10-Q 1 fonda2002q01-10q.txt FISCAL 2002 QUARTER 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Thirteen Weeks Ended December 30, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to_________ Commission file number 333-24939 THE FONDA GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 13-3220732 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2920 North Main Street, Oshkosh, Wisconsin 54901 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 920/235-9330 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 [ ] The number of shares outstanding of the Registrant's common stock as of February 8, 2002: Common Stock, $0.01 par value - 100 shares ================================================================================ PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS THE FONDA GROUP, INC. BALANCE SHEETS (In thousands, except share data)

(Unaudited) ~~June~~December 2430, September 2430, 2001 ~~2000~~2001 ------------- -------------~~----~~ Assets Current assets: Cash and cash equivalents $ 21,~~172~~661 $ 12,~~413~~023 Receivables, less allowances of $1,~~819~~782 and $~~1,459,~~950 4864,~~249~~219 5058,~~927~~886 ~~respectively~~ Inventories 53,~~715~~180 6362,~~145~~944 Deferred income taxes 76,~~644~~918 86,~~044~~918 ~~Refundable income taxes 298 298~~ Spare parts 2,~~584~~728 2,~~523~~699 Other current assets 75,~~620~~617 68,~~328~~110 ---------- ---------- Total current assets ~~122~~134,~~282~~323 ~~132~~141,~~678~~580 Property, plant and equipment, net 5152,~~257~~909 4954,~~280~~249 Goodwill, net 2029,~~630~~469 1829,~~373~~790 Due from SF Holdings 17,~~939~~898 1817,~~441~~898 Other assets 915,~~922~~120 1115,~~604~~356 ---------- ---------- Total assets $ ~~222~~249,~~030~~719 $ ~~230~~258,~~376~~873 ========== ========== Liabilities and ~~Shareholder~~Shareholders's Equity Current liabilities: Accounts payable $ 107,~~815~~612 $ 1514,~~679~~455 Accrued payroll and related costs 1110,~~026~~500 1012,~~469~~745 Other current liabilities 2128,~~964~~750 21,~~203~~478 Current portion of long-term debt 303,~~998~~114 413,~~425~~113 ---------- ---------- Total current liabilities 7449,~~803~~976 8851,~~776~~791 Deferred income taxes 4,~~484~~334 54,~~043~~334 Long-term debt ~~123~~172,~~659~~273 ~~120~~181,~~453~~702 Other liabilities ~~1,175~~989 ~~1,212~~978 ---------- ---------- Total liabilities ~~204~~227,~~121~~572 ~~215~~238,~~484~~805 ---------- ---------- ~~Commitments and contingencies (See Notes) Shareholder~~Shareholders's equity: Common stock - ~~par~~Par value $.01 per share; 1,000 shares authorized; 100 shares issued and outstanding - - Additional paid-in capital 1,~~060~~091 1,~~022~~083 Retained earnings 1621,~~874~~247 1319,~~895~~176 Accumulated other comprehensive loss (25191) (25191) ---------- ---------- Total ~~shareholder~~shareholders's equity 1722,~~909~~147 1420,~~892~~068 ---------- ---------- Total liabilities and ~~shareholder~~shareholders's equity $ ~~222~~249,~~030~~719 $ ~~230~~258,~~376~~873 ========== ==========

See accompanying Notes to the Financial Statements. 2 THE FONDA GROUP, INC. STATEMENTS OF INCOME (Unaudited) (In thousands)

For the ~~For~~Thirteen ~~the~~ For the ~~For the~~ Thirteen ~~Thirteen Thirty-nine Thirty-nine~~ weeks ended weeks ended ~~weeks~~December ~~ended weeks ended June 24~~30, ~~June~~December ~~25, June~~ 24, ~~June 25,~~ 2001 2000 ~~2001 2000~~ --------------- -~~--------------~~ --------------- -~~--------------~~ Net sales $ 88100,~~387~~788 $ 89100,~~702~~166 ~~$ 268,326 $ 265,339~~ Cost of sales 7180,~~275~~924 7281,~~730~~148 ~~218,157 215,545~~ --------- --~~-------~~ ---------- -~~---------~~ Gross profit 1719,~~112~~864 1619,~~972~~018 ~~50,169 49,794~~ Selling, general and administrative expenses 1012,~~118~~850 12,~~203~~409 ~~33,571 36,497 Restructuring expense 407 500 407 500~~ Other income, net (~~253~~211) (4857) ~~(450) (272)~~ --------- --~~-------~~ ---------- -~~---------~~ Operating income 67,~~840~~225 46,~~317~~666 ~~16,641 13,069~~ Interest expense, net of interest income of $-,16 ~~$25, $-~~ and $~~244,~~12 ~~respectively~~ 3,~~778~~770 34,~~837~~029 ~~11,631 11,990~~ --------- --~~-------~~ ---------- ~~----------~~ Income before income tax expense 3,~~062~~455 ~~480 5~~2,~~010~~637 ~~1,079~~ Income tax expense 1,~~192~~384 ~~182 2~~1,~~031~~066 ~~416~~ --------- --~~-------~~ ---------- -~~---------~~ Net income $ 12,~~870~~071 $ ~~298 $ 2~~1,~~979~~571 ~~$ 663~~ ========= ==~~=======~~ ========== =~~=========~~

See accompanying Notes to the Financial Statements. 3 THE FONDA GROUP, INC. STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)

For the Thirteen For the ~~Thirty-nine~~Thirteen ~~Thirty-nine~~ weeks ended weeks ended ~~June~~December 2430, ~~June~~December 2524, 2001 2000 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,~~979~~071 $ ~~663~~1,571 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 52,~~075~~660 51,~~458~~664 Deferred income tax benefit ~~(159)~~- (~~131~~105) Loss on sale of assets 45- 6682 Changes in operating assets and liabilities (net of business ~~acquisition~~acquisitions): Receivables 3(5,~~367~~333) (~~531~~3,000) Inventories 119,~~616~~764 8,029 Spare parts and other current assets 2,464 1,~~596~~294 Other assets (355) 1,078 Accounts payable (6,843) (3,810) Accrued payroll and ~~accrued~~related ~~expenses~~costs (52,~~540~~245) 3(2,~~480~~611) Other, ~~net~~current ~~487~~liabilities 27,~~270~~272 3,381 Other liabilities 11 (64) --------- --------- Net cash provided by operating activities 179,~~870~~466 127,~~871~~509 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (~~3,843~~400) (~~2,167~~712) Payment for business acquisition - (61,~~656~~950) - Due to/from SF Holdings ~~502~~- ~~(32,758)~~408 Proceeds from sale of property, plant and equipment ~~107~~- ~~1,398~~63 --------- --------- Net cash used in investing activities (~~9,890~~400) (332,~~527~~191) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net (repayments) ~~borrowings~~ under revolving credit facilities (109,~~877~~399) 22(3,~~208~~980) ~~Borrowing~~Payments ~~for business acquisition 5,000 - Net repayments~~ of other debt (~~1,344~~29) (~~390~~746) --------- --------- Net cash (used in) ~~provided by~~ financing activities (79,~~221~~428) 21(4,~~818~~726) --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ~~759~~(362) ~~1,162~~592 CASH AND CASH EQUIVALENTS, beginning of period 2,023 1,413 ~~624~~ -------- --------- CASH AND CASH EQUIVALENTS, end of period $ 21,~~172~~661 $ 12,~~786~~005 ========= ========= SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ ~~8,852~~917 $ 91,~~095~~459 ========= ========= Income taxes paid ~~(refunded)~~ $ ~~243~~181 $ ~~(329)~~- ========= =========

See accompanying Notes to the Financial Statements. 4 THE FONDA GROUP, INC. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION The information included in the foregoing interim financial statements of The Fonda Group, Inc. (the "Company") is unaudited but, in the opinion of management, includes all adjustments (consisting only of normal recurring adjustments and accruals) which the Company considers necessary for a fair presentation of the operating results for these periods. Results for the interim periods are not necessarily indicative of results for the entire year. These condensed financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended September 30, 2001. The Company is a wholly-owned subsidiary of SF Holdings Group, Inc. ("SF Holdings"). (2) RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use of the pooling-of-interest method for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and applies to all goodwill and other intangible assets recognized in an entity's balance sheet. The Company has adopted SFAS No. 141 and is currently evaluating the impact of SFAS No. 142 on its financial statements. In October 2001, the FASB issued pronouncement SFAS No. 144, Impairment or Disposal of Long-Lived Assets. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principals Board Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the impact of SFAS No. 144 on its financial statements. (3) INVENTORIES The components of inventories are as follows (in thousands): (Unaudited) December 30, September 30, 2001 2001 ---------------- ----------------- Raw materials and supplies $ 18,711 $ 17,948 Finished products 34,124 44,384 Work in progress 345 612 -------- -------- Total inventories $ 53,180 $ 62,944 ======== ======== 5 (4) 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 believes that transactions entered into with related parties were negotiated on terms which are at least as favorable as it could have obtained from unrelated third parties and were negotiated on an arm's length basis. During the thirteen weeks ending December 30, 2001, the Company sold $2.0 million of paper plates and $0.1 million of equipment rental to the Company's affiliates, Sweetheart Holdings, Inc. ("Sweetheart Holdings") and Sweetheart Cup Company Inc. ("Sweetheart Cup") (collectively, "Sweetheart") and $0.4 million of scrap to Fibre Marketing Group, LLC, the successor to Fibre Marketing Group, Inc., a waste paper recovery business in which the Company has a 25% interest ("Fibre Marketing"). The Company accounts for its ownership interest in Fibre Marketing using the equity method. Included in accounts receivable as of December 30, 2001 are (i) $0.7 million due from Sweetheart, (ii) $0.1 million due from Fibre Marketing and (iii) $0.5 million due from SF Holdings. Other sales to affiliates, if any, during the thirteen weeks ending December 30, 2001 were not significant. During the thirteen weeks ended December 30, 2001, Fibre Marketing issued to the Company a promissory note for $0.4 million in exchange for outstanding accounts receivable from Fibre Marketing, at an annual interest rate of 7.0% payable in 36 monthly installments. As of December 30, 2001 $0.4 million is due to the Company. During the thirteen weeks ending December 30, 2001, the Company purchased (i) $5.0 million of paper cups from Sweetheart (ii) $0.4 million of corrugated containers from Box USA Holdings, Inc. ("Box USA"), a converter and seller of interior packaging, corrugated sheets and corrugated containers, a company in which the Company's Chief Executive Officer owns in excess of 10% of its outstanding capital stock and (iii) $0.1 million of travel services from Emerald Lady, Inc. ("Emerald Lady"), a company wholly owned by the Company's Chief Executive Officer. Included in accounts payable, as of December 30, 2001, was $2.2 million due to Sweetheart. Other purchases from affiliates, if any, during the thirteen weeks ending December 30, 2001 were not significant. The Company had loan receivables from its Chief Executive Officer totaling $0.3 million plus accrued interest at 5.06% at December 30, 2001 and December 24, 2000. The loans are payable upon demand. During the thirteen weeks ending December 24, 2000, the Company sold $2.5 million of paper plates to Sweetheart and $1.2 million of scrap paper to Fibre Marketing. Included in accounts receivable as of December 24, 2000 are (i) $0.9 million due from Sweetheart, (ii) $1.2 million due from Fibre Marketing and (iii) $0.2 million due from SF Holdings. Other sales to affiliates, if any, during the thirteen weeks ending December 24, 2000 were not significant. During the thirteen weeks ending December 24, 2000, the Company purchased (i) $5.3 million of paper cups from Sweetheart (ii) $0.3 million of corrugated containers from Box USA and (iii) $0.1 million of travel services from Emerald Lady. Included in accounts payable, as of December 24, 2000 was $2.0 million due to Sweetheart. Other purchases from affiliates, if any, during the thirteen weeks ending December 24, 2000 were not significant. The Company leases a building in Jacksonville, Florida from the Company's Chief Executive Officer. 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, the Chief Executive Officer 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 6 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 is 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 $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 $0.2 million for the thirteen weeks ending December 30, 2001 and $0.1 million for the thirteen weeks ending December 24, 2000. (5) SF HOLDINGS STOCK OPTION PLAN During the thirteen weeks ended March 25, 2001, SF Holdings granted options to purchase shares of its common stock to certain employees of the Company. The options vest over a period of three years. Certain of the exercise prices of the options were below the fair market value of SF Holdings' common stock at the date of the grant. During the vesting period, this $0.1 million discount is being amortized by the Company as compensation expense and credited to additional paid-in capital. Amortization expense relating to SF Holdings' stock options was $8,000 for the thirteen weeks ended December 30, 2001. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Forward-looking statements in this filing, including those in the Notes to the 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 Fonda Group, Inc.'s (the "Company") products, potential equipment malfunctions and pending litigation. For additional information, see the Company's annual report on Form 10-K for the most recent fiscal year. 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. CEG's net assets and liabilities that were not acquired by the Company pursuant to the CEG Asset 7 Purchase Agreement were acquired by SF Holdings and have been classified as "Due to/from SF Holdings". General The Company believes it is one of the leading converters and marketers of a broad line of paperboard and tissue based disposable foodservice products. The Company sells its products under both branded and private labels to 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, food trays and lunch bags and 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 include supermarkets, mass merchants, warehouse clubs, discount chains and other retail stores. Thirteen Weeks Ended December 30, 2001 Compared to Thirteen Weeks Ended December 24, 2000 Net sales increased $0.6 million, or 0.6%, to $100.8 million for the thirteen weeks ending December 30, 2001, compared to $100.2 million for the thirteen weeks ending December 24, 2000, reflecting a 6.4% increase in average realized sales price partially offset by a 5.8% decrease in sales volume. The decrease in sales volume resulted from declining sales of lower priced items which were affected by the general economic slow down in the leisure travel industry. As a consequence, the remaining product mix shifted to those items with higher average selling prices. Gross profit increased $0.9 million, or 4.7%, to $19.9 million for the thirteen weeks ending December 30, 2001, compared to $19.0 million for the thirteen weeks ending December 24, 2000. As a percentage of net sales, gross profit increased from 19.0% for the thirteen weeks ending December 24, 2000 to 19.7% for the thirteen weeks ending December 30, 2001. Gross profit for the thirteen weeks ending December 30, 2001 was positively affected by increased selling prices due to an improved product mix. Selling, general and administrative expenses increased $0.5 million, or 4.0%, to $12.9 million for the thirteen weeks ending December 30, 2001, compared to $12.4 million for the thirteen weeks ending December 24, 2000 primarily as a result of increased bad debt expense and an increase in goodwill amortization expense from Fiscal 2001 business acquisitions. Other income, net increased $0.1 million, or 100%, to $0.2 million for the thirteen weeks ending December 30, 2001, compared to $0.1 million for the thirteen weeks ending December 24, 2000. This increase is primarily due to a $0.1 million loss recorded during the thirteen weeks ending December 24, 2000 from the sale of equipment. 8 Operating income increased $0.5 million, or 7.5%, to $7.2 million for the thirteen weeks ending December 30, 2001, compared to $6.7 million for the thirteen weeks ending December 24, 2000 due to the reasons discussed above. Interest expense, net of interest income decreased $0.2 million, or 5.0%, to $3.8 million for the thirteen weeks ending December 30, 2001, compared to $4.0 million for the thirteen weeks ending December 24, 2000. For the thirteen weeks ending December 30, 2001, the Company realized lower interest expense due primarily to lower interest rates on lower balances. Income tax expense increased $0.3 million, or 27.3%, to $1.4 million for the thirteen weeks ending December 30, 2001, compared to $1.1 million for the thirteen weeks ending December 24, 2000 as a result of higher pretax earnings. The effective rate for the thirteen weeks ending December 31, 2001 was 40.1% and for the thirteen weeks ending December 24, 2000 was 40.4%. Net income increased $0.5 million, or 31.3%, to income of $2.1 million for the thirteen weeks ending December 30, 2001, compared to income of $1.6 million for the thirteen weeks ending December 24, 2000, due to the reasons stated above. Liquidity And Capital Resources Historically, the Company has relied on cash flow from operations, the sale of assets and borrowing under its credit facility to finance its working capital requirements and capital expenditures. The Company expects to continue this method of funding for its Fiscal 2002 capital expenditures. Net cash provided by operating activities increased $2.0 million to $9.5 million in the thirteen weeks ending December 30, 2001 compared to $7.5 million in the thirteen weeks ending December 24, 2000. This increase is primarily due to higher earnings and lower inventories partially offset by increased receivables. Net cash used in investing activities decreased $1.8 million to $0.4 million in the thirteen weeks ending December 30, 2001 compared to $2.2 million in the thirteen weeks ending December 24, 2000. The decrease resulted from lower capital expenditures and the September 25, 2000, acquisition of Springprint Medallion, a division of Marcal Paper Mills, Inc. Net cash used in financing activities increased $4.7 million to $9.4 million in the thirteen weeks ending December 30, 2001 compared to $4.7 million in the thirteen weeks ending December 24, 2000. This decrease is primarily due to lower borrowings under the Company's revolving credit facility. Working capital decreased $5.5 million to $84.3 million at December 30, 2001 from $89.8 million at December 24, 2000. This decrease resulted from current assets decreasing $7.3 million primarily due to lower inventories which were partially offset by higher receivables. The decrease in current assets was offset by a $1.8 million decrease in current liabilities which primarily resulted from lower accounts payables and payroll expenses which were partially offset by an increase in other current liabilities. Capital expenditures for the thirteen weeks ending December 30, 2001 were $0.4 million compared to $0.7 million for the thirteen weeks ending December 24, 2000. Capital expenditures in the thirteen weeks ending December 30, 2001 included $0.2 million for new production equipment and $0.2 million for facility renovations. 9 The Company's credit facility provides for a revolving credit facility, subject to borrowing base limitations of up to $65 million through August 26, 2004, and a term loan in an amount of $15 million that requires equal monthly principal payments of $0.3 million through August 2004 with the balance due on August 26, 2004 (the "Credit Facility"). The Credit Facility is collateralized by all of the Company's receivables, inventories, and equipment, certain general intangibles and other property, and the proceeds on the sale of receivables and inventories. Borrowings under the revolving credit facility bear interest at the bank's prime rate plus 0.50% or at LIBOR plus 2.50% at the election of the Company. Borrowings under the term loan bear interest at the bank's prime rate plus 0.75% or at LIBOR plus 2.75% at the election of the Company. As of December 30, 2001, the bank's prime rate was 4.75%, and the LIBOR rate was 2.44%. In the thirteen weeks ending December 30, 2001, the weighted average interest rate for the Credit Facility was 5.02%. At December 30, 2001, $41.0 million was outstanding and $24.0 million was the maximum remaining advance available based upon eligible collateral. In Fiscal 1997, the Company issued $120 million of 9-1/2% Series A Senior Subordinated Notes due 2007 (the "Notes") with interest payable semi-annually. Payment of the principal and interest is subordinate in right to payment of the Credit Facility. The Company may, at its election, redeem the Notes at any time after March 1, 2002 at a redemption price equal to a percentage (104.750% after March 1, 2002 and declining in annual steps to 100% after March 1, 2005) of the principal amount thereof plus accrued interest. The Notes provide that upon the occurrence of a change of control (as defined therein), the holders thereof will have the option to require the redemption of the Notes at a redemption price equal to 101% of the principal amount thereof plus accrued interest. 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. Management believes that cash generated by operations, amounts available under the Company's credit facilities and funds generated from asset sales should be sufficient to meet the Company's expected operating needs, planned capital expenditures and debt service requirements in the next twelve months. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with its variable rate debt. Borrowings under the revolving credit facility bear interest at the bank's prime rate plus 0.50% or at LIBOR. Borrowings under the term loan bear interest at the bank's prime rate plus 0.75% or at LIBOR plus 2.75% at the election of the Company. At December 30, 2001, $41.0 million was outstanding and $24.0 million was the maximum remaining advance available based upon eligible collateral. Based upon these amounts, the annual net income would change by approximately $0.3 million for each one percentage point change in the interest rates applicable to the Company's variable rate debt. The level of the exposure to interest rate movements may fluctuate significantly as a result of changes in the amount of indebtedness outstanding under the revolving credit facilities. 10 PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K: No reports on Form 8-K were filed during the thirteen weeks ended December 30, 2001. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, its duly authorized officer and principal financial officer. THE FONDA GROUP, INC. (registrant) Date: February 8, 2002 By: /s/ Hans H. Heinsen ----------------- ------------------- Hans H. Heinsen Senior Vice President - Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer and Duly Authorized Officer) 12

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