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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 27, 2002

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-19495

RADNOR HOLDINGS CORPORATION

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: 610-341-9600

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

Securities 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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes o       No x

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 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

As of March 11, 2003 there were 600 shares of the Registrant’s Voting Common Stock ($.10 par value), 245 shares of the Registrant’s Nonvoting Common Stock ($.10 par value) and 5,400 shares of the Registrant’s Class B Nonvoting Common Stock ($.01 par value) outstanding. The aggregate market value of voting stock held by non-affiliates of the Registrant as of such date was $0.

Table of Contents

RADNOR HOLDINGS CORPORATION
2002 FORM 10-K
TABLE OF CONTENTS

Table of Contents

PART I

ITEM 1.         BUSINESS

Radnor Holdings Corporation (the “Company”, “Radnor”, “we”, “us” or “our”) is a leading worldwide manufacturer and distributor of foam packaging and specialty chemical products for the foodservice, insulation and protective packaging industries. We have been manufacturing EPS and related products sold to the foodservice, insulation and protective packaging industries for more than 25 years. In the foodservice industry, we are the second largest manufacturer of foam cup and container products, and we estimate that we have a 35% share of the US foam cup and container market segment. We are also a leading worldwide producer of EPS. In fiscal 2002, we produced more than 13 billion foam cups for hot and cold drinks, foam bowls and containers and thermoformed lids and 360 million pounds of EPS. We supply 100% of our own EPS needs in addition to supplying EPS to other manufacturers of foodservice, insulation and protective packaging products.

Financial information concerning the Company’s business segments appears in Note 10 to the Consolidated Financial Statements included under Item 8 herein.

Industry Overview

Packaging. We compete within the foodservice industry, which includes products manufactured with paper, plastic, foam and other materials. The foam segment of the disposable cup and container market, in which we primarily operate, is highly concentrated. We believe Radnor and its primary competitor account for more than 80% of the market. A recent independent industry analysis of the US foam cup and container market through 2010 projects an annual growth rate of approximately 3%. The market for other plastic and paper cups and containers is significantly more fragmented.

The factors that originally gave rise to the use of disposable products continue to support the market’s growth. These include lower labor, maintenance and energy costs as compared to reusable products, as well as sanitary considerations and growth in the consumption of take-out foods and beverages. The expansion of fast-food restaurant chains and warehouse retailers and the consolidation of some foodservice distributors into larger companies with a national presence have also increased the use of disposable products.

Within the disposable product market, foam cup and container usage has increased significantly over the last two decades as a result of factors unique to this segment. These factors include the superior insulating qualities of foam, lower production costs and the flexibility in sizing and molding of foam products. In addition, demand for larger sizes and specialized products contributes to growth of the foam packaging segment. Although the success of foam cups to date has been primarily in the hot drink segment, we believe that there continue to be significant growth opportunities in the sale of cold drink cups, particularly in the large (16 through 64 ounce) sizes, including specialized products such as car carrier cups, on which we make higher margin.

Specialty Chemicals. We compete in the North American and European EPS markets. In North America, we sell EPS to the insulation, protective packaging and foodservice industries. A recent independent industry analysis estimated the US EPS market to have been in excess of 400,000 metric tons in 2000 and projected an annual growth rate of approximately 3% through 2010. This market is concentrated, with Radnor and three other competitors accounting for over 90% of the North American market.

In Europe, we sell EPS to the insulation and protective packaging industries. The EPS market in Europe includes a broader range of product applications and is more fragmented than the North American market. A recent independent industry analysis estimated the European EPS market to have been in excess of 995,000 metric tons in 2000 and projected an annual growth rate of approximately 3% through 2005.

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Products

Packaging. Radnor manufactures a broad range of foam packaging products, including cups, bowls and containers, and thermoformed plastic lids. The use of foam provides an insulating feature to our products, allowing them to be used for both hot and cold beverages and food products while enhancing comfort for the end user. Foam cups are manufactured in varying sizes (4 to 64 ounces) for both hot and cold beverages and are sold under numerous brand names, including the WinCup, COMpac, Profit Pals, STYROcup, Big Cool and Simplicity brand names. Foam bowls and other containers are made in varying sizes (3.5 to 32 ounces) for both hot and cold food products and are sold under the STYROcontainers brand name. Our thermoformed leak-resistant plastic lids feature a “stacking ring” that minimizes the shifting of a second cup when placed on top of the first cup. Other enhanced lid features include vents, tear-away tabs and straw slots, depending on the intended use. Cups, bowls, containers and lids are designed so that the same lid can be interchanged with many different cup, bowl or container sizes, which simplifies inventory and display area requirements. For example, our 10 cup-2 lid product line allows two different lids to fit with ten different size cups.

Our cups, bowls and containers are available with custom offset or embossed printing. We also manufacture a broad range of custom-designed foam containers for many of our large national accounts. A significant component of this business is the manufacturing of containers for customers, which use the containers for dried noodle products sold through retail grocery and supermarket chains. We also supply our products in private label packaging for certain of our customers.

We work continuously with our customers to develop new products. One of our early customer-driven developments was the “flare” cup design which replaced the heavier rim typically built into the top of a foam cup with a smooth, flared edge that improves the stability of the cup’s construction. The flare cup was well-received by customers because it combined the favorable appearance of paper with the insulating qualities of foam. More recently, our car carrier cups have addressed the end user’s desire for a cup that can contain larger volumes of liquid while fitting into an automobile’s cup carrier slots.

Specialty Chemicals. In North America, we manufacture EPS for our internal consumption, in addition to selling directly to third-party manufacturers of foodservice, insulation and protective packaging products. EPS is categorized by size, with the smallest size, or cup-grade, used to manufacture foam cups and containers. Larger sizes are sold to manufacturers of insulation and protective packaging products and include EPS modified for fire retardancy and non-modified EPS.

We manufacture a broad range of EPS formulations in Europe for conversion into a variety of standard and specialized insulation and packaging products. This EPS is made primarily for the insulation and protective packaging industries and includes a range of bead sizes and densities for conversion by customers into light and heavy insulation boards as well as various shape products, such as insulated fish packaging boxes. We work closely with our European customers to incorporate special product features into our EPS, such as fire retardancy, specialty coatings, higher thermal insulation qualities and antistatic properties.

Sales, Marketing and Customers

Packaging. Radnor sells its disposable foam packaging products in the foodservice industry through a 36-person sales organization and through an extensive network of 57 independent sales representatives. Sales and marketing efforts are directed by our Senior Vice President of Sales and Marketing and are supported by 12 senior sales managers averaging more than ten years’ experience in the foodservice industry. We believe our experienced sales team and long-term representative relationships enhance our ability to provide high levels of customer service and specialized marketing programs, including custom-designed foam products. Major end users of these products include fast-food restaurants, full-service restaurants, hospitals, nursing homes, educational institutions, airlines, business offices, movie theaters and other leisure time concessionaires, such as sports stadiums.

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We sell disposable foam packaging products in the foodservice industry to more than 1,400 national, institutional and retail accounts throughout the United States, in Mexico and in other countries. This customer base, which includes many of the foodservice industry’s largest companies, can be divided into three major categories:

National Accounts. National accounts are customers that utilize foam products in the sale of their own products and consist primarily of large fast-food restaurant chains and convenience stores. During fiscal 2002, sales to these customers accounted for approximately 11.8% of our net sales.

Institutional Accounts. Institutional accounts are customers that purchase foam products with a view toward reselling such products in bulk to institutional end users, such as hospitals, nursing homes, educational institutions, airlines, movie theaters and similar leisure time concessionaires, such as sports stadiums. These customers, representing approximately 44.5% of our net sales in fiscal 2002, are primarily large foodservice distributors.

Retail Accounts. Retail accounts are customers that purchase foam products for resale to actual consumers of the products and consist primarily of supermarket chains and discount stores. In fiscal 2002, retail customers accounted for approximately 9.3% of our net sales.

Approximately 8.5% of our foam product sales are made pursuant to contracts under which product prices are automatically adjusted based on changes in prices of EPS and other raw materials. Substantially all of our other foam product sales are made pursuant to contracts or other arrangements under which we have the right to change product prices on 30 to 60 days’ prior written notice.

Specialty Chemicals.In North America, we sell EPS through a dedicated sales force averaging 19 years experience and two broker organizations to manufacturers of foam protective packaging and insulation products. In Europe, we market through our Europe-wide sales office network. In support of these sales and marketing efforts, we employ people who are knowledgeable about chemical engineering and manufacturing processes in order to provide technical assistance to our customers.

In Europe, we sell EPS to 200 primarily mid-sized companies throughout Europe. We have actively pursued these customers because they provide potential for higher margins and because of their increased reliance on our technical support, which results in a greater ability to foster long-term customer relationships. We sell approximately 25% of our European EPS production to our former European insulation business pursuant to a long-term supply agreement.

No customer represented more than 7.2% of our net sales for fiscal 2002, although the five largest accounts represented approximately 28.1% of such sales.

Manufacturing

Our highly automated manufacturing facilities produced more than 13 billion foam cups, bowls and containers and thermoformed lids and 360 million pounds of EPS in fiscal 2002. Our foam products for the foodservice industry are made with custom-designed foam cup molding machines, lid production machines and foam cup and container printing machines. Our ten U.S. foam plants and our Polish foam plant generally operate 24 hours a day, seven days a week and 355 days a year. We also operate six plants located in the United States, Canada and Europe that manufacture EPS from styrene monomer. These plants generally operate 24 hours a day, seven days a week.

Manufacturing Process. The manufacture of EPS, the primary raw material in the manufacture of foam products, has two steps: polymerization and impregnation. In the polymerization phase, styrene monomer, which is a commodity petrochemical derived primarily from benzene and ethylene, is suspended in water and then treated with chemicals and catalysts to produce polystyrene crystal in various sizes, each of which has different end-use applications, including general purpose polystyrene. To produce EPS, the crystal is impregnated with a high-purity pentane gas.

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We manufacture our foam cups and containers utilizing a custom molding process. First, the cup-grade EPS is blended with a lubricating agent and then pre-expanded so that the EPS is of the appropriate density. This pre-expanded EPS is then fed through special screeners to remove undersized and oversized beads. The pre-expanded EPS is then injected into machine molds and fused by injecting steam into the mold cavity. After the EPS is fused, the mold shells are cooled, the mold halves are opened and the finished cups are ejected. The finished products are vacuum tested, counted and packaged.

Our lid products are produced from high-impact polystyrene, or HIPS, which is subjected to heat and pressure, after which the product is extruded through a thin die. The lids are then trimmed for finished goods packing, while the scrap is ground and reintroduced into the original material blend.

Quality Control. Our manufacturing quality control program for foam foodservice products involves automated testing of all products for leaks. In addition, random testing is performed at least hourly at each facility for four or five attributes: seepage, weight, appearance, strength and, where applicable, print. We centrally collect the resulting data, subject it to statistical analysis and review the results. In addition, each machine operator and packer performs various quality checks during the production process. We also obtain random samples of finished foam packaging products from our various manufacturing facilities and perform an analysis similar to that described above at our Phoenix laboratory.

In addition to our own programs, certain of our larger customers have established their own product standards and perform periodic manufacturing audits at our facilities, either through their own personnel or through an independent testing group such as ASI Food Safety Consultants. We also submit products to third-party laboratories for microbiologic and physical tests to assure that we conform to or exceed industry product safety standards.

We utilize our quality, service, manufacturing and customer partners to enact and follow through on initiatives consistent with total quality management and good manufacturing practices. Through these programs, we work with our customers to ensure product quality and to create new products that reflect the present and future needs of our customers.

Our North American EPS quality control laboratory includes infrared spectrograph and atomic absorption units. Our laboratory chemists are capable of performing complex chemical and atomic analysis of styrene monomer, polystyrene crystal, expandable polystyrene and all other material components of EPS production. This gives us the ability to customize EPS formulas to meet any special customer requirements. The EPS quality control program includes testing every production batch of EPS to ensure it meets specific customer requirements. Each batch is tested for particle sizes, pentane gas volume and, if the EPS is to be used for insulation, their fire retardation capability.

In Europe, our sophisticated quality control laboratory is complemented by a fully equipped analytical laboratory containing three fully instrumented, automatically controlled pilot reactors, a fully equipped reactor bay, including a reactor and equipment for screening and coating, as well as two complete lines for converting EPS into insulation boards and shape-molded products. Testing equipment for analytical and quality audit work includes electronic balancers, equipment for testing burning behavior, gas chromatographs, sweep electron microscopes, colorimeters, flexural/compressive strength testers, an izod impact tester and lambda value testers. We regularly test our EPS for a range of key attributes that vary by specific product. Our European facilities are either ISO 9001 or ISO 9002 certified and both are also ISO 14001 certified.

Engineering. We employ more than 77 full-time technical personnel, including 27 full-time engineers and engineering managers, based in the Phoenix, Corte Madera, Fort Worth and Canadian facilities. The engineering staff uses computer-aided design and computer-aided manufacturing systems to design advanced, three-dimensional models of products and molds. Once an electronic image of the machine and mold part design is generated, the part can be custom manufactured. We have the capacity to construct all of the proprietary equipment, machines and molds used in the production, testing and packaging of our foam products. We have also developed

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and are installing in our manufacturing facilities automated materials handling equipment that includes in-line printing, automatic case packaging equipment and more advanced molding machines.

We continually examine how to improve our manufacturing process efficiencies. Sophisticated infra-red imaging systems, providing real-time video displays, are used to evaluate the thermal efficiency of molds and machines under development. We also can create special prototype mold forms for new lid designs and single-cavity cup and container molds, both of which enhance our ability to evaluate customer design requests rapidly.

The managing director of our European EPS operations is an engineer, as are each of the managers and supervisors of the production facilities located in Europe. In Europe, we also employ two full-time engineers who are responsible for process and production engineering and interact regularly with research and development personnel based in the analytical laboratory as well as senior technical support staff responsible for assisting the sales team.

Raw Materials

Radnor’s foam products are manufactured from EPS, which is produced from styrene monomer. Styrene monomer is a commodity petrochemical that is readily available throughout the world in bulk quantities from numerous large, vertically integrated chemical companies. Styrene monomer prices have fluctuated significantly as a result of changes in petrochemical prices and the capacity, supply and demand for styrene monomer. For example, the contract price for styrene monomer ranged from $.35 to $.43 per pound during 2000 and fell to $.25 per pound in 2001 before increasing to $.38 per pound in January 2003. Although future styrene monomer prices cannot be predicted with accuracy, prices are forecasted by independent industry surveys and producer reports to remain stable or decline over the next year. While the Company has been able to pass on the majority of past price increases to customers, there can be no assurance that the Company will be able to increase prices if styrene monomer costs rise in the future.

The Company has historically purchased a majority of its styrene monomer requirements under a variety of long-term supply contracts. These contracts provide a supply of styrene under several different pricing mechanisms and with volume discounts. The various pricing mechanisms include those tied to raw material prices, spot market indices, contract indices and varying mixtures of the three. Under these contracts, which expire through 2006, the Company acquires a minimum of approximately 75% of its current styrene monomer needs.

High-purity pentane, which is used as the expanding agent in the production of EPS, is available from a limited number of suppliers. Should high-purity pentane become unavailable, however, high-purity butane may be substituted as the expanding agent.

The raw materials we use for the manufacture of thermoformed lids are primarily plastic resins such as HIPS, which are available from a number of sources. Our HIPS resin supplies are purchased under various agreements that contain minimum and maximum purchase requirements. The price we pay for HIPS resin is determined at the time of purchase.

Risks Attendant to Foreign Operations

The Company conducts its businesses in numerous foreign countries and, as a result, is subject to risks customarily encountered in foreign operations, including fluctuations in foreign currency exchange rates and controls, import and export controls, and other economic, political and regulatory policies of local governments. The Company’s foreign entities report their assets, liabilities and results of operations in the currency in which the entity primarily conducts its businesses. The foreign currencies are ultimately translated into U.S. dollars for financial reporting purposes.

Note 10 to the Company’s financial statements included under Item 8 herein contains information with respect to the geographic composition of the Company’s operations and financial position as of and for the years ended December 27, 2002, December 28, 2001 and December 29, 2000.

Proprietary Technology and Trademarks

We have developed a broad array of proprietary technology that is utilized in various stages of our manufacturing operations. We rely primarily upon confidentiality agreements and restricted plant access to protect our proprietary technology. We own several patents relating to our cup design and our EPS manufacturing processes. However, we do not consider these patents material to our operations.

We hold 27 trademarks registered in the United States, several of which are also registered in other countries. We also hold a number of unregistered trademarks. We do not consider any of these trademarks material to our operations.

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Competition

We compete in the highly competitive foodservice industry. The foam segment of the disposable cup and container market is highly concentrated and, within this segment, we compete principally with Dart Container Corp., which has significantly greater financial resources than we have and controls the largest share of this market segment. We do not believe that companies operating in related markets are likely to enter the foam segment due to the significant investment that would be required.

We believe that competition within the foam segment of the market is based primarily on customer service, product quality and the price at which products are offered. We believe that our market position is attributable to our high level of customer service and product quality, strategically located manufacturing facilities, proprietary technology and experienced management team.

We also compete with the paper segment, which is significantly more fragmented than the foam segment. We believe that competition between foam and paper is based on product appearance, quality and price.

In North America, the EPS industry is highly concentrated. Management believes that each of NOVA Chemicals, Inc., Huntsman Chemical Corp. and BASF Corporation, which are larger than we are and have greater financial resources than we have, controls a significant share of the market for supplying EPS to manufacturers of insulation and protective packaging products. We believe that competition within this industry is primarily based on price, although customer service, support and specialized product development can be significant competitive factors, particularly among the smaller manufacturers of foam insulation and protective packaging products.

The European EPS industry is more fragmented than in North America. Several companies, including BASF Corporation, NOVA Chemicals, Inc. and B.P. Amoco PLC are larger and have more substantial financial resources than we have. We believe that competition is based primarily on price, although technical support, specialized product development and consistently high quality beads are important factors to many of our customers.

Employees

As of December 27, 2002, we had 1,692 full-time employees. We have never experienced a material labor strike or other labor-related work stoppage. We consider our relations with our employees to be good.

Our U.S. employees are not represented by any union. In Canada, approximately 65% of our employees are represented by a union and are covered by a collective bargaining agreement. In Finland, over 80% of our employees are represented by one of three unions and we are subject to two collective bargaining agreements. The European Union directives regarding employment are applicable to us in Finland; however, the terms of the collective bargaining agreements will control employment relationships to the extent that these agreements address relevant issues in a more detailed manner and include benefits exceeding the minimum standards established by the directives.

We are dependent on the management experience and continued services of our executive officers, including our Chief Executive Officer, Michael T. Kennedy. The loss of the services of these officers could have a material adverse effect on our business. In addition, our continued growth depends on our ability to attract and retain experienced key employees.

Environmental Matters

Our facilities are used for manufacturing or warehousing of foam container products or the EPS from which such products are manufactured. Many of these facilities are subject to federal, state, foreign and local laws and regulations relating to, among other things, emissions to air such as pentane, styrene and particulate matter, discharges to water, and the generation, handling, storage, transportation and disposal of hazardous and nonhazardous materials and wastes.

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In 1996, the soil and shallow groundwater at our domestic EPS facilities were found to contain elevated levels of various contaminants. However, based on the results of soil and groundwater testing, material remediation efforts with respect to these conditions have not been, and we believe will not be, required. We own and operate, or owned or operated, underground storage tanks, also referred to as USTs, at several of our facilities for the storage of liquid pentane and heavy fuel oil. Leak detection or containment systems are in place at each facility with USTs that we currently own or operate. USTs are generally subject to federal, state, local and foreign laws and regulations that require testing and upgrading of USTs and remediation of polluted soils and groundwater resulting from leaking USTs. In addition, if any leakage from our USTs were to migrate onto the property of others, we could be subject to civil liability to third parties for remediation costs or other damages.

Some of our facilities have been alleged or are known to have failed to comply with various reporting or permitting obligations under applicable environmental laws and regulations. The resolution of these allegations and failures has not had a material adverse effect on our financial condition or results of operations, nor do we believe that any future costs of achieving and maintaining compliance with these laws and regulations will have that effect. It is possible that we could incur significant fines, penalties or capital costs associated with any confirmed noncompliance with these laws and regulations. Moreover, there can be no assurance that recently promulgated or future environmental laws or regulations, including regulations affecting the volume of and permitting for air emissions both in the United States and in Europe, will not require us to incur substantial expenditures or significantly modify our operations.

Certain of our current and former facilities are located in industrial areas and have been in operation for many years. As a consequence, it is possible that historical or neighboring activities have affected properties currently or formerly owned or operated by us and that, as a result, additional environmental issues may arise in the future, the precise nature of which we cannot now predict.

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ITEM 2.         PROPERTIES

We lease approximately 8,000 square feet in Radnor, Pennsylvania, a suburb of Philadelphia, for our executive offices. We believe that our present facilities are adequate for our current operations and that we will be able to lease or otherwise acquire any additional facilities as may be required for our future operations.

We also own or lease manufacturing, warehouse, office, machine assembly and utilities facilities at the locations shown in the following table:

Packaging

Specialty Chemicals

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ITEM 3.          LEGAL PROCEEDINGS

We are involved in a number of legal proceedings arising in the ordinary course of business. After taking into consideration legal counsel’s evaluation of such actions, management believes that these actions will not have a material adverse effect on our financial condition or results of operations.

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

There are no matters to be reported hereunder.

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PART II

ITEM 5.          MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCK MATTERS

Market Information

There currently exists no established public trading market for the Company’s Voting Common Stock, $.10 par value, Nonvoting Common Stock, $.10 par value, or Class B Nonvoting Common Stock, $.01 par value.

Holders

As of March 11, 2003, there were 3 holders of record of the Company’s Voting Common Stock, 11 holders of record of the Company’s Nonvoting Common Stock and 7 holders of record of the Company’s Class B Nonvoting Common Stock.

Dividends

No dividends were declared or paid during the years ended December 27, 2002 or December 28, 2001. The declaration and payment of dividends are subject to the discretion of the Company’s Board of Directors and will depend on various factors, including restrictions on dividends contained in the Company’s credit agreements and the indentures pursuant to which the Company issued its 10% Senior Notes due 2003 on December 5, 1996 (the “Series A Notes”) and its 10% Series B Senior Notes due 2003 on October 15, 1997 (the “Series B Notes”) and its 11% Senior Notes due 2010 on March 11, 2003.

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ITEM 6.          SELECTED FINANCIAL DATA

The following table presents summary consolidated financial data for the Company. The following data should be read in conjunction with the consolidated financial statements and the related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere herein.

______________

   (1)   The Company’s fiscal year is the fifty-two or fifty-three week period that ends on the last Friday of December of each year. The years presented in the above table were 52-week years with the exception of 1999, which was a 53-week year.

   (2)   Represents gain resulting from sale of European insulation operations. See Note 1 to the Company’s consolidated financial statements included in Item 8 herein.

   (3)   Interest includes amortization of premium and debt issuance costs related to the Company’s senior notes of $1.0 million for the year ended December 25, 1998, $1.2 million for the for the years ended December 31, 1999 and December 29, 2000 and $1.1 million for the years ended December 28, 2001 and December 27, 2002.

   (4)   Total debt includes capital lease obligations.

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ITEM 7.          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The following discussion and analysis should be read in conjunction with Item 6, “Selected Financial Data” and Item 8, “Financial Statements and Supplementary Data” included elsewhere herein. Financial results for the periods presented are not fully comparable because of the December 2001 disposition of the Company's European insulation operations.

Year Ended December 27, 2002 Compared to the Year Ended December 28, 2001

CONSOLIDATED

Net sales in fiscal 2002 were $323.2 million, a decrease of $2.5 million from $325.7 million in fiscal 2001. Excluding the results of the European insulation operations, which were divested in December 2001, net sales increased by $20.4 million or 6.7%. This was primarily caused by an 18.1% increase in sales at the specialty chemicals segment resulting from a 13.8% increase in sales volume and higher average selling prices.

Gross profit increased to $79.7 million or 24.7% of net sales in fiscal 2002 from $75.0 million or 23.0% of net sales in fiscal 2001. Excluding the impact of the divested European insulation operations, gross profit in fiscal 2002 increased by $17.0 million from $62.7 million in fiscal 2001. This increase was caused by higher sales volumes in the specialty chemicals segment, combined with higher selling prices and increased manufacturing efficiencies.

Operating expenses increased by $3.6 million in fiscal 2002 to $49.6 million. Excluding the results of the European insulation operations and the $10.5 million gain recognized on its sale, operating expenses as a percentage of net sales decreased to 15.3% in fiscal 2002 from 16.1% of net sales in fiscal 2001. This favorable change was primarily caused by a decrease in selling and distribution expenses, as a percentage of net sales, at the Company’s specialty chemicals operations.

Income from operations increased by $1.1 million in fiscal 2002 to $30.1 million. Excluding the impact of the divested European insulation operations and the gain resulting from its sale, income from continuing operations increased by $16.0 million to $30.1 million or 9.3% of net sales from 4.6% in fiscal 2001.

Interest expense decreased by $0.9 million to $21.4 million for fiscal 2002 from $22.3 million for fiscal 2001. This decrease was primarily due to a reduction in long-term debt resulting from the sale of the European insulation operations, combined with lower interest rates on the Company’s revolving credit facilities. Included in interest expense for fiscal 2002 and 2001 was $1.1 million of deferred financing fee and premium amortization related to the Company’s senior notes. Other expenses decreased by $1.5 million for the year ended December 27, 2002 primarily as a result of decreased non-operating costs at the Company’s corporate offices and in the domestic packaging operations.

The Company recorded a $2.9 million provision for income taxes in fiscal 2002, representing a $0.7 million increase over fiscal 2001. This increase was primarily caused by a $3.5 million increase in pre-tax income, partially offset by a reduction in the Company’s effective tax rate as compared to fiscal 2001. As of December 27, 2002, the Company had approximately $67.2 million of net operating loss carryforwards for federal income tax purposes, which expire through 2021.

SEGMENT ANALYSIS

Packaging

Net sales in the packaging segment in fiscal 2002 were $195.4 million as compared to $235.9 million in fiscal 2001. Excluding the results of the divested European insulation operations, net sales in fiscal 2002 decreased

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by $1.8 million over fiscal 2001. This decrease was caused by a 2.0% decrease in sales volumes, partially offset by higher average selling prices. The decrease in sales volumes resulted from a planned rationalization of lower margin business to provide capacity for higher margin business which came on stream during the fourth quarter of 2002.

Gross profit increased to 27.9% of net sales in fiscal 2002 from 25.9% of net sales in fiscal 2001. Excluding the impact of the divested European insulation operations, gross profit for fiscal 2002 increased by $5.6 million to $54.4 million. This increase was caused by lower energy costs, combined with higher selling prices and improved manufacturing efficiencies resulting from engineering projects and technology upgrades.

Operating expenses decreased by $10.3 million to $24.7 million for fiscal 2002 from $35.0 million for fiscal 2001. Excluding the results of the divested European operations, operating expenses decreased by $2.4 million to 12.7% of net sales in fiscal 2002 from 13.8% of net sales in fiscal 2001. This decrease was primarily due to lower distribution costs, as well as lower general and administrative costs, resulting from cost containment initiatives and implemented workforce reductions.

Income from operations increased by $3.5 million over fiscal 2001 to $29.7 million in fiscal 2002 for the reasons described above. Fiscal 2001 income from operations for the European insulation operations, which were sold on December 12, 2001, was $4.5 million. Excluding these results, income from operations increased by $8.0 million or 36.8% for fiscal 2002.

Specialty Chemicals

For fiscal 2002, net sales in the specialty chemicals business segment increased by $20.6 million to $134.3 million from $113.7 million in fiscal 2001. This increase was caused by a 13.8% increase in sales volume, primarily in the domestic specialty chemicals operations, and higher average selling prices. Net sales included $9.8 million and $25.6 million of sales to the packaging segment for fiscal 2002 and 2001, respectively, that are eliminated in consolidation. Excluding the impact of the divested European insulation operations, net sales to the packaging segment were $9.8 million for fiscal 2001.

Gross profit increased by $9.4 million to $21.9 million for fiscal 2002 from $12.5 million for fiscal 2001. This increase was caused by higher selling prices and sales volume, combined with favorable raw material pricing and an increase in manufacturing efficiency.

For fiscal 2002, operating expenses increased by $1.8 million to $17.5 million from $15.7 million in fiscal 2001. This increase was primarily caused by higher distribution costs resulting from increased sales volume and a $0.5 million increase in currency transaction losses at the European operations. Income from operations for fiscal 2002 was $4.4 million, representing a $7.6 million improvement over fiscal 2001 for the reasons described above.

Corporate and Other

Corporate operating expenses, excluding the gain on the divestiture of the Company’s European insulation operations, increased by $1.5 million to $7.3 million for fiscal 2002, primarily due to increased amortization, insurance and personnel costs that were partially offset by an increase in investment income.

Year Ended December 28, 2001 Compared to the Year Ended December 29, 2000

CONSOLIDATED

Net sales in fiscal 2001 were $325.7 million, or $28.0 million below fiscal 2000. This decrease was primarily caused by lower selling prices in the Company’s specialty chemical operations, resulting from reductions in the cost of styrene monomer, the Company’s primary raw material. Gross profit increased to 23.0% of net sales in 2001 from 21.6% of net sales in 2000. This increase was caused by higher selling prices, increased manufacturing efficiencies and lower raw material costs in the Company’s domestic packaging business, partially offset by higher energy-related costs in all of the Company’s domestic operations.

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Operating expenses decreased by $16.3 million in 2001 to $46.0 million. Excluding the $10.5 million gain on the sale of the Company’s European insulation operations, operating expenses decreased by $5.8 million in 2001 to 17.3% of sales. This favorable change was caused by lower selling, general and administrative expenses at the Company’s domestic packaging operations and corporate office, resulting from cost containment initiatives and implemented workforce reductions.

Income from operations increased by $14.8 million in 2001 to $29.0 million. Excluding the gain on the sale of the European insulation operations, income from operations increased by $4.3 million to 5.7% of net sales from 4.0% of net sales in 2000.

Interest expense for the year ended December 28, 2001 increased by $0.6 million over fiscal 2000. This was caused by an increase in average outstanding advances under the Company’s revolving credit facilities and an additional equipment financing, partially offset by reductions in interest rates. Other expenses increased by $1.6 million for the year ended December 28, 2001 primarily as a result of increased non-operating costs at the Company’s corporate offices and in the domestic packaging operations.

The Company recorded a $2.1 million provision for income taxes in 2001 due to a $12.6 million increase in pre-tax income over fiscal 2000, for the reasons described above. The increase in the Company’s effective tax rate for 2001 reflects the impact of a $0.2 million valuation allowance against net operating loss carryforwards generated by the Company’s European packaging operations, as well as $0.3 million in provision resulting from changes in foreign effective tax rates that affected the benefit created by previously generated net operating loss carryforwards.

SEGMENT ANALYSIS

Packaging & Insulation

Net sales in the packaging and insulation business segment in fiscal 2001 were $235.9 million or 1.3% lower than fiscal 2000. This decrease was primarily caused by lower selling prices in the Company’s European insulation operations, which were divested in December 2001, and lower sales volumes during the second half of the year at the domestic packaging business. The impact of the reduction in sales volumes at the domestic packaging business was almost entirely offset by increased sales prices within the packaging operations. 2001 net sales for the European insulation operations, which were sold on December 12, 2001, were $38.8 million.

Gross profit increased to 25.9% of net sales in 2001 from 22.7% of net sales in 2000. This increase was caused by lower raw material costs, combined with higher selling prices in the domestic packaging operations, and improved manufacturing efficiencies resulting from engineering projects and technology upgrades. Partially offsetting this was a $2.1 million or 11.1% increase in energy related costs in the domestic packaging operations. Beginning in June 2001 through February 2002, energy costs at the domestic packaging operations have steadily declined with the February 2002 cost per million British Thermal Units more than 75% below the January 2001 level.

Operating expenses decreased by $2.5 million to 14.8% of net sales in 2001 from $37.5 million or 15.7% of net sales in 2000, primarily due to lower selling, general and administrative costs in the domestic packaging operations, resulting from cost containment initiatives and implemented workforce reductions. Income from operations increased by $9.6 million over fiscal 2000 to $26.2 million in 2001 for the reasons described above. 2001 income from operations for the European insulation operations, which were sold on December 12, 2001, was $4.5 million.

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Specialty Chemicals

Fiscal 2001 net sales in the specialty chemicals business segment decreased by $30.4 million to $113.7 million. Net sales included $25.6 million and $32.1 million of sales to the packaging segment for fiscal 2001 and 2000, respectively, that are eliminated in consolidation. The decrease in net sales from 2000 to 2001 was due to lower selling prices in both the domestic and European operations, resulting from reductions in styrene monomer costs, the segment’s primary raw material.

Gross profit decreased to 11.0% of net sales in 2001 from 12.8% of net sales in 2000. This decrease was primarily caused by a contraction between the average selling prices and the cost of styrene monomer in the European operations, which was partially offset by favorable raw material pricing and a $0.9 million reduction in fixed costs in the domestic specialty chemicals operations. This favorable raw material pricing and reduction in fixed costs led to a $3.0 million increase in gross profit in the domestic operations.

Operating expenses decreased by $0.3 million to $15.7 million in 2001 primarily as a result of lower distribution and administrative costs at the Company’s domestic specialty chemicals operations. Income from continuing operations decreased by $5.7 million due to the operating performance of the European operations, for the reasons described above, which was partially offset by a $3.5 million increase in income from operations at the domestic operations.

Corporate and Other

Corporate operating expenses, excluding the gain on the divestiture of the Company’s European insulation operations, decreased by $3.1 million to $5.8 million for the year ended December 28, 2001. This was caused by a reduction in amortization and cost containment initiatives implemented during 2001.

Liquidity and Capital Resources

During the year ended December 27, 2002, the Company’s principal source of funds consisted of cash from operating activities. After-tax cash flow of $19.8 million was primarily used to fund a $11.7 million increase in working capital and $10.6 million in capital expenditures. The Company has managed its historical growth in working capital through a combination of working capital financing, favorable terms from vendors and proceeds of debt financing for capital expenditures.

As of December 27, 2002, the Company had $32.2 million outstanding under its revolving credit facilities. Including cash on hand, the Company had $12.5 million of availability under these facilities as of December 27, 2002. On March 11, 2003, the Company issued $135 million of 11% Senior Notes due 2010 and amended its domestic revolving credit facility to include a $45 million term loan and to increase the revolving credit commitment from $35 million to $45 million. The proceeds were or will be used to repay the existing $159.5 million Series A and Series B Senior Notes due December 1, 2003 and outstanding borrowings under the existing revolving credit facilities. After taking into account the refinancing of the Company’s senior notes and certain restrictions, including borrowing base limitations, the Company would have had $12.9 million outstanding and $27.7 million of availability under its revolving credit facilities as of December 27, 2002. The principal uses of cash for the next several years will be debt service, capital expenditures and working capital requirements. The Company’s capital expenditures for fiscal years 2001 and 2002 were $12.4 million and $10.6 million, respectively.

As a holding company, the Company is dependent upon dividends and other payments from its subsidiaries to generate the funds necessary to meet its obligations. Subject to certain limitations, the Company is, and will continue to be, able to control its receipt of dividends and other payments from its subsidiaries. After taking into account the refinancing of the Company’s existing senior notes due December 1, 2003, management believes that cash generated from operations, together with available borrowings under its revolving credit facilities, will be sufficient to meet the Company’s expected operating needs, planned capital expenditures and debt service requirements. There can be no assurance, however, that sufficient funds will be available from operations or borrowings under its credit agreements to meet the Company’s cash needs.

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Contractual Obligations and Commercial Commitments

The Company has future obligations for debt repayments, capital leases, future minimum rental and similar commitments under noncancelable operating leases and purchase obligations as well as contingent obligations related to outstanding letters of credit and guarantees. These obligations as of December 27, 2002 are summarized in the tables below.

   (1)   On March 11, 2003, the Company issued $135.0 million of 11.0% Senior Notes due 2010 and amended its domestic revolving credit facility and extended the maturity to March 2008.

  (2)   As discussed in Note 4 to the Company’s consolidated financial statements, these amounts represent commitments under long-term styrene monomer supply contracts.

Critical Accounting Policies and Estimates

The Company prepares its financial statements in conformity with GAAP. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of those financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company discloses its significant accounting policies in the notes to its audited consolidated financial statements. As described in such notes, the Company recognizes revenue from product sales at the time of shipment and passage of title.

Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in certain areas. Following are some of the areas requiring significant judgments and estimates: determination of an asset’s useful life; estimates of allowances for bad debts; cash flow and valuation assumptions in performing asset impairment tests of long-lived assets; and estimates of realizeability of deferred tax assets.

There are numerous critical assumptions that may influence accounting estimates in these and other areas. We base our critical assumptions on historical experience, third-party data and on various other estimates we believe to be reasonable. Certain of the more critical assumptions include:

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Bad Debt Risk

•          Credit worthiness of specific customers and aging of customer balances

•          Contractual rights and obligations

•          General and specific economic conditions

Depreciable Lives of Plant and Equipment

•          Changes in technological advances

•          Wear and tear

•          Changes in market demand

Asset Impairment Determinations

•          Intended use of assets and expected future cash flows

•          Industry specific trends and economic conditions

•          Customer preferences and behavior patterns

•          Impact of regulatory initiatives

Deferred Taxes

•          Expected future profitability and cash flows

•          Impact of regulatory initiatives

•          Timing of reversals of existing temporary differences between book and taxable income

Recently Issued Accounting Standards

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt the provisions of this pronouncement no later than the beginning of fiscal 2003. The Company does not believe this Statement will have a material effect on the Company’s financial statements.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company was required to adopt the provisions of this pronouncement in the beginning of fiscal 2002. The adoption had no effect on the Company’s financial statements.

In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” The Statement requires gains and losses from debt extinguishments that are used as part of the Company’s risk management strategy to be classified as income from operations rather than as extraordinary items, net of tax. The Company adopted this Statement during the fourth quarter of its year ended December 27, 2002. The impact on the Company was to reclassify the extraordinary item recorded during the quarter ended March 29, 2002 to income from continuing operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities an interpretation of ARB No. 51.” This interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an entity holds a variable interest that it acquired prior to February 1, 2003. The Company is currently evaluating the impact, if any, that adopting FASB Interpretation No. 46 may have on its consolidated financial statements.

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Forward Looking Statements

The statements contained in this Annual Report that are not historical facts, including but not limited to raw material prices, are based on current expectations. These statements are forward looking (as defined in the U.S. Private Securities Litigation Reform Act of 1995) in nature and involve a number of risks and uncertainties. Actual results may vary materially due to risks relating to raw material price volatility, dependence on key customers, international operations, dependence on key personnel and environmental matters, as well as general business and economic conditions, both domestic and international, and other risks that may be described from time to time in the reports that the Company files with the Securities and Exchange Commission. See “Business-Raw Materials”, “Business-Risks Attendant to Foreign Operations”, “Business-Competition”, “Business-Employees”, “Business-Environmental Matters,” and “Quantitative and Qualitative Disclosures about Market Risk.”

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s market risk is the potential loss arising from adverse changes in interest rates. The Company’s long-term debt obligations are mostly at fixed interest rates and denominated in U.S. dollars. The Company manages its interest rate risk by monitoring trends in interest rates as a basis for determining whether to enter into fixed rate or variable rate agreements. Market risk is estimated as the potential increase in fair value of the Company’s long-term debt obligations resulting from a hypothetical one-percent decrease in interest rates and amounts to approximately $1.5 million over the term of the debt.

Although the Company continues to evaluate derivative financial instruments to manage foreign currency exchange rate changes, the Company does not currently hold derivatives for managing these risks or for trading purposes.

ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Radnor Holdings Corporation and Subsidiaries

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

On June 27, 2002, the Company dismissed Arthur Andersen LLP (“Arthur Andersen”) as its independent public accountants and engaged KPMG LLP (“KPMG”) to serve as our independent public accountants for the fiscal year ended December 27, 2002. The decision to change independent public accountants was approved by our Board of Directors.

Arthur Andersen’s reports on the our consolidated financial statements for each of the fiscal years ended December 28, 2001 and December 29, 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal years ended December 28, 2001 and December 29, 2000 and through June 27, 2002, there were no disagreements with Arthur Andersen on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on our consolidated financial statements for such years; and there were no reportable events as defined in item 304(a)(1)(v) of Regulation S-K.

Radnor Holdings Corporation provided both Arthur Andersen and KPMG with a copy of the foregoing disclosures. We requested and received from Arthur Andersen a letter, dated June 27, 2002, stating its agreement with such statements and filed the same as Exhibit 16.1 to our report on Form 8-K filed on June 27, 2002.

During the fiscal years ended December 28, 2001 and December 29, 2000 and through the date of our decision, the Company did not consult KPMG with respect to the application of accounting principles to a specified transaction either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

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PART III

ITEM 10.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

The directors and executive officers of the Company and their ages as of March 11, 2003 are as follows:

Michael T. Kennedy has served as President, Chief Executive Officer and as a director of the Company since its formation in November 1991. Between March 1985 and July 1990, Mr. Kennedy served as Chief Financial Officer of Airgas, Inc., a New York Stock Exchange-listed distributor of industrial gases.

Michael V. Valenza has served as Senior Vice President-Finance and Chief Financial Officer of the Company since April 1993. He joined the Company in September 1992 as Director of Finance. From 1984 until joining the Company, Mr. Valenza served in a variety of positions with Arthur Andersen LLP, most recently as a manager in the Enterprise Group.

Richard C. Hunsinger has served as Senior Vice President-Sales and Marketing of the Company since its formation in November 1991. From 1979 through August 1991, Mr. Hunsinger served in various management positions, including Vice President of Sales and Marketing for Winkler/Flexible Products, Inc., a former division of The Coca Cola Company.

Donald D. Walker has served as Senior Vice President - Operations of the Company since November 1992. Mr. Walker served as Vice President of Manufacturing and as Director of Manufacturing of the Company from February 1992 through November 1992. From 1969 until February 1992, Mr. Walker served in various management positions with Scott Container Products Group, Inc. (WinCup’s predecessor), WMF Corporation and Thompson Industries.

John P. McNiff has served as Senior Vice President - Corporate Development of the Company since its formation in November 1991 and as a director since May 1997. Previously Mr. McNiff was Vice President-Corporate Development of Airgas, Inc., a New York Stock Exchange - listed distributor of industrial gases. Mr. McNiff is also a director of Chartwell Investment Partners, LP.

R. Radcliffe Hastings has served as Senior Vice President and Treasurer of the Company since June 1996 and as a director since May 1997. Previously, Mr. Hastings was with Continental Bank, N.A. and its successor, Bank of America, for 18 years. Mr. Hastings held a variety of management positions in the U.S. banking group and in Bank of America’s securities operation, BA Securities, Inc.

John P. McKelvey has served as Senior Vice President - Human Resources and Administration for the Company since March 22, 2002. From October 1992 through March 2002, Mr. McKelvey was the Vice President - Human

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Resources and Quality Assurance for the Company. From February 1992 until October 1992, Mr. McKelvey was Director of Human Resources for the Company. From 1971 until joining the Company, Mr. McKelvey served in a variety of human resources management positions for Scott Container Products Group, Inc., Texstyrene Corporation, WMF Corporation and Thompson Industries.

Van D. Groenewold has served as Vice President - Engineering for the Company since November 1992. From February 1992 until November 1992, Mr. Groenewold was Director of Engineering for the Company. From 1982 until joining the Company, Mr. Groenewold held various engineering and quality assurance management positions with Scott Container Products Group, Inc., WMF Corporation and Thompson Industries.

Caroline J. Williamson has served as Vice President and Corporate Counsel of the Company since March 1997. From March 1996 to March 1997, Ms. Williamson served as counsel for Aetna U.S. Healthcare. From September 1992 to March 1996, Ms. Williamson was an associate with Duane Morris LLP.

Paul M. Finigan has served as a director of the Company since July 2000. Mr. Finigan has served counsel to the law firm of Day Berry & Howard, LLP since October 2002. From November 1999 to June 2002, Mr. Finigan served as Chief Legal Officer of Lumenos, Inc. Mr. Finigan is also a director of SkinHealth, Inc. where he served as Executive Vice President from March 1999 to November 1999. From November 1988 to September 1997, Mr. Finigan served as Senior Vice President and General Counsel of Value Health, Inc.

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ITEM 11.         EXECUTIVE COMPENSATION

Officers of the Company who serve as directors are not compensated for serving as directors of the Company. The Company’s non-officer director receives an annual retainer of $20,000 for his services as director. In addition, all directors are reimbursed for their expenses incurred in attending meetings. The following table sets forth certain information concerning the compensation paid to the Company’s chief executive officer and the Company’s four other most highly compensated executive officers (the "Named Executive Officers") whose total annual salary and bonus exceeded $100,000 for the year ended December 27, 2002:

Summary Compensation Table

______________

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The following table sets forth information with respect to options held at December 27, 2002 by the persons named in the Summary Compensation Table above. No options were granted to or exercised by such persons during the fiscal year ended December 27, 2002.

______________

   (1)   Based on the estimated fair value of $11,800 per share of the underlying securities, as determined by the Company’s Board of Directors.

Employment Agreements

In May 1993, the Company entered into an employment agreement with Richard C. Hunsinger, which was amended in January 1996, pursuant to which Mr. Hunsinger serves as Senior Vice President - Sales and Marketing of the Company. The agreement was for an initial term of seven years and six months and, absent 180 days prior written notice by either party before the end of any renewal term, renews for twelve months from year to year. Under the agreement as amended, Mr. Hunsinger is entitled to an annual salary of not less than $145,000 beginning in 1996, subject to annual cost of living increases. The agreement contains a covenant not to engage in any business that is competitive with the business of the Company in any geographical area in which it does business during the term of the agreement and for a period of two years immediately following the termination of the agreement.

In April 1996, the Company entered into an employment agreement with R. Radcliffe Hastings, pursuant to which Mr. Hastings serves as Senior Vice President and Treasurer of the Company. The agreement was for an initial term of three years and, absent 90 days prior written notice by either party before the end of any renewal term, renews for twelve months from year to year. Mr. Hastings is entitled to an annual salary of not less than $125,000, subject to annual review by the Board of Directors. The agreement contains a covenant not to compete in any business that is competitive with the business of the Company in the United States during the term of the agreement.

Compensation Committee Interlocks and Insider Participation

Michael T. Kennedy, the Company’s Chief Executive Officer and a director, is also a director of SkinHealth, Inc. of which Paul Finigan, a director of the Company, is a director.

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ITEM 12.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of March 11, 2003, with respect to each person who is known by the Company to own beneficially 5% or more of each class of voting securities of the Company.

The following table sets forth certain information as of December 27, 2002, with respect to compensation plans under which equity securities of the Company are authorized for issuance.

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The following table sets forth certain information as of March 11, 2003, with respect to beneficial ownership of each class of equity securities of the Company by (a) the directors of the Company, (b) the Named Executive Officers and (c) the directors and all executive officers of the Company as a group.

______________

   (1)   Includes shares of Nonvoting Common Stock that certain individuals have the right to acquire, on or before May 11, 2003, upon the exercise of stock options granted pursuant to the Company’s Equity Incentive Plan, as follows: Michael V. Valenza-130; Richard C. Hunsinger-100; Donald D. Walker-125; and the directors and all executive officers as a group-490.

   (2)   Based upon 600, 5,400 and 245 outstanding shares of Voting Common Stock, Class B Nonvoting Common Stock and Nonvoting Common Stock, respectively, as well as the shares the respective individual has the right to acquire on or before May 11, 2003.

   (3)   Includes 1,573 shares held in a grantor retained annuity trust created by Mr. Kennedy. Mr. Kennedy is entitled to receive 25 of these shares pursuant to the instrument governing the trust and retains the right to acquire the balance of these shares for value from the trust under certain circumstances specified in the instrument governing the trust.

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ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has made interest-bearing advances to Michael T. Kennedy, the Company’s Chief Executive Officer, for personal use. As of December 27, 2002, outstanding principal and interest from these advances totaled $4.3 million, which was the highest amount outstanding in fiscal 2002. These advances accrue interest monthly at the 100% short-term semi-annual applicable federal rate for the current month.

Vincent F. Garrity, Jr., a director of the Company through March 4, 2002, is a partner of Duane Morris LLP, which serves as the Company’s primary legal counsel.

The Company provides certain management services to a related company of which Mr. Kennedy is also a director for which the Company receives a fee. During 2002, the Company earned management fees of $0.5 million. At December 27, 2002, unpaid management fees totaled $0.9 million.

ITEM 14.        CONTROLS AND PROCEDURES

Under the supervision of the Chief Executive Officer and Chief Financial Officer, the Company's management conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures within 90 days of the filing date of this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of its disclosure controls and procedures have been effective. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of such evaluation.

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PART IV

ITEM 15.         EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)       Documents filed as part of this Annual Report

1.             The consolidated financial statements of the Company and its subsidiaries are listed in Item 8.

2.             Financial Statement Schedules – None.

3.             Exhibits:

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