UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(mark one)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the thirteen weeks ended December 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number: 333-24939
The Fonda Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3220732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2920 North Main Street
Oshkosh, Wisconsin 54901
(920) 235-9330
(Address and telephone number of registrant's principal executive offices)
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 the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value, as of February 1, 2000: 100 Shares
1
THE FONDA GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements (unaudited): Page
Balance Sheets as of December 26, 1999 and
September 26, 1999 (audited) 3
Statements of Operations for the thirteen weeks ended
December 26, 1999 and December 27, 1998 4
Statements of Cash Flows for the thirteen weeks ended
December 26, 1999 and December 27, 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FONDA GROUP, INC.
BALANCE SHEETS
(in thousands)
December 26, September 26,
1999 1999
-------------- --------------
(unaudited)
ASSETS
Current assets:
Cash $ 517 $ 624
Accounts receivable, less allowance for doubtful
accounts of $2,393 and $2,049, respectively 50,955 43,977
Inventories 60,558 62,648
Due from affiliates, net 1,536 1,684
Deferred income taxes 6,415 6,205
Other current assets 5,331 7,386
-------------- ------------
Total current assets 125,312 122,524
Due from SF Holdings 2,846 -
Property, plant and equipment, net 50,821 51,922
Goodwill, net 19,064 19,358
Other assets, net 12,422 16,598
-------------- ------------
$ 210,465 $ 210,402
============== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 13,802 $ 15,611
Accrued expenses and other current liabilities 30,080 26,041
Current maturities of long-term debt 551 551
-------------- ------------
Total current liabilities 44,433 42,203
Due to SF Holdings - 17,175
Long-term debt 146,841 132,892
Other liabilities 1,867 1,952
Deferred income taxes 4,105 4,026
-------------- ------------
Total liabilities 197,246 198,248
Stockholder's equity:
Common stock, $.01 par value, 1,000 shares authorized,
100 shares issued and outstanding - -
Other comprehensive income 79 79
Retained earnings 13,140 12,075
-------------- ------------
Total stockholder's equity 13,219 12,154
-------------- ------------
$ 210,465 $ 210,402
============== ============
See notes to financial statements.
3
THE FONDA GROUP, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
Thirteen Weeks Ended
-----------------------------
December 26, December 27,
1999 1998
-----------------------------
Net sales $ 97,572 $ 85,920
Cost of goods sold 78,672 68,795
------------ -------------
Gross profit 18,900 17,125
Selling, general and administrative expenses 13,000 13,089
Other income, net (75) (111)
------------ -------------
Income from operations 5,975 4,147
Interest expense (net of interest income
of $83 and $202) 4,200 4,255
------------ -------------
Income (loss) before income taxes 1,775 (108)
Income tax provision (benefit) 710 (34)
------------ -------------
Net income (loss) $ 1,065 $ (74)
============ =============
See notes to financial statements.
4
THE FONDA GROUP, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Thirteen Weeks Ended
-----------------------------------
December 26, December 27,
1999 1998
-----------------------------------
Operating activities:
Net income (loss) $ 1,065 $ (74)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,829 1,437
Provision for doubtful accounts 595 171
Deferred income taxes (131) 23
Loss on equipment dispositions 39 2
Changes in assets and liabilities:
Accounts receivable (7,775) 2,701
Due to affiliates 148 33
Inventories 2,090 1,544
Other current assets 2,016 (310)
Accounts payable and accrued expenses 2,269 (4,219)
Other (83) 1,216
-------------- -------------
Net cash provided by operating activities 2,062 2,524
-------------- -------------
Investing activities:
Capital expenditures (252) (3,332)
Proceeds from equipment dispositions 28 8
Due from SF Holdings (15,894) (5,927)
-------------- -------------
Net cash used in investing activities (16,118) (9,251)
-------------- -------------
Financing activities:
Net increase in revolving credit borrowings 14,081 -
Repayments of long-term debt (132) (150)
-------------- -------------
Net cash provided by (used in) financing activities 13,949 (150)
-------------- -------------
Net decrease in cash (107) (6,877)
Cash, beginning of period 624 8,530
-------------- -------------
Cash, end of period $ 517 $ 1,653
============== =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 291 $ 101
Income taxes, net of refunds $ (103) $ 2,255
See notes to financial statements.
5
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The information included in the foregoing interim financial statements
of The Fonda Group, Inc. (the "Company") are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments and accruals) which the Company considers necessary for a fair
presentation of the operating results for these periods. Results for interim
periods are not necessarily indicative of results for the entire year. These
condensed financial statements should be read in conjunction with the Company's
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the fiscal year ended September 26, 1999. The Company is a
wholly-owned subsidiary of SF Holdings Group, Inc. ("SF Holdings").
2. BUSINESS ACQUISITION
On December 3, 1999, Creative Expressions Group, Inc. ("CEG"), an
affiliate of the Company in the disposable party goods products business, became
an 87% owned subsidiary of SF Holdings pursuant to a merger. On December 6,
1999, pursuant to an asset purchase agreement entered into on November 21, 1999
(the "CEG Asset Purchase Agreement"), the Company purchased the intangible
assets of CEG, including domestic and foreign trademarks, patents, copyrights,
customer lists. In addition, pursuant to the CEG Asset Purchase Agreement, the
Company subsequently purchased certain inventory of CEG. The aggregate purchase
price for the intangible assets and the inventory was $41 million ($16 million
for the intangible assets and $25 million for the inventory), payable in cash,
the cancellation of certain notes and warrants, and the assumption of certain
liabilities. The agreement further provides that the Company may acquire other
CEG assets in exchange for outstanding trade payables owed to the Company by
CEG. In connection with this agreement, the Company canceled certain security,
licensing, manufacturing and supply agreements with CEG that had been entered
into in Fiscal 1999. As a result of this transaction, the Company markets,
manufactures and distributes disposable party goods products directly to the
specialty (party) channel of the Company's consumer market. The transaction has
been accounted for in a manner similar to a pooling-of-interests. The
accompanying financial statements have been restated for all periods presented
to include the balance sheet and results of operations of CEG. CEG's net assets
and liabilities that were not acquired by the Company pursuant to the CEG Asset
Purchase Agreement have been classified as "Due to/from SF Holdings".
3. INVENTORIES
Inventories consist of the following (in thousands):
December 26, September 26,
1999 1999
--------------- --------------
Raw materials and supplies $ 21,353 $ 23,535
Work-in-process 806 848
Finished goods 38,399 38,265
--------------- --------------
$ 60,558 $ 62,648
=============== ==============
6
4. RELATED PARTY TRANSACTIONS
Net sales to Sweetheart Holdings Inc. ("Sweetheart") were $2.6 million
in the Fiscal 2000 First Quarter and $.1 million for the comparable Fiscal 1999
period. Net purchases from Sweetheart were $3.2 million in the Fiscal 2000 First
Quarter and less than $.1 million for the comparable Fiscal 1999 period. Net
sales to Fibre Marketing Group, LLC were $1.3 million in the Fiscal 2000 First
Quarter and $.9 million for the comparable Fiscal 1999 period. Purchases of
corrugated containers from Four M Corporation were $.5 million in the Fiscal
2000 First Quarter and $.1 million for the comparable Fiscal 1999 period. The
Company believes that the terms on which it sold or purchased products from
these related parties are at least as favorable as those it could otherwise have
obtained from unrelated third parties and were negotiated on an arm's length
basis. All of the above mentioned affiliates are under the common control of the
Company's Chief Executive Officer.
In December 1998, the Company purchased certain paper plate
manufacturing assets from Sweetheart for $2.4 million. An independent appraisal
was obtained to determine the fairness of the purchase price. The Company
believes the terms on which it purchased such assets from Sweetheart are at
least as favorable as those it could have obtained from unrelated third parties
and were negotiated on an arm's length basis.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion for The Fonda Group, Inc. (the "Company")
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results or future events could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, raw material costs, labor market conditions, the
highly competitive nature of the industry, and developments with respect to
contingencies.
The Company, a wholly-owned subsidiary of SF Holdings Group, Inc. ("SF
Holdings"), is a converter and marketer of disposable paper foodservice
products. The prices for raw materials fluctuate. When raw material prices
decrease, selling prices have historically decreased. The actual impact on the
Company from raw material price changes is affected by a number of factors
including the level of inventories at the time of a price change, the specific
timing and frequency of price changes, and the lead and lag time that generally
accompanies the implementation of both raw materials and subsequent selling
price changes. In the event that raw materials prices decrease over a period of
several months, the Company may suffer margin erosion on the sale of such
inventory.
Recent Developments
On December 3, 1999, Creative Expressions Group, Inc. ("CEG"), an
affiliate of the Company in the disposable party goods products business, became
an 87% owned subsidiary of SF Holdings pursuant to a merger. On December 6,
1999, pursuant to an asset purchase agreement entered into on November 21, 1999
(the "CEG Asset Purchase Agreement"), the Company purchased the intangible
assets of CEG, including domestic and foreign trademarks, patents, copyrights
and customer lists. In addition, pursuant to the CEG Asset Purchase Agreement,
the Company subsequently purchased certain inventory of CEG. The aggregate
purchase price for the intangible assets and the inventory was $41 million ($16
million for the intangible assets and $25 million for the inventory), payable in
cash, the cancellation of certain notes and warrants, and the assumption of
certain liabilities. The agreement further provides that the Company may acquire
other CEG assets in exchange for outstanding trade payables owed to the Company
by CEG. In connection with this agreement, the Company canceled certain
security, licensing, manufacturing and supply agreements with CEG that had been
entered into in Fiscal 1999. As a result of this transaction, the Company
markets, manufactures and distributes disposable party goods products directly
to the specialty (party) channel of the Company's consumer market. The
transaction has been accounted for in a manner similar to a
pooling-of-interests. The Company's financial statements have been restated for
all periods presented to include the results of operations of CEG.
Seasonality
The Company's business is moderately seasonal. The Company's paperboard
products experience increased volume in the third and fourth fiscal quarters as
away from home consumption increases in the late spring and summer. The
Company's tissue and party goods products experience increased volume in the
first and fourth fiscal quarters due to the buildup of seasonal business between
Halloween and the Super Bowl. The increased volume results in disproportionately
higher net income during such periods as cost absorption improvements result
from the more profitable sales and production mix.
8
Results of Operations
Thirteen Weeks Ended
---------------------------------------------
December 26, December 27,
1999 1998
---------------------------------------------
% of Net % of Net
Amount Sales Amount Sales
---------------------------------------------
(Dollars in millions)
Net sales $ 97.6 100.0 % $ 85.9 100.0 %
Cost of goods sold 78.7 80.6 68.8 80.1
-------- --------- ---------- ---------
Gross profit 18.9 19.4 17.1 19.9
Selling, general and
administrative expenses 13.0 13.3 13.1 15.2
Other income, net (0.1) (0.1) (0.1) (0.1)
-------- --------- ---------- ---------
Income from operations 6.0 6.1 4.1 4.8
Interest expense, net 4.2 4.3 4.3 5.0
-------- --------- ---------- ---------
Income (loss) before taxes 1.8 1.8 (0.1) (0.1)
Income tax provision 0.7 0.7 - -
-------- --------- ---------- ---------
Net income (loss) $ 1.1 1.1 % $ (0.1) $ (0.1)%
======== ========= ========== =========
Thirteen Weeks Ended December 26, 1999 ("Fiscal 2000 First Quarter") Compared to
December 27, 1998 ("Fiscal 1999 First Quarter")
Net sales increased $11.7 million, or 13.6%, to $97.6 million in the
Fiscal 2000 First Quarter. This increase was primarily due to significant
increases in selling prices of paperboard products; increased institutional
tissue volume; and increased net sales in the Company's specialty party goods
business. Sales volume in the Company's converting operations increased 15.9% in
the institutional market and 4.4% in the consumer market. Average selling prices
increased 12.2% in the consumer market and decreased 2.1% in the institutional
market. In the consumer market, the increase in selling prices was primarily due
to a significant increase in raw material paperboard prices which the Company
passed onto its customers. In the institutional market, the increased tissue
volume was due to increased national account and holiday seasonal sales. The
increase in net sales in the Company's specialty party goods business resulted
in a 24.2% volume increase due to millennium celebrations as well as inventory
restocking for two customers that had been experiencing financial difficulties.
Such volume increase was partially offset by a 11% reduction in average selling
prices. In addition, volume increases in all markets reflected accelerated
inventory purchases by customers resulting from anticipated Year 2000
disruptions.
Gross profit increased $1.8 million, or 10.4%, to $18.9 million in the
Fiscal 2000 First Quarter. The increase was primarily due to the realization of
cost savings from the manufacturing consolidation of CEG, and, as noted above,
increased net sales of specialty party goods products, increased selling prices
of paperboard products, and increased volume of institutional tissue products.
As a percentage of net sales, gross profit decreased to 19.4% in the Fiscal 2000
First Quarter from 19.9% in the Fiscal 1999 First Quarter. The margin
compression was due to a change in sales mix as well as the time lag between
increased raw material costs and the increase in pricing to customers.
Selling, general and administrative expenses decreased $.1 million, or
.7%, to $13.0 million in the Fiscal 2000 First Quarter primarily due to Fiscal
1999 overhead cost saving initiatives. Such cost savings were partially offset
by a provision for doubtful accounts resulting from the filing of a bankruptcy
petition by a CEG customer. As a percentage of net sales, selling, general and
administrative expenses decreased from 15.2% in the Fiscal 1999 First Quarter to
13.3% in the Fiscal 2000 First Quarter.
Income from operations increased $1.8 million to $6.0 million in the
Fiscal 2000 First Quarter due to the reasons discussed above.
Interest expense, net of interest income was $4.2 million in the Fiscal
2000 First Quarter compared to $4.3 million in the Fiscal 1999 First Quarter.
9
The effective tax rate was 40% in the Fiscal 2000 First Quarter and
31.5% in the Fiscal 1999 First Quarter. The rate differential resulted from the
loss incurred by the Company in the Fiscal 1999 First Quarter, offset by state
taxes. As a result of the above, net income was $1.1 million in the Fiscal 2000
First Quarter compared to a loss of $.1 million in the Fiscal 1999 First
Quarter.
Liquidity and Capital Resources
Historically, the Company has relied on cash flows from operations and
borrowings to finance its working capital requirements, capital expenditures and
acquisitions.
Net cash provided by operating activities was $2.1 million in the
Fiscal 2000 First Quarter compared to $2.5 million in the Fiscal 1999 First
Quarter. This increase is primarily due to increased working capital
requirements to support the increase in net sales and was partially offset by
the increase in net income.
Capital expenditures in the Fiscal 2000 First Quarter were $.3 million
primarily for routine capital improvements. Capital expenditures in the Fiscal
1999 First Quarter were $3.3 million, which included $2.4 million to purchase
converting equipment and the remaining expenditures were primarily for routine
capital improvements. See Note 4 of Notes to Financial Statements.
The Company's revolving credit facility, which expires March 31, 2001,
provides up to $55 million borrowing capacity, is collateralized by eligible
accounts receivable and inventories, certain general intangibles and the
proceeds on the sale of accounts receivable and inventory. At December 26, 1999,
$25.8 million was outstanding and $22.1 million was the maximum advance
available based upon eligible collateral. The increase in borrowings under the
revolving credit facility in the Fiscal 2000 First Quarter was primarily due to
the purchase of certain assets in accordance with the CEG Asset Purchase
Agreement. Such amounts were primarily used by CEG to repay its debt, which is
reflected in "Due From SF Holdings" in the statement of cash flows.
During the thirteen weeks ended December 26, 1999, the Company did not
incur material costs for compliance with environmental law and regulations.
The Company believes that cash generated by operations, combined with
amounts available under the revolving credit facility, will be sufficient to
meet the Company's working capital and capital expenditure needs in the
foreseeable future.
Year 2000
As of February 1, 2000, the Company has no knowledge of any material
issues relating to Year 2000 malfunctions that could have a material adverse
effect on the Company's financial condition or results of operations. The
Company is Year 2000 ready and will continue to monitor all Year 2000 related
issues.
10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibits 3.1 through 10.6 are incorporated herein by reference to the exhibit
with the corresponding number filed as part of the Company's Registration
Statement on Form S-4, as amended (File No. 333-24939). Exhibits 10.7 through
10.9 are incorporated herein by reference to the exhibit with the corresponding
number filed as part of the Company's Form 10-Q for the quarterly period ended
April 26, 1998. Exhibit 10.10 is incorporated herein by reference to the exhibit
with the corresponding number filed as part of the Company's Form 10-Q for the
quarterly period ended December 27, 1998. Exhibit 10.11 is incorporated herein
by reference to the exhibit with the corresponding number filed as part of the
Company's Form 10-K for the fiscal year ended September 26, 1999.
Exhibit # Description of Exhibit
--------- ----------------------
3.1 Certificate of Incorporation of The Fonda Group, Inc. (the
"Company").
3.2 Amended and Restated By-laws of the Company.
4.1 Indenture, dated as of February 27, 1997, between the Company
and the Bank of New York.
4.2 Form of 9 1/2% Series A and Series B Senior Subordinated Notes,
dated as of February 27, 1997 (incorporated by reference to
Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of February 27, 1997,
among the Company, Bear Stearns & Co. Inc. and Dillon, Read &
Co. Inc.
10.1 Second Amended and Restated Revolving Credit and Security
Agreement, dated as of February 27, 1997, among the Company, the
financial institutions party thereto and IBJ Schroder Bank &
Trust Company, as agent.
10.2 Stock Purchase Agreement, dated as of October 13, 1995, between
the Company and Chesapeake Corporation.
10.3 Asset Purchase Agreement, dated as of October 13, 1995, between
the Company and Alfred Bleyer & Co., Inc.
10.4 Asset Purchase Agreement, dated as of March 22, 1996, among
James River Paper Company, Inc., the Company and Newco (the
"James River Agreement").
10.5 First Amendment to the James River Agreement, dated as of May 6,
1996, among James River, the Company and Newco.
10.6 Indenture of Lease between Dennis Mehiel and the Company dated
as of January 1, 1995.
10.7 Assignment and Assumption Agreement, dated as of March 12, 1998
between the Company and SF Holdings Group, Inc.
10.8 Tax Sharing Agreement, dated as of March 12, 1998 between SF
Holdings Group, Inc. and the Company.
10.9 License Agreement, dated as of March 12, 1998 between Creative
Expressions Group, Inc. ("CEG") and the Company.
10.10 Exclusive Manufacture and Supply Agreement, dated as of December
18, 1998 between the Company and CEG.
10.11 Asset Purchase Agreement, dated as of December 6, 1999 between
CEG and the Company.
27.1 * Financial Data Schedule.
- -----------------
* filed herein.
(b) A report on Form 8-K was filed on December 27, 1999 under Item 2 to
announce the Asset Purchase Agreement between CEG and the Company.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Date: February 9, 2000
THE FONDA GROUP, INC.
By: /s/ HANS H. HEINSEN
------------------------------
Hans H. Heinsen
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial
And Accounting Officer)
12