SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 AND 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
WASHINGTON, D.C. 20549
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FORM 10-K/A
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 AND 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[x] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from August 1, 1996 to December 31, 1996
Commission File Number: 333-8043
Four M Corporation
(Exact name of Registrant as Specified in Its Charter)
Maryland 52-0822639
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
115 Stevens Avenue 10595
Valhalla, New York 10595 (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (914) 749-3200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 31, 1997, there were no shares of voting stock of the
registrant held by non-affiliates.
As of March 31, 1997, registrant had 6,815,867 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Part 1, Item 8:
The Financial Statements for the period from May 30, 1996 to December 1,
1996, together with the Independent Auditors' Report for Florida Coast and the
Financial Statements for the period from January 1, 1996 to May 30, 1996 and the
two years ended December 31, 1995 and 1994 together with the Independent
Auditors' Report for St. Joe Forest Products Company - Linerboard Mill
Operations included in the Annual Report on Form 10-K for Florida Coast Paper
Company, L.L.C., ("Florida Coast") (File No. 333-8023) ("Florida Coast 10-K") as
filed with the Securities and Exchange Commission ("SEC") on March 31, 1997 are
incorporated herein by reference.
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FOUR M CORPORATION
TRANSITION REPORT ON FORM 10-K/A
TABLE OF CONTENTS
PART I
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Item 1. Business......................................................................................1
Item 2. Properties....................................................................................9
Item 3. Legal Proceedings............................................................................10
Item 4. Submission of Matters to a Vote of Security Holders..........................................10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................11
Item 6. Selected Financial Data......................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........13
Item 8. Financial Statements and Supplementary Data..................................................19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........19
PART III
Item 10. Directors and Executive Officers of the Registrant...........................................20
Item 11. Executive Compensation.......................................................................22
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................23
Item 13. Certain Relationships and Related Party Transactions.........................................23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................24
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Signatures
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PART I
Item 1. BUSINESS
General
Four M Corporation (the "Company" or "Four M"), which operates under
the trade name Box USA, believes that it is one of the largest independent
full-service converters of corrugated packaging materials in North America. The
Company, through its subsidiaries, operates 28 strategically located converting
facilities, which sold 4.6 billion square feet of finished corrugated
containers, partitions and sheets during the fiscal year ended July 31, 1996
("Fiscal 1996") and during the five month period from August 1, 1996 to December
31, 1996 (the "1996 Transition Period"). The Company has developed and maintains
long-standing customer relationships with leading consumer products and
packaging companies including Avon, Clorox, Anchor Glass, Owens Illinois and
Procter & Gamble. The Company also owns a paper mill at Ft. Madison, Iowa (the
"Ft. Madison Mill") which produced 77,726 tons of corrugating medium during
Fiscal 1996 and 31,699 tons of corrugating medium during the 1996 Transition
Period, most of which was sold to third parties during such periods. See "Recent
Developments."
On May 30, 1996, the Company acquired (i) substantially all of the
assets of St. Joe Container Company ("St. Joe Container"), which primarily
consisted of 16 converting facilities and related working capital and (ii)
through Florida Coast Paper Company, L.L.C. ("Florida Coast"), a joint venture
(the "Mill Joint Venture") with Stone Container Corporation ("Stone Container"),
a 50% interest in a 500,000 tons per year linerboard mill (the "St. Joe Mill")
from St. Joe Forest Products Company ("St. Joe Forest"), an affiliate of St. Joe
Container (collectively, the "Acquisition"). The Acquisition more than doubled
the size of the Company to 28 converting facilities. The facilities of the
Company and St. Joe Container utilize similar manufacturing equipment and
production processes and operate with minimal geographic redundancy and no
material customer overlap. Accordingly, the Company believes that the
Acquisition creates opportunities to pursue continued growth in its business,
utilize its purchasing power to achieve reductions in raw material costs,
improve productivity and reduce operating expenses. In the 1996 Transition
Period, the Company had net sales of $196.8 million, net loss of $2.2 million
and EBITDA of $11.8 million.
The Company was founded in 1966 as a manufacturer of corrugated
partitions. From a single partition plant, the Company expanded initially
through internal growth and later through 11 separate acquisitions involving 17
manufacturing facilities prior to the date of the Acquisition. The Company has
historically targeted distressed properties and undermanaged assets to which the
Company could significantly improve profitability. These strategic acquisitions
have allowed the Company to (i) supply its partition plants with lower-cost
corrugated sheets for conversion into interior packaging components, (ii)
capture a portion of its partition customers' corrugated container business and
(iii) diversify its customer base to include a broader variety of users of
corrugated packaging materials. The Company's ability to target and successfully
integrate acquisitions is reflected in an increase in average revenue per plant
from $9.0 million in 1991 to $18.2 million in Fiscal 1996 while average annual
production per plant has grown from 201.7 million square feet to 342.6 million
square feet over the same period. During the 1996 Transition Period, the average
revenue per plant was $16.3 million, and average production per plant was 397.6
million square feet.
The Company has entered into a letter of intent to (i) acquire a 50%
interest in a sheet plant and (ii) enter into a requirements and services
agreement for total investment of $2.25 million
The Company's strategy is to enhance its position as one of the largest
independent full-service converters of corrugated packaging materials in North
America. Fundamental elements of the Company's strategy include:
o providing a full line of high-quality products
o capitalizing on the Company's significant raw materials
purchasing power
o implementing cost-reduction manufacturing techniques and
operating efficiency programs
o responding quickly to customer needs and offering high levels of
customer service
o expanding the Company's penetration of national accounts and
increasing the Company's share of existing customers' business
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One of the Company's competitive advantages is its long-term
relationships with many customers, some of which have been maintained for over
25 years. A second feature which distinguishes the Company from its competitors
is the significant relationships it has established with its containerboard
suppliers. The Company believes that it is the largest customer of its four
primary raw material suppliers. As one of the largest purchasers of linerboard
and corrugating medium in the industry, the Company believes that it has been
able to purchase raw materials from its outside suppliers at prices below those
reported in Pulp & Paper Week, an industry trade publication.
Four M has no assets or independent business operations other than its
ownership interest in its subsidiaries.
Recent Developments
The markets for corrugated packaging materials produced by the Company
are generally subject to changes in industry capacity and cyclical changes in
the economy, both of which can significantly impact the Company's profitability.
The ability of the Company to sustain profitability during cyclical fluctuations
in corrugating packaging material markets is dependent upon the Company's
ability to maintain value-added margins (net sales less the cost of raw
materials). For corrugating packaging material manufacturers, raw materials
typically represent approximately 70% of the total of cost of goods sold. The
ability of the Company to maintain value-added margins is a function of the
speed with which the Company can pass along raw material cost increases to its
customers or conversely, absorb reductions in raw materials prices.
Historically, the Company has been able to sustain consistent value-added
margins on a unit basis.
Although lower prices have affected the Company's ability to maintain
value-added margins, the Company has experienced growth in volume. Thus, the
Company believes that it is well positioned to benefit from any increase in
prices for its products.
The Company is experiencing a decline in prices for its products as a
result of increased capacity in the industry and decreased demand for such
products. This decline in demand and prices has had a negative impact on the
financial results of the Company during the 1996 Transition Period. The Company
has decided to shut down the Ft. Madison Mill on March 31, 1997 for an
indefinite period of time. Operations at the Ft. Madison Mill will resume when
market conditions warrant a resumption of production.
In addition, Florida Coast is also experiencing a decline in prices for
its products as a result of increased capacity in the industry and decreased
demand for such products. As a result, Florida Coast has decided to shut down
the St. Joe Mill on April 1, 1997 for an indefinite period of time until market
conditions warrant a resumption of production. Pursuant to the Output Purchase
Agreement, the Company is required to reimburse the St. Joe Mill for one-half of
its fixed costs during the shut-down, including its debt service costs of
approximately $1,763,000 per month.
The Acquisition
The Acquisition enabled the Company to increase its geographic coverage
from nine to 17 states. As a result, the Company is able to serve new markets in
the Midwest, Mid-Atlantic and the faster growing Southeast. While corrugated
packaging plants typically serve customers within a 150-mile radius, the Company
is generally able to extend its service area to a radius of approximately 250
miles. The Company believes that improved operating efficiencies have enabled it
to overcome any incremental freight costs associated with its larger trading
areas.
The Company believes that the Acquisition, by expanding the Company's
geographic coverage, will particularly benefit its national account sales
program by enabling it to serve national accounts from St. Joe Container
facilities in markets not previously covered by the Company. National accounts
comprised approximately 20% of net sales for the Company in Fiscal 1996 and
18.0% in the 1996 Transition Period. In addition, the Company strives to operate
its corrugator plants for three shifts per day, five days per week rather than
the two shifts per day, five days per week operation of the St. Joe Container
facilities in order to increase aggregate production at these facilities. The
Company intends to utilize available capacity to increase production of
corrugated sheets to supply sheet plants owned by third parties in the vicinity
of the St. Joe Container facilities.
The Company has focused on maximum utilization of available production
capacity, minimization of waste and the development and implementation of
financial controls and management systems. In addition, the Company believes it
can eliminate certain duplicative functions and achieve efficiencies in
manufacturing, administration and sales and marketing. Furthermore, the Company
believes that it can reduce manufacturing costs by reducing waste at the St. Joe
Container facilities.
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Operations
The Company operates three types of converting facilities: (i)
corrugator plants which convert linerboard and corrugating medium into
corrugated sheets and then convert the sheets into corrugated containers, (ii)
sheet or specialty container plants which receive corrugated sheets from the
Company's corrugator plants or external suppliers and then manufacture
corrugated containers and displays and (iii) partition plants which receive
corrugated sheets from the Company's corrugator plants or external suppliers and
make corrugated interior packaging components. The Company also owns the Ft.
Madison Mill, a paper mill which produces corrugating medium primarily for sale
to third parties, and a 50% interest in the St. Joe Mill, which produces
linerboard for sale to the Company and Stone Container. Both mills have been
shut down for an indefinite period of time. See "Recent Developments."
Corrugators
Prior to the Acquisition, the Company operated five corrugator plants
located in the Midwest, the Southeast and California. As a result of the
Acquisition, the Company currently operates an additional 14 full-service
corrugators located in the Southeast, Midwest, Mid-Atlantic and Texas. The
Company supplies corrugated containers to national, regional and local accounts,
which include companies in the food, household products, cosmetics, personal
care, beverage, pharmaceutical, electrical and other machinery, and high-tech
industries. The Company's corrugator plants are value-added container
manufacturers, as well as suppliers of corrugated sheets to the Company's and
third-parties' sheet and partition plants.
During Fiscal 1996 and the 1996 Transition Period, the Company's
corrugator plants produced approximately 5.2 billion and 4.9 billion square feet
of corrugated sheets, respectively. The Company supplied approximately 85.7% of
its own corrugated sheet requirements in Fiscal 1996 and purchased the remaining
14.3% in the marketplace from third parties, while in the 1996 Transition
Period, the Company supplied approximately 86.0% of its own corrugated sheet
requirements and the remaining 14.0% was purchased from other suppliers.
The Company's corrugators convert mottled white linerboard, unbleached
kraft linerboard and corrugating medium into corrugated sheets and containers.
Mottled white containers are generally sold at a premium over kraft containers;
however, the premium tends to cover the higher cost of mottled white linerboard
without increasing operating margins at the container facilities. Approximately
89.9% of the corrugated materials produced in these facilities in Fiscal 1996
required unbleached kraft linerboard and the remaining 10.1% required mottled
white linerboard. During the 1996 Transition Period, the Company's corrugators
used unbleached kraft linerboard for approximately 92.9% of the corrugated
materials produced by such plants and white mottled linerboard for the remaining
7.1%.
Sheet Plants
The Company's sheet plants convert corrugated sheets into specialty
containers and point-of-sale displays. The Company operates one sheet plant in
Ohio, one in Alabama, two in California and one in Florida. During Fiscal 1996,
the Company's sheet plants produced approximately 543.2 million square feet of
corrugated containers, accounting for approximately 16.4% of the Company's net
sales. These plants produced approximately 295.4 million square feet of
corrugated containers and accounted for approximately 9.9% of the Company's net
sales in the 1996 Transition Period. The Alabama facility, which was acquired by
the Company in the Acquisition, shipped approximately 68.1 million square feet
of corrugated containers in Fiscal 1996 and 31.4 million square feet in the 1996
Transition Period.
The Company's sheet plants typically operate on a two shifts per day,
five days per week schedule. The Company operates the sheet plants for smaller
production runs and specialized containers. The customers for these plants are
primarily local and regional accounts. By serving different market segments,
sheet plants allow the Company to operate in trading areas which overlap those
of the corrugator plants without competing with the larger, integrated
facilities.
Partition Plants
The Company believes that it is the largest producer of corrugated
interior packaging components in the United States. The Company operates four
free-standing partition plants in the Midwest and Southeast and supplies
interior packaging components to major food, household products, and glass and
plastic container producers. The Company also has partition manufacturing
capability at two of its sheet plants. The Company maintains a leading position
in the partition segment of the corrugated market by supplying national account,
high-volume users such as Clorox, Anchor Glass and Owens Illinois. Output at the
partition plants totaled approximately 402.4 million square feet in Fiscal 1996
and approximately 128.8 million square feet in the 1996 Transition Period.
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Ft. Madison Mill
The Company's paper mill in Ft. Madison, Iowa was acquired out of
bankruptcy in January 1994. In 1993, the Ft. Madison Mill had a capacity of
approximately 70,000 tons per year or 200 tons per day of corrugating medium.
Actual production for 1993 was approximately 165 tons per day. Following the
acquisition of the Ft. Madison Mill, the Company improved production by
providing management leadership, supplying necessary working capital and
initiating significant repairs. By the first quarter of 1995, the Ft. Madison
Mill began to achieve record daily production levels, thereby lowering unit
operating costs and increasing sales. In Fiscal 1996, the Ft. Madison Mill
produced approximately 77,726 tons, and in the 1996 Transition Period, it
produced approximately 31,699 tons, or 222 tons per day.
The Ft. Madison Mill is currently capable of producing up to 80,000
tons per year of corrugating medium. The Ft. Madison Mill sells its output
primarily to smaller, independent corrugated container manufacturers in the
Midwest. In Fiscal 1996, the Ft. Madison Mill generated net sales of $21.9
million through sales of 59,035 tons of corrugating medium to third parties. In
addition, the Ft. Madison Mill supplied 18,350 tons of corrugating medium for
processing at the Company's corrugator plants. The Ft. Madison Mill sold
approximately 23,285 tons of corrugating medium to third parties and provided
approximately 8,414 tons of corrugating medium to the Company's corrugator
plants in the 1996 Transition Period.
The Ft. Madison Mill has the capability to process both wood fiber and
recycled fiber. Recycled fiber utilized at the Ft. Madison Mill consists of
double-lined kraft clippings. This flexibility in raw materials processing has
enabled the Company to reduce the impact of fluctuations in raw material prices.
Recycled fibers represented approximately 39% of the raw materials used by the
Ft. Madison Mill in Fiscal 1996 and in the 1996 Transition Period. The Company
benefited from lower recycled fiber costs during the 1996 Transition Period. The
price of recycled fiber paid by the Ft. Madison Mill has declined from an
average of approximately $205 per ton in August 1995 to an average of
approximately $99 per ton as of December 31, 1996.
During the 1996 Transition period, the Company experienced a decline in
prices for corrugating medium as a result of increased capacity in the industry
and decreased demand for such products. The Company will shut down the Ft.
Madison Mill as of March 31, 1997 for an indefinite period of time. Operations
at the Ft. Madison Mill will resume when market conditions warrant a resumption
of production. The Company will satisfy its current obligations to third parties
for corrugating medium from other sources. The Company estimates that its fixed
costs for the Ft. Madison Mill during the shut-down will be approximately
$115,000 per month.
St. Joe Mill
On May 30, 1996, Florida Coast, a joint venture of the Company and
Stone Container (the "Joint Venture Partners"), acquired the St. Joe Mill for
its strategic location and to fulfill a portion of the linerboard requirements
of the corrugated container facilities of the Joint Venture Partners. The St.
Joe Mill has two paper machines which are capable of producing an aggregate of
approximately 500,000 tons of linerboard annually in a variety of grades and
basis weights. Since 1990, approximately $148.0 million has been spent for the
maintenance and modernization of the St. Joe Mill's plant, equipment and
machinery and for environmental compliance. The St. Joe Mill's production
presently is approximately 28% mottled white linerboard, a premium priced
product, and 72% unbleached kraft linerboard.
Under the Output Purchase Agreement, each of the Joint Venture Partners
has agreed to purchase one-half of the St. Joe Mill's entire annual linerboard
production, representing approximately one-third of the Company's total
requirements, at a price that is $25 per ton below the price published in Pulp &
Paper Week, under the section entitled "Price Watch: Paper and Paperboard,"
subject to a minimum purchase price, which price is intended to generate
sufficient funds to cover cash operating costs, cash interest expense and
maintenance capital expenditures. Management determined that it was probable
that the Company would be required to pay additional amounts above market price
for linerboard pursuant to the Output Purchase Agreement and established a
reserve (the "Reserve") in the amount of $11.0 million for such purchases. The
Reserve was subsequently increased to $20.2 million and was $17.9 million at
December 31, 1996. The Company was required to pay Florida Coast an additional
$4.0 million for its 50% share of the linerboard produced by the St. Joe Mill
during 1996 Transition Period. The Company recorded a loss on joint venture
contract of $1.7 million and utilized $2.3 of the Reserve during the 1996
Transition Period.
Florida Coast has experienced a decline in prices for linerboard as a
result of increased capacity in the industry and decreased demand for such
products. Florida Coast has decided to shut down the St. Joe Mill as of April 1,
1997 for an indefinite period of time. Pursuant to the Output Purchase
Agreement, the Company is required to reimburse the St. Joe Mill for one-half of
its fixed costs during the shut-down, including its debt service costs of
approximately $1,763,000 per month. The Company believes, in light of
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current market conditions, that it can purchase linerboard from third parties
during this shut-down and meet its financial obligations to the St. Joe Mill.
Fibre Marketing Group
In Fiscal 1996, the Company acquired a 50% interest in Fibre Marketing
Group, LLC ("Fibre Marketing"), which procures and markets waste paper. Fibre
Marketing acts as a broker for the sale and transportation of waste material
from companies which generate waste, such as printers, paper converters and
recycling processors, to paper mills. Fibre Marketing currently provides
brokerage services to all of the Company's converting facilities. Fibre
Marketing also owns and operates Fibre Processing Corporation, a waste paper
processing company located in Edgemere, Maryland, which services sources of
recyclable waste paper which are too small to utilize brokerage services.
MannKraft Corporation
In the 1996 Transition Period the Company acquired an additional 49% of
the outstanding shares of common stock of MannKraft Corporation (the "MannKraft
Acquisition") from Stone Container, increasing its ownership interest to 50%.
MannKraft is a manufacturer of corrugated paper products, such as cartons and
displays, which it sells primarily in New Jersey, southern New York,
southeastern Connecticut and eastern Pennsylvania.
Box USA of Florida, L.P.
In the 1996 Transition Period, Four M Manufacturing Group of Georgia,
Inc. acquired a 51% interest in Box USA of Florida, L.P. ("Florida, L.P.").
Florida, L.P. operates a sheet plant in Jacksonville, Florida.
Sales, Marketing and Customers
Sales and Marketing
The Company's products are primarily sold on a direct basis and, to a
lesser degree, through the use of brokers. Currently, the Company generates
approximately 90% of its business through direct sales and approximately 10%
through brokers. The Company seeks to be a leader in customer service for the
markets it serves by capitalizing on its marketing experience, technical
expertise and manufacturing flexibility. The Company's corrugated packaging
materials are typically manufactured to customer order. The Company believes
that the strong integration between manufacturing, marketing and sales provides
it with a competitive advantage by allowing it to respond favorably and quickly
to changing customer demands. The Company prides itself on its sales oriented
culture and its long-standing relationships with customers. The Company's senior
executive officers personally handle a number of the larger accounts.
Each of the Company's sales representatives receives training in
product specifications and manufacturing techniques in order to satisfy customer
requirements and maintain existing national and local account relationships. The
Company emphasizes achieving sales efficiency by preserving existing
relationships, having a thorough knowledge of customer requirements and being
flexible and responsive to changing customer needs. The Company has focused on
capturing market share by targeting a diverse customer base and offering a full
product line within a given geographical area. The Company believes that the
Acquisition has provided access to markets previously outside the Company's
geographic service areas, as well as allowed it to expand relationships with
existing customers which have packaging requirements within geographic areas
serviced by the St. Joe Container facilities.
The Company's sales and marketing system is supported by a centralized
computer network. All sales are invoiced and entered into the computer network
at the plant level. Sales information and data are accessible on a real-time
basis from computer terminals at each plant and at the Company's executive
offices. The Company's sales and marketing organization provides the Company
with accurate and timely information on projected product demand, competitive
activity in the marketplace and potential markets for new products and services.
Customers
In Fiscal 1996 and the 1996 Transition Period, the Company's largest
customer accounted for approximately 7.1% and 2.5% of net sales, respectively.
The top 10 customers accounted for approximately 21.8% and 12.7% of net sales
during such periods. The Company typically has one-year, and in some cases
multi-year, contracts with its national accounts. These contracts have
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provisions which provide for price adjustments based on changes in the Company's
raw material prices. Sales to national accounts accounted for approximately
20.0% of net sales in Fiscal 1996 and 18.0% of net sales in the 1996 Transition
Period.
Competition
The markets in which the Company sells its products are highly
competitive. Competitors of the Company's corrugators include large, integrated
manufacturers with operations throughout the United States as well as small,
independent converters with a regional or local focus. The Company competes by
offering its customers high-quality products produced to the customers'
specifications, rapid order turnaround, competitive pricing and high levels of
customer service.
The Company's sheet plants generally compete with independent regional
and local sheet plants. Competitive factors include product quality, price,
delivery time and customer service. The Company believes that its ready access
to raw materials from its corrugator plants provides it with a competitive
advantage over its non-integrated competitors.
The market for corrugated partitions is mature. The primary competitors
in the partition business are producers of solid fiber partitions. Solid fiber
partitions have a price advantage over corrugated partitions due to lower raw
material costs but are not as effective as corrugated partitions for protection
of fragile products during shipment and storage. The Company competes with the
solid fiber manufacturers by tailoring timing, manufacturing specifications and
delivery requirements to individual customer needs. As consolidation among users
of corrugated partitions has increased, the Company has continued to focus on
aligning its manufacturing capabilities with individual customer needs to
maintain its market share in the partition segment. In addition, the Company has
utilized its relationships with its partition customers to increase sales of
corrugated containers.
Distribution
Corrugated packaging materials generally are delivered by truck due to
the large number of customers and demand for timely service. The dispersion of
customers and the high bulk and low density and value of corrugated packaging
materials make shipping costs a relatively high percentage of total costs. As a
result, corrugated packaging material plants tend to be located close to
customers to minimize freight costs. Generally, corrugated packaging material
plants service an area within a 150-mile radius of the plant locations. Each of
the Company's plants typically services a market within a 250-mile radius of the
plant. The Company believes that improved operating efficiencies have enabled it
to overcome any incremental freight costs associated with its larger trading
areas.
Raw Materials
The Company's primary raw materials are linerboard and corrugating
medium. Historically, over two-thirds of the Company's raw materials have been
provided by Stone Container, Inland Container Corporation and Tenneco Packaging
Inc. pursuant to long-term supply contracts. The Company has recently negotiated
renewals of these contracts; two of them expire in March and July 2000, and the
third contract expires in December 2002. The Company has also entered into an
additional long-term supply contract with Georgia-Pacific Corporation which
expires in January 2001. The contracts specify certain monthly and annual
discounts to negotiated market prices, which are based on volumes purchased. The
Company believes that alternate sources of raw materials are available.
In Fiscal 1996, St. Joe Container bought a substantial amount of its
linerboard from the St. Joe Mill. Under the Output Purchase Agreement, each of
the Joint Venture Partners has agreed to purchase one-half of the St. Joe Mill's
entire annual linerboard production, representing approximately one-third of the
Company's total requirements, at a price that is $25 per ton below the price
published in Pulp & Paper Week, under the section entitled "Price Watch: Paper
and Paperboard," subject to a minimum purchase price, which price is intended to
generate sufficient funds to cover cash operating costs, cash interest expense
and maintenance capital expenditures. Pursuant to this minimum price provision,
the Company was required to pay Florida Coast an additional $4.0 million for its
share of the linerboard produced by the St. Joe Mill during the six-month period
ended December 31, 1996. Florida Coast has experienced a decline in prices for
linerboard as a result of increased capacity in the industry and decreased
demand for such products. Florida Coast has decided to shut down the St. Joe
Mill as of April 1, 1997 for an indefinite period of time. In light of current
market conditions, the Company believes that it can purchase linerboard from
third parties during the period the St. Joe Mill is shut down.
The Ft. Madison Mill purchases its virgin fiber and its recycled fiber
from several suppliers, including some suppliers of recycled fiber who are also
customers of the Ft. Madison Mill. The Ft. Madison Mill does not typically enter
into long-term supply contracts.
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Environmental Matters
The Company's operations are subject to environmental regulation by
federal, state and local authorities in the United States. The Company believes
that it is in substantial compliance with current federal, state and local
environmental regulation. Unreimbursed liabilities arising from environmental
claims, if significant, could have a material adverse effect on the Company's
results of operations and financial condition. Furthermore, actions by federal,
state and local governments concerning environmental matters could result in
laws or regulations that could increase the cost of compliance with
environmental laws and regulations.
In November 1993, the EPA announced proposed regulations, known as the
"cluster rules," that would require more stringent controls on air and water
discharges from pulp and paper mills under the Clean Water Act and the Clean Air
Act. Pulp and paper manufacturers have submitted extensive comments to the EPA
on the proposed cluster rules in support of the position that requirements under
the proposed regulations are unnecessarily complex, burdensome and
environmentally unjustified. It cannot be predicted at this time whether the EPA
will modify the requirements in the final regulations. Based on information
presently available from the EPA, it is expected that the EPA will promulgate
the final cluster rules in 1997. In addition, the Company anticipates that the
earliest time for industry compliance with certain aspects of the regulations
should not be prior to the last quarter of 1997, and that compliance with the
remaining elements will be required by the end of 1999. The Company estimates
that these regulations, if adopted as currently proposed, would require capital
expenditures of approximately $1.5 million to $2.0 million by the Company with
respect to the Ft. Madison Mill. The ultimate financial impact of the proposed
regulations on the Company will depend on the nature of the final regulations,
the timing of required implementation and the cost and availability of new
technology.
St. Joe Container, St. Joe Paper and St. Joe Forest (collectively, the
"Paper Indemnitors") agreed to indemnify the Company for certain "On-Site
Environmental Liabilities" (as defined in the Asset Purchase Agreement dated as
of November 1, 1995 (the "Acquisition Agreement")) arising from conditions
existing on the date of the closing of the Acquisition (the "Closing Date") and
relating either to the St. Joe Mill or the St. Joe Container facilities.
Pursuant to these provisions, (1) 100.0% of the first $2.5 million of such
liability will be paid by the Company or the Mill Joint Venture, (2) 100.0% of
the next $2.5 million by the Paper Indemnitors, (3) 100.0% of the next $2.5
million of such liability will be paid by the Company or the Mill Joint Venture,
(4) 100.0% of the next $2.5 million of such liability will be paid by the Paper
Indemnitors, (5) 100.0% of the next $2.5 million of such liability will be paid
by the Company or the Mill Joint Venture and (6) 100.0% of the next $5.0 million
of such liability will be paid by the Paper Indemnitors; provided that the
conditions that give rise to such On-Site Environmental Liabilities are
discovered and the Paper Indemnitors are notified not later than three years
after the Closing Date and, subject to certain exceptions, remediation expenses
are incurred within five years after the Closing Date. The Paper Indemnitors
will have no responsibility to indemnify the Company or the Mill Joint Venture
for expenses relating to On-Site Environmental Liabilities in excess of the
foregoing or for any On-Site Environmental Liabilities discovered after the
third anniversary of the Closing Date. The Company is solely responsible for
On-Site Environmental Liabilities that arise from the acts or omissions of the
Company after the Closing Date. In the event that On-Site Environmental
Liabilities arise from acts or omissions which occurred both before and after
the Closing Date, such liabilities will be allocated between the Paper
Indemnitors, on the one hand, and the Company or the Mill Joint Venture, on the
other hand, based on the relative contribution of the acts and omissions
occurring in each time period to such On-Site Environmental Liabilities. St. Joe
Paper and its affiliates, including St. Joe Container, have retained
responsibility for "Off-Site Environmental Liabilities" (as defined in the
Acquisition Agreement) that arise from conditions existing on the Closing Date.
In the event Off-Site Environmental Liabilities arise from acts or omissions
that occurred both before and after the Closing, such Liabilities will be
allocated between the Paper Indemnitors, on the one hand, and the Company and
the Mill Joint Venture, on the other hand, based on the relative contribution of
the acts and omissions occurring in each time period to such Off-Site
Environmental Liabilities. Should a condition exist that requires remediation
costs to be incurred both within and without the boundaries of the real
property, the costs for work within the boundaries will be deemed On-Site
Environmental Liabilities, and the work outside such boundaries will be deemed
Off-Site Environmental Liabilities. Subject to certain exceptions, On-Site
Environmental Liabilities do not include liabilities that arise due to a change
in any law or regulation becoming effective after November 1, 1995.
Pursuant to the Indemnification Reimbursement Agreement between the
Mill Joint Venture and the Company, the benefit of indemnification from the
Paper Indemnitors with respect to such environmental liabilities will be
allocated 80.0% to the Mill Joint Venture and 20.0% to the Company, with the
Mill Joint Venture or the Company being obligated, under certain circumstances,
to reimburse the other in the event either recovers more than its allocated
share and the other recovers less.
The obligations of the Paper Indemnitors with respect to On-Site
Environmental Liabilities will terminate in the event that either the Company or
the Mill Joint Venture undergoes a "change of control" (as defined in the
Acquisition Agreement). Change of Control is defined to mean (i) a transaction
in which any Person or Group (as defined in Rule 13d-5 of the Exchange Act)
other than the "Principals" (as defined in the Acquisition Agreement) or the
"Lenders" (as defined in the Acquisition Agreement) acquires
7
<PAGE>
more than 50.0% of the total voting power of all classes of voting stock of the
Company or the Mill Joint Venture, as the case may be, (ii) a transaction in
which any Person or Group (as defined in Rule 13d-5 of the Exchange Act) other
than the Principals or the Lenders has a sufficient number of nominees elected
to constitute a majority of the Board of Directors of the Company or of the
Board of Managers of the Mill Joint Venture, as the case may be, (iii) the sale
of all or substantially all of the capital stock of the Company or the Mill
Joint Venture, as the case may be, as an entirety or substantially as an
entirety to any Person or Group (as defined in Rule 13d-5 of the Exchange Act)
other than the Principals or the Lenders and (iv) the sale or transfer of all or
substantially all of the assets of the Company or the Mill Joint Venture, as the
case may be, as an entirety or substantially as an entirety to any Person other
than the Principals or the Lenders. For purposes of the definition of Change of
Control, "Principals" is defined as (1) Dennis Mehiel in the case of the
Company, (2) the Company and Stone Container, in the case of the Mill Joint
Venture, and (3) any subsidiary of Dennis Mehiel, the Company or Stone
Container; and "Lenders" is defined as one or more institutional lenders which
provide debt financing to the Company or the Mill Joint Venture as of the
Closing.
Pursuant to the Acquisition Agreement, St. Joe Container has completed,
at its sole cost, remedial actions required for a former land application area
at the container facility located in Laurens, South Carolina and remedial
actions associated with two underground storage tanks at the container facility
located in Chicago, Illinois. St. Joe Container has also agreed to reimburse the
Company for up to $1.4 million of expenses incurred by the Company after the
Closing Date to undertake certain identified environmental projects at several
of the acquired container facilities. To date, the Company has spent
approximately $100,000 in connection with these projects and expects that it
will be reimbursed for these amounts from St. Joe Container.
The indemnification provisions in the Acquisition Agreement are
generally intended to be the exclusive remedies of the parties with respect to
such agreements.
Personnel
As of December 31, 1996, the Company had 2,439 employees, of whom 1,769
were hourly employees and 670 were salaried employees. Of such employees, 559
were engaged in management and administrative functions, 111 were engaged in
sales and marketing and 1,769 were engaged in manufacturing. One thousand three
hundred and sixty-seven hourly employees at 20 Company facilities are members of
unions under 21 separate contracts. One of these contracts is currently being
renegotiated, one expires in 1997, ten expire in 1998, seven expire in 1999, one
expires in 2000 and one expires in 2001. Management believes that its employee
relations are good.
8
<PAGE>
Item 2. PROPERTIES
The Company owns or leases manufacturing properties having an aggregate
floor space of approximately 4.7 million square feet. The table below provides
summary information regarding the principal properties owned or leased by the
Company.
Approximate Leased
Location Square Footage Type or Owned
- -------- -------------- ---- --------
Birmingham, AL (1) 167,000 Corrugator Owned
Compton, CA 135,000 Corrugator Leased
Port St. Joe, FL (1)(2)(6) 142,000 Corrugator Leased
Lake Wales, FL (1) 275,000 Corrugator Owned
Stockbridge, GA (3) 160,000 Corrugator Leased
Chicago, IL (1) 185,000 Corrugator Owned
Hartford City, IN (1) 277,150 Corrugator Owned
Louisville, KY (1) 240,000 Corrugator Owned
Baltimore, MD (1) 220,000 Corrugator Owned
Newark, NJ 180,000 Corrugator Owned
Charlotte, NC (1) 170,000 Corrugator Owned
Newark, OH 107,000 Corrugator Owned
Eighty Four, PA 133,000 Corrugator Owned
Pittsburgh, PA (1) 225,000 Corrugator Owned
Laurens, SC (1) 180,000 Corrugator Owned
Memphis, TN (1) 216,000 Corrugator Owned
Dallas, TX (1) 187,000 Corrugator Owned
Houston, TX (1) 157,000 Corrugator Owned
Chesapeake, VA (1) 148,000 Corrugator Owned
Dothan, AL (1) 31,000 Sheet Owned
Montebello, CA (6) 90,000 Sheet (4) Leased
San Leandro, CA 110,000 Sheet (4) Leased
Jacksonville, FL 72,700 Sheet Leased
Byesville, OH 60,000 Sheet Owned
Jacksonville, FL (3) 69,000 Partition Leased
Litchfield, IL 42,000 Partition Leased
Portland, IN (3) 40,500 Partition Leased
Bethesda, OH (3) 44,100 Partition Leased
Ft. Madison, IA(6) 138,570 Mill Owned
Valhalla, NY 16,000 Executive Offices Leased
New York City, NY 3,500 Executive Offices Leased
College Park, GA (1)(7) 167,000 Corrugator Owned
Vernon, CA (5) 200,000 Sheet Owned
North Brunswick, NJ (6) 107,220 Sheet Owned
- -----------
(1) Properties acquired in the Acquisition.
(2) Property net leased from the Mill Joint Venture for a nominal rental
payment.
(3) Properties owned, directly or indirectly, by Dennis Mehiel. See "Certain
Relationships and Related Party Transactions."
(4) Sheet plants which have the capability to produce partitions.
(5) Acquired on June 4, 1996 by Box USA Group, Inc., a wholly-owned subsidiary
of the Company for approximately $4.5 million. The Company has spent
approximately $1.2 million for capital expenditures on this plant. Full
operations are expected to commence during Fiscal 1997.
(6) Inactive facilities.
(7) Machinery and equipment sold in January 1997. The plant was net leased to
the purchaser.
9
<PAGE>
Item 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of its business. The Company
maintains insurance coverage against claims in an amount which it believes to be
adequate. The Company believes that it is not presently a party to any
litigation, the outcome of which could reasonably be expected to have a material
adverse effect on its financial condition or results of operations.
On July 19, 1996, a civil action was filed in the Superior Court of
Fulton County, Georgia (the "Suit") by Sid Dunken, individually and on behalf of
D&M Partnership, a purported Georgia partnership, against Four M, Box USA Group,
Inc., Four M Manufacturing Group of Georgia, Inc. and Dennis Mehiel. The
complaint alleges that Dunken is entitled to an equity interest in Four M or in
the alternative, $150,000,000 in compensatory damages, as well as punitive
damages and attorneys' fees. On September 23, 1996, the Company filed an answer
in response to the Complaint. The Company believes that the Suit is without
merit. The Company intends to defend against the Suit vigorously and believes
that it has adequate defenses. However, the Suit is in a very preliminary stage,
and there can be no assurance that the outcome of the Suit will not be adverse
to Four M.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the five month period covered by this report, no matter was
submitted to a vote of security holders of the Company.
10
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's Common
Stock. Dennis Mehiel, the Chairman of the Board of Directors and the Chief
Executive Officer of the Company, is the sole shareholder of the Company's
outstanding Common Stock.
Item 6. SELECTED FINANCIAL DATA
The following historical data have been derived from consolidated
financial statements of the Company. The data as of and for the five months
ended December 31, 1996 and the fiscal years ended July 31, 1996, 1995 and 1994
are derived from the consolidated financial statements of the Company audited by
BDO Seidman, LLP, independent certified public accountants, whose report thereon
is included elsewhere in this report. The data as of and for the fiscal years
ended July 31, 1993 and 1992 are derived from the Company's consolidated
financial statements audited by KPMG Peat Marwick LLP, independent certified
public accountants, whose report is not included herein. The data as of and for
the five months ended December 31, 1995 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 that period. The following data should
be read in conjunction with the Company's consolidated financial statements, and
related notes, "Management's Discussions and Analysis of Financial Condition and
Results of Operations" and the other financial information included elsewhere
herein.
11
<PAGE>
<TABLE>
<CAPTION>
Five Months Ended
December 31, Fiscal Year Ended July 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ----- ---- ----- ----- -----
(In thousands)
Statement of Operation Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales .............................. $ 196,787 $ 95,614 $ 257,817 $ 271,994 $ 228,563 $ 214,936 $ 203,179
Cost of goods sold ..................... 171,304 81,119 222,105 232,154 205,025 192,208 178,189
--------- -------- --------- --------- --------- --------- ---------
Gross profit ........................... 25,483 14,495 35,712 39,840 23,538 22,728 24,990
Selling, general and administrative
expenses ............................... 17,707 6,320 19,217 19,703 22,018 21,813 23,663
--------- -------- --------- --------- --------- --------- ---------
Income from operations ................. 7,776 8,175 16,495 20,137 1,520 915 1,327
Loss on joint venture contract ......... 1,668 -- -- -- -- -- --
Other income ........................... 425 2 -- 1,927 126 3,651 5,917
Interest expense ....................... 10,106 1,589 7,565 5,607 5,448 4,948 5,903
--------- -------- --------- --------- --------- --------- ---------
Income (loss) before provision (benefit)
for income taxes, minorit interest,
cumulative effect of change in method
of accounting and extraordinary gain
on early retirement of debt ...... (3,573) 6,588 8,930 16,457 (3,802) (382) 1,341
Minority interest ...................... (87) -- -- (146) (180) -- 94
Cumulative effect in change in method
of accounting for taxes on income . -- -- -- -- 381 -- --
Provision (benefit) for income taxes ... (1,486) 2,966 3,817 5,483 (325) 453 832
Extraordinary gain on early retirement
of debt............................ -- -- -- 2,219 -- -- 321
--------- -------- --------- --------- --------- --------- ---------
Net income (loss) ...................... $ (2,174) $ 3,622 $ 5,113 $ 13,047 $ (3,276) $ (835) $ 924
========= ======== ========= ========= ========= ========= =========
Other Financial Data:
Ratio of earnings to fixed charges(1) .. 0.7x 3.9x 2.0x 3.3x .5x 1.0x 1.1x
EBITDA(2) .............................. $ 11,820 $ 9,469 $ 21,677 $ 25,382 $ 6,796 $ 6,209 $ 6,664
Net cash provided by (used for)
operating activities(3) ........... (3,930) 1,127 27,060 (2,217) 4,794 8,860 3,615
Net cash provided by (used for)
investing activities .............. (4,707) (221) (166,642) (1,975) (9,126) (4,135) 3,733
Net cash provided by (used for)
financing activities .............. 10,257 (1,032) 139,167 3,518 5,182 (3,841) (8,336)
Depreciation and amortization .......... 5,287 1,432 5,182 5,245 5,276 5,294 5,337
Capital expenditures ................... (6,721) (1,405) 8,612 3,690 3,916 3,935 2,862
Adjusted net sales(4) .................. 196,787 89,252 246,140 212,562 155,869 153,857 139,116
Adjusted EBITDA(4) ..................... 11,820 10,919 24,831 24,210 3,926 2,196 3,110
Five Months Ended
December 31, Fiscal Year Ended July 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ----- ---- ----- ----- -----
(In thousands)
Balance Sheet Data:
Working capital ........................ $ 45,849 $ 16,108 $ 37,590 $ 14,504 $ 8,903 $ 10,413 $ 11,573
Property, plant and equipment, net ..... 173,333 33,736 157,973 27,044 36,536 36,052 37,636
Total assets ........................... 303,645 76,322 263,809 73,137 93,933 79,716 85,744
Total long-term debt ................... 210,691 36,113 187,092 30,998 44,105 40,993 44,285
Stockholder's equity ................... 12,188 12,131 14,362 8,649 1,278 4,554 5,389
The accompanying footnotes, which are an integral part of this financial data, appear on the following page.
</TABLE>
12
<PAGE>
(1) For purpose of calculating the ratio of earnings to fixed charges, earnings
consist of earnings (loss) before provision (benefit) for income taxes,
minority interest and extraordinary gain on early retirement of debt plus
fixed charges, and fixed charges consist of interest expense plus that
portion of rental payments on operating leases deemed representative on the
interest factor.
(2) EBITDA represents income from operations before interest expense, provision
(benefit) for income taxes and depreciation and amortization. EBITDA
provides information regarding a company's ability to service and/or incur
debt. EBITDA should not be considered in isolation or as a substitute for
net income, cash flows from operations or other consolidated income or cash
flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
EBITDA is not intended to disclose excess funds available for reinvestments
because other commitments and obligations exist, including, but not limited
to, principal repayment obligations and lease commitments, that are not
considered in the calculation of EBITDA. See Notes 12, 13 and 16 through 19
to the Company's financial statements.
(3) Material differences between EBITDA and net cash provided by or used in
operating activities may occur because of the inherent differences in each
such calculation including (a) the change in operating assets and
liabilities between the beginning and end of each period, as well as
certain non-cash items which are considered when presenting net cash
provided by or used in operating activities but are not used when
calculating EBITDA and (b) interest expense, provision for income taxes and
other income or expense which are included when presenting net cash
provided by or used in operating activities but are not included in the
calculation of EBITDA. EBITDA is a measure used as part of the covenants of
the Credit Facility.
(4) Adjusted to exclude the results of The Fonda Group, Inc. ("Fonda"), which
was a subsidiary until March 1995, and the Flint, Michigan facility (the
"Flint Facility") which was owned by Box USA Group, Inc. ("Box USA Group"),
a wholly-owned subsidiary of the Company. On August 16, 1996, Box USA Group
discontinued its operations at the Flint Facility and disposed of
substantially all of the machinery and equipment, finished goods and
work-in-progress inventory and certain related assets utilized at such
facility.
13
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion and analysis should be read in conjunction with
the financial statements of the Company and the notes thereto included elsewhere
in this report.
The Company manufacturers corrugated paper, rolled paper and other paper
products such as cartons and displays. The markets for corrugated packing
materials produced by the Company are generally subject to changes in industry
capacity and cyclical changes in the economy, both of which can significantly
impact the Company's profitability. The ability of the Company to sustain
profitability during cyclical fluctuations in corrugating packaging material
markets is dependent upon the Company's ability to maintain value-added margins
(net sales less the cost of raw materials). For corrugated packaging material
manufacturers, raw materials typically represent approximately 70.0% of the
total cost of goods sold. The ability of the Company to maintain value-added
margins is a function of the speed with which the Company can pass on raw
material cost increases to its customers or conversely, absorb reductions in raw
materials prices. Historically, the Company has been able to sustain consistent
value-added margins on a unit basis. In addition, the Company also believes it
has been able to mitigate raw material price increases at its converting
facilities by entering into several long-term supply contracts.
In addition to maintaining value-added margins, the Company has also
focused on controlling costs through maximum utilization of available production
capacity, the development and implementation of financial controls and
management systems and minimization of waste. Direct costs of production at the
Company's converting facilities have declined on a per unit basis from 1992
through the present. By controlling costs and maintaining value-added margins,
together with adding to its manufacturing base through acquisitions completed in
a cost effective manner, the Company has been able to increase its net sales
from $36.3 million in Fiscal 1985 to 257.8 million in Fiscal 1996, to increase
net income from $0.7 million to $5.1 million over the same period and to
increase EBITDA from $2.6 million to $21.7 million over the same period. In the
1996 Transition Period, the Company had net sales of $196.8 million, net loss of
$2.2 million and EBITDA of $11.8 million.
On May 30, 1996, the Mill Joint Venture acquired the St. Joe Mill for
its strategic location and to fulfill a portion of the linerboard requirements
of the corrugated container facilities of the Mill Joint Venture Partners, each
of which has committed to purchase one-half of the St. Joe Mill's output. The
St. Joe Mill has two paper machines which are capable of producing approximately
500,000 tons of linerboard annually in a variety of grades and basis weights.
Since 1990, approximately $148.0 million has been spent for the maintenance and
modernization of the St. Joe Mill's plant, equipment and machinery and for
environmental compliance. The St. Joe Mill's operations will be managed
principally by personnel designated by Stone Container.
The Company was required to pay Florida Coast an additional $4.0
million for its 50% share of the linerboard produced by the St. Joe Mill during
the five-month period ended December 31, 1996. The Company recorded a loss on
joint venture contract of $1.7 million and utilized $2.3 of the Reserve during
the 1996 Transition Period.
Prior to the consummation of the Acquisition, both of the St. Joe
Mill's paper machines were shut down for maintenance and to reduce inventory,
from April 17, 1996 through May 6, 1996, and in December 1995 and January 1996,
one paper machine was shut down for the same reasons. Since the consummation of
the Acquisition, both of the St. Joe Mill's paper machines were shut down in
July 1996 for annual maintenance. Florida Coast has experienced a decline in
prices for linerboard as a result of increased capacity in the industry and
decreased demand for its products. Florida Coast has decided to shut down the
St. Joe Mill as of April 1, 1997 for an indefinite period of time until market
conditions warrant a resumption of production.
During the 1996 Transition Period, the Company experienced a decline in
prices for corrugating medium as a result of increased capacity in the industry
and decreased demand for such products. As a result of this decline in prices
and demand, the Company shut down the Ft. Madison Mill as of March 31, 1997 for
an indefinite period of time. Operations at the Ft. Madison Mill will resume
when market conditions warrant resumption of production. The Company will
satisfy its current obligations to third parties for corrugating medium from
other sources.
In December 1996, the Company changed its fiscal year end from July 31 to
December 31. This report includes the five month period from August 1, 1996 to
December 31, 1996 as a transitional period.
14
<PAGE>
Summary Sales Table
<TABLE>
<CAPTION>
Five Months Ended December 31, Fiscal Year Ended July 31,
------------------------------------- -------------------------------------------------------
1996 1995 1996 1995 1994
----------------- ----------------- ---------------- --------------- ----------------
(in millions)
Percent Percent Percent Percent Percent
of Net of Net of Net of Net of Net
Amount Sales Amount Sales Amount Sales Amount Sales Amount Sales
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ....................... $ 196.8 100.0% $ 95.6 100.0% $ 257.8 100.0% $ 272.0 100.0% $ 228.6 100.0%
Cost of goods sold .............. 171.3 87.0 81.1 84.8 222.1 86.2 232.2 85.4 205.0 89.7
Gross profit .................... 25.5 13.0 14.5 15.2 35.7 13.8 39.8 14.6 23.6 10.3
Selling, general and
administrative expenses .... 17.7 9.0 6.3 6.6 19.2 7.4 19.7 7.2 22.0 9.6
Income from operations .......... 7.8 4.0 8.2 8.6 16.5 6.4 20.1 7.4 1.6 0.7
Loss on joint venture
contract ................... 1.7 0.9 -- -- -- -- -- -- -- --
Other income .................... 0.4 0.9 -- -- -- -- 2.0 0.7 0.1 0.1
Interest expense ................ 10.1 5.1 1.6 1.7 7.6 2.9 5.6 2.1 5.5 2.4
------ ----- ----- ----- ------ ----- ------ ----- ------ -----
Income (loss) before provision
(benefit) for income taxes,
minority interest and
extraordinary gain on early
retirement of debt ........ (3.6) (1.8) 6.6 6.9 8.9 3.5 16.5 6.1 (3.8) (1.6)
Provision (benefit) for
income taxes ............... (1.5) (0.1) 3.0 3.1 3.8 1.5 5.5 2.0 (0.3) (0.1)
------ ----- ----- ----- ------ ----- ------ ----- ------ -----
Net income (loss) before
minority interest and
extraordinary gain on
early retirement of debt ... $ (2.1) (1.1)% $ 3.6 3.8% $ 5.1 2.0% $ 11.0 4.1% $ (3.5) (1.5)%
====== ===== ===== ===== ====== ===== ====== ===== ====== =====
</TABLE>
1996 Transition Period Compared to the Five Month Period Ended December 31, 1995
The Company's net sales increased $101.2 million, or 105.9%, to $196.8
million in the 1996 Transition Period compared to $95.6 million in the five
month period from August 1, 1995 to December 31, 1995 (the "1995 Period"). Net
sales for the Company's converting operations increased $110.3 million, or
137.4%, to $190.7 million in the 1996 Transition Period compared to $80.3
million in the 1995 Period primarily as a result of the Acquisition and the
MannKraft Acquisition which was partially offset by lower average selling prices
during the 1996 Transition Period. Net sales at the Ft. Madison Mill decreased
$9.2 million, or 60.0%, to $6.1 million in the 1996 Transition Period compared
to $15.3 million in the 1995 Period due to a 54.1% decrease in price per ton to
$262 in the 1996 Transition Period from $461 in the 1995 Period.
The Company's cost of goods sold as a percentage of net sales increased
to 87.0% for the 1996 Transition Period from 84.8% in the 1995 Period primarily
as a result of the decrease in sales price per ton incurred at the Ft. Madison
Mill which was partially offset by a decrease in cost of goods sold as a
percentage of net sales at the converting facilities. Cost of goods sold at the
Company's converting operations decreased as a percentage of net sales to 86.4%
in the 1996 Transition Period from 89.1% in the 1995 Period, whereas cost of
goods sold at the Ft. Madison Mill increased as a percentage of net sales to
105.7% in the 1996 Transition Period from 62.1% in the 1995 Period primarily as
a result of the 54.1% decrease in selling prices per ton.
Gross profit increased $11.0 million, or 75.9 %, to $25.5 million in
the 1996 Transition Period from $14.5 million in the 1995 Period primarily a
result of the Acquisition and the MannKraft Acquisition. As a percentage of net
sales, gross profit decreased to 13.0% in the 1996 Transition Period compared to
15.2% in the 1995 Period primarily as a result of the net loss incurred at the
Ft. Madison Mill. Gross profit as a percentage of net sales for the Company's
converting operations increased to 13.5% in the 1996 Transition Period compared
to 10.8% in the 1995 Period.
Selling, general and administrative expenses increased $11.4 million,
or 181.0%, to $17.7 million in the 1996 Transition Period from $6.3 million in
the 1995 Period, primarily as a result of the Acquisition and the MannKraft
Acquisition. Selling, general and administrative expenses as a percent of net
sales increased to 9.0% in the 1996 Transition Period from 6.6% in the 1995
Period. This increase is primarily a result of a decrease in paper prices.
15
<PAGE>
Loss on joint venture contract was $1.7 million in the 1996 Transition
Period.
Operating income decreased $0.4 million, or 4.9%, to $7.8 million in
the 1996 Transition Period from $8.2 million in the 1995 Period, primarily as a
result of a decrease in selling price per ton.
Interest expense was $10.1 million in the 1996 Transition Period
compared to $1.6 million in the 1995 Period. This increase is primarily a result
of the issuance of the Company's 12% Senior Secured Notes due 2006 in connection
with the Acquisition.
An income tax benefit of $1.5 million was recorded in the 1996
Transition Period as compared to a provision of $3.0 million in the 1995 Period.
This change is related to the decrease in income before taxes. The effective tax
rate in the 1996 Transition Period was 41.6% compared to 45.5% in the 1995
Period. This decrease was primarily due to a gain on the sale of one of the
Company's subsidiaries in the 1995 Period.
Fiscal 1996 Compared to Fiscal 1995
The Company's net sales decreased $14.2 million, or 5.2%, to $257.8
million in Fiscal 1996 compared to $272.0 million in the twelve month period
ended July 31, 1995 ("Fiscal 1995"). Net sales for the Company's converting
operations increased $39.9 million, or 20.4%, to $235.9 million in Fiscal 1996
compared to $196.0 million in Fiscal 1995 primarily as a result of the
Acquisition, which increased sales by $44.8 million, or 22.8%. This increase was
partially offset by the effect of the sale in August 1995 by the Companmy of its
equity interest in Timberline Packaging, Inc. ("Timberline"), a converting
facility which accounted for $1.2 million, or 0.5%, of net sales for Fiscal 1996
compared to $13.6 million, or 5.0%, for Fiscal 1995. Net sales at the Ft.
Madison Mill decreased $11.7 million, or 34.8%, to $21.9 million in Fiscal 1996
compared to $33.6 million in Fiscal 1995 due to a 16.1% decrease in price per
ton to $371.47 in Fiscal 1996 from $442.67 in Fiscal 1995. The Company's net
sales decreased by $42.4 million, or 15.6%, in Fiscal 1996 due to the spinoff of
Fonda in March 1995.
The Company's cost of goods sold as a percentage of net sales increased
to 86.2% for Fiscal 1996 from 85.4% in Fiscal 1995. Cost of goods sold at the
Company's converting operations increased as a percentage of net sales to 88.0%
in Fiscal 1996 from 87.6% in Fiscal 1995 primarily as a result of a shift in
product mix in Fiscal 1996. Cost of goods sold at the Ft. Madison Mill increased
as a percentage of net sales to 74.3% in Fiscal 1996 from 73.2% in Fiscal 1995
primarily as a result of a decrease in selling prices per ton.
Gross profit decreased $4.1 million, or 10.3%, to $35.7 million in
Fiscal 1996 from $39.8 million in Fiscal 1995. As a percentage of net sales,
gross profit decreased to 13.8% in Fiscal 1996 compared to 14.6% in Fiscal 1995.
Gross profit as a percentage of net sales for the Company's converting
operations decreased to 12.0% in Fiscal 1996 compared to 12.4% in Fiscal 1995.
Gross profit as a percentage of net sales for the Ft. Madison Mill increased to
25.7% in Fiscal 1996 compared to 26.8% in Fiscal 1995.
Selling, general and administrative expenses decreased $0.5 million, or
2.5%, to $19.2 million in Fiscal 1996 from $19.7 million in Fiscal 1995. The
decrease is primarily a result of the elimination of Fonda's expenses after
March 1995, partially offset by the addition of St. Joe expenses for June and
July 1996. Selling, general and administrative expenses as a percent of net
sales remained flat in Fiscal 1996 and Fiscal 1995.
Operating income decreased $3.6, or 31.9%, to $16.5 million in Fiscal
1996 from $20.1 million in Fiscal 1995, primarily as a result of the spin-off of
Fonda, the sale of the Company's interest in Timberline and a decrease in
selling price per ton.
Income taxes decreased $1.7 million to $3.8 million in Fiscal 1996
compared to $5.5 million in Fiscal 1995. This decrease in the provision for
income taxes is related to the decrease in income before taxes.
Fiscal 1995 Compared to Fiscal 1994
The Company's net sales increased $43.4 million, or 19.0%, to $272.0
million in Fiscal 1995 compared to $228.6 million in Fiscal 1994. Net sales for
the Company's converting operations increased $40.6 million, or 26.1%, to $196.0
million in Fiscal 1995 compared to $155.4 million in Fiscal 1994 primarily as a
result of an increase in average price per thousand square feet sold to $51.66
in Fiscal 1995 from $40.90 in Fiscal 1994 with volume remaining virtually flat
at 3,794 million square feet sold compared to 3,799 million square feet sold.
Net sales at the Ft. Madison Mill increased $22.3 million, or 197.3%, to $33.6
million in Fiscal 1995 compared to $11.3 million in Fiscal 1994 primarily as a
result of net sales in Fiscal 1994 reflecting only five full months of
16
<PAGE>
operations of the Ft. Madison Mill, which was acquired by the Company in January
1994, and by a 48.6% rise in the average price per ton sold of corrugating
medium to $442.67 in Fiscal 1995 from $297.98 in Fiscal 1994. Volume at the Ft.
Madison Mill increased to 75,872 tons sold in Fiscal 1995 from 38,029 tons sold
in Fiscal 1994. The increase in net sales from the Company's converting and mill
operations was partially offset by a decrease of $19.4 million, or 31.4%, in
Fonda's net sales to $42.4 million in Fiscal 1995 from $61.8 million in Fiscal
1994, resulting from the elimination of four months of operations following the
spin-off of Fonda in March 1995.
The Company's cost of goods sold as a percentage of net sales improved
to 85.4% in Fiscal 1995 compared to 89.7% in Fiscal 1994. Cost of goods sold as
a percentage of net sales at the Company's converting facilities improved to
87.1% in Fiscal 1995 compared to 91.2% in Fiscal 1994. This improvement was
primarily a result of a decrease in labor costs to 10.3% of net sales in Fiscal
1995 from 13.8% of net sales in Fiscal 1994 and reductions in other major
components of manufacturing costs as a percentage of net sales. Cost of goods
sold as a percentage of net sales at the Ft. Madison Mill improved to 73.2% in
Fiscal 1995 from 99.1% of net sales for the initial five months of ownership
ended July 31, 1994. The improved performance at the Ft. Madison Mill was
primarily a result of improved value-added margins which resulted from the 48.6%
increase in average price per ton sold of corrugating medium partially offset by
a 24.7% increase in raw material costs per ton sold. Manufacturing costs per ton
(excluding raw materials used at the Ft. Madison Mill) decreased to $169 per ton
in Fiscal 1995, or 1.7%, from $172 per ton sold in Fiscal 1994.
Gross profit increased $16.3 million, or 69.4%, to $39.8 million in
Fiscal 1995 from $23.5 million in Fiscal 1994, primarily as a result of the
reduction in the cost of goods sold as a percentage of net sales to 85.4% from
89.7% during this period. Gross profit as a percentage of net sales for the
Company's converting operations increased to 12.4% in Fiscal 1995 compared to
8.8% in Fiscal 1994. Gross profit as a percentage of net sales for the Ft.
Madison Mill improved to 26.8% in Fiscal 1995 compared to 0.9% in Fiscal 1994.
Selling, general and administrative expenses decreased $2.3 million, or
10.5%, to $19.7 million in Fiscal 1995 from $22.0 million in Fiscal 1994 due, in
part, to the elimination of Fonda's expenses subsequent to March 1995. Selling,
general and administrative expenses as a percentage of net sales were 7.2% in
Fiscal 1995 compared to 9.6% in Fiscal 1994. This decrease was primarily a
result of a reduction in certain selling, legal, insurance and other costs at
the Company's converting facilities.
Operating income increased $18.6 million to $20.1 million in Fiscal
1995 from $1.5 million in Fiscal 1994. This increase was attributable to a 26.1%
increase in net sales in the Company's converting operations and a 13.2%
improvement in value-added margin for the Company's converting operations, as
well as a reduction in overall selling, general and administrative expenses
primarily as a result of the exclusion of Fonda after March 1995.
Other income increased $1.8 million to $1.9 million in Fiscal 1995
compared to $0.1 million in Fiscal 1994. This increase was due to a gain on the
sale of the assets of the Company's fiber partitions division.
Income taxes increased $5.8 million to $5.5 million in Fiscal 1995
compared to a tax benefit in Fiscal 1994 of $0.3 million. This increase was
directly related to the change in income before taxes.
Liquidity and Capital Resources
Historically, the Company has relied on cash flows from operations and
bank borrowing to finance its working capital requirements and capital
expenditures.
Net cash used for operating activities was $3.9 million in the 1996
Transition Period compared to net cash provided by operating activities of $1.1
million in the 1995 Period. This decrease in cash flow was primarily a result of
the Company's reduction in earnings during the 1996 Transition Period. Net cash
provided by operating activities for Fiscal 1996 was $27.1 million compared to
net cash used for operating activities of $2.2 million for Fiscal 1995. Cash
provided by operating activities in Fiscal 1996 was driven by net income of $5.1
million for the period and a $14.1 million reduction in the level of accounts
receivable and inventory which was offset by a $7.1 million reduction in
accounts payable and accrued liabilities. Net cash used for operating activities
was $2.2 million for Fiscal 1995 compared to net cash provided by operating
activities of $4.8 million in Fiscal 1994. The period-to-period change was due
primarily to the net changes related to the exclusion of Fonda after March 1995.
Net cash used for investing activities was $4.7 million in the 1996
Transition Period compared to $0.2 million in the 1995 Period. This increase was
due principally to capital expenditures and the Company's investment in
MannKraft, which was partially
17
<PAGE>
offset by the receipt of the final purchase price adjustment by St. Joe in
connection with the Acquisition and the sale of certain assets located at the
Flint, Michigan facility. Net cash used for investing activities was $166.6
million for Fiscal 1996 compared to $2.0 million for Fiscal 1995. This increase
was principally the result of the financing raised for the Acquisition and an
increase in capital expenditures. The Company's net cash used for investing
activities decreased to $2.0 million in Fiscal 1995 compared to $9.1 million for
Fiscal 1994. The decrease was principally the result of the acquisition by the
Company in January 1994 of three converting facilities and the Ft. Madison Mill
for $5.3 million (the "CPC Acquisition").
Net cash provided by financing activities was $10.3 million in the 1996
Transition Period compared to net cash used for financing activities of $1.0
million in the 1995 Period. This increase was due primarily to borrowings by the
Company pursuant to the Credit Facility which were used to fund capital
expenditures and working capital needs. This increase was partially offset by
the prepayment of certain long-term debt. Net cash provided by financing
activities was $139.2 million in Fiscal 1996 compared to net cash provided by
financing activities of $3.5 million in Fiscal 1995. The increase was primarily
a result of the net proceeds received from the sale of the Company's 12% Series
A Senior Secured Notes due 2006 (the "Notes") and borrowings under the Company's
Credit Facility. In Fiscal 1996 net cash provided by financing activities was
used to repay $16.1 million under a credit facility, $10.0 million of term
loans, $2.1 million of subordinated debt and the balance for other debt.
Capital expenditures for the 1996 Transition Period were $6.7 million
compared to $1.4 million in the 1995 Period. Capital expenditures for Fiscal
1996 were $8.6 million compared to $3.7 million for Fiscal 1995. These increases
were primarily a result of equipment purchases for and rehabilitation of certain
property at a facility in Vernon, California.
The Company has implemented a target capital expenditure program with
annual capital expenditures totaling approximately $17.0 million for 1997. The
Company intends to finance capital expenditures primarily through operating cash
flow.
On May 30, 1996, the Company established a Credit Facility which will
mature in 2001. The Credit Facility provides total borrowing of up to $80.0
million on a revolving basis, subject to borrowing base limitations, to finance
the Company's working capital needs. Unused borrowing base availability must be
at least $5.0 million. On December 31, 1996, the Company had unused borrowing
capacity of approximately $30.6 million under the Credit Facility. Pursuant to
the Credit Facility, the Company is subject to certain affirmative and negative
covenants customarily found in agreements of this type, including, without
limitation, covenants that restrict, subject to specified exceptions (i)
mergers, consolidations, asset sales or changes in capital structure, (ii)
creation or acquisition of subsidiaries, (iii) purchase or redemption of the
Company's capital stock or declaration or payment of dividends or distributions
on such capital stock, (iv) incurrence of additional indebtedness, (v)
investment activities, (vi) capital expenditures, (vii) granting or incurrence
of liens to secure other indebtedness, (viii) prepayment or modification of the
terms of subordinated indebtedness and (ix) transactions with affiliates. In
addition, the Credit Facility requires that the Company maintain certain
specified financial covenants, including, without limitation, a minimum tangible
net worth, a minimum interest coverage ratio, a maximum funded debt to EBITDA
ratio and a minimum fixed charge coverage ratio. At December 31, 1996, the
Company was in violation of two of its financial covenants for which waivers
were obtained. On February 28, 1997, the Credit Facility was amended and
Florida, L.P. was made an additional borrower thereunder. The sole general
partner of Florida, L.P. is Four M Manufacturing Group of Georgia, Inc., one of
the guarantors of the Notes.
In addition, the Company will provide, if needed, the Mill Joint
Venture with up to $10.0 million of subordinated indebtedness on a revolving
credit basis (the "Subordinated Credit Facility"). At December 2, 1996, the Mill
Joint Venture drew down on the Subordinated Credit Facility in the amount of
$2.0 million ($1.0 million of which was funded by the Company) to supplement its
cash flow in order to meet its 1996 debt service requirements. The Mill Joint
Venture currently has availability of $10.0 million from each Joint Venture
Partner under the Subordinated Credit Facility.
On May 30, 1996 (i) the Company acquired substantially all of the
assets of St. Joe Container and (ii) the Company and Stone Container through the
Mill Joint Venture acquired the St. Joe Mill. The purchase price for the St. Joe
Container facilities was $87.8 million for the fixed assets, plus approximately
$69.7 million for working capital, for a total purchase price of $157.5 million,
subject to adjustment for changes in working capital. The purchase price for the
St. Joe Mill was $185.0 million for the fixed assets, plus approximately $17.4
million for working capital, for a total purchase price of $202.4 million,
subject to adjustment for changes in working capital. In July 1996, the Company
and Florida Coast received monies as purchase price adjustments. Approximately
$13.8 million was paid to the Company. In December 1996, St. Joe paid
approximately $5.2 million as final payment for the purchase price adjustment.
The Company acquired a 50% equity interest in the Mill Joint Venture for $5.0
million. The Acquisition was funded by the sale of the Notes and borrowings
under the Credit Facility.
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<PAGE>
Pursuant to the Output Purchase Agreement, the Company was required to
pay Florida Coast an additional $4.0 million for its share of the linerboard
produced by the St. Joe Mill during the six-month period ended December 31,
1996. The Company recorded a loss on joint venture contract of $1.7 million and
utilized $2.3 of the Reserve during the 1996 Transition Period.
Although there can be no assurance, the Company believes that cash
generated by operations together with amounts available under the Credit
Facility, will be sufficient to meet its capital expenditure needs, debt service
requirements and working capital needs for the next twelve months.
Impact of Inflation
A period of rising prices will affect the Company's cost of production
and, in particular, the Company's raw material costs. Since the Company's
business is a margin business, the impact of increased costs on the Company will
depend upon the Company's ability to pass on such costs to its customers. The
Company is typically able to pass on a significant portion of its increased raw
material costs in a timely fashion. From time to time, however, there is a lag
in passing on price adjustments which creates a temporary margin contraction in
a rising price environment. Historically, the Company has been able to recover
fully from the impact of rising prices over a short period of time.
Environmental Matters
The Company's operations are subject to environmental regulation by
federal, state and local authorities in the United States. The Company believes
that it is in substantial compliance with current federal, state and local
environmental regulation. Unreimbursed liabilities arising from environmental
claims, if significant, could have a material adverse effect on the Company's
results of operations and financial condition. Furthermore, actions by federal,
state and local governments concerning environmental matters could result in
laws or regulations that could increase the cost of compliance with
environmental laws and regulations.
In November 1993, the EPA announced proposed regulations, known as the
"cluster rules," that would require more stringent controls on air and water
discharges from pulp and paper mills under the Clean Water Act and the Clean Air
Act. Pulp and paper manufacturers have submitted extensive comments to the EPA
on the proposed cluster rules in support of the position that requirements under
the proposed regulations are unnecessarily complex, burdensome and
environmentally unjustified. It cannot be predicted at this time whether the EPA
will modify the requirements in the final regulations. Based on information
presently available from the EPA, it is expected that the EPA will promulgate
the final cluster rules in 1997. In addition, the Company anticipates that the
earliest time for industry compliance with certain aspects of the regulations
should not be prior to the last quarter of 1997, and that compliance with the
remaining elements will be required by the end of 1999. The Company
estimates that these regulations, if adopted as currently proposed, would
require capital expenditures of approximately $1.5 million to $2.0 million by
the Company with respect to the Ft. Madison Mill. The ultimate financial impact
of the proposed regulations on the Company will depend on the nature of the
final regulations, the timing of required implementation and the cost and
availability of new technology.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and notes thereto are presented
under item 14 of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
19
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
Name Age Position
Dennis Mehiel 55 Chairman, Chief Executive Officer and Director
Chris Mehiel 57 Executive Vice President, Chief Operating
Officer and Director
Timothy D. McMillin 54 Senior Vice President, Chief
Financial Officer and Director
Gerald K. Adams 43 Chief Executive Officer of Box USA Group, Inc.
Harvey L. Friedman 55 Corporate Secretary and General Counsel
Howard Brainin 67 Regional Vice President
Lawrence A. Bishop 52 Director
Samuel B. Guren 50 Director
Thomas Uleau 52 Director
James Armenakis 53 Director
John Nevin 62 Director
Dennis Mehiel, a co-founder of the Company, has been the Chairman and
Chief Executive Officer of the Company, except during a leave of absence from
April 1994 through July 1995, since 1977. He was also the Chief Executive
Officer of the Company's subsidiary, Box USA Group, Inc., until June 1996. He is
also the Chairman of the Executive Committee of the Company's Board of
Directors. Mr. Mehiel is also the Chairman of Fonda and the MannKraft
Corporation, a corrugated container manufacturer ("MannKraft").
Chris Mehiel, the brother of Dennis Mehiel, is a co-founder of the
Company and has been Executive Vice President, Chief Operating Officer and a
Director of the Company since September 1995. Mr. Mehiel was President of Fibre
Marketing Group, Inc., a waste paper recovery business which he co-founded, from
1994 to January 1996. He is the President of the managing member of Fibre
Marketing Group, LLC, the successor to Fibre Marketing Group, Inc. From 1993 to
1994, Mr. Mehiel served as President and Chief Operating Officer of MannKraft
Corporation, a corrugated container manufacturer affiliated with the Company.
From 1982 to 1992, Mr. Mehiel served as the President and Chief Operating
Officer of Specialty Industries, Inc., a waste paper processing and container
manufacturing company.
Timothy D. McMillin has been a Director of the Company since 1983 and
Senior Vice President and Chief Financial Officer since September 1995. From
November 1994 to September 1995, he was Chairman of Executive Advisors, Inc., a
consulting firm specializing in financial restructuring. From 1991 to 1994, Mr.
McMillin was an independent strategic and financial consultant. Mr. McMillin
spent over 25 years in the financial services industry and served in various
capacities, including Executive Vice President, at Maryland National Bank, from
1965 to 1990. Mr. McMillin is a Director of EIL Instruments, Inc., a
manufacturer and distributor of testing, measurement and energy control systems.
Mr. McMillin is a member of the Audit Committee of the Company's Board of
Directors.
Gerald K. Adams became Chief Executive Officer of the Company's
subsidiary, Box USA Group, Inc., in June 1996. From March 1992 to March 1996, he
was Chief Executive Officer of Amcor Fibre Packaging Group, a corrugated
packaging company and a division of Amcor, Ltd. From March 1988 until March
1992, Mr. Adams was the General Manager of Australian Paper, a folding
cartonboard producer and a division of Amcor, Ltd.
Harvey L. Friedman has been General Counsel since 1991 and Corporate
Secretary since May 1996. He was a Director of the Company from 1985 to May
1996. He was formerly a partner in Kramer, Levin, Naftalis & Frankel, a New York
City law firm.
Howard Brainin became Regional Vice President of Box USA Group, Inc. in
May 1996. From March 1992 until May 1996, Mr. Brainin was a Vice President and a
Director of St. Joe Paper and the President of St. Joe Container. From December
1981 to March 1992, Mr. Brainin was a Regional Vice President of St. Joe
Container.
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<PAGE>
Lawrence A. Bishop has been a Director of the Company since November
1985. He has held various positions since 1980 at Gray, Seifert and Co., Inc., a
registered investment advisor that provides money management services to
individuals and institutions, and currently holds the title of Executive Vice
President. From 1972 to 1979, he was a Vice President of Bessemer Trust Company,
N.A. Mr. Bishop is a Director of Synergistics, Inc. and Unapix Entertainment,
Inc. Mr. Bishop is Chairman of the Compensation/Stock Appreciation Rights
Committee and a member of the Executive Committee and Audit Committee of the
Company's Board of Directors. Mr. Bishop is also a Director of Fonda.
Samuel B. Guren has been a Director of the Company since 1987. He is a
Managing Director of Baird Capital Partners, a private equity fund. He is also
co-founder and Managing Partner since 1982 of William Blair Venture Management
Company, the general partner of three private equity funds. Mr. Guren was a Vice
President at Continental Illinois Corporation from 1974 to 1981. Mr. Guren is
Chairman of the Audit Committee of the Company's Board of Directors. Mr. Guren
is also a Director of Fonda and Maus Bros. Jewelers Inc.
Thomas Uleau has been the President of Fonda since January 1997, the
Chief Operating Officer of Fonda since March 1995, a Director of Fonda since
1988 and a Director of the Company since May 1989. Mr. Uleau was Executive Vice
President and Chief Financial Officer of the Company from 1989 through March
1994. He served as President of Cardinal Container Corporation (which was
acquired by the Company in 1985) from 1983 to 1986. Mr. Uleau started his career
as an accountant at Deloitte, Haskins and Sells from 1969 to 1972, after which
he spent several years in various capacities at IU International, a
transportation and paper products conglomerate. Mr. Uleau is a Director and
Chief Operating Officer of Creative Expressions Group, Inc., a company owned 97%
by Dennis Mehiel and 3% by Mr. Uleau.
James Armenakis has been a Director of the Company since May 1996. He
has been a partner in Armenakis & Armenakis, a New York City law firm, since
1990.
John Nevin has been a Director of the Company since May 1996. He has
been an Executive Vice President at Fieldcrest Cannon, Inc. since October 1995.
From September 1990 to October 1995 he was a Senior Vice President at James
River Corporation. From 1957 to 1990, Mr. Nevin served in various capacities at
International Paper Company, including Vice President and Group Executive of the
Pulp and Coated Papers Businesses.
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<PAGE>
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned, whether paid or
deferred, to the Company's Chief Executive Officer and its other four most
highly compensated executive officers during the 1996 Transition Period
(collectively, the "Named Executive Officers") for services rendered in all
capacities to the Company for the 1996 Transition Period and Fiscal 1994, 1995,
and 1996:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Long-Term
Compensation(1) Compensation
---------------------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Option/SARs Compensation
--------------------------- ---- ------ ----- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Dennis Mehiel................. 1996 Transition Period $229,167 $ 39,200 - - -
Chairman of the Board of 1996 369,166 173,131 31,574(2) - 101,412(3)
Directors and Chief 1995 333,044 375,000 38,904(2) - 137,448(3)
Executive Officer 1994 373,641 - 16,462(2) - 87,287(3)
Chris Mehiel.................. 1996 Transition Period $115,000 - - - -
Executive Vice President and 1996 167,333(4) 60,000 - - -
Chief Operating Officer 1995 24,000 - - - -
1994 144,000 - - - -
Gerald K. Adams............... 1996 Transition Period $114,583 - 2,083(6) - -
Chief Executive Officer of 1996 31,445(5) - 500(6) - -
Box USA Group, Inc. 1995 - - - - -
1994 - - - - -
Timothy D. McMillin........... 1996 Transition Period $ 83,333 - 434(7)
Senior Vice President 1996 154,542(4) 40,000 1,250(7) - -
and Chief Financial Officer 1995 - - - - -
1994 - - - - -
Howard Brainin................ 1996 Transition Period $83,333 $20,833 - - -
Regional Vice President of 1996 33,333(8) 38,000 - - -
Box USA Group, Inc. 1995 - - - - -
1994 - - - - -
</TABLE>
- -----------------------------
(1) Unless otherwise indicated, the Named Executive Officers did not receive
any annual compensation, stock options, restricted stock awards, SARs,
long-term incentive plan payments or any perquisites or other personal
benefits that exceeded the lesser of $50,000 or 10% of the salary and bonus
for such officer during the 1996 Transition Period or Fiscal 1996, 1995 and
1994.
(2) Includes imputed interest from non-interest bearing loans provided to
Dennis Mehiel by the Company in Fiscal 1996, 1995 and 1994.
(3) Consists of split-dollar term life insurance premiums for Mr. Mehiel paid
by the Company.
(4) Consists of salary for employment commencing in September 1995.
(5) Consists of salary for employment commencing on June 24, 1996.
(6) Represents imputed interest from non-interest bearing loan provided to Mr.
Adams by the Company.
(7) Represents imputed interest from non-interest bearing loan provided to Mr.
McMillin by the Company.
(8) Consists of salary for employment commencing on May 31, 1996.
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<PAGE>
Compensation of Directors
Any Director who is not an employee of the Company receives annual
compensation of (i) $12,000 (provided such director attends five meetings per
year), (ii) a fee of $1,000 for attendance at each meeting of the Board of
Directors or any committee thereof and (iii) 1,000 SARs. Directors who are
employees of the Company do not receive any compensation or fees for service on
the Board of Directors.
Stock Appreciation Rights
Timothy D. McMillan and Chris Mehiel received grants of stock
appreciation rights ("SARs") in the amount of 17,000 and 20,000, respectively,
during the 1996 Transition Period.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 1996 with
respect to the beneficial ownership of shares of Common Stock:
Percentage of
Amount of Beneficial Beneficial Ownership
Ownership of Shares of Shares
Name of Common Stock of Common Stock
- ---- --------------- ---------------
Dennis Mehiel...... 6,815,867 100%
Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Dennis Mehiel, Chairman and Chief Executive Officer of the Company, is an
owner, directly or indirectly, of entities from which the Company rents certain
property, plant and equipment. Rental expense incurred and paid to these
entities in the 1996 Transition Period, Fiscal 1996, Fiscal 1995 and Fiscal 1994
amounted to approximately $0.4 million, $1.0 million, $0.9 million, and $1.1
million, respectively. The Company believes that such rents were not in excess
of market levels. The partition plant located in Jacksonville, Florida is
currently leased by Fonda from Mr. Mehiel, and a portion of the facility is
subleased to the Company. In addition, the Company is selling products to this
partition plant on terms no more favorable than those given to unaffiliated
third parties.
Dennis Mehiel has been a part owner since 1993 of MannKraft, to which the
Company sold approximately $1,351,000 million and $3,300,000 million of material
in Fiscal 1996 and Fiscal 1994, respectively. The Company believes that the
prices at which such sales were made are not below market levels. There were no
material sales to MannKraft in Fiscal 1995.
In March 1995, the Company spun off its Fonda subsidiary to Dennis Mehiel.
The Company sold approximately $1.1 million and $.06 million of material to
Fonda in Fiscal 1995 and Fiscal 1994, respectively. The Company believes that
the prices at which such sales were made are not below market levels.
Chris Mehiel, Chief Operating Officer of the Company has been a part owner
since 1994 of Fibre Marketing, to which the Company sold approximately $3.1
million, $2.0 million and $3.4 million of material in the 1996 Transition
period, Fiscal 1996 and Fiscal 1995, respectively. The Company believes that the
prices at which such sales were made are not below market levels. There were no
material sales to Fibre Marketing in Fiscal 1994.
The Company has outstanding notes and loan receivables from Gerald Adams and
Timothy McMillin in the amount of $100,000 and $25,000, respectively, at the end
of Fiscal 1996 which are non-interest bearing and are due on June 30, 1999 and
on demand, respectively. The Company had outstanding notes and loans receivables
from Dennis Mehiel in the amount of $0.8 million and $1.5 million at the end of
Fiscal 1996 and Fiscal 1995, respectively, all of which have been paid and were
non-interest bearing. Of these amounts, approximately $0.8 million and $0.7
million, at the end of Fiscal 1996 and Fiscal 1995, respectively, relate to the
cumulative premiums on life insurance policies paid by the Company on behalf of
Mr. Mehiel.
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<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules:
Index to Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996, July 31, 1996 and 1995
Consolidated Statements of Operations for the five months ended
December 31, 1996, the years ended July 31, 1996, 1995 and 1994
Consolidated Statements of Stockholder's Equity for the five months
ended December 31, 1996, the years ended July 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the five months ended
December 31, 1996, the years ended July 31, 1996, 1995 and 1994 Notes to
Consolidated Financial Statements
The Financial Statements for the period from May 30, 1996 to December 31,
1996, together with the Independent Auditors' Report for Florida Coast and the
Financial Statements for the period from January 1, 1996 to May 30, 1996,
together with the Independent Auditors' Report for St. Joe Forest Products
Company - Linerboard Mill Operations included in the Florida Coast 10-K as filed
with the SEC on March 31, 1997 are incorporated herein by reference.
(b) Exhibits:
Exhibits 2.1 through 10.6 and Exhibit 21.1, are incorporated herein by
reference to the exhibit with the corresponding number filed as part of the
Company's Registration Statement on Form S-4 filed on July 12, 1996, and all
amendments thereto (File No. 333-8043).
Exhibit
Number Description of Exhibit
- ------ ----------------------
2.1 Asset Purchase Agreement, dated as of November 1, 1995, among Four M
Corporation (the "Company"), St. Joe Forest Products Company, St. Joe
Container Company, St. Joe Paper Company and Florida Coast Paper
Company, L.L.C. ("Florida Coast").
3.1 Certificate of Incorporation of the Company.
3.2 Certificate of Incorporation of Box USA Group, Inc.
3.3 Certificate of Incorporation of Four M Paper Corporation.
3.4 Certificate of Incorporation of Page Packaging Corporation.
3.5 Certificate of Incorporation of Box USA, Inc.
3.6 Certificate of Incorporation of Four M Manufacturing Group of Georgia,
Inc.
3.7 By-laws of the Company.
3.8 By-laws of Box USA Group, Inc.
3.9 By-laws of Four M Paper Corporation.
3.10 By-laws of Page Packaging Corporation.
3.11 By-laws of Box USA, Inc.
3.12 By-laws of Four M Manufacturing Group of Georgia, Inc.
4.1 Indenture, dated as of May 30, 1996, between the Company and Norwest
Bank Minnesota, National Association (the "Trustee").
4.2 Form of 12% Series A and Series B Senior Secured Notes,
dated as of May 30, 1996 (incorporated by reference to
Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of May 30, 1996, among
24
<PAGE>
the Company, the Guarantors and Bear, Stearns & Co. Inc. (the "Initial
Purchaser").
4.4 Security Agreement, dated as of May 30, 1996, between the Company and the
Trustee.
4.5 Subsidiary Security Agreement, dated as of May 30, 1996, among the
Guarantors and the Trustee.
4.6 Contribution Agreement, dated as of May 30, 1996, among the Company, the
Guarantors and the Trustee.
4.7 Drop Down Notes, dated as of May 30, 1996, executed by each of the
Guarantors.
4.8 Drop Down Note Security Agreement, dated as of May 30, 1996, among the
Guarantors and the Company.
4.9 Guaranty, dated as of May 30, 1996, among the Guarantors and
the Trustee.
4.10 Form of Company Pledge Agreement, dated as of May 30, 1996, between the
Company and the Trustee.
4.11 Form of Subsidiary Pledge Agreement, dated as of May 30, 1996, among the
Guarantors and the Trustee.
4.12 Warrant Agreement, dated as of May 30, 1996, between the Company and the
Initial Purchaser.
10.1 Output Purchase Agreement, dated as of May 30, 1996, among
the Company, Florida Coast and Stone Container Corporation
("Stone").
10.2 Financing and Security Agreement, dated as of May 30, 1996, among the
Company, the Guarantors, NationsBank, N.A. ("NationsBank"), the financial
institutions named therein (together with NationsBank, the "Lenders"), and
NationsBank, as agent (NationsBank, in such capacity, the "Agent").
10.3 Subordinated Credit Agreement, dated as of May 30, 1996, among the
Company, Florida Coast and Stone.
10.4 Environmental Indemnity Agreement, dated as of May 30, 1996, between the
Company and Florida Coast.
10.5 Stock Appreciation Unit Plan of the Company, dated as of
August 1, 1992, and Amendment No. 1 thereto, dated as of
August 1, 1995.
10.6 Subordination, Nondisturbance and Attornment Agreement, dated as of May
30, 1996, between Norwest Bank Minnesota, National Association, and Box
USA Group, Inc.
10.7 First Amendment to Financing and Security Agreement and Additional
Borrower Joinder Supplement, dated as of February 28, 1997, among the
Company, the Guarantors, the Lenders, the Agent and Box USA of Florida,
L.P.
12.1 Statement re computation of ratios.
21.1 Subsidiaries of the registrant.
27.1 Financial Data Schedule.
99.1 The Financial Statements for the period from May 30, 1996 to December 1,
1996, together with the Independent Accountants' Report for Florida Coast
and the Financial Statements for the period from January 1, 1996 to May
30, 1996 and the two years ended December 31, 1995 and 1994 together with
the Independent Auditors' Report for St. Joe Forest Products Company -
Linerboard Mill Operations included in the Florida Coast 10-K as filed
with SEC on March 31, 1997.
25
<PAGE>
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on December 19, 1996
regarding the change of the Company's fiscal year end from July 31 to
December 31.
A report on Form 8-K was filed by the Company on March 14, 1997 regarding
the shut down of the Company's Ft. Madison Mill.
26
<PAGE>
Four M Corporation
and Subsidiaries
d/b/a Box USA
Financial Statements
For the five months ended December 31, 1996 and
the years ended July 31, 1996, 1995 and 1994
1
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Contents
Report of Independent Certified Public Accountants 3
Consolidated financial statements:
Balance sheets 4
Statements of operations 5
Statements of stockholder's equity 6
Statements of cash flows 7
Notes to consolidated financial statements 8-29
2
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholder
Four M Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Four M
Corporation and subsidiaries (the "Company") as of December 31, 1996, July 31,
1996 and 1995 and the related consolidated statements of operations,
stockholder's equity and cash flows for the five month period ended December 31,
1996 and each of the three years in the period ended July 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1996, July 31, 1996 and 1995 and the results of their operations
and their cash flows for the five month period ended December 31, 1996 and each
of the three years in the period ended July 31, 1996, in conformity with
generally accepted accounting principles.
Valhalla, NY
March 18, 1997
3
<PAGE>
<TABLE>
<CAPTION>
Four M Corporation and Subsidiaries
d/b/a Box USA
Consolidated Balance Sheets
(In Thousands, except per share data)
December 31, July 31, July 31,
1996 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Assets
Current:
<S> <C> <C> <C>
Cash and cash equivalents $ 2,431 $ 811 $ 1,226
Accounts receivable, less allowance for doubtful
accounts of $1,621, $1,909 and $1,778, respectively
(Note 12) 52,775 43,193 22,867
Inventories (Notes 10 and 12) 32,896 32,732 15,110
Deferred income taxes (Note 14) 12,661 10,241 2,001
Notes, advances and other receivables 3,863 1,433 1,452
Income taxes recoverable 4,207 -- --
----- -------- -------
Total current assets 108,833 88,410 42,656
Property, plant and equipment, net (Notes 11 and 12) 173,333 157,973 27,044
Goodwill and other intangibles, net of accumulated
amortization of $880, $763 and $546, respectively
(Note 6) 4,678 933 1,007
Other assets (Notes 2 and 17) 16,801 16,493 2,430
------ ------ -----
$303,645 $263,809 $73,137
======== ======== =======
-------
Liabilities and Stockholder's Equity
Current:
Accounts payable and accrued liabilities (Note 3) $ 60,537 $48,380 $24,703
Current maturities of long-term debt and subordinated
debt (Note 12 and 13) 2,447 2,440 3,449
----- ----- -----
Total current liabilities 62,984 50,820 28,152
Long-term debt (Note 12) 208,777 187,092 29,918
Subordinated debt (Note 13) 1,914 -- 1,080
Deferred income taxes (Note 14) 14,486 10,390 3,663
Minority interest (Note 15) 1,584 -- 326
Other liabilities 1,712 1,145 1,349
----- ----- -----
Total liabilities 291,457 249,447 64,488
------- ------- ------
Commitments and contingencies (Note 8,9, 16 and 18)
Stockholder's equity
Common stock, $.125 par value, 10,000,000 shares
authorized; 7,229,770 shares issued and 6,815,867
outstanding 904 904 904
Additional paid-in capital 717 717 117
Retained earnings 11,529 13,703 8,590
------ ------ -----
13,150 15,324 9,611
Less: treasury stock, at cost (413,903) shares 962 962 962
--- --- ---
Total stockholder's equity 12,188 14,362 8,649
------ ------ -----
$303,645 $263,809 $73,137
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Four M Corporation and Subsidiaries
d/b/a Box USA
Consolidated Statements of Operations
(In Thousands)
Five Months
Ended Years ended July 31,
December 31, -------------------------------------------------------------
1996 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $196,787 $257,817 $271,994 $228,563
Cost of goods sold 171,304 222,105 232,154 205,025
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 25,483 35,712 39,840 23,538
Selling, general and administrative
expenses 17,707 19,217 19,703 22,018
- -----------------------------------------------------------------------------------------------------------------------------------
Income from operations 7,776 16,495 20,137 1,520
Other income (expense):
Interest expense (10,106) (7,565) (5,607) (5,448)
Loss on joint venture contract (Notes 6
and 9) (1,668) - - -
Gain on sale of assets and other (Note 6) 425 - 1,927 126
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes, minority interest,
cumulative effect of change in
method of accounting and extraordinary
gain on early retirement of debt (3,573) 8,930 16,457 (3,802)
Provision (benefit) for income taxes
(Note 14) (1,486) 3,817 5,483 (325)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest,
cumulative effect of change in method of
accounting and extraordinary gain
on early retirement of debt (2,087) 5,113 10,974 (3,477)
Minority interest (Note 15) (87) - (146) (180)
Cumulative effect of change in method of
accounting for taxes on income
(Note 14) - - - 381
Extraordinary gain on early retirement of
debt (Notes 12 and 13) - - 2,219 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (2,174) $ 5,113 $ 13,047 $ (3,276)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
Four M Corporation and Subsidiaries
d/b/a Box USA
Consolidated Statements of Stockholder's Equity
(In Thousands)
Common Common Additional
Stock Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, August 1, 1993 7,230 $904 $117 $ 4,495 $962 $ 4,554
Net loss - - - (3,276) - (3,276)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1994 7,230 904 117 1,219 962 1,278
Net income - - - 13,047 - 13,047
Distribution (Note 6) - - - (5,676) - (5,676)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1995 7,230 904 117 8,590 962 8,649
Net income - - - 5,113 - 5,113
Warrant issuance (Note 6) - - 600 - - 600
- ------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1996 7,230 904 717 13,703 962 14,362
Net loss - - - (2,174) - (2,174)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 7,230 $904 $717 $11,529 $962 $12,188
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
Four M Corporation and Subsidiaries
d/b/a Box USA
Consolidated Statements of Cash Flows
(Note 4) (In Thousands)
Five Months
Ended Years ended July 31,
December 31, ----------------------------------------------
1996 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income (loss) $ (2,174) $ 5,113 $13,047 $(3,276)
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization 5,287 5,182 5,245 5,276
Allowance for doubtful accounts 583 (290) 467 678
Non-cash interest expense - - 499 1,123
Gain on sale/closure of subsidiary - (166) (1,618) -
Gain on exchange of stock for debt - - (2,393) (381)
Deferred income taxes 1,578 (1,506) (312) (600)
Loss (gain) on sale of fixed assets (480) 246 32 (830)
Change in assets and liabilities, net of effect of acquisitions
and disposals:
Accounts, advances, notes and other receivables (3,151) 2,218 (4,273) (5,061)
Income taxes recoverable (4,027) - - -
Inventories 1,025 12,296 (10,594) (1,194)
Other assets, net of other liabilities (3,338) (512) 275 (387)
Accounts payable and accrued liabilities 767 4,479 (2,592) 9,446
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating
activities (3,930) 27,060 (2,217) 4,794
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (6,721) (8,612) (3,690) (3,916)
Proceeds from sale of subsidiaries - 898 1,618 1,401
Proceeds from sale or exchange of fixed assets 2,300 679 397 174
Payment for acquisition, net of cash acquired - - - (6,601)
Investment in MannKraft, net of cash acquired (5,500) - - -
Purchase of net assets of St. Joe Container - (159,168) - -
Recovery of purchase price from St. Joe Container 5,214 - - -
Payment related to subsidiary spin-off, net of common stock
sold - - (300) -
Loans made to employees, net of payment - (439) - (184)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (4,707) (166,642) (1,975) (9,126)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from bond issuance - 170,000 - -
Financing costs - (8,798) - -
Borrowings under revolving credit agreements 94,200 14,419 - 3,428
Repayments under revolving credit agreements (79,223) (22,953) - -
Secured term, mortgage, equipment and other borrowings 8,534 380 8,914 7,172
Repayment of long-term debt (13,254) (13,881) (5,396) (5,418)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,257 139,167 3,518 5,182
Increase (decrease) in cash and cash equivalents 1,620 (415) (674) 850
Cash and cash equivalents, beginning of period 811 1,226 1,900 1,050
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,431 $ 811 $ 1,226 $ 1,900
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
1. Summary of Business
Significant Accounting
Policies
Four M Corporation and subsidiaries
("Four M" or the "Company") are
manufacturers of corrugated packaging
and semi-chemical corrugating medium and
prior to the distribution of The Fonda
Group, Inc. ("Fonda") (See Note 6),
paper cups and plates. The Company uses
the trade name Box USA to conduct the
bulk of its business activities.
Four M has no assets or independent
business operations other than its
ownership interest in its subsidiaries.
Principles of Consolidation
The consolidated financial statements
include the accounts of Four M
Corporation and all of its subsidiaries.
All of the common stock of Four M is
owned by its Chairman of the Board and
Chief Executive Officer, Dennis Mehiel
(the "Stockholder"). Intercompany
accounts and transactions have been
eliminated.
The Company has certain investments of
50% which are accounted for under the
equity method.
Inventories
Inventories are valued at the lower of
cost (first-in, first-out) or market.
Property, Plant and Equipment
Property, plant and equipment are stated
at cost, less accumulated depreciation.
Depreciation is based on estimated
useful lives of the assets and is
provided using the straight-line method.
For income tax purposes, statutory
accelerated methods of depreciation are
used.
Goodwill and Other Intangibles
Goodwill and other intangibles
principally relate to the excess of the
purchase price of certain acquisitions
over the fair value of the net assets
acquired and are being amortized over
their estimated useful lives, which
range from 10 to 20 years, using the
straight-line method.
Revenue Recognition
Revenue is recognized when products are
shipped.
8
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
Income Taxes
Deferred taxes are provided on the
differences between the basis of assets
and liabilities for financial reporting
and income tax purposes using the
statutory rates enacted for future
periods.
The Company files a consolidated federal
tax return with all of its subsidiaries
except MannKraft (see Note 6) and Box
USA of Florida, L.P., a 51% owned joint
venture. State income tax returns are
filed separately.
Cash and Cash Equivalents
The Company considers all highly liquid
debt instruments purchased with an
original maturity of three months or
less to be cash equivalents.
Reclassifications
Certain prior year balances have been
reclassified to conform with the
December 31, 1996 presentation.
Estimates
The preparation of financial statements
in conformity with generally accepted
accounting principles requires
management to make estimates and
assumptions that affect the reported
amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
Long-lived Assets
As prescribed in Statement of Financial
Accounting Standards No. 121,
"Accounting for the Impairment of
Long-lived Assets and for Long-lived
Assets to be Disposed Of," long-lived
assets are required to be adjusted to
net realizable value if, in the opinion
of management, there is a permanent
diminution in value. The adoption of
this pronouncement in 1996 did not have
a significant impact on the Company's
financial statements. The Company
assesses recoverability based upon
estimated undiscounted future cash flows
from the related assets.
9
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments
The carrying value of financial
instruments including cash, accounts
receivable, advances and other
receivables and accounts payable
approximate fair value because of the
relatively short maturities of these
instruments. The carrying value of
long-term debt, including the current
portion and subordinated debt,
approximate fair value based upon market
rates for similar instruments.
2. Other Assets Other assets at December 31, 1996 and
July 31, 1996 include an investment in
Groveton Paper Board, Inc. ("Groveton")
an unconsolidated affiliate of
approximately $5,250,000 (see Note 6)
and deferred financing costs of
approximately $8,285,000 and $8,798,000,
respectively. Deferred financing costs
are being amortized over 10 years using
the straight-line method.
3. Accounts Payable and Accrued liabilities were approximately
Accrued Liabilities $30,150,000, $25,915,000 and $4,603,000
at December 31, 1996, July 31, 1996 and
1995, respectively. At December 31, 1996
and July 31, 1996 accrued liabilities
included approximately $19,363,000 and
$12,492,000, respectively, in reserves
for unfavorable contracts related to the
Acquisition (see Note 6) and
approximately $870,000 and $5,000,000 at
December 31, 1996 and July 31, 1996,
respectively, in acquisition related
provisions (see Note 6). In addition,
accrued liabilities consisted of various
items including employee benefits,
utilities, interest and plant repairs at
December 31, 1996, July 31, 1996 and
1995.
4. Supplemental Cash The Company made interest payments of
Disclosures $11,683,000, $4,204,000, $4,882,000 and
$4,015,000 and income tax payments of
$1,127,000, $3,668,000, $6,052,000 and
$1,080,000 during the five month period
ended December 31, 1996 and the twelve
month period ended July 31, 1996, 1995
and 1994, respectively. In addition, the
Company purchased equipment under
capital leases for $7,862,000 during the
twelve month period ended July 31, 1996.
The Company had non-cash distributions
of $5,676,000 and $1,262,000 during the
twelve month period ended July 31, 1995
and 1994, respectively.
10
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
5. Credit Risk Financial instruments which potentially
subject the Company to concentrations of
credit risk consist principally of
temporary cash investments and trade
receivables. The Company places its
temporary cash investments with
financial institutions having high
credit ratings. Concentrations of credit
risk with respect to trade receivables
are limited due to the large number of
customers comprising the Company's
customer base, and their dispersion
across many different geographical
regions. At December 31, 1996, the
Company had no significant
concentrations of credit risk. No single
customer accounted for 10% or more of
net sales during any of the reported
periods.
6. Acquisitions and MannKraft Corporation
Dispositions
On August 5, 1996, the Company acquired
490 shares of common stock of MannKraft
Corporation ("MannKraft") from Stone
Container for $5.5 million. The purchase
represented 49% of MannKraft's
outstanding shares, increasing the
Company's ownership interest to 50%.
Since the remaining interest in
MannKraft is owned indirectly by the
Stockholder, the financial statements of
MannKraft are included in the Company's
consolidation.
The acquisition has been accounted for
using the purchase method of accounting.
The purchase price was allocated to the
assets purchased and liabilities assumed
based upon fair value at the date of the
acquisition. The Company recorded
goodwill of approximately $4 million,
which is being amortized over 15 years.
The results of MannKraft's operations
have been included in the Company's
financial statements since the date of
acquisition.
Purchase of Fibre Marketing
Pursuant to a Limited Liability Company
Agreement, dated as of May 24, 1996, the
Company acquired a 50% interest in Fibre
Marketing Company, L.L.C. ("Fibre
Marketing"). The Company made an
aggregate capital contribution of
$280,000 to Fibre Marketing in August
1996.
11
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
St. Joe Container Company
On May 30, 1996, the Company acquired
substantially all of the assets and
certain liabilities of St. Joe Container
Company for approximately $160 million
(the "Acquisition"). In accordance with
the Asset Purchase Agreement (the
"Agreement"), the Company entered into
an investment in a joint venture (the
"Mill Joint Venture") between the
Company and Stone Container Corporation
("Stone Container") to acquire a paper
mill (the "Mill") owned by St. Joe
Forest Products Company having an annual
production capacity of approximately
500,000 tons (see Note 9). On May 30,
1996 the Company issued senior secured
notes for $170 million and warrants
valued at $600,000 and entered into a
revolving credit facility of $80 million
to, in part, finance such transactions.
In December 1996, the Company received
$5.2 million as a purchase price
adjustment in accordance with the
Agreement.
The Acquisition has been accounted for
using the purchase method of accounting,
and accordingly the purchase price, as
adjusted as discussed above, has been
allocated to the assets purchased and
the liabilities assumed based upon fair
value at the date of the Acquisition.
The purchase price has been allocated as
follows:
-------------------------------------------------------------
Accounts receivable, net $ 23,558
Inventories, net 30,257
Property, plant and equipment, net 120,747
Long-term investment 5,250
Deferred financing costs 8,798
Accounts payable and accrued liabilities (2,552)
Acquisition related provisions (a) (5,000)
Reserve for unfavorable contracts (b) (17,706)
-------------------------------------------------------------
Total costs allocated (c) $163,352
-------------------------------------------------------------
12
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
(a) The Acquisition related provisions
consist of professional costs incurred
with respect to the Acquisition, costs
associated with a plant closure,
severance and relocation costs. During
the five months ended December 31, 1996
approximately $2.6 million of costs have
been applied to this reserve and
approximately $1.53 million has been
reclassified to reserve for unfavorable
contracts (see (b)).
(b) The Company has provided for two
unfavorable contracts related to the
Acquisition and has established a
separate reserve for each such
unfavorable contract. The first
unfavorable contract is the Output
Purchase Agreement with the Mill Joint
Venture, which requires the Company and
Stone Container to each purchase
one-half of the Mill's annual output of
linerboard. Initially, management
determined it was probable that the
Company would be required to pay
additional amounts above market price
for linerboard as a result of the Output
Purchase Agreement and accordingly,
provided a reserve for approximately
$11.0 million in accordance with
Accounting Principles Board Opinion No.
16 "Business Combinations." During the
five month period ended December 31,
1996, the Company reevaluated such
reserve and increased this reserve by
$9.2 million. The Company increased the
reserve by reducing other reserves
established in purchase accounting and
by the purchase price adjustment
described above. The Company has charged
approximately $2.3 million against this
reserve during the five month period
ended December 31, 1996 and its balance
at December 31, 1996 was approximately
$17.9 million. The second unfavorable
contract is the Shareholder's Agreement
relating to the Company's 12.6%
shareholder's interest in Groveton which
requires the Company to purchase 12.6%
of Groveton's annual production of
medium paper at a defined price.
Management has determined it is probable
that the Company will be required to pay
an aggregate $1.5 millon above market
price in 1997 and 1998 and as a result
has provided a reserve for
approximatlely $1.5 million. Since the
acquisition, no amounts have been
charged against this reserve.
(c) The Company did not allocate any portion
of the purchase price to its investment
in the Mill Joint Venture since
management believes the investment value
is nominal (see Note 9).
Timberline Packing Inc.
In August 1995, the Company sold its 67%
interest in Timberline Packaging, Inc.
The sale resulted in a gain of
approximately $166,000.
13
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
The Fonda Group, Inc.
In March 1995, Fonda acquired certain
net assets and the business of the Scott
Foodservice Division for approximately
$30 million in cash plus the assumption
of certain liabilities.
In March 1995, the stock of Fonda was
distributed to the Stockholder, except
for 3.5% which was distributed to a
lender as described in Note 13. The
distribution to the Stockholder amounted
to 96.5% of the net assets of Fonda as
of March 31,1995.
Accordingly, the results of operations
of Fonda are not included in the
financial statements after March 31,
1995.
The accounts of Fonda as of and for the
eight months ended March 31, 1995 and
for the twelve months ended July 31,
1994 are summarized as follows (in
thousands):
March 31, July 31,
1995 1994
------------------------------------------
Net sales $42,413 $61,839
Operating income 1,352 1,788
Net (loss) income (57) 251
Total assets 33,332 24,668
Stockholder's equity 5,882 5,977
------------------------------------------
Fiber Partition Products
Effective March 20, 1995, the Company
disposed of certain assets relating to
its fiber partition products which
resulted in a gain before income taxes
of approximately $1,618,000.
Consolidated Packaging Corporation,
Debtor-In-Possession
On January 5, 1994, the Company acquired
certain assets of Consolidated Packaging
Corporation, Debtor-in-Possession (the
"CPC Acquisition"). The purchase price
was approximately $5,285,000. Assets
acquired included accounts receivable,
inventories, equipment and certain real
estate and leasehold interests including
a paper mill in Ft. Madison, Iowa. The
assets were transferred to certain
subsidiaries. The financial statements
reflect the operations of such
subsidiaries from the date of
acquisition.
14
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
Effective July 31, 1994, the Company
disposed of certain of the assets
purchased in the CPC Acquisition,
resulting in a gain before income taxes
of approximately $622,000.
In November 1994, the Company sold
certain additional assets purchased in
the CPC Acquisition, consisting of
substantially all of the inventory,
property and equipment and certain
tangible assets resulting in a loss of
approximately $73,000 which was recorded
in 1994.
On August 16, 1996, Box USA Group, Inc.
("Box USA"), a wholly-owned subsidiary
of the Company, discontinued operations
at its Flint, Michigan facility (which
was purchased as a part of the CPC
Acquisition), and disposed of
substantially all of the machinery and
equipment for approximately $2.3 million
and finished goods and work-in-progress
inventory and certain related assets
utilized at such facility for
approximately $0.3 million which
resulted in a gain of $480,000. Box USA
retained all accounts receivable,
accounts payable and raw materials
inventory. The machinery and equipment
were transferred pursuant to a like-kind
exchange within the meaning of Section
1031 of the Internal Revenue Code of
1986, as amended.
7. Results of Operations Unaudited results of operations of the
for the Five Months Company for the five months ended
Ended December 31, December 31, 1995 are as follows:
1995 (Unaudited)
(Unaudited)
December 31, 1995
------------------------------------------------
Net sales $95,614
Gross profit 14,495
Income before income taxes 6,588
Provision for income taxes 2,966
Net income 3,622
------------------------------------------------
15
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
8. Condensed In connection with the Acquisition, the
Consolidating Company issued and sold $170 million
Financial Statements aggregate principal amount of 12% Series
A Secured Notes due 2006 (the "Old
Notes"). In September 1996, the Company
registered $170 million aggregate
principal amount of 12% Series B Senior
Secured Notes due 2006 (the "New
Notes"). The Company consummated an
exchange offer pursuant to which the New
Notes were exchanged for the Old Notes
in November 1996. The Notes are
guaranteed on a senior secured basis by
Box USA Group, Inc., Four M Paper
Corporation, Page Packaging Corporation,
Box USA, Inc. and Four M Manufacturing
Group of Georgia, Inc., each a direct or
indirect wholly owned subsidiary of the
Company (collectively, the
"Guarantors"). The Notes are not
guaranteed by Box USA Paper Corporation,
Box USA of Florida, L.P., Florida Coast
or MannKraft (collectively, the
"Non-Guarantors"). The Guarantors have
fully and unconditionally guaranteed the
Notes on a joint and several basis.
Separate financial statements and other
disclosures concerning the Guarantors
are not presented because management has
determined that they are not material to
holders of the Notes. The following are
unaudited condensed consolidating
financial statements regarding the
Company (on a stand-alone basis and on a
consolidated basis) and Guarantors and
Non-Guarantors as of and for the five
months ended December 31, 1996 (in
thousands):
16
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
Four M Non Elimination
Corporation Guarantors Guarantors Entries Consolidated
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current assets $ - $98,772 $10,061 $ - $108,833
Investment in
affiliates 12,188 5,730 - (12,388) 5,530
Total assets 12,188 278,405 25,440 (12,388) 303,645
Current liabilities - 57,010 5,974 - 62,984
Total liabilities - 269,287 22,170 - 291,457
Stockholder's equity 12,188 9,118 3,270 (12,388) 12,188
- ------------------------------------------------------------------------------------------
Condensed Consolidating Statement of Operations
Four M Non Elimination
Corporation Guarantors Guarantors Entries Consolidated
- -----------------------------------------------------------------------------------------
Net sales $ - $176,172 $20,615 $ - $196,787
Gross profit - 22,812 2,671 - 25,483
Income from
operations - 6,765 1,011 - 7,776
Income (loss) before
income taxes - (3,864) 291 - (3,573)
Net loss of
subsidiaries (2,174) - - 2,174 -
Net income (loss) (2,174) (2,344) 170 (2,174) (2,174)
- -----------------------------------------------------------------------------------------
Condensed Consolidating Statement of Cash Flows
Four M Non Elimination
Corporation Guarantors Guarantors Entries Consolidated
- -----------------------------------------------------------------------------------------
Net cash used in
operating activities $ - $(3,151) $ (779) $ - $(3,930)
Net cash used in -
investing activities (3,948) (759) - (4,707)
Net cash used in -
financing activities 8,619 1,638 - 10,257
(Decrease) increase in
cash and cash
equivalents - 1,520 100 - 1,620
Cash and cash -
equivalents,
beginning of period 544 267 - 811
- -----------------------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ - $ 2,064 $ 367 $ - $ 2,431
- -----------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
9. Investment in Mill On May 30, 1996, the Company and Stone
Joint Venture Container each invested $5 million for a
50% interest in Florida Coast Holding
Co., L.L.C. ("Florida Coast Holding"),
the holder of all of the member
interests in the Mill Joint Venture (see
Note 6). Additionally, Stone Container
made a $30 million loan to Florida Coast
Holding. In addition, the Company and
Stone Container have each agreed to
provide the Mill Joint Venture with up
to $10 million of subordinated
indebtedness if needed for general
corporate purposes.
The Company's investment in the Mill
Joint Venture is accounted for using the
equity method of accounting. During the
five month period ended December 31,
1996, the Company did not record its 50%
share of the Mill Joint Venture's
operating results aggregating $(3.5)
million since its investment had no
carrying value. As a result of the
Company's 4.0 million obligation under
the Output Purchase Agreement, during
the five month period ended December 31,
1996, the Company recorded approximately
$1.7 million as loss on joint venture
contract and approximatley $2.3 million
against its reserve for unfavorable
contracts (see Note 6).
Summarized balance sheet and income
statement information of the Mill Joint
Venture, as of December 31, 1996, and
for the seven months ended December 31,
1996 were as follows:
Summarized balance sheet information (in
thousands):
December 31,
1996
-------------------------------------------------------
Current assets 31,697
Land, buildings and equipment, net 184,946
Other assets 8,822
Current liabilities 20,542
Long term liabilities 178,867
Equity (1) 26,056
-------------------------------------------------------
Summarized statement of operations (in
thousands):
Seven Months
Ended
December 31, 1996
-------------------------------------------------------
Net sales $103,365
Net operating income (loss) (908)
Interest expense (13,546)
Net loss (13,944)
-------------------------------------------------------
(1) Equity of the Mill Joint Venture is held
entirely by Stone Container.
18
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
10. Inventories Inventories consist of the following (in
thousands):
July 31,
December 31, ----------------------
1996 1996 1995
------------------------------------------------------
Raw materials $25,056 $25,410 $10,710
Work-in-process 1,615 1,563 632
Finished goods 6,225 5,759 3,768
------------------------------------------------------
$32,896 $32,732 $15,110
------------------------------------------------------
11. Property, Plant Property, plant and equipment consist of
and Equipment the following (in thousands):
<TABLE>
<CAPTION>
July 31,
Life in December 31, ---------------------------
Years 1996 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Land and buildings 20 $ 56,384 $ 50,015 $ 9,107
Machinery and equipment 3-20 142,145 125,574 31,819
Leasehold improvements 5-10 1,402 1,461 1,362
Furniture and fixtures 5 3,071 2,798 2,987
Autos and trucks 5 460 365 306
- ----------------------------------------------------------------------------------------
203,462 180,213 45,581
Less: accumulated
depreciation 30,129 22,240 18,537
- ----------------------------------------------------------------------------------------
$173,333 $157,973 $27,044
- ----------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
Depreciation expense was approximately
$5,135,000 for the five months ended
December 31, 1996. Depreciation expense
was approximately $5,118,000, $4,887,000
and $5,014,000 for the years ended July
31, 1996, 1995 and 1994, respectively.
Property, plant and equipment includes
equipment under capital leases as
follows (in thousands):
July 31,
December 31, --------------------------
1996 1996 1995
- ---------------------------------------------------------------------------
Equipment $8,332 $8,332 $1,170
Less: accumulated depreciation 710 634 311
- ---------------------------------------------------------------------------
$7,622 $7,698 $ 859
- ---------------------------------------------------------------------------
20
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
12. Long-Term Debt Long-term debt consist of the following
(in thousands):
July 31,
December 31, ------------------
1996 1996 1995
- -------------------------------------------------------------------------
12% Senior Secured Notes (a) $170,000 $170,000 $ -
Revolving credit agreements (b) 22,235 7,258 16,110
Mortgages (weighted average
interest rate as of December 31,
1996 7.9%) 2,374 2,456 2,620
Term loan agreements (c) 8,500 - 9,913
Pre-petition creditors (discounted at
9%)(d) - - 275
Other 832 2,267 2,857
- -------------------------------------------------------------------------
203,941 181,981 31,775
Capital lease obligations (Note 16) 7,283 7,551 592
- -------------------------------------------------------------------------
211,224 189,532 32,367
Less: current portion 2,447 2,440 2,449
- -------------------------------------------------------------------------
Long-term debt $208,777 $187,092 $29,918
- -------------------------------------------------------------------------
(a) On May 30, 1996, the Company issued $170
million aggregate principal amount of
12% Series A Senior Secured Notes (the
"Notes") due 2006 to, in part, finance
the Acquisition. The Notes are secured
by the Company's real and personal
property other than accounts receivable,
inventory and certain related assets and
interest is payable semi-annually in
arrears on June 1 and December 1 of each
year beginning December 1, 1996.
21
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
(b) On May 30, 1996, the Company entered
into a new credit facility (the "Credit
Facility") in the amount of $80 million.
The Credit Facility is secured by
accounts receivable, inventories and
certain related assets. Advances are
limited to 85% of eligible receivables
and the lesser of 60% of eligible
inventories or $40 million. The Credit
Facility matures on May 30, 2001. The
interest rate at December 31, 1996 was
prime (8.25% at December 31, 1996) plus
.75%. At December 31, 1996, the Company
had outstanding $16,566,000 and
available approximately $30.6 million of
additional credit under the Credit
Facility. The Company has the ability to
convert interest on some or all of its
advances to a LIBOR based rate. At
December 31, 1996, the Company had
converted $8.0 million of its debt under
this option at a rate of 8.25%. This
LIBOR based arrangement matured on March
2, 1997 and was replaced with a 90 day
contract for $10 million. Pursuant to
the Credit Facility, the Company is
subject to certain affirmative and
negative covenants customarily found in
agreements of this type. In addition,
the Credit Facility requires that the
Company maintain certain specified
financial covenants, including, without
limitation, a minimum tangible net
worth, a minimum interest coverage
ratio, a maximum funded debt to EBITDA
ratio and a minimum fixed charge
coverage ratio. The Company was in
compliance with these covenants, as
amended, at December 31, 1996,
MannKraft Corporation (see Note 6) has a
revolving credit agreement for $10
million, secured by inventories,
receivables and equipment. Borrowings
are limited to 85% of eligible
inventory. MannKraft had approximately
$5,669,000 outstanding and $249,000 of
additional credit available under this
agreement at December 31, 1996. Interest
under this agreement is prime (8.25% at
December 31, 1996) plus 1%. MannKraft
has the ability to convert interest on
some or all of its advances to a LIBOR
based rate equal to LIBOR plus 3.5%.
(c) MannKraft Corporation had outstanding at
December 31, 1996 an $8.5 million term
loan due September 30, 2001 which is
secured by MannKraft's equipment, real
estate and eligible receivables. This
loan bears interest at the prime rate
(8.25% at December 31, 1996) plus 1.5%.
MannKraft has the ability to convert
some or all of this term loan to a LIBOR
based rate equal to LIBOR plus 3.5%. At
December 31, 1996, MannKraft had $8.0
million of its debt under this option at
a rate of 9.0%.
22
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
(d) In January 1995, Four M assumed certain
outstanding pre-petition creditor
liabilities from Fonda aggregating
$870,000 in exchange for partial
settlement of amounts owed to Fonda by
Four M. In July 1995, this assumed
liability of $870,000 was settled for
$455,000 resulting in an extraordinary
gain of $241,000 net of income taxes.
Long-term debt, excluding capital lease
obligations, is payable as follows (in
thousands):
--------------------------------------
1997 $ 1,352
1998 1,804
1999 1,472
2000 1,942
2001 3,657
Thereafter 193,714
--------------------------------------
$203,941
--------------------------------------
13. Subordinated Debt Subordinated debt consists of the
following (in thousands):
July 31,
December 31, --------------------
1996 1996 1995
- ---------------------------------------------------------------------------
Subordinated notes (a) $2,279 $ - $ -
Debt with warrants (b) - - 2,080
Less: Deferred interest (365) - -
Current portion - - (1,000)
- ---------------------------------------------------------------------------
Long-term subordinated debt $1,914 $ - $ 1,080
- ---------------------------------------------------------------------------
23
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
(a) Prior to the Company's purchase of
MannKraft, the Bankruptcy Court
confirmed MannKraft's Plan of
Reorganization and MannKraft emerged
from Chapter 11 of the United States
Bankruptcy Code. Pursuant to MannKraft's
Plan of Reorganization, MannKraft's
previous shareholders received
$2,750,000 in cash and notes payable in
consideration of full and complete
satisfaction of their interests. The
first note is in the principal amount of
$700,000 and interest is payable on the
outstanding principal balance at 7.5%
per annum paid quarterly, with the
exception of the first six payments
which are payable in the year 2001. The
second and third notes are in the
principal amounts of $1,179,000 and
$321,000, respectively, and are
non-interest bearing. The notes have
been discounted using a rate of 8%
resulting in aggregate initial deferred
interest of $838,638. Deferred interest
is accreted over the repayment period
using the balance outstanding method.
All three notes are payable beginning
after fiscal year ending July 31, 1999
provided that MannKraft's secured claims
and trade and other claims are paid in
full. The notes are secured by a pledge
agreement executed by Four M
Manufacturing Group of New Jersey, Inc.
(b) In January 1990, the Company borrowed
$4,000,000 (the "Subordinated Debt")
from a lender (the "Holder") and issued
a warrant (the "Warrant") to the Holder
to purchase 513,000 shares of its common
stock. Interest on the Warrant was
accreted such that at March 31, 1995,
the Warrant had a value of $2,184,000.
In March 1995, the Subordinated Debt was
restructured as follows: (i) the Company
distributed 35 shares (3.5%) of the
issued and outstanding stock of Fonda to
the Holder (see Note 6), in exchange for
a portion of the outstanding principal
balance of the Subordinated Debt; and
(ii) in consideration of the Holder's
surrendering the Warrant, and in
satisfaction of the remaining portion of
the Subordinated Debt and interest
accrued thereon, payments aggregating
$4,000,000 were made, with a final
payment of $1,080,000 which was made on
July 30, 1996, together with interest
accrued thereon. As a result, the
Company recognized an extraordinary gain
of $1,978,000 in 1995 which represented
the excess of the recorded value of the
Warrant settled less $206,000,
representing 3.5% of the net assets of
Fonda at March 31, 1995.
24
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
14. Income Taxes Components of provision (benefit) for
income taxes are as follows (in
thousands):
5 Months
Ended 12 Months Ended July 31,
December 31, ---------------------------
1996 1996 1995 1994
- --------------------------------------------------------------------------------
Current:
Federal $(2,362) $ 4,441 $ 4,675 $ --
State (702) 889 1,120 275
-------
(3,064) 5,330 5,795 275
-------
Deferred:
Federal 1,206 (1,261) (250) (481)
State 372 (252) (62) (119)
-------
1,578 (1,513) (312) (600)
-------
Provision (benefit)
for income taxes before
extraordinary item (1,486) 3,817 5,483 (325)
Taxes on extraordinary item -- -- 174 --
-------
$(1,486) $ 3,817 $ 5,657 $ (325)
-------
Deferred income taxes reflect the tax
effect of temporary differences between
carrying amounts of assets and
liabilities for financial reporting and
income tax purposes. Deferred tax assets
(liabilities) result from temporary
differences as follows (in thousands):
<TABLE>
<CAPTION>
July 31,
December 31,-----------------------
1996 1996 1995
- ---------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Allowance for doubtful
accounts receivable $ 670 $ 581 $ 751
Capitalized inventory costs 1,632 1,213 762
Accrued salaries and benefits 964 730 299
Provisions for losses 9,133 7,350 --
Other 262 367 189
--------
Current deferred tax assets 12,661 10,241 2,001
--------
Long term:
Property, plant and equipment (19,340) (10,390) (3,663)
MannKraft net operating loss carryforward 4,854 -- --
--------
Net long-term deferred tax liabilities (14,486) (10,390) (3,663)
--------
Net deferred tax liabilities $ (1,825) $ (149) $ (1,662)
--------
</TABLE>
25
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
The effective tax rate was different
than the federal statutory rate due to
the following:
<TABLE>
<CAPTION>
Five Months
Ended 12 Months Ended July 31,
December 31, ----------------------------------
1996 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax (benefit) at the statutory
Federal rate (35.0)% 35.0% 34.0% (34.0)%
State income taxes (net of
Federal benefit) (6.0) 6.4 4.0 7.0
Non-deductible interest - - 3.0 5.3
Reversal of valuation
allowance - - (3.7) 11.7
Other (0.6) 1.3 (4.0) 1.5
- -----------------------------------------------------------------------------------------
(41.6)% 42.7% 33.3% (8.5)%
- -----------------------------------------------------------------------------------------
</TABLE>
During 1994, the Company adopted the
provisions of Financial Accounting
Standards Board Statement No. 109,
"Accounting for Income Taxes" ("FASB
109"). The cumulative effect of this
change in method of accounting for taxes
on income has been reported as of the
beginning of the 1994 fiscal year in the
consolidated statements of operations.
15. Minority Interest Minority interest represents the
minority stockholder's investment plus
its proportionate share of the income or
loss of the respective subsidiary.
26
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
16. Leases The Company leases several facilities
and certain equipment used in connection
with its manufacturing operations.
Future minimum payments for capital
leases and noncancellable operating
leases with initial or remaining terms
of one year or more are (in thousands):
Capital Operating
Year ending December 31, Leases Leases
- ------------------------------------------------------------------------------
1997 $1,957 5,033
1998 1,883 4,314
1999 1,671 3,350
2000 1,662 2,573
2001 1,634 1,921
Thereafter 876 7,761
- ------------------------------------------------------------------------------
Total minimum lease payments 9,683 24,952
-------------
Less: amount representing interest (2,400)
- ------------------------------------------------------------
Present value of capital lease obligations 7,283
- ------------------------------------------------------------
Rent expense under operating leases was
approximately $3,555,000 for the five
months ended December 31, 1996. Rent
expense under operating leases was
approximately $5,041,000, $4,613,000 and
$4,984,000 for the years ended July 31,
1996, 1995 and 1994, respectively.
17. Related Party Transactions The Stockholder is an owner of entities
from which the Company rents certain
property, plant and equipment. Rent
expense for the five months ended
December 31, 1996 was approximately
$434,000. Rental expense for the three
years ended 1996, 1995 and 1994 was
approximately $964,000, $929,000 and
$1,120,000, respectively. The Company
believes that such rents are not in
excess of market levels. The partition
plant located in Jacksonville, Florida
is currently leased by Fonda from the
Stockholder, and a portion of the
facility is subleased to the Company.
The Stockholder has been a part owner
since 1993 of MannKraft, to which the
Company sold approximately $1,351,000
and $3,300,000 of material in the twelve
months ended July 31, 1996 and 1995,
respectively. There were no material
sales to this entity during the twelve
month period ended July 31, 1995. The
Company believes that the prices at
which such sales were made are not below
market levels. For the five month period
ended December 31, 1996, all sales to
MannKraft have been eliminated in
consolidation.
27
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
The Company had outstanding receivables
from officers and employees in the
amount of $286,000, $1,124,000 and
$1,474,000 at December 31, 1996, July
31, 1996 and at July 31, 1995,
respectively, all of which are
non-interest bearing. These receivables
are classified as other assets.
An officer of the Company has been part
owner since 1994 of Fibre Marketing, to
which the Company sold approximately
$3,130,074 of material in the five
months ended December 31, 1996 and
$2,024,000 and $3,400,000 of material in
the twelve months ended July 31, 1996
and 1995, respectively. The Company
believes that the prices at which such
sales were made are not below market
levels.
18. Commitment and Purchase Commitments
Contingencies
The Company has commitments to purchase
paperboard inventory from four major
vendors. The total commitment is for the
purchase of up to 170,000 tons of
inventory annually through December
2001. The price per ton will be based on
market rates.
As discussed in Note 6, the Company has
commitments to purchase one half the
production of the Mill. The price per
ton is based on the Output Purchase
Agreement discussed in Note 6.
Additionally the Company is required to
purchase 12.6% of the output of the
Groveton medium mill at prices defined
in an agreement among the owners of the
mill. The mill's production capacity is
approximately 140,000 tons annually.
Litigation
On July 19, 1996, a civil action was
filed in the Superior Court of Fulton
County, Georgia (the "Suit") by a former
employee, individually and on behalf of
D&M Partnership, a purported Georgia
partnership, against Four M, Box USA
Group, Inc., Four M Manufacturing Group
of Georgia, Inc. and the Stockholder.
The plaintiff alleges that he is
entitled to an equity interest in Four M
or in the alternative, $150,000,000 in
compensatory damages, as well as
punitive damages and attorneys' fees.
The Company believes that the Suit is
without merit. On September 23, 1996,
the Company filed an answer in response
to the complaint. The Company intends to
defend against the Suit vigorously and
believes that it has adequate defenses.
The Suit is in the preliminary stages
and management believes that the outcome
of this Suit will not have a material
impact on the Company's financial
statements.
28
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
The Company is involved in various other
legal actions and claims arising in the
ordinary course of its business.
Management believes that current
litigation and claims will be resolved
without any material effect on the
Company's financial statements
Savings and Investment Plans
The Company has two defined contribution
savings and investment plans covering
most of its non-union employees with at
least one year of service. One plan does
not provide for matching of employee
contributions. Under the other plan,
employee contributions up to 6% of their
salary are matched at 20%. Expenses
incurred under both plans amounted to
approximately $130,000 for the five
months ended December 31, 1996 and
$195,000, $107,000 and $81,000 for the
years ended July 31, 1996, 1995 and
1994, respectively.
The Company amended one of its plans,
effective January 1, 1997, to increase
the Company's employee match to 50%
Pension Plans
The Company has defined contribution
plans for its union employees.
Contributions are made by the Company at
a defined rate per hour worked. Expense
incurred under these plans amounted to
approximately $306,000 for the five
months ended December 31, 1996 and
$93,000, $67,000 and $431,000 for the
years ended July 31, 1996, 1995 and
1994, respectively.
Stock Appreciation Unit Plan
On September 8, 1993, the Company's
Board of Directors approved a Stock
Appreciation Unit Plan (the "Plan").
Pursuant to the Plan units may be
granted to key employees at the
discretion of the Chief Executive
Officer and the non-employee directors
of the Company. Units awarded under the
Plan are subject to the vesting and
redemption terms of the Plan. Employees
may elect to redeem vested units awarded
under the Plan. Units to be redeemed
will be paid in cash over a period of
time at an amount based on earnings and
increases in book value.
29
<PAGE>
Four M Corporation and Subsidiaries
d/b/a Box USA
Notes to Consolidated Financial Statements
19. Subsequent Events The Company has experienced a decline in
prices for corrugating medium as a
result of increased capacity in the
industry and decreased demand for such
products. As a result of this decline in
price and demand, the Company will shut
down its Ft. Madison Mill as of March
31, 1997 for an indefinite period of
time. Operations at the Ft. Madison Mill
will resume when market conditions
warrant a resumption of production. In
addition, the Company and Stone
Container, as partners in the Mill Joint
Venture, (see Note 9) have decided to
shut down the St. Joe Mill on April 1,
1997 for an indefinite period of time.
The Company continues to be subject to
the terms of the Output Purchase
Agreement (see Note 6) .
The Company sold certain of its
machinery and equipment in its
corrugating facility located in College
Park, Georgia in January 1997 for
approximately $2.5 million.
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
RELATING TO SCHEDULE
Board of Directors and Stockholder
Four M Corporation and Subsidiaries
The audits referred to in our report to Four M Corporation and
Subsidiaries dated March 18, 1997 which is contained in Item 8 of this Form 10-K
included the audit of the Schedule listed under Item 21(b) for the five month
period ended December 31, 1996 and each of the three years in the period ended
July 31, 1996. This Financial Statement Schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
Financial Statement Schedule based on our audits.
In our opinion, such Schedule presents fairly, in all material
respects, the information set forth therein for the five month period ended
December 31, 1996 and each of the three years in the period ended July 31, 1996.
/s/ BDO Seidmen, LLP
--------------------
BDO Seidman, LLP
Valhalla, New York
March 18, 1997
<PAGE>
SCHEDULE II
FOUR M CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------- -------- ------------------------------------ --------------------- -------------
ADDITIONS
---------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COST AND OTHER ACCOUNTS - BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE DEDUCTIONS - DESCRIBE OF PERIOD
- --------------------------------- ------------------------------- ------------------ ----------------------- --------------
<S> <C> <C> <C> <C>
Year ended July 31, 1993
Allowance for doubtful
accounts....................... $1,970,000 $809,000 -- $ 612,000(1) $2,167,000
- --
Year ended July 31, 1994
Allowance for doubtful
accounts....................... $2,167,000 $599,000 -- $1,224,000(1) $1,542,000
Year ended July 31, 1995
Allowance for doubtful
accounts....................... $1,542,000 $575,000 -- $ 339,000(1) $1,778,000
Year ended July 31, 1996
Allowance for doubtful
accounts....................... $1,778,000 $736,000 -- $ 605,000(1) $1,909,000
Period ended December 31, 1996... $1,909,000 $582,000 $151,000(2) $1,021,000(1) $1,621,000
</TABLE>
- --------
(1) Amounts written off.
(2) Acquired through MannKraft purchase.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
FOUR M CORPORATION
By: /s/Dennis Mehiel
----------------
Dennis Mehiel
Chairman of the Board and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
/s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997
- ----------------- (Principal Executive Officer)
Dennis Mehiel
/s/ Chris Mehiel Executive Vice President, Chief April 2, 1997
- ---------------- Operating Officer and Director
Chris Mehiel
/s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997
- ----------------------- Financial Officer and Director
Timothy D. McMillin (Principal Accounting Officer)
/s/ James Armenakis Director April 2, 1997
- -------------------
James Armenakis
/s/ Lawrence Bishop Director April 2, 1997
- -------------------
Lawrence A. Bishop
Samuel B. Guren Director April 2, 1997
/s/ John Nevin Director April 2, 1997
- --------------
John Nevin
/s/ Thomas Uleau Director April 2, 1997
- ----------------
Thomas Uleau
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
FOUR M PAPER CORPORATION
By: /s/Dennis Mehiel
----------------
Dennis Mehiel
Chairman of the Board and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
/s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997
- ----------------- (Principal Executive Officer)
Dennis Mehiel
/s/ Chris Mehiel Executive Vice President, Chief April 2, 1997
- ---------------- Operating Officer and Director
Chris Mehiel
/s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997
- ----------------------- Financial Officer and Director
Timothy D. McMillin (Principal Accounting Officer)
/s/ James Armenakis Director April 2, 1997
- -------------------
James Armenakis
/s/ Lawrence Bishop Director April 2, 1997
- -------------------
Lawrence A. Bishop
Samuel B. Guren Director April 2, 1997
/s/ John Nevin Director April 2, 1997
- --------------
John Nevin
/s/ Thomas Uleau Director April 2, 1997
- ----------------
Thomas Uleau
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
BOX USA GROUP, INC.
By: /s/Dennis Mehiel
----------------
Dennis Mehiel
Chairman of the Board and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
/s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997
- ----------------- (Principal Executive Officer)
Dennis Mehiel
/s/ Chris Mehiel Executive Vice President, Chief April 2, 1997
- ---------------- Operating Officer and Director
Chris Mehiel
/s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997
- ----------------------- Financial Officer and Director
Timothy D. McMillin (Principal Accounting Officer)
/s/ James Armenakis Director April 2, 1997
- -------------------
James Armenakis
/s/ Lawrence Bishop Director April 2, 1997
- -------------------
Lawrence A. Bishop
Director
Samuel B. Guren Director April 2, 1997
Director
/s/ John Nevin Director April 2, 1997
- --------------
John Nevin
/s/ Thomas Uleau Director April 2, 1997
- ----------------
Thomas Uleau
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
PAGE PACKAGING CORPORATION
By: /s/Dennis Mehiel
----------------
Dennis Mehiel
Chairman of the Board and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
/s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997
- ----------------- (Principal Executive Officer)
Dennis Mehiel
/s/ Chris Mehiel Executive Vice President, Chief April 2, 1997
- ---------------- Operating Officer and Director
Chris Mehiel
/s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997
- ----------------------- Financial Officer and Director
Timothy D. McMillin (Principal Accounting Officer)
/s/ James Armenakis Director April 2, 1997
- -------------------
James Armenakis
/s/ Lawrence Bishop Director April 2, 1997
- -------------------
Lawrence A. Bishop
Samuel B. Guren Director April 2, 1997
/s/ John Nevin Director April 2, 1997
- --------------
John Nevin
/s/ Thomas Uleau Director April 2, 1997
- ----------------
Thomas Uleau
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
BOX USA, INC.
By: /s/Dennis Mehiel
----------------
Dennis Mehiel
Chairman of the Board and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
/s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997
- ----------------- (Principal Executive Officer)
Dennis Mehiel
/s/ Chris Mehiel Executive Vice President, Chief April 2, 1997
- ---------------- Operating Officer and Director
Chris Mehiel
/s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997
- ----------------------- Financial Officer and Director
Timothy D. McMillin (Principal Accounting Officer)
/s/ James Armenakis Director April 2, 1997
- -------------------
James Armenakis
/s/ Lawrence Bishop Director April 2, 1997
- -------------------
Lawrence A. Bishop
Samuel B. Guren Director April 2, 1997
/s/ John Nevin Director April 2, 1997
- --------------
John Nevin
/s/ Thomas Uleau Director April 2, 1997
- ----------------
Thomas Uleau
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
FOUR M MANUFACTURING GROUP OF GEORGIA,
INC.
By: /s/Dennis Mehiel
----------------
Dennis Mehiel
Chairman of the Board and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
/s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997
- ----------------- (Principal Executive Officer)
Dennis Mehiel
/s/ Chris Mehiel Executive Vice President, Chief April 2, 1997
- ---------------- Operating Officer and Director
Chris Mehiel
/s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997
- ----------------------- Financial Officer and Director
Timothy D. McMillin (Principal Accounting Officer)
/s/ James Armenakis Director April 2, 1997
- -------------------
James Armenakis
/s/ Lawrence Bishop Director April 2, 1997
- -------------------
Lawrence A. Bishop
Director
Samuel B. Guren Director April 2, 1997
Director
/s/ John Nevin Director April 2, 1997
- --------------
John Nevin
/s/ Thomas Uleau Director April 2, 1997
- ----------------
Thomas Uleau
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Page
- ------ ---------------------- ----
2.1 Asset Purchase Agreement, dated as of November 1, 1995, among Four M
Corporation (the "Company"), St. Joe Forest Products Company, St. Joe
Container Company, St. Joe Paper Company and Florida Coast Paper
Company, L.L.C. ("Florida Coast").
3.1 Certificate of Incorporation of the Company.
3.2 Certificate of Incorporation of Box USA Group, Inc.
3.3 Certificate of Incorporation of Four M Paper Corporation.
3.4 Certificate of Incorporation of Page Packaging Corporation.
3.5 Certificate of Incorporation of Box USA, Inc.
3.6 Certificate of Incorporation of Four M Manufacturing Group of Georgia,
Inc.
3.7 By-laws of the Company.
3.8 By-laws of Box USA Group, Inc.
3.9 By-laws of Four M Paper Corporation.
3.10 By-laws of Page Packaging Corporation.
3.11 By-laws of Box USA, Inc.
3.12 By-laws of Four M Manufacturing Group of Georgia, Inc.
4.1 Indenture, dated as of May 30, 1996, between the Company and Norwest
Bank Minnesota, National Association (the "Trustee").
4.2 Form of 12% Series A and Series B Senior Secured Notes,
dated as of May 30, 1996 (incorporated by reference to
Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of May 30, 1996, among the
Company, the Guarantors and Bear, Stearns & Co.
Inc. (the "Initial Purchaser").
4.4 Security Agreement, dated as of May 30, 1996, between the Company and the
Trustee.
4.5 Subsidiary Security Agreement, dated as of May 30, 1996, among the
Guarantors and the Trustee.
4.6 Contribution Agreement, dated as of May 30, 1996, among the Company, the
Guarantors and the Trustee.
4.7 Drop Down Notes, dated as of May 30, 1996, executed by each of the
Guarantors.
4.8 Drop Down Note Security Agreement, dated as of May 30, 1996, among the
Guarantors and the Company.
4.9 Guaranty, dated as of May 30, 1996, among the Guarantors and
the Trustee.
4.10 Form of Company Pledge Agreement, dated as of May 30, 1996, between the
Company and the Trustee.
4.11 Form of Subsidiary Pledge Agreement, dated as of May 30, 1996, among the
Guarantors and the Trustee.
4.12 Warrant Agreement, dated as of May 30, 1996, between the Company and the
Initial Purchaser.
10.1 Output Purchase Agreement, dated as of May 30, 1996, among
the Company, Florida Coast and Stone Container Corporation
("Stone").
10.2 Financing and Security Agreement, dated as of May 30, 1996, among the
Company, the Guarantors, NationsBank, N.A. ("NationsBank"), the financial
institutions named therein (together with NationsBank, the "Lenders"), and
NationsBank, as agent (NationsBank, in such capacity, the "Agent").
10.3 Subordinated Credit Agreement, dated as of May 30, 1996, among the
Company, Florida Coast and Stone.
10.4 Environmental Indemnity Agreement, dated as of May 30, 1996, between the
Company and Florida Coast.
10.5 Stock Appreciation Unit Plan of the Company, dated as of
August 1, 1992, and Amendment No. 1 thereto, dated as of
August 1, 1995.
10.6 Subordination, Nondisturbance and Attornment Agreement, dated as of May
30, 1996, between Norwest Bank Minnesota, National Association, and Box
USA Group, Inc.
10.7 First Amendment to Financing and Security Agreement and
Additional Borrower Joinder Supplement, dated as of February
28, 1997, among the Company, the Guarantors, the Lenders, the Agent and
Box USA of Florida, L.P.
12.1 Statement re computation of ratios.
21.1 Subsidiaries of the registrant.
27.1 Financial Data Schedule.
99.1 The Financial Statements for the period from May 30, 1996 to December 1,
1996, together with the Independent Accountants' Report for Florida Coast
and the Financial Statements for the period from January 1, 1996 to May
30, 1996 and the two years ended December 31, 1995 and 1994 together with
the Independent Auditors' Report for St. Joe Forest Products Company -
Linerboard Mill Operations included in the Florida Coast 10-K as filed
with SEC on March 31, 1997.
Exhibit 10.7
FIRST AMENDMENT TO FINANCING AND SECURITY AGREEMENT
AND
ADDITIONAL BORROWER JOINDER SUPPLEMENT
THIS FIRST AMENDMENT TO FINANCING AND SECURITY AGREEMENT AND
ADDITIONAL BORROWER JOINDER SUPPLEMENT (this "Agreement") is made
this 28th day of February, 1997, by and among
BOX USA OF FLORIDA, L.P., a limited partnership organized under the
laws of the State of Georgia (the "Florida Partnership");
Four M Corporation, a corporation organized under the laws of the State
of Maryland ("FMC"), Box USA Group, Inc., a corporation organized under
the laws of the State of New York ("Box"), Four M Paper Corporation, a
corporation organized under the laws of the State of Delaware
("Paper"), Four M Manufacturing Group of Georgia, Inc., a corporation
organized under the laws of the State of Pennsylvania ("Georgia") and
Page Packaging Corporation, a corporation organized under the laws of
the State of Delaware ("Page"), jointly and severally (FMC, Box, Paper,
Georgia, and Page, are sometimes herein collectively referred to as the
"Original Borrowers;" FMC, Box, Paper, Georgia, Page, and the Florida
Partnership are sometimes herein collectively referred to as the
"Borrowers" and individually, as a "Borrower");
NATIONSBANK, N.A., a national banking association ("NationsBank"), and
the other financial institutions listed on the signature pages hereof
(NationsBank and the other financial institutions are herein
collectively referred to as the "Lenders" and individually, as a
"Lender"); and
NATIONSBANK, N.A., a national banking association (the "Agent").
RECITALS
--------
A. The Agent, the Lenders and the Original Borrowers are parties to the
Financing and Security Agreement dated as of May 30, 1996 (as amended, modified,
restated, substituted, extended and renewed at any time and from time to time,
the "Financing Agreement"). Capitalized terms not otherwise defined in this
Agreement shall have the meanings given to them in the Financing Agreement.
B. Box Georgia is the sole general partner of the Florida Partnership
which is in the same business as Box.
C. The Borrowers have requested that the Lenders provide working
capital financing to the Florida Partnership by adding the Florida Partnership
as an Additional Borrower under the Financing Agreement. The Borrowers have
advised the Lenders that
<PAGE>
the Borrowers believe that such financing will benefit them by the enhancement
to Box Georgia's position as general partner of the Florida Partnership.
D. The Lenders are willing to provide the working capital financing on
the condition that the Florida Partnership, to the limited extent provided in
this Agreement, becomes an Additional Borrower and grant a Lien on the Florida
Partnership Collateral (as that term is defined in this Agreement) and that the
Borrowers agree to the other terms and conditions of this Agreement.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, receipt of which is hereby acknowledged, the Borrowers,
the Agent and the Lenders agree that the Financing Agreement is hereby amended
as follows:
1. The Borrowers, the Agent and the Lenders agree that the Recitals
above are a part of this Agreement. Unless otherwise expressly defined in this
Agreement, terms defined in the Financing Agreement shall have the same meaning
under this Agreement.
2. (a) Subject to the terms, conditions and limitations set forth in
this Agreement, the Florida Partnership hereby acknowledges, confirms and agrees
that on and as of the date of this Agreement the Florida Partnership has become,
and is, an "Additional Borrower" and a "Borrower" under the Financing Agreement
and the other Financing Documents. Except as otherwise provided in this
Agreement, the Florida Partnership shall be bound and liable, jointly and
severally, with the Original Borrowers by all of the terms, provisions and
conditions of the Financing Documents.
(b) Notwithstanding the provisions of subsection (a)
above and the terms and conditions of the Financing Agreement or
any of the other Financing Documents:
(i) The Florida Partnership shall be obligated to the Agent
and the Lenders only to the extent of the Florida Partnership
Obligations (as that term is defined below) outstanding from time
to time.
(ii) The Florida Partnership Collateral shall secure only
the Florida Partnership Obligations.
(iii) The proceeds of the Florida Partnership Advances shall
be used solely for the working capital uses of the Florida
Partnership in the ordinary course of the Florida Partnership's
business.
(iv) The Florida Partnership Advances outstanding at any
time shall not exceed the sum of $600,000 plus the lesser of (A)
$1,500,000, or (B) the Florida Partnership Borrowing Base (as
that term is defined below).
<PAGE>
(v) Advances to Borrowers other than the Florida Partnership
shall not exceed the portion of the Borrowing Base based solely
on the Eligible Receivables and the Eligible Inventory of those
other Borrowers minus the amount by which the Florida Partnership
Advances exceed the Florida Partnership Borrowing Base.
(vi) To the extent a limitation contained in item (v) or
(vi) is exceeded, a Borrowing Base Deficiency shall be deemed to
exist.
(vii) As part of the monthly statements required by Section
6.1.1(c) of the Financing Agreement, the Borrower shall furnish a
detailed statement of the extent to which advances under the
Revolving Credit Facility during the month were Florida
Partnership Advances.
(viii) All Prepayments made by the Florida Partnership under
the Revolving Credit Facility shall be applied solely to the
Florida Partnership Obligations.
(ix) All proceeds from collections of the Florida
Partnership Collateral under the Financing Agreement shall be
applied solely to the Florida Partnership Obligations.
(x) The Florida Partnership shall have no liability under
Section 2.4.5 of the Financing Agreement. Each other Borrower
(other than Box USA of Florida, L.P., if and when it becomes a
Borrower) shall be obligated under Section 2.4.5 with respect to
all Obligations including, without limitation, the Obligations of
the Florida Partnership.
(c) Without otherwise in any way implying any limitation on
any of the provisions of this Agreement, the Financing Agreement, or any of the
other Financing Documents, to secure the Florida Partnership Obligations, the
Florida Partnership hereby assigns, pledges and grants to the Agent, for the
ratable benefit of the Lenders and for the benefit of the Agent with respect to
the Agent's Obligations, and agrees that the Agent and the Lenders shall have a
perfected and continuing security interest in, and Lien on, (i) all of the
Florida Partnership's Accounts, Inventory, Chattel Paper, Documents, and
Instruments, (ii) all credit insurance policies and insurance covering the
Inventory and all cash and non-cash proceeds thereof, and (iii) all books and
records in whatever media (paper, electronic or otherwise) recorded or stored,
with respect to any or all of the foregoing, all of the foregoing whether now
owned or existing or hereafter acquired or arising. The Florida Partnership
further agrees that the Agent, for the ratable benefit of the Lenders and for
the benefit of the Agent with respect to the Agent's Obligations, shall have in
respect thereof all of the rights and remedies of a secured party under the
Uniform Commercial Code as well as those provided in this Agreement, under each
of the other Financing Documents and under applicable Laws.
<PAGE>
3. Section 1.1 of the Financing Agreement is hereby amended by adding
the following new definitions:
"Florida Partnership" means Box USA of Florida, L.P., a limited
partnership organized under the laws of the State of Georgia.
"Florida Partnership Advance" means an advance under the
Revolving Credit Facility for the use by or for the benefit of the
Florida Partnership, and shall include an advance in the amount of
$694,304 made on or after the date of this Agreement to repay Box for
advances it made to the Florida Partnership prior to the date of this
Agreement; and "Florida Partnership Advances" means the collective
reference to all such advances.
"Florida Partnership Borrowing Base" means that portion of the
Borrowing Base based solely on the Eligible Receivables and the
Eligible Inventory of the Florida Partnership.
"Florida Partnership Collateral" means the Collateral of the
Florida Partnership.
"Florida Partnership Collateral Account" has the meaning
described in Section 2.1.8A.
"Florida Partnership Lockbox" has the meaning set forth in
Section 2.1.8A.
"Florida Partnership Obligations" means those Obligations arising
pursuant to, in connection with and/or on account of the Florida
Partnership Advances, whether pursuant to this Agreement, each Note,
each Security Document, and any of the other Financing Documents,
including, without limitation, with respect to and to the extent
related to the Florida Partnership Advances, the principal of, and
interest on, each Note, late charges, the Fees, Enforcement Costs, and
prepayment fees; and also means any and all renewals, extensions,
substitutions, amendments, restatements and rearrangements of any such
Obligations.
"Florida Partnership Revolving Loan Account" has the meaning
described in Section 2.1.9A.
4. The Financing Agreement is amended by adding the following as new
Section 2.1.8A:
2.1.8A The Florida Partnership
Collateral Account. Notwithstanding and, with respect to the Florida
Partnership only, in lieu of the provisions of Section 2.1.8, the
Florida Partnership will deposit, or cause to be deposited, all Items
of Payment with respect to the Florida Partnership Collateral to a bank
account designated by the Agent
<PAGE>
and from which the Agent alone has power of access and withdrawal (the
"Florida Partnership Collateral Account"). Each deposit shall be made
not later than the next Business Day after the date of receipt of the
Items of Payment with respect to the Florida Partnership Collateral.
The Items of Payment shall be deposited in precisely the form received,
except for the endorsements of the Florida Partnership where necessary
to permit the collection of any such Items of Payment, which
endorsement the Florida Partnership hereby agrees to make. In the event
the Florida Partnership fails to do so, the Florida Partnership hereby
authorizes the Agent to make the endorsement in the name of the Florida
Partnership. Prior to such a deposit, the Florida Partnership will not
commingle any Items of Payment with any of the Florida Partnership'
other funds or property, but will hold them separate and apart in trust
and for the account of the Agent for the ratable benefit of the
Lenders.
In addition, the Florida Partnership shall direct the mailing of all Items
of Payment from its Account Debtors to a post-office box designated by the
Agent, or to such other additional or replacement post-office boxes pursuant to
the request of the Agent from time to time (collectively, the "Florida
Partnership Lockbox"). The Agent shall have unrestricted and exclusive access to
the Lockbox.
The Florida Partnership hereby authorizes the Agent to inspect all Items of
Payment, endorse all Items of Payment in the name of the Florida Partnership,
and deposit such Items of Payment in the Florida Partnership Collateral Account.
The Agent reserves the right, exercised in its sole and absolute discretion from
time to time, to provide to the Florida Partnership Collateral Account credit
prior to final collection of an Item of Payment and to disallow credit for any
Item of Payment which is unsatisfactory to the Agent. In the event Items of
Payment are returned to the Agent for any reason whatsoever, the Agent may, in
the exercise of its discretion from time to time, forward such Items of Payment
a second time. Any returned Items of Payment shall be charged back to the
Florida Partnership Collateral Account, the Florida Partnership Revolving Loan
Account, or other account, as appropriate.
The Agent will apply the whole or any part of the funds credited to the
Florida Partnership Collateral Account against the outstanding principal balance
of the Florida Partnership Advances (or during the continuance of a Default or
an Event of Default, against any of the Florida Partnership Obligations) or, in
the event there are no Florida Partnership Obligations outstanding, credit such
funds to the depository account of the Florida Partnership with the
<PAGE>
Agent. The order and method (including, without limitation, the extent to which
credit may be given for uncollected funds) of such application shall be in the
sole discretion of the Agent, exercised from time to time. On the first day of
each month, the Borrowers shall pay the Agent as part of the Agent's Obligations
an amount equal to the additional interest which would have accrued on the
Revolving Loans during the preceding month if collections in the Florida
Partnership Collateral Account during the month had been received one (1)
Business Day subsequent to their actual receipt.
The Enforcement Costs include, without limitation, all customary fees,
charges and expenses charged or incurred by the Agent with respect to the
administration of the Florida Collateral Account.
5. The Financing Agreement is amended by adding the following as new
Section 2.1.9A:
SECTION 2.1.9A Florida Partnership
Revolving Loan Account. In addition to the Revolving Loan Account, the
Agent will establish and maintain a loan account on its books (the
"Florida Partnership Revolving Loan Account") to which the Agent will
(a) debit (i) the principal amount of each Florida Partnership Advance
made by the Lenders hereunder as of the date made, (ii) the amount of
any interest accrued on the Florida Partnership Advances as and when
due, and (iii) any other amounts due and payable by the Borrowers to
the Agent and/or the Lenders from time to time under the provisions of
this Agreement in connection with the Florida Partnership Advances, and
(b) credit all payments made by the Borrowers to the Agent on account
of the Florida Partnership Advances as of the date made including,
without limitation, funds credited to the Florida Partnership Revolving
Loan Account from the Florida Partnership Collateral Account. The Agent
may debit the Florida Partnership Revolving Loan Account for the amount
of any Item of Payment credited to the Florida Partnership Collateral
Account or the Florida Partnership Loan Account which is returned to
the Agent unpaid. All credit entries to the Florida Partnership
Revolving Loan Account are conditional and shall be readjusted as of
the date made if final and indefeasible payment is not received by the
Agent in cash or solvent credits. The Borrowers hereby promise to pay
to the order of the Agent for the ratable benefit of the Lenders, on
demand, an amount equal to the excess, if any, of all debit entries
over all credit entries recorded in the Florida Partnership Revolving
Loan Account under the provisions of this Agreement. Any and all
periodic or other statements or reconciliations, and the information
contained in those statements or reconciliations, of the Florida
Partnership Revolving Loan Account shall be final,
<PAGE>
binding and conclusive upon the Borrowers in all respects, absent
manifest error, unless the Agent receives specific written objection
thereto from the Borrowers within thirty (30) Business Days after such
statement or reconciliation shall have been sent by the Agent.
6. Section 2.1.12(b) of the Financing Agreement is amended to read as
follows:
(b) The aggregate outstanding principal amount of the
Revolving Loan minus the lesser of (i) the Florida
Partnership Advances or (ii) the Florida Partnership
Borrowing Base, shall at no time exceed an amount equal to
the aggregate of (x) the Borrowing Base minus (y) the
Florida Partnership Borrowing Base, minus (z) Five Million
Dollars ($5,000,000).
7. References in the Financing Agreement and in any of the other
Financing Documents (a) to the status of any one or more of the Borrowers as a
corporation shall in the case of the Florida Partnership be deemed to refer to
the Florida Partnership as a limited partnership, (b) to the corporate power,
authority, action, structure or organizational documents of any one or more of
the Borrowers shall in the case of the Florida Partnership be deemed to refer to
the limited partnership power, authority, action, structure or organizational
documents of the Florida Partnership.
8. The agreements of the Agent and the Lenders under this Agreement are
subject to the following terms and conditions, time being of the essence:
(a) The Agent shall have received a certificate of the general partner
of the Florida Partnership, dated as of the date of this Agreement:
(i) stating that the Florida Partnership's limited
partnership agreement and certificate of limited partnership
furnished to the Agent on the Closing Date has not been the
subject of any amendments, modifications, restatements,
substitutions, extensions or renewals thereto;
(ii) authorizing the execution and delivery of this
Agreement, the joinder in the other Financing Documents, and the
performance of the Florida Partnership's obligations under the
Financing Documents;
(iii) setting forth the identity and signatures of the
general partner then authorized to sign the Financing Documents
to which the Florida Partnership is a party;
<PAGE>
(iv) authorizing Box to request and direct the Florida
Partnership Advances on behalf of the Florida Partnership and
otherwise to act on behalf of the Florida Partnership as set
forth in Section 2.2.1(c) of the Financing Agreement; and
(v) identifying the Florida Partnership's partners.
(b) The Agent shall have received the favorable opinion of
counsel for the Borrowers addressed to the Agent and the Lenders in form
satisfactory to the Agent and its counsel.
(c) The Agent shall have received with respect to the Florida
Partnership an insurance certificate in accordance with the provisions of
Section 6.1.8 (Insurance) and Section 6.1.20 (Insurance With Respect to
Inventory) of this Agreement.
(d) The Collateral Disclosure List shall be supplemented by
information pertaining to the Florida Partnership and the Florida Partnership
shall become a party thereto.
9. The Florida Partnership hereby represents and warrants that all of
the representations and warranties contained in the Financing Documents are true
and correct on and as of the date hereof as if made on and as of such date, both
before and after giving effect to this Agreement, and that no Event of Default
or Default has occurred and is continuing or exists or would occur or exist
after giving effect to this Agreement. Each of the Borrowers hereby issues,
ratifies and confirms the representations, warranties and covenants contained in
the Financing Agreement, as amended hereby. Each of the Borrowers agrees that
this Agreement is not intended to and shall not cause a novation with respect to
any or all of the Obligations. This Agreement is one of the Financing Documents.
10. This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Maryland, without regard to principles
of choice of law.
11. The Borrowers shall pay at the time this Agreement is executed and
delivered all fees, commissions, costs, charges, taxes and other expenses
incurred by the Agent and its counsel in connection with this Agreement,
including, but not limited to, reasonable fees and expenses of the Agent's
counsel and all recording fees, taxes and charges.
12. This Agreement may be executed in any number of duplicate originals
or counterparts, each of such duplicate originals or counterparts shall be
deemed to be an original and all taken together shall constitute but one and the
same instrument. The Borrowers agree that the Agent and the Lenders may rely on
a telecopy of any signature of any Borrower. The Agent and the Lenders agree
that the Borrower may rely on a telecopy of this Agreement executed by the Agent
and the Lenders, respectively.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have executed and
delivered this Agreement under their respective seals as of the day and year
first written above.
[SIGNATURES ARE ON THE FOLLOWING PAGES]
<PAGE>
SIGNATURE PAGE TO
FIRST AMENDMENT TO FINANCING AND SECURITY AGREEMENT
AND
ADDITIONAL BORROWER JOINDER SUPPLEMENT
WITNESS OR ATTEST: FOUR M CORPORATION
/s/Harvey L. Friedman By: Timothy D. McMillin (Seal)
- --------------------- -------------------
Senior Vice President
WITNESS OR ATTEST: BOX USA GROUP, INC.
/s/Harvey L. Friedman
- ---------------------- By: Timothy D. McMillin (Seal)
-------------------
Senior Vice President
WITNESS OR ATTEST: FOUR M PAPER CORPORATION
/s/Harvey L. Friedman
- ---------------------- By: Timothy D. McMillin (Seal)
-------------------
Senior Vice President
WITNESS OR ATTEST: FOUR M MANUFACTURING GROUP
OF GEORGIA, INC.
/s/Harvey L. Friedman
- ---------------------- By: Timothy D. McMillin (Seal)
-------------------
Senior Vice President
WITNESS OR ATTEST: PAGE PACKAGING CORPORATION
/s/Harvey L. Friedman
- ---------------------- By: Timothy D. McMillin (Seal)
-------------------
Senior Vice President
<PAGE>
SIGNATURE PAGE TO
FIRST AMENDMENT TO FINANCING AND SECURITY AGREEMENT
AND
ADDITIONAL BORROWER JOINDER SUPPLEMENT
--------------------------------------
WITNESS OR ATTEST: BOX USA OF FLORIDA, L.P.
BY: FOUR M MANUFACTURING
GEORGIA, INC.
/s/Harvey L. Friedman
- ---------------------- By: Timothy D. McMillin (Seal)
-------------------
Senior Vice President
WITNESS: NATIONSBANK, N.A.
in its capacity as Agent
By:/s/ Vickie Tillman (Seal)
- ------------------------- ------------------------
Name: Vickie Tillman
Title: Vice President
WITNESS: NATIONSBANK, N.A.
in its capacity as a Lender
By:/s/ Vickie Tillman (Seal)
- ------------------------- ------------------------
Name: Vickie Tillman
Title: Vice President
WITNESS: IBJ SCHRODER BANK & TRUST COMPANY
By:/s/ Robert R. Wallace (Seal)
- ------------------------- ------------------------
Name: Robert R. Wallace
Title: Vice President
<PAGE>
SIGNATURE PAGE TO
FIRST AMENDMENT TO FINANCING AND SECURITY AGREEMENT
AND
ADDITIONAL BORROWER JOINDER SUPPLEMENT
WITNESS: SANWA BUSINESS CREDIT CORPORATION
By:/s/ Lawrence J. Placek (Seal)
- ------------------------- ------------------------
Name: Lawrence J. Placek
Title: Vice President
WITNESS: THE BANK OF NEW YORK COMMERCIAL
CORPORATION
By:/s/ Ryan Peck (Seal)
- ------------------------- ------------------------
Name: Ruan Peck
Title: Vice President
WITNESS: FLEET CAPITAL CORPORATION
By: /s/ Howard Handman (Seal)
- ------------------------- ------------------------
Name: Howard Handman
Title:
Exhibit 12.1
FOUR M CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Five Months
Ended
December 31, Fiscal Year Ended July 31,
----------------------------------------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest expense................ $ 10,106 $ 1,589 $ 7,565 $ 5,607 $ 5,448 $ 4,948 $ 5,903
Rent expense.................... 3,555 2,051 5,041 4,613 4,984 4,997 5,442
One third rent expense.......... 1,185 684 1,680 1,538 1,661 1,666 1,814
------- --------- -------- --------- -------- -------- --------
Fixed charges................... $ 11,291 $ 2,273 $ 9,245 $ 7,145 $ 7,109 $ 6,614 $ 7,717
IBT............................. $ (3,573) 6,588 $ 8,930 $ 16,457 $ (3,802) $ 1,435 $ 1,435
Fixed charges from above........ 11,291 2,273 9,245 7,145 7,109 6,614 7,717
-------- -------- -------- -------- -------- -------- --------
Earnings, as defined............ $ 7,718 $ 8,861 $ 18,175 $ 23,602 $ 3,307 $ 6,232 $ 9,152
Ratio of earnings to fixed
charges......................... .7x 3.9x 2.0x 3.3x 0.5x 1.0x .7x
--------- --------- --------- --------- --------- --------- ----------
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> AUG-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,431
<SECURITIES> 0
<RECEIVABLES> 52,775
<ALLOWANCES> 1,621
<INVENTORY> 32,896
<CURRENT-ASSETS> 108,833
<PP&E> 173,333
<DEPRECIATION> 30,129
<TOTAL-ASSETS> 303,645
<CURRENT-LIABILITIES> 62,984
<BONDS> 0
0
0
<COMMON> 13,150
<OTHER-SE> 962
<TOTAL-LIABILITY-AND-EQUITY> 12,188
<SALES> 196,787
<TOTAL-REVENUES> 0
<CGS> 171,304
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (10,106)
<INCOME-PRETAX> (3,573)
<INCOME-TAX> (1,486)
<INCOME-CONTINUING> (2,087)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,174)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
Independent Auditors' Report
Statement of Financial Position as of December 31, 1995
Statementof Operations for the period from January 1, 1996 to May 30,
1996 and for the years ended December 31, 1995 and 1994
Statementof Cash Flows for the period from January 1, 1996 to May 30,
1996 and for the years ended December 31, 1995 and 1994
Statementof Changes in Equity for the period from January 1, 1996 to
May 30, 1996 and for the years ended December 31, 1995 and 1994
Notes to Financial Statements
FLORIDA COAST PAPER COMPANY, L.L.C.
Independent Auditors' Report
Balance Sheet as of December 31, 1996
Statementof Operations and Changes in Accumulated Deficit for the
period from May 30, 1996 to December 31, 1996
Statement of Cash Flows for the period from May 30, 1996 to December 31, 1996
Notes to Financial Statements
FLORIDA COAST PAPER FINANCE CORP.
Finance Corp. is a subsidiary of the Company that was incorporated in Delaware
for the purpose of serving as co- issuer of and to facilitate the offering of
Florida Coast's 12 3/4% Series A First Mortgage Notes due 2003 (the "Old Notes")
and Florida Coast's exchange of its Old Notes for its registered 12 3/4% Series
B First Mortgage Notes due 2003. Finance Corp. does not have any substantial
operations or assets and does not have any revenues; thus, the separate
financial statements of Finance Corp. have not been included in the financial
statements included herein.
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
St. Joe Forest Products Company:
We have audited the accompanying statement of financial position of St. Joe
Forest Products Company--Linerboard Mill Operations as of December 31, 1995, and
the related statements of operations, cash flows and changes in equity for the
period from January 1, 1996 to May 30, 1996 and for each of the years in the
two-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of St. Joe Forest Products
Company--Linerboard Mill Operations as of December 31, 1995, and the results of
its operations and its cash flows for the period from January 1, 1996 to May 30,
1996 and for each of the years in the two-year period ended December 31, 1995,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Jacksonville, Florida
March 20, 1997
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
STATEMENT OF FINANCIAL POSITION
As of December 31, 1995
(dollars in thousands)
ASSETS
Current assets:
Accounts receivable ....................................... $ 9,249
Inventories, net .......................................... 14,632
Other assets .............................................. 1,143
--------
Total current assets ...................................... 25,024
Property, plant and equipment, net ........................ 169,424
--------
Total assets .............................................. $194,448
========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable........................................... $ 7,746
Accrued liabilities ....................................... 1,354
Accrued reserves .......................................... 2,056
--------
Total current liabilities ................................. 11,156
Accrued reserves .......................................... 2,379
Deferred income taxes ..................................... 33,533
--------
Total liabilities ......................................... 47,088
--------
Equity in net assets ...................................... 147,360
--------
Total liabilities and equities ............................ $194,448
========
See accompanying notes to financial statements.
- 2 -
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
STATEMENT OF OPERATIONS
For the period from January 1, 1996 to May 30, 1996 and the
years ended December 31, 1995 and 1994
(dollars in thousands)
<TABLE>
<CAPTION>
Period ended Year ended December 31,
------------ -----------------------
May 30, 1996 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Net Sales ...................................................... $ 67,670 $ 239,165 $ 192,886
Cost of sales .................................................. 68,979 180,788 183,800
Selling, general and administrative expense .................... 1,409 4,672 3,077
-------- --------- ---------
Operating profit (loss) ........................................ (2,718) 53,705 6,009
Other income:
Interest income ................................................ -- 962 383
Other, net ..................................................... 152 95 227
-------- --------- ---------
152 1,057 610
-------- --------- ---------
Income (loss) before income taxes .............................. (2,566) 54,762 6,619
Provision for income taxes:
Current ........................................................ (753) 20,995 (494)
Deferred ....................................................... (198) (701) 2,947
-------- --------- ---------
Total provision for income taxes ............................... (951) 20,294 2,453
-------- --------- ---------
Net income (loss) .............................................. $ (1,615) $ 34,468 $ 4,166
======== ========= =========
</TABLE>
See accompanying notes to financial statements.
- 3 -
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
STATEMENT OF CASH FLOWS
For the period from January 1, 1996 to May 30, 1996
and the years ended December 31, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Period ended Year ended December 31,
------------ -----------------------
May 30, 1996 1995 1994
------------ ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) ................................................ $ (1,615) $ 34,468 $ 4,166
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation ............................................ 10,335 24,054 23,678
Increase (decrease) in deferred
income taxes ....................................... (198) (701) 2,947
Changes in operating assets and liabilities:
Accounts receivable ......................................... 3,324 3,043 (3,920)
Inventories, net ............................................ 630 (2,524) 2,370
Other assets ................................................ (304) (78) (4)
Accounts payable ............................................ 402 (810) 426
Accrued liabilities ......................................... 820 558 333
Accrued expenses and reserves ............................... -- 1,212 (153)
-------- -------- --------
Cash provided by operating activities ............................ 13,394 59,222 29,843
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ....................... (4,160) (22,457) (8,321)
Purchases of held to maturity investments ........................ -- (8,850) (3,951)
Proceeds from maturity of investments ............................ -- 8,850 3,951
-------- -------- --------
Cash used in investing activities ................................ (4,160) (22,457) (8,321)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in intercompany accounts .................................. (9,234) (50,326) (8,434)
-------- -------- --------
Cash used in financing activities ................................ (9,234) (50,326) (8,434)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents ................................................. -- (13,561) 13,088
Cash and cash equivalents at
beginning of period ......................................... -- 13,561 473
-------- -------- --------
Cash and cash equivalents at end of period ....................... $ -- $ -- $ 13,561
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
- 4 -
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
STATEMENT OF CHANGES IN EQUITY
For the period from January 1, 1996 to May 30, 1996
and the years ended December 31, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Period ended Year ended December 31,
------------ -----------------------
May 30, 1996 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Common stock ........................................................ $ 10 $ 10 $ 10
========= ========= =========
Additional paid in capital .......................................... $ 75,014 $ 75,014 $ 75,014
========= ========= =========
Retained earnings:
Balance at beginning of year ................................... $ 158,684 $ 124,216 $ 120,050
Net income (loss) .............................................. (1,615) 34,468 4,166
--------- --------- ---------
Balance at end of year ......................................... $ 157,069 $ 158,684 $ 124,216
========= ========= =========
Intercompany accounts:
Balance at beginning of year ................................... $ (86,348) $ (36,022) $ (27,588)
Intercompany (sales) purchases:
St. Joe Container Company .................................. (36,834) (126,410) (97,691)
St. Joseph Land and Development
Company ............................................... 16,932 55,225 54,321
Apalachicola Northern Railroad ............................. 1,241 4,310 4,489
Costs allocated from St. Joe Paper Company:
Overhead allocation ........................................ 400 960 960
Current income taxes ....................................... (753) 20,995 (494)
Net cash (transferred) received ................................ 9,780 (5,406) 29,981
--------- --------- ---------
Balance at end of year ......................................... $ (95,582) $ (86,348) $ (36,022)
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
- 5 -
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
NOTES TO FINANCIAL STATEMENTS
For the period from January 1, 1996 to May 30, 1996
and the years ended December 31, 1995 and 1994
(Dollars in thousands)
(1) Nature of Operations
St. Joe Forest Products Company (SJFP) is engaged in the manufacture of mottled
white and unbleached kraft linerboard. SJFP operates one production facility
which is located in Port St. Joe, Florida. Sales are primarily to manufacturers
of corrugated containers, both domestic and foreign.
(2) Basis of Presentation
The accompanying financial statements include all of the relevant assets,
liabilities, revenues and expenses attributable to the linerboard mill operation
of SJFP. Certain of SJFP's assets and liabilities were sold on May 30, 1996,
pursuant to the asset purchase agreement between St. Joe Paper Company (SJPC),
SJFP, St. Joe Container Company (SJCC), Florida Coast Paper Company, L.L.C. and
Four M. Corporation dated November 1, 1995. The financial statements do not
reflect SJFP's wholly owned subsidiaries.
(3) Summary of Significant Accounting Policies
(a) Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(b) Revenue Recognition
Revenue from the sale of linerboard is recognized generally on delivery of the
product to the common carrier.
(c) Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents include
cash on hand, bank demand accounts, money market accounts, remarketed
certificates of participation and repurchase agreements having original
maturities of three months or less.
(d) Inventories
Inventories are stated at the lower of cost or market. Costs for manufactured
paper products and associated raw materials are determined under the last-in,
first-out (LIFO) method. Costs for substantially all other inventories are
determined under the first-in, first-out (FIFO) or the average cost method. A
reserve for obsolescence is established for materials and supplies having no
activity in the previous seven years.
(e) Property, Plant and Equipment
Depreciation is computed using both straight-line and accelerated methods over
the useful lives of various assets.
- 6 -
<PAGE>
(f) Self-insurance
Self-insurance reserves are established for automobile liability, workers'
compensation, group health insurance provided to employees and property losses
based on claims filed and claims incurred but not reported, with a maximum per
occurrence of $25 for automobile liability, $600 for workers' compensation, $50
for property loss, other than windstorm, and $250 for damage due to windstorm.
SJFP is insured for insurance costs in excess of these limits.
(g) Income Taxes
SJFP's results of operations are included in the consolidated U.S. federal and
Florida income tax returns of SJPC. The tax provisions and deferred tax
liabilities presented have been determined as if SJFP was a stand-alone business
filing separate returns, except to the extent that an operating loss can be
utilized by SJPC, the benefit is allocated to SJFP. Current tax liabilities are
paid to or refunded by SJPC.
SJFP follows the asset and liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes." Under SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(4) Inventories
Inventories as of December 31 consist of:
1995
----
Manufactured paper products and associated raw materials....... $ 3,886
Materials and supplies......................................... 10,746
-------
$ 14,632
The replacement cost of manufactured paper products and associated raw material
inventories was in excess of LIFO stated cost by approximately $2,750 as of
December 31, 1995. The reserve for obsolescence was approximately $2,100 at
December 31, 1995.
(5) Property, Plant and Equipment
Property, plant and equipment, at cost, as of December 31 consist of:
Estimated
1995 Useful Life
---- -----------
Land............................................ $ 200 --
Land improvements............................... 4,123 20
Buildings....................................... 11,474 45
Machinery and equipment......................... 366,225 12-30
Office equipment................................ 732 10
Autos and trucks................................ 861 3-6
Construction 1,796 --
----------
385,411
Accumulated depreciation........................ 215,987
---------
$ 169,424
=========
- 7 -
<PAGE>
(6) Income Taxes
Total income tax expense (benefit) for the period from January 1, 1996 to May
30, 1996 and the year ended December 31, 1995 and 1994 was attributable to
income (loss) from continuing operations and was ($951), $20,294, and $2,453,
respectively.
Income tax expense (benefit) attributable to income (loss) from continuing
operations differed from the amount computed by applying the statutory federal
income tax rate to pre-tax income (loss) as a result of the following:
<TABLE>
<CAPTION>
Period ended Year ended December 31,
------------ -----------------------
May 30, 1996 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Tax at the statutory federal rate .................................. $ (898) $19,167 $2,317
State income taxes (net of federal benefit) ........................ (53) 1,127 136
-------- ------- ------
$ (951) $20,294 $2,453
======== ======= ======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax liabilities and deferred tax assets at December 31, 1995, are
presented below:
1995
----
Deferred tax liabilities:
Property, plant and equipment, principally due to differences
in depreciation............................................ $ 35,197
Deferred tax assets:
Current:
Accrued reserves........................................... 762
Noncurrent:
Accrued reserves........................................... 1,644
Total deferred tax assets.................................. 2,406
Net deferred tax liability........................................ $ 32,791
=======
Based on the timing of reversal of future taxable amounts and SJFP's history of
reporting taxable income, SJFP believes that the deferred tax assets will be
realized and a valuation allowance is not considered necessary. The current
deferred tax asset of $762 is recorded in other assets as of December 31, 1995
(7) Pension and Retirement Plans
Substantially all of SJFP's employees, along with other SJPC and subsidiaries
eligible employees, participate in SJPC pension plans. During the past four
years, the assets of the SJPC pension plan have exceeded benefit obligations
under such plans, resulting in pension income under SFAS No. 87 "Employers'
Accounting for Pensions." SJPC has an Employee Stock Ownership Plan (ESOP) for
the purpose of purchasing stock of SJPC for the benefit of qualified employees.
Contributions to the ESOP are limited to .5% of compensation of employees
covered under the ESOP. No assets of the SJPC pension plan or the ESOP will be
transferred as a result of the asset purchase agreement. No allocation of
benefit or expense from the pension plans or ESOP has been made to SJFP during
the period from January 1, 1996 to May 30, 1996 and the years ended December 31,
1995 and 1994 due to immateriality.
SJPC also has other defined contribution plans which, in conjunction with the
ESOP cover substantially all its salaried employees. Contributions are at the
employees' discretion and are matched by SJPC up to certain limits. SJFP's
expense for these defined contribution plans was $79, $131 and $133 in 1996,
1995 and 1994 respectively.
- 8 -
<PAGE>
Pursuant to the asset purchase agreement, the assets of the defined contribution
plans attributable to transferred SJFP employees may be paid out immediately to
the employee, left in the plans or rolled over into a qualified plan of the
buyer, if such plan exists.
(8) Related Party Transactions
Intercompany due to and due from balances between SJFP and SJPC and its
affiliates have been included in equity. The net intercompany due to SJFP was
$86,348 at December 31, 1995. The intercompany transactions described below may
or may not be indicative of what such transactions would have been had SJFP
operated either as an unaffiliated entity or in affiliation with another entity.
An allocation of costs of overhead of SJPC is included in selling, general and
administrative expenses. SJPC provides services for SJFP in treasury, taxes,
benefits administration and legal support and other financial systems and
support. SJPC's budgeted overhead was allocated based on a formula which equally
weighted each subsidiary's proportional share of payroll, sales and fixed
assets. This formula is similar to that which is used by many states to
determine the economic activity of an entity and is considered by management to
be a reasonable measure of the use of corporate resources by each subsidiary.
SJFP was billed approximately $400 for the period from January 1, 1996 to May
30, 1996 and approximately $960 annually for such services in 1995 and 1994.
Sales to SJCC, a wholly owned subsidiary of SJFP, amounted to approximately
$36,834, $126,410 and $97,691 representing approximately 78,000, 238,000 and
248,000 tons for the period from January 1, 1996 to May 30, 1996 and for the
years ended December 31, 1995 and 1994, respectively. Pricing for these
transactions was based on the Pulp & Paper Week Price Watch: Paper and
Paperboard. In addition, SJFP purchases both linerboard and corrugating medium
for SJCC from outside suppliers. The price paid by SJFP for this rollstock was
negotiated with each supplier. SJCC was charged for this rollstock at the prices
published in Pulp & Paper Week.
Purchases of pulpwood and wood chips from St. Joseph Land and Development
Company, a wholly owned subsidiary of SJFP, amounted to approximately $16,932,
$55,225 and $54,321 representing approximately 570,000, 2,033,000 and 2,028,000
tons for the period from January 1, 1996 to May 30, 1996 and for the years ended
December 31, 1995 and 1994, respectively.
SJFP ships the majority of its product via Apalachicola Northern Railroad, a
subsidiary of SJPC. Amounts billed for freight amounted to approximately $1,241,
$4,310 and $4,489 for the period from January 1, 1996 to May 30, 1996 and for
the years ended December 31, 1995 and 1994, respectively.
(9) Contingencies
SJFP is involved in litigation on a number of matters and is subject to certain
claims which arise in the normal course of business, none of which, in the
opinion of management, is expected to have a material adverse effect on SJFP's
financial position, liquidity, or results of operations.
SJFP has retained certain self-insurance risks with respect to losses for third
party liability, property damage and group health insurance provided to
employees.
SJFP is subject to costs arising out of environmental laws and regulations,
which include obligations to remove or limit the effects on the environment of
the disposal or releases of certain wastes or substances at various sites. It is
SJFP's policy to accrue and charge against earnings environmental cleanup costs
when it is probable that a liability has been incurred and an amount is
reasonably estimable. As assessments and cleanups proceed, these accruals are
reviewed and adjusted, if necessary, as additional information becomes
available.
SJFP is currently a party to, or involved in, legal proceedings involving
environmental matters such as alleged discharges into water or soil. It is not
possible to quantify future environmental costs because many issues relate to
actions by third parties or changes in environmental regulation. Environmental
liabilities are paid over an
- 9 -
<PAGE>
extended period and the timing of such payments cannot be predicted with any
confidence. Based on information presently available, management believes that
the ultimate disposition of currently known matters will not have a material
effect on the financial position, liquidity, or results of operations of SJFP.
Aggregate environmental related accruals were approximately $1,000 as of
December 31, 1995.
- 10 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE MANAGEMENT OVERSIGHT COMMITTEE AND MEMBERS
OF FLORIDA COAST PAPER COMPANY, L.L.C.
In our opinion, the accompanying balance sheet and the related statements of
operations and changes in accumulated deficit and of cash flows present fairly,
in all material respects, the financial position of Florida Coast Paper Company,
L.L.C. (the "Company") at December 31, 1996 and the results of its operations
and its cash flows for the period from May 30, 1996 to December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 9 to the financial statements, all of the Company's
linerboard production is purchased by the Company's owners at prices intended to
generate sufficient funds to cover the Company's cash operating costs, cash
interest expenses and maintenance capital expenditures. As discussed in Note 3
to the financial statements, the Company's owners have agreed to continue to
make supporting payments to the Company, despite the planned cessation of
production on April 1, 1997.
PRICE WATERHOUSE LLP
Chicago, Illinois
March 27, 1996
- 11 -
<PAGE>
FLORIDA COAST PAPER COMPANY, L.L.C.
BALANCE SHEET
As of December 31, 1996
(dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 8,621
Accounts receivable from Joint Venture Partners................... 8,643
Other receivables................................................. 567
Inventories....................................................... 13,185
Other............................................................. 681
---------
Total current assets.......................................... 31,697
--------
Property, plant and equipment, net of accumulated depreciation.... 184,946
Deferred debt issuance costs...................................... 7,825
Other noncurrent assets........................................... 997
---------
Total assets.................................................. $225,465
-------
Current liabilities:
Accounts payable.................................................. $ 10,222
Accrued liabilities............................................... 8,567
Accrued interest.................................................. 1,753
---------
Total current liabilities..................................... 20,542
--------
Long-term debt:
Senior long-term debt............................................. 165,000
Subordinated debt................................................. 10,791
Other noncurrent liabilities...................................... 3,076
Commitments and contingencies (Note 10)........................... ---------
Total liabilities............................................. 199,409
---------
Members' equity
Contributed capital............................................... 40,000
Accumulated deficit............................................... (13,944)
---------
Total members' equity......................................... 26,056
----------
Total liabilities and members' equity................................$ 225,465
=========
The accompanying notes are an integral part of these statements.
- 12 -
<PAGE>
FLORIDA COAST PAPER COMPANY, L.L.C.
STATEMENT OF OPERATIONS AND CHANGES IN ACCUMULATED DEFICIT
For the period from May 30, 1996 to December 31, 1996
(dollars in thousands)
Net sales to Joint Venture Partners.................... $ 103,365
Cost of sales.......................................... 102,728
General, selling & administrative expense.............. 1,545
-----------
Operating loss...................................... (908)
-----------
Interest income........................................ 510
Interest expense....................................... (13,546)
----------
Other expense, net.................................. (13,036)
----------
Loss before income taxes............................... (13,944)
Provision for state income taxes....................... --
-------------
Net loss............................................... (13,944)
Accumulated deficit, beginning of period............... --
-------------
Accumulated deficit, end of period..................... $ (13,944)
==========
The accompanying notes are an integral part of these financial statements.
- 13 -
<PAGE>
FLORIDA COAST PAPER COMPANY, L.L.C.
STATEMENT OF CASH FLOWS
For the period from May 30, 1996 to December 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss ...................................................................... $ (13,944)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation ............................................................... 7,785
Other non-cash items ....................................................... 1,952
Changes in current assets and liabilities:
Accounts receivable ........................................................ (3,403)
Inventories ................................................................ 1,153
Other current assets ....................................................... (1,368)
Accounts payable ........................................................... 788
Accrued liabilities ........................................................ 7,501
Accrued interest ........................................................... 1,753
---------
Net cash provided by operating activities ..................................... 2,217
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings .................................................................... 175,500
Debt repayments ............................................................... (500)
Capital contribution from Joint Venture Partners .............................. 40,000
Payment of debt issuance costs ................................................ (8,250)
---------
Net cash provided by financing activities ..................................... $ 206,750
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................................................... (3,932)
Payments made for business acquired ........................................... (196,414)
---------
Net cash used in investing activities ......................................... (200,346)
---------
NET CASH FLOWS:
Net increase in cash and cash equivalents ..................................... 8,621
Cash and cash equivalents, beginning of period ................................ --
---------
Cash and cash equivalents, end of period ...................................... $ 8,621
---------
</TABLE>
See Note 4 regarding supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
- 14 -
<PAGE>
FLORIDA COAST PAPER COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE 1 -- NATURE OF OPERATIONS
Florida Coast Paper Company, L.L.C. (the "Company") was formed for the purpose
of purchasing a paperboard mill from St. Joe Forest Products Company ("St. Joe")
located in Port St. Joe, Florida (the "Mill"). The Company is a joint venture
between Stone Container Corporation ("Stone") and Four M Corporation (together,
the "Joint Venture Partners"). The purchase, which occurred on May 30, 1996, was
accounted for under the purchase method. Accordingly, the purchase price was
allocated to the net assets acquired based on estimated fair values as supported
by various company analyses some of which are still pending. The Mill is engaged
in the manufacture of mottled white and unbleached kraft linerboard. See also
Part I Item 1. Business--The Company.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year:
The Company utilizes a December 31 fiscal year end. The accompanying financial
statements are presented as of December 31, 1996 and for the period from May 30,
1996 to December 31, 1996 (the "1996 period").
Estimates:
The financial statements are prepared in conformity with generally accepted
accounting principles that require the use of management estimates. Changes in
such estimates may affect amounts reported in future periods.
Cash and cash equivalents:
The Company considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents and, therefore,
includes such investments as cash and cash equivalents in the financial
statements.
Inventories:
Inventories are stated at the lower of cost or market. Costs for substantially
all inventories are determined using the average cost method.
Property, plant and equipment:
Property, plant and equipment is stated at cost. Expenditures for maintenance
and repairs are charged to income as incurred. Additions, improvements and major
replacements are capitalized. The cost and accumulated depreciation related to
assets sold or retired are removed from the accounts and any gain or loss is
credited or charged to income.
Depreciation is provided on the straight-line method over the estimated useful
lives of depreciable assets based on the following annual rates:
Type of asset: Rates
- ------------- --------------
Machinery and equipment...................................... 7% to 33%
Buildings.................................................... 4%
Land improvements............................................ 7%
- 15 -
<PAGE>
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Company's long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
Deferred debt issuance costs:
Deferred debt issuance costs are amortized over the expected life of the related
debt using the interest method.
Revenue recognition policy:
Revenues are recognized during the period in which such product is shipped.
Income taxes:
As a limited liability company, the Company's results of operations are included
in the U.S. federal income tax returns of the Joint Venture Partners. The
Company has provided a valuation allowance for all state net operating loss
carryforwards generated.
Insurance reserves:
The Company retains portions of anticipated losses related to workers'
compensation and group medical. Liabilities in excess of specified amounts are
the responsibility of the Company's insurance carriers. Reserves have been
provided for the Company's loss retentions, based on experience and management's
best estimate. Changes in actual experience could cause these estimates to
change in the near term.
Concentration of credit risk
A significant portion of the Company's accounts receivable are due from the
Joint Venture Partners. See Note 9 "Related party transactions."
NOTE 3 -- SUBSEQUENT EVENT
On March 5, 1997 the Company announced that on April 1, 1997 it will cease
production at the Mill until market conditions warrant a resumption of
linerboard production. Stone and Four M, the Joint Venture Partners, have
committed to fund the Company's cash operating costs, cash interest expense and
maintenance capital expenditures during the shutdown. The Company also has a $20
million Subordinated Credit Facility provided by its Joint Venture Partners.
NOTE 4 -- ADDITIONAL CASH FLOW STATEMENT INFORMATION
(in thousands)
- ----------------------------------------------------------
Cash paid during the 1996 period for: interest............ $10,577
income taxes........ $ --
========
- 16 -
<PAGE>
NOTE 5 -- INVENTORIES
Inventories as of December 31, 1996 are summarized as follows:
(in thousands) 1996
- --------------------------------------------- ------------
Raw materials................................ $ 3,616
Supplies..................................... 8,337
Finished goods and work in process........... 1,232
------------
Total inventories......................... $ 13,185
------------
NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1996 is summarized as follows:
(in thousands) 1996
- --------------------------------------------- ------------
Land and land improvements................................ $ 2,815
Buildings................................................. 7,564
Machinery and equipment................................... 181,177
Construction in progress.................................. 1,175
-----------
Total property, plant and equipment.................... 192,731
Accumulated depreciation.................................. (7,785)
----------
Total property, plant and equipment, net............... $ 184,946
-----------
NOTE 7-- LONG-TERM DEBT
Long-term debt at December 31, 1996 is summarized as follows:
(in thousands) 1996
- --------------------------------------------- ------------
Senior debt:
12.75% First Mortgage Notes due June 1, 2003.......... $ 165,000
Subordinated debt:
13.25% Subordinated Seller Note due June 1, 2004...... 10,791
Subordinated Credit Facility.......................... --
----------
Total subordinated debt.................................. 10,791
----------
Total long-term debt..................................... $ 175,791
----------
The First Mortgage Notes (the "Notes") bear interest at a rate of 12.75% per
annum, payable semiannually on June 1 and December 1 of each year, commencing
December 1, 1996. The Company is not required to make any mandatory redemption
or sinking fund payments with respect to the Notes prior to maturity.
Interest on the Subordinated Seller Note (the "Seller Note") is compounded
quarterly and has been added to the principal of the Seller Note rather than
being paid in cash.
In connection with the acquisition of the Mill assets, the Joint Venture
Partners have agreed to provide the Company with a $20 million subordinated line
of credit for general corporate purposes (the "Subordinated Credit Facility").
The Subordinated Credit Facility will expire 90 days after the maturity of the
Notes, and each loan made under the Subordinated Credit Facility bears interest
at a rate equal to LIBOR, plus 3.625% per annum. At December 31, 1996, there
were no borrowings outstanding under the Subordinated Credit Facility.
- 17 -
<PAGE>
There are no amounts of long-term debt maturing during the next five years.
The indenture pursuant to which the Notes have been issued contains certain
covenants that, among other things, limit the ability of the Company to incur
additional indebtedness, make distributions, create certain liens, enter into
certain transactions with affiliates, sell assets or enter into certain mergers
and consolidations.
The Notes are secured by a first mortgage on all real property and improvements
comprising the Company and a first priority security interest in substantially
all of the equipment of the Company and certain other assets (but excluding,
among other things, inventories and accounts receivable).
The Seller Note contains certain covenants none of which are more restrictive
than those contained in the indenture.
The fair value of the Company's debt, based on the quoted market price at
December 31, 1996, was $190,641.
NOTE 8 -- PENSIONS
The Company has noncontributory pension plans for the benefit of all salaried
and hourly employees. The funding policy for the plans is to annually contribute
the statutory required minimum. The salaried pension plan provides benefits
based on a formula that takes into account each participant's final average
earnings. The hourly pension plan provides benefits under a flat benefit
formula. The salaried and hourly pension plans provide reduced benefits for
early retirement.
Net pension expense for the combined pension plans for the 1996 period includes
the following components:
(in thousands) 1996
- ------------------------------------------------------- ------------
Service cost-- benefits earned during the period....... $ 442
Interest cost on projected benefit obligations......... 75
-------------
Net pension expense.................................... $ 517
-------------
The following table sets forth the funded status of the Company's pension plans
and the amounts recorded in the Balance Sheet:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1996
- -------------------------------------------------------------------------- ----
Actuarial present value of benefit obligations:
<S> <C>
Vested benefits ........................................................ $(1,835)
Non-vested benefits .................................................... (391)
-------
Accumulated benefit obligation ............................................ (2,226)
Effect of increase in compensation levels ................................. (70)
-------
Projected benefit obligation for service rendered through December 31, 1996 (2,296)
Plan assets at fair value ................................................. 50
-------
Excess of projected benefit obligation over plan assets ................... (2,246)
Unrecognized net actuarial loss ........................................... 170
-------
Net accrual ............................................................... $(2,076)
=======
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligations at December 31, 1996 was 7.5 percent.
The rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligations was 5.0 percent.
The expected long-term rate of return on assets was 8.5 percent.
- 18 -
<PAGE>
NOTE 9 -- RELATED PARTY TRANSACTIONS
Pursuant to an Output Purchase Agreement, each of the Joint Venture Partners has
agreed to purchase from the Company one half of the Mill's entire linerboard
production at a price that is $25 per ton below the price of such product
published in Pulp & Paper Week, an industry trade publication, subject to a
minimum purchase price, which minimum purchase price is intended to generate
sufficient funds to cover cash operating costs, cash interest expense and
maintenance capital expenditures. During the 1996 period, the Joint Venture
Partners were charged an additional $8.34 million as a result of the minimum
purchase price provisions of the Output Purchase Agreement. This amount is
included in Net Sales to Joint Venture Partners in the Statement of Operations.
Furthermore, in addition to an initial investment of $40 million in the Company,
the Joint Venture Partners have severally agreed to provide the Company with a
$20 million Subordinated Credit Facility. See Note 7 "Long-term debt."
At December 31, 1996, the Company had receivables from the Joint Venture
Partners of approximately $8.6 million.
The Company has entered into a procurement agreement with Stone pursuant to
which Stone will procure wood fiber, at market values, on behalf of the Company.
NOTE 10 -- COMMUNICATIONS AND CONTINGENCIES
The Company entered into a Wood Fiber Supply Agreement (the "Fiber Agreement")
with St. Joseph Land and Development Company ("St. Joe Land") pursuant to which
St. Joe Land will supply a specified quantity of pulpwood and wood chips to the
Company. The Company and St. Joe Land are currently determining the impact of
the cessation of production on the Fiber Agreement. See Note 3. The Company may
be required to make payments pursuant to the Fiber Agreement during the shutdown
period.
In accordance with the provisions of the WARN Act, in the event that the
shutdown of the Company's operations exceeds six months, the Company may be
required to provide severance payments to its employees of up to 60 days of pay.
Pursuant to the Acquisition Agreement, St. Joe Forest Products Company, St. Joe
Paper Company and St. Joe Container Company have agreed to indemnify the Company
for certain environmental matters based on activities prior to May 30, 1996.
However, there can be no assurance that this indemnification will be sufficient
to reimburse the Company for all environmental liabilities.
The Company is subject to costs arising out of environmental laws and
regulations that include obligations to remove or limit the effects on the
environment of the disposal or release of certain wastes or substances at
various sites. It is the Company's policy to accrue and charge against earnings
environmental cleanup costs when it is probable that a liability has been
incurred and an amount is reasonably estimable. As assessments and cleanups
proceed, these accruals are reviewed and adjusted, if necessary, as additional
information becomes available. St. Joe previously made significant capital
expenditures to comply with water, air and solid and hazardous waste
regulations. The Company expects to make significant expenditures in the future.
The Company's environmental capital expenditures were immaterial in 1996 and are
expected to approximate $600 thousand in 1997.
In December 1993, the U.S. Environmental Protection Agency (the "EPA") issued a
proposed rule affecting the pulp and paper industry. These proposed regulations,
informally known as the "cluster rules," would make more stringent requirements
for discharge of wastewaters under the Clean Water Act and would impose new
requirements on air emissions under the Clean Air Act. Pulp and paper
manufacturers have submitted extensive comments to the EPA on the proposed
regulations in support of the position that requirements under proposed
regulations are unnecessarily complex, burdensome and environmentally
unjustified. Estimates, based on currently proposed regulations, indicate that
the Company could be required to make capital expenditures of approximately $87
million (unaudited) in order to meet the requirements of the regulations,
although it is likely this estimate will decrease upon finalization of the
rules. While it cannot be predicted with certainty, it appears as though the
final cluster rules that
- 19 -
<PAGE>
are currently expected to be issued in 1997, will be modified to reduce certain
requirements. Assuming that the anticipated reduced requirements are promulgated
as the Company expects, the Company currently believes it would be required to
make capital expenditures of approximately $27 million (unaudited) during the
period of 1998 through 2006 in order to meet the requirements of the anticipated
regulations. If the Company determines to discontinue the production of mottled
white linerboard, the Company estimates the capital spending that may be
required to comply with the anticipated regulations could be $5 million
(unaudited) (but could reach as high as $45 million (unaudited) under the
currently proposed regulations). The ultimate financial impact of the
regulations on the Company cannot be accurately estimated at this time but will
depend on the nature of the final regulations, the timing of required
implementation and the cost and availability of new technology. The Company may
determine that, under the final regulations, the costs associated with the
production of mottled white linerboard may be prohibitive and could discontinue
its production. Because of the current higher margins associated with mottled
white linerboard, in the event the Company discontinues the production of
mottled white linerboard, its revenues and profit margins could decrease.
The Company may be subject to legal proceedings involving environmental matters
such as alleged discharges into water or soil. Based on information presently
available, management believes that the ultimate disposition of such matters
would not have a material effect on the financial position, results of
operations or liquidity of the Company.
Additionally, the Company is involved in certain litigation primarily arising in
the normal course of business. In the opinion of management, the Company's
liability under any pending litigation would not materially affect its financial
condition, results of operations or liquidity.
NOTE 11 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes quarterly financial data for 1996:
(dollars in thousands)
----------------------
1996 Second (1) Third Fourth
- ---- ----------- ------ --------
Net sales ....... $14,279 $43,496 $45,590
Cost of sales ... 14,478 43,393 44,857
Net income (loss) (2,138) (5,365) (6,441)
(1) Includes one month of Florida Coast's results.
- 20 -
