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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 April 26, 1998 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) 235-1036
(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 June 1, 1998: 100 Shares
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THE FONDA GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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<CAPTION>
<S> <C>
Item 1. Financial Statements (unaudited): Page
Balance Sheets as of April 26, 1998 and July 27, 1997 (audited) 3
Statements of Income for the three and nine months ended April 26, 1998
and April 27, 1997 4
Statements of Cash Flows for the nine months ended April 26, 1998
and April 27, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FONDA GROUP, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 26, JULY 27,
1998 1997
--------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,655 $ 5,908
Accounts receivable, less allowance for doubtful
accounts of $569 and $961, respectively 26,751 30,009
Due from affiliates 5,920 1,207
Inventories 38,450 40,834
Deferred income taxes 6,855 6,780
Refundable income taxes - 1,657
Other current assets 1,212 4,178
--------------- ----------------
Total current assets 82,843 90,573
Property, plant and equipment, net 48,907 59,261
Goodwill, net 22,047 15,405
Other assets, net 24,877 14,365
--------------- ----------------
$ 178,674 $ 179,604
=============== ================
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable $ 11,634 $ 7,340
Accrued expenses 21,706 24,611
Current maturities of long-term debt 466 619
--------------- ----------------
Total current liabilities 33,806 32,570
Long-term debt 122,443 122,368
Other liabilities 1,676 1,436
Deferred income taxes 7,368 6,144
--------------- ----------------
Total liabilities 165,293 162,518
Redeemable common stock, $.01 par value, 7,000 shares issued,
6,500 shares outstanding at July 27, 1997 - 2,076
Stockholders equity 13,381 15,010
=============== ================
$ 178,674 $ 179,604
=============== ================
</TABLE>
See notes to financial statements.
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THE FONDA GROUP, INC.
STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- ------------------------------------
APRIL 26, APRIL 27, APRIL 26, APRIL 27,
1998 1997 1998 1997
-------------- ------------- --------------- ------------------
<S> <C> <C> <C> <C>
Net sales $ 66,923 $ 60,165 $203,597 $ 184,544
Cost of goods sold 56,494 48,742 167,520 148,820
-------------- ------------- --------------- ------------------
Gross profit 10,429 11,423 36,077 35,724
Selling, general and
administrative expenses 8,671 7,699 26,003 24,128
Other income, net (9,099) - (9,566) -
-------------- ------------- --------------- ------------------
Income from operations 10,857 3,724 19,640 11,596
Interest expense, net 3,148 2,257 9,151 6,798
-------------- ------------- --------------- ------------------
Income before income taxes 7,709 1,467 10,489 4,798
Provision for income taxes 3,238 616 4,406 2,015
-------------- ------------- --------------- ------------------
Income before extraordinary
expense 4,471 851 6,083 2,783
Extraordinary expense, net - 3,495 - 3,495
============== ============= =============== ==================
Net income (loss) $ 4,471 $ (2,644) $ 6,083 $ (712)
============== ============= =============== ==================
</TABLE>
See notes to financial statements.
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THE FONDA GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------
APRIL 26, APRIL 27,
1998 1997
-------------- ---------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 6,083 $ (712)
Adjustments to reconcile net income (loss) to net cash
cash provided by operating activities:
Depreciation and amortization 4,153 3,475
Amortization and write-off of debt issuance costs 413 2,634
Elimination of unamortized debt discount - 2,108
Provision for doubtful accounts 113 99
Deferred income taxes 1,051 (910)
Gain on business disposition (9,325) -
Gain on sale of equipment (446) -
Interest capitalized on debt - 684
Changes in assets and liabilities (net of
business acquisitions and disposition):
Accounts receivable 2,153 (3,973)
Due from affiliates (4,713) 994
Inventories 1,673 (3,131)
Income taxes payable/refundable 3,218 (1,320)
Other current assets 2,885 160
Accounts payable and accrued expenses (434) 466
Other (482) 105
-------------- ---------------
Net cash provided by operating activities 6,342 679
-------------- ---------------
Investing activities:
Capital expenditures (6,245) (3,469)
Proceeds from business disposition 20,843 -
Proceeds from sale of equipment 574 -
Payments for business acquisitions (6,901) (3,416)
Payment for Management Services Agreement (7,000) -
Note receivable from affiliate - (2,600)
-------------- ---------------
Net cash provided by (used in) investing activities 1,271 (9,485)
-------------- ---------------
Financing activities:
Net increase (decrease) in revolving credit borrowings 390 (32,842)
Proceeds from long-term debt - 120,000
Repayments of long-term debt (468) (50,989)
Acquisition of common stock for treasury (9,788) -
Financing costs - (4,696)
-------------- ---------------
Net cash (used in) provided by financing activities (9,866) 31,473
-------------- ---------------
Net increase (decrease) in cash (2,253) 22,667
Cash, beginning of period 5,908 1,467
============== ===============
Cash, end of period $ 3,655 $ 24,134
============== ===============
Supplemental cash flow information:
Cash paid during the period for:
Interest, including $192 capitalized in Fiscal 1998 $ 7,484 $ 4,685
Income taxes, net of refunds $ 272 $ 1,630
</TABLE>
See notes to financial statements.
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THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
On March 12, 1998, SF Holdings Group, Inc. ("SF Holdings"), a Delaware
corporation principally owned by the majority stockholder of The Fonda Group,
Inc. (the "Company"), acquired 90% of the total outstanding common stock,
including 48% of the total voting common stock, of Sweetheart Holdings Inc.
("Sweetheart"). In connection therewith, the Company consummated the following
transactions:
(a) All of the outstanding shares of the Company were converted into
shares of SF Holdings pursuant to a merger whereby the stockholders of
the Company became stockholders of SF Holdings and the Company became
a wholly-owned subsidiary of SF Holdings (the "Merger"). Each share of
Class A and Class B common stock of the Company was converted into
47.6766 shares of Class A or Class B common stock, as the case may be,
of SF Holdings;
(b) The outstanding options to purchase Class A common stock of the
Company granted to the majority stockholder were converted into
options to purchase 715,149 shares of Class A common stock of SF
Holdings; and
(c) Outstanding warrants to purchase shares of Class B common stock of the
Company were exercised and such shares were converted into 564,586
shares of Class B common stock of SF Holdings.
The financial statements as of April 26, 1998 and for the three and
nine months ended April 26, 1998 and April 27, 1997 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.
Certain amounts for prior periods have been reclassified to conform with
current period presentation.
2. INVENTORIES
Inventories consist of the following (in thousands):
APRIL 26, JULY 27,
1998 1997
-------------- ---------------
Raw materials $ 16,130 $ 18,143
Work in process 278 391
Finished goods 20,010 20,345
Other 2,032 1,955
============== ===============
$ 38,450 $ 40,834
============== ===============
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3. STOCKHOLDERS' EQUITY
The changes in stockholders' equity consist of the following (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 26, APRIL 27,
1998 1997
-------------- --------------
<S> <C> <C>
Balance at beginning of fiscal year $ 15,010 $ 11,873
Net income (loss) 6,083 (712)
Treasury stock repurchase (9,787) -
Accretion of redeemable common stock (48) (49)
Transfer of liquidation value of redeemable common stock 2,123 -
============== ==============
Balance at end of period $ 13,381 $ 11,112
============== ==============
</TABLE>
In connection with the Merger, as discussed in Note 1, the $2.1
million accreted value of the redeemable common stock at that date was credited
to Stockholders' Equity.
In September 1997 and January 1998, the Company redeemed 61,865 and
10,635 shares of Class A common stock (pre-Merger shares) for $8.4 million and
$1.4 million, respectively. The redemption was made pursuant to an offer by the
Company to repurchase up to 74,000 shares of common stock (pre-Merger shares)
at $135 per share from its stockholders on a pro rata basis. The Company has
completed such stock repurchase. On March 12, 1998, such treasury stock was
canceled in the Merger.
4. OTHER INCOME, NET
On March 24, 1998, the Company consummated an agreement to sell
substantially all of the fixed assets and certain related working capital of
its Natural Dam tissue mill (the "Mill"), pursuant to which the Company
realized net proceeds of $24.6 million, including a note receivable of $3.7
million, and recorded a pre-tax gain of $9.3 million. The Mill had net sales,
excluding intercompany sales and operating income of $19.3 million and $4.1
million, respectively, in Fiscal 1997, $12.7 million and $0.9 million in the
Fiscal 1998 nine month period and $13.8 million and $2.7 million in the Fiscal
1997 nine month period.
In February 1998, the Company decided to close its Jacksonville,
Florida facility and relocate such manufacturing capacity and equipment to
other sites. The Company accrued $0.3 million primarily related to severance
and continuing lease costs after the facility closed.
5. EXTRAORDINARY EXPENSE, NET
In the third quarter of fiscal 1997, the Company incurred a $3.5
million extraordinary expense (net of a $2.5 million income tax benefit) in
connection with the early retirement of debt. The expense consisted of the
write-off of unamortized debt issuance costs, elimination of unamortized debt
discount and prepayment penalties.
6. RELATED PARTY TRANSACTIONS
On March 12, 1998, the Company entered into an agreement with Creative
Expressions Group, Inc. ("CEG"), an affiliate of the Company, whereby CEG will
manufacture and distribute certain party goods products currently manufactured
by the Company for a period of five years, subject to extension. In connection
therewith, the Company will receive an annual royalty equal to 5% of CEG's cash
flow, as determined in accordance with a formula specified in such agreement.
Pursuant to such agreement, during a transition period, the Company is
manufacturing such party goods products for CEG on a contract basis. The
Company believes that the terms of such agreement are at least as favorable as
those it could otherwise
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have obtained from unrelated third parties and were negotiated on an arm's
length basis. In Fiscal 1997, the Company's net sales of such party goods
products were approximately $30 million. For the nine months ended April 25,
1998, net sales to CEG were $7.1 million and royalty income was not
significant. Receivables from CEG at April 25, 1998 were $5.0 million.
On March 12, 1998, the Company amended certain terms of the $2.6
million Promissory Note dated February 27, 1997, made by CEG in favor of the
Company (the "CEG Note"). The 10% annual interest on the CEG Note was converted
to pay-in-kind, the note's 2002 maturity was extended for an additional three
years and the note was made subordinate to Senior Debt (as such term is defined
therein). In connection with such amendment, Fonda was also issued a warrant to
purchase, for a nominal amount, 2.5% of CEG's common stock. The Company
believes that the terms of such loan and the amendments thereto are no more
favorable to CEG than those that CEG could otherwise have obtained from
unrelated third parties and such terms were negotiated on an arm's length
basis.
On March 12, 1998, SF Holdings and the Company agreed to file
consolidated Federal income tax returns and entered into a Tax Sharing
Agreement, pursuant to which the Company will pay SF Holdings its allocable
share of the consolidated group's Federal income tax liability, which, in
general, will equal the tax liability the Company would have paid if it had
filed a separate Federal income tax return.
On March 12, 1998 the Company entered into an agreement with SF
Holdings whereby the Company acquired for $7.0 million substantially all of SF
Holdings' rights under a Management Services Agreement dated August 31, 1993,
as amended, and pursuant to which the Company will have the right, subject to
the direction of the board of directors of Sweetheart, to manage Sweetheart's
day-to-day operations. In consideration of the Company's performance of
services, the Company will be entitled to receive management fees from
Sweetheart of $.7 million, $.9 million and $1.1 million in the first, second
and third years, respectively, and $1.6 million per year for the remaining five
years of the Management Services Agreement. The Company believes that the terms
of such agreement 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.
7. OTHER BUSINESS DEVELOPMENTS
In January 1998, the Company acquired certain net assets of
Leisureway, Inc., a manufacturer of white paper plates, for $7.2 million,
including deferred payments of $0.3 million and acquisition costs, subject to a
working capital adjustment. The excess of the purchase price over the Company's
preliminary evaluation of the fair value of the net assets acquired was $7.5
million and has been recorded as goodwill.
In February 1998, the Company reached an agreement with the owner of
the co-generation facility hosted by the Company at the Mill, whereby the owner
of such facility will terminate its obligation to supply steam to the Mill and
to make certain land lease payments in return for a lump sum cash payment and
the delivery of certain equipment. The consummation of this agreement is
subject to various conditions, including the negotiation and execution of a
definitive agreement and the consummation of a master restructuring agreement
among Niagara Mohawk Power Corporation and sixteen independent power producers,
including the owner of such facility. The Company expects to record a gain upon
the consummation of the transaction contemplated by this agreement, however,
there can be no assurance that such transaction will be consummated.
8. SUBSEQUENT EVENTS
In May 1998, the Company purchased a 38.2% ownership interest in Fibre
Marketing Group, LLC ("Fibre Marketing"), a limited liability company engaged
in the waste paper recovery business, from a director of the Company for $0.2
million. Four M Corporation, an affiliate of the Company, owns a 50% interest
in Fibre Marketing. In Fiscal 1997, net sales to Fibre Marketing were $3.6
million. The Company
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believes that the terms on which it purchased such interest was at least as
favorable as those it could otherwise have obtained from an unrelated third
party and were negotiated on an arms length basis.
In May 1998, the Company decided to close its administrative offices
in St. Albans, Vermont and relocate such offices, including its principal
executive offices, to Oshkosh, Wisconsin. The costs associated with such
relocation will be recorded in the fourth fiscal quarter.
9
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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.
GENERAL
The Company is a converter and marketer of paperboard and tissue
products. The selling prices for the Company's raw materials fluctuate. This is
particularly true with respect to commodity products, such as coated and
uncoated white paper plates. The Company's selling prices historically follow
the changes in raw material prices. The actual impact on the Company from raw
materials 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.
However, over time the Company believes that it is able to maintain relatively
stable margins between its selling prices and raw materials prices.
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.
YEAR 2000
The Company has implemented Year 2000 compliance programs designed to
ensure that its computer systems and applications will function properly beyond
1999. The Company expects such programs to be substantially completed by the
end of 1999. The Company believes that adequate resources, both internal and
external, have been allocated for this purpose. Spending for these Year 2000
compliance programs, including Fiscal 1998 spending, is estimated to be $1.8
million and will be funded by cash flow from operations or borrowings under the
Company's credit facility. However, there can be no assurance that the Company
will identify all Year 2000 date conversion problems in its computer systems in
advance of their occurrence or that the Company will be able to successfully
remedy all problems that are discovered. Failure by the Company and/or their
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 and 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.
RECENT DEVELOPMENTS
On March 24, 1998, the Company consummated an agreement with Cellu
Tissue Holdings, Inc. ("Cellu"), whereby Cellu acquired substantially all of
the fixed assets and certain related working capital (the "Mill Disposition")
of the Natural Dam tissue mill in Gouverneur, New York (the "Mill"), and the
Company realized net proceeds of $24.6 million, including a note receivable of
$3.7 million, and recorded a pre-tax gain of $9.3 million. The Mill produced
tissue mill products, primarily specialty "jumbo" rolls of tissue.
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In February 1998, the Company reached an agreement with Kamine
Besicorp Natural Dam L.P. ("Kamine"), the owner of the co-generation facility
hosted by the Company at the Mill, whereby Kamine will terminate its obligation
to supply steam to the Mill and to make certain land lease payments in return
for a lump sum cash payment and the delivery of certain equipment. The
consummation of this agreement is subject to various conditions, including the
negotiation and execution of a definitive agreement and the consummation of a
master restructuring agreement among Niagara Mohawk Power Corporation and
sixteen independent power producers, including Kamine. The Company expects to
record a gain upon the consummation of the transaction contemplated by this
agreement, however, there can be no assurance that such transaction will be
consummated.
On May 27, 1998, the Company decided to close its administrative
offices in St. Albans, Vermont and to relocate such offices, including its
principal executive offices, to the Company's Oshkosh, Wisconsin facility. The
costs associated with such relocation will be recorded in the fourth fiscal
quarter.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------- ----------------------------------------------
APRIL 26, 1998 APRIL 27, 1997 APRIL 26, 1998 APRIL 27, 1997
------------------- ------------------- -------------------- -------------------
% OF % OF % OF % OF
NET NET NET NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES AMOUNT SALES
---------- -------- ---------- ------- ----------- -------- ----------- -------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 66.9 100.% $ 60.2 100.% $ 203.6 100.% $ 184.5 100.%
Cost of goods sold 56.5 84.4 48.7 81.0 167.5 82.3 148.8 80.6
---------- -------- ---------- ------- ----------- -------- ----------- -------
Gross profit 10.4 15.6 11.4 19.0 36.1 17.7 35.7 19.4
Selling, general and
administrative expenses 8.7 13.0 7.7 12.8 26.0 12.8 24.1 13.1
Other income, net (9.1) (13.6) (9.6) (4.7)
---------- -------- ---------- ------- ----------- -------- ----------- -------
Income from operations 10.9 16.2 3.7 6.2 19.6 9.6 11.6 6.3
Interest expense, net 3.1 4.7 2.3 3.8 9.2 4.5 6.8 3.7
---------- -------- ---------- ------- ----------- -------- ----------- -------
Income before taxes 7.7 11.5 1.5 2.4 10.5 5.2 4.8 2.6
Income tax expense 3.2 4.8 0.6 1.0 4.4 2.2 2.0 1.1
---------- -------- ---------- ------- ----------- -------- ----------- -------
Income before
extraordinary expense $ 4.5 6.7% $ 0.9 1.4% $ 6.1 3.0% $ 2.8 1.5%
========== ======== ========== ======= =========== ======== =========== =======
</TABLE>
THREE MONTHS ENDED APRIL 26, 1998 COMPARED TO THREE MONTHS ENDED APRIL 27, 1997
Net sales increased $6.8 million, or 11.2%, to $66.9 million, in the
three months ended April 26, 1998 compared to $60.2 million in the three months
ended April 27, 1997. The increase was primarily due to increased sales volume
in converting operations from businesses acquired subsequent to the third
quarter of Fiscal 1997. Sales volume in the converting operations increased 18%
in the consumer markets and decreased less than 1% in the institutional
markets. Average selling prices increased 10% in the institutional markets and
decreased 3% in the consumer markets. Net sales of tissue mill products
decreased $0.5 million primarily due to the Mill Disposition on March 24, 1998.
Gross profit decreased $1.0 million, or 8.7%, to $10.4 million in the
three months ended April 26, 1998 compared to $11.4 million in the three months
ended April 27, 1997. This decrease is primarily the result of a $1.5 million
decrease in gross profit of tissue mill products, partially offset by a $0.5
million increase in gross profit in the converting operations. In the
converting operations, gross profits from businesses acquired subsequent to the
third quarter of Fiscal 1997
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were partially offset by increased costs of paperboard, which were not
recovered through price adjustments. The decrease in gross profit of tissue
mill products was a result of increased sales of lower margin white paper and
reduced sales of higher margin deep tone paper due to competitive market
conditions, as well as increased manufacturing costs resulting from the
start-up of the second paper machine. As a percentage of net sales, gross
profit decreased from 19.0% in the three months ended April 27, 1997 to 15.6%
in the three months ended April 26, 1998 due to the decline in gross profit of
tissue mill products.
Selling, general and administrative expenses increased $1.0 million,
or 12.6%, to $8.7 million in the three months ended April 26, 1998 compared to
$7.7 million in the three months ended April 27, 1997 primarily due to
increased selling expenses resulting from the increase in net sales. As a
percentage of net sales, selling, general and administrative expenses increased
slightly from 12.8% in the three months ended April 27, 1997 to 13.0% in the
three months ended April 26, 1998.
Other income, net includes a $9.3 million pre-tax gain on the sale of
the Mill. The gain was partially offset by closure cost accruals relating to
the decision to close the Jacksonville converting facility.
Income from operations increased $7.1 million to $10.9 million in the
three months ended April 26, 1998 compared to $3.7 million in the three months
ended April 27, 1997 due to the reasons discussed above. Excluding other
income, net, as a percentage of net sales, income from operations decreased
from 6.2% in the three months ended April 27, 1997 to 2.6% in the three months
ended April 26, 1998.
Interest expense, net of interest income, increased $0.9 million, or
39.4% to $3.1 million in the three months ended April 26, 1998 compared to $2.3
million in the three months ended April 27, 1997. The increase was due to
higher borrowing levels resulting from the issuance in the third quarter of
Fiscal 1997 of $120.0 million of 9 1/2% Senior Subordinated Notes due 2007,
(the "Senior Notes") which replaced higher interest rate debt.
As a result of the above and a 42% effective tax rate in both periods,
income before extraordinary items was $4.5 million in the three months ended
April 26, 1998 compared to $0.9 million in the three months ended April 27,
1997.
In the three months ended April 27, 1997, the Company incurred a $3.5
million extraordinary expense (net of a $2.5 million income tax benefit) in
connection with the early retirement of debt consisting of the write-off of
unamortized debt issuance costs, elimination of unamortized debt discount, and
prepayment penalties. As a result of the above, net income was $4.5 million in
the three months ended April 26, 1998 compared to a net loss of $2.6 million in
the three months ended April 27, 1997.
NINE MONTHS ENDED APRIL 26, 1998 COMPARED TO NINE MONTHS ENDED APRIL 27, 1997
Net sales increased $19.1 million, or 10.3%, to $203.6 million, in the
nine months ended April 26, 1998 compared to $184.5 million in the nine months
ended April 27, 1997. The increase was primarily due to increased sales volume
in converting operations from businesses acquired subsequent to the third
quarter of Fiscal 1997, and to a lesser extent increased sales volume in
converted tissue products. Sales volume in the converting operations increased
12% in the consumer markets and 7% in the institutional markets. Average
selling prices increased 5% in the
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institutional markets and decreased less than 1% in the consumer markets. Net
sales of tissue mill products declined $1.1 million resulting from a shift in
mix due to competitive market conditions, a nine day outage due to a severe ice
storm which interrupted the availability of electricity and steam and the sale
of The Mill on March 24, 1998. Increased sales of commodity white paper from
the new paper machine were offset by reduced sales of deep tone paper due to
competitive market conditions.
Gross profit increased $0.4 million, or 1.0%, to $36.1 million in the
nine months ended April 26, 1998 compared to $35.7 million in the nine months
ended April 27, 1997. This increase is primarily the result of a $3.3 million
increase in gross profit in the converting operations, partially offset by a
$2.9 million decrease in gross profit in tissue mill products. In the
converting operations, gross profits from businesses acquired subsequent to the
third quarter of Fiscal 1997 and higher margins in converted tissue products
were partially offset by increased costs of paperboard, which were not
recovered through price adjustments. The decrease in gross profits of tissue
mill products was due to the increased sales of lower margin white paper and
reduced sales of higher margin deep tone paper, as well as increased
manufacturing costs resulting from the start-up of the second paper machine. As
a result of the ice storm, the Mill sustained property damage and experienced a
temporary shut down. The Company maintains insurance policies that cover losses
of this type, and expects to recover a portion of these costs. The Company
believes that any additional costs would not have a significant effect on it
results of operations. As a percentage of net sales, gross profit decreased
from 19.4% in the nine months ended April 27, 1997 to 17.7% in the nine months
ended April 26, 1998 for the reasons set forth above.
Selling, general and administrative expenses increased $1.9 million,
or 7.8%, to $26.0 million in the nine months ended April 26, 1998 compared to
$24.1 million in the nine months ended April 27, 1997 primarily due to
increased selling expenses resulting from the increase in net sales. As a
percentage of net sales, selling, general and administrative expenses decreased
slightly from 13.1% in the nine months ended April 27, 1997 to 12.8% in the
nine months ended April 26, 1998.
Other income, net includes a $9.3 million pre-tax gain on the sale of
the Mill and a $0.4 million gain on the sale of other non-core assets. These
gains were partially offset by closure cost accruals relating to the decision
to close the Jacksonville converting facility.
Income from operations increased $8.0 million, or 69.4% to $19.6
million in the nine months ended April 26, 1998 compared to $11.6 million in
the nine months ended April 27, 1997 due to the reasons discussed above.
Excluding other income, net, as a percentage of net sales, income from
operations decreased from 6.3% in the nine months ended April 27, 1997 to 4.9%
in the nine months ended April 26, 1998.
Interest expense, net of interest income, increased $2.4 million, or
34.6% to $9.2 million in the nine months ended April 26, 1998 compared to $6.8
million in the nine months ended April 27, 1997. The increase was due to higher
borrowing levels resulting from the issuance in the third quarter of Fiscal
1997 of the Senior Notes, which replaced higher interest rate debt.
As a result of the above and a 42% effective tax rate in both periods,
income before extraordinary items was $6.1 million in the nine months ended
April 26, 1998 compared to $2.8 million in the nine months ended April 27,
1997.
In the nine months ended April 27, 1997, the Company incurred a $3.5
million extraordinary expense (net of a $2.5 million income tax benefit) in
connection with the early retirement of debt consisting of the write-off of
unamortized debt issuance costs, elimination of unamortized debt discount, and
prepayment penalties. As a result of the above, net income was
13
<PAGE>
$6.1 million in the nine months ended April 26, 1998 compared to a net loss of
$0.7 million in the nine months ended April 27, 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 provided by operating activities for the nine months ended
April 26, 1998 was $6.3 million compared to $0.7 million for the nine months
ended April 27, 1997. The nine month period ended April 26, 1998 includes the
receipt of $2.9 million resulting from the settlement of a lawsuit.
Historically, the Company's investing activities have been primarily
capital expenditures and business acquisitions. Capital expenditures in the
nine months ended April 26, 1998 were $6.2 million, including $1.8 million
related to the installation of a second paper machine at the Mill. The
remaining $4.4 million in such period and the capital expenditures in the nine
months ended April 27, 1997 were for routine capital improvements. In addition,
during the 1998 period the Company received proceeds of $20.8 million, net of
transaction costs and fees, from the Mill Disposition and paid $7.0 million to
SF Holdings in consideration for its right to manage Sweetheart's day to day
operations pursuant to the Management Services Agreement. (See Note 6 of Notes
to Financial Statements)
The Company's revolving credit facility provides up to $50 million
borrowing capacity, collateralized by accounts receivable and inventories. At
April 26, 1998, $0.4 million was outstanding under such facility and $36.1
million was the maximum advance available based upon eligible collateral.
Pursuant to the terms of the Senior Notes and the revolving credit
facility, 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 the
Company's 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,
the revolving credit facility requires that the Company satisfy certain
financial covenants.
During the nine months ended April 26, 1998, the Company redeemed
72,500 shares of Class A common stock (pre-Merger shares) for $9.8 million
pursuant to an offer by the Company to repurchase up to 74,000 shares of its
common stock (pre-Merger shares) at $135 per share from its stockholders on a
pro rata basis. The Company has completed such stock repurchase.
During the nine months ended April 26, 1998, 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 capital expenditure needs, debt service requirements and
working capital needs for the foreseeable future.
14
<PAGE>
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.
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 among 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 herewith.
(b) Reports on Form 8-K
A report on Form 8-K (Item 5. Other events) was filed on February 20, 1998.
15
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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: June 10, 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)
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<PAGE>
ASSIGNMENT AND ASSUMPTION AGREEMENT
Assignment and Assumption Agreement (the "Agreement"), dated as of
March 12, 1998, by and between SF Holdings Group, Inc., a Delaware corporation
("SF Holdings"), and The Fonda Group, Inc., a Delaware corporation ("Fonda").
WHEREAS, SF Holdings is a party to that certain Second Restated
Management Services Agreement (the "Management Agreement"), dated as of March
12, 1998, as amended by Amendment No. 1 thereto dated as of March 12, 1998, by
and among Sweetheart Holdings Inc., a Delaware corporation ("Holdings"),
Sweetheart Cup Company Inc., a Delaware corporation ("Cup" and together with
Holdings, the "Company"), American Industrial Partners Management Company, Inc.
and SF Holdings; and
WHEREAS, SF Holdings desires to assign to Fonda, and Fonda desires to
assume, substantially all of the rights and obligations of SF Holdings under
the Management Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
1. Capitalized terms used but not defined herein shall
have the meanings ascribed to them in the Management Agreement.
2. SF Holdings hereby assigns to Fonda, and Fonda agrees to assume,
substantially all of the obligations of SF Holdings under the Management
Agreement; provided, however, that the obligations of SF Holdings pursuant to
Section 2 of the Management Agreement shall be assigned as follows:
a. During the term of the Management Agreement, Fonda shall
provide general management services to the Company and, subject to the
direction of the Board of Directors of the Company, shall have
authority, responsibility and control over all of the business
operations of the Company, including, without limitation, the
following: (i) implementing the business plan of the Company; (ii)
acquiring and disposing of assets; (iii) entering into contracts,
agreements and other commitments for, and on behalf of, the Company;
(iv) hiring, determining the compensation of, and terminating
employees of the Company other than the Chief Executive Officer, Chief
Financial Officer and Chief Operating Officer of each of Holdings and
of Cup; and (v) taking all other actions associated with management of
the day-to-day operations of the business of the Company. In addition,
Fonda shall provide financial and other corporate advisory services to
the Company. All of the services to be provided pursuant to this
Section 2(a)
<PAGE>
shall be performed by the qualified officers, employees or agents of
Fonda as the Company may reasonably request from time to time, and
Fonda shall at all times direct, monitor and supervise the performance
of such services by such officers, employees or agents.
b. During the term of the Management Agreement, SF Holdings
shall provide certain financial and other corporate advisory services
to the Company. All of the services to be provided pursuant to this
Section 2(b) shall be performed by the qualified officers, employees
or agents of SF Holdings as the Company may reasonably request from
time to time, and SF Holdings shall at all times direct, monitor and
supervise the performance of such services by such officers, employees
or agents.
3. SF Holdings assigns to Fonda, and Fonda shall be entitled to
receive, substantially all of the rights and benefits of SF Holdings under the
Management Agreement; provided, however, that the rights of SF Holdings
pursuant to Section 3 of the Management Agreement shall be assigned as follows:
SF Holdings shall receive from the Company Management Fees of $200,000
per annum. Fonda shall receive from the Company Management Fees of
$725,000 in respect of the period from the date of the Management
Agreement to the first anniversary thereof; $910,000 in respect of the
period from the first anniversary of the date of the Management
Agreement to the second anniversary of the date of the Management
Agreement; (iii) $1,095,000 in respect of the period from the second
anniversary of the date of the Management Agreement to the third
anniversary of the date of the Management Agreement; and (iv)
$1,650,000 thereafter, in respect of each period ending on the next
following anniversary of the date of the Management Agreement during
the term of the Management Agreement.
4. In consideration of the assignment by SF Holdings of substantially
all of its rights under the Management Agreement, upon the execution of this
Agreement, Fonda shall pay SF Holdings $7,000,000 by wire transfer of
immediately available funds.
5. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their successors and permitted
assigns.
6. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to any choice or
conflict of law provision or rule (whether in the State of New York or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of New York.
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<PAGE>
7. This Agreement may be executed in two or more
counterparts, each of which taken together shall constitute a
fully-executed original instrument.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed as of the day and year first above written.
SF HOLDINGS GROUP, INC.
By:/s/ Hans Heinsen
________________________
Name: Hans Heinsen
Title: Chief financial Officer
THE FONDA GROUP, INC.
By:/s/ Harvey L. Friedman
________________________
Name: Harvey L. Friedman
Title: Secretary
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<PAGE>
TAX SHARING AGREEMENT
This AGREEMENT, effective as of March 12, 1998, by and among SF
Holdings Group, Inc. ("Parent") and The Fonda Group, Inc. ("Subsidiary"):
WITNESSETH:
WHEREAS, the parties hereto are part of an affiliated group (the
"Affiliated Group," the members of which are hereinafter sometimes referred to
as "Members," or in the singular "Member"), as defined in Section 1504(a) of
the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, such Affiliated Group intends to file a consolidated federal
income tax return in accordance with section 1501 of the Code; and
WHEREAS, Parent is the common parent of the Affiliated Group, within
the meaning of Code Section 1504(a)(1) and the Treasury Regulations issued
pursuant to section 1502 of the Code; and
WHEREAS, it is the intent and desire of the parties hereto that a
method be established for reimbursing Parent for payment of Subsidiary's
allocable share of the Affiliated Group's consolidated "federal income tax
liability" (as determined under Treasury Regulation ss. 1.1502- 2); for
compensating Subsidiary for use of its "net operating loss" or "tax credits" in
arriving at such tax liability; and to provide for the allocation and payment
of any refund arising from a carryback of net operating losses or tax credits
from subsequent taxable years.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. Subsidiary shall execute and file such consents, elections,
and other documents that may be required or appropriate for the proper filing
of U.S. consolidated federal income tax returns for the taxable years in which
this Agreement is in effect.
2. The tax liability of the Affiliated Group shall be allocated
to Subsidiary in the following manner:
Step 1. The consolidated federal income tax liability of the
Affiliated Group, as determined under Treasury Regulation ss. 1.1502-2, shall
be allocated to Subsidiary in accordance with the method set forth in section
1552(a)(1) of the Code and Treasury Regulation ss. 1.1552-1(a)(1) and (b) (or
in accordance with one of the methods set forth in section 1552(a)(2) or (3) if
the Affiliated Group elects to adopt such an alternative method);
<PAGE>
Step 2. An additional amount shall be allocated to Subsidiary equal to
100 percent of the excess, if any, of (1) the "separate return tax liability"
of Subsidiary for the taxable year over (2) the tax liability of Subsidiary as
determined in accordance with Step 1 of Paragraph 2 of this Agreement. For
purposes of the preceding sentence, the "separate return tax liability" shall
be determined as if Subsidiary were filing a separate tax return under the
Code, without application of the exceptions contained in Treasury Regulation
ss. 1.1552-1(a)(2)(ii). For purposes of determining the "separate return tax
liability" of Subsidiary:
a. Any dividends received from another Member will be assumed to
qualify for the 100 percent dividends received deduction of
section 243 of the Code, or shall be eliminated from such
calculation in accordance with Treasury Regulation ss.
1.1502-13(f).
b. Gain or loss on intercompany transactions, whether deferred
or not, shall be treated in the manner required by Treasury
Regulation ss. 1.1502-13.
c. Limitations on the calculation of a deduction or the
utilization of tax credits or the calculation of a tax
liability shall be made on a consolidated basis. Accordingly,
the limitations provided in sections 38(c), 56, 170(b)(2),
and 172(b)(2) of the Code and similar limitations shall be
applied on a consolidated basis.
d. Elections as to tax credits and tax computations that may
have been different from the consolidated treatment if
separate returns were filed shall be made on an annual basis
by Parent.
Step 3. The total of any additional amounts allocated to Subsidiary
pursuant to Step 2 of Paragraph 2 of this Agreement (including amounts
allocated as a result of a carryback) shall be paid (as provided in paragraph 5
of this Agreement) by Subsidiary to Parent. If (1) Subsidiary's "separate
return tax liability" for a taxable year is zero, and (2) the aggregate
"separate return tax liabilities" of the other Members of the Affiliated Group
(determined under Step 2 of this Paragraph 2) exceed their aggregate tax
liability for such year determined under Step 1 of this Paragraph 2, then
Parent shall pay to Subsidiary the portion of such excess, if any, attributable
to the Affiliated Group's utilization in such year of a net operating loss or
tax credit of Subsidiary (taking into account carrybacks or carryforwards).
Subsidiary's share of any such excess shall be determined by Parent in a
reasonable and consistent basis, which will generally be the case if the share
is equal to 35 percent of net operating losses utilized and 100 percent of tax
credits utilized (unless, due to special circumstances, this would be
inequitable) as substantiated by specific records maintained for such purposes.
Under the principles of Revenue Ruling 66-374, 1966-2 C.B. 427, the
net operating loss of Subsidiary is the deduction that Subsidiary would have
had available if it actually filed a separate return for the year and thus
would not include any portion of Subsidiary's net operating loss sustained in a
prior or subsequent year that had been absorbed by the Affiliated Group or by
Subsidiary in computing actual liabilities for prior or subsequent years.
Notwithstanding the preceding sentence, no benefit under Step 3 of Paragraph 2
of this Agreement shall be granted Subsidiary unless the net operating loss is
availed of in reducing the consolidated federal income
- 2 -
<PAGE>
tax liability of the Affiliated Group. The rules stated in the previous
sentences regarding carryover net operating losses will also apply in the
computation of other carryover items such as investment tax credits, foreign
tax credits, and charitable contribution deductions.
In calculating any benefit from a carryback or carryover of net
operating losses, adjustments shall be made to such prior or subsequent year's
separate return tax liability as required under sections 172(b)(2) and 172(d)
of the Code. For purposes of this calculation, the election under section
172(b)(3) shall be made on a separate company basis.
3. Regarding the application of the allocation method in
Paragraph 2 of this Agreement, the following principles will govern:
a. It is acknowledged that allocation of the consolidated
federal income tax liability under Treasury Regulation ss.
1.1552-1(a)(1) and Step 1 of Paragraph 2 of this Agreement
shall (in accordance with Treasury Regulation ss.
1.1552-1(b)(2)) in the amount allocated to Subsidiary (or
another Member) (i) decrease the earnings and profits of such
Member and (ii) be treated as a liability of such Member for
such amount.
b. It is acknowledged that allocations under Step 2 and Step 3
(but not Step 1) of Paragraph 2 of this Agreement to
Subsidiary (or other individual Members of the Affiliated
Group) will not create liabilities and receivables among
such Members, under the principles of Treasury
Regulationss.1.1552-1(b)(2), Revenue Ruling 73-605,
1973-2 C.B. 109, and Revenue Ruling 76-302, 1976-2 C.B. 257,
but rather will be regarded as distributions with respect to
stock, contributions to capital, or combinations thereof when
such amounts are paid pursuant to Paragraph 5 of this
Agreement.
4. The provisions of this Agreement shall be administered by Parent.
5. Subsidiary shall pay Parent its allocated consolidated federal
income tax liability under Step 1 of Paragraph 2 of this Agreement. Subsidiary
shall pay Parent, or Parent shall pay Subsidiary, as the case may be, the
respective amounts set forth in Step 3 of Paragraph 2 of this Agreement.
Payments are to be made no later than ten days after the date of filing of the
consolidated federal income tax return for such taxable year.
6. Parent shall have the right to assess Subsidiary its share of
estimated tax payments to be made on the projected consolidated federal income
tax liability for each year. Such payment shall be made ten days after such
assessment. Subsidiary shall receive credit for such prepayments in the
year-end computation under Paragraph 5 of this Agreement.
7. If part or all of an unused consolidated net operating loss or tax
credit is allocated to Subsidiary pursuant to Treasury Regulation ss.ss.
1.1502-21T and 1.1502-79A, and it is carried back or forward to a year in which
Subsidiary filed a separate income tax return or a consolidated federal income
tax return with another affiliated group, any reduction in tax liability
arising from the carryover shall be retained by Subsidiary. Parent shall
determine whether an
- 3 -
<PAGE>
election shall be made not to carry back any consolidated net operating loss
arising in a consolidated return year (including any portion allocated to
Subsidiary under Treasury Regulation ss. 1.1502-79) in accordance with section
172(b)(3) of the 1986 Code.
8. If the consolidated federal income tax liability is adjusted for
any taxable period, whether by means of an amended return, claim for refund, or
audit by the Internal Revenue Service, the liability of (or amounts owing to)
Subsidiary shall be recomputed under Paragraphs 2 and 3 of this Agreement to
give effect to such adjustments. In the case of a refund, Parent shall make
payment to Subsidiary for its share of the refund, determined in the same
manner as in Paragraph 5 of this Agreement, within ten days after the refund is
received by Parent, and in the case of an increase in tax liability, Subsidiary
shall pay to Parent its allocable share of such increased tax liability within
ten days after receiving notice of such liability from Parent. If any interest
is to be paid or received as a result of a consolidated federal income tax
deficiency or refund, such interest shall be allocated to Subsidiary in the
ratio that Subsidiary's change in consolidated federal income tax liability
bears to the total change in tax liability. Any penalty shall be allocated upon
such basis as Parent deems just and proper in view of all applicable
circumstances.
9. This Agreement shall continue to apply unless and until Parent and
Subsidiary agree in writing to terminate the Agreement or Subsidiary is no
longer a Member of the Affiliated Group. Notwithstanding such termination, this
Agreement shall continue in effect with respect to any payment or refunds due
for all taxable periods prior to termination.
10. The Agreement shall not be assignable by either party without
the prior written consent of the other.
11. All material including, but not limited to, returns, supporting
schedules, work papers, correspondence, and other documents relating to the
consolidated federal income tax returns filed for a taxable year during which
this Agreement was in effect shall be made available to any party to the
Agreement during regular business hours for a minimum period equal to
applicable federal record retention requirements.
12. A dispute or difference between the parties with respect to the
operation or interpretation of this Agreement shall be decided by three
arbitrators. Each Party shall elect one arbitrator and agree on a third. The
losing party shall bear the cost of arbitration including all fees for
attorneys and accountants.
13. Any alteration, modification, addition, deletion, or other change
in the consolidated income tax return provisions of the Code or the regulations
thereunder shall automatically be applicable to this Agreement mutatis
mutandis.
14. This Agreement shall bind and inure to the respective successors
and assigns of the parties hereto; but no assignment shall relieve any party's
obligations hereunder without the written consent of the other parties.
15. This Agreement shall be governed by the laws of the State
of Delaware.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their names to be
subscribed and executed by their respective authorized officers on the dates
indicated, effective as of the date first written above.
SF Holdings Group, Inc.
By:/s/ Hans Heinsen
_____________________________
Name: Hans Heinsen
Title: Chief Financial Officer
The Fonda Group, Inc.
By: /s/ Harvey L. Friedman
_____________________________
Name: Harvey L. Friedman
Title: Secretary
- 5 -
<PAGE>
LICENSE AGREEMENT
THIS LICENSE AGREEMENT is made as of this 12th day of March, 1998, by
and between The Fonda Group, Inc., ("Licensor"), having an office at 115
Stevens Avenue, Valhalla, New York 10595 and CREATIVE EXPRESSIONS GROUP, INC.
("Licensee"), having an office at 7240 Shadeland Station, Suite 300,
Indianapolis, IN 46256.
WHEREAS, Licensor is the sole owner of the Marks (as hereinafter
defined);
WHEREAS, Licensee desires to be granted all of Licensor's rights to
and in the Marks and to exclusively use the Marks during the License Term (as
hereinafter defined) on or in association with the manufacture, advertising,
promotion, distribution, offering for sale and sale of Licensed Products (as
hereinafter defined) throughout the world; and
WHEREAS, Licensor desires to grant to Licensee an exclusive license to
use the proprietary rights in and to the Marks subject to and upon the terms,
covenants and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the respective representations,
warranties, covenants, agreements, and conditions contained herein and other
good and valuable consideration, the receipt of which are hereby acknowledged,
Licensor and Licensee hereby agree to the following:
1. GRANT OF LICENSE; LICENSED PRODUCTS.
1.1 Licensor hereby grants to Licensee for the period and upon
the terms, covenants and conditions hereinafter set forth, the exclusive right
and license (the "License") throughout the world to use the trademarks,
tradenames and service marks set forth on Exhibit A (the "Marks") and each of
them solely in connection with the design, manufacture, advertising, promotion,
distribution and sale of disposable party goods (collectively, the "Products"),
subject, however, to the non-exclusive right retained by Licensor to use the
Marks during the Transition Period (as hereinafter defined) as set forth in
Section 3 hereof. As used herein, the term "Licensed Products" shall mean
Products sold or promoted in connection with the Marks.
1.2 Licensor retains all rights to use and to grant to others
rights to use the Marks on products other than, and non-competitive with, the
Licensed Products; provided, however, that all such uses of the Marks shall be,
and any license thereof shall be granted and enforced, in a manner consistent
with the maintenance by Licensor of the standards of quality, style and design
imposed on Licensee pursuant to this Agreement.
2. DESIGN.
2.1 Licensed Products shall at all times reflect the standards
and reputation embodied in the design, content, quality, style, price point and
value which Products bearing
<PAGE>
the Marks have come to represent in the minds of the trade and the public.
Licensee shall have no right hereunder to alter or modify the Marks, nor to
create derivative works thereof; except, however, to the extent expressly
authorized in this Agreement.
3. TRANSITION PERIOD.
3.1 Notwithstanding anything contained in this Agreement to the
contrary, Licensor retains the non-exclusive rights to manufacture, invoice
and distribute, on behalf of Licensee, the Licensed Products for a period not
to exceed six months following the date hereof or such later date as the
parties shall mutually agree (the "Transition Period").
3.2 As payment for Licensor's services pursuant to Section
3.1 hereof, Licensee shall pay to Licensor an amount equal to (i) Licensor's
fully absorbed cost to manufacture the Licensed Products and (ii) Licensor's
actual cost with respect to any selling, general or administrative services
performed by Licensor on behalf of Licensee, plus 15% (collectively, the
"Transition Payment"). The Transition Payment shall be paid to Licensor on the
first day of each month through the expiration or sooner termination of the
Transition Period. In addition, at any time during the Transition Period,
Licensee shall, at Licensor's election, purchase all of Licensor's inventory
relating to the Licensed Products for an amount equal to Licensor's fully
absorbed cost of such inventory.
4. TERM.
4.1 The initial term of this Agreement shall commence on the
date hereof and continue through the date which is the fifth anniversary of the
last day of the First Period (the "Initial Term") unless renewed or sooner
terminated as provided herein. As used herein, the term (i) "First Period"
shall mean the period commencing on the date hereof and ending on the last day
of Licensee's 1998 fiscal year; and (ii) "Annual Period" shall mean the First
Period, and each succeeding fiscal year during the License Period (as
hereinafter defined).
4.2 Provided that no Event of Default on the part of Licensee
has occurred and is continuing at the date of renewal, Licensee may, upon
notice to Licensor given at least six months prior to the expiration of the
Initial Term, or if this Agreement has been renewed, the then current term of
this Agreement, extend the term of this Agreement for up to five additional
successive renewal periods of one year each, so as to finally expire on the
tenth anniversary of the last day of the First Period. The Initial Term,
together with any renewal periods hereunder, are together referred to as the
"License Period."
5. ROYALTIES.
5.1 During the License Period, Licensee shall pay Licensor a
royalty (the "Royalty") in an amount equal to 5% of Licensee's earnings before
interest, taxes, depreciation and amortization as determined in accordance with
generally accepted accounting principles and as reported on Licensee's
financial statements for each Annual Period. During the License Period,
Licensee shall, at the time that Licensee sends to
2
<PAGE>
Licensor the reports required by Sections 5.3 and 5.4, deliver therewith
payment of the amount, if any, by which the Royalty exceeds the aggregate
Interim Payments previously paid for the applicable Annual Period. In the event
that the aggregate Interim Payments for such Annual Period exceed the Royalty,
such excess amount shall be applied to reduce the Royalty payable for the next
Annual Period.
5.2 Licensee shall pay Licensor on account of the Royalty,
$10,000 on the first day of each month during the License Period (the "Interim
Payment").
5.3 Within 45 days after the end of each quarterly period
during the License Period (commencing with the first quarter-end during the
First Period), Licensee shall deliver to Licensor a quarterly report certified
by the Chief Financial Officer of Licensee calculating the Royalty payable for
such period and certifying and attaching Licensee's financial statements with
respect to such period.
5.4 Within 90 days after the close of each Annual Period,
Licensee shall deliver to Licensor a report setting forth information
equivalent to that contained in quarterly reports specified in 5.3 hereof for
the preceding Annual Period or, in the case of termination of this Agreement,
such information for the period ending at termination. Each such annual
statement shall be certified by the Licensee's Chief Financial Officer and have
attached thereto the financial statements of Licensee as audited by Licensee's
independent public accountants.
5.5 The provisions of this Section 5 shall survive the
expiration or sooner termination of this Agreement.
6. PRESERVATION OF MARKS.
6.1 Licensee will use the Marks in compliance in all material
respects with applicable legal requirements. Licensee shall cause to appear on
all Licensed Products, such legends, markings and notices as may be required by
applicable law.
6.2 Licensor shall take all action as is or may become necessary
to the maintenance of trademark protection for the Marks in the geographic area
in which the Licensed Products are being or are likely to be manufactured,
transported, distributed or sold. Licensee shall take any action reasonably
requested by Licensor to assist Licensor in preserving and protecting
Licensor's rights in and to the Marks or any registration thereof. Without
limiting the generality of the foregoing, at Licensor's reasonable request
Licensee shall promptly execute any documents, agreements and applications to
record Licensee as a registered user, to confirm Licensor's ownership of all
rights in and to the Marks and the respective rights of Licensor and Licensee
pursuant to this Agreement. Licensor shall reimburse Licensee for all costs and
expenses of complying with any request by Licensor under this Section.
6.3 Licensee will not challenge Licensor's ownership of or the
validity of the Marks or any application for registration thereof, or any
trademark registrations thereof
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<PAGE>
insofar as the rights granted to Licensee are not affected. Licensee agrees
that it shall not during the License Period or thereafter, register or apply to
register any of the Marks anywhere in the world.
6.4 Each party shall give notice to the other as soon as
practicable of any infringement of any of the Marks of which such party has
knowledge. Licensor, at its sole cost and expense and in its own name, may, in
its sole judgment, prosecute any action or proceeding that Licensor deems
necessary or desirable to protect the Marks, including but not limited to
actions or proceedings involving infringement of the Marks. Licensee may join
Licensor in any such action or proceeding, except that, in an action or
proceeding involving counterfeit Licensed Products Licensee may itself take
such action as it deems appropriate. Licensee shall cooperate with Licensor in
all respects at Licensor's reasonable request in connection with any action or
proceeding prosecuted by Licensor involving the rights granted Licensee
hereunder. If Licensor fails to take any such action, Licensee shall have the
right to do so at Licensee's sole cost and expense.
7. DEFAULTS.
Each of the following shall constitute an event of default
under this Agreement (each an "Event of Default"):
7.1 If Licensee shall fail to pay any Royalty or other
obligation owing to Licensor pursuant to this Agreement within 30 days of
receipt of notice of non-payment; or
7.2 If either party shall fail in any material respect to
perform or observe any material term, condition, agreement or covenant in this
Agreement on its part to be performed or observed (other than as specifically
provided in Section 7.1), or if any representation or warranty on its part
shall be or become false in any material respect, and such default is curable,
but is not cured within 30 days after notice thereof from the non-defaulting
party, unless such default is not capable of being cured through the defaulting
party's diligent and continuous effort within such 30 day period, and such
party immediately commences to cure such default, and thereafter applies its
diligent and continuous best efforts to cure such default, and does in fact
cure such default within 90 days of the initial notice of default; or
7.3 If Licensee or Licensor shall institute proceedings to be
adjudicated a voluntary bankrupt or insolvent, or shall consent to the filing
of a bankruptcy proceeding against it, or shall file a petition or answer
seeking reorganization or arrangement under any bankruptcy act or any other
similar applicable law of any country, or shall consent to the appointment of a
receiver or liquidator or trustee or assignee in bankruptcy or insolvency for
it, or any of its property, or shall make an assignment for the benefit of
creditors, or shall be unable to pay its debts generally as they become due, or
shall cease doing business as a going concern, or corporate action shall be
taken by it in furtherance of any of the foregoing purposes; or
4
<PAGE>
7.4 If an order, judgment or decree of a court having
jurisdiction shall have been entered adjudicating Licensee or Licensor a
bankrupt or insolvent, or approving, as properly filed, a petition seeking
reorganization of Licensee or Licensor or of all or a substantial part of its
properties or assets under any bankruptcy act or other similar applicable law,
as from time to time amended, or appointing a receiver, trustee or liquidator of
Licensee, and such order, judgment or decree shall remain in force, undischarged
and unstated for a period of 90 days, or any writ or warrant or attachment shall
be issued or levied against a substantial part of its property and the same
shall not be released, vacated or bonded within 30 days after issue or levy; or
7.5 If either party shall, without the prior consent of the
other first had and obtained, sell (regardless of how designated) all or
substantially all of its assets, or shall merge or consolidate with another
corporation or entity not an affiliate prior to such transaction, whether in a
single transaction or as the aggregate result of a series of transactions.
8. TERMINATION.
8.1 If an Event of Default shall occur and be continuing, the
non-defaulting party may at its option after 10 days' prior notice, terminate
this Agreement. In such event, Licensee shall promptly pay to Licensor all
Royalties due hereunder through the date of termination. Such payment shall
constitute Licensor's sole and exclusive remedy hereunder and shall be retained
as liquidated damages and Licensee shall not have any other liability of
whatever kind hereunder. Notwithstanding the foregoing, each of the parties
shall have and hereby reserves all rights and remedies which it has or which
are granted to it by operation of law or in equity to: (i) enjoin the unlawful
or unauthorized use of the Licensed Property and Marks; and (ii) be compensated
for all reasonable attorneys' fees and expenses and court costs in connection
with the enforcement of either party's rights of termination.
8.2 On the expiration or sooner termination of this Agreement,
the License and all rights of Licensee in and to the Marks shall terminate
forthwith and shall revert immediately to Licensor, and Licensee shall
immediately cease and desist and discontinue all use of the Marks, and shall no
longer have the right to use the Marks or any variation thereof; provided,
however, that Licensee shall have the continuing right, for a period of 24
months following the date of termination, to, upon and subject to the terms,
covenants and conditions of this Agreement dispose of all Licensed Products then
in the possession of Licensee, and all Licensed Products on order or in the
process of manufacture on the effective date of such termination. Within 30 days
following the effective date of termination hereof, Licensee shall provide
Licensor with a statement setting forth the number and description of Licensed
Products then in Licensee's possession, on order or in the process of
manufacture. Licensee shall pay Licensor any Royalty coming due with respect to
the sale of all such Licensed Products.
5
<PAGE>
9. REPRESENTATIONS AND WARRANTIES.
9.1 Each of Licensee and Licensor represents and warrants to the
other that:
(i) it is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation and is duly qualified
and authorized to do business as a foreign corporation in good standing in all
jurisdictions in which the nature of its assets or business requires such
qualification;
(ii) it has full right, power and authority to enter into this
Agreement and to perform all of its obligations hereunder; and
(iii) its execution, delivery and performance of this Agreement
have been duly and properly authorized by all necessary actions and this
Agreement constitutes its valid and binding obligation, enforceable against it
in accordance with its terms.
9.2 Licensor additionally represents and warrants that
(i) it has the sole and exclusive right to license the Marks as
contemplated by this Agreement; and
(ii) there are no pending claims, actions, suits, proceedings
or to Licensor's knowledge, investigations instituted by or against Licensor or
any of its affiliates challenging Licensor's ownership of the Marks.
10. INDEMNIFICATION.
10.1 Each party (an "Indemnifying Party") hereby indemnifies
the other party and its officers, directors, agents, employees, successors and
permitted assigns (hereinafter collectively an "Indemnified Party" or
"Indemnified Parties"), and shall hold it and them harmless against any and all
losses, claims, suits, proceedings, liabilities, causes of action, damages,
costs, expenses (including reasonable attorneys' fees and expenses)
(collectively, "claims") arising out of or in connection with the breach or
inaccuracy of, or failure to comply with, any of the representations,
warranties, covenants, agreements, terms or conditions (including those in
Section 9) on the part of the Indemnifying Party contained in this Agreement.
Notwithstanding the foregoing, Licensee shall not be obligated to, and shall
not, indemnify Licensor for any claims arising out of or related to any alleged
defect in any of the Licensed Products approved or deemed approved by Licensor
hereunder.
10.2 The Indemnified Party shall give prompt notice to the
Indemnifying Party of any claim with respect to which it seeks indemnification
but the failure to so notify the Indemnifying Party shall not relieve the
Indemnifying Party of any liability except, however, to the extent, if any,
that it is actually prejudiced by such delay. The Indemnifying Party shall
assume, at its sole cost and expense, the defense of such claim with counsel
reasonably satisfactory to the Indemnified Party. The Indemnifying Party will
not be subject
6
<PAGE>
to any liability for any settlement made without its consent (but such consent
will not be unreasonably withheld). The Indemnifying Party shall not, without
the consent of the Indemnified Party (which consent shall not be unreasonably
withheld), effect any settlement or discharge or consent to the entry of any
judgment, unless such settlement or judgment includes as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
general release from all liability in respect of such claim or litigation.
11. SITUS OF ACTIONS, APPLICABLE LAW.
11.1 The State and Federal courts sitting in the State, City and
County of New York shall have exclusive jurisdiction in any action arising
out of or connected in any way with this Agreement and Licensee and Licensor
hereby irrevocably consent to personal jurisdiction of and venue in such courts
in any such matter. The service of process or of any other papers with respect
to such proceedings upon either party by mail in accordance with the notice
provisions hereof shall be deemed to have been duly given to and received by
them five days after the date of mailing by certified mail-RR, and shall for
all purposes constitute good, proper and effective in personam service.
11.2 This Agreement shall be considered as having been entered into in
the State of New York, and shall be construed and interpreted in accordance with
the internal laws of that State applicable to agreements made and to be wholly
performed therein, without reference to conflict of laws considerations.
12. MISCELLANEOUS.
(a) This Agreement does not constitute either party as the agent or
legal representative of the other for any purpose whatsoever, and neither party
is granted any right or authority to assume or to create obligation or
responsibility, express or implied, on behalf of or in the name of the other or
to bind the other in any manner or thing whatsoever. No joint venture or
partnership between Licensor and Licensee is intended or shall be inferred.
(b) Each party represents to the other that it has not incurred any
obligation to any broker or finder in connection with this Agreement and hereby
agrees to indemnify the other party against any and all such payments and any
loss, cost, expense or liability including reasonable attorneys' fees related
thereto.
(c) All notices between Licensor and Licensee shall be effective only
if in writing and delivered by hand or by certified mail, return receipt
requested, addressed to Licensee or Licensor at the respective addresses set
forth below, and shall be effective upon receipt:
7
<PAGE>
Licensor: The Fonda Group, Inc.
2920 North Main Street
Osh Kosh, WI 54903
Attention: Robert Korzenski
Licensee: Creative Expression Group, Inc.
72405 Nadel and Station
Suite 300
Indianapolis, IN 46256
Any person entitled to notice hereunder may change its address by giving
written notice to all others entitled to notice.
(d) Failure on the part of either party hereto to meet any of the
terms and conditions contained herein because of any governmental restriction,
strike or major labor disturbance, war, revolution, riot, earthquake, fire,
flood or any other causes beyond the control of the party involved shall not
constitute a breach of this Agreement and shall excuse the party involved from
any action by the other party hereto, based upon the said failure to perform.
(e) Each of Licensee and Licensor acknowledges that during the term of
this Agreement it shall receive information of a business or technical nature
with respect to the business of the other and its affiliates, including without
limitation business plans, designs, sketches, materials, colors, costs,
pricing, customers, production techniques, sources of supply and other
documents, non-public information and trade secrets, which were acquired,
designed and/or developed by them at great expense, are secret, confidential
and unique, and constitute the trade secrets and exclusive property of such
party and its affiliates, and that any use by either party, or any of its
affiliates or subcontractors, of any such trade secrets and property other than
for the sole purpose of manufacturing, advertising, merchandising, promoting,
selling and distributing Licensed Products in accordance with the terms of this
Agreement would be wrongful and would cause irreparable injury to the other
party and its affiliates. Neither party shall at any time disclose or divulge
to any third party or use or suffer the use by any third party, any
confidential financial information obtained from the other hereunder. For
purposes of this Section, all financial terms of this Agreement shall be deemed
confidential financial information. Neither party shall make any public
announcement relating to the License or this Agreement without the prior
written approval of the other party.
(f) The definitions in this Agreement shall apply equally to both the
singular and plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine
and neuter forms. All references herein to Articles, Sections, Paragraphs,
Annexes, Exhibits and Schedules shall be deemed to be references to Articles,
Sections and Paragraphs of, and Annexes, Exhibits and Schedules to, this
Agreement unless the context shall otherwise require. All Annexes, Exhibits and
Schedules attached hereto shall be deemed incorporated herein as if set forth
in
8
<PAGE>
full herein. The words "include," "includes" and "including" shall be deemed to
be followed by the phrase "without limitation." All accounting terms not
defined in this Agreement shall have the meanings determined by United States
generally accepted accounting principles as in effect from time to time. The
words "hereof," "herein" and "hereunder" and words of similar import when used
in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. References to a person or entity are
also to its permitted successors and permitted assigns. Unless otherwise
expressly provided herein, any agreement, instrument or statute defined or
referred to herein or in any agreement or instrument that is referred to herein
means such agreement, instrument or statute as from time to time amended,
modified or supplemented, including (in the case of agreements or instruments)
by waiver or consent and (in the case of statutes) by succession of comparable
successor statutes and references to all attachments thereto and instruments
incorporated therein.
(g) In the event either party shall at any time waive any of its
rights under this Agreement or waive the performance by the other party of
any of its obligations hereunder, such waiver shall not be construed as a
continuing waiver of the same rights or obligations or a waiver of any other
rights or obligations.
(h) This Agreement (which includes the Schedules hereto) constitutes
the entire agreement between the parties as to Licensed Products and merges and
supersedes all prior discussions between the parties as to the subject matter
hereof. This Agreement may not be changed or terminated orally.
(i) Any provision of this Agreement that shall be or is determined to
be invalid shall be ineffective, but such invalidity shall not affect the
remaining provisions hereof.
(j) The titles to the paragraphs hereof are for convenience only and
have no substantive effect.
(k) This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Neither party shall, directly or indirectly, in whole or in part,
assign or transfer this Agreement or any of its rights, duties or interest
hereunder without the prior written approval of the other party. Any approved
third party shall agree in writing to be bound as Licensee or Licensor
hereunder, as the case may be. No assignment hereunder shall relieve the
assigning party of any liability hereunder.
(l) This Agreement may be executed in two or more counterparts, each
of which shall constitute an original and all of which taken together shall
constitute one and the same agreement.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement the day and year first above written.
The Fonda Group, Inc.
By: /s/Hans Heinsen
Name: Hans Heinsen
Title: Senior Vice President
Creative Expression Group, Inc.
By: /s/Harvey L. Friedman
Name: Harvey L. Friedman
Title: Secretary
10
<PAGE>
EXHIBIT A
MARKS
Chesapeake, Splash and Party Creations and all designs related thereto.
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Form
10-Q for the fiscal quarter ended April 26, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> APR-26-1998
<CASH> 3,655
<SECURITIES> 0
<RECEIVABLES> 27,320
<ALLOWANCES> 569
<INVENTORY> 38,450
<CURRENT-ASSETS> 82,843
<PP&E> 69,355
<DEPRECIATION> 20,448
<TOTAL-ASSETS> 178,674
<CURRENT-LIABILITIES> 33,806
<BONDS> 122,443
0
0
<COMMON> 0
<OTHER-SE> 13,381
<TOTAL-LIABILITY-AND-EQUITY> 178,674
<SALES> 203,597
<TOTAL-REVENUES> 203,597
<CGS> 167,520
<TOTAL-COSTS> 167,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 113
<INTEREST-EXPENSE> 9,151
<INCOME-PRETAX> 10,489
<INCOME-TAX> 4,406
<INCOME-CONTINUING> 6,083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,083
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
