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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X|Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 24, 2000
|_|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 33-24939
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 No.)
2920 North Main Street, Oshkosh, Wisconsin 54901
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 920/235-9330
Securities of the Registrant registered pursuant to Section 12b of the Act: None
Securities of the Registrant registered pursuant to Section 12g 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 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock of the Registrant
held by non-affiliates of the Registrant as of December 6,2000. Not Applicable.
There is no market for the Common Stock of the Registrant.
The number of shares outstanding of the Registrant's common stock
as of December 6, 2000:
The Fonda Group, Inc. Common Stock, $0.01 par value - 100 shares
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<PAGE>
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 one of the leading
converters and marketers of a broad line of paperboard and tissue based
disposable foodservice products. In Fiscal 2000, the Company had net sales of
$351 million. The Company sells its products under both branded and private
labels to the institutional foodservice customers and consumer foodservice
customers and participates at all major price points. The Company sells 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
brand names for the Company's principal products include Sensations(R), Paper
Art(R), Touch of Color(R) and Hoffmaster(R).
The Company offers a broad range of products, enabling it to offer its
customers "one-stop" shopping for their disposable foodservice product 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
material costs.
The Company sells its converted products to more than 6,000
institutional and consumer foodservice customers primarily located throughout
the United States and has developed and maintained long-term relationships with
many of these customers. Institutional foodservice customers include
restaurants, schools, hospitals and other major institutions. Consumer
foodservice customers supermarkets, mass merchants, warehouse clubs, discount
chains and other retail stores.
Products
The Company's principal products include: (i) disposable paperboard
products, such as white or printed paper plates, cups, and bowls, (ii)
disposable tissue and other specialty products, such as plain or printed
napkins, tablecovers, placemats, and cutlery, and (iii) party goods accessory
products, such as banners, cello bags, gift sacks, and invitations. The Company
believes it holds one of the top market positions in the commodity private label
business.
Paperboard Products
Tabletop Service Products. Paper plates and bowls represent the largest
portion of the Company's sales and are sold to both institutional foodservice
and consumer foodservice customers. The Company also manufactures these products
for its affiliate, Sweetheart Cup Company Inc. ("Sweetheart Cup"). White
uncoated and coated paper plates are purchased for everyday use by
cost-conscious consumers. Printed and solid color plates or bowls are considered
value-added and are purchased for everyday use as well as seasonal celebrations.
Beverage Service Products. The Company offers a variety of cup and lid
combinations for both hot and cold beverages. The Company's hot and cold cups
are sold to both institutional foodservice and consumer foodservice customers.
The Company purchases all of its hot and cold paper cups from Sweetheart Cup.
<PAGE>
Take-out Containers. The Company sells paper trays, food pails, and
nested containers to institutional foodservice customers for use by restaurants,
hotels, and other foodservice operators.
Tissue and Specialty Foodservice Products
Tissue Products. Napkins represent the second largest portion of the
Company's sales and are sold under the Hoffmaster(R), Linen-Like(R),
Sensations(R) and Fonda(R) brand names as well as private labels. Napkin
products range from single-ply white beverage napkins, to custom printed dinner
napkins, to color multi-ply napkins, to fully printed graphic-intensive napkins
for the party goods sector. Table covers are also offered in a variety of
configurations, colors, and sizes.
Specialty Products. The Company sells placemats, traycovers, doilies,
fluted baking products, portion control cups, and cutlery to both institutional
foodservice and consumer foodservice customers. The Company also produces a
non-skid traycover that serves the needs of healthcare and airline use.
Party Goods Products
The Company manufactures party good products which include custom
designed napkins, plates, cups, table covers, as well as a variety of accessory
items to add to the ensemble. These items are sold in ensembles or separately to
party goods stores, mass merchants, drug stores, and grocery chains. These items
are sold in pre-packed displays as well as open stock cases.
Marketing
Marketing. The Company's marketing efforts are focused on (i) providing
value-added products and services, (ii) cross-marketing products, designs or
services between both institutional foodservice and consumer foodservice
customers, (iii) developing new products that enhance the value of the bundle
for the customer, (iv) developing new designs which capitalize on future trends,
color palettes, and imagery and (v) increasing brand awareness through enhanced
packaging and promotion. The Company sells its products through an internal
sales force and independent brokers. The Company sells to more than 6,000
institutional foodservice and consumer foodservice customers located mostly in
the United States.
Sales
Institutional Foodservice Customers.Institutional foodservice customers
include restaurants, hotels, airlines, hospitals, and other non-retail
foodservice institutions. These customers, which the Company sells to through
foodservice distributors, represented approximately 39% of the Company's net
sales in Fiscal 2000, including sales to Sweetheart Cup. The market is serviced
by dedicated territory sales managers as well as brokers. The sales force works
directly with these national and regional distributors to service the needs of
the various customers in the disposable foodservice industry.
Consumer Foodservice Customers. Supermarkets, mass merchants, drug
stores, warehouse clubs, specialty party, and other retail stores comprise the
Company's consumer foodservice customers. These customers represented
approximately 61% of the Company's net sales in Fiscal 2000. The Company's
consumer foodservice customers are serviced by field sales representatives as
well as a network of national and regional brokers.
<PAGE>
Production
The Company's plants generally operate on a five day per week, 24 hours
per day schedule with Saturday scheduled as an overtime day when needed to meet
customer demand. Due to customer demand, the Company's paperboard plant
utilization is historically substantially higher during late spring and summer.
The tissue plants are typically at their highest utilization during the fall
season.
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 that may be slit for in-line printing and processed into final
products. 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.
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 include Imperial Bondware (a division of International Paper Co.),
Dixie Foodservice (a division of Georgia Pacific Corp.), AJM Packaging Corp.,
Temple-Inland Inc., Fold-Pak Corp., Solo Cup Co., Duni Corp., Erving Paper
Products Inc., Fort James Corp. and Wisconsin Tissue Mills Inc. (a subsidiary of
Georgia-Pacific Corp.).
Customers
The Company markets its products primarily to customers in the United
States. During Fiscal 2000, sales to the Company's five largest customers
represented approximately 21.7% of its net sales. The loss of one or more large
national customers could adversely affect the Company's operating results. The
Company believes it has strong relationships with its major national accounts
which have been developed over many years.
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, discharge 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
<PAGE>
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.
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.
Technology and Research
The Company tests new product concepts at its facilities located in
Oshkosh, Wisconsin, Appleton, Wisconsin and St. Albans, Vermont. The Company's
plant management, supervisors and experienced operators are responsible for
plant safety, product quality, process control, improvement of existing
products, development of new products and processes and technical assistance in
adhering to environmental rules and regulations. The Company focuses on
improving upon safety and performance, further automating its manufacturing
operations and developing improved manufacturing processes and product designs.
Employees
At September 24,2000, the Company employed approximately 1,805 persons,
of whom approximately 1,320 were hourly employees. The Company has collective
bargaining agreements in effect at its facilities in Appleton, Wisconsin;
Oshkosh, Wisconsin; St. Albans, Vermont; Indianapolis, Indiana; 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, Indianapolis, Williamsburg and Maspeth
facilities are May 1, 2002, May 31, 2002, January 31, 2001, December 1, 2001,
June 11, 2004 and October 31, 2001, respectively. The Company considers its
relationship with its employees to be good.
<PAGE>
Item 2. PROPERTIES
The Company has manufacturing and distribution facilities located
throughout the United States. All of the Company's facilities are well
maintained, in good operating condition and suitable for the Company's
operations. The table below provides summary information regarding the
properties owned or leased by the Company.
<TABLE>
<CAPTION>
Size
Type of Owned/ (Approximate
Location Facility (1) Leased square feet)
-------- ------------ ------ ------------
<S> <C> <C> <C>
Appleton, Wisconsin ........................ M/W O 267,700
Glens Falls, New York....................... M/W O 59,100
Goshen, Indiana............................. M/W O 63,000
Indianapolis, Indiana....................... W L 725,000
Lakeland, Florida........................... M/W L 45,000
Maspeth, New York........................... M/W L(2) 130,000
Oshkosh, Wisconsin.......................... M/W O 484,000
St. Albans, Vermont (2 facilities).......... M O 124,900
W L 182,000
Williamsburg, Pennsylvania.................. M/W O(3) 146,000
(1) M-Manufacturing; W-Warehouse; M/W-Manufacturing and Warehouse in same facility.
(2) Lease expired November 30, 2000 and all equipment was moved to other facilities.
(3) Subject to capital lease. (See Note 14 of the Notes to Consolidated Financial Statements)
</TABLE>
The Company also occupies several retail and storage facilities located
throughout Indiana and Pennsylvania in connection with its party goods consumer
business. These facilties are comprised of outlet stores and local storage
facilities maintained for marketing purposes.
Item 3. LEGAL PROCEEDINGS
From time to time,the Company is subject to legal proceedings and other
claims arising in the ordinary course of business. The Company maintains
insurance coverage of types and in amounts that 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 HOLDERS
NONE.
<PAGE>
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
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. The transaction has
been accounted for in a manner similar to pooling-of-interests. The accompanying
consolidated financial statements have been restated for all periods presented
to include the balance sheet and results of operations of CEG. CEG's net assets
and liabilities that were not acquired by the Company pursuant to the CEG Asset
Purchase Agreement have been classified as "Due to/from SF Holdings".
Set forth below are selected historical financial data of the Company
at the dates and for the fiscal years shown. The selected historical financial
data at September 24, 2000, September 26, 1999, September 27, 1998 and July 26,
1998 and for Fiscal 2000, 1999, 1998 and TP 1998 is derived from historical
financial statements of the Company and subsidiaries for such periods that have
been audited by Deloitte & Touche, LLP, independent auditors and are included
elsewhere herein. The selected historical financial data at July 27, 1997 and
July 28, 1996 and for Fiscal 1997 and 1996 is derived from the historical
financial statements of the Company and for such periods. Prior periods have
been restated to reflect the acquisition by the Company of certain assets and
liabilities from CEG.(See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations").
<TABLE>
<CAPTION>
Fiscal
------------------------------------------------------------------------
(In thousands) 2000 1999 TP 1998 (1) 1998 (2) 1997 (3) 1996
---------- ---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales $351,699 $329,259 $59,251 $340,666 $317,018 $221,404
Cost of sales 284,252 269,813 47,675 269,394 238,287 172,635
--------- --------- -------- --------- --------- ---------
Gross profit 67,447 59,446 11,576 71,272 78,731 48,769
Selling, general and administrative 47,707 51,073 9,134 54,100 56,053 34,132
Restructuring charge (credit) 650 - - 1,828
Other (income) expense, net (255) (606) (351) (15,366) (1,608) -
--------- --------- -------- --------- --------- ---------
Operating income (loss) 19,345 8,979 2,793 30,710 24,286 14,637
Interest expense, net 15,783 16,742 2,717 15,701 11,140 8,452
--------- --------- -------- --------- --------- ---------
Income (loss) before income taxes
expense (benefit) and
extraordinary loss 3,562 (7,763) 76 15,009 13,146 6,185
Income tax expense (benefit) 1,558 (2,388) 23 6,174 5,491 2,609
Extraordinary loss - - - - 3,495 -
--------- --------- -------- --------- --------- ---------
Net income (loss) $ 2,004 $ (5,375) $ 53 $ 8,835 $ 4,160 $ 3,576
========= ========= ======== ========= ========= =========
Balance Sheet Data (at end of period):
Property, plant and equipment, net $ 49,280 $ 51,922 $48,127 $ 48,151 $ 59,261 $ 46,350
Total assets 230,376 210,172 211,507 213,047 212,546 172,904
Long-term debt (4) 120,453 132,892 121,735 121,767 122,368 81,740
Shareholders' equity 14,892 11,970 17,266 17,213 18,166 14,208
</TABLE>
<PAGE>
------------------
(1) The 1998 Transition Period ("TP 1998") is the nine weeks ending September
27, 1998.
(2) 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").
(3) 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.
(4) See Note 10 of the Notes to Consolidated Financial Statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements in this filing, including those in the Notes
to Consolidated Financial Statements, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties and actual
results could differ materially. Such risks and uncertainties include, but are
not limited to, general economic and business conditions, competitive market
pricing, increases in raw material costs, energy costs and other manufacturing
costs, fluctuations in demand for the Company's products, potential equipment
malfunctions and pending litigation.
General
The Company, a wholly-owned subsidiary of SF Holdings is a converter
and marketer of disposable paper foodservice products. 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 for $16
million. In addition, pursuant to the CEG Asset Purchase Agreement the Company
subsequently purchased certain inventory and acquired other CEG assets for cash
and in exchange for outstanding trade payables owed to the Company by CEG. As a
result of this transaction, the Company markets, manufactures and distributes
disposable party goods products directly to the specialty (party) channel of the
Company's consumer market. The companies are under common control, and
therefore, the transaction has been accounted for in a manner similar to
pooling-of-interests. The accompanying consolidated financial statements have
been restated for all periods presented to include the balance sheet and results
of operations of CEG. CEG's net assets and liabilities that were not acquired by
the Company pursuant to the CEG Asset Purchase Agreement were acquired by SF
Holdings and have been classified as "Due to/from SF Holdings".
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 24, 2000 to the fiscal year ended September 26, 1999 and the fiscal
year ended September 26, 1999 to the fiscal year ended July 26, 1998.
<PAGE>
Recent Developments
On September 25, 2000, pursuant to an asset purchase agreement dated
August 9, 2000 (the "Springprint Agreement"), the Company purchased
substantially all of the property, plant and equipment, intangibles and net
working capital of Springprint Medallion, a division of Marcal Paper Mills, Inc.
("Springprint"). In addition, pursuant to the Springprint Agreement, the Company
has agreed to assume the liabilities and obligations of Springprint arising
under contracts or leases that are either assets purchased by the Company or a
part of the accounts payable. The aggregate purchase price for the assets and
working capital was $6.7 million, subject to post-closing adjustments.
Results of Operations
Fiscal 2000 Compared to Fiscal 1999
Net sales increased $22.4 million, or 6.8%, to $351.7 million in Fiscal
2000, compared to $329.3 million in Fiscal 1999, reflecting an 11.6% increase in
average realized sales price partially offset by a 4.8% decrease in sales
volume. Net sales to consumer foodservice customers increased 5.6%, resulting
from a 14.0% increase in average realized sales price, partially offset by a
decrease in sales volume of 8.4%. Selling prices were positively affected by
increases in raw material costs that were passed through to customers as well as
more competitive market conditions. Net sales to institutional foodservice
customers increased 8.8%, resulting from a 3.6% increase in average realized
sales price and a 5.2% increase in sales volume. The increased sales volume to
institutional foodservice customers 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 a more favorable
sales mix.
Gross profit increased $8.0 million, or 13.5%, to $67.4 million in
Fiscal 2000, compared to $59.4 million in Fiscal 1999. As a percentage of net
sales, gross profit increased from 18.0% in Fiscal 1999 to 19.2% in Fiscal 2000.
Gross profit in Fiscal 2000 was positively affected by margin enhancement in
value-added tissue products as well as cost reductions through manufacturing
efficiencies.
Selling, general and administrative expenses decreased $3.4 million or
6.7%, to $47.7 million in Fiscal 2000 from $51.1 million in Fiscal 1999. In
Fiscal 1999 results of operations reflected an increased bad debt write-off
associated with bankruptcy filings by two of the Company's top 25 customers.
This decrease was supplemented by savings in Fiscal 2000 resulting from the
consolidation of the CEG business.
Restructuring expense of $0.7 million in Fiscal 2000 was recorded in
connection with the November 2000 closing of the Maspeth, New York facility
which will result in the elimination of 130 positions by 2001.
Other (income) expense, net decreased $0.3 million in Fiscal 2000 to
income of $0.3 million, compared to income of $0.6 million in Fiscal 1999. This
is the result of a $0.1 million loss from the sale of a building in St. Albans,
Vermont and $0.1 million loss from the disposal of various machinery and
equipment.
Operating income increased $10.3 million to $19.3 million in Fiscal
2000 from $9.0 million in Fiscal 1999 due to the reasons discussed above.
<PAGE>
Interest expense, net of interest income decreased $0.9 million, or
5.4%, to $15.8 million in Fiscal 2000 compared to $16.7 million in Fiscal 1999.
In Fiscal 2000, the Company realized lower interest expense due primarily to
lower average interest rates and lower average outstanding balances.
Income tax expense (benefit) increased $4.0 million to an expense of
$1.6 million in Fiscal 2000 compared to a benefit of $2.4 million in Fiscal
1999. The effective rate for Fiscal 2000 was 43.8% and for Fiscal 1999 was 30.8%
due to the acquisition of CEG and related adjustments.
Net income (loss) increased $7.4 million, to income of $2.0 million for
Fiscal 2000 compared to a loss of $5.4 million for Fiscal 1999, due to the
reasons stated above.
Fiscal 1999 Compared to Fiscal 1998
Net sales decreased $11.4 million, or 3.3%, to $329.3 million in Fiscal
1999, compared to $340.7 million in Fiscal 1998. 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 $1.1
million in the converting operations. Net sales to consumer foodservice
customers decreased 10.3%, resulting from a decrease in sales volume of 9.9% and
a 0.4% decrease in average selling prices. Selling prices were adversely
affected by reductions in raw material costs that were passed through to
customers as well as more competitive market conditions. Net sales to
institutional foodservice customers increased 10.5%, resulting from a 3.7%
increase in volume and a 6.8% increase in sales price. The increased sales
volume to institutional customers 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 $11.9 million or 16.7%, to $59.4 million in
Fiscal 1999, compared to $71.3 million in Fiscal 1998. 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 $10.2 million in the converting operations. As a percentage of net
sales, gross profit decreased from 20.9% in Fiscal 1998 to 18.0% in Fiscal 1999.
Gross profit in Fiscal 1999 was adversely affected by margin erosion in
commodity paperboard products as well as excess costs incurred in implementing
efficiency initiatives.
Selling, general and administrative expenses decreased $3.0 million or
5.5%, to $51.1 million in Fiscal 1999 from $54.1 million in Fiscal 1998. Fiscal
1998 included $0.8 million of such costs relating to the Mill. Excluding such
Mill costs, the $2.3 million cost decrease was primarily due to headcount
reduction.
Other (income) expense, net decreased $14.8 million in Fiscal 1999 to
income of $0.6 million, compared to income of $15.4 million in Fiscal 1998. In
Fiscal 1998, other income included a $15.9 million gain on the Mill Disposition
and the Steam Contract and a gain on the sale of other non-core assets.
Restructuring expense was $1.8 million in Fiscal 1998. Of this, $0.5
million related to the decision to close the Company's Jacksonville, Florida
facility and the St. Albans, Vermont administrative offices. The remaining $1.3
million relates to CEG's closure of its Indianapolis, Indiana manufacturing
facility.
Operating income decreased $21.7 million to $9.0 million in Fiscal 1999
from $30.7 million in Fiscal 1998 due to the reasons discussed above. Excluding
other income, net and the restructuring expense, operating income decreased $8.9
million, and as a percentage of net sales, decreased from 5.0% in Fiscal 1998 to
2.5% in Fiscal 1999.
Interest expense, net of interest income, increased $1.0 million to
$16.7 million in Fiscal 1999 compared to $15.7 million in Fiscal 1998. During
the period the Company realized higher interest expense due to higher average
outstanding balances.
<PAGE>
Income tax expense (benefit) decreased $8.6 million to a benefit of
$2.4 million in Fiscal 1999 compared to an expense of $6.2 million in Fiscal
1998. The effective rate for Fiscal 1999 was 30.8% due to the integration of CEG
and related adjustments and for Fiscal 1998, the rate was 41.1%.
Net income (loss) decreased as a result of the above, the net loss was
$5.4 million in Fiscal 1999 compared to net income of $8.8 million in Fiscal
1998.
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. In Fiscal 2000, the Company funded its capital expenditures using
cash generated from operations and the sale of assets. The Company expects to
continue this method of funding for its Fiscal 2001 capital expenditures.
Net cash provided by operating activities increased $2.4 million to a
source of $5.7 million in Fiscal 2000, compared to a source of $3.3 million in
Fiscal 1999. This is primarily due to more favorable income from operating
activities.
Capital expenditures in Fiscal 2000 were $3.4 million compared to $12.4
million in Fiscal 1999. Capital expenditures in Fiscal 2000 included $1.5
million for new equipment and $1.9 million for routine capital improvements.
These expenditures were funded by $1.9 million from equipment sales and the
remainder from cash generated by operations.
On January 12, 2000, the Company's revolving credit facility was
amended to increase the revolving facility to $55 million, subject to borrowing
base limitations and collateralized by eligible accounts receivable and
inventories, certain general intangibles and the proceeds on the sale of
accounts receivable and inventory. On February 28, 2000, the Company's revolving
credit facility was amended to extend the maturity through September 30, 2001.
Borrowings are available at the bank's prime rate plus 0.25% or at LIBOR plus
2.25% at the election of the Company. At September 24, 2000, $40.7 million was
outstanding and $14.3 million was the maximum remaining advance available based
upon eligible collateral. Although the Company intends to refinance this debt,
there can be no assurances that the Company will be able to obtain such
refinancing on terms and conditions acceptable to the Company.
On September 25, 2000, the Company's revolving credit facility was
amended to include a term loan of $5 million. This amount is payable in equal
monthly installments through the maturity date of September 30, 2001, at an
annual rate of LIBOR plus 2.5%. The proceeds from this term loan were used to
partially finance the purchase of Springprint.
In 1997, the Company issued $120 million of 9-1/2% Series A Senior
Subordinated Notes due 2007 with interest payable semiannually. 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 (104.75% after March 1, 2002 and
declining in annual steps to 100% after March 1, 2005) of the principal amount
thereof plus accrued interest. The Notes provide that upon the occurrence of a
change of control (as defined therein), the holders thereof will have the option
to require the redemption of the Notes at a redemption price equal to 101% of
the principal amount thereof plus accrued interest.
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
limitations covenants that restrict, subject to specified exceptions (i)
<PAGE>
mergers, consolidations, asset sales or changes in capital structure, (ii)
creation or acquisition of subsidiaries, (iii) purchase or redemption of capital
stock or declaration or payment of dividends or distributions on such capital
stock, (iv) incurrence of additional indebtedness, (v) investment activities,
(vi) granting or incurrence of liens to secure other indebtedness, (vii)
prepayment or modification of the terms of subordinated indebtedness, and (viii)
engaging in transactions with affiliates. In addition, such debt instruments
restrict the Company's ability to pay dividends or make other distributions to
SF Holdings. The credit facility also requires that certain financial covenants
are satisfied.
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.
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 requirements in the
next twelve months.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 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 has evaluated this process which is effective for Fiscal 2001 and
has concluded that SFAS No. 133 will not have a significant impact on the
financial statement presentation.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 establishes accounting and reporting standards for
revenue recognition and requires that an entity not recognize revenue unitl it
is realized or realizable and earned. The Company has evaluated this bulletin
which is effective for Fiscal 2001 and has concluded that SAB No.101 will not
have a significant impact on the financial statement presentation.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
NONE.
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.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the directors,
executive officers and key employees of Fonda as of December 5, 2000. All
directors hold office until the next annual meeting of shareholders and until
their successors are duly elected and qualified. Officers serve at the
discretion of the Board of Directors.
Name Age Position
---- --- --------
Dennis Mehiel 58 Chairman and Chief Executive
Officer
Robert Korzenski 46 President and Chief Operating
Officer
Thomas Uleau 56 Executive Vice President and
Director
Hans H. Heinsen 47 Senior Vice President - Finance,
Chief Financial Officer and
Treasurer
Michael Hastings 53 Senior Vice President
Joseph Marcelynas 55 Senior Vice President
John Lewchenko 49 Vice President
Bryan Hollenbach 38 Vice President
Jon Mclain 56 Vice President and General Manager
Harvey L Freidman 58 Secretary and General Counsel
Alfred D. DelBello 66 Vice Chairman
James Armenakis 57 Director
Gail Blanke 52 Director
John A. Catsimatidis 52 Director
Chris Mehiel 61 Director
Jerome T. Muldowney 55 Director
Alan D. Scheinkman 50 Director
G. William Seawright 59 Director
Lowell P. Weicker, Jr. 69 Director
Mr. Dennis Mehiel has been Chairman and Chief Executive Officer of the
Company since it was purchased in 1988 and is also Chairman and Chief Executive
Officer of CEG. He has been Chairman of the Board and Chief Executive Officer of
Sweetheart Holdings, Inc. ("Sweetheart Holdings") and Sweetheart Cup
(collectively, "Sweetheart") since March 1998. Mr. Mehiel is also Chairman and
Chief Executive Officer of SF Holdings. Since August 2000, he has been a
director of Four M Corporation ("Four M"), a converter and seller of interior
packaging, corrugated sheets and corrugated containers which he co-founded. From
1966 until August 2000, he was Chairman of Four M, and since 1977 (except during
a leave of absence from April 1994 through July 1995) he was the Chief Executive
Officer of Four M. Mr. Mehiel is also currently a director of Box USA Holdings,
Inc. ("Box USA").
<PAGE>
Mr. 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 ("Scott"). Prior to that, he
was Director of National Sales at Thompson Industries.
Mr. 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 has also been President, Chief Operating Officer
and a Director of Sweetheart since March 1998. Mr. Uleau is also President,
Chief Operating Officer and a Director of SF Holdings. He has been Executive
Vice President of CEG since 1996. He served as Executive Vice President and
Chief Financial Officer of Four M from 1989 through 1993 and its Chief Operating
Officer in 1994. He is also currently a director of Four M, CEG and Box USA.
Mr. 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 Senior Vice President of
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.
Mr. Hastings has been Senior Vice President of the Company since
January 1997 and was President of the Fonda division since joining the Company
in May 1995 until March 1998. Mr. Hastings also has been Senior Vice 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 and Thompson Industries.
Mr. 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.
Mr. Lewchenko has been Vice President of Institutional Sales since
February 1996. He was employed by the Scott Foodservice Division of Scott 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.
Mr.Hollenbach has been Vice President of Operations since December 1998
and a Director of Operations since 1996. He was employed by the Chesapeake
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.
Mr. Mclain has been Vice President and General Manager since December
1999. He acted in the same capacity for CEG since November 1998. From August
1998 until November 1998 he was Vice President of Sales and Marketing for CEG.
Prior to joining CEG, he served as Vice President and General Manager of Erving
Paper Products from February 1997 until July of 1998. Mr. Mclain had previously
held numerous management positions including sales, marketing, plant operations,
and retail product supply management for James River Corporation.
<PAGE>
Mr.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 USA and is a director of CEG. He was formerly a partner of Kramer, Levin,
Naftalis & Frankel, a New York City law firm.
Mr. 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.
Mr. 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.
Ms. 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.
Mr. 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 News 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 Merchants Association.
Mr.Chris 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 from August 1997 until July 2000. He is an executive officer of the
managing member of Fibre Marketing Group, LLC, the successor to Fibre Marketing
Group, Inc., ("Fibre Marketing") 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 USA. 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.
Mr. 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.
<PAGE>
Mr. Scheinkman has been a Director of the Company since April 2000.
Since January 1998 Mr. Scheinkman has been County Attorney of Westchester
County, New York, Counsel to the County Executive and Board of Legislators.
Prior thereto, Mr. Scheinkman was in private practice with Scheinkman, Fredman &
Kosan LLP. Mr. Scheinkman is also an adjunct professor of law at Pace
University, School of Law and St. John's University, School of Law.
Mr. 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.
Mr. 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. He
currently serves as a director of Compuware Corporation, World Wrestling
Federation Entertainment, Inc., HPSC, Inc. and UST, Inc.
Director Compensation
Directors of Fonda who are not employees receive annual compensation of
(i) $12,000, (ii) $1,000 for each Board meeting attended, and (iii) $1,000 for
each committee meeting attended which is not held on the date of a board
meeting. Prior to Fiscal 2000, Directors also received 100 stock appreciation
rights ("SARs") as part of their compensation. The Company's SAR program was
terminated on September 14, 2000 and all SARs have been redeemed (See Note 12 of
the Notes to Consolidated Financial Statements). Directors who are employees do
not receive any compensation or fees for service on the Board of Directors or
any committee thereof.
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 2000, Fiscal 1999, the 1998 TP and Fiscal 1998 for services rendered in
all capacities to the Company during such periods. The Company has concluded
that the aggregate amount of perquisites and other personal benefits paid to
each of the named executive officers did not exceed the lesser of (i) 10% of
such officer's total annual salary and bonus or (ii) $50,000. Thus, such amounts
are not reflected in the following table.
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
---------------------------------------------------------------------------------------------------------------------
All Other
Name and Principal Salary Bonus SARs Compensation
Position Fiscal ($) ($) (#)(1) ($)(2)
----------------------------------------- -------------- -------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Dennis Mehiel
Chairman and Chief Executive Officer 2000 175,000 200,000 - -
of Fonda 1999 175,000 75,000 - -
1998 TP 29,167 - - -
1998 175,000 150,000 - -
Robert Korzenski
President and Chief Operating 2000 239,578 235,000 - 20,998 (3)
Officer of Fonda 1999 204,616 75,000 - 31,332 (4)
1998 TP 30,769 - - 1,548
1998 188,590 100,000 1,950 10,419
Jon Mclain
Vice President and General Manager 2000 174,231 67,950 - 6,988
of Fonda 1999 167,500 - - 101,521 (5)
1998TP(6) 12,885 - - 6,379 (7)
1998 - - - -
Joseph Marcelynas
Senior Vice President of Fonda 2000 163,684 60,415 - 5,191
1999 159,646 30,000 - 9,470
1998 TP 24,117 - - 1,051
1998 139,204 27,922 160 6,079
John Lewchenko
Vice President of Fonda 2000 151,538 55,500 - 7,197
1999 143,230 16,500 - 11,069
1998 TP 22,035 - - 1,130
1998 134,529 28,000 160 7,616
(1) The SAR Plan was terminated on September 14, 2000,effective as of October 1
, 1999. No SARs were issued during Fiscal 2000 or Fiscal 1999. All vested
SARs were redeemed on September 20, 2000.See "--Stock Appreciation Rights".
(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.
(3) Included in other compensation is $11,726 paid for relocation by the Company.
(4) Included in other compensation is $17,565 paid for relocation by the Company.
(5) Included in other compensation is $94,646 paid for relocation by the Company.
(6) Mr. Mclain began employment on August 31, 1998.
(7) Included in other compensation is $6,379 paid for relocation by the Company.
</TABLE>
<PAGE>
Stock Appreciation Rights
No SARs were issued to Named Officers during Fiscal 2000. On September
14, 2000 the Company terminated the SAR plan effective as of October 1, 1999. In
total, 4,860 SARs were redeemed at their October 1, 1999 value from Named
Officers at a total cost of $138,394. All unvested SARs held by Named Officers
not redeemed by the Company were forfeited.
<TABLE>
<CAPTION>
SARs Outstanding at Value of Outstanding
Name SARs Redeemed (#) Value Realized ($) FY end SARs
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Robert Korzenski 3,900 126,516 - -
Joseph Marcelynas 480 5,939 - -
John Lewchenko 480 5,939 - -
</TABLE>
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.
On January 1, 1997, the Company adopted a defined contribution benefit
plan. All non-union employees and certain union employees are covered under the
Company's 401(k) savings and investment plans. Employee contributions are
matched to varying amounts according to the plan as it relates to a particular
facility and in addition, at the discretion of the Company. The Company also
participates in multi-employer pension plans for certain of its union employees.
See Note 17 of the Notes to Consolidated Financial Statements.
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, New York 10016. The following table sets forth certain
information as of December 6, 2000, 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.
<TABLE>
<CAPTION>
Number of Percent
Name of Beneficial Owner Shares Ownership
------------------------ ---------------- --------------
<S> <C> <C>
Dennis Mehiel
373 Park Avenue South
New York, NY 10016 715,850 (1) 73.25%
Thomas Uleau
10100 Reisterstown Road
Owings Mills, Maryland 21117 13,487 1.38%
Directors and executive officers as a
Group (3 persons) 738,872 75.60%
</TABLE>
<PAGE>
(1) Includes 15,65 shares of Class A common stock of SF Holdings that would be
issuable upon conversion of Class B Series 1 Preferred Stock held by CEG,
116,647 shares of Class A common stock of SF Holdings that would be
issuable upon conversion of Class B Series 2 Preferred Stock, 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All of the affiliates referenced below are directly or indirectly
under the common ownership of the Company's Chief Executive Officer.
During Fiscal 2000, the Company sold certain paper cup machines to
Sweetheart Cup at a fair market value of $1.3 million. The gain on the sale of
equipment resulted in a credit to equity of $1.0 million. Independent appraisals
were obtained to determine the fairness of the purchase price.
During Fiscal 2000, the Company sold $11.1 million of paper plates,
$0.2 of equipment rental and $0.5 million of other services to Sweetheart.
Included in accounts receivable as of September 24, 2000 are $2.2 million due
from Sweetheart and $1.1 million due from Fibre Marketing. Other sales to
affiliates, if any, during Fiscal 2000 were not significant.
During Fiscal 2000, the Company purchased $15.9 million of paper cups
from Sweetheart, $1.7 million of corrugated containers from Box USA and $0.5
million of travel services from Emerald Lady, Inc.. Included in accounts
payable, as of September 24, 2000, is $1.6 million due to Sweetheart. Other
purchases from affiliates, if any, during Fiscal 2000 were not significant.
At September 24, 2000, the Company had loans receivable from its Chief
Executive Officer totaling $275,000 plus accrued interest at 10%. This loan is
payable upon demand. During Fiscal 1999, the Company also had a $150,000 loan
receivable from another executive officer plus accrued interest at 5.39% which
was paid in full in June 1999.
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 purchased 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. Pursuant to the agreement, the Company
also acquired other CEG assets in exchange for outstanding trade payables owed
to the Company by CEG. In connection with the CEG Asset Purchase Agreement, the
Company canceled previous agreements with CEG including all licensing and
manufacturing arrangements and a certain Promissory Note dated February 27,
1997. Financial results are presented on a consolidated basis with all
significant inter-company transactions eliminated for all periods presented.
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.
<PAGE>
During Fiscal 1999, the Company purchased certain paper plate
manufacturing assets from Sweetheart Cup for $2.4 million. Also in Fiscal 1999,
the Company entered into a five year operating lease with Sweetheart Cup,
whereby the Company leases certain paper cup manufacturing assets to Sweetheart
Cup with a net book value of $1.3 million for annual lease income of $0.2
million. Independent appraisals were obtained to determine the fairness of both
the purchase price and lease terms.
During Fiscal 1999, the Company sold $4.3 million of paper plates and
$0.2 million of equipment rental to Sweetheart and $3.9 million of scrap paper
to Fibre Marketing. Included in accounts receivable as of September 26, 1999 are
$1.3 million due from Sweetheart and $1.0 million due from Fibre Marketing.
Other sales to affiliates, if any, during Fiscal 1999 were not significant.
During Fiscal 1999, the Company purchased $6.8 million of paper cups
from Sweetheart, $1.8 million of corrugated containers from Box USA and $0.5
million of travel services from Emerald Lady, Inc. Included in accounts payable,
as of September 26, 1999, is $0.6 million due to Sweetheart. Other purchases
from affiliates, if any, during Fiscal 1999 were not significant.
During 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 is entitled to receive management fees from Sweetheart of
$0.7 million, $0.9 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 $0.5
million in Fiscal 2000 and 1999, less than $0.1 million in the 1998 TP, and $0.1
million in Fiscal 1998.
During Fiscal 1998, the Company purchased a 38.2% ownership interest in
Fibre Marketing from a Director of the Company for $0.2 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 $0.1 million. During Fiscal
2000, the Company sold a 13.2% interest in Fibre Marketing to Mehiel
Enterprises, Inc. for $0.1 million, retaining a 25% ownership interest in Fibre
Marketing. The Company believes that the terms on which it purchased and sold
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.
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 $0.2 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 its operations at this facility and is currently
subleasing the entire facility. Four M subleased a portion of this facility
through May 1998 and again from October 1999 through February 2000. Rent
expense, net of sublease income on the portion of the premises subleased to Four
M during Fiscal 2000 was less than $0.2, and through May 1998 was $0.1 million
in Fiscal 1999, less than $0.1 million in the 1998 TP, and $0.1 million in
Fiscal 1998.
<PAGE>
SF Holdings and the Company will file a consolidated federal income tax
return 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 is generally equal to the tax liability the Company would have
paid if it had filed separate tax returns.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. The financial statements listed in the "Index to Consolidated Financial
Statements."
2. The financial statement schedule listed in the "Index to Financial
Statement Schedules."
3. Exhibits
Exhibits 3.1 through 10.5 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 10.8 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 10.10 is incorporated herein by reference
to the exhibit with the corresponding number filed as part of the Company's Form
8-K filed on December 27, 1999. Exhibits 10.11 and 10.12 are filed herein.
3.1 Certificate of Incorporation of 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 Steams & 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. ("James River"), 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.
10.8 Tax Sharing Agreement, dated as of March 12, 1998 between SF
Holdings and the Company.
10.10 Asset Purchase Agreement dated as of December 6, 1999 between CEG
and the Company.
<PAGE>
10.11* Amendment No. 4 to the Second Amended and Restated Revolving Credit
and Security Agreement dated as of January 12, 2000, among the
Company, the financial institutions party thereto and IBJ Whitehall
Business Credit Corporation as successor to IBJ Schroder Bank &
Trust Company, as agent.
10.12* Amendment No. 5 to the Second Amended and Restated Revolving Credit
and Security Agreement dated as of February 28, 2000, among the
Company, the financial institutions party thereto and IBJ
Whitehall Business Credit Corporation as successor to IBJ Schroder
Bank & Trust Company, as agent.
27.1* Financial Data Schedule.
* filed herein.
(b) A report on Form 8-K was filed on December 27, 1999 under Item 2 to
announce the Asset Purchase Agreement between CEG and the Company.
A report on Form 8-K/A was filed on February 25, 2000 under Item 7 to
provide pro forma financial information for CEG.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 24
Consolidated Balance Sheets as of September 24, 2000
and September 26, 1999 25
Consolidated Statements of Operations and Other
Comprehensive Income (Loss) for Fiscal Years 2000,
1999, the nine weeks ended September 27, 1998
and the fifty two weeks ended July 26, 1998 26
Consolidated Statements of Cash Flows
for Fiscal Years 2000, 1999, the nine weeks ended
September 27, 1998 and the fifty two weeks ended July 26, 1998 27
Consolidated Statements of Shareholders' Equity for Fiscal Years 2000,
1999, the nine weeks ended September 27, 1998 and the
fifty two weeks ended July 26, 1998 28
Notes to Consolidated Financial Statements 29
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Fonda Group, Inc.
We have audited the accompanying consolidated balance sheets of The
Fonda Group, Inc. (the "Company") as of September 24, 2000 and September 26,
1999, and the related consolidated statements of operations and other
comprehensive income (loss), cash flows and shareholders' equity for the years
ended September 24, 2000 and September 26, 1999, the nine week transition period
ended September 27, 1998 and the year ended July 26, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. These 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 consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of September
24, 2000 and September 26, 1999, and the results of its operations and its cash
flows for the years ended September 24, 2000 and September 26, 1999, the nine
week transition period ended September 27, 1998 and the year ended July 26, 1998
in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 1 to the consolidated financial statements, in
Fiscal 2000 the Company acquired certain assets and liabilities of an affiliate.
The transaction has been accounted for in a manner similar to
pooling-of-interests and accordingly, the consolidated financial statements have
been restated for all periods presented.
/s/ DELOITTE & TOUCHE LLP
Baltimore, Maryland
November 22, 2000
<PAGE>
THE FONDA GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 24, September 26,
2000 1999
------------- -------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 1,413 $ 624
Receivables, less allowances of $1,459 and $2,049, respectively 50,927 45,431
Inventories 63,145 60,167
Deferred income taxes 8,044 6,205
Refundable income taxes 298 1,174
Spare parts 2,523 2,481
Other current assets 6,328 6,212
--------- --------
Total current assets 132,678 122,294
--------- --------
Property, plant and equipment, net 49,280 51,922
Goodwill, net 18,373 19,358
Due from SF Holdings 18,441 -
Other assets 11,604 16,598
--------- --------
Total assets $230,376 $210,172
========= ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 15,679 $ 16,272
Accrued payroll and related costs 10,469 8,681
Other current liabilities 21,203 16,529
Current portion of long-term debt 41,425 551
--------- --------
Total current liabilities 88,776 42,033
--------- --------
Due to SF Holdings - 17,155
Deferred income taxes 5,043 4,026
Long-term debt 120,453 132,892
Other liabilities 1,212 2,096
--------- --------
Total liabilities 215,484 198,202
--------- --------
Commitments and contingencies (See Note 18) - -
Shareholders' equity:
Common Stock - Par value $.01 per share; 1,000 shares authorized; 100
shares issued and outstanding - -
Additional paid-in capital 1,022 -
Retained earnings 13,895 11,891
Accumulated other comprehensive (loss) income (25) 79
--------- --------
Total liabilities and shareholders' equity $230,376 $210,172
========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
THE FONDA GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
Nine Weeks
Ended Fifty Two
Fiscal Fiscal September Weeks Ended
2000 1999 27, 1998 (1) July 26, 1998
---------- ---------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales $351,699 $329,259 $59,251 $340,666
Cost of sales 284,252 269,813 47,675 269,394
--------- --------- -------- ---------
Gross profit 67,447 59,446 11,576 71,272
Selling, general and administrative expenses 47,707 51,073 9,134 54,100
Restructuring expense 650 - - 1,828
Other (income) expense, net (255) (606) (351) (15,366)
--------- -------- -------- ---------
Operating income (loss) 19,345 8,979 2,793 30,710
Interest expense, net of interest income of $275,
$498, $296 and $820, respectively 15,783 16,742 2,717 15,701
--------- --------- -------- ---------
Income (loss) before income tax
expense (benefit) 3,562 (7,763) 76 15,009
Income tax expense (benefit) 1,558 (2,388) 23 6,174
--------- --------- -------- ---------
Net income (loss) $ 2,004 $ (5,375) $ 53 $ 8,835
========= ========= ======== =========
Other comprehensive income (loss), net of tax:
Minimum pension liability adjustment
(net of income tax expense (benefit) of
($69) and $53, respectively) (104) 79 - -
--------- --------- -------- ---------
Comprehensive income (loss) $ 1,900 $ (5,296) $ 53 $ 8,835
========= ========= ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
(1) See Note 1
<PAGE>
THE FONDA GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Weeks
Ended Fifty Two
Fiscal Fiscal September 27, Weeks Ended
2000 1999 1998 July 26, 1998
---------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,004 $ (5,375) $ 53 $ 8,835
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,374 6,598 1,039 6,156
Deferred income tax expense (benefit) 192 (1,826) 294 (792)
(Gain) / Loss on sale of assets 202 (72) (201) (16,333)
Changes in operating assets and liabilities:
Receivables (3,218) 954 (6,304) 1,048
Inventories (3,020) (3,930) 496 1,295
Accounts payable 5,885 2,942 (6,103) 2,481
Redemption of stock appreciation rights (504) - - -
Other, net (3,233) 4,008 (2,098) 745
--------- --------- --------- ---------
Net cash provided by (used in)operating activities 5,682 3,299 (12,824) 3,435
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (3,441) (12,379) (748) (7,039)
Due to/from SF Holdings (30,449) (10,722) 4,656 3,475
Acquisition of a business - - - (6,901)
Acquisition of Management Services Agreement - - - (7,000)
Proceeds from sale of property, plant and equipment 562 762 294 34,793
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (33,328) (22,339) 4,202 17,328
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under credit facilities 29,000 11,710 - -
Net borrowings (repayments) of other debt (565) (576) (53) (569)
Redemption of common stock - (9,788)
--------- --------- --------- ---------
Net cash provided by (used in)financing activities 28,435 11,134 (53) (10,357)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 789 (7,906) (8,675) 10,406
CASH AND CASH EQUIVALENTS, beginning of period 624 8,530 17,205 6,799
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 1,413 $ 624 $ 8,530 $ 17,205
========= ========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 15,099 $ 15,949 $ 6,310 $ 14,519
========= ========= ========= =========
Income taxes paid $ 701 $ 2,528 $ 53 $ 6,127
========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
THE FONDA GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Accumulated Total
Common Additional Retained Other Treasury Shareholders'
Stock Paid-In Earnings Comp-rehensive Stock Equity
Capital Income (Loss)
------- ---------- --------- ---------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 27, 1997 $ 2,145 $ 7,845 $ 8,378 $ - $ (202) $ 18,166
Net income - - 8,835 - - 8,835
Transfer of common stock - 2,118 - - - 2,118
Accretion of redeemable stock - (43) - - - (43)
Redemption of common stock
and treasury stock (2,145) (9,920) - - 202 (11,863)
------ -------- -------- --------- ------- ---------
Balance, July 26, 1998 - - 17,213 - - 17,213
Net income - - 53 - - 53
------ -------- -------- --------- ------- ---------
Balance, September 27, 1998 - - 17,266 - - 17,266
Net loss - - (5,375) - - (5,375)
Minimum pension liability
adjustment - - - 79 - 79
------ -------- -------- --------- ------- ---------
Balance, September 26, 1999 - - 11,891 79 - 11,970
Net income - - 2,004 - - 2,004
Elimination of gain on
equipment sold to related
party - 1,022 - - - 1,022
Minimum pension liability
adjustment - - - (104) - (104)
------ -------- -------- --------- ------- ---------
Balance, September 24, 2000 $ $ 1,022 $13,895 $ (25) $ - $ 14,892
======= ======== ======== ========= ======= =========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
THE FONDA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
1. PRIOR YEARS RESTATEMENT
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 (the "CEG Merger").
The companies are under common control, and therefore, the transaction has been
accounted for in a manner similar to pooling-of-interests. The financial
statements have been restated for all periods presented to include the balance
sheet and results of operations of CEG. CEG's net assets and liabilities that
were not acquired by the Company pursuant to the CEG Asset Purchase Agreement
were acquired by SF Holdings and have been classified as "Due to/from SF
Holdings" (See Note 13).
The following information presents certain income statement data of the
separate companies for the periods preceding the CEG Merger:
Nine Weeks
Ended Fifty Two
Fiscal Fiscal September Weeks Ended
2000 1999 27, 1998 July 26, 1998
-------- -------- --------- -------------
Net sales
Fonda $257,051 $222,720 $ 35,665 $254,513
CEG 94,648 106,539 23,586 86,153
-------- -------- -------- --------
Consolidated net sales $351,699 $329,259 $ 59,251 $340,666
======== ======== ======== ========
Net income (loss)
Fonda $ (1,051) $ (1,867) $ (341) $ 10,257
CEG 3,055 (3,508) 394 (1,422)
--------- --------- --------- ---------
Consolidated net income (loss) $ 2,004 $ (5,375) $ 53 $ 8,835
========= ========= ========= =========
Sales from Fonda to CEG were eliminated and have been excluded from net
sales as presented. Intercompany sales to CEG were $30.0 million in Fiscal 2000,
$40.1 million in Fiscal 1999, $6.9 million in the 1998 Transition Period and
$17.0 million in Fiscal 1998.
2. SIGNIFICANT ACCOUNTING POLICIIES
Business Segments - The Company operates within one business segment
and accordingly does not report multiple business segments.
<PAGE>
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 2000 is the fifty two
week period ended September 24, 2000. 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 was the fifty-two
week period ended July 26, 1998.
Principles of Consolidation - The financial statements include the
accounts of The Fonda Group and CEG on a consolidated basis as of September 24,
2000 and September 26, 1999 and for Fiscal Years 2000, 1999, the 1998 Transition
Period and Fiscal 1998.
The Company incorporates the results of Fibre Marketing Group, LLC
("Fibre Marketing") based upon the equity method of accounting for its relative
share of the profit and or loss of Fibre Marketing for the corresponding period
(See Note 13).
Revenue recognition - Revenue is recognized upon shipment of product.
Reclassifications - Certain prior year amounts have been reclassified
to conform to the current period presentation.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
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.
The asset lives of buildings range between 20 and 40 years. The asset
lives of machinery and equipment range between 3 and 12 years and the asset
lives of leasehold improvements range between 5 and 10 years.
Deferred Catalog Cost and Advertising Expense - The Company expenses
the costs of advertising as incurred, except for catalog costs, which are
capitalized and amortized over the expected period of future benefits. Direct
response advertising consists primarily of catalogs that include order forms for
the Company's products. The everyday products catalog costs are expensed over a
period of twelve months, while the spring, fall and holiday season catalog costs
are amortized over periods ranging from four to six months coinciding with
shipments of products.
At September 24, 2000 and September 26, 1999, $215,000 and $290,000,
respectively, of unamortized catalog costs were included in other current
assets. Advertising expense was $193,000 in Fiscal 2000, $101,000 in Fiscal
1999, $27,000 in the 1998 Transition Period and $451,000 in Fiscal 1998. Catalog
expense was $559,000 in Fiscal 2000, $746,000 in Fiscal 1999, $165,000 in the
1998 Transition Period, and $748,000 in Fiscal 1998.
<PAGE>
Advanced Royalties and Minimum License Guarantees - The Company enters
into licensing agreements with third parties for the right to use their designs
and trademarks. Certain agreements require minimum guarantees of royalties, as
well as advance payments. Advance royalty payments are recorded as other current
assets and are charged to expense as royalties are earned. Minimum license
guarantees are recorded as an other asset, with a corresponding payable, when
the agreement is executed and are charged to expense based on actual sales. The
Company charges to expense remaining advance royalties and minimum license
guarantees when management determines that actual related product sales are
significantly less than original estimates.
As of September 24,2000 and September 26, 1999,the Company had $450,000
and $536,000 in minimum license guarantees and advance royalties, net of
reserves, respectively. Future minimum royalty payments are $60,000 in 2001 and
$187,000 thereafter.
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 not be
recoverable. 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. Should the review indicate
that goodwill is not recoverable, the Company's carrying value of the goodwill
would be reduced by the estimated shortfall of the cash flows.
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. SF Holdings and the Company will
file a consolidated federal income tax return 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 is
generally equal to the tax liability the Company would have paid if it had filed
separate tax returns.
Impact of Recently Issued Accounting Standards - In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 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 has evaluated
this process which is effective for Fiscal 2001 and has concluded that SFAS No.
133 will not have a significant impact on the financial statement presentation.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 establishes accounting and reporting standards for
revenue recognition and requires that an entity not recognize revenue until it
is realized or realizable and earned. The Company has evaluated this bulletin
which is effective for Fiscal 2001 and has concluded that SAB No.101 will not
have a significant impact on the financial statement presentation.
<PAGE>
3. INVENTORIES
The components of inventories are as follows (in thousands):
September 24, September 26,
2000 1999
-------------- --------------
Raw materials and supplies $ 19,723 $ 20,910
Finished products 42,732 38,409
Work in progress 690 848
-------- --------
Total inventories $ 63,145 $ 60,167
======== ========
4. INCOME TAXES
The income tax provision includes the following components (in
thousands):
<TABLE>
<CAPTION>
Year Ended Nine Weeks Ended
September 26, September 27, Year Ended
Fiscal 2000 1999 1998 July 26, 1998
------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Current-
Federal $ 1,026 $ (866) $ (187) $ 5,254
State 340 304 (84) 1,712
------- -------- -------- --------
Total current 1,366 (562) (271) 6,966
------- -------- -------- --------
Deferred -
Federal $ 167 $(1,453) $ 228 $ (484)
State 25 (373) 66 (308)
------- -------- -------- --------
Total deferred 192 (1,826) 294 (792)
------- -------- -------- --------
$ 1,558 $(2,388) $ 23 $ 6,174
======= ======== ======= ========
</TABLE>
The effective tax rate varied from the U.S. Federal tax rate of 35% for
Fiscal 2000, Year Ended September 26, 1999; Nine Weeks Ended September 27, 1998
and Year Ended July 26, 1998:
<TABLE>
<CAPTION>
Nine Weeks
Year Ended Ended
September 26, September 27, Year Ended
Fiscal 2000 1999 1998 July 26, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. Federal tax rate 35% 35% 35% 35%
State income taxes, net of
U.S. Federal tax impact
6 - - 5
Non-deductible goodwill 2 (1) - -
Meals and Entertainment
disallowance 1 (1) - -
Other - (2) (5) 1
--- --- ---- ---
Effective tax rate 44% 31% 30% 41%
</TABLE>
Deferred income taxes reflect the net tax effects of net operating loss
carry-forwards, tax credit carry-forwards, and temporary differences between the
carrying amounts of assets and liabilities for
<PAGE>
financial reporting purposes and the amounts used for income tax purposes. The
significant components of the Company's net deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
September 24, September 26,
2000 1999
-------------- ---------------
<S> <C> <C>
Assets
Capitalized inventory costs $ 948 $ 819
Allowance for doubtful accounts receivable and related
reserves 2,105 443
Accrual for health insurance and other employee benefits 2,408 2,649
Inventory and sales related reserve 3,005 2,111
Pension reserve 14 43
Benefit of tax carryforwards 325 96
Other 83 389
-------- --------
8,888 6,550
-------- --------
Liabilities
Depreciation (5,801) (4,371)
Other (86) -
-------- --------
(5,887) (4,371)
-------- --------
Net deferred tax assets $ 3,001 $ 2,179
======== ========
</TABLE>
The tax benefit carryforward primarily relates to charitable
contribtuion carryforwards which will expire in the year 2005.
5. OTHER CURRENT ASSETS
The components of other current assets are as follows (in thousands):
September 24, September 26,
2000 1999
-------------- --------------
Vendor receivable $ 2,637 $ 3,217
Prepaid expenses 2,125 2,043
Other 1,566 952
------- -------
Total other current assets $ 6,328 $ 6,212
======= =======
<PAGE>
6. PROPERTY, PLANT AND EQUIPMENT
The Company's major classes of property, plant and equipment, net are
as follows (in thousands):
September 24, September 26,
2000 1999
-------------- --------------
Land and building $ 22,300 $ 22,690
Machinery and equipment 47,465 52,011
Leasehold improvements 1,282 1,194
Construction in progress 3,148 1,382
--------- ---------
Total property, plant and equipment 74,195 77,277
--------- ---------
Accumulated depreciation (24,915) (25,355)
--------- ---------
Property, plant and equipment, net $ 49,280 $ 51,922
========= =========
Depreciation expense was $5.2 million in Fiscal 2000, $4.5 million in
Fiscal 1999, $0.7 million in the 1998 Transition Period and $4.6 million in
Fiscal 1998. In addition, property, plant and equipment includes buildings under
capital lease at a cost of $2.2 million and a net book value of $1.4 million at
September 24, 2000 and $1.5 million at September 26, 1999.
7. 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 $0.3 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.
The above acquisition has been accounted for under the purchase method
and the results have been included in the consolidated statements of operations
since the respective date of acquisition. Goodwill amortization was $1.0 million
in Fiscal 2000, $1.2 million in Fiscal 1999, $0.2 million in the 1998 Transition
Period and $1.0 million in Fiscal 1998. Accumulated amortization was $4.0
million and $3.0 million at September 24, 2000 and September 26, 1999,
respectively. The inclusion of this acquisition within the financial statements
presented had a minimal impact on the Company's results.
8. OTHER ASSETS
The components of other assets are as follows (in thousands):
September 24, September 26,
2000 1999
------------- -------------
Management service agreement, net $ 5,900 $ 6,413
Debt issuance costs, net 3,226 3,786
Notes receivable - 4,084
Other 2,478 2,315
-------- --------
Total other assets $ 11,604 $ 16,598
======== ========
<PAGE>
Included in other assets are unamortized debt issuance costs of $3.5
million at September 24, 2000 and $4.7 million at September 26, 1999, which are
being amortized over the terms of the respective borrowing agreements.
9. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in
thousands):
September 24, September 26,
2000 1999
-------------- --------------
Promotional allowances $ 8,179 $ 7,987
Due to other affiliates 1,676 -
Freight 1,467 1,554
Interest payable 1,426 975
Medical and other insurance 1,565 1,060
Workers compensation 398 2,021
Other 6,492 2,932
-------- --------
Total other current liabilities $ 21,203 $ 16,529
======== ========
10. LONG-TERM DEBT
Long-term debt, including amounts payable within one year, is as
follows (in thousands):
September 24, September 26,
2000 1999
---------------- -----------------
Senior Subordinated Notes $ 120,000 $ 120,000
Revolving credit agreement 40,710 11,710
Other 1,168 1,733
---------- ----------
Total debt 161,878 133,443
Less - Current portion of long-term debt (41,425) (551)
---------- ----------
Total long-term debt $ 120,453 $ 132,892
========== ==========
The aggregate annual maturities of long-term debt at September 24, 2000
are as follows (in thousands):
Fiscal 2001 $ 41,425
Fiscal 2002 113
Fiscal 2003 118
Fiscal 2004 124
Fiscal 2005 and thereafter 120,098
--------------------
$ 161,878
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
<PAGE>
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.
On January 12, 2000, the Company's revolving credit facility was
amended to increase the revolving facility to $55 million, subject to borrowing
base limitations and collateralized by eligible accounts receivable and
inventories, certain general intangibles and the proceeds on the sale of
accounts receivable and inventory. On February 28, 2000, the Company's revolving
credit facility was amended to extend the maturity through September 30, 2001.
Borrowings are available at the bank's prime rate plus 0.25% or at LIBOR plus
2.25% at the election of the Company. At September 24, 2000, $40.7 million was
outstanding and $14.3 million was the maximum remaining advance available based
upon eligible collateral. Although the Company intends to refinance this debt,
there can be no assurances that the Company will be able to obtain such
refinancing on terms and conditions acceptable to the Company.
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
limitations covenants that restrict, subject to specified exceptions (i)
mergers, consolidations, asset sales or changes in capital structure, (ii)
creation or acquisition of subsidiaries, (iii) purchase or redemption of capital
stock or declaration or payment of dividends or distributions on such capital
stock, (iv) incurrence of additional indebtedness, (v) investment activities,
(vi) granting or incurrence of liens to secure other indebtedness, (vii)
prepayment or modification of the terms of subordinated indebtedness, and (viii)
engaging in transactions with affiliates. In addition, such debt instruments
restrict the Company's ability to pay dividends or make other distributions to
SF Holdings. The credit facility also requires that certain financial covenants
are satisfied.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments included in current
assets and current liabilities approximate their estimated fair value because of
the relatively short maturities of these instruments. Long-term debt
instruments, other than the Company's Senior Subordinated Notes, have variable
interest rates that fluctuate along with current market conditions and thus the
carrying value approximates their fair value.
The fair value of the Company's Senior Subordinated Notes is estimated
to be $15.6 million lower than the carrying value at September 24, 2000 and
$20.4 million lower than the carrying value at September 26, 1999 based on
independent third party information.
12. STOCKHOLDERS' EQUITY
On September 14, 2000, the Company terminated the Stock Appreciation
Unit Plan (the "SAR Plan") effective as of October 1, 1999. In total, 24,780
SARs were redeemed at a total cost to the Company of $0.5 million. The SAR Plan
had provided for the granting of up to 200,000 units to key executives of the
Company. A grantee was entitled to the appreciation in a unit's value from the
date of the grant to the date of its redemption. Unit value was based upon a
formula consisting of net income (loss) and book value criteria and grants
vested 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
$0.9 million and $0.4 million, respectively. There were no units granted in
Fiscal Years 2000 or 1999. The Company recorded compensation expense of $0.5
million in Fiscal 1998 and $0.1 million in Fiscal 1997.
<PAGE>
No compensation expense was required to be recorded in Fiscal Years 2000, 1999
or in the 1998 Transition Period. As of September 20, 2000, all vested units
have been redeemed.
Prior to the Merger, the Company paid $9.8 million in Fiscal 1998 and
$0.2 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 stockholder's equity 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 stockholders' equity.
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 $0.1 million in each of
Fiscal 1999, the 1998 Transition Period and Fiscal 1998.
13. RELATED PARTY TRANSACTIONS
All of the affiliates referenced below are directly or indirectly under
the common ownership of the Company's Chief Executive Officer.
The Company leases a building in Jacksonville, Florida from Dennis
Mehiel, the Company's Chief Executive Officer, 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 $0.2
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 is currently subleasing the entire facility.
Four M Corporation ("Four M") subleased a portion of this facility through May
1998 and again from October 1999 through February 2000. Rent expense, net of
sublease income on the portion of the premises subleased to Four M during Fiscal
2000 was less than $0.2, and through May 1998 was $0.1 million in Fiscal 1999,
less than $0.1 million in the 1998 Transition Period, and $0.1 million in Fiscal
1998.
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 purchased 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. Pursuant to the agreement, the Company
also acquired other CEG assets in exchange for outstanding trade payables owed
to the Company by CEG. In connection with the CEG Asset Purchase Agreement, the
Company canceled previous agreements with CEG including all licensing and
manufacturing arrangements and a certain Promissory Note dated February 27,
1997. Financial results are presented on a consolidated basis with all
inter-company transactions eliminated for all periods presented. 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.
<PAGE>
During Fiscal 2000, the Company sold certain paper cup machines to
Sweetheart Cup Company. ("Sweetheart Cup") at a fair market value of $1.3
million. The gain on the sale of equipment resulted in a credit to equity of
$1.0 million. Independent appraisals were obtained to determine the fairness of
the purchase price.
In Fiscal 1999, the Company purchased certain paper plate manufacturing
assets from Sweetheart Cup for $2.4 million. Also in Fiscal 1999, the Company
entered into a five year operating lease with Sweetheart Cup, whereby the
Company leases certain paper cup manufacturing assets to Sweetheart Cup with a
net book value of $1.3 million for annual lease income of $0.2 million.
Independent appraisals were obtained to determine the fairness of both the
purchase price and lease terms.
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 is
entitled to receive management fees from Sweetheart of $0.7 million, $0.9
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 $0.5 million in Fiscal 2000 and
1999, less than $0.1 million in the 1998 Transition Period and $0.1 million in
Fiscal 1998.
In Fiscal 1998, the Company purchased a 38.2% ownership interest in
Fibre Marketing, a waste paper recovery business, from a director of the Company
for $0.2 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 $0.1 million. During Fiscal 2000, the Company sold a 13.2%
interest in Fibre Marketing to Mehiel Enterprises, Inc. for $0.1 million. The
Company retains a 25% ownership interest in Fibre Marketing. The Company
believes that the terms on which it purchased and sold 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.
During Fiscal 2000, the Company sold $11.1 million of paper plates,
$0.2 of equipment rental and $0.5 million of other services to Sweetheart.
Included in accounts receivable as of September 24, 2000 are $2.2 million due
from Sweetheart and $1.1 million due from Fibre Marketing. Other sales to
affiliates, if any, during Fiscal 2000 were not significant.
During Fiscal 2000, the Company purchased $15.9 million of paper cups
from Sweetheart, $1.7 million of corrugated containers from Box USA Holdings,
Inc. ("Box USA") and $0.5 million of travel services from Emerald Lady, Inc..
Included in accounts payable, as of September 24, 2000, is $1.6 million due to
Sweetheart. Other purchases from affiliates, if any, during Fiscal 2000 were not
significant.
During Fiscal 1999, the Company sold $4.3 million of paper plates and
$0.2 million of equipment rental to Sweetheart and $3.9 million of scrap paper
to Fibre Marketing. Included in accounts receivable as of September 26, 1999 are
$1.3 million due from Sweetheart and $1.0 million due from Fibre Marketing.
Other sales to affiliates, if any, during Fiscal 1999 were not significant.
During Fiscal 1999, the Company purchased $6.8 million of paper cups
from Sweetheart, $1.8 million of corrugated containers from Box USA and $0.5
million of travel services from Emerald Lady,
<PAGE>
Inc.. Included in accounts payable, as of September 26, 1999, is $0.6 million
due to Sweetheart. Other purchases from affiliates, if any, during Fiscal 1999
were not significant.
At September 24, 2000, the Company had loans receivable from its Chief
Executive Officer totaling $275,000 plus accrued interest at 10%. This loan is
payable upon demand. 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.
14. LEASES
The Company leases certain of its facilities and equipment under
operating leases. Future minimum payments under non-cancellable operating leases
with remaining terms of one year or more are $4.1 million in Fiscal 2001, $3.2
million in Fiscal 2002, $2.2 million in Fiscal 2003, $1.6 million in Fiscal
2004, $1.7 million in Fiscal 2005 and $3.4 million thereafter.
Rent expense was $6.6 million in Fiscal 2000, $7.4 million in Fiscal
1999, $0.8 million in the 1998 Transition Period and $4.5 million in Fiscal
1998.
The Company leases a warehouse facility in Williamsburg, Pennsylvania
which is being accounted for as a capital lease. The term of this lease is 15
years, expiring in Fiscal 2005. The initial cost of the lease was $2.2 million
and the net capital lease value is $1.4 million as of September 24, 2000 and was
$1.5 million as of September 26, 1999. The future minimum lease payments are
$0.2 million in Fiscal 2001, $0.1 million in Fiscal 2002, $0.2 million in Fiscal
2003, $0.1 million in Fiscal 2004 and $0.1 million in Fiscal 2005. The present
value of the future minimum lease payments is $0.6 million.
15. OTHER INCOME, NET
In Fiscal 2000, the Company recognized a $0.2 million loss on the sale
of a building in St. Albans, Vermont and various pieces of machinery and
equipment. Other income, net also includes a $0.5 million management fee from
Sweetheart.
In Fiscal 1999, the Company recognized a $0.1 million gain on the sale
of various pieces of machinery and equipment and a $0.5 million management fee
from Sweetheart.
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. 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.
<PAGE>
16. RESTRUCTURING CHARGES
A restructuring charge of $0.7 million was incurred in Fiscal 2000 due
to the initiation of a restructuring exit activity for the November 2000 closing
of the Maspeth, New York facility which will result in the elimination of 130
positions. This amount is recorded as part of other current liabilities on the
balance sheet.
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 $0.5 million in 1998 for
severance and other costs relating to such relocation which was spent in Fiscal
1999. Also, in Fiscal 1998, the Company initiated a restructuring exit activity
of $1.3 million for the closure of a manufacturing facility in Indianapolis,
Indiana.
17. 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 $0.2 million credit to income. The Company's policy is to
annually fund the minimum contributions required by applicable regulations.
Net periodic cost for the Company's pension and other benefit plans
consists of the following (in thousands):
<TABLE>
<CAPTION>
Nine Weeks Fifty Two
ended Weeks
Fiscal Fiscal September Ended July
2000 1999 27, 1998 26, 1998
-------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Pension Benefits
Service Cost $ 245 $ 381 $ 66 $ 390
Interest Cost 308 514 92 465
Return on plan assets (360) (746) 215 (536)
Net amortizations and deferrals 50 291 (295) 98
------ ------- ------ ------
Net periodic pension cost $ 243 $ 440 $ 78 $ 417
------ ------ ------- ------
Other Benefits
Service Cost $ 44 $ 44 7 66
Interest Cost 76 76 13 70
------ ------ ------- ------
Net periodic benefit cost $ 120 $ 120 $ 20 $ 136
------ ------ ------- ------
</TABLE>
<PAGE>
The following table sets forth the change in benefit obligation for the
Company's benefit plans (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 4,058 $ 7,359 $ 276 $ 156
Service cost 245 447 44 44
Interest cost 308 606 76 76
Amendments - - - -
Actuarial (gain) or loss (47) (393) - -
Benefits paid (57) (104) - -
Transfer to multi-employer plan - (3,857) - -
-------- -------- ------- -------
Benefit obligation at end of period $ 4,507 $ 4,058 $ 396 $ 276
Change in plan assets:
Fair value of plan assets at beginning of
period $ 4,034 $ 6,210 $ - $ -
Actual return on plan assets 360 531 - -
Employer contributions to plan 590 1,062 - -
Participant contributions to plan - - - -
Benefits paid (57) (104) - -
Transfer to multi-employer plan - (3,665) - -
-------- -------- ------- -------
Fair value of plan assets at end of period $ 4,927 $ 4,034 $ - $ -
Funded status $ 420 $ (24) $ (396) $ (276)
Unrecognized prior service cost 250 271 - -
Unrecognized (gain) loss (512) (436) - -
Additional liability - - - -
Intangible asset - - - -
-------- -------- ------ --------
Net asset (liability) recognized $ 158 $ (189) $ (396) $ (276)
-------- -------- ------- --------
</TABLE>
The following sets forth the amounts recognized in the Consolidated
Balance Sheets:
Pension Benefits
----------------
September 24, September 26,
2000 1999
-------------- -------------
Funded status $ 420 $ (24)
Intangible asset 184 191
Other (gain) loss (488) (224)
Deferred income taxes 17 (53)
Accrued other comprehensive (income) loss 25 (79)
------ -------
Net liability recognized $ 158 $ (189)
------ -------
<PAGE>
The assumptions used in computing the preceding information are as
follows:
Nine Weeks Fifty Two
Ended Weeks
Fiscal Fiscal September Ended July
2000 1999 27, 1998 26, 1998
------ ------ ------------- ------------
Pension Benefits
Discount rate 7.75% 7.75% 7.00% 7.00%
Rate of return on plan assets 8.00% 8.00% 8.00% 8.00%
Other Benefits
Discount rate 8.00% 8.00% 8.00% 8.00%
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 $4.5 million in Fiscal
2000, $3.6 million in Fiscal 1999, $0.1 million in the 1998 Transition Period
and $1.0 million in Fiscal 1998.
The Company also participates in multi-employer pension and 401(k)
saving plans for certain of its union employees. Contributions to these plans,
at a defined rate per hour worked, amounted to $1.8 million in Fiscal 2000, $0.9
million in Fiscal 1999, $0.7 million in the 1998 Transition Period and $0.2
million in Fiscal 1998.
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 EVENTS
On September 25, 2000, pursuant to an asset purchase agreement dated
August 9, 2000 (the "Springprint Agreement"), the Company purchased
substantially all of the property, plant and equipment, intangibles and working
capital of Springprint Medallion, a division of Marcal Paper Mills, Inc. The
aggregate purchase price for the assets and net working capital was $6.7
million, subject to post closing adjustments. This acquisition is not included
within the financial statements and its impact is expected to be minimal to the
Company's results.
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
Independent Auditors' Report 44
Schedule II - Valuation and Qualifying Accounts 45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Fonda Group, Inc.:
We have audited the consolidated financial statements of The Fonda
Group, Inc. (the "Company") as of September 24, 2000 and September 26, 1999, and
for the years ended September 24, 2000 and September 26, 1999, the nine week
transition period ended September 27, 1998 and the year ended July 26, 1998 and
have issued our report thereon dated November 22, 2000; such consolidated
financial statements and report are included in this Form 10-K. The consolidated
schedule listed in the accompanying index is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
/s/DELOITTE & TOUCHE LLP
Baltimore, Maryland
November 22, 2000
<PAGE>
SCHEDULE II
THE FONDA GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
-------------------------
Balance at Charged to Charged Balance at
beginning costs and to other end of
Classifications of period expenses accounts (1) Deductions (2) period
--------------- ----------- ---------- ------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Fiscal 2000 $2,049 $ 1,696 $ (397) $ (1,889) $ 1,459
Fiscal 1999 1,541 3,931 9 (3,432) 2,049
Nine weeks
ended September 27, 1998 1,659 98 - (216) 1,541
Fifty two weeks ended July 26, 1998 1,934 849 (541) (583) 1,659
</TABLE>
(1)Includes recoveries on accounts previously written-off and reclassifications.
(2)Accounts written-off.
<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 6, 2000.
THE FONDA GROUP, INC.
(Registrant)
By: /s/ DENNIS MEHIEL
-----------------
Dennis Mehiel
Chairman of the Board and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities.
Signature Title(s)
--------- --------
/s/ DENNIS MEHIEL Chairman of the Board and Chief
----------------- Executive Officer (Principal Executive Officer)
Dennis Mehiel
/s/ ROBERT KORZENSKI President and Chief Operating Officer
--------------------
Robert Korzenski
/s/ THOMAS ULEAU Executive Vice President and Director
----------------
Thomas Uleau
/s/ HANS H. HEINSEN Senior Vice President, Chief Financial
------------------- Officer and Treasurer (Principal
Hans H. Heinsen Financial and Accounting Officer)
/s/ ALFRED B. DELBELLO Vice Chairman
----------------------
Alfred B. DelBello
/s/ JAMES J. ARMENAKIS Director
----------------------
James J. Armenakis
/s/ GAIL BLANKE Director
---------------
Gail Blanke
/s/ JOHN A. CATSIMATIDIS Director
------------------------
John A. Catsimatidis
/s/ CHRIS MEHIEL Director
----------------
Chris Mehiel
/s/ JEROME T. MULDOWNEY Director
-----------------------
Jerome T. Muldowney
/s/ ALAN P. SCHEINKMAN Director
----------------------
Alan P. Scheinkman
/s/ G. WILLLAM SEAWRIGHT Director
------------------------
G. William Seawright
<PAGE>
/s/ LOWELL P. WEICKER, JR. Director
--------------------------
Lowell P. Weicker, Jr.
