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The following is an excerpt from a 10-K SEC Filing, filed by FONDA GROUP INC on 10/24/1997.
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FONDA GROUP INC - 10-K - 19971024 - PART_I



The Fonda Group, Inc. (the "Company") was formed in 1915. In October 1988, the Company became a wholly-owned subsidiary of Four M Corporation ("Four M"). In March, 1995, Four M distributed approximately 96% of the Company's common stock to Dennis Mehiel, Four M's sole stockholder at such time. The remaining 4% of the Company's common stock was distributed to American International Life Insurance Company of New York ("AIG").

The Company has grown rapidly, principally through acquisitions, from net sales of $61.8 million in Fiscal 1994 to $252.5 million in Fiscal 1997. In June 1997, the Company acquired the outstanding capital stock of Heartland Mfg. Corp. ("Heartland"), a manufacturer of paper plates. Also in June 1997, the Company acquired net assets relating to the manufacture of placemats and other disposable tabletop products from Tenneco, Inc. (together with Heartland, the "1997 Acquisitions"). In May 1996, the Company acquired certain net assets from James River Paper Corporation (" James River") including a California converting facility for tissue-based products and a tissue mill in Gouverneur, New York ("Natural Dam"). In December 1995, the Company acquired the Chesapeake Consumer Products Company, a manufacturer of napkins, tablecovers and crepe paper, ("Chesapeake") from Chesapeake Corporation. In November 1995, the Company acquired substantially all of the net assets of a manufacturer of paper plates and cups ("Maspeth"), (together with James River and Chesapeake, the "1996 Acquisitions"). In March 1995, the Company acquired substantially all of the net assets of the Scott Foodservice Division ("Hoffmaster"), (together with the 1997 Acquisitions and 1996 Acquisitions, the "Acquisitions") from Scott Paper Company ("Scott"). See Note 3 to the Financial Statements for a further discussion of the Acquisitions.

The Company believes that it is a leading converter and marketer of a broad line of disposable paper food service products. The Company sells its products under both branded and private labels to the consumer and institutional markets and participates at all major price points. The Company believes it is a market leader in the sale of premium white, colored and custom-printed napkins, placemats, tablecovers and food trays and in the sale of private label consumer paper plates, bowls and cups. The Company's Sensations, Splash (Registered Trademark) and Party Creations (Registered Trademark) brands are well recognized in the consumer markets and its Hoffmaster (Registered Trademark) brand is well recognized in the institutional markets.

The Company offers a broad range of products, enabling it to offer its customers "one-stop" shopping for their disposable food service product needs. See " --- Products". The Company is principally a converter and marketer of paperboard and tissue products, the prices of which typically follow the general movement in the costs of such principal raw materials. The Company believes that it is generally able to maintain relatively stable margins between its selling prices and its raw materials costs.

The Company sells its converted products to more than 2,500 consumer and institutional customers located throughout the United States and has developed and maintained long-term relationships with many of these customers. Food service distributors, restaurants, schools, hospitals and other major institutions with dining facilities comprise the institutional market. Supermarkets, mass merchants, warehouse clubs, discount chains and other retail stores comprise the consumer market.

The Company also produces specialty and deeptone colored tissue paper, the primary raw material used in the conversion of colored napkins and tablecovers, at its Natural Dam mill. In Fiscal 1997, this mill produced approximately 14,400 tons of tissue paper. The Company has recently completed the installation of a second paper machine at Natural Dam which is expected to double the mill's production capacity.

General. The Company classifies its products into five categories:
(i) paperboard converted products, such as white, colored and printed paper plates and bowls, paper cups for both hot and cold drinks, handled food pails for take-out food and food trays; (ii) tissue converted products, such as printed and solid napkins and printed and solid


paper tablecovers and crepe paper; (iii) tissue mill products, including jumbo rolls of tissue and specialty tissue products; (iv) specialty products, such as placemats, doilies, tray covers and fluted products including baking cups; and (v) products for resale, such as plastic cutlery, coasters, plastic cups and plastic toothpicks. The Company's premium products include colored and custom printed napkins and placemats. The Company currently has over 8,000 SKUs. The Company believes that it holds one of the top three market positions in white paper plates, decorated plates, bowls and cups in the consumer market, as well as in food pails, trays and premium napkins in the institutional market. These products are sold nationwide to supermarkets, restaurant franchises, discount store chains and major food distributors.


Paper Plates and Bowls. Paper plates and bowls, which represent the largest portion of the Company's sales, are sold primarily to the consumer market. These products include coated and uncoated white plates, decorated plates and bowls. The plates range in size from a four inch square to a 10 1/4 inch diameter round. The bowls include seven ounce and 12 ounce sizes. Uncoated and coated paper plates are considered commodity items and are generally purchased by cost-conscious consumers for everyday use. Printed and decorated plates and bowls, which are typically in lower count packages, are sold for everyday use as well as for parties and seasonal celebrations, such as Halloween and Christmas.

Paper Cups. Paper cups, which range in size from three ounces to 46 ounces, are sold to both the consumer and institutional markets. The Company offers a number of attractive cup and lid combinations for both hot and cold beverages. Cups for the consumption of cold beverages are generally wax coated for superior rigidity, while cups for the consumption of hot beverages are made from paper which is poly-coated on one side to provide a barrier to heat transfer. Printed cups are often used as promotional items by the Company's customers.

Take-Out Containers. Trays, which range in size from four ounces to 10 pounds, are sold to the institutional markets customers and are used primarily for the take-out of fast foods. Food pails, which range in size from eight ounces to 64 ounces, are sold exclusively to the institutional market and are used primarily by restaurants for take-out meals.


Napkins. Napkins represent the second largest portion of the Company's sales. Napkins are sold under the Company's Hoffmaster (Registered Trademark), Fonda, Sensations, Splash (Registered Trademark) and Party Creations (Registered Trademark) brand names, as well as under national distributor brand names. The Company believes its brand names are well established and are widely considered to be among the leading brands in the consumer and institutional food service markets. Napkin products range from decorated-colored, multi-ply napkins and simple custom printed napkins featuring an end-user's name or logo to fully printed, graphic-intensive napkins for the premium paper goods sector. Hoffmaster is a line of premium quality one-, two-, three-, and four-ply napkins that coordinate with printed and solid paper placemats, paper plates, paper cups, paper and plastic tablecovers, plastic cutlery and crepe paper.

Tablecovers. Tablecovers represent one of the Company's fastest growing product segments, ranging from economy to premium product lines. Tablecovers are sold under the Hoffmaster (Registered Trademark), Linen-Like (Registered Trademark), Windsor (Registered Trademark), Sensations, Splash (Registered Trademark) and Party Creations (Registered Trademark) brand names. The Company has a broad selection of tablecovers in one-, two-, and three-ply configurations. Tablecovers, in rolled and folded package formats, are produced in white, solid color and one-to-four-colored printed products. These tablecovers are matched in color and design with the Company's napkins, placements, cups, plates, plastic cutlery and crepe paper. Linen-Like is a premium line of tablecovers, currently sold to institutional customers as a linen replacement.

Crepe. Rolled crepe paper complements the Company's offering of disposable tableware products. Originally sold only in the consumer market, the Company has expanded crepe products to the Company's institutional seasonal product lines. The Company is vertically integrated in crepe products and uses the beater-dyed process, at its Natural Dam mill, which makes colored crepe products bleed-resistant to moisture. Crepe products are sold under the Hoffmaster (Registered Trademark), Splash (Registered Trademark) and Party Creations (Registered Trademark) brand names. In addition to solid color crepe paper products, the Company produces printed crepe paper in seasonal and themed product offerings. The Company believes it can produce higher quality crepe products than its


competitors because it controls all parts of the crepe production process, from paper making to converting and packaging.

Natural Dam manufactures "jumbo" rolls of unconverted deep-tone, multi-ply tissue, a primary raw material used in the conversion of napkins and tablecovers. Approximately 55% of the production from Natural Dam is sold to converters of specialty tabletop products, including the Company's internal consumption. The Company's tissue based converting operations utilize Natural Dam production to the extent that it is strategically beneficial. The remaining 45% of production is customized specialty products sold to converters of disposable products used in the medical, hygienic, industrial and other markets; such products include electrical insulating tissue, filter media, waxing tissue base, surgical face mask and blood wadding.


Placemats. Placemats and traycovers are available in a variety of shapes and sizes. The Company owns 30 different die shapes which create unique decorated placemats in shapes such as flags, pumpkins, fish, seashells and farm animals. These unusual shapes attract interest because they allow customers to individualize their placemats by focusing on a particular theme, season or holiday. In addition to placemats, the Company uses a proprietary technology to produce non-skid traycovers that serve the particular needs of the airline and healthcare industries. These traycovers, made from both recycled and virgin paper, can be printed with up to four colors and coordinated with printed or solid napkins.

Doilies. Paper doilies are used as decorative items by the food service industry. The Company offers numerous different styles of paper lace doilies that are used primarily to enhance the visual appeal of foods, fine china and glassware in upscale restaurants and hotels.

Portion Cups and Fluted Products. Portion cups and fluted products are offered in a variety of sizes and shapes. Portion cups range in size from 0.5 to 5.5 ounces and are pleated and wax-coated for extra strength. Portion cups are typically used for dispensing condiments, medicines, liquids and other items where portion control is important. Fluted products also come in a variety of sizes and are used as baking cups for muffins and as trays for fast foods.


In an effort to offer its customers the convenience of "one-stop" shopping, the Company purchases products which it does not manufacture, and offers such products for resale. These products round out the Company's complete product line and include plastic cutlery, coasters, plastic cups, plastic plates, wooden and plastic sandwich picks, special occasion invitations and party favors.

Marketing. The Company's marketing efforts are principally focused on
(i) providing value-added services, including EDI capabilities, automatic shipment notification to customers, sales training for distributors, promotional support, brochures and catalogs, state-of-the-art graphics services, merchandising programs, prompt delivery of products and information systems that provide detailed sales data to customers; (ii) category expansion by cross marketing products between the consumer and institutional markets;
(iii) development of new graphic designs which the Company believes will offer consumers recognized value; and (iv) increasing brand awareness through enhanced packaging and promotion. The marketing group, together with its customers, conducts product trial tests to gather consumer feedback and improve product salability. The seasonal product marketing programs promote the Company's sophisticated graphic art capabilities and encourage customers to supplement their regular purchases with premium-quality seasonal items.

The marketing group coordinates the projects of artists and designers in the Company's art department. The art department has state-of-the-art graphic capabilities, including computer-aided design systems and lithograph plate making capabilities, which allow the Company to compete effectively in the custom printed napkin market. The Company also benefits from its extensive design library.


The Company sells its products through a sales organization of approximately 50 salespersons, as well as independent brokers. The Company believes that its experienced sales team and its ability to provide high levels of customer service enhances the Company's long-term relationships with its customers. The Company sells to more than 2,500 institutional and consumer customers located throughout the United States.

Institutional Market. Restaurants, schools, hospitals and other major institutions comprise the institutional market. This market represented approximately 47% of the Company's net sales in Fiscal 1997. The institutional market is serviced by dedicated field service representatives located throughout the United States under the direction of five dedicated sales managers. The field sales force works directly with national and regional distributors to service the needs of the various segments of the food service industry. The field sales force serves four primary functions: (i) to work with distributors' own sales representatives to increase demand for the Company's products; (ii) to make direct sales calls with distributors; (iii) to keep distributors' sales representatives knowledgeable about the Company's new products; and (iv) to demonstrate to end-users the value added by the Company's customized color printing capabilities for table top products. These functions also help to create "pull-through" demand for the Company's products.

Consumer Market. Supermarkets, mass merchants, warehouse clubs, discount chains and other retail stores comprise the consumer market. This market represented approximately 53% of the Company's net sales in Fiscal 1997. The Company's consumer market is classified into four distribution channels: (i) the grocery channel, which is serviced through a national and regional network of brokers, (ii) the retail mass merchant channel, which is serviced directly by field service representatives, (iii) the specialty
(party) channel, a new channel of distribution, which is serviced through both national and regional networks of brokers and directly by field service representatives and (iv) the warehouse club channel, also a new channel of distribution, which is serviced through both national and regional networks of brokers and directly by field service representatives. Each channel is managed by a Sales Director who is responsible for all product sales in that channel. The Company's broker relationships are managed by eight regional managers who have an average of 20 years of experience selling service products.

As a result of the Acquisitions, the Company has experienced an increase in sales to existing customers and additional product opportunities in markets in which it historically had limited penetration. For example, the Maspeth acquisition provided the Company with access to the mass merchandising market. In addition, the Company's consumer customer base has extended into additional channels as a result of product line enhancements. In this regard, the James River acquisition afforded the Company three customers in the warehouse club channel. In order to eliminate duplicate sales representation with certain customers in connection with the Acquisitions, the Company has also reorganized its consumer sales and marketing efforts to be more responsive to the marketplace.

In Fiscal 1997, the Company's five largest customers represented approximately 16% of net sales and no one customer accounted for more than 10% of net sales.

Prior to March 1995, the Company's business was highly seasonal with over 30% of its net sales and 50% of its cash flow realized in the fourth quarter of its fiscal year. As a result of significant growth and diversification through acquisitions, its business has become less seasonal. Nevertheless, income from operations tends to be greatest during the first and fourth quarters of the fiscal year.

Each of the Company's manufacturing facilities includes sufficient warehouse space to store such facility's raw materials and finished goods as well as products from the Company's other manufacturing facilities. Shipments of finished goods are made from each facility via common carrier. Raw materials are received by rail or truck in the Company's Vermont facility and by truck in all other facilities.

The disposable food service 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. Consequently, such competitors may be able to more effectively compete by offering a broader range of products to customers.

The Company's primary competitors in the paper plate and cup categories include Imperial Bondware (a division of International Paper Co.), Fort James Corp. (successor by merger of James River and Fort Howard Corp.), AJM Packaging Corp., Temple-Inland Inc., Fold-Pak Corp., Solo Cup Co. and Sweetheart Cup Co., Inc. Major competitors in the napkin, tablecover, tray and doily categories include Brooklyn Lace Paper Works, Inc., Duni Corp., Erving Paper Products Inc., Fort James Corp. and Wisconsin Tissue Mills Inc. (a subsidiary of Chesapeake Corporation). The Company's competitors also include manufacturers of products made from plastics and foam. The Company's competitors in tissue mill products include Lincoln Pulp and Paper Co., Inc. ("Lincoln"). Little Rapids Corporation and Cellu Tissue Corporation.

Raw materials are a significant component of the Company's cost structure. Principal raw materials for the Company's paperboard and tissue operations include solid bleached sulfate ("SBS") paperboard, napkin tissue, bond paper and waxed bond obtained from major domestic manufacturers. Pulp is the principal raw material for the Natural Dam tissue mill and is obtained from a number of suppliers. Other material components include corrugated boxes, poly bags, wax adhesives, coatings and inks. Paperboard, napkin tissue, bond paper and waxed bond paper are purchased in "jumbo" rolls which may either be slit for in-line printing and processing, printed and processed or printed and blanked for processing into final products. Lincoln is the primary supplier of tissue to the Company. Pursuant to a contract, as amended, with Lincoln, the Company is required to purchase color and white tissue at the lower of a formula-based price or market price through December 31, 1999. Primary suppliers of paperboard stock are Georgia-Pacific Corp., Temple-Inland Inc., and Gilman Paper Co. The Company has a number of suppliers for substantially all of its raw materials and believes that current sources of supply for its raw materials are adequate to meet its requirements. The Company purchases the bulk of its SBS paperboard and napkin tissue under long-term contracts.

The Company and its operations are subject to comprehensive and frequently changing Federal, state, local and foreign environmental and occupational health and safety laws and regulations, including laws and regulations governing emissions of air pollutants, discharges of waste and storm water, and the disposal of hazardous wastes. The Company is subject to liability for the investigation and remediation of environmental contamination (including contamination caused by other parties) at properties that it owns or operates and at other properties where the Company or its predecessors have arranged for the disposal of hazardous substances. As a result, the Company is involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters. The Company believes that there are currently no pending investigations at the Company's plants and sites relating to environmental matters. However, there can be no assurance that 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 laws 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. 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.

As of July 27, 1997, the Company employed 1,739 persons consisting of 1,356 hourly and 383 salaried workers. Approximately 84% of the Company's hourly employees are represented by the United Paperworkers International Union. The Company considers its relationship with its employees to be good. The current labor agreements expire on October 31, 1997 at Maspeth; January 31, 1998 at St. Albans; November 28, 1998 at Gouverneur, March 31, 1999 at Appleton; June 9, 2000 at Williamsburg and May 31, 2002 at Oshkosh. Since 1989, the Company has not experienced any work stoppages or curtailment of operation due to a labor dispute, other than a one-month work stoppage at the Three Rivers, Michigan facility in August 1996. Operations were maintained during the time of the walkout, and the Company negotiated a one-year extension until August 31, 1997 that gave the Company the flexibility to close this facility. In Fiscal 1997, management decided to close this facility.



The Company's converting facilities, located throughout the United States, operated at approximately 70% of total production capacity in 1997. The Company also operates a specialty and deep-tone colored tissue mill in Gouverneur, New York. 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 principal properties owned or leased by the Company.

                                                                         SIZE              OWNED/
LOCATION                             TYPE OF FACILITY               (APPROX SQ FT)         LEASED      PRODUCTS
--------                             ----------------               --------------         ------      --------
    St. Albans, VT                   Manufacturing                     112,500                O        Plates, pails,
                                     Warehouse                         182,000                L        bowls, trays
                                     Office                             12,400                O

    Williamsburg, PA                 Manufacturing                      66,000              O(1)       Plates, cups
                                     Warehouse                          71,000              O(1)
                                     Office                              9,000              O(1)

    Jacksonville, FL                 Manufacturing                      57,500              L(2)       Plates, pails
                                     Warehouse                          10,100              L(2)
                                     Office                              2,400              L(2)

    Three Rivers, MI                 Manufacturing                      70,500              O(3)       Plates
                                     Warehouse                          39,900              O(3)

    Maspeth, NY                      Manufacturing                      55,000                L        Plates, cups
                                     Warehouse                          70,000                L
                                     Office                              5,000                L

    Goshen, IN                       Manufacturing                      15,000                O        Plates
                                     Warehouse                          48,000                O

    Oshkosh, WI                      Manufacturing                     234,000                O        Napkins, placemats,
                                     Warehouse                         218,000                O        tablecovers, doilies,
                                     Office                             32,000                O        portion cups/fluted

    Appleton, WI                     Manufacturing                      90,300                O        Napkins, crepe
                                     Warehouse                         168,900                O        tablecovers
                                     Office                              8,500                O

    Long Beach, CA                   Manufacturing                      47,400              L(4)       Napkins, placemats
                                     Warehouse                          49,000              L(4)

    Glens Falls, NY                  Manufacturing                      23,800                O        Napkins,
                                     Warehouse                          35,300                O        placemats

    Gouverneur, NY                   Manufacturing                      88,000                O        Tissue, crepe
                                     Warehouse                         143,000                O
                                     Office                              3,800                O

(1) Subject to capital lease.
(2) Leased from Dennis Mehiel. See "Certain Relationships and Related Transactions."
(3) In August 1997, the Company closed this facility.
(4) In Fiscal 1997, management decided to close this facility and it is expected that it will be closed before the end of the calendar year.


The Company hosts a co-generation facility owned by Kamine/Besicorp Natural Dam L.P. ("Kamine") at its Natural Dam mill in Gouverneur, New York. This co-generation facility generates power sold under long-term contract to Niagara Mohawk Power Corporation ("Niagara") and produces steam for internal use at the Natural Dam mill and which is expected to provide significant cost savings to the Company. Natural Dam will receive all of its steam energy requirements at 50% of historical cost in calendar 1997, and expects to continue to receive its steam energy requirements at significantly increased savings for the next 40 years thereafter. Natural Dam also expects to receive land lease payments from the operator of the land occupied by the co-generation facility.

In July 1997, Niagara announced its intention to seek modifications or terminate a number of contracts with independent power providers, including Kamine. At this time, the Company is unable to assess what impact, if any, will occur as a result of such intention.


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 does not believe that it is 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.

Following the Company's Hoffmaster acquisition, the Company brought a civil action in the United States District Court for the Eastern District of Pennsylvania against Scott alleging, among other things, breach of warranties and representations with regard to disclosures of raw material pricing information. In July 1997, the Company and Scott settled the lawsuit for a net $2.9 million.