UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(mark one)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the nine week transition period from July 27, 1998 to September 27, 1998
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) 235-1036
(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 December 1, 1998: 100 Shares
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 September 27, 1998 and July 26, 1998 (audited) 3
Statements of Operations for the nine weeks ended September 27, 1998
and the thirteen weeks ended October 26, 1997 4
Statements of Cash Flows for the nine weeks ended September 27, 1998
and the thirteen weeks ended October 26, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
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)
September 27, July 26,
1998 1998
-------------- -------------
(unaudited)
ASSETS
Current assets:
Cash $ 8,262 $ 16,361
Accounts receivable, less allowance for doubtful
accounts of $804 and $789, respectively 31,494 29,385
Due from affiliates 1,001 1,584
Inventories 37,223 34,803
Deferred income taxes 5,414 5,469
Other current assets 2,243 2,086
-------------- -------------
Total current assets 85,637 89,688
Property, plant and equipment, net 48,127 48,151
Goodwill, net 20,532 21,462
Other assets, net 19,671 19,227
-------------- -------------
TOTAL ASSETS $ 173,967 $ 178,528
============== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 4,753 $ 7,077
Accrued expenses 22,148 23,863
Income taxes payable 632 1,004
Current maturities of long-term debt 574 595
-------------- -------------
Total current liabilities 28,107 32,539
Long-term debt 121,735 121,767
Other liabilities 1,900 1,896
Deferred income taxes 5,011 4,771
-------------- -------------
Total liabilities 156,753 160,973
Stockholder's equity 17,214 17,555
============== =============
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 173,967 $ 178,528
============== =============
See notes to financial statements.
3
THE FONDA GROUP, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
Nine Weeks Thirteen Weeks
Ended Ended
September 27, October 26,
1998 1997
------------- --------------
Net sales $ 42,679 $ 70,658
Cost of goods sold 36,126 57,519
------------- --------------
Gross profit 6,553 13,139
Selling, general and administrative expenses 5,336 8,413
------------- --------------
Income from operations 1,217 4,726
Interest expense (net of interest income
of $251 and $52) 1,796 2,936
------------- --------------
Income (loss) before income taxes (579) 1,790
Income tax provision (benefit) (238) 751
============= ==============
Net income (loss) $ (341) $ 1,039
============= ==============
See notes to financial statements.
4
THE FONDA GROUP, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Weeks Thirteen Weeks
Ended Ended
September 27, October 26,
1998 1997
-------------- --------------
Operating activities:
Net income (loss) $ (341) $ 1,039
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,039 1,491
Provision for doubtful accounts 20 71
Deferred income taxes 295 789
Gain on building and equipment dispositions (201) (157)
Changes in assets and liabilities:
Accounts receivable (2,130) (6,587)
Due from affiliates 583 170
Inventories (2,420) (1,937)
Other current assets 143 3,238
Accounts payable and accrued expenses (4,126) 516
Income taxes payable (373) 37
Other (81) (26)
-------------- --------------
Net cash used in operating activities (7,592) (1,356)
-------------- --------------
Investing activities:
Capital expenditures (748) (2,021)
Proceeds from building and equipment dispositions 294 260
-------------- --------------
Net cash used in investing activities (454) (1,761)
-------------- --------------
Financing activities:
Net increase in revolving credit borrowings - 8,049
Repayments of long-term debt (53) (149)
Redemption of common stock - (8,352)
-------------- --------------
Net cash used in financing activities (53) (452)
-------------- --------------
Net decrease in cash (8,099) (3,569)
Cash, beginning of period 16,361 5,908
-------------- --------------
Cash, end of period $ 8,262 $ 2,339
============== ==============
Supplemental cash flow information:
Cash paid (refunded) during the period for:
Interest, including $192 capitalized in the
thirteen week 1997 period $ 5,711 $ 5,959
Income taxes, net of refunds (165) (71)
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. Certain amounts for the prior period have been reclassified to
conform with current period presentation.
On October 22, 1998, the Board of Directors approved a change in the
Company's fiscal year end from a fifty-two or fifty-three week period which ends
on the last Sunday in July to the same number of periods which ends on the last
Sunday in September. The nine week period from July 27, 1998 to September 27,
1998 will be treated as a transition period that will not be part of the fiscal
year ended July 26, 1998 or Fiscal 1999 which will end on September 26, 1999.
2. INVENTORIES
Inventories consist of the following (in thousands):
September 27, July 26,
1998 1998
------------ ----------
Raw materials and supplies $ 16,299 $ 15,663
Work-in-process 422 194
Finished goods 20,502 18,946
----------- ----------
$ 37,223 $ 34,803
=========== ==========
6
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.
In October 1998, the Company changed its fiscal year end to the last
Sunday in September. The following discussion compares the nine week transition
period ended September 27, 1998 (the "Nine Week Transition Period") to the
thirteen week period ended October 26, 1997 (the "1998 First Quarter"). The
Company did not recast the data for the nine week period ended September 28,
1997 because certain review procedures and significant judgmental estimates that
are implemented on a quarterly basis only, were not implemented for the nine
week period ended September 28, 1997. As a result of changes in certain computer
systems, the Company believes it would be impractical to implement these review
procedures and make the judgmental estimates to recast the prior nine week
period.
General
The Company, a wholly owned subsidiary of SF Holdings Group, Inc. ("SF
Holdings"), is a converter and marketer of disposable paper food service
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.
The Company's business is moderately seasonal. Sales and income from
operations tend to be highest from May through November.
Results of Operations
Nine Weeks Ended Thirteen Weeks Ended
September 27, October 26,
1998 1997
-------------------------- --------------------------
Amount % of Net Sales Amount % of Net Sales
------------- -------------- -------------- --------------
(Dollars in millions)
Net sales $ 42.7 100.0 % $ 70.7 100.0 %
Cost of goods sold 36.1 84.6 57.5 81.4
------------- ------------ -------------- -----------
Gross profit 6.6 15.4 13.1 18.6
Selling, general and
administrative expenses 5.3 12.5 8.4 11.9
------------- ------------ -------------- -----------
Income from operations 1.2 2.9 4.7 6.7
Interest expense, net 1.8 4.2 2.9 4.2
------------- ------------ -------------- -----------
Income (loss) before taxes (0.6) (1.4) 1.8 2.5
Income taxes provision (benefit) (0.2) (0.6) 0.8 1.1
------------- ------------ -------------- -----------
Net income (loss) $ (0.3) (0.8)% $ 1.0 1.5 %
============= ============ ============== ===========
7
Nine Weeks Ended September 27, 1998 Compared to Thirteen Weeks Ended October 26,
1997
Net sales were $42.7 million in the Nine Week Transition Period and
$70.7 million in the 1998 First Quarter. Net sales decreased $3.4 million from
$46.1 million for the comparable nine week period ended September 28, 1997,
which included $3.0 million of net sales of tissue mill products relating to
operations that were sold in March 1998. For the comparable nine week periods,
sales volume in the Company's converting operations increased 2.7% in the
consumer market and decreased 9.4% in the institutional market. Average selling
prices decreased 4.7% in the consumer market and increased 13.3% in the
institutional market. The reduction in selling prices in the consumer market
primarily reflects lower pricing of certain party goods products sold to
Creative Expressions Group ("CEG"), an affiliate of the Company. Under the terms
of the License Agreement entered into in March 1998, CEG has the right to sell,
market, distribute and manufacture certain party goods previously manufactured
and distributed by the Company under various brands. In connection therewith,
the Company receives a royalty of 5% of CEG's cash flow as determined in
accordance with a formula specified in such agreement. CEG has notified the
Company of its intention to focus solely on selling, marketing and distributing
and will outsource all of its manufacturing requirements. The Company has
historically manufactured party goods products for CEG and it expects to
continue to do so in the future. During the Nine Week Transition Period, the
reduction in sales revenues of such party goods products sold to CEG exceeded
royalty income by approximately $.7 million. In the institutional market, the
reduction in sales volume and offsetting increase in selling prices was
primarily due to a change in sales mix, whereby the Company emphasized the sale
of value added converted tissue products rather than commodity products.
Gross profit was $6.6 million in the Nine Week Transition Period and
$13.1 million in the 1998 First Quarter. As a percentage of net sales, gross
profit decreased from 18.6% in the 1998 First Quarter to 15.4% in the Nine Week
Transition Period. The Nine Week Transition Period was adversely affected by the
gross margin impact resulting from reduced selling prices of consumer products
in connection with the License Agreement, which were not sufficiently offset by
royalty revenues. The Company believes the reductions in net sales and gross
profit in connection with the License Agreement, reflect transition and timing
issues which are expected to be recovered in future periods, however, there can
be no assurance that such will occur.
Selling, general and administrative expenses were $5.3 million in the
Nine Week Transition Period and $8.4 million in the 1998 First Quarter. As a
percentage of net sales, selling, general and administrative expenses increased
from 11.9% in the 1998 First Quarter to 12.5% in the Nine Week Transition
Period. The sale of the Company's tissue mill operations, for which selling,
general and administrative expenses were low relative to net sales, was the
primary cause of this increase, and was partially offset by the reduction of
selling, marketing and distribution costs in the Nine Week Transition Period due
to the License Agreement.
Income from operations was $1.2 million in the Nine Week Transition
Period and $4.7 million in the 1998 First Quarter due to the reasons discussed
above. As a percentage of net sales, income from operations decreased from 6.7%
in the 1998 First Quarter to 2.9% in the Nine Week Transition Period.
Interest expense, net of interest income was $1.8 million in the Nine
Week Transition Period and $2.9 million in the 1998 First Quarter. Outstanding
debt levels and interest rates were comparable in the two periods.
The effective tax rate was 41% in the Nine Week Transition Period and
42% in the 1998 First Quarter. As a result of the above, the net loss was $.3
million in the Nine Week Transition Period compared to net income of $1.0
million in the 1998 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.
8
Net cash used in operating activities in the Nine Week Transition
Period was $7.6 million compared to $1.4 million in the 1998 First Quarter. The
increase in cash used is primarily due to the $1.4 million reduction in net
income and the receipt of $2.9 million from the settlement of a lawsuit in the
1998 First Quarter.
Capital expenditures in the Nine Week Transition Period were $.7
million primarily for routine capital improvements. The $2 million of capital
expenditures in the 1998 First Quarter included $1.4 million related to the
installation of the second paper machine at the Company's former tissue mill,
which was sold in March 1998.
The Company has outstanding $120 million of 9 1/2% Series A Senior
Subordinated Notes due 2007 (the "Notes") with interest payable semi-annually.
Payment of the principal of, and interest on, the Notes is subordinate in right
of payment to Senior Debt (as defined therein), which includes the Company's
revolving credit facility. The principal amount of the Notes is payable on
February 28, 2007. The Company may, at its election, redeem the Notes at any
time after March 1, 2002 at a redemption price equal to a percentage (104.750%
after March 1, 2002 and declining in annual steps to 100% after March 1, 2005)
of the principal amount thereof plus accrued interest. The Notes provide that
upon the occurrence of a Change of Control (as defined therein), the holders
thereof will have the option to require the redemption of the Notes at a
redemption price equal to 101% of the principal amount thereof plus accrued
interest.
The Company's revolving credit facility, which expires March 31, 2000,
provides up to $50 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 September 27,
1998, there was no outstanding balance and $39.3 million was the maximum advance
available based upon eligible collateral. At September 27, 1998, borrowings were
available at the bank's prime rate (8.50%) plus .25% and at LIBOR (approximately
5.40%) plus 2.25%.
Pursuant to the terms of the instruments governing the indebtedness of
the Company, the Company is subject to certain affirmative and negative
covenants customarily contained in agreements of this type, including, without
limitation, covenants that restrict, subject to specified exceptions (i)
mergers, consolidations, asset sales or changes in capital structure, (ii)
creation or acquisition of subsidiaries, (iii) purchase or redemption of capital
stock or declaration or payment of dividends or distributions on such capital
stock, (iv) incurrence of additional indebtedness, (v) investment activities,
(vi) granting or incurrence of liens to secure other indebtedness, (vii)
prepayment or modification of the terms of subordinated indebtedness, and (viii)
engaging in transactions with affiliates. In addition, such debt instruments
restrict the Company's ability to pay dividends or make other distributions to
SF Holdings. The credit facility also requires that certain financial covenants
are satisfied.
Pursuant to the asset sale covenant under the indenture governing the
Notes, resulting from the receipt of proceeds from the sale of the tissue mill,
the Company is required to (i) reinvest approximately $10 million of the net
proceeds from the sale of the tissue mill in fixed assets within 270 days of
such disposition or (ii) offer to repurchase the Notes to the extent that such
amount has not been reinvested. As of November 30, 1998, the Company has
reinvested or has committed to reinvest amounts in excess of $10 million,
primarily in napkin and plate-making equipment.
During the Nine Week Transition Period, 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
Many of the Company's computer systems may be unable to process dates
beyond December 31, 1999. This could result in system failures or
miscalculations which could have a material adverse effect
9
on the Company's business, financial condition or results of operations. The
Company has implemented a Year 2000 compliance program intended to identify the
programs and infrastructures that could be effected by Year 2000 issues and to
resolve the problems that are identified on a timely basis.
The Company has completed the assessment phase, in which it has
identified potential Year 2000 issues, including those with respect to
information technology systems, technology embedded within equipment the Company
uses as well as equipment that interfaces with vendors and other third parties.
The Company is in the process of upgrading its hardware and software systems
which run most of the Company's data processing and financial reporting software
applications and consolidating certain of its in-house developed computer
systems into the upgraded systems. The upgraded systems are expected to be
operational and Year 2000 compliant by December 1998. All other information
technology systems, that are not currently Year 2000 compliant, are also
expected to be compliant by December 1998. In addition, the Company is working
with vendors to ensure that its telephone systems and other embedded
technologies are Year 2000 compliant. EDI trading partners have been contacted,
and other key business partners are in the process of being contacted, to ensure
that key business transactions will be Year 2000 compliant. Furthermore, in the
event the Company is unable to meet certain key operational dates, the Company
believes its systems that are already Year 2000 compliant, as well as temporary
solutions to systems that are currently in place, and manual procedures would
allow the Company to ship product to customers and engage in other critical
business functions.
As of December 1, 1998, the Company estimates the total cost of its
Year 2000 program at $3.4 million, of which $1.2 million has been spent through
September 27, 1998, including $.2 million in the Nine Week Transition Period.
Future expenditures will be funded by cash flows from operations or from
borrowings under the Company's credit facility. However, there can be no
assurance that the Company will identify all Year 2000 issues in its computer
systems in advance of their occurrence or that it will be able to successfully
remedy all problems that are discovered. Failure by the Company and/or its
significant vendors and customers to complete Year 2000 compliance programs in a
timely manner could have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, the revenue stream
and financial stability of existing customers may be adversely impacted by Year
2000 problems which could cause fluctuations in the Company's revenues and
operating profitability.
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 # 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. and the Company.
27.1 * Financial Data Schedule.
-----------------
* filed herein.
(b) A report on Form 8-K was filed on October 30, 1998 under item 8 for the
change in the Company's year-end from the last Sunday in July to the last
Sunday in September.
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: December 4, 1998
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)