UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the thirteen weeks ended December 27, 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 February 1, 1999: 100 Shares
<PAGE>
THE FONDA GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements (unaudited): Page
Balance Sheets as of December 27, 1998 and July 26, 1998 (audited) 3
Statements of Income for the thirteen weeks ended
December 27, 1998 and January 25, 1998 4
Statements of Cash Flows for the thirteen weeks ended
December 27, 1998 and January 25, 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FONDA GROUP, INC.
BALANCE SHEETS
(in thousands)
December 27, July 26,
1998 1998
-------------- -------------
(unaudited)
ASSETS
Current assets:
Cash $ 1,271 $ 16,361
Accounts receivable, less
allowance for doubtful
accounts of $816 and $789,
respectively 30,112 29,385
Due from affiliates 5,762 1,584
Inventories 34,299 34,803
Deferred income taxes 5,762 5,469
Other current assets 2,809 2,086
-------------- -------------
Total current assets 79,991 89,688
Property, plant and equipment, net 55,346 48,151
Goodwill, net 20,238 21,462
Other assets, net 19,809 19,227
-------------- -------------
TOTAL ASSETS $175,384 $178,528
============== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 6,227 $ 7,077
Accrued expenses 21,275 24,867
Current maturities of long-term debt 551 595
-------------- -------------
Total current liabilities 28,053 32,539
Long-term debt 121,608 121,767
Other liabilities 2,635 1,896
Deferred income taxes 5,382 4,771
-------------- -------------
Total liabilities 157,678 160,973
Stockholder's equity 17,706 17,555
============== =============
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $175,384 $178,528
============== =============
See notes to financial statements.
3
<PAGE>
THE FONDA GROUP, INC.
STATEMENTS OF INCOME
(unaudited)
(in thousands)
Thirteen Weeks Ended
-------------------------------
December 27, January 25,
1998 1998
--------- ---------
Net sales $ 68,992 $ 66,016
Cost of goods sold 56,887 53,492
--------- ---------
Gross profit 12,105 12,524
Selling, general and administrative expenses 8,541 8,776
Other income, net (92) (309)
--------- ---------
Income from operations 3,656 4,057
Interest expense (net of interest income
of $270 and $141) 2,822 3,067
--------- ---------
Income before income taxes 834 990
Income tax provision 342 417
--------- ---------
Net income $ 492 $ 573
========= =========
See notes to financial statements.
4
<PAGE>
THE FONDA GROUP, INC.
STATEMENT OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
December 27, January 25,
1998 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 492 $ 573
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,437 1,475
Provision for doubtful accounts 46 37
Deferred income taxes 23 (251)
Gain (loss) on equipment dispositions 2 (308)
Changes in assets and liabilities:
Accounts receivable 1,110 5,851
Due from affiliates (4,737) (1,035)
Inventories 2,924 3,910
Other current assets (340) 37
Accounts payable and accrued expenses 839 499
Other (413) (108)
------- --------
Net cash provided by operating activities 1,383 10,680
------- --------
Investing activities:
Capital expenditures (8,232) (2,387)
Proceeds from equipment dispositions 8 219
Payments for business acquisitions -- (6,712)
------- --------
Net cash used in investing activities (8,224) (8,880)
------- --------
Financing activities:
Net decrease in revolving credit borrowings -- (2,020)
Repayments of long-term debt (150) (159)
Redemption of common stock -- (1,436)
------- --------
Net cash used in financing activities (150) (3,615)
------- --------
Net decrease in cash (6,991) (1,815)
Cash, beginning of period 8,262 2,339
------- --------
Cash, end of period $ 1,271 $ 524
======= ========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 101 $ 204
Income taxes, net of refunds $ 2,255 $ 169
</TABLE>
See notes to financial statements.
5
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The information included in the foregoing interim financial statements
of The Fonda Group, Inc. (the "Company") are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments and accruals) which the Company considers necessary for a fair
presentation of the operating results for these periods. Results for interim
periods are not necessarily indicative of results for the entire year. These
condensed financial statements should be read in conjunction with the Company's
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the fiscal year ended July 26, 1998 and its transition report
on Form 10-Q for the nine week period ended September 27, 1998. Certain amounts
for the prior period have been reclassified to conform with current period
presentation.
On October 22, 1998, the Board of Directors approved a change in the
Company's fiscal year end from a fifty-two or fifty-three week period which ends
on the last Sunday in July to the same weekly periods which end on the last
Sunday in September. The nine-week transition period ending September 27, 1998
was not part of the fiscal year ended July 26, 1998 and will not be part of
Fiscal 1999, which will end on September 26, 1999. The quarterly comparisons in
this report are between the thirteen week periods ended December 27, 1998 and
January 25, 1998.
2. INVENTORIES
Inventories consist of the following (in thousands):
December 27, July 26
1998 1998
---- ----
Raw materials and supplies $ 17,070 $ 15,663
Work-in-process 438 194
Finished goods 16,791 18,946
-------- --------
$ 34,299 $ 34,803
======== ========
3. RELATED PARTY TRANSACTIONS
In December 1998, the Company entered into an Exclusive Manufacture and
Supply Agreement (the "Manufacture and Supply Agreement") with Creative
Expressions Group ("CEG"), an affiliate. Pursuant to such agreement, the Company
will manufacture and supply all of CEG's requirements for, among other items,
disposable paper plates, cups, napkins and tablecovers. The Company sells such
manufactured products to CEG in accordance with a formula based on cost.
Also in December 1998, the Company purchased certain manufacturing
assets from CEG for $4.9 million and in a separate transaction, purchased
certain paper plate manufacturing assets from Sweetheart Holdings Inc., an
affiliate, for $2.4 million. An independent appraisal was obtained, for each
transaction, to determine the fairness of the respective purchase prices. The
Company believes the terms on which it purchased such assets from CEG and
Sweetheart are at least as favorable as those it could have obtained from
unrelated third parties and were negotiated on an arm's length basis.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion for The Fonda Group, Inc. (the "Company")
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results or future events could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, raw material costs, labor market conditions, the
highly competitive nature of the industry, and developments with respect to
contingencies.
As a result of the change in the fiscal year-end from the fifty-two or
fifty-three week period which ends on the last Sunday in July to the same weekly
periods which ends on the last Sunday in September, the quarterly comparisons
are between the thirteen week period ended December 27, 1998 (the "1999 First
Fiscal Quarter") and the thirteen week period ended January 25, 1998 (the "1998
Second Fiscal Quarter"). The Company's business is moderately seasonal. Sales
and income from operations tend to be highest from May through November. As a
result, the four week period in January (which is included in the 1999 First
Fiscal Quarter) historically has had lower sales compared to the four week
period in October (which is included in the 1998 Second Fiscal Quarter).
The Company, a wholly owned subsidiary of SF Holdings Group, Inc. ("SF
Holdings"), is a converter and marketer of disposable paper food service
products. The prices for raw materials fluctuate. When raw material prices
decrease, selling prices have historically decreased. The actual impact on the
Company from raw material price changes is affected by a number of factors
including the level of inventories at the time of a price change, the specific
timing and frequency of price changes, and the lead and lag time that generally
accompanies the implementation of both raw materials and subsequent selling
price changes. In the event that raw materials prices decrease over a period of
several months, the Company may suffer margin erosion on the sale of such
inventory.
Recent Developments
In connection with the License Agreement, the Company and Creative
Expressions Group ("CEG"), an affiliate, entered into an Exclusive Manufacture
and Supply Agreement in December 1998 (the "Manufacture and Supply Agreement").
Pursuant to the Manufacture and Supply Agreement, the Company will manufacture
and supply all of CEG's requirements for, among other items, disposable paper
plates, cups, napkins and tablecovers. The Company sells such manufactured
products to CEG in accordance with a formula based on cost, as defined in such
agreement. The Company believes that such agreement will enable it to increase
the utilization of its manufacturing capacity. Pursuant to the License
Agreement, CEG has the right, among other things, to distribute certain products
previously distributed by the Company and in exchange therefor, the Company
receives a royalty of 5% of CEG's cash flow as determined in accordance with a
formula specified in such agreement.
7
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------------------------------
December 27, January 25,
1998 1998
------------------------------------------------------------
Amount % of Net Sales Amount % of Net Sales
------------ ------------ ------------- ---------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Net sales $ 69.0 100.0 % $ 66.0 100.0 %
Cost of goods sold 56.9 82.5 53.5 81.0
------------- ------------ -------------- -----------
Gross profit 12.1 17.5 12.5 19.0
Selling, general and
administrative expenses 8.5 12.4 8.8 13.3
Other income, net (0.1) (0.1) (0.3) (0.5)
------------- ------------ -------------- -----------
Income from operations 3.7 5.3 4.1 6.1
Interest expense, net 2.8 4.1 3.1 4.6
------------- ------------ -------------- -----------
Income before taxes 0.8 1.2 1.0 1.5
Income tax provision 0.3 0.5 0.4 0.6
============= ============ ============== ===========
Net income $ 0.5 0.7 % $ 0.6 0.9 %
============= ============ ============== ===========
============= ============ ============== ===========
</TABLE>
Thirteen Weeks Ended December 27, 1998 Compared to January 25, 1998
Net sales were $69.0 million in the 1999 First Fiscal Quarter and $66.0
million in the 1998 Second Fiscal Quarter. The 1998 Second Fiscal Quarter
included $4.2 million of net sales of tissue mill products relating to
operations that were sold in March 1998. Sales volume in the Company's
converting operations increased 32.3% in the consumer market and decreased 1.6%
in the institutional market. Average selling prices decreased 9.5% in the
consumer market and increased 8.8% in the institutional market. The increased
volume in the consumer market was primarily due to the effects of seasonality
resulting from comparing the 1999 First Fiscal Quarter (which includes the four
week period in October 1998) with the 1998 Second Fiscal Quarter (which includes
the four week period in January 1998). Sales in the Company's converting
operations were $6.3 million higher in the four weeks of October 1998 compared
to the four weeks of January 1998. The reduction in selling prices in the
consumer market primarily results from lower pricing of certain products sold to
CEG. This reduction in selling prices reflects cost savings from the License
Agreement as well as savings that the Company expects to realize in future
periods upon full implementation of the Manufacture and Supply Agreement. In the
institutional market, the increase in selling prices and reduction in sales
volume was primarily due to a change in sales mix, whereby the Company
emphasized the sale of value added converted tissue products rather than
commodity products.
Gross profit was $12.1 million in the 1999 First Fiscal Quarter and
$12.5 million in the 1998 Second Fiscal Quarter. As a percentage of net sales,
gross profit decreased from 19.0% in the 1998 Second Fiscal Quarter to 17.5% in
the 1999 First Fiscal Quarter. Gross margins in the 1999 First Fiscal Quarter
were adversely affected by reduced selling prices of consumer products,
described above, and are expected to improve in future periods upon full
implementation of the Manufacture and Supply Agreement, however, there can be no
assurance that such will occur.
Selling, general and administrative expenses were $8.5 million in the
1999 First Fiscal Quarter and $8.8 million in the 1998 Second Fiscal Quarter. As
a percentage of net sales, selling, general and administrative expenses
decreased from 13.3% in the 1998 Second Fiscal Quarter to 12.4% in the 1999
First Fiscal Quarter. The decrease as a percentage of net sales was primarily
caused by the reduction of selling, marketing and distribution costs in the 1999
First Fiscal Quarter due to the License Agreement, as well as the closure of an
administrative office. Such decrease was partially offset by the sale of the
tissue mill operation, for which selling, general and administrative costs were
low relative to net sales.
8
<PAGE>
Income from operations was $3.7 million in the 1999 First Fiscal
Quarter and $4.1 million in the 1998 Second Fiscal Quarter due to the reasons
discussed above and other income realized in the 1998 Second Fiscal Quarter from
the sale of equipment.
Interest expense, net of interest income was $2.8 million in the 1999
First Fiscal Quarter and $3.1 million in the 1998 Second Fiscal Quarter. The net
reduction in interest expense was primarily due to interest on revolving credit
borrowings in the 1998 Second Fiscal Quarter and increased interest income in
the 1999 First Fiscal Quarter.
The effective tax rate was 41% in the 1999 First Fiscal Quarter and 42%
in the 1998 Second Fiscal Quarter. As a result of the above, net income was $.5
million in the 1999 First Fiscal Quarter compared to $.6 million in the 1998
Second Fiscal Quarter.
Liquidity and Capital Resources
Historically, the Company has relied on cash flows from operations and
borrowings to finance its working capital requirements, capital expenditures and
acquisitions.
Net cash provided by operating activities in the 1999 First Fiscal
Quarter was $1.4 million compared to $10.7 million in the 1998 Second Fiscal
Quarter. The reduction in cash provided by operations is primarily due to the
seasonal reduction in working capital in January 1998, which was included in the
1998 Second Fiscal Quarter, and a buildup in amounts due from affiliates
resulting from the implementation of the License Agreement.
Capital expenditures were $8.2 million, which included $7.3 million to
purchase converting equipment and the remaining expenditures were primarily for
routine capital improvements. See Note 3 of Notes to Financial Statements.
The Company has outstanding $120 million of 9 1/2% Series A Senior
Subordinated Notes due 2007 (the "Notes") with interest payable semi-annually.
Payment of the principal of, and interest on, the Notes is subordinate in right
of payment to Senior Debt (as defined therein), which includes the Company's
revolving credit facility. The principal amount of the Notes is payable on
February 28, 2007. The Company may, at its election, redeem the Notes at any
time after March 1, 2002 at a redemption price equal to a percentage (104.75%
after March 1, 2002 and declining in annual steps to 100% after March 1, 2005)
of the principal amount thereof plus accrued interest. The Notes provide that
upon the occurrence of a Change of Control (as defined therein), the holders
thereof will have the option to require the redemption of the Notes at a
redemption price equal to 101% of the principal amount thereof plus accrued
interest.
The Company's revolving credit facility, which expires March 31, 2000,
provides up to $50 million borrowing capacity, is collateralized by eligible
accounts receivable and inventories, certain general intangibles and the
proceeds on the sale of accounts receivable and inventory. At December 27, 1998,
there was no outstanding balance and $35.5 million was the maximum advance
available based upon eligible collateral. At December 27, 1998, borrowings were
available at a bank's prime rate plus .25% or at LIBOR plus 2.25%.
Pursuant to the terms of the instruments governing the indebtedness of
the Company, the Company is subject to certain affirmative and negative
covenants customarily contained in agreements of this type, including, without
limitation, covenants that restrict, subject to specified exceptions (i)
mergers, consolidations, asset sales or changes in capital structure, (ii)
creation or acquisition of subsidiaries, (iii) purchase or redemption of capital
stock or declaration or payment of dividends or distributions on such capital
stock, (iv) incurrence of additional indebtedness, (v) investment activities,
(vi) granting or incurrence of liens to secure other indebtedness, (vii)
prepayment or modification of the terms of subordinated indebtedness, and (viii)
engaging in transactions with affiliates. In addition, such debt instruments
restrict the Company's ability to pay dividends or make other distributions to
SF Holdings. The credit facility also requires that certain financial covenants
are satisfied.
9
<PAGE>
The Company has reinvested amounts in excess of $10 million from the
sale of the tissue mill, within the required time period, in accordance with the
asset sale covenant under the indenture governing the Notes.
During the thirteen weeks ended December 27, 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 working capital and capital expenditure needs in the
foreseeable future.
Year 2000
Many of the Company's computer systems may be unable to process dates
beyond December 31, 1999. This could result in system failures or
miscalculations which could have a material adverse effect on the Company's
business, financial condition or results of operations. The Company has
implemented a Year 2000 compliance program intended to identify the programs and
infrastructures that could be effected by Year 2000 issues and to resolve the
problems that are identified on a timely basis.
The Company has completed the assessment phase, in which it has
identified potential Year 2000 issues, including those with respect to
information technology systems, technology embedded within equipment the Company
uses as well as equipment that interfaces with vendors and other third parties.
The Company has also completed the upgrade of its hardware and software systems
which run most of the Company's data processing and financial reporting software
applications and has consolidated certain of its in-house developed computer
systems into the upgraded systems. In addition, the Company is working with
vendors to ensure that its telephone systems and other embedded technologies are
Year 2000 compliant. The telephone system is expected to be Year 2000 compliant
by May 1999. EDI trading partners have been contacted, and other key business
partners are in the process of being contacted, to ensure that key business
transactions will be Year 2000 compliant. Furthermore, in the event the Company
is unable to meet certain key operational dates, the Company believes its
systems that are already Year 2000 compliant, as well as temporary solutions to
systems that are currently in place, and manual procedures would allow the
Company to ship product to customers and engage in other critical business
functions.
As of February 1, 1999, the Company estimates the total cost of its
Year 2000 program at $3.2 million, of which $2.2 million has been spent through
December 27, 1998, including $1.0 million in the 1999 First Fiscal Quarter.
Expenditures have been and are expected to be funded by cash flows from
operations, available cash, borrowings under the Company's credit facility, or
by lease. However, there can be no assurance that the Company will identify all
Year 2000 issues in its computer systems in advance of their occurrence or that
it will be able to successfully remedy all problems that are discovered. Failure
by the Company and/or its significant vendors and customers to complete Year
2000 compliance programs in a timely manner could have a material adverse effect
on the Company's business, financial condition or results of operations. In
addition, the revenue stream and financial stability of existing customers may
be adversely impacted by Year 2000 problems which could cause fluctuations in
the Company's revenues and operating profitability.
10
<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). Exhibits 10.7 through
10.9 are incorporated herein by reference to the exhibit with the corresponding
number filed as part of the Company's Form 10-Q for the quarterly period ended
April 26, 1998.
Exhibit # Description of Exhibit
--------- ----------------------
3.1 Certificate of Incorporation of The Fonda Group, Inc. (the "Company").
3.2 Amended and Restated By-laws of the Company.
4.1 Indenture, dated as of February 27, 1997, between the Company and the
Bank of New York.
4.2 Form of 9 1/2% Series A and Series B Senior Subordinated Notes, dated
as of February 27, 1997 (incorporated by reference to Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of February 27, 1997, among
the Company, Bear Stearns & Co. Inc. and Dillon, Read & Co. Inc.
10.1 Second Amended and Restated Revolving Credit and Security Agreement,
dated as of February 27, 1997, among the Company, the financial
institutions party thereto and IBJ Schroder Bank & Trust Company, as
agent.
10.2 Stock Purchase Agreement, dated as of October 13, 1995, between the
Company and Chesapeake Corporation.
10.3 Asset Purchase Agreement, dated as of October 13, 1995, between the
Company and Alfred Bleyer & Co., Inc.
10.4 Asset Purchase Agreement, dated as of March 22, 1996, among James
River Paper Company, Inc., the Company and Newco (the "James River
Agreement").
10.5 First Amendment to the James River Agreement, dated as of May 6, 1996,
among James River, the Company and Newco.
10.6 Indenture of Lease between Dennis Mehiel and the Company dated as of
January 1, 1995.
10.7 Assignment and Assumption Agreement, dated as of March 12, 1998
between the Company and SF Holdings Group, Inc.
10.8 Tax Sharing Agreement, dated as of March 12, 1998 between SF Holdings
Group, Inc. and the Company.
10.9 License Agreement, dated as of March 12, 1998 between Creative
Expressions Group, Inc. ("CEG") and the Company.
10.10* Exclusive Manufacture and Supply Agreement, dated as of December
18, 1998 between the Company and CEG.
27.1 * Financial Data Schedule.
-----------------
* filed herein.
(b) A report on Form 8-K was filed on October 30, 1998 under item 8 for the
change in the Company's fiscal year-end from the last Sunday in July to
the last Sunday in September.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized.
Date: February 9, 1999
THE FONDA GROUP, INC.
By: /s/ HANS H. HEINSEN
-------------------
Hans H. Heinsen
Senior Vice President, Chief Financial
Officer and Treasurer (Principal Financial
And Accounting Officer)
12
EXCLUSIVE MANUFACTURING AND
SUPPLY AGREEMENT
THIS AGREEMENT made as of December 18, 1998, between THE HOFFMASTER
DIVISION OF THE FONDA GROUP, INC., a Delaware corporation, ("Hoffmaster") and
CREATIVE EXPRESSIONS GROUP, INC., a Delaware corporation, ("CEG").
W I T N E S S E T H :
WHEREAS, CEG is engaged in the design, promotion, distribution and sale
of disposable party goods, including, without limitation, the Products (as
hereinafter defined); and
WHEREAS, CEG has concurrently herewith sold and transferred to
Hoffmaster, all of CEG's right, title and interest in and to certain machinery
and equipment heretofore utilized by CEG for the manufacture of the Products;
and
WHEREAS, Hoffmaster and CEG have determined that they will mutually
benefit from an exclusive manufacturing and distribution relationship pursuant
to which CEG will utilize Hoffmaster exclusively to manufacture the Products to
CEG's specifications and pursuant to which Hoffmaster will agree to so
manufacture such Products for sale to CEG, upon and subject to the terms,
covenants and conditions set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Hoffmaster and CEG hereby agree as
follows:
1. Definitions.
(a) "Adjustment Period" shall mean the most current calendar
quarter for which a Purchase Price adjustment is to be made pursuant to Section
4.1(b) hereof.
(b) "Labor Costs" shall mean the contractual hourly labor rates
for the Adjustment Period as set forth in the Collective Bargaining Agreement
covering Hoffmaster's hourly workers at Appleton, Wisconsin, as the same may be
amended, extended or replaced.
(c) "Party Goods Market" shall mean the party goods segment of
the disposable consumer goods products market in the Territory.
(d) "Products" shall mean (i) the paper plates, napkins and table
covers listed on a products list initialed by the parties for purposes of
identification; and (ii) such additional disposable consumer goods products as
Hoffmaster and CEG may from time-to-time agree upon in
1
<PAGE>
writing.
(e) "Raw Material Costs" with respect to each Product, shall mean
the actual per ton cost for all tissue or plate board, as the case may be,
incurred by Hoffmaster for the manufacture of such Product during the Adjustment
Period.
(f) "Territory" shall mean the United States and Canada.
2. Purchase and Sale. CEG hereby agrees to purchase from Hoffmaster, and
Hoffmaster hereby agrees to manufacture and sell to CEG, all of CEG's
requirements for the Products during the Term.
3. Term. The term of this Agreement (the "Term") shall commence on the
date hereof and continue through the fifth (5th) anniversary of the date of this
Agreement, and continue thereafter from year-to-year unless either party shall
elect to terminate this Agreement by notice given to the other party not less
than ninety (90) days prior to the expiration of the Term, unless sooner
terminated as herein provided.
4. Prices. (a) The initial purchase price for each Product shall be as
set forth on a price list initialed by the parties for purposes of
identification, subject to adjustment in accordance with the provisions of
Section 4(b) hereof (the "Purchase Price").
(b) The parties recognize and agree that approximately seventy
(70%) percent of Hoffmaster's manufacturing costs for the Products are based on
Raw Material Costs, and that the remainder of such costs are in all material
respects based on Labor Costs. Therefore, the Purchase Price for each Product
will be adjusted as of April 1, 1999 and as of the first day of each succeeding
calendar quarter during the Term as follows: (i) seventy (70%) percent of the
Purchase Price for such Product shall be adjusted by the percentage change, if
any, in the Raw Material Costs for the immediately preceding calendar quarter;
and (ii) thirty (30%) percent of the Purchase Price for such Product shall be
adjusted by the percentage change, if any, in the Labor Costs for the
immediately preceding calendar quarter. Further, the ratio of Raw Material Costs
to Labor Costs set forth above shall be reviewed on April 1, 1999 and annually
thereafter and adjusted as agreed upon by the parties.
5. Orders, Shipments and Forecasts. CEG shall place its orders
specifying the Products to be purchased hereunder not later than twenty-one (21)
days prior to the date on which such Products are to be shipped. CEG has
provided a yearly usage forecast which CEG shall update semi-annually during the
Term. CEG shall be required to purchase all raw materials specifically relating
to the Products but not to exceed three (3) months of normal demand,
work-in-process and finished goods Products inventory on hand upon the
expiration or sooner termination of the Term and such obligation shall survive.
2
<PAGE>
6. Delivery, Freight and Title. The Purchase Price shall be the price
F.O.B. CEG's facility at Indianapolis, Indiana, with full freight being at
Hoffmaster's sole cost and expense; except, however, that the Purchase Price for
Products manufactured for Target shall be the price F.O.B. Appleton, Wisconsin
and CEG shall have the right to select and contract with the applicable carriers
for such Products. Title to and possession of Products shipped hereunder shall
pass to CEG upon delivery by Hoffmaster to the carrier or if delivered by
Hoffmaster, upon delivery to CEG's facility, as the case may be, and such
Products shall be at the risk of CEG from and after the date of such delivery.
7. Taxes. In addition to the Purchase Price, CEG shall pay to Hoffmaster
an amount equal to all federal, state, or local sales, use, or excise taxes now
or hereafter imposed or payable with respect to the sale and delivery of the
Products sold hereunder ("Taxes").
8. Invoices, Terms of Payment. Invoices setting forth the Purchase Price
and the Taxes with respect thereto shall be forwarded to CEG at the time of
delivery of the Products covered thereby to CEG. Payment shall be in cash, net
thirty (30) days, from the date of such invoices.
9. Separate Sale. Each shipment of Products under this Agreement shall
constitute a separate and distinct sale, and except as otherwise provided in
Section 13 hereof, any default of CEG in specifying, accepting or paying for any
shipment shall not affect Hoffmaster's right to insist upon full performance of
the provisions of this Agreement for the full Term.
10. Contingencies. The obligations of each party hereto with respect to
the manufacture, sale, purchase, shipment, delivery and receipt of Products,
shall be suspended to the extent that such party is unable to manufacture, sell,
purchase, ship, deliver or receive Products by reason of strikes, lockouts,
boycott, picketing, riots, civil commotion, sabotage, acts of war, embargoes,
carrier shortage, mechanical failures, prohibition imposed by federal, state or
local authority, fires, accidents, floods or any other event beyond such party's
reasonable control. During any period of shipping suspension, or with respect to
Products with specifications which exceed Hoffmaster's technical or other
capabilities, CEG shall have the right to purchase CEG's requirements for the
Products affected thereby, without restriction.
11. Inspections and Claims. Any claim asserted by CEG, for any reason
whatsoever except for quality, shall be made by notice given by CEG to
Hoffmaster within sixty (60) days after receipt of the material which is the
subject matter of the claim, or such claim shall be deemed to have been waived.
CEG shall also store inside, and set aside such material for inspection by
Hoffmaster, and shall give Hoffmaster an opportunity to conduct an adequate
investigation. No claim shall be allowed for defects in quality unless made
within sixty (60) days after shipment nor after the material shipped hereunder
is processed by CEG in any manner. Hoffmaster shall be deemed to have allowed
each such claim unless Hoffmaster disputes the same in writing within sixty (60)
days following Hoffmaster's receipt of notice of such claim and sets forth in
reasonable detail the basis for such dispute.
3
<PAGE>
12. Hoffmaster's Warranty. Hoffmaster warrants that the Products
delivered hereunder shall be merchantable, comply with CEG's Product
specifications and otherwise be of standard grade and quality as described in
TAPPI standards. HOFFMASTER SHALL NOT BE LIABLE FOR ANY BREACH OF SUCH WARRANTY
IN ANY AMOUNT IN EXCESS OF THE PRICE OF THE PARTICULAR PRODUCTS WITH RESPECT TO
WHICH SUCH BREACH OCCURS. IN NO EVENT SHALL CEG BE ENTITLED TO MAKE ANY CLAIM TO
RECOVER FOR LOSS OF CONTENTS OR FOR SPECIAL OR CONSEQUENTIAL DAMAGES WHICH CEG
HEREBY EXPRESSLY WAIVES. HOFFMASTER DOES NOT WARRANT FITNESS FOR ANY PARTICULAR
PURPOSE OR MAKE ANY OTHER WARRANTY EXPRESSED OR IMPLIED WITH RESPECT TO THE
PRODUCTS DELIVERED HEREUNDER.
13. Default. In the event of a breach of this Agreement by either CEG or
Hoffmaster, as the case may be, which shall not be cured within fifteen (15)
days following the defaulting party's receipt of notice of such default from the
non-defaulting party, the non-defaulting party, at its option may (a) without
affecting in any way the obligation of either party in respect of further
shipment hereunder, regard such shipment as a separate and independent sale on
the terms and conditions applicable hereunder, or (b) terminate this Agreement
as regards further shipments and if CEG shall be the defaulting party,
Hoffmaster may in such event declare the obligations of CEG for all Products
shipped due forthwith, but the defaulting party shall remain liable to the
non-defaulting party for all losses and damages sustained by reason of such
breach.
14. Bankruptcy, Receivership, etc. In the event of the adjudication of
either party as bankrupt, or of the appointment of a receiver for either party
which shall remain undischarged for forty-five (45) days after such appointment,
or of the making by either party of an assignment for the benefit of creditors,
the other party shall have the right to terminate this Agreement forthwith but
without waiving thereby its right to recover any losses and damages to which it
may be entitled.
15. Non-Compete. Hoffmaster agrees that during the Term, it will not
compete with CEG in those market segments of the Party Goods Market accounting
for not less than sixty (60%) percent of CEG's aggregate Product sales during
calendar year 1998.
16. Trademarks and Copyrights.
(a) Products and their labels and packaging under this Agreement
may bear, as CEG may direct, CEG trademarks, corporate logo and copyright
notice. Hoffmaster's use of CEG trademarks, corporate logo and designs (whether
or not copyrighted) shall be limited to Products and their labels and packaging
manufactured or sold to CEG under this Agreement, and upon the expiration or
sooner termination of this Agreement, Hoffmaster shall not use any CEG designs
(whether or not copyrighted) or any CEG trademark, corporate logo or any other
marks confusingly similar thereto except to the extent necessary to complete
ensembles, if any, work-in-process inventory and packaging for such inventory on
hand at such time.
(b) Except as expressly provided in Section 16(a) above, this
Agreement in no
4
<PAGE>
way creates or conveys a license or permission of any kind for Hoffmaster to use
CEG trademarks, corporate logo, copyrights or designs, and expressly prohibits
the unauthorized use of CEG trademarks, corporate logo, copyrights or designs.
(c) Hoffmaster shall not at any time contest or claim rights in
CEG trademarks, corporate logo or designs (whether or not copyrighted), or cause
or permit any other person or entity to do anything that may tend to disparage,
confuse or lessen the significance of any CEG trademarks, corporate logo or
designs. Hoffmaster will not avail itself of the name of CEG in any of
Hoffmaster's promotional or advertising literature, or otherwise assert
affiliation with CEG or any of its subsidiaries without prior written permission
of CEG.
17. Independent Contractor. CEG acknowledges that it is an independent
business acting as an independent contractor. Nothing in this Agreement or in
the course of dealing of the parties shall be construed to create between the
parties hereto a relationship as partners, joint venturers, or as authorizing
either party to obligate the other in any manner.
18. Indemnification.
(a) Subject to the limitations contained in Section 12 hereof,
Hoffmaster hereby agrees to indemnify and hold CEG harmless from and against any
and all damages, losses, deficiencies, actions, demands, judgments, costs and
expenses (including reasonable attorneys' fees) of or against CEG to the extent
resulting from (i) the breach of any warranty or the nonfulfillment of any
undertaking, warranty, covenant or agreement on the part of Hoffmaster contained
herein; (ii) a defect in any of the Products; or (iii) except with respect to a
claim for which Hoffmaster is entitled to indemnification pursuant to clause
(ii) of Section 18(b) hereof, any claim by a third party that the Products
infringe upon the rights of such party.
(b) CEG hereby agrees to indemnify and hold Hoffmaster harmless
from and against any and all damages, losses, deficiencies, actions, demands,
judgments, costs and expenses (including reasonable attorneys' fees) of or
against Hoffmaster to the extent resulting from (i) the nonfulfillment of any
undertaking, covenant or agreement on the part of CEG contained herein; or (ii)
any claim by a third party that Hoffmaster's use of any trademark, corporate
logo or Product design pursuant to Section 16 hereof, infringes upon the rights
of such party.
19. Confidentiality. The parties mutually agree that all information and
documentation made available or disclosed to each other as a result of this
Agreement, shall be received and treated by each other as confidential and such
information shall be maintained on a restricted basis. The parties agree not to
disclose to third parties any such information regarding each other's
operations, business, marketing strategies or finances. CEG and Hoffmaster each
acknowledge that the other may possess certain trade secrets or other
intellectual property regarding its manufacturing processes for the Products and
agrees to strictly maintain the confidentiality thereof. The above provisions
shall not apply to information which (a) is or becomes publicly available
through no fault of the receiving party (b) was in the receiving party's
possession as shown by written records prior to
5
<PAGE>
disclosure hereunder or (c) is received from a third party with right to
disclose and without any obligation on the receiving party to maintain such
information in confidence.
20. Notices. Any notice, consent, approval or election authorized or
required by this Agreement shall be effective only if in writing and sent by
United States registered or certified mail, return receipt requested, addressed
to the other party at the following address or to such other address as either
party shall designate by notice to the other.
If to Hoffmaster: The Fonda Group, Inc.
Hoffmaster Division
2920 North Main Street
Oshkosh, Wisconsin 54901
Attn: Robert Korzenski
President
If to CEG: Creative Expressions Group, Inc.
7240 Shadeland Station
Suite 300
Indianapolis, Indiana 46256-3928
Attn: Jon McLain
Vice President and General Manager
Notices shall be deemed received on the third business day following the mailing
thereof in the manner set forth above.
21. Arbitration. Any controversy or claim arising out of or relating to
this Agreement or the breach thereof shall be settled by arbitration in Oshkosh,
Wisconsin (or in such other place as the parties may mutually agree) in
accordance with the laws or regulations then obtaining of the American
Arbitration Association, and judgment upon the award rendered may be entered in
any court, state or federal, having jurisdiction.
(INTENTIONALLY LEFT BLANK)
6
<PAGE>
22. Miscellaneous. This Agreement shall be governed by the laws of the
State of Wisconsin, contains the entire agreement of the parties hereto with
respect to the subject matter hereof, may not be amended or modified in any
manner except by written instrument executed and delivered by duly authorized
officers of each party hereto, and shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that neither party shall have the right to assign this
Agreement without obtaining the other party's prior consent thereto in each
instance.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
ATTEST: THE FONDA GROUP, INC.
/s/Harvey L. Friedman By: /s/Robert Korzenski
- --------------------- --------------------
Harvey L. Friedman Robert Korzenski
Secretary President
ATTEST: CREATIVE EXPRESSIONS GROUP, INC.
/s/Harvey L. Friedman By: /s/Jon McLain
- --------------------- --------------
Harvey L. Friedman Jon McLain
Secretary Vice President and General Manager
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Form 10-Q
for the thirteen week period ended December 27, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> DEC-27-1998
<CASH> 1,271
<SECURITIES> 0
<RECEIVABLES> 30,928
<ALLOWANCES> 816
<INVENTORY> 34,299
<CURRENT-ASSETS> 79,991
<PP&E> 77,666
<DEPRECIATION> 22,320
<TOTAL-ASSETS> 175,384
<CURRENT-LIABILITIES> 28,053
<BONDS> 121,608
0
0
<COMMON> 0
<OTHER-SE> 17,706
<TOTAL-LIABILITY-AND-EQUITY> 175,384
<SALES> 68,992
<TOTAL-REVENUES> 68,992
<CGS> 56,887
<TOTAL-COSTS> 56,887
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 46
<INTEREST-EXPENSE> 3,092
<INCOME-PRETAX> 834
<INCOME-TAX> 342
<INCOME-CONTINUING> 492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 492
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
