UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For
the fiscal year ended September 26, 1999
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) 235-9330
(Address and telephone number of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
As of December 20, 1999, there were no shares of voting and non-voting
equity of the registrant held by non-affiliates.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value, as of December 20, 1999: 100 Shares
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PART I
ITEM 1. BUSINESS
General
The Fonda Group, Inc. (the "Company"), a wholly-owned subsidiary of SF
Holdings Group, Inc. ("SF Holdings"), believes it is a leading converter and
marketer of a broad line of paperboard and tissue based disposable foodservice
products. The Company sells its products under both branded and private labels
to the consumer and institutional markets and participates at all major price
points. The Company believes it is a market leader in the sale of premium white,
colored and custom-printed napkins, placemats, tablecovers and food trays and in
the sale of private label consumer paper plates, bowls and cups. The Company's
Sensations(R), Splash(R), and Party Creations(R), brands are well recognized in
the consumer markets and its Hoffmaster(R) brand is well recognized in the
institutional markets.
The Company offers a broad range of products, enabling it to offer its
customers "one-stop" shopping for their disposable foodservice products needs.
The Company is principally a converter and marketer of paperboard and tissue
products, the prices of which typically follow the general movement in the costs
of such principal raw materials. The Company believes that it is generally able
to maintain relatively stable margins between its selling prices and its raw
materials costs.
The Company sells its converted products to more than 2,500 consumer
and institutional customers located throughout the United States and has
developed and maintained long-term relationships with many of these customers.
Restaurants, schools, hospitals and other major institutions comprise the
institutional market. Supermarkets, mass merchants, warehouse clubs, discount
chains and other retail stores comprise the consumer market.
Recent Developments
On December 3, 1999, Creative Expressions Group, Inc. ("CEG"), an
affiliate of the Company in the disposable party goods products business, became
an 87% owned subsidiary of SF Holdings pursuant to a merger. On December 6,
1999, pursuant to an asset purchase agreement entered into on November 21, 1999
(the "CEG Asset Purchase Agreement"), the Company purchased the intangible
assets of CEG, including domestic and foreign trademarks, patents, copyrights
and customer lists. In addition, pursuant to the CEG Asset Purchase Agreement,
the Company has agreed to purchase over a sixty day period certain inventory of
CEG. The aggregate purchase price for the intangible assets and inventory is $41
million ($16 million for the intangible assets and $25 million for the
inventory) payable in cash, the cancellation of certain notes and warrants, and
the assumption of certain liabilities. The agreement further provides that the
Company may acquire other CEG assets in exchange for outstanding trade payables
owed to the Company by CEG. In connection with this agreement, the Company will
cancel the CEG Agreements. See "Certain Relationships and Related Transactions".
Upon the consummation of the CEG Asset Purchase Agreement, the Company will
market, manufacture and distribute disposable party goods products directly to
the specialty (party) channel of the Company's consumer market. The transaction
will be accounted for in a manner similar to pooling-of-interests.
Products
General. The Company's principal products include: (i) paper
foodservice products, such as white, solid color and printed paper plates, bowls
and cups, (ii) tissue and specialty foodservice products, such as printed and
solid napkins, placemats and tablecovers, and (iii) paper and tissue based party
goods products such as colored and printed plates and napkins and tablecovers.
The Company believes it holds one of the top three market positions in white
paper plates, decorated plates, bowls and cups in the consumer market, as well
as, food pails, trays and premium napkins in the institutional market.
Paperboard Products
Tabletop Service Products. Paper plates and bowls represent the largest
portion of the Company's sales and are sold to the consumer and institutional
markets. In Fiscal 1999, the Company also started manufacturing certain of such
products for Sweetheart Holdings Inc. ("Sweetheart"), an affiliate. White
uncoated and coated paper plates are considered commodity items and are
generally purchased by cost-conscious consumers for everyday use. Printed and
solid color plates and bowls are value-added products and are purchased for
everyday use as well as for seasonal celebrations, such as Halloween and
Christmas.
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Beverage Service Products. The Company offers a number of attractive
cup and lid combinations for both hot and cold beverages. Cups for the
consumption of cold beverages are generally wax coated for superior rigidity,
while cups for the consumption of hot beverages are made from paper which is
poly-coated on one side to provide a barrier to heat transfer. The Company's hot
and cold beverage cups are sold to both the consumer and institutional markets.
In Fiscal 1999, the Company began to purchase all of its hot cups from
Sweetheart.
Take-out Containers. The Company sells paper trays and food pails in
the institutional market for use by restaurants and other foodservice
operations.
Tissue and Specialty Foodservice Products
Tissue Converted Products. Napkins represent the second largest portion
of the Company's sales and are sold under the Company's Hoffmaster(R), Fonda(R)
or Sensations(R) brand names, as well as under national distributor private
label names. Napkin products range from decorated-colored, multi-ply napkins and
simple custom printed napkins featuring an end-user's name or logo to fully
printed, graphic-intensive napkins for the premium paper goods sector.
Tablecovers, ranging from economy to premium product lines, are sold under the
Hoffmaster(R), Linen-Like(R), Windsor(R) or Sensations(R) brand names. The
Company offers a broad selection of tablecovers in one-, two-, and three-ply
configurations and produces tablecovers in white, solid color and one-to
four-colored printed products.
Specialty Products. The Company sells placemats, traycovers, paper
doilies, paper portion cups and fluted products in a variety of shapes and
sizes. The Company produces unique decorated placemats in a variety of shapes.
In addition, the Company uses a proprietary technology to produce non-skid
traycovers that serve the particular needs of the airline and healthcare
industries.
Paper Party Goods Products
The Company manufactures paperboard and tissue party goods products
that, in Fiscal 1999, it sold to CEG for distribution, including products it had
licensed to CEG under the Company's Splash(R) or Party Creations(R) brand names.
Upon consummation of the CEG Asset Purchase Agreement, the Company will also
market and distribute such party goods products directly to its specialty
(party) channel. In Fiscal 1999, the Company also licensed crepe products under
the Party Creations(R) brand to CEG. Party goods products include paper plates,
napkins, cups and tablecovers sold in ensembles or separately to party goods
stores, mass merchants, drug stores and grocery chains.
Marketing and Sales
The Company's marketing efforts are principally focused on (i)
providing value-added services; (ii) category expansion by cross marketing
products between the consumer and institutional markets; (iii) developing new
graphic designs which the Company believes will offer consumers recognized
value; and (iv) increasing brand awareness through enhanced packaging and
promotion. The Company sells its products through an internal sales organization
and independent brokers. The Company believes its experienced sales team and its
ability to provide high levels of customer service enhance its long-term
relationships with its customers. The Company sells to more than 2,500
institutional and consumer customers located throughout the United States.
In Fiscal 1999, the Company's five largest customers, including CEG,
represented approximately 26% of net sales. CEG, the Company's largest customer,
accounted for 10% of net sales.
Sales
Institutional Market. Restaurants, schools, hospitals and other major
institutions comprise the Company's institutional market. This market, which the
Company sells to through foodservice distributors, represented approximately 49%
of the Company's net sales in Fiscal 1999. The Company's predominant
institutional customers of private label products include Sysco Corporation,
Alliant Foodservice, Inc. and Dinex International, Inc. Institutional customers
of branded products include U.S. Foodservice, Inc., Bunzl USA, Inc. and Edward
Don and Company. The institutional market is serviced by brokers and dedicated
field service representatives located throughout the United States. The field
sales force works directly with these national and regional distributors to
service the needs of the various segments of the foodservice industry.
Consumer Market. Supermarkets, mass merchants, warehouse clubs,
discount chains, specialty party and other retail stores comprise the Company's
consumer market. This market represented approximately 51% of the Company's net
sales in Fiscal 1999. The Company's consumer market is classified into four
distribution channels:
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(i) the grocery channel, which is serviced through a national and regional
network of brokers, (ii) the retail mass merchant channel, which is serviced
directly by field service representatives, (iii) the specialty (party) channel,
which in Fiscal 1999 had been serviced principally through CEG (see
"--Affiliated Company Sales") and (iv) the warehouse club channel, which is
serviced both through national and regional networks of brokers and directly by
field service representatives. Customers of the Company's branded consumer
products include Publix Super Markets, Inc., Ames Department Stores, Inc. and
CVS Corporation. The Company's primary private label customers in the consumer
market include The Kroger Co., Topco Associates Inc., The Stop & Shop Companies,
Inc., and The Great Atlantic & Pacific Tea Company, Inc.
Affiliated Company Sales. In Fiscal 1999, the Company's net sales of
party goods products to CEG were $26.9 million. As a result of the CEG Asset
Purchase Agreement, the Company will market and distribute these products
directly to the specialty (party) channel.
Distribution
Each of the Company's manufacturing facilities includes sufficient
warehouse space to store such facility's raw materials and finished goods as
well as products from the Company's other manufacturing facilities. Shipments of
finished goods are made from each facility via common carrier.
Competition
The disposable foodservice products industry is highly competitive. The
Company believes that competition is principally based on product quality,
customer service, price and graphics capability. Competitors include large
multinational companies as well as regional and local manufacturers. The
marketplace for these products is fragmented and includes participants that
compete across the full line of products, as well as those that compete with a
limited number of products. Some of the Company's major competitors are
significantly larger than the Company, are vertically integrated and have
greater access to financial and other resources.
The Company's primary competitors in the paperboard foodservice
converted product categories include Imperial Bondware (a division of
International Paper Co.), Fort James Corp., AJM Packaging Corp., Temple-Inland
Inc., Fold-Pak Corp. and Solo Cup Co. Major competitors in the tissue and
specialty foodservice converted product categories include Duni Corp., Erving
Paper Products Inc., Fort James Corp. and Wisconsin Tissue Mills Inc. (a
subsidiary of Georgia-Pacific Corp.). The Company's competitors also include
manufacturers of products made from plastics and foam.
Raw Materials and Suppliers
Raw materials are a significant component of the Company's cost
structure. Principal raw materials for the Company's paperboard and tissue
operations include bleached paperboard, napkin tissue, bond paper and waxed bond
paper obtained from major domestic manufacturers. Other material components
include corrugated boxes, poly bags, wax adhesives, coating and inks.
Paperboard, napkin tissue, bond paper and waxed bond paper are purchased in
"jumbo" rolls which may either be slit for in-line printing and processing,
printed and processed or printed and blanked for processing into final products.
Primary suppliers of paperboard stock are Georgia-Pacific Corp., Temple-Inland
Inc., International Paper Co., and Gulf States Paper Corporation. Lincoln is the
primary supplier of tissue to the Company. The Company has a number of suppliers
for substantially all of its raw materials and believes current sources of
supply for its raw materials are adequate to meet its requirements. The Company
purchases the bulk of its bleached paperboard and napkin tissue under long-term
contracts.
Environmental Matters
The Company and its operations are subject to comprehensive and
frequently changing Federal, state, local and foreign environmental and
occupational health and safety laws and regulations, including laws and
regulations governing emissions of air pollutants, discharges of waste and storm
water, and the disposal of hazardous wastes. The Company is subject to liability
for the investigation and remediation of environmental contamination (including
contamination caused by other parties) at properties that it owns or operates
and at other properties where the Company or its predecessors have arranged for
the disposal of hazardous substances. As a result, the Company is involved from
time to time in administrative and judicial proceedings and inquiries relating
to environmental matters. The Company believes there are currently no pending
investigations at the Company's plants and sites relating to environmental
matters. However, there can be no assurance the Company will not be involved in
any such proceeding in the future and that any amount of future clean up costs
and other environmental liabilities will not be material.
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The Company cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist at its properties. Enactment of more stringent laws or
regulations or more strict interpretation of existing laws and regulations may
require additional expenditures by the Company, some of which could be material.
Employees
At September 26, 1999, the Company employed approximately 1,600
persons, of whom approximately 1,300 were hourly employees. The Company has
collective bargaining agreements in effect at its facilities in Appleton,
Wisconsin; Oshkosh, Wisconsin; St. Albans, Vermont; Williamsburg, Pennsylvania
and Maspeth, New York which cover all production, maintenance and distribution
hourly-paid employees at each respective facility and contain standard
provisions relating to, among other things, management rights, grievance
procedures, strikes and lockouts, seniority, and union rights. The current
expiration dates of the Company's collective bargaining agreements at the
Appleton, Oshkosh, St. Albans, Williamsburg and Maspeth facilities are May 1,
2002, May 31, 2002, January 31, 2001, June 11, 2000 and October 31, 2001,
respectively. The Company considers its relationship with its employees to be
good.
ITEM 2. PROPERTIES
The table below provides summary information regarding the principal
properties owned or leased by the Company. All of the Company's facilities are
well maintained, in good operating condition and suitable for the Company's
operations.
SIZE
(APPROXIMATE
MANUFACTURING/ AGGREGATE OWNED/
LOCATION WAREHOUSE SQUARE FEET) LEASED
-------- --------- ------------ ------
Appleton, Wisconsin M/W 267,700 O
Glens Falls, New York M/W 59,100 O
Goshen, Indiana M/W 63,000 O
Lakeland, Florida M/W 45,000 L
Maspeth, New York M/W 130,000 L
Oshkosh, Wisconsin M/W 484,000 O
St. Albans, Vermont (2 facilities) M 124,900 O
W 182,000 L
Williamsburg, Pennsylvania M/W 146,000 O(1)
- ------------------
(1) Subject to capital lease.
ITEM 3. Legal Proceedings
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of its business. The Company
maintains insurance coverage of types and in amounts which it believes to be
adequate. The Company believes that it is not presently a party to any
litigation, the outcome of which could reasonably be expected to have a material
adverse effect on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDLERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a wholly-owned subsidiary of SF Holdings. There is no
established public trading market for the Company's common stock. The Company
has never paid any cash dividends on its common stock and does not anticipate
paying any cash dividends in the foreseeable future. The Company's current
credit facility and indenture governing the $120 million of 9 1/2% Senior
Subordinated Notes due 2007 (the "Notes") limit the payment of dividends. The
Company currently intends to retain future earnings to fund the development and
growth of its business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the audited
consolidated financial statements of the Company. The information set forth
below is not necessarily indicative of results of future operations, and should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and related notes thereto included elsewhere in this Form 10K.
<TABLE>
<CAPTION>
Nine
Year Weeks
Ended Ended
September September Years Ended July (1)
1999 (1) 1998 1998 1997 1996 1995
-------- ---- ---- ---- ---- ----
Statement of Operations Data: (2)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 262,837 $ 42,593 $ 271,402 $ 252,513 $ 204,903 $ 97,074
Cost of goods sold 225,509 36,126 222,509 201,974 164,836 76,252
-------- ------ -------- ------- ------- -------
Gross profit 37,328 6,467 48,893 50,539 40,067 20,822
Selling, general and
administrative expenses 28,810 5,601 34,450 31,527 26,203 14,112
Other income, net (3) (963) (351) (14,947) (1,608) - -
-------- ------ -------- ------- ------- -------
Income from operations 9,481 1,217 29,390 20,620 13,864 6,710
Interest expense, net 11,926 1,796 12,006 9,017 7,934 2,943
-------- ------ -------- ------- ------- -------
Income (loss) before taxes and
extraordinary loss (2,445) (579) 17,384 11,603 5,930 3,767
Provision (benefit) for income taxes (577) (238) 7,127 4,872 2,500 1,585
-------- ------ -------- ------- ------- -------
Income (loss) before
extraordinary loss (1,868) (341) 10,257 6,731 3,430 2,182
Extraordinary loss, net (4) - - - 3,495 - -
-------- ------ -------- ------- ------- -------
Net income $ (1,868) $ (341) $ 10,257 $ 3,236 $ 3,430 $ 2,182
======== ====== ======== ======= ======= =======
Balance Sheet Data:
Cash $ 109 $ 16,361 $ 5,908 $ 1,467 $ 120
Working capital 61,690 57,149 58,003 38,931 28,079
Property, plant and equipment, net 51,922 48,151 59,261 46,350 26,933
Total assets 184,405 178,528 179,604 136,168 79,725
Total indebtedness (5) 133,443 122,362 122,987 87,763 48,165
Redeemable common stock (6) - - 2,076 2,179 2,115
Stockholders' equity 13,331 17,555 15,010 11,873 7,205
</TABLE>
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(1) All fiscal years were 52 weeks. The Company's 1999 fiscal year ended on the
last Sunday in September. Previously, it ended on the last Sunday in July.
Certain prior year amounts have been reclassified to conform to current
year presentation.
(2) Includes the results of operations of the Company and acquisitions since
their respective dates of acquisition in accordance with purchase
accounting. See Note 3 to the Financial Statements.
(3) Fiscal 1998 includes a $15.9 million gain on the sale of substantially all
of the fixed assets and certain related working capital (the "Mill
Disposition") of its tissue mill in Gouverneur, New York (the "Mill") and
settlement in connection with the termination by the owner of the
co-generation facility formerly hosted by the Company at the Mill of its
obligation, among other things, to supply steam to the Mill (the "Steam
Contract").
(4) The Company incurred a $3.5 million extraordinary loss (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.
(5) Includes short-term and long-term borrowings and current maturities of
long-term debt.
(6) See Note 10 to the Financial Statements.
ITEM 7. 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 disposable paper foodservice
products. The prices for raw materials fluctuate. When raw material prices
decrease, selling prices have historically decreased. The actual impact on the
Company from raw material price changes is affected by a number of factors
including the level of inventories at the time of a price change, the specific
timing and frequency of price changes, and the lead and lag time that generally
accompanies the implementation of both raw materials and subsequent selling
price changes. In the event that raw materials prices decrease over a period of
several months, the Company may suffer margin erosion on the sale of such
inventory.
The Company's business is moderately seasonal. Income from operations
tends to be greater during the first and fourth quarters of the fiscal year than
during the second and third quarters.
Recent Developments
On December 3, 1999, CEG, an affiliate of the Company in the disposable
party goods products business, became an 87% owned subsidiary of SF Holdings
pursuant to a merger. On December 6, 1999, pursuant to the CEG Asset Purchase
Agreement, the Company purchased the intangible assets of CEG, including
domestic and foreign trademarks, patents, copyrights and customer lists. In
addition, pursuant to the CEG Asset Purchase Agreement, the Company has agreed
to purchase over a sixty day period certain inventory of CEG. The aggregate
purchase price for the intangible assets and the inventory is $41 million ($16
million for the intangible assets and $25 million for the inventory) payable in
cash, the cancellation of certain notes and warrants and the assumption of
certain liabilities. The agreement further provides that the Company may acquire
other CEG assets in exchange for outstanding trade payables owed to the Company
by CEG. In connection with this agreement, the Company will cancel the CEG
Agreements. See "Certain Relationships and Related Transactions". Upon the
consummation of the CEG Asset Purchase Agreement, the Company will market,
manufacture and distribute disposable party goods products directly to the
specialty (party) channel of the Company's consumer market. The transaction will
be accounted for in a manner similar to pooling-of-interests.
During Fiscal 1999, the Company was engaged in an extensive program to
improve manufacturing efficiencies and upgrade production capabilities, which
included, among other things, the full implementation of the Manufacture and
Supply Agreement and further consolidation of its manufacturing operations (the
"Efficiency Initiatives"). This program has resulted in incremental expenses
arising from start-up, training and other related expenses in Fiscal 1999 and as
of September 26, 1999 was substantially complete. In connection with the
Efficiency Initiatives, (i) in December 1998, the Company purchased certain
paper plate manufacturing assets from Sweetheart, an affiliate, for $2.4 million
and (ii) in February 1999, the Company entered into a five year operating lease
whereby the Company leases certain paper cup manufacturing assets to Sweetheart.
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Year 2000
The Company has completed its Year 2000 readiness program intended to
identify the programs and infrastructures that could be affected by Year 2000
issues and resolve the problems that were identified on a timely basis.
During the assessment phase of its year 2000 readiness program, the
Company 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 completed the upgrade of its hardware and software systems which
run most of its 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 has upgraded its telephone, data
communication and network systems to ensure that they are Year 2000 ready.
Embedded logic in manufacturing equipment has been tested and is now Year 2000
ready. Contingency plans have been developed for equipment that cannot be
upgraded. EDI trading partners and other key business partners have been
contacted to ensure that key business transactions are Year 2000 ready. The
Company has received detailed business plans and commitments from all such key
partners that they are Year 2000 ready. Contingency plans have been developed to
work with trading partners or to replace suppliers who cannot meet our
compliance deadlines. The Company acknowledges that its business systems are
Year 2000 ready, but may experience isolated incidences of non-compliance and
potential outages with respect to its information technology infrastructure. The
Company has allocated internal resources to be ready to take action should any
of these events occur. Investors are cautioned, however, that the Company's
assessment of its readiness, of the costs of performing the program and the
risks attendant thereto, and of the need for its contingency plans may change
materially.
As of September 26, 1999, the Company has spent a total of $2.8 million
to complete its Year 2000 readiness program, of which $1.6 million was spent in
Fiscal 1999. Expenditures have been funded by cash flows from operations,
available cash, borrowings under the Company's credit facility, or by lease.
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 readiness
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.
Change of fiscal year-end
In October 1998, the Company changed its fiscal year end to the last
Sunday in September. The following discussion compares the fiscal year ended
September 26, 1999 to the fiscal year ended July 26, 1998 and the nine week
transition period ended September 27, 1998 (the "Nine Week Transition Period")
to the thirteen week period ended October 26, 1997 (the "1998 First Quarter").
The Company did not recast the data for the comparative fiscal years ended
September 26, 1998 and September 28, 1997, or for the nine week period ended
September 28, 1997 because certain review procedures and significant judgmental
estimates that are implemented on a quarterly basis only, were not implemented
for such periods. As a result of changes in certain computer systems, the
Company believes it would be impractical to implement these review procedures
and make such judgmental estimates to recast the prior fiscal years or nine week
period.
8
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Results of Operations
<TABLE>
<CAPTION>
Year ended
September Years Ended July
1999 1998 1997
% of Net % of Net % of Net
Amount Sales Amount Sales Amount Sales
------ ----- ------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 262.8 100.0 % $ 271.4 100.0 % $ 252.5 100.0 %
Cost of goods sold 225.5 85.8 222.5 82.0 202.0 80.0
----------- --------- ------------ -------- ------------ ---------
Gross profit 37.3 14.2 48.9 18.0 50.5 20.0
Selling, general and
administrative expenses 28.8 11.0 34.5 12.7 31.5 12.5
Other income, net (1.0) (0.4) (14.9) (5.5) (1.6) (0.6)
----------- --------- ------------ -------- ------------ ---------
Income from operations 9.5 3.6 29.4 10.8 20.6 8.2
Interest expense, net 11.9 4.5 12.0 4.4 9.0 3.6
----------- --------- ------------ -------- ------------ ---------
Income (loss) before taxes
and extraordinary loss (2.4) (0.9) 17.4 6.4 11.6 4.6
Income tax expense (benefit) (0.6) (0.2) 7.1 2.6 4.9 1.9
----------- --------- ------------ -------- ------------ ---------
Income (loss) before
extraordinary loss (1.9) (0.7) 10.3 3.8 6.7 2.7
Extraordinary loss, net - - - - 3.5 1.4
----------- --------- ------------ -------- ------------ ---------
Net income (loss) $ (1.9) (0.7)% $ 10.3 3.8 % $ 3.2 1.3 %
=========== ========= ============ ======== ============ =========
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Net sales decreased $8.6 million, or 3.2%, to $262.8 million. Fiscal
1998 included $13.3 million of net sales of tissue mill products prior to the
March 1998 Mill Disposition. Excluding such tissue product sales, net sales
increased $4.8 million in the converting operations. Net sales of party goods
products decreased 8.7%, primarily due to the CEG Agreements. Such agreements
resulted in a significant increase in volume, which was more than offset by a
significant reduction in selling prices. The lower selling prices reflect cost
savings from the License Agreement as well as anticipated savings that the
Company had begun to realize from implementation of the Manufacture and Supply
Agreement. Excluding such party goods products, net sales in the consumer market
increased 1.6%, resulting from an increase in sales volume of 5.3%, which was
partially offset by a 3.5% decrease in average selling prices. Selling prices in
this market were adversely affected by reductions in raw material costs that
were passed through to customers as well as more competitive market conditions.
In the institutional market, net sales increased 5.2%, resulting from a 3.6%
increase in sales price and a 1.5% increase in volume. The increased sales
volume in the institutional market was primarily due to an increase in sales of
value added converted tissue products and certain commodity paperboard products.
The increase in average selling prices primarily resulted from the more
favorable sales mix.
Gross profit decreased $11.6 million, or 23.7%, to $37.3 million.
Fiscal 1998 included $1.7 million of gross profit from tissue mill products
prior to the Mill Disposition. Excluding the gross profit from such tissue
product sales, gross profit decreased $9.9 million in the converting operations.
As a percentage of net sales, gross profit decreased from 18.0% in Fiscal 1998
to 14.2% in Fiscal 1999. Gross profit in Fiscal 1999 was adversely affected by
reduced selling prices of party goods products sold to CEG, described above,
margin erosion in commodity paperboard products, as well as excess costs
incurred in implementing the Efficiency Initiatives. Gross profit is expected to
improve in future periods as the cost savings resulting from the Efficiency
Initiatives are realized, and as a result of recent price increases in various
product lines, however, there can be no assurance that such improvements will
occur.
Selling, general and administrative expenses decreased $5.6 million, or
16.2%, to $28.9 million. Fiscal 1998 included $.8 million of such costs relating
to the Mill. Excluding such Mill costs, the $4.8 million cost decrease was
primarily due to the reduction in selling costs of party goods products
resulting from the License Agreement. As a percentage of net sales, selling,
general and administrative expenses decreased from 12.7% in Fiscal 1998 to 11.0%
in Fiscal 1999.
9
<PAGE>
Other income, net in Fiscal 1998 includes a $15.9 million gain on the
Mill Disposition and the Steam Contract. Fiscal 1998 also includes a gain on the
sale of other non-core assets offset by closure cost accruals relating to the
decision to close the Company's Jacksonville, Florida facility and the St.
Albans, Vermont administrative offices.
Income from operations decreased $19.9 million to $9.5 million due to
the reasons discussed above. Excluding other income, net, income from operations
decreased $6.0 million, and as a percentage of net sales, decreased from 5.3% in
Fiscal 1998 to 3.2% in Fiscal 1999.
Interest expense, net of interest income, decreased $.1 million to
$11.9 million in Fiscal 1999 compared to $12 million in Fiscal 1998.
The effective tax rate was 23.6% in Fiscal 1999 compared to a 41%
effective rate in Fiscal 1998. The reduction in the effective tax rate was due
to the effect of state taxes, non-deductible goodwill and other non-deductible
expenses. As a result of the above, the net loss was $1.9 million in Fiscal 1999
compared to net income of $10.3 million in Fiscal 1998.
Fiscal 1998 Compared to Fiscal 1997
Net sales increased $18.9 million, or 7.5%, to $271.4 million. This
increase is due in part to increased sales volume in converting operations
resulting from the impact of businesses acquired in late 1997 and 1998, and to a
lesser extent increased sales volume in converted tissue products. Sales volume
in the Company's converting operations increased 12% in the consumer markets and
7% in the institutional markets. Average selling prices increased 5% in the
institutional markets and 1% in the consumer markets. Net sales of tissue mill
products declined $6 million resulting from the Mill Disposition on March 24,
1998 and a shift in mix due to competitive market conditions. 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 decreased $1.6 million, or 3.3%, to $48.9 million. A $4.8
million decrease in gross profit in tissue mill products was partially offset by
an increase in gross profit in the converting operations. The decrease in gross
profit of tissue mill products was due to the Mill Disposition, as well as the
increased sales of lower margin white paper, reduced sales of higher margin deep
tone paper, and increased manufacturing costs resulting from the start-up of the
second paper machine. In the converting operations, the increase in gross profit
attributable to the businesses acquired and higher margins in converted tissue
products were partially offset by increased costs of paperboard, which were not
recovered through price adjustments. As a percentage of net sales, gross profit
decreased from 20.0% in Fiscal 1997 to 18.0% in Fiscal 1998 for the reasons set
forth above.
Selling, general and administrative expenses increased $2.9 million, or
9.3%, to $34.5 million 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 from 12.5% in Fiscal 1997 to 12.7% in
Fiscal 1998.
Other income, net includes a $15.9 million gain on the Mill Disposition
and the Steam Contract. Other income, net also includes a gain on the sale of
other non-core assets offset by closure cost accruals relating to the decision
to close the Company's Jacksonville, Florida facility and the St. Albans,
Vermont administrative offices. In Fiscal 1997, other income included a $2.9
million gain from the settlement of a lawsuit, partially offset by $1.3 million
in costs to close the Three Rivers, Michigan converting facility.
Income from operations increased $8.8 million, or 42.5%, to $29.4
million due to the reasons discussed above. However, excluding other income,
net, income from operations decreased $4.6 million, and as a percentage of net
sales, decreased from 7.5% in Fiscal 1997 to 5.3% in Fiscal 1998.
Interest expense, net of interest income, increased $3.0 million to
$12.0 million in Fiscal 1998 compared to $9.0 million in Fiscal 1997. The
increase was due to higher borrowing levels resulting from the issuance in the
third quarter of Fiscal 1997 of the Notes, which replaced higher interest rate
debt.
The effective tax rate was 41% in Fiscal 1998 compared to a 42%
effective rate in Fiscal 1997. As a result of the above, income before
extraordinary loss was $10.3 million in Fiscal 1998 compared to $6.7 million in
Fiscal 1997.
10
<PAGE>
In Fiscal 1997, the Company incurred a $3.5 million extraordinary loss
(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 $10.3 million in Fiscal 1998 compared to
$3.2 million in Fiscal 1997.
Nine Weeks Ended September 27, 1998 Compared to Thirteen Weeks Ended October 26,
1997
<TABLE>
<CAPTION>
Nine Weeks Ended September 27, 1998 Compared to Thirteen Weeks Ended October 26, 1997
Nine Weeks Ended Thirteen Weeks Ended
September 27, October 26,
1998 1997
-------------------------- --------------------------
Amount % of Net Sales Amount % of Net Sales
------------- --------------- ------------- ---------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Net sales $ 42.6 100.0 % $ 70.7 100.0 %
Cost of goods sold 36.1 84.8 57.5 81.4
------------- ------------ -------------- -----------
Gross profit 6.5 15.2 13.1 18.6
Selling, general and
administrative expenses 5.6 13.2 8.6 12.1
Other income (0.4) (0.8) (0.2) (0.2)
------------- ------------ --------------------------
Income from operations 1.2 2.9 4.7 6.7
Interest expense, net 1.8 4.2 2.9 4.2
------------- ------------ -------------- -----------
Income (loss) before taxes (0.6) (1.4) 1.8 2.5
Income taxes provision (benefit) (0.2) (0.6) 0.8 1.1
------------- ------------ -------------- -----------
Net income (loss) $ (0.3) (0.8)% $ 1.0 1.5 %
============= ============ ============== ===========
</TABLE>
Net sales were $42.6 million in the Nine Week Transition Period and
$70.7 million in the 1998 First Quarter. Net sales decreased $3.5 million from
$46.1 million for the comparable nine week period ended September 28, 1997,
which included $3.0 million of net sales of tissue mill products prior to the
Mill Disposition. For the comparable nine week periods, sales volume in the
Company's converting operations increased 2.7% in the consumer market and
decreased 9.4% in the institutional market. Average selling prices decreased
4.7% in the consumer market and increased 13.3% in the institutional market. The
reduction in selling prices in the consumer market primarily reflects lower
pricing of certain party goods products sold to CEG. During the Nine Week
Transition Period, the reduction in sales revenues of party goods products sold
to CEG exceeded royalty income by approximately $.7 million. In the
institutional market, the reduction in sales volume and offsetting increase in
selling prices was primarily due to a change in sales mix, whereby the Company
emphasized the sale of value added converted tissue products rather than
commodity products.
Gross profit was $6.5 million in the Nine Week Transition Period and
$13.1 million in the 1998 First Quarter. As a percentage of net sales, gross
profit decreased from 18.6% in the 1998 First Quarter to 15.2% in the Nine Week
Transition Period. The Nine Week Transition Period was adversely affected by the
gross profit impact resulting from reduced selling prices of consumer products
in connection with the License Agreement, which were not sufficiently offset by
royalty revenues. The Company believes the reductions in net sales and gross
profit in connection with the License Agreement, reflect transition and timing
issues which are expected to be recovered in future periods, however, there can
be no assurance that such will occur.
Selling, general and administrative expenses were $5.6 million in the
Nine Week Transition Period and $8.6 million in the 1998 First Quarter. As a
percentage of net sales, selling, general and administrative expenses increased
from 12.1% in the 1998 First Quarter to 13.2% in the Nine Week Transition
Period. The sale of the Mill , for which selling, general and administrative
expenses were low relative to net sales, was the primary cause of this increase,
and was partially offset by the reduction of selling, marketing and distribution
costs in the Nine Week Transition Period due to the License Agreement.
Income from operations was $1.2 million in the Nine Week Transition
Period and $4.7 million in the 1998 First Quarter primarily due to the reasons
discussed above. As a percentage of net sales, income from operations decreased
from 6.7% in the 1998 First Quarter to 2.9% in the Nine Week Transition Period.
11
<PAGE>
Interest expense, net of interest income was $1.8 million in the Nine
Week Transition Period and $2.9 million in the 1998 First Quarter. Outstanding
debt levels and interest rates were comparable in the two periods.
The effective tax rate was 41% in the Nine Week Transition Period and
42% in the 1998 First Quarter. As a result of the above, the net loss was $.3
million in the Nine Week Transition Period compared to net income of $1.0
million in the 1998 First Quarter.
Liquidity and Capital Resources
Historically, the Company has relied on cash flows from operations and
borrowings to finance its working capital requirements, capital expenditures and
acquisitions.
Net cash used in operating activities was $7.7 million in Fiscal 1999
and $7.6 million in the 1998 Transition Period and net cash provided by
operating activities was $7.0 million in Fiscal 1998 and $8.3 million in Fiscal
1997. The use of cash from operating activities in Fiscal 1999 includes a $14.0
million increase in affiliated company receivables, primarily due to increased
sales to CEG as a result of the CEG Agreements (see "Certain Relationships and
Related Transactions") as well as extended payment terms. The Company expects
that CEG, upon consummation of the CEG Asset Purchase Agreement, will satisfy
all amounts due. The $5.4 million decrease in trade receivables was also
primarily due to the CEG Agreements as all party goods products previously sold
to unaffiliated companies are now sold to CEG. The 1998 Transition Period
includes a use of $3.6 million due to timing of the payment of biannual interest
on the Company's Notes (as defined below). Fiscal 1998 includes the receipt of
$2.9 million resulting from the settlement of a lawsuit.
Capital expenditures in Fiscal 1999 were $12.4 million, including $10.3
million for converting equipment, primarily associated with its Efficiency
Initiatives and $.8 million for management information systems. The remaining
capital expenditures in Fiscal 1999 were primarily for routine capital
improvements. Capital expenditures in Fiscal 1998 were $7.0 million, including
$1.8 million related to the installation of a second paper machine at the Mill
and $1.2 million for plate converting equipment. The remaining $4.0 million were
for routine capital improvements. The $10.4 million of capital expenditures in
Fiscal 1997 included $8.2 million related to the installation of the second
paper machine. In addition, during Fiscal 1998 the Company (i) received proceeds
of $34.8 million, net of transaction costs and fees, from (a) the Mill
Disposition, and (b) the Steam Contract; (ii) acquired certain net assets of a
manufacturer of white paper plates for $6.9 million; and (iii) 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 15 of Notes
to Financial Statements). The Company does not anticipate any material capital
expenditures in the next twelve months other than those funded through available
cash.
In 1997, the Company issued $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 revolving
credit facility. The principal amount of the Notes is payable on February 28,
2007. The Company may, at its election, redeem the Notes at any time after March
1, 2002 at a redemption price equal to a percentage (104.750% after March 1,
2002 and declining in annual steps to 100% after March 1, 2005) of the principal
amount thereof plus accrued interest. The Notes provide that upon the occurrence
of a change of control (as defined therein), the holders thereof will have the
option to require the redemption of the Notes at a redemption price equal to
101% of the principal amount thereof plus accrued interest.
The Company's revolving credit facility, which expires March 31, 2001,
provides up to $50 million borrowing capacity, collateralized by eligible
accounts receivable and inventories, certain general intangibles and the
proceeds on the sale of accounts receivable and inventory. At September 26,
1999, $11.7 million was outstanding and $27.8 million was the maximum remaining
advance available based upon eligible collateral. At September 26, 1999,
borrowings were available at the bank's prime rate (8.50%) plus .25% and at
LIBOR (approximately 5.38%) plus 2.25%. At December 15, 1999, as a result of the
CEG Asset Purchase Agreement, $21.4 million was outstanding and $16.5 million
was the maximum remaining advance available.
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
12
<PAGE>
of the terms of subordinated indebtedness, and (viii) engaging in transactions
with affiliates. In addition, such debt instruments restrict the Company's
ability to pay dividends or make other distributions to SF Holdings. The credit
facility also requires that certain financial covenants are satisfied.
Pursuant to the asset sale covenant under the indenture governing the
Notes, the Company reinvested approximately $10 million of the net proceeds from
the Mill Disposition in fixed assets within 270 days of such disposition.
During Fiscal 1998, the Company redeemed shares of Class A common stock
(pre-Merger shares) for $9.8 million pursuant to an offer to repurchase a
certain number of shares of its common stock (pre-Merger shares) from its
stockholders on a pro rata basis.
During Fiscal 1999, 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.
Impact of Recently Issued Accounting Standards
The impact of recently issued accounting standards is discussed in Note
2 of Notes to the Financial Statements.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company is exposed to market risk related to interest rates on its
fixed and variable rate long-term debt.
Variable interest rate risk: The Company's earnings are affected by
changes in short-term interest rates as a result of its borrowings under its
revolving credit agreement. Based on amounts outstanding under the Company's
revolving credit agreement at September 26, 1999, a 100 basis point increase in
market rates would increase interest expense and decrease earnings before income
taxes by approximately $.1 million. This sensitivity analysis does not consider
any actions management might take to mitigate its exposure in the event of a
change of such magnitude.
Fixed interest rate risk: The fair value of the Company's Senior
Subordinated Notes may also be subject to interest rate risk. Generally, the
fair market value of fixed interest rate debt will increase as interest rates
fall and decrease as interest rates rise. Based upon the interest rate of the
Company's fixed rate debt at September 26, 1999, the fair value of such debt is
approximately 87% of its carrying value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements and Schedule attached hereto and listed in
Item 14 (a)(1) and (a)(2) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
NAME AGE POSITION
---- --- --------
Dennis Mehiel 57 Chairman and Chief Executive Officer
Robert Korzenski 45 President and Chief Operating Officer
Thomas Uleau 55 Executive Vice President and Director
Hans Heinsen 46 Senior Vice President, Chief Financial
Officer and Treasurer
Michael Hastings 52 Senior Vice President
Joseph Marcelynas 54 Senior Vice President
John Lewchenko 48 Vice President
Bryan Hollenbach 37 Vice President
Harvey L. Friedman 57 Secretary and General Counsel
Alfred B. DelBello 65 Vice Chairman
James Armenakis 56 Director
Gail Blanke 51 Director
John A. Catsimatidis 51 Director
Chris Mehiel 60 Director
Jerome T. Muldowney 54 Director
G. William Seawright 58 Director
Lowell P. Weicker, Jr. 68 Director
Dennis Mehiel has been Chairman and Chief Executive Officer of the
Company since it was purchased in 1988. Since 1966 he has been Chairman of Four
M Corporation ("Four M"), a converter and seller of interior packaging,
corrugated sheets and corrugated containers which he co-founded, and since 1977
(except during a leave of absence from April 1994 through July 1995) he has been
the Chief Executive Officer of Four M. Mr. Mehiel also has been Chief Executive
Officer and a director of Sweetheart since March 1998; Chairman and Chief
Executive Officer of SF Holdings since December 1997; Chairman of Box USA of New
Jersey, Inc. ("Box of New Jersey"), a manufacturer of corrugated containers; and
Chairman and Chief Executive Officer of CEG.
Robert Korzenski has been President and Chief Operating Officer of the
Company since March 1998. Prior to that, he had been Senior Vice President of
the Company since January 1997 and President of the Hoffmaster division since
its acquisition by the Company in March 1995. From October 1988 to March 1995,
he served as Vice President of Operations and Vice President of Sales of Scott
Institutional, a division of Scott Paper Company. Prior to that, he was Director
of National Sales at Thompson Industries.
Thomas Uleau has been Executive Vice President of the Company since
March 1998 and he has been a Director of the Company since 1988. Prior to that,
he had been President of the Company since January 1997 and Chief Operating
Officer since 1994. Mr. Uleau was Executive Vice President of the Company from
1994 to 1996 and from 1988 to 1989. He also has been Executive Vice President of
CEG since 1996; President, Chief Operating Officer and a director of SF Holdings
since February 1998; President and Chief Operating Officer and a director of
Sweetheart since March 1998; a director of Four M, CEG, and Box of New Jersey.
He served as Executive Vice President and Chief Financial Officer of Four M from
1989 through 1993 and Chief Operating Officer in 1994.
Hans Heinsen has been Senior Vice President and Treasurer of the
Company since January 1997 and Chief Financial Officer of the Company since June
1996. Mr. Heinsen also has been Chief Financial Officer and Vice President
Finance of Sweetheart since March 1998 and Senior Vice President, Chief
Financial Officer and Treasurer of SF Holdings since February 1998. Prior to
joining the Company, Mr. Heinsen spent 21 years in a variety of corporate
finance positions with The Chase Manhattan Bank, N.A.
Michael Hastings has been Senior Vice President of the Company since
January 1997 and President of the Fonda division since joining the Company in
May 1995 until March 1998. Mr. Hastings also has been Senior Vice
14
<PAGE>
President of Sweetheart since March 1998. From December 1990 to April 1995, Mr.
Hastings served as Vice President of Sales and Marketing and as a member of the
Board of Directors of Anchor Packaging Company, a manufacturer of institutional
films and thermoformed plastic packaging. Mr. Hastings had previously worked in
a variety of positions, including sales, marketing and plant operations
management, at Scott Paper Company and Thompson Industries.
Joseph Marcelynas has been Senior Vice President of Sales and Marketing
Consumer Products since March 1996 and was Vice President of Sales and Marketing
since 1989. He has been employed by the Company in a number of executive sales
and marketing positions since 1984.
John Lewchenko has been Vice President of Institutional Sales since
February 1996. He was employed by the Scott Foodservice Division of Scott Paper
Company prior to its acquisition in March 1995. Previously with Scott, and until
his promotion by the Company, he had been National Sales Manager since 1995 and
a regional sales manager since 1990.
Bryan Hollenbach has been Vice President of Operations since December
1998 and a Director of Operations since 1996. He was employed by the Chespeake
Consumer Products Company prior to its acquisition in December 1995 as Director
of Operations and Finance since 1994 and in other management positions since
1989.
Harvey L. Friedman has been Secretary and General Counsel of the
Company since May 1996. He was a Director of the Company from 1985 to January
1997. Mr. Friedman is also Secretary and General Counsel of CEG, SF Holdings,
Four M and Box of New Jersey and is a director of CEG. He was formerly a partner
of Kramer, Levin, Naftalis & Frankel, a New York City law firm.
Alfred B. DelBello has served as Vice Chairman of the Company since
January 1997 and a Director of the Company since 1990. He also has been Vice
Chairman of SF Holdings since February 1998. Since July 1995, Mr. DelBello has
been a partner in the law firm of DelBello, Donnellan & Weingarten & Tartaglia,
LLP. From September 1992 to July 1995 he was a partner in the law firm of Worby
DelBello Donnellan & Weingarten. Prior thereto, he had been President of
DelBello Associates, a consulting firm, since 1985. Mr. DelBello served as
Lieutenant Governor of New York State from 1983 to 1985.
James Armenakis has served as a Director of the Company since June
1997. He also has been a director of SF Holdings since February 1998. He is a
senior partner in the law firm of Armenakis & Armenakis.
Gail Blanke has served as a Director of the Company since January 1997.
She also has been a director of SF Holdings since February 1998. She has been
President and Chief Executive Officer of Gail Blanke's Lifedesigns, LLC since
March 1995. Lifedesigns was founded in March 1995 as a division of Avon
Products, Inc. ("Avon") and was spun off from Avon in March 1997. Prior thereto,
she held the position of Corporate Senior Vice President of Avon since August
1991. She also held a number of management positions at CBS, Inc., including the
position of Manager of Player Promotion for the New York Yankees. Ms. Blanke
will be serving her second consecutive term as President of the New York Women's
Forum.
John A. Catsimatidis has served as a Director of the Company since
January 1997. He also has been a director of SF Holdings since February 1998. He
has been Chairman and Chief Executive Officer of the Red Apple Group, Inc., a
company with diversified holdings that include oil refining, supermarkets, real
estate, aviation and newspapers, since 1969. Mr. Catsimatidis serves as a
director of Sloan's Supermarket, Inc. and New's Communications, Inc. He also
serves on the board of trustees of New York Hospital, St. Vincent Home for
Children, New York University Business School, Athens College, Independent
Refiners Coalition and New York State Food Merchant's Association.
Chris Mehiel, the brother of Dennis Mehiel, has been a Director of the
Company since January 1997. He also has been a director of SF Holdings since
February 1998. Mr. Mehiel is a co-founder of Four M and has been Executive Vice
President, Chief Operating Officer and a director of Four M since September 1995
and Chief Financial Officer since August 1997. He is an executive officer of the
managing member of Fibre Marketing Group, LLC, the successor to Fibre Marketing
Group, Inc., a waste paper recovery business which he co-founded, and was
President from 1994 to January 1996. From 1993 to 1994, Mr. Mehiel served as
President and Chief Operating Officer of Box of New Jersey. From 1982 to 1992,
Mr. Mehiel served as the President and Chief Operating Officer of Specialty
Industries, Inc., a waste paper processing and container manufacturing company.
15
<PAGE>
Jerome T. Muldowney has served as a Director of the Company since 1990.
He also has been a director of SF Holdings since February 1998. Since January
1996, Mr. Muldowney has been a Managing Director of AIG Global Investment Corp.
and since March 1995 he has been a Senior Vice President of AIG Domestic Life
Companies ("AIG Life"). Prior thereto, he had been a Vice President of AIG Life
since 1982. In addition, from 1986 to 1996, he served as President of AIG
Investment Advisors, Inc. He is currently a director of AIG Life and AIG Equity
Sales Corp.
G. William Seawright has served as a Director of the Company since
January 1997. He also has been a director of SF Holdings since February 1998. He
has been President and Chief Executive Officer of Stanhome Inc., a manufacturer
and distributor of giftware and collectibles, since 1993. Prior thereto, he was
President and Chief Executive Officer of Paddington, Inc., an importer of
distilled spirits, since 1990. From 1986 to 1990, he was President of Heublein
International, Inc.
Lowell P. Weicker, Jr. has served as a Director of the Company since
January 1997. He also has been a director of SF Holdings since February 1998.
Mr. Weicker served as Governor of the State of Connecticut from January 1991
through January 1995. From 1968 to 1989, Mr. Weicker served in the U.S.
Congress. In 1992, Mr. Weicker earned the Profiles in Courage Award from the
John F. Kennedy Library Foundation.
ITEM 11. Executive Compensation
The following table sets forth the compensation earned, whether paid or
deferred, to the Company's Chief Executive Officer and its other four most
highly compensated executive officers (collectively, the "Named Officers") for
Fiscal 1999, the 1998 Nine Week Transition Period ("1998 TP"), Fiscal 1998, and
Fiscal 1997 for services rendered in all capacities to the Company during such
periods.
<TABLE>
<CAPTION>
SECURITIES ALL OTHER
NAME AND PRINCIPAL UNDERLYING COMPENSATION
POSITION YEAR SALARY BONUS OTHER(1) SARS (#) (2)
- -------- ---- ------ ----- -------- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Dennis Mehiel 1999 $175,000 $ 75,000 $ -- $-- $--
Chairman and Chief 1998 TP 29,167 -- -- -- --
Executive Officer 1998 175,000 150,000 -- -- --
1997 168,750 75,000 -- -- --
Robert Korzenski 1999 222,181 75,000 -- -- 13,767
President and Chief 1998TP 30,769 -- -- -- 1,548
Operating Officer 1998 188,590 100,000 -- 1,950 10,419
1997 164,423 50,000 -- 1,950 10,216
Joseph Marceynas 1999 159,646 30,000 -- -- 9,470
Senior Vice President 1 1998 TP 24,117 -- -- -- 1,051
1998 139,204 27,922 -- 160 6,079
1997 126,694 16,500 -- 160 3,672
John Lewchenko 1999 143,230 16,500 -- -- 11,069
Vice President 1 1998 TP 22,035 -- -- -- 1,130
1998 134,529 28,000 -- 160 7,616
1997 126,727 21,363 -- 160 5,392
Bryan Hollenbach 1999 129,144 25,550 -- -- 9,405
Vice President 1 1998 TP 18,615 -- -- -- 940
1998 113,115 28,500 -- 160 6,264
1997 126,727 21,363 -- 160 4,102
</TABLE>
1. The Company has concluded that the aggregate amount of perquisites and
other personal benefits paid to each of the Named Officers did not exceed
the lesser of (i) 10% of such officer's total annual salary and bonus and
(ii) $50,000. Thus, such amounts are not reflected in the table.
16
<PAGE>
2. Reflects matching contributions by the Company under the Company's 401(k)
Plans, long-term disability and life insurance premiums paid by the
Company.
Director Compensation
Directors who are not employees receive annual compensation of (i)
$12,000, (ii) $1,000 for each Board meeting attended, (iii) $1,000 for each
committee meeting attended which is not held on the date of a Board meeting and
(iv) 100 SARs. Directors who are employees do not receive any compensation or
fees for service on the Board of Directors or any committee thereof.
Employee Benefit Plans
The Company provides certain union and non-union employees with
retirement and disability income benefits under defined benefit pension plans.
The Company's policy has been to fund annually the minimum contributions
required by applicable regulations.
The Company provides 401(k) savings and investment plans for the
benefit of non-union employees. Employee contributions are matched at the
discretion of the Company. On January 1, 1997, the Company adopted a defined
contribution benefit plan for all non-union employees for which contributions
and costs are based on participant earnings. The Company also participates in
multi-employer pension plans for certain of its union employees. See Note 15 of
the Notes to the Financial Statements.
Stock Appreciation Rights
The following table provides information on the vested status of stock
appreciation rights ("SARs") at September 26, 1999 to the Named Officers. There
were no SARs granted during Fiscal 1999.
<TABLE>
<CAPTION>
Number of
1999 SAR Grant Unexercised
------------------------------------------------------------------
% of Total Options at
# of Granted to Exercise Sept. 26, 1999
Securities Employees or Base Expira-
Underlying in Fiscal Price Per tion Exercisable/
Name Grant Year Share Date Unexercisable(1)
-------------- --------------- ------------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Robert Korzenski -- -- -- -- 3,900/3,900
Joseph Marcelynus -- -- -- -- 192/288
Jon Lewchenko -- -- -- -- 192/288
Bryan Hollenbach -- -- -- -- 96/244
</TABLE>
- ------------------
(1) Unless otherwise determined by the Administering Committee of the Company's
SAR Plan, awards of SARs will vest on each anniversary of their grant at
the rate of 20% per year commencing on the first anniversary date. However,
unless otherwise determined by the Administering Committee, in the event
that at the time of any grant of SARs the grantee has not been continuously
employed by the Company for at least five years, such vesting will be
subject to the completion of such five-year period. Upon voluntary
termination of employment, involuntary termination without cause or
termination due to death, disability or retirement at age 60 or above, all
unvested SARs will be forfeited and vested SARs not previously redeemed
will be redeemed automatically by the Company as of the date of
termination.
17
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is a wholly-owned subsidiary of SF Holdings which owns 100
shares of common stock of the Company. SF Holdings' address is 373 Park Avenue
South, New York City, New York 10016. The following table sets forth certain
information as of December 20, 1999, with respect to the shares of common stock
of SF Holdings beneficially owned by each person or group that is known by the
Company to be a beneficial owner of more than 5% of the outstanding common stock
of SF Holdings, the directors and officers of the Company, and all directors and
officers of the Company, as a group.
BENEFICIAL OWNERSHIP
NAME AND ADDRESS OF NUMBER OF PERCENTAGE OF
BENEFICIAL OWNER SHARES OWNERSHIP(1)(2)
---------------- ------ ---------------
Dennis Mehiel
373 Park Avenue South
New York City, NY 10016 ........... 692,969 80.2%
Thomas Uleau
10100 Reisterstown Road
Owings Mills, Maryland 21117........ 12,739 1.5%
All executive officers and directors
as a group (3 persons) ........... 715,243 82.8%
- ----------
(1) Includes 56,459 shares of Class B common stock, 39,900 shares of Class C
common stock and 133,494 shares of Class A common stock of SF Holdings that
would be issuable upon conversion of Class B Series 1 Preferred Stock.
(2) Includes 71,515 shares underlying options to purchase Class A common stock
of SF Holdings, which are presently exercisable, and 134,138 shares which
Mr. Mehiel has the power to vote pursuant to a voting trust agreement
between his spouse, Edith Mehiel, and himself.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases a building in Jacksonville, Florida from Dennis
Mehiel on terms the Company believes are no less favorable than could be
obtained from independent third parties and were negotiated on an arm's length
basis. Annual payments under the lease are $.2 million plus annual increases
based on changes in the Consumer Price Index ("CPI") through December 31, 2014.
In addition, Mr. Mehiel can require the Company to purchase the facility for
$1.5 million, subject to a CPI-based escalation, until July 31, 2006. In Fiscal
1998, the Company terminated it operations at this facility and had been seeking
a sublease tenant. Effective October 1, 1999, Four M has assumed a portion of
the obligations under this lease. Rent expense, net of sublease income on a
portion of the premises subleased through May 1998 to Four M, was $.1 million in
Fiscal 1999, less than $.1 million in the 1998 Transition Period, and $.1
million in both Fiscal 1998 and 1997.
In Fiscal 1998, the Company entered into a license agreement with CEG,
whereby CEG was granted the exclusive rights to use certain of the Company's
trademarks and trade names in connection with the manufacture, distribution and
sale of disposable party goods products for a period of five years, subject to
extension. In connection therewith, the Company has received an annual royalty
equal to 5% of CEG's cash flow, as determined in accordance with a formula
specified in such agreement. In Fiscal 1999, the Company entered into an
exclusive manufacture and supply agreement with CEG (together with the before
mentioned license agreement, the "CEG Agreements"). Pursuant to such agreement,
the Company manufactures and supplies 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 the
Company's cost. Also in Fiscal 1999, the Company purchased certain manufacturing
assets from CEG for $4.9 million and entered into operating leases whereby the
Company leases to CEG certain non-manufacturing assets for annual lease income
of $.1 million. Independent appraisals were obtained to determine the fairness
of both the purchase price and lease terms. The assets purchased from CEG were
recorded in machinery and equipment as a carryover of CEG's book value ($1.4
million) and the excess of the purchase price over such CEG amounts, net of
income tax, was charged to stockholders' equity. The Company believes the terms
on which it (i) granted license rights to CEG, (ii)
18
<PAGE>
manufactured and supplied products for CEG, (iii) purchased manufacturing assets
from CEG, and (iv) leased non-manufacturing assets to CEG are at least as
favorable as those it could have obtained from unrelated third parties and were
negotiated on an arm's length basis.
On December 6, 1999, pursuant to the CEG Asset Purchase Agreement, the
Company purchased the intangible assets of CEG, including domestic and foreign
trademarks, patents, copyrights and customer lists. In addition, pursuant to the
CEG Asset Purchase Agreement, the Company has agreed to purchase over a sixty
day period certain inventory of CEG. The aggregate purchase price for the
intangible assets and inventory is $41 million ($16 million for the intangible
assets and $25 million for the inventory), payable in cash, the cancellation of
certain notes and warrants, and the assumption of certain liabilities. The
agreement further provides that the Company may acquire other CEG assets in
exchange for outstanding trade payables owed to the Company by CEG. In
connection with this agreement, the Company will cancel the CEG Agreements.
Independent appraisals were obtained to determine the fairness of the purchase
price for such assets. The Company believes the terms on which it purchased such
assets are at least as favorable as it could have obtained from unrelated third
parties and were negotiated on an arm's length basis.
In Fiscal 1999, the Company purchased certain paper plate manufacturing
assets from Sweetheart Holdings Inc. ("Sweetheart") for $2.4 million. Also in
Fiscal 1999, the Company entered into a five year operating lease with
Sweetheart, whereby the Company leases certain paper cup manufacturing assets to
Sweetheart with a net book value of $1.3 million for annual lease income of $.2
million. Independent appraisals were obtained to determine the fairness of both
the purchase price and lease terms. The Company believes the terms on which it
purchased manufacturing assets from Sweetheart, and leases manufacturing assets
to 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.
In Fiscal 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 rate on the CEG Note was converted to
pay-in-kind, the CEG Note's 2002 maturity was extended for an additional three
years and the CEG Note was made subordinate to Senior Debt (as such term is
defined therein). In connection with such amendment, the Company 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.
The loan is included in other assets. The CEG Note was canceled on December 6,
1999 in partial consideration of the CEG Asset Purchase Agreement.
In Fiscal 1998, the Company entered into an agreement with SF Holdings
whereby the Company acquired for $7.0 million substantially all of SF Holding's
rights under a Management Services Agreement dated August 31, 1993, as amended,
and pursuant to which the Company has 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 term 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. The $7 million payment is included in other
assets and is being amortized over the term of such agreement. Management fee
income, net of amortization was $.5 million in Fiscal 1999, less than $.1
million in the 1998 Transition Period, and $.1 million in Fiscal 1998.
In Fiscal 1998, the Company purchased a 38.2% ownership interest in
Fibre Marketing Group, LLC ("Fibre Marketing"), a waste paper recovery business,
from a director of the Company for $.2 million. Four M is also a member of Fibre
Marketing. The Company granted Sweetheart the right to acquire 50% of the
Company's interest in Fibre Marketing for $.1 million. The Company believes that
the terms on which it purchased such interest are at least as favorable as those
it could otherwise have obtained from an unrelated third party and were
negotiated on an arm's length basis.
Net sales to CEG were $26.9 million in Fiscal 1999, $6.9 million in the
1998 Transition Period, $17.0 million in Fiscal 1998 and $7.8 million in Fiscal
1997. Accounts receivable from CEG was $13.3 million at September 26, 1999
compared to $.5 million at July 26, 1998. Net sales to Sweetheart were $4.3
million in Fiscal 1999. Net purchases from Sweetheart were $6.8 million in
Fiscal 1999, $.1 million in the 1998 Transition Period and $.2 million in Fiscal
1998. Net sales to Fibre Marketing were $3.9 million in Fiscal 1999, $.4 million
in the 1998 Transition Period, $4.2 million in Fiscal 1998 and $3.6 million in
Fiscal 1997. The Company also purchases corrugated containers from Four
19
<PAGE>
M, which were $1.8 million in Fiscal 1999, $.2 million in the 1998 Transition
Period, $1.1 million in Fiscal 1998 and $.9 million in Fiscal 1997. The Company
believes that the terms on which it sold or purchased products from related
parties 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. In Fiscal
1998, the Company contracted with The Emerald Lady, Inc., an affiliate, to
provide air transportation services. The Company incurred $.5 million for such
services in Fiscal 1999, $.1 million in the 1998 Transition Period and $.3
million in Fiscal 1998. The Company believes that the terms on which it
purchases such services 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. All of the above mentioned affiliates are under the common control
of the Company's Chief Executive Officer.
At September 26, 1999, the Company had loan receivables from its Chief
Executive Officer totaling $275,000 plus accrued interest at 10%. During Fiscal
1999, the Company also had a $150,000 loan receivable with another executive
officer plus accrued interest at 5.39% which was paid in full in June 1999.
SF Holdings and the Company intend to file consolidated federal income
tax returns and pursuant to a tax sharing agreement, the Company will pay SF
Holdings its allocable share of the consolidated group's consolidated federal
income tax liability, which, in general, will equal the tax liability the
Company would have paid if it had filed separate tax returns.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) - Financial Statements
The following financial statements of the Company are included in this
report:
Independent Auditors' Report F-1
Balance Sheets as of September 26, 1999 and
July 26, 1998 F-2
Statements of Operations and Comprehensive Income
(Loss) for the year ended September 26, 1999, the nine week
transition period ended September 27, 1998, and the years ended
July 26, 1998 and July 27, 1997 F-3
Statements of Cash Flows for the year ended September 26, 1999, the
nine week transition period ended September 27, 1998, and the
years ended July 26, 1998 and July 27, 1997 F-4
Notes to Financial Statements F-5
(a) (2) - Financial Statement Schedule
The following schedule to the financial statements of the Company is
included in this report:
Schedule
II - Valuation and Qualifying Accounts and Reserves S-1
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required or are inapplicable, and therefore have been omitted.
20
<PAGE>
(a) (3) 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. (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 between SF
Holdings Group, Inc. and the Company.
10.9 License Agreement, dated as of March 12, 1998 between Creative
Expressions Group, Inc. and the Company.
10.10* Asset Purchase Agreement, dated as of December 6, 1999 between
Creative Expressions Group, Inc and the Company.
27.1* Financial Data Schedule.
- -----------------
* filed herein.
(b) No reports were filed on Form 8-K during the fourth quarter ended September
26, 1999.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15 (d) 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 on
December 23, 1999.
THE FONDA GROUP, INC.
By: /s/ DENNIS MEHIEL
-------------------------------
Dennis Mehiel
Chairman of the Board and
Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the date indicated.
Signature Title(s) Date
--------- -------- ----
/s/ DENNIS MEHIEL Chairman of the Board and December 23, 1999
---------------------------- Chief Executive Officer
Dennis Mehiel (Principal Executive
Officer)
/s/ ROBERT KORZENSKI President, Chief Operating December 23, 1999
---------------------------- Officer and Director
Robert Korzenski
/s/ THOMAS ULEAU Executive Vice President December 23, 1999
---------------------------- and Director
Thomas Uleau
/s/ HANS H. HEINSEN Senior Vice President, December 23, 1999
---------------------------- Chief Financial
Hans H. Heinsen Officer and Treasurer
(Principal Financial and
Accounting Officer)
/s/ ALFRED B. DELBELLO Vice Chairman December 23, 1999
----------------------------
Alfred B. DelBello
/s/ JAMES J. ARMENAKIS Director December 23, 1999
----------------------------
James J. Armenakis
/s/ GAIL BLANKE Director December 23, 1999
----------------------------
Gail Blanke
/s/ JOHN A. CATSIMATIDIS Director December 23, 1999
----------------------------
John A. Catsimatidis
/s/ CHRIS MEHIEL Director December 23, 1999
----------------------------
Chris Mehiel
/s/ JEROME T. MULDOWNEY Director December 23, 1999
----------------------------
Jerome T. Muldowney
/s/ G. WILLIAM SEAWRIGHT Director December 23, 1999
----------------------------
G. William Seawright
/s/ LOWELL P. WEICKER, JR. Director December 23, 1999
----------------------------
Lowell P. Weicker, Jr.
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Fonda Group, Inc.
We have audited the accompanying balance sheets of The Fonda Group,
Inc. as of September 26, 1999 and July 26, 1998 and the related statements of
operations and comprehensive income (loss), and cash flows for the year ended
September 26, 1999, the nine week transition period ended September 27, 1998,
and the years ended July 26, 1998 and July 27, 1997. Our audits also included
the financial statement schedule listed at Item 14(a)2. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of The Fonda Group, Inc. as of
September 26, 1999 and July 26, 1998 and the results of its operations and its
cash flows for the year ended September 26, 1999, the nine week transition
period ended September 27, 1998, and the years ended July 26, 1998 and July 27,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
December 15, 1999
F-1
<PAGE>
THE FONDA GROUP, INC.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 26, July 26,
1999 1998
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash $ 109 $ 16,361
Accounts receivable, less allowance for doubtful
accounts of $725 and $789, respectively 25,611 29,385
Due from affiliates 14,980 1,584
Inventories 40,794 34,803
Deferred income taxes 6,205 5,469
Other current assets 6,254 2,086
------------- --------------
Total current assets 93,953 89,688
Property, plant and equipment, net 51,922 48,151
Goodwill, net 19,358 21,462
Other assets, net 19,172 19,227
------------- --------------
TOTAL ASSETS $184,405 $178,528
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 12,505 $ 7,077
Accrued expenses and other current liabilities 19,207 24,867
Current maturities of long-term debt 551 595
------------- --------------
Total current liabilities 32,263 32,539
Long-term debt 132,892 121,767
Other liabilities 1,893 1,896
Deferred income taxes 4,026 4,771
------------- --------------
Total liabilities 171,074 160,973
------------- --------------
Stockholders' equity:
Common stock, $.01 par value, 1,000 shares authorized,
100 shares issued and outstanding - -
Other comprehensive income 79 -
Retained earnings 13,252 17,555
------------- --------------
Total stockholders' equity 13,331 17,555
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $184,405 $178,528
============= ==============
</TABLE>
See notes to financial statements.
F-2
<PAGE>
THE FONDA GROUP, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
<TABLE>
<CAPTION>
Nine
Year Weeks
Ended Ended
September 26, September 27, Years Ended
1999 1998 July 26, 1998 July 27, 1997
---- ---- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 262,837 $ 42,593 $271,402 $252,513
Cost of goods sold 225,509 36,126 222,509 201,974
-------------- -------------- ------------- --------------
Gross profit 37,328 6,467 48,893 50,539
Selling, general and administrative expenses 28,810 5,601 34,450 31,527
Other income, net (963) (351) (14,947) (1,608)
-------------- -------------- ------------- --------------
Income from operations 9,481 1,217 29,390 20,620
Interest expense (net of interest income
of $783, $251, $557 and $490) 11,926 1,796 12,006 9,017
-------------- -------------- ------------- --------------
Income (loss) before income taxes
and extraordinary loss (2,445) (579) 17,384 11,603
Provision (benefit) for income taxes (577) (238) 7,127 4,872
-------------- -------------- ------------- --------------
Income (loss) before extraordinary loss (1,868) (341) 10,257 6,731
Extraordinary loss from debt
extinguishment, net - - - 3,495
-------------- -------------- ------------- --------------
Net income (loss) $ (1,868) $ (341) $ 10,257 $ 3,236
============== ============== ============= ==============
Comprehensive income (loss):
Net income (loss) $ (1,868) $ (341) $ 10,257 $ 3,236
Minimum pension liability adjustment
(net of $51 income tax) 79 - - -
-------------- -------------- ------------- --------------
Total comprehensive income (loss) $ (1,789) $ (341) $ 10,257 $ 3,236
============== ============== ============= ==============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
THE FONDA GROUP, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine
Year Weeks
Ended Ended Years Ended
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
--------------- -------------- ------------- -------------
Operating activities:
<S> <C> <C> <C> <C>
Net income (loss) $ (1,868) $ (341) $ 10,257 $ 3,236
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 6,598 1,039 6,156 4,954
Write-off of unamortized debt discount
and issuance costs - - - 4,234
Interest capitalized on debt - - - 684
Provision for doubtful accounts 419 20 388 457
Deferred income taxes (437) 294 (61) 3,005
Net gain on business and equipment dispositions
and settlement of long-term contracts (72) (201) (16,333) -
Changes in assets and liabilities:
Accounts receivable 5,238 (2,130) (795) (2,007)
Due from affiliates (13,979) 583 (377) (213)
Inventories (3,571) (2,420) 5,171 (1,178)
Other current assets (2,611) 143 1,978 (3,273)
Accounts payable and accrued expenses 2,666 (4,499) 1,394 (2,299)
Other (53) (80) (765) 673
--------------- -------------- ------------- -------------
Net cash provided by (used in)
operating activities (7,670) (7,592) 7,013 8,273
--------------- -------------- ------------- -------------
Investing activities:
Capital expenditures (12,379) (748) (7,039) (10,363)
Proceeds from business and
equipment dispositions 762 294 34,793 -
Payments for business acquisitions - - (6,901) (23,043)
Payment for Management Services Agreement - - (7,000) -
Note receivable from affiliate - - - (2,600)
--------------- -------------- ------------- -------------
Net cash provided by (used in)
investing activities (11,617) (454) 13,853 (36,006)
--------------- -------------- ------------- -------------
Financing activities:
Revolving credit borrowings (repayments), net 11,710 - - (32,842)
Proceeds from long-term debt - - - 120,000
Repayments of long-term debt (576) (53) (625) (49,879)
Redemption of common stock - - (9,788) (203)
Debt issuance costs - - - (4,902)
--------------- -------------- ------------- -------------
Net cash provided by (used in)
investing activities 11,134 (53) (10,413) 32,174
--------------- -------------- ------------- -------------
Net increase (decrease) in cash (8,153) (8,099) 10,453 4,441
Cash, beginning of period 8,262 16,361 5,908 1,467
--------------- -------------- ------------- -------------
Cash, end of period $ 109 $ 8,262 $ 16,361 $ 5,908
=============== ============== ============= =============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
On March 12, 1998, all of the outstanding shares of The Fonda Group,
Inc. (the "Company") were converted into shares of SF Holdings Group, Inc. ("SF
Holdings"), a Delaware corporation principally owned by the majority stockholder
of the Company, 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, and options and warrants to purchase such shares,
were converted into shares of Class A or Class B common stock, or options and
warrants to purchase such shares, as the case may be, of SF Holdings.
The Company operates in one business segment and is a leading converter
and marketer of a broad line of disposable paper foodservice products. The
Company sells its products under both branded and private labels to the consumer
and institutional markets and participates at all major price points. The
Company believes it is a market leader in the sale of premium white, colored and
custom-printed napkins, placemats, tablecovers and food trays and in the sale of
private label consumer paper plates, bowls and cups. The Company also
manufactures disposable party goods products including paper plates and napkins,
which it sells to Creative Expressions Group, Inc. ("CEG"), a company under
common management control, in the disposable party goods products business (see
Notes 15 and 19).
2. SIGNIFICANT ACCOUNTING POLICIES
Management Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those estimates.
Fiscal Year--In October 1998, the Company's Board of Directors approved
a change in the Company's fiscal year from the fifty-two or fifty-three week
period which ends on the last Sunday in July to the same number of weekly
periods ending on the last Sunday in September. Fiscal 1999 was the fifty-two
week period ended September 26, 1999. The nine week period from July 27, 1998 to
September 27, 1998 (the "1998 Transition Period") has been treated as a
transition period that was not part of Fiscal 1998 or Fiscal 1999. Fiscal 1998
and Fiscal 1997 were fifty-two week periods ended July 26, 1998 and July 27,
1997, respectively.
Revenue recognition--Revenue is recognized upon shipment of product.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation.
Inventories--Inventories are valued at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment--Property, plant and equipment is stated
at cost or fair market value for business acquisitions. Depreciation is computed
by use of the straight-line method over the estimated useful lives of the
assets.
Goodwill--Goodwill represents the excess of the purchase price over the
fair value of tangible and identifiable intangible net assets acquired and is
amortized on a straight-line basis over twenty years. The carrying value of
goodwill is reviewed when facts and circumstances suggest that it may be
impaired. The Company assesses its recoverability by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted projected future cash flows.
F-5
<PAGE>
Income Taxes--Deferred income taxes are provided on the differences
between the basis of assets and liabilities for financial reporting and income
tax purposes using presently enacted tax rates.
Debt Issuance Costs--Included in other assets are unamortized debt
issuance costs of $3.8 million at September 26, 1999 and $4.4 million at July
26, 1998 incurred in connection with obtaining financing which are being
amortized over the terms of the respective borrowing agreements.
Fair Value of Financial Instruments--The carrying amounts of financial
instruments included in current assets and liabilities approximate their
estimated fair value because of the relatively short maturities of these
instruments. The estimated fair value of the Notes (as defined below), which is
thinly traded, are approximately 87% of carrying amounts based on recent trading
prices.
Impact of Recently Issued Accounting Standards-- In Fiscal 1999, the
Company adopted Financial Accounting Standards Board ("FASB") Statement No. 130,
Reporting Comprehensive Income (see Statements of Operations and Comprehensive
Income (Loss), Statement No. 131, Disclosures about Segments of an Enterprise
and Related Information (see Note 1) and Statement No. 132, Employers'
Disclosure about Pensions and Other Postretirement Benefits (see Note 16).
Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
establishes accounting and reporting standards for derivative instruments and
requires that an entity recognize all derivatives at fair value in the statement
of financial position. The Company is in the process of evaluating the new
statement, which is effective for Fiscal 2001.
3. BUSINESS ACQUISITIONS
The following acquisitions have been accounted for under the purchase
method and their results of operations have been included in the statements of
operations since the respective dates of acquisition. Goodwill amortization was
$1.2 million in Fiscal 1999, $.2 million in the 1998 Transition Period, $1.0
million in Fiscal 1998 and $.4 million in Fiscal 1997. Accumulated amortization
was $3.0 million and $1.6 million at September 26, 1999 and July 26, 1998,
respectively.
Fiscal 1998 Acquisition
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 $.3 million and acquisition costs. The excess of the purchase price
over the Company's evaluation of the fair value of the net assets acquired was
$7.1 million and has been recorded as goodwill.
Fiscal 1997 Acquisitions
In June 1997, the Company acquired all of the outstanding capital stock
of Heartland Mfg. Corp., a manufacturer of paper plates, for $12.6 million,
including acquisition costs. The excess of the purchase price over the Company's
evaluation of the fair value of the net assets acquired was $9.3 million and has
been recorded as goodwill.
Also in June 1997, the Company acquired from Tenneco, Inc. net assets
relating to the manufacture of placemats and other disposable tabletop products
for $7.0 million, including acquisition costs. The excess of the purchase price
over the Company's evaluation of the fair value of the net assets acquired was
$1.3 million and has been recorded as goodwill.
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
specialty and deep tone tissue mill (the "Mill"). In addition, on July 1, 1998,
the Company consummated an agreement with the owner of the co-generation
facility at the Mill, whereby the owner of such facility terminated its
obligation to supply steam to the Mill and to make certain land lease payments.
As a result of these transactions, the Company realized net proceeds of $38.5
million and recorded a gain of $15.9 million which was included in other income,
net. Such net proceeds included a $3.7 million note receivable (included in
other assets) from the disposition of the Mill, due in March 2008, with 5.7%
interest payable in the form of additional notes receivable. Pursuant to an
asset sale covenant under the indenture covering the Notes (see Note 10), the
Company reinvested approximately $10 million of such net proceeds in fixed
assets within 270 days of such disposition.
F-6
<PAGE>
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 Company accrued $.5 million in 1998 for
severance and other costs relating to such relocation, which was spent in Fiscal
1999.
In Fiscal 1997, other income, net includes a net $2.9 million from the
settlement of a lawsuit. Partially offsetting this gain was a $1.3 million
charge for anticipated costs of the closure of the Company's Three Rivers,
Michigan facility. The charge covers the costs for the termination of employees
as well as costs to maintain the facility until its disposition, which occurred
in Fiscal 1999.
5. INVENTORIES
Inventories consist of the following (in thousands):
September 26, July 26
1999 1998
-------------- -------------
Raw materials and supplies $ 23,032 $ 15,663
Work-in-process 260 194
Finished goods 17,502 18,946
-------------- -------------
$ 40,794 $ 34,803
============== =============
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
Lives In September 26, July 26,
Years 1999 1998
--------- ----------- --------
Land and buildings 20-40 $ 22,690 $ 21,958
Machinery and equipment 3-12 52,011 43,241
Leasehold improvements 5-10 1,194 923
Construction in progress 1,382 2,732
----------- --------
77,277 68,854
Less: accumulated depreciation (25,355) (20,703)
----------- --------
$ 51,922 $ 48,151
=========== =========
Depreciation expense was $4.5 million in Fiscal 1999, $.7 million in
the 1998 Transition Period, $4.3 million in Fiscal 1998 and $3.9 million in
Fiscal 1997. In addition, property, plant and equipment includes buildings under
capital lease at a cost of $2.2 million and a net book value of $1.5 million at
September 26, 1999 and $1.6 million at July 26, 1998.
7. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, and
their dispersion across many different geographical regions.
F-7
<PAGE>
8. OTHER ASSETS
Other assets consist of the following (in thousands):
September 26, July 26,
1999 1998
----------- ---------
Notes receivable $ 7,118 $ 6,479
Management Services Agreement, net 6,413 6,867
Debt issuance costs, net 3,786 4,446
Other 1,855 1,435
-------- --------
$ 19,172 $ 19,227
======== ========
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following
(in thousands):
September 26, July 26,
1999 1998
------------ ---------
Compensation and benefits $ 9,543 $ 10,763
Interest payable 975 4,622
Promotion and sales allowances 3,435 2,447
Other 5,254 7,035
-------- --------
$ 19,207 $ 24,867
======== ========
10. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
September 26, July 26,
1999 1998
------------- --------
Senior Subordinated Notes $120,000 $120,000
Revolving credit agreement 11,710 -
Other 1,733 2,362
-------- --------
133,443 122,362
Less amounts due within one year 551 595
-------- --------
$132,892 $121,767
======== ========
In Fiscal 1997, the Company issued $120 million of 9 1/2% Series A
Senior Subordinated Notes due 2007 (the "Notes") with interest payable
semi-annually. Proceeds from the issuance of the Notes were primarily used to
retire debt. The Company incurred a $3.5 million extraordinary loss (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 discount and prepayment penalties.
The Company has a $50 million revolving credit agreement with a bank,
expiring March 31, 2001 and collateralized by eligible accounts receivable and
inventories, certain general intangibles and the proceeds on the sale of
accounts receivable and inventory. At September 26, 1999, $27.8 million was the
maximum advance available based upon eligible collateral. A commitment fee of
.375% per annum is charged on the unutilized portion of the facility. At
September 26, 1999, borrowings were available at the bank's prime rate (8.50%)
plus .25% and at LIBOR (approximately 5.38%) plus 2.25%.
The revolving credit agreement and the Notes contain certain
restrictive covenants with respect to, among others, (i) mergers and
acquisitions, (ii) capital expenditures, (iii) asset sales, (iv) dividends, and
(v) additional indebtedness. In addition, the revolving credit agreement
requires that the Company satisfy certain financial covenants.
F-8
<PAGE>
11. STOCKHOLDERS' EQUITY
Prior to the Merger, the Company paid $9.8 million in Fiscal 1998 and
$.2 million in Fiscal 1997 to repurchase shares of its then outstanding Class A
Common Stock and its Class A Common Stock subject to a redemption agreement
("Redeemable Common") from its stockholders. The repurchase of the Redeemable
Common for less than the present value of the liquidation amount as of the date
of repurchase resulted in a credit to retained earnings in Fiscal 1997. In
conjunction with the Merger, the treasury stock was canceled and the outstanding
Redeemable Common were converted into shares of redeemable common stock of SF
Holdings and the book value of the Redeemable Common at that date was credited
to retained earnings.
In Fiscal 1998, the Company's Board of Directors granted the Company's
majority stockholder options to purchase shares of Class A Common Stock at an
option price equal to the current market value. In conjunction with the Merger,
such options were converted into options to purchase shares of Class A common
stock of SF Holdings. The proforma effect of such options on compensation
expense, as required by SFAS No. 123, was less than $.1 million in each of
Fiscal 1999, the 1998 Transition Period and Fiscal 1998.
The changes in retained earnings consists of the following (in
thousands):
<TABLE>
<CAPTION>
Nine
Year Weeks
Ended Ended Years Ended
September 26, September 27, July 26, 1998 July 27, 1997
1999 1998 1998 1997
-------------- -------------- ------------- -------------
$ 17,214 $ 17,555 $ 11,643 $ 8,371
<S> <C> <C> <C> <C>
Net income (loss) (1,868) (341) 10,257 3,236
Purchase of affiliate assets in excess
of affiliates book value (see Note 15) (2,094) - - -
Transfer of liquidation value of
redeemable common stock - - 2,118 100
Accretion of redeemable common stock - - (43) (64)
Retirement of treasury stock - - (6,420) -
-------------- -------------- ------------- -------------
$ 13,252 $ 17,214 $ 17,555 $ 11,643
============== ============== ============= =============
</TABLE>
The Fonda Group, Inc. Stock Appreciation Unit Plan provides for the
granting of up to 200,000 units to key executives of the Company. A grantee is
entitled to the appreciation in a unit's value from the date of the grant to the
date of its redemption. Unit value is based upon a formula consisting of net
income (loss) and book value criteria and grants vest over a five-year period.
The Company granted 15,560 units in Fiscal 1998 and 10,980 units in Fiscal 1997
at an aggregate value on the date of grant of $.9 million and $.4 million,
respectively. There were no units granted in Fiscal 1999. The Company recorded
compensation expense of $.5 million in Fiscal 1998 and $.1 million in Fiscal
1997. No compensation expense was required to be recorded in Fiscal 1999 or in
the 1998 Transition Period. As of September 26, 1999, 40,530 units are
outstanding.
F-9
<PAGE>
12. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
Nine
Year Weeks
Ended Ended Years Ended
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
------------- -------------- ------------ ----------
Current:
Federal $ (325) $ (416) $ 5,430 $ 1,449
State 185 (116) 1,758 418
----------- ------------ --------- --------
(140) (532) 7,188 1,867
----------- ------------ --------- --------
Deferred:
Federal (238) 228 156 2,328
State (199) 66 (217) 677
----------- ------------ --------- --------
(437) 294 (61) 3,005
----------- ------------ --------- --------
$ (577) $ (238) $ 7,127 $ 4,872
=========== ============ ========= ========
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Deferred tax assets (liabilities) result from temporary
differences as follows (in thousands):
September 26, July 26,
1998 1998
------------- ---------
Deferred tax assets:
Capitalized inventory costs $ 819 $ 710
Allowance for doubtful accounts receivable 443 636
Accruals for health insurance and other
employee benefits 2,649 1,852
Inventory and sales related reserves 2,111 996
Pension reserve 43 384
Benefit of tax carryforwards 96 233
Other 389 993
------------ -----------
6,550 5,804
Deferred tax liabilities:
Depreciation (4,371) (5,106)
------------ -----------
$ 2,179 $ 698
============ ===========
A reconciliation of the income tax provision (benefit) to the amount
computed using the federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
Nine
Year Weeks
Ended Ended Years Ended
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
Income tax at statutory rate $ (856) $ (202) $ 6,084 $ 4,061
State income taxes (net of federal benefit) 8 (32) 947 712
Non-deductible goodwill 70 - - -
Meals and entertainment 44 - - -
Other 157 (4) 96 99
---------- -------------- ------------- -------------
$ (577) $ (238) $ 7,127 $ 4,872
========== ============== ============= =============
</TABLE>
At September 26, 1999, the Company has $1.9 million of state net
operating loss carryforwards which expire at various dates from 2003 through
2020. For federal income tax purposes, these net operating losses will be
carried back to Fiscal 1998.
F-10
<PAGE>
SF Holdings and the Company intend to file consolidated Federal income
tax returns and pursuant to a tax sharing agreement, the Company will pay SF
Holdings its allocable share of the consolidated group's consolidated Federal
income tax liability, which, in general, will equal the tax liability the
Company would have paid if it had filed separate tax returns.
13. LEASES
The Company leases certain of its facilities and equipment under
operating leases. Future minimum payments under noncancellable operating leases
with remaining terms of one year or more are $2.4 million in Fiscal 2000, $1.8
million in Fiscal 2001, $1.7 million in Fiscal 2002, $1.6 million in Fiscal
2003, $1.6 million in Fiscal 2004, and $2.9 million thereafter.
Rent expense was $3.8 million in Fiscal 1999, $.3 million in the 1998
Transition Period, $2.0 million in Fiscal 1998 and $2.0 million in Fiscal 1997.
14. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine
Year Weeks
Ended Ended Years Ended
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
-------------- -------------- ------------- -------------
Cash paid during the period for:
Interest, including $192 capitalized
<S> <C> <C> <C> <C>
in Fiscal 1998 and $163 in 1997 $ 12,032 $ 5,711 $ 12,104 $ 5,018
Income taxes, net of refunds 1,718 (165) 4,532 614
Businesses acquired:
Fair value of assets acquired,
including goodwill $ 8,874 $ 23,637
Liabilities assumed 1,973 594
------------- -------------
Cash paid $ 6,901 $ 23,043
============= =============
</TABLE>
15. RELATED PARTY TRANSACTIONS
The Company leases a building in Jacksonville, Florida from the
majority stockholder of SF Holdings on terms the Company believes are no less
favorable than could be obtained from independent third parties and were
negotiated on an arm's length basis. Annual payments under the lease are $.2
million plus annual increases based on changes in the Consumer Price Index
("CPI") through December 31, 2014. In addition, the majority stockholder can
require the Company to purchase the facility for $1.5 million, subject to a
CPI-based escalation, until July 31, 2006. In Fiscal 1998, the Company
terminated it operations at this facility and had been seeking a sublease
tenant. Effective October 1, 1999, Four M Corporation ("Four M"), an affiliate,
has assumed a portion of the obligations under this lease. Rent expense, net of
sublease income on a portion of the premises subleased through May 1998 to Four
M, was $.1 million in Fiscal 1999, less than $.1 million in the 1998 Transition
Period, and $.1 million in both Fiscal 1998 and 1997.
In Fiscal 1998, the Company entered into a license agreement with CEG,
whereby CEG was granted the exclusive rights to use certain of the Company's
trademarks and trade names in connection with the manufacture, distribution and
sale of disposable party goods products for a period of five years, subject to
extension. In connection therewith, the Company has received an annual royalty
equal to 5% of CEG's cash flow, as determined in accordance with a formula
specified in such agreement. In Fiscal 1999, the Company entered into an
exclusive manufacture and supply agreement with CEG (together with the before
mentioned license agreement, the "CEG Agreements"). Pursuant to such agreement,
and until December 6, 1999, the Company manufactured and supplied all of CEG's
requirements for, among other items, disposable paper plates, cups, napkins and
tablecovers. The Company sold such manufactured products to CEG in accordance
with a formula based on the Company's cost. Also in Fiscal 1999, the Company
purchased certain manufacturing assets from CEG for $4.9 million and entered
into operating leases whereby the Company leases to CEG certain
non-manufacturing assets for annual lease income of $.1 million. Independent
appraisals were obtained to determine the fairness of both the purchase price
and lease terms. The assets
F-11
<PAGE>
purchased from CEG were recorded in machinery and equipment as a carryover of
CEG's book value ($1.4 million) and the excess of the purchase price over such
CEG amounts was charged to retained earnings. The Company believes the terms on
which it (i) granted licence rights to CEG, (ii) manufactures and supplies
products for CEG, (iii) purchased manufacturing assets from CEG, and (iv) leased
non-manufacturing assets to CEG are at least as favorable as those it could have
obtained from unrelated third parties and were negotiated on an arm's length
basis. Pursuant to the CEG Asset Purchase Agreement (see Note 19), the Company
will cancel the CEG Agreements.
In Fiscal 1999, the Company purchased certain paper plate manufacturing
assets from Sweetheart Holdings Inc. ("Sweetheart"), an affiliate, for $2.4
million. Also in Fiscal 1999, the Company entered into a five year operating
lease with Sweetheart, whereby the Company leases certain paper cup
manufacturing assets to Sweetheart with a net book value of $1.3 million for
annual lease income of $.2 million. Independent appraisals were obtained to
determine the fairness of both the purchase price and lease terms. The Company
believes the terms on which it purchased manufacturing assets from Sweetheart,
and leases manufacturing assets to 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.
In Fiscal 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 rate on the CEG Note was converted to
pay-in-kind, the CEG Note's 2002 maturity was extended for an additional three
years and the CEG Note was made subordinate to Senior Debt (as such term is
defined therein). In connection with such amendment, the Company 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.
The loan is included in other assets. The CEG Note was canceled on December 6,
1999 in partial consideration of the CEG Asset Purchase Agreement (see Note 19).
In Fiscal 1998 the Company entered into a ten year agreement with SF
Holdings whereby the Company acquired for $7.0 million substantially all of SF
Holding's rights under a Management Services Agreement dated August 31, 1993, as
amended, and pursuant to which the Company has 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 term 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. The
$7.0 million payment is included in other assets and is being amortized over the
term of such agreement. Management fee income, net of amortization was $.5
million in Fiscal 1999, less than $.1 million in the 1998 Transition Period, and
$.1 million in Fiscal 1998.
In Fiscal 1998, the Company purchased a 38.2% ownership interest in
Fibre Marketing Group, LLC ("Fibre Marketing"), a waste paper recovery business,
from a director of the Company for $.2 million. Four M is also a member of Fibre
Marketing. The Company granted Sweetheart the right to acquire 50% of the
Company's interest in Fibre Marketing for $.1 million. The Company believes that
the terms on which it purchased such interest are at least as favorable as those
it could otherwise have obtained from an unrelated third party and were
negotiated on an arm's length basis.
Net sales to CEG were $26.9 million in Fiscal 1999, $6.9 million in the
1998 Transition Period, $17.0 million in Fiscal 1998 and $7.8 million in Fiscal
1997. Accounts receivable from CEG was $12.6 million at September 26, 1999
compared to $.5 million at July 26, 1998. Such increase was primarily due to
increased sales to CEG as a result of the CEG Agreements as well as extended
payment terms. Net sales to Sweetheart were $4.3 million in Fiscal 1999. Net
purchases from Sweetheart were $6.8 million in Fiscal 1999, $.1 million in the
1998 Transition Period and $.2 million in Fiscal 1998. Net sales to Fibre
Marketing were $3.9 million in Fiscal 1999, $.4 million in the 1998 Transition
Period, $4.2 million in Fiscal 1998 and $3.6 million in Fiscal 1997. The Company
also purchases corrugated containers from Four M, which were $1.8 million in
Fiscal 1999, $.2 million in the 1998 Transition Period, $1.1 million in Fiscal
1998 and $.9 million in Fiscal 1997. The Company believes that the terms on
which it sold or purchased products from related parties are at least as
favorable as those it could otherwise have obtained from unrelated third parties
and were negotiated on an arm's
F-12
<PAGE>
length basis. In Fiscal 1998, the Company contracted with The Emerald Lady,
Inc., an affiliate, to provide air transportation services. The Company incurred
$.5 million for such services in Fiscal 1999, $.1 million in the 1998 Transition
Period and $.3 million in Fiscal 1998. The Company believes that the terms on
which it purchases such services 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. All of the above mentioned affiliates are under the common
control of the Company's Chief Executive Officer.
At September 26, 1999, the Company had demand loan receivables from its
Chief Executive Officer totaling $275,000 plus accrued interest at 10%. During
Fiscal 1999, the Company also had a $150,000 loan receivable with another
executive officer plus accrued interest at 5.39% which was paid in full in June
1999.
16. EMPLOYEE BENEFIT PLANS
The Company provides certain union and non-union employees with
retirement and disability income benefits under defined benefit pension plans.
Pension costs are based upon the actuarially determined normal costs plus
interest on and amortization of the unfunded liabilities. The benefits for
participants in the non-union pension plans are frozen. In Fiscal 1999, the
assets and obligations of a pension plan for a significant number of the
Company's union employees were transferred to a multi-employer pension plan
resulting in a $.2 million credit to income. The Company's policy is to annually
fund the minimum contributions required by applicable regulations.
The net periodic pension cost for benefits earned in the respective
years is computed as follows (in thousands):
<TABLE>
<CAPTION>
Nine
Year Weeks
Ended Ended Years Ended
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
------------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Service cost $ 255 $ 44 $ 285 $ 433
Interest cost 473 85 444 403
Return on plan assets (734) 217 (534) (751)
Deferred gain 269 (299) 93 487
-------- -------- ------- -------
Net periodic pension cost $ 263 $ 47 $ 288 $ 572
======== ======== ======= =======
</TABLE>
F-13
<PAGE>
The funded status of the plans and the amount recognized in the balance sheets
is as follows (in thousands):
September 26, July 26,
1999 1998
------------- --------
Change in benefit obligation:
Benefit obligation at beginning of period $ 6,850 $ 5,599
Service cost 299 285
Interest cost 558 444
Amendments - 219
Actuarial (gain) loss (398) 280
Benefits paid (43) (32)
Transfer to multi-employer plan (3,857) -
Other - 55
--------- ---------
Benefit obligation at end of period 3,409 6,850
--------- ---------
Change in plan assets:
Fair value of plan assets at beginning of period 6,144 5,016
Actual return on plan assets 517 534
Contributions to plan 782 626
Benefits paid (43) (32)
Transfer to multi-employer plan (3,665) -
--------- ---------
Fair value of plan assets at end of period 3,735 6,144
--------- ---------
Funded status 326 (706)
Unrecognized prior service cost 65 215
Unrecognized gain (472) (305)
Additional liability (28) (199)
Intangible asset 28 69
--------- ---------
Net liability $ (81) $ (926)
========= =========
For purposes of the above table, the benefit obligation at the
beginning of Fiscal 1999 is as of July 26, 1998 and the changes in benefit
obligation and in plan assets include amounts for the 1998 Transition Period.
The actuarial present values of benefit obligations were determined using
discount rates of 7.75% in Fiscal 1999 and 7% in Fiscal 1998. The expected rate
of return on assets was assumed to be 8%. As of September 26, 1999 and July 26,
1998 the Company had plans with benefit obligations in excess of plan assets.
Benefit obligations for such plans at September 26, 1999 and July 26, 1998 were
$1.1 million and $4.7 million, respectively, and plan assets were $1.0 million
and $3.8 million, respectively.
The Company provides 401(k) savings and investment plans for the
benefit of non-union employees. Employee contributions are matched at the
discretion of the Company. The Company has a defined contribution benefit plan
for all non-union employees for which contributions and costs are based on
participant earnings. The costs for these plans were $3.1 million in Fiscal
1999, $.4 million in the 1998 Transition Period, $1.1 million in Fiscal 1998 and
$.8 million in Fiscal 1997.
The Company also participates in multi-employer pension plans for
certain of its union employees. Contributions to these plans, at a defined rate
per hour worked, amounted to $.7 million in Fiscal 1999, less than $.1 million
in the 1998 Transition Period, $.6 million in Fiscal 1998 and $.6 million in
Fiscal 1997.
F-14
<PAGE>
17. COMPARATIVE 1998 TRANSITION PERIOD INFORMATION
The following summary information is derived from the audited results
of operations for the nine week transition period ended September 27, 1998 and
comparative unaudited results for the thirteen weeks ended October 26, 1997 (in
thousands):
Nine Thirteen
Weeks Weeks
Ended Ended
September 27, October 26,
1998 1997
-------------- -----------
Net sales $ 42,593 $ 70,658
Gross profit 6,467 13,139
Income(loss) before income taxes (579) 1,790
Net income(loss) (341) 1,039
18. CONTINGENCIES
The Company is subject to legal proceedings and other claims arising in
the ordinary course of its business. The Company maintains insurance coverage of
types and in amounts which it believes to be adequate and believes that it is
not presently a party to any litigation, the outcome of which could reasonably
be expected to have a material adverse effect on its financial condition or
results of operations.
19. SUBSEQUENT EVENT
On December 3, 1999, CEG became an 87% owned subsidiary of SF Holdings.
On December 6, 1999, pursuant to the CEG Asset Purchase Agreement, the Company
purchased the intangible assets of CEG, including domestic and foreign
trademarks, patents, copyrights and customer lists. In addition, pursuant to the
CEG Asset Purchase Agreement, the Company has agreed to purchase over a sixty
day period certain inventory of CEG. The aggregate purchase price for such
assets was $41 million including cash, the cancellation of certain notes and
warrants and the assumption of certain liabilities. The agreement further
provides that the Company may acquire other CEG assets in exchange for
outstanding trade payables owed to the Company by CEG. In connection with this
agreement, the Company will cancel the CEG Agreements (see Note 15). Upon the
consummation of the CEG Asset Purchase Agreement, the Company will market,
manufacture and distribute disposable party goods products directly to the
specialty (party) channel of the Company's consumer market.
The following unaudited pro forma information gives effect to the
transaction as if it had occurred at the beginning of the respective periods (in
thousands):
Nine
Year Weeks Year
Ended Ended Ended
September 26, September 27, July 26,
1999 1998 1998
------------- ------------- ---------
Net sales $ 341,863 $ 59,244 $338,969
Net income (loss) (5,112) 53 8,233
F-15
<PAGE>
SCHEDULE II
THE FONDA GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end
Classification of period expenses accounts Deductions of period
----------------- --------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year ended September 26, 1999 $ 804 419 498 (1) $ 725
Transition Period ended
September 27, 1998 $ 789 20 5 (1) $ 804
Year ended July 26, 1998 $ 961 388 28 (2) 535 (1) $ 789
57 (3) 110 (4)
Year ended July 27, 1997 $ 549 457 -- 45 (1) $ 961
</TABLE>
(1) Amounts written off.
(2) Additions relating to acquisitions.
(3) Recoveries.
(4) Deductions related to dispositions.
S-1
ASSET PURCHASE AGREEMENT
Asset Purchase Agreement, dated as of November 21, 1999 (the
"Agreement"), by and between Creative Expressions Group, Inc., a Delaware
corporation ("Seller"), with its principal place of business at 7240 Shadeland
Station, Suite 300, Indianapolis, Indiana 46256, and The Fonda Group, Inc., a
Delaware corporation ("Buyer"), with its principal place of business at 2920
North Main Street, Oshkosh, Wisconsin 54901.
RECITALS
WHEREAS, Seller is engaged in the business of marketing and selling
paper and plastic products to the party goods industry (the "Business"); and
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase
from Seller, certain of the assets of the Business on the terms and conditions
set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties do hereby agree as
follows:
1. Purchase and Sale of Assets
1.1 Acquired Assets. On the terms and subject to the conditions of this
Agreement, Seller shall sell, transfer, assign and deliver to Buyer, and Buyer
shall purchase, acquire and accept from Seller, on an "as-is, where-is" basis
and without any representations and warranties, all of the right, title and
interest of Seller in and to (a) the intangible assets of Seller set forth on
Schedule 1.1 (the "Intangible Assets") (b) the Inventory (as hereinafter
defined) and (c) the Encumbered Inventory (as hereinafter defined)
(collectively, the "Acquired Assets").
1.2 Excluded Assets. Seller is not hereby selling, and Buyer is not
hereby purchasing, Seller's interest in any assets of Seller not set forth on
Schedule 1.1.
1.3 Transfer of Assets. (a) The transfer of the Intangible Assets and
the Inventory as contemplated by this Agreement shall be made by Seller free and
clear of all mortgages, pledges, security interests, liens, claims, charges,
liabilities, obligations and encumbrances (collectively, "Liens") of any kind or
nature whatsoever, and shall be effected by delivery to Buyer of an Assignment
and such other instruments of transfer and assignment as shall be necessary or
appropriate to transfer and assign the Intangible Assets and the Inventory to
Buyer and as shall be reasonably requested by Buyer.
(b) Except for those Liens set forth on Schedule 1.3(b), the transfer
of the Encumbered Inventory as contemplated by this Agreement shall be made by
Seller free and clear of all Liens of any kind or nature whatsoever, and shall
be effected by delivery to Buyer of such instruments of transfer and assignment
as shall be necessary or appropriate to transfer and assign the Encumbered
Inventory to Buyer and as shall be reasonably requested by Buyer.
(c) Seller shall, at any time and from time to time after the Closing
Date (as hereinafter defined), execute and deliver such other instruments of
transfer and assignment and do all such further acts and things as may be
reasonably requested by Buyer to transfer, assign
<PAGE>
and deliver to Buyer or to aid and assist Buyer in collecting and reducing to
possession, any and all of the Acquired Assets, or to vest in Buyer good and
valid title to the Acquired Assets.
1.4 No Assumption of Liabilities. Except for those obligations, debts,
claims or liabilities set forth on Schedule 1.4 (the "Assumed Liabilities"), by
executing this Agreement and acquiring the Acquired Assets in the manner
contemplated hereunder, Buyer in no way assumes or becomes liable for any
obligation, debt, claim or liability of Seller.
2. Purchase Price and Payment; Allocation; Closing
2.1 Purchase Price and Payment. The aggregate purchase consideration
for the Acquired Assets (the "Purchase Price") shall be $41 million, payable to
Seller or its designee(s) as follows:
(a) Upon execution of this Agreement, Buyer shall make a contract
deposit having an agreed aggregate value of $3,612,602.38 as follows:
(i) $3,081,042.65 by canceling that certain Restated and
Amended Promissory Note, dated March 12, 1998, made by Seller
in favor of Buyer, in the original principal amount of $2.6
million and having an outstanding principal balance in such
amount as of the date hereof; and
(ii) $531,559.73 by canceling those certain warrants issued on
March 12, 1998 by Seller to Buyer for the purchase of 3.065
shares of common stock, par value $.01 per share, of Seller;
(b) At the Closing, in exchange for the assignment and transfer to
Buyer of the Intangible Assets, Buyer shall pay and deliver to Seller aggregate
consideration having an agreed aggregate value of $16 million as follows:
(i) cash in the amount of $12 million; and
(ii) $4 million by Buyer assigning to Seller, pursuant to
documentation reasonably satisfactory to Seller in form and
substance, that certain Promissory Note, dated March 24, 1998,
made by Cellu Tissue Corporation-Natural Dam in favor of
Buyer, in the original principal amount of $3.75 million; and
(c) From time to time, but no later than sixty (60) days following the
Closing Date, Buyer shall pay the aggregate sum of $21,387,397.62 as follows:
(i) as Buyer purchases the Inventory, cash in the
aggregate amount of $16,387,397.62; and
(ii) when Buyer purchases the Encumbered Inventory, $5
million by the assumption by Buyer of the Assumed
Liabilities.
<PAGE>
For purposes hereof, "Inventory" shall mean the first $20 million in
book value of inventory acquired by Buyer, and "Encumbered Inventory" shall mean
the remaining $5 million in book value of inventory acquired by Buyer, which
Encumbered Inventory shall be acquired on the date on which Buyer assumes the
Assumed Liabilities and shall be subject to the Liens set forth on Schedule
1.3(b).
2.2 Allocation of Purchase Price. Seller and Buyer agree to allocate
the Purchase Price among the Acquired Assets for all purposes (including
financial accounting and tax purposes) in accordance with the allocation
schedule attached hereto as Schedule 2.2.
2.3 Consummation of Transactions. The consummation of the transactions
provided for in Section 2.1(a) of this Agreement shall take place on the date
hereof. The consummation of the transactions provided for in Section 2.1(b) of
this Agreement (the "Closing") shall take place on December 3, 1999, or such
other date or time as may be fixed by mutual agreement of the parties (the
"Closing Date"). The consummation of the transactions provided for in Section
2.1(c) of this Agreement shall take place within sixty (60) days following the
Closing Date.
3. Satisfaction of Seller Trade Payables
3.1 Additional Assets. Following the indefeasible payment in full of
all Obligations (as defined in Amendment No. 3, dated September 21, 1999, to the
Revolving Credit, Term Loan and Security Agreement, dated as of March 12, 1998,
among Seller, the lenders named therein and PNC Bank, National Association, as
agent) and the indefeasible payment in full of all obligations of Seller to
Albion Alliance Mezzanine Fund, L.P., The Equitable Life Assurance Society of
the United States, and Cellu Tissue Holdings, Inc., respectively, and provided
that Buyer is not in default of any of its obligations under this Agreement, if
there shall be any outstanding trade payables (the "Seller Trade Payables") owed
to Buyer by Seller, Buyer shall at any time thereafter have the right, in its
sole discretion, to take possession of any current assets or non-current assets
of Seller (the "Additional Assets") in satisfaction of the Seller Trade
Payables; provided, however, that the aggregate value of the Additional Assets
shall not exceed the total amount of Seller Trade Payables.
3.2 Valuation. For purposes of computing the value of the Additional
Assets, current assets of Seller shall be valued at book value and non-current
assets of Seller shall be valued at appraised value.
4. Miscellaneous
4.1 Bulk Sales Laws. Buyer hereby waives compliance with the provisions
of any bulk transfer laws applicable to the transactions contemplated by this
Agreement. Seller agrees promptly and diligently to pay and discharge when due
or to contest or litigate all claims of creditors that are asserted against
Buyer by reason of any non-compliance with such laws.
<PAGE>
4.2 Modifications. There can be no waiver of any of the terms and
conditions of this Agreement or any amendment hereof except as expressly set
forth in a writing signed by an authorized representative of Buyer and Seller.
No course of dealing and no trade custom shall be deemed to modify this
Agreement, and Seller's acknowledgment or confirmation of any writing from Buyer
which is in conflict with the terms and conditions hereof shall not constitute a
modification of this Agreement.
4.3 Survival. The provisions of this Agreement shall survive the
Closing and the delivery of the Assignment and any other instruments of
transfer, conveyance or assignment covering the Acquired Assets.
4.4 Governing Law. The laws of the State of New York, irrespective of
its choice of law principles, will govern the validity of this Agreement, the
construction of its terms and the interpretation and enforcement of the rights
and duties of the parties hereto.
4.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument.
4.6 Severability. If any provision of this Agreement, or the
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto. The parties further agree to replace such void
or unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the greatest extent possible, the economic,
business and other purposes of the void or unenforceable provision.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
THE FONDA GROUP, INC.
By: /s/ Hans H. Heinsen
-----------------------
Name:
Title:
CREATIVE EXPRESSIONS GROUP, INC.
By: /s/ Hans H. Heinsen
-----------------------
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Form 10-K
for the fifty-two week Period ended September 26, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001037478
<NAME> The Fonda Group, Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> SEP-26-1999
<CASH> 109
<SECURITIES> 0
<RECEIVABLES> 26,336
<ALLOWANCES> 725
<INVENTORY> 40,794
<CURRENT-ASSETS> 93,953
<PP&E> 77,277
<DEPRECIATION> 25,355
<TOTAL-ASSETS> 184,405
<CURRENT-LIABILITIES> 32,263
<BONDS> 132,892
0
0
<COMMON> 0
<OTHER-SE> 13,331
<TOTAL-LIABILITY-AND-EQUITY> 184,405
<SALES> 262,837
<TOTAL-REVENUES> 262,837
<CGS> 225,509
<TOTAL-COSTS> 225,509
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 419
<INTEREST-EXPENSE> 11,926
<INCOME-PRETAX> (2,445)
<INCOME-TAX> (577)
<INCOME-CONTINUING> (1,868)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,868)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
