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 quarterly period ended October 26, 1997
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)
21 LOWER NEWTON STREET
ST. ALBANS, VERMONT 05478
(802) 524-5966
(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 10, 1997: Class A: 128,635 Shares
Class B: 2,666 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 October 26, 1997 and July 27, 1997 (audited) 3
Statements of Income for the three months ended October 26, 1997
and October 27, 1996 4
Statements of Cash Flows for the three months ended
October 26, 1997 and October 27, 1996 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 10
Signatures 11
2
PARTI - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FONDA GROUP, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
OCTOBER 26, JULY 27,
1997 1997
----------- --------
(unaudited)
ASSETS
Current assets:
Cash $ 2,339 $ 5,908
Accounts receivable, less allowance for doubtful
accounts of $1,033 and $961, respectively 36,525 30,009
Due from affiliates 1,037 1,207
Inventories 42,771 40,834
Deferred income taxes 6,752 6,780
Refundable income taxes 1,621 1,657
Other current assets 940 4,178
-------- --------
Total current assets 91,985 90,573
Property, plant and equipment, net 60,068 59,261
Note receivable from affiliate 2,600 2,600
Goodwill, net 15,226 15,405
Other assets, net 11,589 11,765
-------- --------
$181,468 $179,604
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,265 $ 7,340
Accrued expenses 20,687 24,611
Current maturities of long-term debt 583 619
-------- --------
Total current liabilities 33,535 32,570
Long-term debt 130,304 122,368
Other liabilities 950 1,436
Deferred income taxes 6,906 6,144
-------- --------
Total liabilities 171,695 162,518
Redeemable common stock, $.01 par value, 7,000 shares issued,
6,500 shares outstanding 2,092 2,076
Stockholders' equity 7,681 15,010
-------- --------
$181,468 $179,604
======== ========
See notes to financial statements
3
THE FONDA GROUP, INC.
STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
--------------------------
OCTOBER 26, OCTOBER 27,
1997 1996
----------- -----------
Net sales $ 70,658 $ 66,283
Cost of goods sold 55,983 50,698
-------- --------
Gross profit 14,675 15,585
Selling, general and administrative expenses 9,949 10,161
-------- --------
Income from operations 4,726 5,424
Interest expense, net 2,936 2,215
-------- --------
Income before income taxes 1,790 3,209
Provision for income taxes 751 1,348
-------- --------
Net income $ 1,039 $ 1,861
======== ========
See notes to financial statements.
4
THE FONDA GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
-------------------------------
OCTOBER 26, OCTOBER 27,
1997 1996
-------------- --------------
Operating activities:
Net income $ 1,039 $ 1,861
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,350 1,259
Amortization of debt issuance costs 141 99
Provision for doubtful accounts 71 75
Deferred income taxes 789 574
Interest capitalized on debt -- 173
Changes in assets and liabilities:
Accounts receivable (6,587) (4,208)
Due from affiliates 170 (143)
Inventories (1,937) (3,498)
Refundable income taxes 37 476
Other current assets 3,238 110
Accounts payable and accrued expenses 516 919
Other (183) (312)
------- -------
Net cash used in operating activities (1,356) (2,615)
------- -------
Investing activities:
Capital expenditures (2,021) (642)
Proceeds from disposition of equipment 260 --
------- -------
Net cash used in investing activities (1,761) (642)
------- -------
Financing activities:
Net increase in revolving credit agreement borrowings 8,049 3,351
Repayments of long-term debt (149) (1,414)
Acquisition of common stock for treasury (8,352) --
------- -------
Net cash (used in) provided by financing activities (452) 1,937
------- -------
Net decrease in cash (3,569) (1,320)
Cash, beginning of period 5,908 1,467
------- -------
Cash, end of period $ 2,339 $ 147
======= =======
Supplemental cash flow information:
Cash paid (refunded) during the period for:
Interest, including $192 capitalized in Fiscal 1998 $ 5,959 $ 1,046
Income taxes, net of refunds $ (71) $ 296
See notes to financial statements.
5
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements as of October 26, 1997 and for the three months
ended October 26, 1997 and October 27, 1996 are unaudited but, in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments and accruals) which The Fonda Group, Inc. (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. Certain amounts for the three months ended October 27, 1996 have
been restated to conform to current period presentation.
2. INVENTORIES
Inventories consist of the following (in thousands):
OCTOBER 26, JULY 27,
1997 1997
---------- ----------
Raw materials $ 19,188 $ 18,143
Work-in-process 378 391
Finished goods 21,226 20,345
Other 1,979 1,955
---------- ----------
$ 42,771 $ 40,834
=========== ===========
3. TREASURY STOCK
In September 1997, 61,865 shares of Class A Common Stock were redeemed for
$8.4 million and have been included as Treasury Stock within Stockholders'
Equity. The redemption was made pursuant to an offer by the Company to
repurchase up to 74,000 shares of common stock at $135 per share from its
stockholders on a pro rata basis. Management expects that up to 10,635
additional shares of Class A Common Stock will be repurchased later in Fiscal
1998 pursuant to this offer.
4. CONTINGENCIES
The Company hosts a co-generation facility, owned by an independent power
provider, at its tissue mill in Gouverneur, New York. This co-generation
facility generates power sold under a long-term contract to Niagara Mohawk
Power Corporation ("Niagara") and produces steam for internal use at the tissue
mill. The Company has a long term contract with the independent power provider
for which the Company expects to receive substantial cost savings in calendar
1997 and the next 40 years thereafter. In July 1997, Niagara announced its
intention to seek modifications or terminate a number of contracts with
independent power providers, including the contract related to the
co-generation facility at the Company's tissue mill. At this time, the
Company is unable to assess what impact, if any, will occur as a result of such
intention.
5. SUBSEQUENT EVENT
In December 1997, the Company entered into an agreement to purchase
certain assets of a small manufacturer of white paper plates located in the
southeastern United States. The Company expects this transaction to close in
January 1998; however, there can be no assurance that this transaction will be
consummated.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion 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 such as environmental
matters and litigation.
GENERAL
The Company is a converter and marketer of paperboard and tissue
products, the selling prices of which typically follow the general movement in
the cost of such principal raw materials. This is particularly true with
respect to commodity products, such as coated and uncoated white paper plates.
Operating margins tend to improve when raw materials costs and selling prices
are rising and tend to decrease when raw materials costs and selling prices are
declining. The actual impact on the Company of raw materials cost changes is
affected by a number of factors including the level of inventories at the time
of a cost change, the specific timing and frequency of cost changes, and the
lead and lag time that generally accompanies the implementation of both raw
materials cost and subsequent selling price changes. However, over time the
Company believes that it is able to maintain relatively stable margins between
its selling prices and raw materials costs.
The Company's operations are moderately seasonal. Income from
operations tends to be greater during the first and fourth quarters of the
fiscal year than during the second and third quarters.
7
RESULTS OF OPERATIONS
THREE MONTHS ENDED
--------------------------------------------------
OCTOBER 26, 1997 OCTOBER 27, 1996
---------------------- -----------------------
% OF % OF
NET NET
AMOUNT SALES AMOUNT SALES
------------ --------- ------------ ----------
(Dollars in millions)
Net sales $70.7 100.0% $66.3 100.0%
Cost of goods sold 56.0 79.2 50.7 76.5
----- ----- ----- -----
Gross profit 14.7 20.8 15.6 23.5
Selling, general and
administrative expenses 10.0 14.1 10.2 15.3
----- ----- ----- -----
Income from operations 4.7 6.7 5.4 8.2
Interest expense, net 2.9 4.1 2.2 3.3
----- ---- ----- -----
Income before taxes 1.8 2.6 3.2 4.9
Income tax expense 0.8 1.1 1.3 2.0
----- ---- ----- -----
Net income $1.0 1.5% $ 1.9 2.9%
===== ==== ===== =====
THREE MONTHS ENDED OCTOBER 26, 1997 COMPARED TO THREE MONTHS ENDED
OCTOBER 27, 1996
Net sales in the first quarter of Fiscal 1998 increased $4.4 million, or
7%, to $70.7 million, including an increase in net sales of $5 million in the
Company's converting operations. Sales volume in the converting operations
increased 11% in the institutional markets and 3% in the consumer markets,
primarily due to sales volume from businesses acquired in the fourth quarter of
Fiscal 1997. The increase in sales volume was partially offset by a slight
decline in average selling prices, primarily a 3% decline in the consumer
markets. Net sales of tissue mill products declined $.6 million as a result of
lower volume due to competitive market conditions.
Gross profit in the first quarter of Fiscal 1998 decreased $.9 million, or
6%, to $14.7 million. As a percentage of net sales, gross profit declined from
23.5% in the first quarter of Fiscal 1997 to 20.8% in the first quarter of
Fiscal 1998. Gross profits in the converting operations remained unchanged as
the results of operations from businesses acquired in the fourth quarter of
Fiscal 1997 were offset by increased costs of paperboard, which have yet to be
recovered through price adjustments. Gross profits of tissue mill products
declined $1 million due to the decline in net sales discussed above, as well as
increased manufacturing costs resulting from the start-up of a second paper
machine.
Selling, general and administrative expenses in the first quarter of
Fiscal 1998 decreased $.2 million, or 2%, to $9.9 million. As a percentage of
net sales, selling, general and administrative expenses decreased from 15.3% in
the first quarter of Fiscal 1997 to 14.1% in the first quarter of Fiscal 1998.
Income from operations decreased $.7 million, or 13% due to the reasons
discussed above. As a percentage of net sales, income from operations decreased
from 8.2% in the first quarter of Fiscal 1997 to 6.7% in the first quarter of
Fiscal 1998.
8
Interest expense, net of interest income, increased $.7 million, or 33%,
due to higher borrowing levels resulting from the issuance in the third quarter
of Fiscal 1997 of $120 million of 9 1/2% Senior Subordinated Notes due 2007,
which replaced higher interest rate debt.
As a result of the above, net income was $1 million in the first quarter
of Fiscal 1998 compared to $1.9 million in the first quarter of Fiscal 1997.
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 used by operating activities was $1.4 million in the first
quarter of Fiscal 1998 compared to $2.6 million in the first quarter of Fiscal
1997. The use of cash from operations in both periods reflects the normal
seasonal buildup of accounts receivable in the first fiscal quarter.
Capital expenditures in the first quarter of Fiscal 1998 were $2 million,
including $1.4 million related to the installation of a second paper machine at
the Company's tissue mill. The remaining $.6 million in the first quarter of
Fiscal 1998 and the capital expenditures in the first quarter of Fiscal 1997
were for routine capital improvements.
At October 26, 1997, $8 million was outstanding under the Company's
revolving credit agreement and $37.6 million was the maximum advance available
based upon eligible collateral.
In September 1997, 61,865 shares of Class A Common Stock were redeemed for
$8.4 million pursuant to an offer by the Company to repurchase up to 74,000
shares of its common stock at $135 per share from its stockholders on a pro
rata basis. Management expects that up to 10,635 additional shares of Class A
Common Stock will be repurchased later in Fiscal 1998 pursuant to this offer.
The Company incurred no material costs for compliance with
environmental laws and regulations during the first quarter of either Fiscal
1998 or Fiscal 1997.
The Company believes that cash generated by operations, combined with
amounts available under the revolving credit agreement, will be sufficient to
meet its capital expenditure needs, debt service requirements and working
capital needs for the foreseeable future. The Company may need to obtain
additional financing to pursue additional acquisitions; however, there can be
no assurance that the Company will be able to obtain such financing or on terms
favorable to the Company.
9
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).
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. (the
"Initial Purchasers").
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.
27.1 Financial Data Schedule.
(b) No reports were filed on Form 8-K during the first quarter ended
October 26, 1997.
10
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 10, 1997
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)
11