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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

For the transition period from              to             

Commission file number 33-91600

SOLO CUP COMPANY

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 847/831-4800

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the Registrant’s common stock as of November 5, 2004:

Class A Common Stock, $0.01 par value - 100 shares

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

SOLO CUP COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

See accompanying Notes to Consolidated Financial Statements.

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SOLO CUP COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

See accompanying Notes to Consolidated Financial Statements.

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SOLO CUP COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands, except share amounts)

See accompanying Notes to Consolidated Financial Statements.

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SOLO CUP COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

See accompanying Notes to Consolidated Financial Statements.

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SOLO CUP COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) BASIS OF PRESENTATION

As used in these notes, unless the context otherwise requires, the “Company” shall refer to Solo Cup Company (“Solo Delaware”), a Delaware corporation which is the holding company for Solo Cup Company (“Solo Illinois”), an Illinois corporation, and its subsidiaries and SF Holdings Group, Inc. (“SF Holdings”) and its subsidiaries, including Sweetheart Cup Company Inc. (“Sweetheart”). The Company is a wholly owned subsidiary of Solo Cup Investment Corporation (“SCI Corporation”), a Delaware corporation. SCC Holding Company LLC (“SCC Holding”), a Delaware limited liability company and Vestar Capital Partners (“Vestar”) own 67.2% and 32.7% of SCI Corporation, respectively.

Effective February 22, 2004, the predecessor company, Solo Illinois, became a wholly-owned subsidiary of a newly formed holding company, Solo Delaware. Solo Delaware is a holding company, the material assets of which are 100% of the capital stock of Solo Illinois and 100% of the capital stock of SF Holdings. The consolidated financial statements presented herein as of December 31, 2003 and for the three and nine months ended September 30, 2003 present the financial position and results of operations of the predecessor company, Solo Illinois, which are the same operations as those of the Company under a different capital structure.

On February 27, 2004, with an effective date of February 22, 2004, the Company acquired 100.0% of the outstanding stock of SF Holdings. For the three and nine months ended September 30, 2004, the financial position and results of operations for the Company include the accounts of SF Holdings for the periods from June 28, 2004 to September 26, 2004 and February 22, 2004 to September 26, 2004, respectively.

The information included in the accompanying interim consolidated financial statements of the Company is unaudited but, in the opinion of management, includes all adjustments (consisting only of normal recurring adjustments and accruals) which the Company considers necessary for a fair presentation of the operating results and cash flows for these periods. Results for the interim periods are not necessarily indicative of results for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended December 31, 2003 included in its registration statement on Form S-4 declared effective July 13, 2004 with the Securities and Exchange Commission.

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

(2) INVENTORIES

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

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(3) INCOME TAXES

Prior to January 1, 2004, the Company was subject to taxation under the provisions of subchapter S of the Internal Revenue Code in the United States and, as a result, the federal and certain state income tax liabilities of the Company were the responsibility of its shareholders. As of January 1, 2004, the Company revoked its subchapter S status and became a subchapter C Corporation, and became subject to United States federal and state income tax at the corporate level. Consequently, the Company, pursuant to generally accepted accounting principles in the United States, recorded a one-time, $29.8 million non-cash tax expense to establish a $29.8 million net deferred income tax liability for the future tax consequences attributable to differences between the financial statement and income tax bases of its assets and liabilities as of January 1, 2004.

From December 31, 2003 to September 30, 2004, the net deferred tax liability of the Company increased by $40.3 million from a $0.7 million net deferred tax liability to a $41.0 million net deferred tax liability, respectively. At September 30, 2004, the balances include the preliminary valuation of the deferred tax assets and liabilities resulting from the SF Holdings acquisition.

The increase is comprised of the following (in thousands):

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

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(4) PROPERTY, PLANT AND EQUIPMENT, NET

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

Depreciation of property, plant and equipment was $25.1 million and $61.7 million for the three months and nine months ended September 30, 2004, respectively. Capitalized interest was $0.2 million and $0.6 million for the three months and nine months ended September 30, 2004, respectively.

(5) ACQUISITION

On February 27, 2004, with an effective date of February 22, 2004, the Company consummated the purchase of 100.0% of the issued and outstanding capital stock of SF Holdings (the “SF Holdings Acquisition”). SF Holdings and its subsidiaries are one of the largest converters and marketers of plastic and paper disposable foodservice and food packaging products in North America. The results of operations of SF Holdings from February 22, 2004 to September 26, 2004 are included in the consolidated financial statements of the Company.

The aggregate purchase price was $917.1 million of which $15.0 million is being held in an escrow account pending the final working capital adjustment. The $15.0 million held in escrow is not included in the allocation of the cost of the assets acquired and liabilities assumed as it represents contingent consideration for which the contingency has not been resolved. The consideration was applied to the purchase of all common stock and common stock equivalents of SF Holdings, as well as the repayment of all outstanding debt of SF Holdings and the repurchase and cancellation of its preferred stock. In addition, the Company purchased from a lessor certain leased manufacturing equipment and other assets that SF Holdings uses in its operations for an aggregate purchase price of $209.1 million, plus $8.0 million of accrued rent on the leases and the payment of documentation expenses. These amounts are included in the $917.1 million of aggregate consideration paid.

The funding of the SF Holdings Acquisition was made through bank financing, bonds and private investment. The SF Holdings Acquisition resulted in goodwill of $159.5 million that is not tax deductible and $45.1 million of acquired intangible assets with a weighted average useful life of approximately five years. These intangible assets consisted of trademarks and trade names of $22.2 million with an estimated useful life of five years, Trophy manufacturing technology valued at $21.1 million with an estimated useful life of five years, and $1.8 million of other intangible assets previously established by the acquired company with an estimated useful life of three years.

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The following are the amounts assigned to the acquired assets and liabilities at the acquisition date (in millions):

The allocation of purchase price is subject to final determination based on valuations and other determinations that are expected to be completed during 2004. The Company is obtaining valuations of certain actuarially determined liabilities, and finalizing estimates related to income taxes and certain restructuring liabilities.

The following are the pro-forma results assuming that the acquisition had occurred as of January 1, 2003 (in thousands):

In a subsequent transaction, on May 20, 2004, SF Holdings and Sweetheart purchased the remaining issued and outstanding 20.0% interest in Global Cup, S.A. De C.V. (“Global Cup”) for $2.9 million. The purchase resulted in $0.4 million of goodwill.

On July 6, 2004, the Company consummated the purchase of certain assets and liabilities of Erving Paper Products, Inc. (“Erving”) located in Green Bay, Wisconsin. Erving specializes in and provides foodservice distributors with high quality paper products, which include: placemats, banquet rolls, table covers, white and color napkins, seasonal designs and specialty prints. The aggregate purchase price of $2.6 million was paid in cash.

The proforma effects of these two acquisitions are not significant.

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(6) GOODWILL AND INTANGIBLE ASSETS

The following are changes in the carrying value of goodwill by business segment (in thousands):

The following are changes in the carrying value of intangible assets by business segment (in thousands):

(7) DEBT

Short-term debt and long-term debt, including amounts payable within one year, are as follows (in thousands):

Canadian Credit Facility

On September 24, 2004, Lily Cups Inc., a Canadian subsidiary of the Company, entered into a credit agreement (“Canadian Credit Facility”) which provides for a term loan and a revolving credit facility with a maximum credit borrowing of Cdn $30.0 million (approximately US $23.8 million) subject to borrowing base limitations and satisfaction of other conditions of borrowing. The term borrowings have 11 mandatory quarterly repayments of Cdn $0.482 million every January 1, April 1, July 1 and October 1 beginning January 1, 2005, with a final payment of Cdn $8.2 million on September 24, 2007. Both the revolving credit and term loan borrowings have a final maturity date of September 24, 2007. The Canadian Credit Facility is secured by all existing and thereafter acquired real and personal tangible assets of Lily Cups Inc. Borrowings under the revolving credit facility bear interest at Canadian prime rate plus 0.50% or Canadian bankers acceptance rate plus 1.75%, at the Company’s

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option. Term loan borrowings bear interest at Canadian prime rate plus 0.75% or Canadian bankers acceptance rate plus 2.00%, at the Company’s option. As of September 30, 2004, borrowings under the revolving credit facility and the term loan carried effective interest rates of 3.92% and 4.17%, respectively. As of September 30, 2004, Cdn $6.2 million (approximately US $4.8 million) was available under the revolving facility and the term loan balance was Cdn $13.5 million (approximately US $10.6 million).

Senior Credit Facility

On February 27, 2004, the Company entered into credit facilities comprised of a $150.0 million revolving credit facility maturing in 2010 and a $650.0 million term loan facility maturing in 2011 (“Senior Credit Facility”). The revolver is principally used for working capital purposes, and the term loan was used to finance the acquisition and related transactions. For purposes of calculating interest, loans under the credit facility are designated as Eurodollar rate loans or, in certain circumstances, base rate loans. Eurodollar rate loans bear interest at the British Bankers Association Interest Settlement Rate for deposits in dollars plus a borrowing margin as described below. Interest on Eurodollar rate loans is payable at the end of the applicable interest period of one, two, three or six months, but not less frequently than quarterly. Base rate loans bear interest at (a) the greater of (i) the rate most recently announced by Bank of America as its “prime rate” or (ii) the Federal Funds Rate plus ½ of 1% per annum, plus (b) a borrowing margin as described below. The margin varies from 2.0% to 2.75% on Eurodollar rate loans and from 1.0% to 1.75% on base rate loans, depending on the Company’s leverage ratio. As of September 30, 2004, the weighted average annual interest rate applicable to Eurodollar rate loans was 4.13% and the weighted average annual interest rate applicable to base rate loans was 6.50%. During the three months ended September 30, 2004, the weighted average annual interest rate for the credit facilities was 4.43%. A commitment fee of 0.50% on the unused portion of the credit facilities is payable on a quarterly basis. As of September 30, 2004, $99.8 million was available under the Senior Credit Facility.

The Senior Credit Facility is secured by (i) the present and future personal and real property and assets of the Company and its restricted subsidiaries, as defined; (ii) a pledge of 100.0% of the stock of each of SCI Corporation’s present and future direct and indirect domestic subsidiaries and 66.0% of the stock of each first-tier foreign subsidiary, as defined; (iii) all present and future intercompany debt of the Company and its restricted subsidiaries; and (iv) all proceeds of the foregoing. Under the Senior Credit Facility, the Company is required to meet certain restrictive financial covenants, including a maximum consolidated leverage ratio, minimum consolidated interest coverage ratio and maximum capital expenditures. The Senior Credit Facility also contains other various covenants that limit, or restrict, among other things, indebtedness, dividends, leases, capital expenditures and the use of proceeds from asset sales and certain other business activities. The Company is currently in compliance with all covenants under the Senior Credit Facility. At September 30, 2004, the interest rate on the term loan facility was 4.13% and 6.30% on the revolving credit facility.

The Company may make optional prepayments to either the credit facility or the term loan in million dollar increments with a minimum prepayment of $10.0 million. There are mandatory quarterly prepayments for the term loan. The quarterly prepayments range from $1.625 million per quarter through February 27, 2006 to $6.25 million per quarter from May 27, 2006 through February 27, 2008 to $12.5 million per quarter from May 27, 2008 through November 27, 2010 with a balloon payment of $449.5 million due on February 27, 2011. All mandatory quarterly prepayments have been made to date. The Company is required to make a mandatory annual prepayment of the term loan facility and the revolving credit facility in an amount equal to 50.0% of excess cash flow, as defined when the consolidated leverage ratio, as defined, is 3.5x or greater, or 25.0% of excess cash flow when the Company’s consolidated leverage ratio is less than 3.5x. In addition, the Company is required to make a mandatory prepayment of the term loan facility and the revolving credit facility with, among other things: (i) 100.0% of the net cash proceeds of any property or asset sale, subject to certain exceptions and reinvestment requirements; (ii) 100.0% of the net cash proceeds of any extraordinary receipts, as defined, subject to certain exceptions and reinvestment requirements; (iii) 100.0% of the net cash proceeds of certain debt issuances, subject to certain exceptions; and (iv) 50.0% of the net cash proceeds from the issuance of additional equity interests when the consolidated leverage ratio is 3.5x or greater, or 25.0% of such proceeds when the consolidated leverage ratio is less than 3.5x.

The Senior Credit Facility requires the Company to fix the interest rate for a portion of the borrowings. Accordingly, on March 10, 2004, the Company entered into an interest rate swap agreement to hedge the cash flows associated with the interest payments on $180.0 million of the Eurodollar rate based borrowings. Also, on June 1, 2004, the Company entered into an interest rate cap agreement to hedge the cash flows associated with the interest payments on $30.0 million of the Eurodollar rate based borrowings.

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8.5% Senior Subordinated Notes

On February 27, 2004, the Company issued $325.0 million of Senior Subordinated Notes with a coupon of 8.5% (the “8.5% Senior Subordinated Notes”). The Company registered the 8.5% Senior Subordinated Notes with the Securities and Exchange Commission on July 13, 2004. The 8.5% Senior Subordinated Notes mature on February 15, 2014 with interest paid semi-annually every February 15 and August 15. The Company has made all scheduled interest payments to date. Under the indenture governing the 8.5% Senior Subordinated Notes, the Company must meet a minimum fixed charge coverage ratio to incur additional indebtedness. The 8.5% Senior Subordinated Notes are non-callable for the first five years. Starting on February 15, 2009, the Company has the option to redeem all or a portion of the 8.5% Senior Subordinated Notes at a redemption price equal to a percentage of the principal amount thereof plus accrued interest. If redeemed during the twelve-month period beginning on February 15, 2009 the price is 104.25%, from February 15, 2010 the price is 102.833%, from February 15, 2011 the price is 101.417% and from February 15, 2012 and thereafter, the price is 100.0% of the principal amount. The 8.5% Senior Subordinated Notes provide that upon the occurrence of a change of control (as defined), the holders thereof will have an option to require the redemption of the 8.5% Senior Subordinated Notes at a redemption price equal to 101.0% of the principal amount thereof plus accrued interest. The 8.5% Senior Subordinated Notes contain various covenants which prohibit, or limit, among other things, asset sales, change of control, dividend payments, equity repurchases or redemption, the incurrence of additional indebtedness, the issuance of disqualified stock, certain transactions with affiliates, the creation of additional liens and certain other business activities.

Debt Extinguishment

On February 27, 2004, the Company extinguished $160.0 million of 7.08% senior notes due June 30, 2011 (the “7.08% Senior Notes”) and $44.2 million of 3.67% Yen-denominated senior notes due July 16, 2008 (the “3.67% Yen-denominated Senior Notes”) resulting in prepayment penalties of $26.9 million and $3.8 million, respectively. As a result of the early extinguishment of debt, the Company incurred a $0.9 million loss from the write off of deferred finance fees. The following sets forth the payments made in connection with the termination of the debt instruments outstanding on February 27, 2004 (in thousands):

(8) DERIVATIVES AND HEDGING ACTIVITIES

To limit the variability of a portion of the interest payments under the credit facilities, on March 10, 2004 the Company entered into receive-variable, pay-fixed interest rate swaps with a total notional amount of $180.0 million. Under these interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments; thereby fixing the rate on a portion of the outstanding debt. The variable rate of interest received is the Eurodollar rate. The fixed rate of interest paid is 2.375% to 2.376%. The swap agreements extend through March 31, 2007. At September 30, 2004, the fair value of these swap agreements was $3.0 million. They are accounted for as cash flow hedges and their fair value is included in other assets in the Company’s consolidated balance sheet.

On June 1, 2004, the Company entered into an interest rate cap agreement with a total notional amount of $30.0 million. Under this interest rate cap agreement, the Company receives variable interest rate payments when the three-month Eurodollar rises above 4.0%. This interest rate cap agreement is in effect through March 31, 2005. At September 30, 2004, the fair value of the interest rate cap was $0.

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(9) PENSIONS AND OTHER POSTRETIREMENT BENEFITS

In connection with the SF Holdings Acquisition, the Company assumed the obligations of certain domestic employee benefit plans. The related liabilities recorded in the initial purchase price allocation were $70.5 million, of which $62.1 million is long-term and $8.4 million is short-term, included within accrued payroll and related costs in the Company’s consolidated balance sheet.

The following are components of net periodic benefit costs (in thousands):

As of September 30, 2004, $2.5 million of contributions had been made to the Company’s pension plans. The Company presently anticipates contributing an additional $0.9 million to fund its pension plans in 2004 for a total of $3.4 million.

(10) EQUITY TRANSACTIONS

During the nine months ended September 30, 2004, the Company received net proceeds of $230.5 million from the issuance of 100 shares of Class A common stock to SCI Corporation. SCI Corporation is a holding company that owns 100% of the outstanding stock of the Company. SCI Corporation has no operations and no cash flows, other than those provided by its investors, or resulting from equity transactions with its subsidiaries, which include the Company and its investors. In order to fund the proceeds for this purchase of stock in the Company, SCI Corporation issued $240.9 million of convertible preferred stock to a third-party investor. The convertible preferred stock pays cash dividends at a rate of 10.0% per annum on an amount equal to the sum of the original purchase price of the convertible preferred stock plus all accrued and unpaid dividends. Dividends will accumulate to the extent not paid, whether or not earned or declared. SCI Corporation is further required to redeem the convertible preferred stock for an amount in cash equal to its original purchase price plus all accrued and unpaid dividends on the eleventh anniversary of its issuance, and is subject to other accelerated redemption clauses. The Company provides no guarantees with respect to these obligations of SCI Corporation, and the recourse of the holders of the preferred stock is limited to claims against the common stock of SCI Corporation.

(11) STOCK-BASED COMPENSATION

SCI Corporation, the Company’s parent, has a management investment and incentive compensation plan for certain key employees of the Company. Under this plan, SCI Corporation has reserved 1.4 million shares of common stock, and 5,000 shares of convertible participating preferred stock for issuance. The accounting impact of this plan is recorded in the financial statements of the Company as the plan relates to employees of the Company.

During the second quarter of 2004, SCI Corporation issued 3,283 Convertible Preferred Units (“CPU’s”) to certain Company employees in settlement of certain deferred compensation liabilities. During the quarter ended September 30, 2004, the Company recorded compensation expense and additional paid-in capital of $179 thousand

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reflecting dividends declared by SCI Corporation on those instruments. The fair value of the CPU’s granted by SCI Corporation was linked to the fair market value of one share of SCI Corporation convertible participating preferred stock. The fair market value of a share of SCI Corporation common stock as of September 30, 2004 was $47.32 per share, based on a conversion rate of 21.13 shares of common for each convertible participating preferred share. CPU’s do not have voting rights and are in certain circumstances convertible to common stock or convertible participating preferred stock of SCI Corporation. The issuance of CPU’s by SCI Corporation in settlement of deferred compensation liabilities of the Company totaling $3.3 million were recorded as additional paid in capital.

During the first six months of 2004, SCI Corporation granted 1,036,624 options to purchase shares of SCI Corporation common stock at a price equal to the fair market value at the date of grant. Included in this grant were 414,646 options that are conditional upon the Company achieving certain defined performance targets for EBITDA and debt reduction.

The Company accounts for these stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Under APB No. 25, compensation expense is based on the difference, if any, on the measurement date, between the estimated fair value of the Company’s stock and the exercise price of options to purchase that stock. The compensation expense is amortized on a straight-line basis over the vesting period of the options. For performance-based options, compensation expense is recognized periodically based on changes in the fair value of the stock relative to the exercise price of the option, the ratable vesting schedule, and management’s estimate regarding the Company’s ability to meet the performance criteria. For CPU’s, compensation expense is recognized periodically based on changes in the fair value of the CPU relative to the grant-date fair value of the CPU. Excluding dividends recorded in relation to CPUs, no compensation expense has been recorded related to stock-based compensation agreements with employees through September 30, 2004.

(12) ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income (loss) are as follows (in thousands):

(13) RESTRUCTURING CHARGES

During the third quarter of 2004, the Company announced the reorganization of its administrative offices, including the closure of its Urbana, Illinois administrative office, and recorded restructuring charges of $0.5 million before taxes ($0.3 million after tax) reflecting one-time termination benefits. Approximately $0.3 million of this amount has been paid to date. The Company expects to complete the spending associated with this restructuring during the first six months of 2005. As of September 30, 2004, a liability of $0.2 million is recorded in the consolidated balance sheet. In addition, the Company plans to incur an additional $1.0 million of restructuring charges related to the closure of the Urbana office through the second quarter of 2005.

Also in the third quarter of 2004, the Company announced the closing of 3 plants and incurred restructuring charges of approximately $0.6 million before taxes ($0.4 million after tax) reflecting one-time termination benefits. The Company expects to complete the spending associated with this restructuring during the first quarter of 2005. As of September 30, 2004, a liability of $0.6 million is recorded in the consolidated balance sheet.

Total restructuring charges of $1.1 million are included in selling, general and administrative expenses in the Company’s consolidated statement of operations and comprehensive income (loss).

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(14) RELATED PARTY TRANSACTIONS

Robert L. Hulseman, who is John F. Hulseman’s brother and the husband of Sheila M. Hulseman, and is the Chairman and Chief Executive Officer of the Company, received salary and benefits of $828,617 and $827,710 for the nine months ended September 30, 2004 and 2003, respectively. John F. Hulseman, who is Robert L. Hulseman’s brother and the husband of Georgia S. Hulseman, is the Vice Chairman and Secretary of the Company, received salary and benefits of $828,617 and $827,710 for the nine months ended September 30, 2004 and 2003, respectively. Robert L. and John F. Hulseman each hold 50.0% of the voting membership interests of SCC Holding, which owns 67.2% of the voting stock of SCI Corporation. In addition, Robert L., Sheila M., John F., and Georgia S. Hulseman and Ronald L. Whaley, the Company’s President and Chief Operating Officer, are directors of the Company.

In the first quarter of 2004, the Company and SCI Corporation entered into a management agreement with SCC Holding providing for, among other things, the payment by SCI Corporation of an annual advisory fee of $2.5 million. In addition, SCC Holding and Vestar entered into a stockholders’ agreement relating to their ownership of voting stock of SCI Corporation. Robert L. Hulseman and John F. Hulseman, as a result of their ownership of voting and non-voting membership interests in SCC Holding, have economic interests of 0.2758% and 0.8512%, respectively, in SCC Holding. Ten children of Robert L. and Sheila M. Hulseman each have economic interests in SCC Holding, either directly or as beneficiaries of trusts, of 4.9765%; and six children of John F. and Georgia S. Hulseman each have economic interests in SCC Holding, either directly or as beneficiaries of trusts, of 8.1859% (in the case of two of the children), 8.1841% (in the case of three of the children) and 8.1849% (in the case of the remaining child).

In the first quarter of 2004, SCI Corporation paid to Vestar a one-time $4.0 million advisory fee and reimbursed specified out of pocket expenses of Vestar. SCI Corporation also entered into a management agreement with Vestar pursuant to which SCI Corporation will pay Vestar an $800,000 annual advisory fee, plus reimbursement of its expenses. Vestar also is party to a registration rights agreement with SCI Corporation and SCC Holding. In addition, Vestar and SCC Holding entered into a stockholders’ agreement relating to, among other things, their ownership of voting stock of SCI Corporation. Vestar owns convertible preferred stock representing 32.7% of the voting stock of SCI Corporation. Daniel S. O’Connell and Norman W. Alpert are directors of the Company and are both employees and equity owners of Vestar.

The Company paid dividends of $13.0 million and $7.2 million to shareholders for the nine months ended September 30, 2004 and 2003, respectively.

(15) LEASES

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. The full amount of lease rental payments is charged to expense using the straight-line method over the term of the lease. Future minimum rental commitments under non-cancelable operating leases in effect at September 30, 2004 are as follows (in thousands):