UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1 to Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 27, 1999
THE FONDA GROUP, INC.
(Exact name of registrant as specified in its charter)
Commission file number 333-24939
Delaware 13-3220732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2920 North Main Street 54901
Oshkosh, WI (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (920) 235-9330
================================================================================
1
This Form 8-K/A amends the Form 8-K filed on December 27, 1999. The following
item has been amended:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Set forth on pages 3 to 18 are the Independent Auditors' Report and
financial statements of Creative Expressions Group, Inc. ("CEG") as of
September 26, 1999 and July 26, 1998, and for the year ended September
26, 1999, the nine week transition period ended September 27, 1998, and
the years ended July 26, 1998 and July 27, 1997 as required by Rule
3-05(b) of Regulation S-X.
(b) Set forth on pages 19 to 21 are the unaudited pro forma statements of
operations for the year ended September 26, 1999, the nine week
transition period ended September 27, 1998, and the years ended July
26, 1998 and July 27, 1997 as required by Article 11 of Regulation S-X.
2
INDEPENDENT AUDITORS' REPORT
Shareholders
Creative Expressions Group, Inc.
Indianapolis, Indiana
We have audited the accompanying balance sheets of Creative Expressions Group,
Inc. (the "Company") as of September 26, 1999 and July 26, 1998 and the related
statements of operations, changes in shareholders' deficiency, and cash flows
for the year ended September 26, 1999, the nine week transition period ended
September 27, 1998 and the years ended July 26, 1998 and July 27, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Creative Expressions Group, Inc. as of
September 26, 1999 and July 26, 1998 and the results of its operations and its
cash flows for the year ended September 26, 1999, the nine week transition
period ended September 27, 1998, and the years ended July 26, 1998 and July 27,
1997 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company has given
retroactive effect to the change in accounting for inventories from the
last-in-first-out ("LIFO") method to the first-in-first-out ("FIFO") method.
As discussed in Note 12 to the financial statements, the Company became an 87%
owned subsidiary of SF Holdings Group, Inc. and sold substantially all of its
operating assets to The Fonda Group, Inc. in December 1999.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
December 15, 1999
(January 31, 2000 with respect to Note 13)
3
CREATIVE EXPRESSIONS GROUP, INC.
BALANCE SHEETS (IN THOUSANDS)
- --------------------------------------------------------------------------------------------
September 26, July 26,
ASSETS 1999 1998 (a)
CURRENT ASSETS:
Cash $ 515 $ 844
Accounts receivable, less allowance for doubtful
accounts and returns of $5,049 and $1,572, respectively 23,617 12,806
Inventories 21,328 24,889
Deferred income taxes 1,380 85
Income taxes receivable 766 418
Other current assets 1,133 1,097
------ -----
Total current assets 48,739 40,139
PROPERTY, PLANT AND EQUIPMENT, NET 1,003 4,665
INVESTMENT IN PREFERRED STOCK OF
SF HOLDINGS GROUP, INC. 15,000 15,000
OTHER ASSETS, NET 999 1,537
DEFERRED INCOME TAXES 400 1,645
------- -------
TOTAL ASSETS $66,141 $62,986
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 3,789 $ 5,105
Accounts payable to Fonda 12,770 478
Accrued liabilities 8,645 7,498
Restructuring accrual 1,675
Current maturities of long-term debt 848 1,232
------- -------
Total current liabilities 26,052 15,988
LONG-TERM DEBT 41,205 46,940
OTHER LONG-TERM LIABILITY 60 215
SHAREHOLDERS' DEFICIENCY:
Class A Common Stock - Par value $.01 per share; 1,000 shares authorized; 103
shares issued and outstanding
Class B Common Stock - Par value $.01 per share; 1,000 shares authorized; none
issued
Additional paid-in-capital 2,289 195
Retained deficit (3,465) (352)
-------- -------
Total shareholders' deficiency (1,176) (157)
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $66,141 $62,986
======== =======
(a) Prior period balances have been restated (see Note 2 to the financial
statements)
See notes to financial statements.
4
CREATIVE EXPRESSIONS GROUP, INC.
STATEMENTS OF OPERATIONS (IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------
Nine Weeks
Year Ended Ended Years Ended
September 26, September 27, July 26, July 27,
1999 1998 1998 (a) 1997 (a)
---- ---- -------- --------
NET REVENUES $106,539 $23,586 $86,153 $ 72,256
COST OF GOODS SOLD 84,421 18,477 63,856 49,705
------- ------- ------- --------
Gross profit 22,118 5,109 22,297 22,551
------- ------ ------- --------
OPERATING EXPENSES:
Selling 12,234 2,266 12,824 12,432
General and administrative 10,385 1,267 6,826 6,340
Restructuring expense 1,328
-------- ------ ------- -------
Total operating expenses 22,619 3,533 20,978 18,772
-------- ------ ------- -------
INCOME (LOSS) FROM OPERATIONS (501) 1,576 1,319 3,779
INTEREST EXPENSE 4,816 921 3,695 2,236
-------- ------ ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES (5,317) 655 (2,376) 1,543
PROVISION (BENEFIT) FOR
INCOME TAXES (1,810) 261 (953) 619
--------- ------- ------- --------
NET INCOME (LOSS) $ (3,507) $ 394 $(1,423) $ 924
========= ======= ======= ========
(a) Prior period balances have been restated (see Note 2 to the financial
statements).
See notes to financial statements.
5
CREATIVE EXPRESSIONS GROUP, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) (IN THOUSANDS)
Nine Weeks
Year Ended Ended Years Ended
September 26, September 27 , July 26, July 27,
1999 1998 1998 (a) 1997 (a)
---- ---- -------- --------
Common Stock:
Class A Common Stock - Par value $.01 per share;
1,000 shares authorized; 103 shares issued and outstanding
Class B Common Stock - Par value $.01 per share;
1,000 shares authorized; none issued
Additional Paid-in-capital:
Balance, beginning of period $ 195 $ 195 $ 10 $ 10
Issuance of warrants 185
Effect of sale of assets to Fonda
in excess of book value 2,094
------- ------- ------- ------
Balance, end of period 2,289 195 195 10
------- ------- ------- ------
Retained earnings (deficit):
Balance, July 28, 1996, as previously reported 74
Cummulative effect on prior years of
change in accounting principle (see Note 2) 73
------
Balance, beginning of period 42 (352) 1,071 147
Net income (loss) (3,507) 394 (1,423) 924
------ ------- ------- ------
Balance, end of period (3,465) 42 (352) 1,071
------ ------- ------- ------
Total Shareholders' Equity (Deficiency) $(1,176) $ 237 $ (157) $1,081
======= ======= ======= ======
(a) Prior period balances have been restated (see Note 2 to the financial
statements).
See notes to financial statements.
6
CREATIVE EXPRESSIONS GROUP, INC.
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Nine Weeks
Year Ended Ended Years Ended
September 26, September 27, July 26, July 27,
1999 1998 1998 (a) 1997 (a)
---- ---- -------- --------
OPERATING ACTIVITIES:
Net income (loss) $ (3,507) $ 394 $ (1,423) $ 924
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 175 110 469 266
Deferred income tax benefit (1,388) (731) (481)
Non-cash interest capitalized as long-term debt 786 63 56
Provision for doubtful accounts and returns 3,230 247 196 144
Provision (recovery) for obsolete inventory 905 739 (1,219) (16)
Change in assets and liabilities:
Accounts receivable (7,252) (7,030) 310 (314)
Inventories (1,060) 2,977 (3,078) (2,560)
Other current assets 578 (117) 613 (573)
Accounts payable and accrued liabilities 12,462 (2,517) 3,914 (613)
Income taxes receivable/payable (556) 208 (1,424) 385
------- -------- -------- -------
Net cash from operating activities 4,373 (4,926) (2,317) (2,838)
------- -------- -------- -------
INVESTING ACTIVITIES:
Capital expenditures (428) (407) (3,092) (1,440)
Proceeds from sale of equipment 8,089
Investment in preferred stock of SF Holdings Group, Inc. (15,000)
------- -------- ------- ------
Net cash from investing activities 7,661 (407) (18,092) (1,440)
------- -------- ------- ------
FINANCING ACTIVITIES:
Revolving credit borrowings (repayments), net (3,249) 4,879 1,624 8,238
Proceeds from long-term debt 24,486 2,600
Payments on long-term debt (8,538) (100) (4,410) (6,532)
Debt issuance costs (22) (1,338)
------- -------- -------- ------
Net cash from financing activities (11,787) 4,757 20,362 4,306
------- -------- -------- ------
INCREASE (DECREASE) IN CASH 247 (576) (47) 28
CASH, BEGINNING OF PERIOD 268 844 891 863
------- -------- ------- ------
CASH, END OF PERIOD $ 515 $ 268 $ 844 $ 891
======= ======== ======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 3,917 $ 599 $ 2,415 $ 2,076
Cash paid during the period for income taxes $ 133 $ 53 $ 1,205 $ 716
(a) Prior period balances have been restated (see Note 2 to the financial
statements).
See notes to financial statements.
7
CREATIVE EXPRESSIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS DESCRIPTION AND ACQUISITION
Creative Expressions Group, Inc. (the "Company") was incorporated on March
29, 1996 in the state of Delaware for the purpose of acquiring certain net
assets and business of the Specialties Operations Division (the
"Division") of James River Paper Corporation ("James River"). As more
fully disclosed in Note 12, on December 3, 1999, the shareholders of the
Company exchanged with SF Holdings Group, Inc. ("SF Holdings") 87% of
their shares for shares of SF Holdings. SF Holdings is a Delaware
corporation principally owned by the majority shareholder of the Company.
The Company purchases and distributes disposable paper products and
various party goods throughout the United States. During fiscal 1999, the
Company outsourced its manufacturing operations to an affiliate (see
below).
Concurrent with the acquisition of certain assets and business of the
Division, the Company recorded a restructuring charge of $2.2 million to
restructure the Company's operations, reduce overhead costs and increase
operating efficiencies. In connection with the restructuring, the Company
expected to incur certain costs to exit activities, which consisted of the
abandonment of leased distribution facilities and cancellation of the
related leases.
In July 1998, the Company abandoned its original restructuring plan and
designed a new plan. The new plan consists of the Company maintaining its
leased distribution facilities in Indianapolis and discontinuing its
manufacturing operations. Manufacturing operations previously performed by
the Company will be outsourced to The Fonda Group, Inc. ("Fonda"), a
wholly-owned subsidiary of SF Holdings. In accordance with EITF 95-3,
"Recognition of Liabilities in Connection with a Purchase Business
Combination," the original restructuring accrual was reduced to $.3
million as of July 26, 1998, consisting principally of facility closure
costs, with the offsetting credit to property, plant and equipment. In
addition, the Company recorded approximately $1.3 million in fiscal 1998
of restructuring charges relating to severance costs associated with the
new restructuring plan. Significantly all of the costs accrued as part of
such restructuring charges were paid in fiscal 1999.
In connection with the new restructuring plan, the Company sold certain
manufacturing equipment to Fonda in fiscal 1999 (see Note 9). In addition,
the Company is attempting to sell its manufacturing facility.
2. SIGNIFICANT ACCOUNTING POLICIES
Change in Accounting - In fiscal 1999, the Company changed its inventory
costing method from the last-in, first-out ("LIFO") method to the
first-in, first-out ("FIFO") method. The change in accounting principle
was made to conform its inventory costing method to that of Fonda. The
effect of the change in accounting principle was to reduce net income
(loss) reported for fiscal 1998 and fiscal 1997 by $163,000 and $554,000,
respectively. The change has been applied to prior years by retroactively
restating the financial statements. The effect of this restatement was to
increase retained earning as of July 28, 1996 by $73,000.
8
Revenue Recognition - Revenue, less an estimate for returns and other
allowances, is recognized when products are shipped.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment - Property, plant and equipment is stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows:
Years
-----
Building 40
Machinery and equipment 12
Computer equipment 2
Furniture and fixtures 2 to 5
Vehicles 3
The Company evaluates all long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Deferred Catalog Cost and Advertising Expense - The Company expenses the
costs of advertising as incurred, except for catalog costs, which are
capitalized and amortized over the expected period of future benefits.
Direct response advertising consists primarily of catalogs that include
order forms for the Company's products. The everyday products catalog
costs are expensed over a period of twelve months, while the spring, fall
and holiday season catalog costs are amortized over periods ranging from
four to six months coinciding with shipments of products.
At September 26, 1999 and July 26, 1998, $290,000 and $450,000,
respectively, of unamortized catalog costs were included in other current
assets. Advertising expense was $101,000 in fiscal 1999, $27,000 in the
1998 Transition Period, $451,000 in fiscal 1998 and $307,000 in fiscal
1997. Catalog expense was $746,000 in fiscal 1999, $165,000 in the 1998
Transition Period, $748,000 in fiscal 1998 and $942,000 in fiscal 1997.
Debt Issuance Costs - Included in other assets are debt issuance costs of
$.9 million at September 26, 1999 and $1.3 million at July 26, 1998
incurred in connection with the revolving credit agreements and term note
agreements which are being amortized using a method that approximates the
effective interest method. Amortization expense was $344,000 in fiscal
1999, $60,000 in the 1998 Transition Period, $194,000 in fiscal 1998 and
$113,000 in fiscal 1997.
Advanced Royalties and Minimum License Guarantees - The Company enters
into licensing agreements with third parties for the right to use their
designs and trademarks. Certain agreements require minimum guarantees of
royalties, as well as advance payments. Advance royalty payments are
recorded as other current assets and are charged to expense as royalties
are earned. Minimum license guarantees are recorded as an other asset,
with a corresponding payable, when the agreement is executed and are
charged to expense based on actual sales. The Company charges to expense
remaining advance royalties and minimum license guarantees when management
determines that actual related product sales are significantly less than
original estimates.
As of September 26, 1999 and July 26, 1998, the Company had $536,000 and
$643,000 in minimum license guarantees and advance royalties, net of
reserves, respectively. Future minimum royalty payments are $305,000 in
2000 and $60,000 in 2001.
9
Income Taxes - Deferred income taxes are provided for temporary
differences between the financial reporting and income tax bases of assets
and liabilities. Deferred tax assets and liabilities are measured based on
the enacted tax rates.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally
of accounts receivable. The Company sells products to retailers and other
customers and extends credit to its customers based on an evaluation of
the customer's financial condition, generally without requiring
collateral. Exposure to losses on receivables is principally dependent on
each customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for such losses. The Company's
three most significant customers accounted for approximately 37% and 49%
of accounts receivable as of September 26, 1999 and July 26, 1998,
respectively, and represented 38% of net sales for fiscal 1999, 46% of net
sales for the 1998 Transition Period, 49% of net sales for fiscal 1998 and
48% of net sales for fiscal 1997.
Approximately 55% of the Company's workforce is subject to the terms of a
collective bargaining agreement which expires December 2001.
Fiscal Year - The Company's fiscal year is the fifty-two or fifty-three
week period which ends on the last Sunday in July. The periods presented
in these financial statements were presented to conform with Fonda who in
October 1998, changed its fiscal year from the fifty-two or fifty-three
week period which ends on the last Sunday in July to the same number of
weekly periods ending on the last Sunday in September. Fiscal 1999 was the
fifty-two week period ended September 26, 1999. The nine week period from
July 27, 1998 to September 27, 1998 ( the "1998 Transition Period") has
been treated as a transition period that was not part of fiscal 1998 or
fiscal 1999. Fiscal 1998 and fiscal 1997 were fifty-two week periods ended
July 26, 1998 and July 26, 1997, respectively.
Management Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
New Accounting Pronouncements - SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, is effective for fiscal
periods beginning after June 15, 2000. SFAS No. 133 requires that an
entity recognize all derivatives and hedging activities as either assets
or liabilities in the statement of financial position and measure these
instruments at fair value. The Company has not determined the effect, if
any, of the new standard on the financial statements.
10
3. INVENTORIES
Inventories consist of the following (in thousands):
September 26, July 26,
1999 1998
---- ----
Raw materials $ 503 $ 2,727
Work-in-process 588 873
Finished goods 25,097 24,505
------ ------
26,188 28,105
Valuation allowance for obsolesence (4,860) (3,216)
------ ------
$21,328 $24,889
====== =======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
September 26, July 26,
1999 1998
---- ----
Land and building $ 513 $ 432
Machinery and equipment 95 4,404
Computer equipment 65 213
Construction in progress 387 187
------ ------
1,060 5,236
Less accumulated depreciation (57) (571)
------- ------
$1,003 $4,665
======= ======
Depreciation expense was $78,000 in fiscal 1999, $49,000 in the 1998
Transition Period, $275,000 in fiscal 1998 and $153,000 in fiscal 1997.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
September 26, July 26,
1999 1998
---- ----
Promotion and sales allowances $3,858 $3,283
Compensation and benefits 2,194 2,038
Interest payable 1,024 934
Other 1,569 1,243
------ ------
$8,645 $7,498
====== ======
11
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
September 26, July 26,
1999 1998
---- ----
Revolving line of credit $ 22,845 $ 21,215
Term note payable 848 7,500
Equipment loan 1,986
Senior subordinated notes 10,000 10,000
Junior subordinated note 5,498 5,000
Term note payable to Fonda 3,007 2,656
-------- -------
42,198 48,357
Less amounts due within one year (848) (1,232)
Less unamortized discount (145) (185)
-------- -------
$41,205 $46,940
======== =======
Bank Credit Facilities - On March 12, 1998, the Company refinanced its
revolving credit facility, consisting of a revolving line of credit and a
term note payable ("Previous Facility"), with a bank by entering into a
new revolving credit facility agreement ("Existing Facility") with a bank.
The proceeds from the Existing Facility refinancing were utilized to pay
the outstanding balances of the Previous Facility totaling $25.4 million.
The Existing Facility consists of a revolving line of credit, term note
payable and an equipment loan.
The availability of borrowings on the revolving line of credit is based on
eligible accounts receivable and inventories, as defined. The maximum
advance availability at September 26, 1999 and July 26, 1998 was $28.7
million and $23.3 million, respectively. The revolving line of credit
requires all cash receipts of the Company to be deposited in a lock box
account and applied as payments against the outstanding borrowings.
Borrowings bear interest at the LIBOR rate (6.0% at September 26, 1999)
plus 2.25%, as well as a facility fee determined on a monthly basis at a
rate of .375% on the unused principal balance.
In addition, letters of credit are available under the revolving line of
credit, up to a maximum of $5 million. The term of the letters of credit
cannot exceed one year or extend past the maturity date of the revolving
line of credit facility agreement. The Company pays a monthly fee based on
the undrawn principal amount of the letters of credit outstanding at a
rate of 1.5%. The amount of outstanding letters of credit was $346,000 at
September 26, 1999.
In connection with the refinancing of its revolving credit facility, the
Company entered into a term note payable agreement with a bank. The note
is payable in monthly principal payments of $100,000 commencing September
1, 1998. Interest is payable monthly at the LIBOR rate plus 2.75%.
On March 12, 1998, the Company entered into an equipment loan with a bank.
The availability of the equipment loan is based on up to 80% of net
invoice cost of new machinery and equipment, not to exceed in the
aggregate $2.5 million. The agreement requires monthly principal payments,
commencing April 1, 1999, of equal installments based on a five year basis
of the sum of outstanding principal balance at March 12, 1999 and March
12, 2000. The Company pays interest on a monthly
12
basis at the LIBOR rate plus 2.5%, as well as a facility fee, payable on a
monthly basis at a rate of .375% on the unused principal balance. The
equipment loan was paid off during fiscal 1999.
The revolving credit facility agreements are collateralized by
substantially all of the Company's assets, excluding the investment in SF
Holdings Group, Inc. The agreements expire February 27, 2003, at which
time all unpaid principal on all revolving credit facility agreements and
outstanding interest are due. The revolving line of credit, term note
payable and equipment loan agreements contain certain restrictive
covenants, including among others, (i) fixed charge coverage and capital
funds ratios (ii) mergers and acquisitions, (iii) dividend restrictions,
and (iv) additional indebtedness.
Subordinated Notes - On March 12, 1998, the Company issued senior
subordinated notes for $10 million to finance the purchase of preferred
stock in SF Holdings Group, Inc. ("SF Holdings"), parent of Fonda.
Interest is payable semi-annually March 30 and September 30, commencing
September 30, 1998, at a rate of 12%. The Company may redeem the senior
subordinated notes between March 1998 and March 2002, with a prepayment
charge ranging from 2% to 7% of the unpaid principal balance, as defined.
The term of the senior subordinated notes expires March 30, 2004.
In addition, the Company issued a junior subordinated note for $5 million
on March 12, 1998 to finance the purchase of preferred stock in SF
Holdings. Interest is payable at a rate of 9.25% semi-annually, commencing
September 30, 1998. For the period March 1998 through March 2004, the
Company, at its option, may elect to pay interest in the form of
additional junior subordinated notes. Commencing April 2004, all interest
payments are payable in cash. The Company may redeem the junior
subordinated note until September 2000, with a prepayment charge ranging
from 5% to 7% on the unpaid principal balance, as defined. The term of the
junior subordinated note expires March 12, 2008.
The senior and junior subordinated notes are subordinate to the Existing
Facility and are unsecured. In addition, the subordinated notes contain
certain restrictive covenants, including, among others, (i) fixed charge
coverage and capital funds ratios, (ii) mergers and acquisitions, (iii)
dividend restrictions, the most restrictive of which limits dividends to
50% of cumulative net income subsequent to an initial public offering, and
(iv) additional indebtedness.
In connection with the issuance of the senior and junior subordinated
notes, the Company issued three warrants to purchase an aggregate of
16.546 shares of its Class A common stock for $.01 per share (see Note
12). The warrants expire in March 2004 and March 2008. The Company
assigned a fair value to the warrants of approximately $155,000. This
discount is being amortized as additional interest expense over the terms
of the senior and junior subordinated notes.
Term Note Payable to Fonda - In fiscal 1998, the Company amended certain
terms of the $2.6 million Promissory Note dated February 27, 1997 with
Fonda. The 10% annual interest rate on the note was converted to
pay-in-kind, the 2002 maturity was extended for an additional three years
and the note was made subordinate to the Existing Facility and the senior
subordinated notes. The amount of deferred interest included in the unpaid
balance of the note was $407,000 and $56,000 as of September 26, 1999 and
July 26, 1998, respectively. In connection with such amendment, the
Company issued a warrant to Fonda to purchase, for a nominal amount, 2.5%
of the Company's common stock. The Company assigned a fair value to the
warrants of approximately $30,000. This discount is being amortized as
additional interest expense over the term of the term note payable to
Fonda. The Company believes that the terms of such loan and the amendments
thereto are no more favorable to Fonda than those that Fonda could
otherwise have obtained from unrelated third parties and such terms
13
were negotiated on an arm's length basis. The Fonda note and related
warrants were canceled on December 6, 1999 in partial consideration of the
CEG Asset Purchase Agreement (see Note 12).
Aggregate annual principal payments of long-term debt are as follows (in
thousands):
Years ending September:
2000 $ 848
2001
2002
2003 22,845
2004 10,000
Thereafter 8,505
-------
$42,198
=======
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
Nine Weeks
Year Ended Ended Years Ended
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
---- ---- ---- ----
Current:
Federal $ (541) $ 229 $ (176) $ 783
State 119 32 (46) 317
-------- ----- ------- ------
(422) 261 (222) 1,100
-------- ----- ------- ------
Deferred:
Federal (1,214) (640) (421)
State (174) (91) (60)
-------- ------- -------
(1,388) (731) (481)
-------- ------- -------
Income tax expense (benefit) $(1,810) $ 261 $ (953) $ 619
======== ===== ======= =======
Principal reasons for the difference between the federal statutory income
tax rate and the Company's effective income tax rate were as follows (in
thousands):
Nine Weeks
Year Ended Ended Years Ended
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
---- ---- ---- ----
Federal tax at statutory rates $(1,857) $ 229 $ (832) $ 540
Permanent differences and other 20 33 (24)
State income taxes, net of federal
income tax effect 27 32 (154) 103
------- ----- ------ -----
$(1,810) $ 261 $ (953) $ 619
======= ===== ====== =====
14
Deferred tax assets (liabilities) result from temporary differences as
follows (in thousands):
September 26, July 26,
1999 1998
---- ----
Deferred tax assets:
Current:
Accruals not currently deductible $2,155 $1,165
Long-term:
Excess fair value of net assets acquired
over purchase price allocated for financial
reporting to property, plant and equipment 400 1,645
------ ------
$2,555 $2,810
====== ======
Deferred tax liabilities:
Current:
Excess fair value of net assets acquired
over purchase price allocated to inventory
for income tax purposes $ 635 $ 900
Other 140 180
------ ------
$ 775 $1,080
====== ======
8. LEASES
The Company leases certain facilities and equipment under operating
leases. Future minimum payments under noncancelable operating leases with
remaining terms of one year or more are (in thousands):
Years ending September:
2000 $2,669
2001 2,292
2002 1,775
2003 597
------
$7,333
Rent expense was $2.9 million in fiscal 1999, $.4 million in the 1998
Transition Period, $2.4 million in fiscal 1998 and $2.3 million in fiscal
1997.
9. RELATED PARTY TRANSACTIONS
In fiscal 1998, the Company entered into a license agreement with Fonda,
whereby the Company was granted the exclusive rights to use certain of
Fonda's trademarks and trade names in connection with the manufacture,
distribution and sale of disposable party goods products for a period of
five years, subject to extension. In connection therewith, Fonda receives
an annual royalty equal to 5% of the Company's cash flow, as determined in
accordance with a formula specified in such agreement. Royalty expense
recorded by the Company was $356,000 in fiscal 1999, $86,000 in the 1998
Transition Period and $82,000 in fiscal 1998. In fiscal 1999, the Company
entered into an exclusive manufacture and supply agreement with Fonda
(together with the before mentioned license agreement, the "CEG
Agreements"). Pursuant to such agreement, and until December 6, 1999,
Fonda manufactured and supplied all the Company's requirements for, among
other items, disposable paper plates, cups, napkins and tablecovers. Fonda
sold such manufactured products to the Company in accordance with a
formula based on Fonda's cost. Also in fiscal 1999, Fonda purchased
certain manufacturing assets from the Company for $4.9 million and entered
into
15
operating leases whereby Fonda leases to the Company certain
non-manufacturing assets for annual rentals of $100,000. Independent
appraisals were obtained to determine the fairness of both the purchase
price and lease terms.
The $2.1 million excess of the purchase price over the Company's book
value, net of deferred tax assets, was recorded as additional
paid-in-capital. The Company believes the terms on which it (i) entered
into the license agreement with Fonda; (ii) purchases products
manufactured and supplied by Fonda, (iii) sold manufacturing assets to
Fonda; and (iv) leased non-manufacturing assets from Fonda are at least as
favorable as those it could have obtained from unrelated third parties and
were negotiated on an arm's length basis. Pursuant to the CEG Asset
Purchase Agreement (see Note 12) the CEG Agreements will be cancelled by
Fonda.
The Company purchases certain inventory from Fonda. The outstanding
accounts payable due to Fonda as of September 26, 1999 and July 26, 1998
were approximately $12.8 million and $.5 million, respectively. Such
increase was primarily due to increased purchases from Fonda as a result
of the CEG Agreements as well as extended payment terms. Total purchases
from Fonda were $26.9 million in fiscal 1999, $6.9 million in the 1998
Transition Period, $17.0 million in fiscal 1998 and $7.8 million in fiscal
1997.
On March 12, 1998, the Company purchased 15,000 shares of Class B Series 1
preferred stock of SF Holdings for $1,000 per share. The Company has
recorded the value of the preferred stock using the cost method. The
preferred stock is convertible, at any time, into 133,495 shares of Class
A common stock of SF Holdings, at the option of the Company and is
required to be redeemed in March 2010 at a redemption price per share, in
cash, equal to the aggregate liquidation value.
10. EMPLOYEE BENEFIT PLANS
Defined Contribution Plan - On May 6, 1996, the Company established a
defined contribution plan, Creative Expressions Group, Inc. 401(k) Plan
(the "Plan"), which covers substantially all employees of the Company.
Participants may elect to contribute between 1% and 15% of their pre-tax
wages to the Plan. The Company matches 75% of the first 2% percent of
employee contributions, 50% of the next 3% and may elect, at its
discretion, to make additional contributions to the Plan. The Company's
expense under the Plan was $363,000 in fiscal 1999, $90,000 in the 1998
Transition Period, $505,000 in fiscal 1998 and $510,000 in fiscal 1997.
Defined Benefit Plan - Effective May 6, 1996, the Company established a
noncontributory defined benefit plan for union employees. Benefits are
based on a flat benefit per year of credited service. The Company's policy
is to make contributions sufficient to meet the minimum funding amount
required by applicable laws and regulations.
16
Net periodic pension cost consisted of the following (in thousands):
Nine Weeks
Year Ended Ended Years Ended
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
---- ---- ---- ----
Service cost $ 126 $ 22 $105 $118
Interest cost on projected benefit
obligation 41 7 21
Actual return on plan assets (12) (2) (2)
Net amortization and deferral 22 4 5
----- ---- ---- ----
Net periodic pension cost $ 177 $ 31 $129 $118
===== ==== ==== ====
The unfunded status of the plan is as follows (in thousands):
September 26, July 26,
1999 1998
---- ----
Change in benefit obligation:
Benefit obligation at beginning of period $ 509 $ 118
Service cost 148 105
Interest cost 48 21
Actuarial loss 5 265
Benefits paid (61)
----- ----
Benefit obligation at end of period 649 509
----- ----
Change in plan assets:
Fair value of plan assets at beginning of period 66
Actual return on plan assets 14 2
Contributions to plan 280 64
Benefits paid (61)
----- -----
Fair value of plan assets at end of period 299 66
----- -----
Unfunded status (350) (443)
Unrecognized prior service cost 206 162
Unrecognized loss 36 100
------ ------
Net liability $ (108) $ (181)
====== ======
For purposes of the above table, the benefit obligation at the beginning
of fiscal 1999 is as of July 26, 1998 and the changes in benefit
obligation and in plan assets include amounts for the 1998 Transition
Period. The actuarial present values of benefit obligations were
determined using discount rates of 7.5% in fiscal 1999 and 7% in fiscal
1998. The expected rate of return on plan assets was assumed to be 8%.
17
11. COMMITMENTS
At the date of the acquisition of the Division from James River, the
Company did not purchase certain real property due to environmental
conditions. The Company has a commitment to purchase the property
contingent on James River's resolution of certain environmental issues.
The Company is required to purchase the property for $500,000 within 30
days of the Company's acceptance of evidence of such resolution.
12. SUBSEQUENT EVENT
On December 3, 1999, CEG became an 87% owned subsidiary of SF Holdings
pursuant to a merger whereby 87% of the outstanding shares of the Company
were exchanged by the Companies shareholders for shares of SF Holdings,
and accordingly, the stockholders of the Company became stockholders of SF
Holdings. Concurrent with the merger, certain holders of senior
subordinated debt exercised their warrants to purchase 9.196 shares of
common stock of the Company for $.01 per share (see Note 6).
On December 6, 1999, pursuant to an asset purchase agreement entered into
on November 21, 1999 (the "CEG Asset Purchase Agreement"), Fonda purchased
substantially all of the assets of the Company except accounts receivable
and property, plant and equipment. The aggregate purchase price was $41
million, payable in cash, the cancellation of the term note payable to
Fonda and related warrants (see Note 6) and the assumption of a $4 million
subordinated note receivable and certain liabilities.
Subsequent to the transaction, the Company's assets consisted of property,
plant and equipment and trade receivables, which it expects to collect as
they become due, the proceeds of which will be used to satisfy trade
payables and amounts due to Fonda.
13. EXTINGUISHMENT OF DEBT
As of January 31, 2000 the Existing Facility, plus accrued interest, the
senior subordinated notes, plus accrued interest, and the junior
subordinated notes, plus accrued interest had been repaid from the
proceeds of the CEG Asset Purchase Agreement.
* * * * * *
18
Unaudited Pro Forma Combined Condensed Statements of Operations
On December 3, 1999, CEG, an affiliate of The Fonda Group, Inc. (the "Company")
in the disposable party goods products business, became an 87% owned subsidiary
of the Company's parent, SF Holdings Group, Inc., 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 1998 and 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 following unaudited pro forma combined condensed statements of operations of
the Company are for the year ended September 26, 1999, the nine week transition
period ended September 27, 1998, and the fiscal years ended July 26, 1998 and
July 27, 1997. Such statements are derived from, and should be read in
conjunction with, the Company's Form 10-K for the year ended September 26, 1999,
and from CEG's audited financial statements, as filed herein. Such pro forma
statements give effect to the transactions contemplated by the CEG Asset
Purchase Agreement as if such transactions had occurred on the first day of each
respective period. Such pro forma information is not necessarily indicative of
the Company's future results.
Unaudited Pro Forma Combined Condensed Statements of Operations for the
year ended September 26, 1999
(in thousands)
Inter-
Fonda CEG company Pro Forma Pro Forma
Historical Historical Elimination Adjustment Combined
-------------- ------------- ------------- ------------- -------------
Net sales $262,837 $106,539 $(27,513) $ 341,863
Cost of goods sold 225,509 84,421 (27,513) 282,417
-------------- ------------- -------------
Gross profit 37,328 22,118 59,446
-------------- ------------- -------------
Selling, general and
administrative 28,810 22,201 51,011
Other (income) expense, net (963) 418 (545)
-------------- ------------- -------------
Income from operations 9,481 (501) 8,980
Interest expense, net 11,926 4,816 $ (350)(a) 16,392
-------------- ------------- ------------- -------------
Income (loss) before income tax (2,445) (5,317) 350 (7,412)
Income tax provision (benefit) (577) (1,810) 137 (2,250)
============== ============= ============= ============= =============
Net income (loss) $ (1,868) $ (3,507) $ - $ 213 $ (5,162)
============== ============= ============= ============= =============
See note to unaudited pro forma combined condensed statements of operations
19
Unaudited Pro Forma Combined Condensed Statements of Operations for the Nine
week transition period ended September 27, 1998
(in thousands)
Inter-
Fonda CEG company Pro Forma Pro Forma
Historical Historical Elimination Adjustments Combined
-------------- ------------- ------------- ------------- -------------
Net sales $ 42,593 $ 23,586 $ (6,935) $ 59,244
Cost of goods sold 36,126 18,477 (6,935) 47,668
-------------- ------------- -------------
Gross profit 6,467 5,109 11,576
-------------- ------------- -------------
Selling, general and
administrative 5,601 3,447 9,048
Other (income) expense, net (351) 86 (265)
-------------- ------------- -------------
Income from operations 1,217 1,576 2,793
Interest expense, net 1,796 921 $ (61)(a) 2,656
-------------- ------------- ------------- -------------
Income (loss) before income tax (579) 655 61 137
Income tax provision (benefit) (238) 261 24 47
============== ============= ============= ============= =============
Net income (loss) $ (341) $ 394 $ - $ 37 $ 90
============== ============= ============= ============= =============
Unaudited Pro Forma Combined Condensed Statements of Operations for the year
ended July 26, 1998
(in thousands)
Inter-
Fonda CEG company Pro Forma Pro Forma
Historical Historical Elimination Adjustments Combined
-------------- ------------- ------------- ------------- -------------
Net sales $271,402 $ 86,153 $(18,586) $ 338,969
Cost of goods sold 222,509 63,856 (18,586) 267,779
-------------- ------------- -------------
Gross profit 48,893 22,297 71,190
-------------- ------------- -------------
Selling, general and
administrative 34,450 20,896 55,346
Other (income) expense, net (14,947) 82 (14,865)
-------------- ------------- -------------
Income from operations 29,390 1,319 30,709
Interest expense, net 12,006 3,695 $ (131)(a) 15,570
-------------- ------------- ------------- -------------
Income (loss) before income tax 17,384 (2,376) 131 15,139
Income tax provision (benefit) 7,127 (953) 51 6,225
============== ============= ============= ============= =============
Net income (loss) $ 10,257 $ (1,423) $ - $ 80 $ 8,914
============== ============= ============= ============= =============
See note to unaudited pro forma combined condensed statements of operations
20
Unaudited Pro Forma Combined Condensed Statements of Operations for the
year ended July 27, 1997
(in thousands)
Inter-
Fonda CEG company Pro Forma
Historical Historical Elimination Combined
-------------- -------------- ------------- -------------
Net sales $ 252,513 $ 72,256 $ (7,751) $ 317,018
Cost of goods sold 201,974 49,705 (7,751) 243,928
-------------- -------------- -------------
Gross profit 50,539 22,551 73,090
-------------- -------------- -------------
Selling, general and
administrative 31,527 18,772 50,299
Other income, net (1,608) - (1,608)
-------------- -------------- -------------
Income from operations 20,620 3,779 24,399
Interest expense, net 9,017 2,236 11,253
-------------- -------------- -------------
Income before income tax 11,603 1,543 13,146
Income tax provision 4,872 619 5,491
-------------- -------------- ------------- -------------
Net income before
extraordinary item $ 6,731 $ 924 $ - $ 7,655
============== ============== ============= =============
Note to Unaudited Pro Forma Combined Condensed Statements of Operations:
(a) Reflects the interest rate differential resulting from the repayment of
CEG's debt, which was refinanced with borrowings under the Company's
revolving credit facility.
21
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 hereunto duly authorized.
THE FONDA GROUP, INC.
By: /s/ Hans H. Heinsen
-----------------------
Hans H. Heinsen
Chief Financial Officer
Date: February 25, 2000