Dennis Mehiel
                                                        Chief Executive Officer


          Pursuant to the  requirements of the Securities  Exchange Act of 1934,
          this report has been signed on July 10, 1998, by the following persons
          in the capacities indicated:

                 SIGNATURE                         CAPACITY



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



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



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



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



           /s/  LAWRENCE W. WARD         Director
           ---------------------
                Lawrence W. Ward



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