================================================================================ 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 Thirty-nine Weeks Ended June 24, 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 July 20, 2001: Common Stock, $0.01 par value - 100 shares ================================================================================ PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS THE FONDA GROUP, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)

(Unaudited) ~~March~~June 2524, September 24, 2001 2000 ------------- ----------------- Assets Current assets: Cash and cash equivalents $ ~~491~~2,172 $ 1,413 Receivables, less allowances of $1,~~831~~819 and $1,459, ~~respectively~~ 48,~~475~~249 50,927 respectively Inventories 5653,~~408~~715 63,145 Deferred income taxes 7,644 8,044 Refundable income taxes 298 298 Spare parts 2,~~565~~584 2,523 Other current assets 67,~~145~~620 6,328 ---------- ---------- Total current assets 122,~~026~~282 132,678 Property, plant and equipment, net 51,~~396~~257 49,280 Goodwill, net 2120,~~354~~630 18,373 Due from SF Holdings 1817,~~033~~939 18,441 Other assets 109,~~014~~922 11,604 ---------- ---------- Total assets $ 222,~~823~~030 $ 230,376 ========== ========== Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ 910,~~161~~815 $ 15,679 Accrued payroll and related costs 811,~~106~~026 10,469 Other current liabilities 1821,~~313~~964 21,203 Current portion of long-term debt 4130,~~611~~998 41,425 ---------- ---------- Total current liabilities 7774,~~191~~803 88,776 Deferred income taxes 4,484 5,043 Long-term debt 123,~~970~~659 120,453 Other liabilities 1,~~162~~175 1,212 ---------- ---------- Total liabilities ~~206~~204,~~807~~121 215,484 ---------- ---------- Commitments and contingencies (See Notes) Shareholder's equity: Common stock - par value $.01 per share; 1,000 shares authorized; 100 shares issued and outstanding - - Additional paid-in capital 1,~~037~~060 1,022 Retained earnings 1516,~~004~~874 13,895 Accumulated other comprehensive loss (25) (25) ---------- ---------- Total shareholder's equity 1617,~~016~~909 14,892 ---------- ---------- Total liabilities and shareholder's equity $ 222,~~823~~030 $ 230,376 ========== ==========

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

For the For the For the For the Thirteen Thirteen ~~Twenty~~Thirty-~~six~~nine ~~Twenty~~Thirty-~~six~~nine weeks ended weeks ended weeks ended weeks ended ~~March~~June 2524, ~~March~~June 2625, ~~March~~June 2524, ~~March~~June 2625, 2001 2000 2001 2000 --------------- --------------- --------------- --------------- Net sales $ 7988,~~773~~387 $ 7889,~~063~~702 $ ~~179~~268,~~939~~326 $ ~~175~~265,~~635~~339 Cost of sales 6571,~~734~~275 6472,~~142~~730 ~~146~~218,~~882~~157 ~~142~~215,~~814~~545 ---------- ---------- ---------- ---------- Gross profit 1417,~~039~~112 1316,~~921~~972 3350,~~057~~169 3249,~~821~~794 Selling, general and administrative expenses 1110,~~044~~118 1112,~~293~~203 2333,~~453~~571 2436,~~292~~497 Restructuring expense 407 500 407 500 Other (income), net (~~140~~253) (~~149~~48) (~~197~~450) (~~224~~272) ---------- ---------- ---------- ---------- Operating income 36,~~135~~840 24,~~777~~317 916,~~801~~641 813,~~753~~069 Interest expense, net of interest income of $27-, $~~136~~25, $39- and $~~219~~244, respectively 3,~~824~~778 3,~~953~~837 711,~~853~~631 811,~~153~~990 ---------- ---------- ---------- ---------- Income ~~(loss)~~ before income tax expense ~~(benefit)~~3,062 ~~and~~480 ~~extraordinary loss (689) (1~~5,~~176)~~010 1,~~948~~079 ~~600~~ Income tax expense ~~(benefit) (227) (476) 839 234 ---------- ---------- ---------- ---------- Income (loss) before extraordinary loss (462) (700)~~ 1,~~109~~192 ~~366~~182 ~~Extraordinary~~2,031 ~~loss~~416 ~~on debt extinguishment (net of income taxes of $350)~~ - ~~525~~ - ~~525~~ -------~~---~~ ---------- ---------- ---------- Net income ~~(loss)~~ $ ~~(462)~~1,870 $ ~~(1,225)~~298 $ 12,~~109~~979 $ ~~(159)~~663 ========== ========== ========== ==========

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

For the ~~Twenty-six~~ For the ~~Twenty~~Thirty-~~six~~nine Thirty-nine weeks ended weeks ended ~~March~~June 2524, ~~March~~June 2625, 2001 2000 ----------------~~------~~ ---------------~~-------~~ CASH FLOWS FROM OPERATING ACTIVITIES Net income ~~(loss)~~ $ 12,~~109~~979 $ ~~(159)~~663 Adjustments to reconcile net income ~~(loss)~~ to net cash provided by operating activities: Depreciation and amortization 35,~~395~~075 35,~~658~~458 Deferred income tax benefit (159) (131) Loss on sale of assets 8745 1266 Changes in operating assets and liabilities (net of business acquisition): Receivables 3,~~401~~367 ~~114~~(531) Inventories 811,~~980~~616 (41,~~165)~~596 Accounts payable and accrued expenses (145,~~201~~540) 23,~~733~~480 Other, net ~~1,486~~487 12,~~463~~270 --------- ---------- Net cash provided by operating activities 417,~~098~~870 312,~~525~~871 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (23,~~540~~843) (~~782~~2,167) Payment for business acquisition (6,~~654~~656) - Due to/from SF Holdings ~~408~~502 (3132,~~692~~758) Proceeds from sale of property, plant and equipment 63107 1,~~357~~398 --------- ---------- Net cash used in investing activities (89,~~723~~890) (3133,~~117~~527) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net (repayments) borrowings under revolving credit facilities (~~262~~10,877) 2822,~~561~~208 Borrowing for business acquisition 5,000 - Net repayments of other debt (1,~~035~~344) (~~261~~390) --------- ---------- Net cash (used in) provided by financing activities 3(7,~~703~~221) 2821,~~300~~818 --------- ---------- NET ~~(DECREASE)~~ INCREASE IN CASH AND CASH EQUIVALENTS ~~(922)~~759 ~~708~~1,162 CASH AND CASH EQUIVALENTS, beginning of period 1,413 624 --------- ---------- CASH AND CASH EQUIVALENTS, end of period $ ~~491~~2,172 $ 1,~~332~~786 ========= ========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 78,~~989~~852 $ 89,~~104~~095 ========= ========== Income taxes paid (refunded) $ ~~245~~243 $ (49329) ========= ==========

See accompanying Notes to Consolidated Financial Statements. 4 THE FONDA GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION The information included in the foregoing interim financial statements of The Fonda Group, Inc. (the "Company") are unaudited but, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) which the Company considers necessary for a fair presentation of the operating results for these periods. Results for 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 24, 2000. Certain prior period amounts have been reclassified to conform to current period presentation. The Company is a wholly-owned subsidiary of SF Holdings Group, Inc. ("SF Holdings"). (2) 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 as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and requires that an entity recognize all derivatives at fair value in the balance sheet. The adoption of SFAS No. 133 did not have an impact on the consolidated financial statements. 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 adoption of SAB No.101 did not have an impact on the consolidated financial statements. (3) INVENTORIES The components of inventories are as follows (in thousands): (Unaudited) June 24, September 24, 2001 2000 -------------- ----------------- Raw materials and supplies $ 15,340 $ 19,723 Finished products 37,977 42,732 Work in progress 398 690 ---------- ---------- Total inventories $ 53,715 $ 63,145 ========== ========== (4) RELATED PARTY TRANSACTIONS All of the below referenced affiliates are under the common control of the Company's Chief Executive Officer or a director of the Company. During the thirty-nine weeks ending June 24, 2001, the Company sold $7.6 million of paper plates to Sweetheart Holdings Inc. ("Sweetheart") and $3.7 million of scrap paper to Fibre Marketing, LLC ("Fibre Marketing"). Included in receivables as of June 24, 2001 are (i) $1.3 million due from 5 Sweetheart, (ii) $1.3 million due from Fibre Marketing and (iii) $0.7 million due from SF Holdings. Other sales to affiliates, if any, during the thirty-nine weeks ending June 24, 2001 were not significant. During the thirty-nine weeks ending June 25, 2000, the Company sold $8.3 million of paper plates and $0.1 million of equipment rental and shared services to Sweetheart and $5.2 million of scrap paper to Fibre Marketing. Included in receivables as of June 25, 2000 was (i) $1.6 million due from Sweetheart, (ii) $1.0 million due from Fibre Marketing and (iii) $0.2 million due from SF Holdings. Other sales to affiliates, if any, during the thirty-nine weeks ending June 25, 2000 were not significant. During the thirty-nine weeks ending June 24, 2001, the Company purchased (i) $16.3 million of paper cups from Sweetheart (ii) $1.0 million of corrugated containers from Box USA Holdings, Inc. ("Box USA") and (iii) $0.4 million of travel services from Emerald Lady, Inc. Included in accounts payable, as of June 24, 2001, was $3.0 million due to Sweetheart. Other purchases from affiliates, if any, during the thirty-nine weeks ending June 24, 2001 were not significant. During the thirty-nine weeks ending June 25, 2000, the Company purchased (i) $10.8 million of paper cups from Sweetheart, (ii) $1.3 million of corrugated containers from Box USA and (iii) $0.4 million of travel services from Emerald Lady, Inc. Included in accounts payable, as of June 25, 2000, was $1.5 million due to Sweetheart. Other purchases from affiliates, if any, during the thirty-nine weeks ending June 25, 2000 were not significant. 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 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 for the thirty-nine weeks ending June 24, 2001 and $0.3 million for the thirty-nine weeks ending June 25, 2000. 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 its operations at this facility and is currently subleasing the entire facility to an unrelated third party. Rent expense, net of sublease income on the portion of the premises subleased, is not significant. During the thirty-nine weeks ended June 25, 2000, the Company sold certain paper cup machines to Sweetheart at a fair market value of $1.3 million. The excess of the proceeds from the sale over the Company's net book value of such equipment was recorded as a credit to equity of $1.0 million. Independent appraisals were obtained to determine the fairness of the sale price. 6 (5) BUSINESS ACQUISITION 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 assumed 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, paid in cash. The Springprint acquisition has resulted in goodwill of $3.2 million; which is being amortized over 20 years. The Springprint acquisition has been accounted for under the purchase method and the results have been included in the consolidated statements of operations since the date of acquisition. (6) SF HOLDINGS STOCK COMPENSATION PLAN During the thirty-nine weeks ended June 24, 2001, SF Holdings, the Company's parent, 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 Holding's 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 Holding's stock options was $38,000 for the thirty-nine weeks ended June 24, 2001. (7) RESTRUCTURING EXPENSE During the thirty-nine weeks ended June 24, 2001, the Company established a restructuring reserve of $0.4 million in conjunction with the consolidation of the Creative Expression Group, Inc.'s ("CEG"), an affiliate of the Company, administrative offices in Indianapolis, Indiana with The Fonda Group, Inc.'s administrative offices in Oshkosh, Wisconsin. This closing includes the elimination of approximately 40 positions. During the thirty-nine weeks ended June 25, 2000, the Company established a restructuring reserve of $0.5 million in conjunction with the November 2000 closing of a manufacturing facility in Maspeth, New York. This closing included the elimination of approximately 130 positions. 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 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. For additional information, see the Company's annual report on Form 10-K for the most recent fiscal year. 7 General The Company, a wholly-owned subsidiary of SF Holdings, is a converter and marketer of disposable paper foodservice products. On December 3, 1999, CEG, an affiliate of the Company in the disposable party goods products business, became an 87% owned subsidiary of SF Holdings pursuant to a merger. On December 6, 1999, pursuant to an asset purchase agreement entered into on November 21, 1999, 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 Purchase Agreement were acquired by SF Holdings and have been classified as "Due to/from SF Holdings". On September 25, 2000, pursuant to 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. In addition, pursuant to the Springprint Agreement, the Company has assumed 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. Thirteen Weeks Ended June 24, 2001 Compared to Thirteen Weeks Ended June 25, 2000 (Unaudited) Net sales decreased $1.3 million, or 1.4%, to $88.4 million for the thirteen weeks ending June 24, 2001 compared to $89.7 million for the thirteen weeks ending June 25, 2000, reflecting a 2.7% increase in average realized sales price partially offset by a 4.1% decrease in sales volume. Net sales to consumer foodservice customers decreased 7.9%, resulting from a 0.8% increase in average realized sales price and an decrease in sales volume of 8.7%. Net sales to consumer foodservice customers was negatively impacted by more competitive market conditions and the Company's decision to reduce sales to certain customers experiencing deteriorating credit conditions. Net sales to institutional foodservice customers increased 8.4%, resulting from a 0.5% increase in average realized sales price and a 7.9% increase in sales volume. This increase in institutional foodservice customers volumes is primarily attributed to the Springprint acquisition. Gross profit increased $0.1 million, or 0.6%, to $17.1 million for the thirteen weeks ending June 24, 2001 compared to $17.0 million for the thirteen weeks ending June 25, 2000. As a percentage of net sales, gross profit increased from 18.9% for the thirteen weeks ending June 25, 2000 to 19.4% for the thirteen weeks ending June 24, 2001. Gross profit for the thirteen weeks ending June 24, 2001 was positively affected by increased selling prices, which were partially offset by higher raw material and energy costs. Selling, general and administrative expenses decreased $2.1 million, or 17.2%, to $10.1 million for the thirteen weeks ending June 24, 2001 compared to $12.2 million for the thirteen weeks ending June 25, 2000 primarily as a result of a decrease in the workforce resulting from the CEG consolidation and a reduction in selling expenses. 8 Restructuring expenses decreased $0.1 million, or 20.0%, to $0.4 million for the thirteen weeks ending June 24, 2001 compared to $0.5 million for the thirteen weeks ending June 25, 2000. In the thirteen weeks ending June 24, 2001, the Company recorded a $0.4 million reserve in conjunction with the consolidation of the CEG administrative office. In the thirteen weeks ended June 25, 2000, the Company established a restructuring reserve of $0.5 million in conjunction with the closing of a manufacturing facility in Maspeth, New York. Other (income), net increased $0.2 million, or 200.0%, to income of $0.3 million for the thirteen weeks ending June 24, 2001 compared to income of $0.1 million for the thirteen weeks ending June 25, 2000 due to an increase in management fee income. Operating income increased $2.5 million, or 58.1%, to $6.8 million for the thirteen weeks ending June 24, 2001 compared to $4.3 million for the thirteen weeks ending June 25, 2000 due to the reasons discussed above. Interest expense, net of interest income was flat at $3.8 million for the thirteen weeks ending June 24, 2001 and the thirteen weeks ending June 25, 2000. Income tax expense increased $1.0 million, or 500.0%, to $1.2 million for the thirteen weeks ending June 24, 2001 compared to $0.2 million for the thirteen weeks ending June 25, 2000 as a result of increased income. The effective rate for the thirteen weeks ending June 24, 2001 was 38.9% and for the thirteen weeks ending June 25, 2000 was 37.9%. Net income increased $1.6 million, or 533.3%, to $1.9 million for the thirteen weeks ending June 24, 2001 compared to $0.3 million for the thirteen weeks ending June 25, 2000, due to the reasons stated above. Thirty-nine Weeks Ended June 24, 2001 Compared to Thirty-nine Weeks Ended June 25, 2000 (Unaudited) Net sales increased $3.0 million, or 1.1%, to $268.3 million for the thirty-nine weeks ending June 24, 2001 compared to $265.3 million for the thirty-nine weeks ending June 25, 2000, reflecting a 5.7% increase in average realized sales price partially offset by a 4.6% decrease in sales volume. Net sales to consumer foodservice customers decreased 7.2%, resulting from a 4.4% increase in average realized sales price, offset by a decrease in sales volume of 11.6%. Net sales to consumer foodservice customers was negatively impacted by more competitive market conditions and the Company's decision to reduce sales to certain customers experiencing deteriorating credit conditions, offset partially by a more favorable product mix. Net sales to institutional foodservice customers increased 14.4%, resulting from a 0.4% increase in average realized sales price, combined with a 14.0% increase in sales volume. This increase in institutional foodservice customers volumes is primarily attributed to the Springprint acquisition. Gross profit increased $0.4 million, or 0.8%, to $50.2 million for the thirty-nine weeks ending June 24, 2001 compared to $49.8 million for the thirty-nine weeks ending June 25, 2000. As a percentage of net sales, gross profit decreased from 18.8% for the thirty-nine weeks ending June 25, 2000 to 18.7% for the thirty-nine weeks ending June 24, 2001. Gross profit for the thirty-nine weeks ending June 24, 2001 was positively affected by increased selling prices, which was entirely offset by higher raw material and energy costs. Selling, general and administrative expenses decreased $2.9 million, or 7.9%, to $33.6 million for the thirty-nine weeks ending June 24, 2001 compared to $36.5 million for the thirty-nine weeks 9 ending June 25, 2000 primarily as a result of a decrease in the workforce resulting from the CEG consolidation and a reduction in selling expenses. Restructuring expenses decreased $0.1 million, or 20.0%, to $0.4 million for the thirty-nine weeks ending June 24, 2001 compared to $0.5 million for the thirty-nine weeks ending June 25, 2000. In the thirty-nine weeks ending June 24, 2001, the Company recorded a reserve in conjunction with the consolidation of the CEG administrative office. In the thirty-nine weeks ended June 25, 2000, the Company established a restructuring reserve of $0.5 million in conjunction with the closing of a manufacturing facility in Maspeth, New York. Other (income), net increased $0.2 million, or 66.7%, to $0.5 million for the thirty-nine weeks ending June 24, 2001 compared to $0.3 million for the thirty-nine weeks ending June 25, 2000 due to an increase in management fee income. Operating income increased $3.5 million, or 26.7%, to $16.6 million for the thirty-nine weeks ending June 24, 2001 compared to $13.1 million for the thirty-nine weeks ending June 25, 2000 due to the reasons discussed above. Interest expense, net of interest income decreased $0.4 million, or 3.3%, to $11.6 million for the thirty-nine weeks ending June 24, 2001 compared to $12.0 million for the thirty-nine weeks ending June 25, 2000. For the thirty-nine weeks ending June 24, 2001, the Company realized lower interest expense due primarily to lower average interest rates. Income tax expense increased $1.6 million, or 400.0%, to $2.0 million for the thirty-nine weeks ending June 24, 2001 compared to $0.4 million for the thirty-nine weeks ending June 25, 2000 as a result of higher income. The effective rate for the thirty-nine weeks ending June 24, 2001 was 40.5% and for the thirty-nine weeks ending June 25, 2000 was 38.6%. Net income increased $2.3 million, or 328.6%, to $3.0 million for the thirty-nine weeks ending June 24, 2001 compared to $0.7 million for the thirty-nine weeks ending June 25, 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 2001 capital expenditures. Net cash provided by operating activities increased $5.0 million to $17.9 million in the thirty-nine weeks ending June 24, 2001 compared to $12.9 million in the thirty-nine weeks ending June 25, 2000. This increase is primarily due to a decrease in receivables as a result of better collections and a decrease in inventory as a result of improved inventory management. Capital expenditures for the thirty-nine weeks ended June 24, 2001 were $3.8 million compared to $2.2 million for the thirty-nine weeks ending June 25, 2000. Capital expenditures in the thirty-nine weeks ending June 24, 2001 included $2.8 million for new production equipment and $1.0 million for renovations and conversions. The Company has a $55 million revolving credit facility subject to borrowing base limitations. The credit facility is collateralized by eligible accounts receivable, inventories, and certain general intangibles. The credit facility matures on 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 June 24, 2001, $29.8 million was 10 outstanding and $25.2 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. In addition to the revolving credit facility, the Company's credit facility also includes a term loan of $5 million of which $4.3 million was outstanding at June 24, 2001. This amount is payable in equal monthly installments through the maturity date of September 30, 2001. Borrowings under the term loan bear interest, at the Company's election, equal to the bank's prime rate plus 0.5% or LIBOR plus 2.5%. The proceeds from this term loan were used to partially finance the purchase of Springprint. 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, combined with amounts available under the Company's credit facility, will be sufficient to meet the Company's working capital and capital expenditure needs in the next twelve months. The Company is contemplating various strategic options which may include a restructuring of its business debt and capital structure, including, among other things, the public sale or private placement of debt or equity securities of the Company or its subsidiaries, joint venture transactions, new borrowings, the refinancing of the Company's existing debt agreements, open market purchases, tender offers or exchange offers of the Company's outstanding securities. There can be no assurances that any of these strategic options will be consummated. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NONE PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Reports on Form 8-K: No reports on Form 8-K were filed during the thirty-nine weeks ended June 24, 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: July 20, 2001 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)

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