<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _____________
Commission File Number: 333-8043
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
Valhalla, New York 10595
------------------ -----
(Address of principal executive offices) (Zip Code)
(914) 749-3200
--------------
Registrant's telephone number, including area code:
-----------
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
----- -----
As of August 1, 1998, the registrant had 6,815,867 shares of Common Stock
outstanding.
<PAGE>
FOUR M CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited): Page
<S> <C>
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 (audited) 1
Consolidated Statements of Operations for the three and six months ended
June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II - Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
</TABLE>
<PAGE>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
FOUR M CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, 1998 December 31, 1997
(unaudited) (audited)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 617 $ 2,025
Restricted cash (Note 9) 3,435 116
Accounts receivable, less allowance for doubtful
accounts of $2,090 and $2,727 55,180 55,209
Inventories (Note 6) 30,978 36,963
Income taxes recoverable - 6,900
Notes, advances and other receivables 3,722 2,638
Deferred income taxes (Note 10) 9,304 16,654
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 103,236 120,505
Property, plant and equipment, net of accumulated depreciation 167,022 181,549
Other assets 16,171 16,399
Goodwill and other intangibles, net of accumulated amortization 4,147 4,321
- -----------------------------------------------------------------------------------------------------------------------------
$290,576 $322,774
-------- --------
-------- --------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 41,578 $ 48,237
Accrued liabilities (Note 7) 15,550 15,769
Current maturities of long-term debt and subordinated debt 3,603 3,303
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 60,731 67,309
Long-term debt, less current maturities 224,718 235,354
Subordinated debt, less current maturities 1,986 1,969
Deferred income taxes 9,304 9,404
Minority interest 1,546 1,508
Other liabilities 462 565
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 298,747 316,109
- -----------------------------------------------------------------------------------------------------------------------------
Stockholder's equity:
Common stock, par value $.125: Authorized shares -
10,000,000; shares issued 7,229,770, and
outstanding 6,815,867 904 904
Additional paid-in capital 717 717
Retained earnings (8,830) 6,006
- -----------------------------------------------------------------------------------------------------------------------------
(7,209) 7,627
Less treasury stock, at cost (413,903 shares) 962 962
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity (8,171) 6,665
- -----------------------------------------------------------------------------------------------------------------------------
$290,576 $322,774
-------- --------
-------- --------
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
1
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $123,150 $116,129 $246,059 $234,025
Cost of goods sold 109,633 97,578 215,062 196,632
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 13,517 18,551 30,997 37,393
- -----------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 11,572 11,852 21,307 23,558
- -----------------------------------------------------------------------------------------------------------------------
Income from operations 1,945 6,699 9,690 13,835
Other Income (expense):
Interest expense (6,646) (6,200) (13,571) (12,624)
Loss on joint venture contract (3,200) - (3,200) -
Other (52) - (467) 85
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for
income taxes and minority interest (7,953) 499 (7,548) 1,296
Provision for income taxes (Note 10) (7,096) (201) (7,250) (536)
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest (15,049) 298 (14,798) 760
Minority interest (15) (125) (38) (103)
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $(15,064) $173 $(14,836) $657
--------- --------- --------- ---------
--------- --------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
2
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
--------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (14,836) $ 657
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 8,027 7,369
Allowance for doubtful accounts (637) 304
Non-cash interest expense 18 -
Deferred income taxes 7,250 2,981
Loss on sale of fixed assets 467 26
Change in assets and liabilities:
Accounts, advances, notes, and other receivables 665 4,227
Inventories 5,985 6,265
Income taxes recoverable (payable) 6,900 (1,776)
Other assets, net of other liabilities (1,319) (801)
Accounts payable and accrued liabilities (6,878) (17,127)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,642 2,125
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (8,474) (11,061)
Proceeds from sale of fixed assets 771 2,679
Sale of fixed assets of Dallas and Houston facilities 14,392 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 6,689 (8,382)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit (8,657) 3,985
agreements
Secured term, mortgage, equipment and other 62 2,336
borrowings
Repayment of long-term debt (1,825) (1,249)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (10,420) 5,072
- -----------------------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and restricted cash:
Increase (decrease) in cash, cash equivalents and restricted cash 1,911 (1,185)
Cash and cash equivalents, beginning of period 2,025 2,431
Restricted cash, beginning of period 116 -
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 617 $1,246
-------- -------
-------- -------
Restricted cash, end of period $ 3,435 $ -
-------- -------
-------- -------
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 13,141 $12,613
Income taxes $ 109 $ (856)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying footnotes are an integral part of these financial
statements.
3
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the results for
interim periods. Operating results for the six months ended June 30, 1998 are
not necessarily indicative of the results to be expected for the full year
ending December 31, 1998. For further information refer to the consolidated
financial statements and footnotes thereto contained in the Four M Corporation
Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Business: Four M Corporation and subsidiaries ("Four M" or the "Company") are
manufacturers of corrugated packaging and semi-chemical corrugating medium. 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.
Use of 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 in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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 beneficially owned by its Chairman of the Board and Chief
Executive Officer, Dennis Mehiel (the "Stockholder") (Note 11). Intercompany
accounts and transactions have been eliminated.
The Company has certain 50% owned investments which are accounted for under the
equity method.
Reclassifications: Certain prior period amounts have been reclassified to
conform with the current period presentation.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
St. Joe Container Company
On May 30, 1996, the Company acquired (i) substantially all of the assets
of St. Joe Container Company, which consisted primarily of 16 converting
facilities and related working capital (the "St. Joe Acquisition") and (ii) a
50% interest in Florida Coast Paper Company, L.L.C. ("Florida Coast"), a limited
liability company which owns a linerboard mill located at Port St. Joe, Florida
(the "St. Joe Mill"). Stone Container Corporation ("Stone Container", together
with the Company, the "Joint Venture Partners") acquired the remaining 50%
interest in Florida Coast (Note 5). On May 30, 1996, the Company issued the
Notes (Note 4) and warrants valued at $0.6 million and entered into a revolving
credit facility which, as amended, provides up to $65.0 million to, in part,
finance such transactions.
The St. Joe Acquisition has been accounted for using the purchase method of
accounting.
4
<PAGE>
Box USA of New Jersey, Inc. ("New Jersey")
On August 5, 1996, the Company acquired 490 shares of common stock in New
Jersey from Stone Container for $5.5 million. The purchase represented 49% of
New Jersey's outstanding shares, increasing the Company's ownership interest to
50%. Since the remaining 50% interest in New Jersey is owned indirectly by the
Stockholder, the financial statements of New Jersey are included in the
Company's consolidation (Note 11).
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 (Note 11).
Consolidated Packaging Corporation, Debtor-In-Possession
On August 16, 1996, Box USA Group, Inc. ("Box USA"), a wholly-owned
subsidiary of the Company, discontinued operations at its Flint, Michigan
facility and disposed of substantially all the machinery and equipment utilized
in the operations of such facility for approximately $2.3 million, and finished
goods and work-in-progress inventory and certain related assets utilized at such
facility for approximately $300,000, which resulted in a gain of $480,000.
NOTE 4 - CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
In connection with the St. Joe Acquisition, the Company issued and sold
$170.0 million aggregate principal amount of 12% Senior Secured Notes due 2006
(the "Notes"). The Notes are fully and unconditionally guaranteed on a joint and
several 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"). Separate financial statements and other disclosures
concerning the Guarantors are not presented because management has determined
that they are not material to the holders of the Notes. The Notes are not
guaranteed by Box USA Paper Corporation, Box USA of Florida, L.P. ("Florida
L.P."), Florida Coast, New Jersey or Fibre Marketing Group, L.L.C.
(collectively, the "Non-Guarantors"). The following are unaudited condensed
consolidating financial statements regarding the Company (on a stand-alone basis
and on a consolidated basis) and the Guarantors and Non-Guarantors as of and for
the six months ended June 30, 1998:
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
(in thousands)
Four M Guarantors Non-Guarantors Elimination Consolidated
Corporation ---------- -------------- Entries ------------
----------- -----------
<S> <C> <C> <C> <C> <C>
Current assets......... $ - $89,017 $14,219 $ - $ 103,236
Investment in
affiliates............. (8,171) 5,890 - 7,971 5,690
Total assets........... (8,171) 261,293 29,483 7,971 290,576
Current liabilities.... - 50,603 10,128 - 60,731
Total liabilities...... - 272,692 26,055 - 298,747
Stockholder's equity. (8,171) (11,399) 3,428 7,971 (8,171)
</TABLE>
5
<PAGE>
Condensed Consolidating Statement of Operations
(in thousands)
<TABLE>
<CAPTION>
Four M Guarantors Non-Guarantors Elimination Consolidated
Corporation ---------- -------------- Entries ------------
----------- -------
<S> <C> <C> <C> <C> <C>
Net sales............ $ - $220,941 $25,118 $ - $246,059
Gross profit......... - 27,967 3,030 - 30,997
Income from
operations........... - 8,721 969 - 9,690
Income(loss) before
income taxes......... - (7,672) 124 - (7,548)
Net income (loss) of
subsidiaries......... (14,836) - - 14,836 -
Net income (loss).... (14,836) (14,922) 86 14,836 (14,836)
</TABLE>
Condensed Consolidating Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Four M Guarantors Non-Guarantors Elimination Consolidated
Corporation ---------- -------------- Entries ------------
----------- -------
Net cash provided by
<S> <C> <C> <C> <C> <C>
operating activities....... $ - $4,746 $ 896 $ - $5,642
Net cash provided by (used
for) investing activities.. - 6,717 (28) - 6,689
Net cash used for financing
activities................. - (9,617) (803) - (10,420)
---------------------------------------------------------------------------------------
Increase in cash and cash
equivalents................ - 1,846 65 - 1,911
Cash and cash equivalents,
beginning of period........ - 1,745 396 - 2,141
---------------------------------------------------------------------------------------
Cash and cash equivalents, end
of period.................. - $3,591 $461 - $4,052
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
NOTE 5 - INVESTMENT IN FLORIDA COAST
In conjunction with the formation of Florida Coast, the Company and Stone
Container each invested $5.0 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 Florida Coast and, Stone Container made a $30.0 million capital contribution
to Florida Coast Holding. In addition, the Company and Stone Container have each
agreed to provide Florida Coast with up to $10.0 million of subordinated
financing, if needed, for general corporate purposes. As of June 30, 1998, the
Company had not advanced any loans under the Subordinated Credit Facility (Note
11).
The Company's investment in Florida Coast Holding is accounted for using
the equity method of accounting. The Company did not record its 50% share of
Florida Coast's operating results for the six month period ended June 30, 1998
of $(1.8) million since its investment had no carrying value.
Summarized unaudited income statement information of Florida Coast for the
six months ended June 30, 1998 were as follows:
Summarized Statement of Operations (in thousands):
<TABLE>
<CAPTION>
Six Months
Ended
June 30, 1998
<S> <C>
- ------------------------------------------------
Net sales $88,737
Net operating income 8,321
Interest expense 11,899
Net loss (3,578)
- ------------------------------------------------
</TABLE>
Pursuant to an Output Purchase Agreement, the Company and Stone Container
have agreed to purchase one-half of the St. Joe Mill's entire linerboard
production at a price indexed to market prices but subject to a minimum purchase
price. This purchase price is intended to generate sufficient funds to cover
cash operating costs, cash interest expense and maintenance capital expenditures
of the St. Joe Mill. In accounting for the acquisition of the St. Joe Mill, the
Company determined that it would be required to pay additional amounts above
market price for linerboard and possibly incur other additional costs to fulfill
its obligations under the Output Purchase Agreement and accordingly, provided a
reserve for such purchases. Pursuant to the Output Purchase Agreement, the
Company on August 7, 1998 paid to Florida Coast $0.6 million, which was charged
to the reserve (Note 11).
NOTE 6 - INVENTORY
Inventories are valued at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials $22,388 $28,071
Work-in-process 1,677 1,801
Finished goods 6,913 7,091
------- -------
$30,978 $36,963
------- -------
------- -------
</TABLE>
7
<PAGE>
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities were approximately $15.5 million at June 30, 1998 and
$15.8 million at December 31, 1997, respectively. These amounts include reserves
for unfavorable contracts related to the acquisition of the St. Joe Mill (Note
5) and accruals for various items including employee benefits, utilities,
interest and plant repairs.
NOTE 8 - MILL SHUTDOWNS AND REOPENINGS
In the latter part of 1996 and first quarter of 1997, 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. In response to
such market conditions, the Company shut down its corrugating medium mill at Ft.
Madison, Iowa (the "Ft. Madison Mill") in March 1997 and resumed limited
production in August 1997. Full production commenced in September 1997.
In addition, the St. Joe Mill experienced a decline in prices for
linerboard as a result of increased capacity in the industry. In response to
such market conditions, Florida Coast shut down the St. Joe Mill in April 1997
and resumed limited production in early September 1997. Full production
commenced in October 1997. During the period of the St. Joe Mill shut down, the
Company remained subject to the terms of the Output Purchase Agreement (Note 5).
A portion of the Company's payments under the Output Purchase Agreement during
the shut down period ($6.0 million) has been charged to operations as part of a
loss on joint venture.
NOTE 9 - PLANT CLOSING AND DISPOSITIONS
On August 9, 1997, the Company announced its intent to close two of its
facilities and to reallocate its business at those locations to its other nearby
facilities, including a new facility that is intended to utilize state of the
art technology and is expected to expand the Company's capacity in the
Southeastern operating region. In connection therewith, the Company recorded a
provision of $1.0 million in the third quarter of 1997 to accrue the costs of
closing such facilities, which are principally related to severance and
relocation of employees. In addition, the Company established a reserve during
the third quarter of 1997 of $1.8 million, to cover costs in connection with
certain plant dispositions which have occurred in 1998.
In January 1998, the Company sold its Dallas and Houston corrugating
operations for cash of $20.4 million, subject to working capital adjustments,
which approximated net book value. Approximately $11.2 million of the proceeds
of such sale was put into a collateral account to be utilized pursuant to the
terms of the Indenture governing the Notes, and the remainder was used for
working capital purposes. As of June 30, 1998, approximately $7.8 million of
such proceeds were used for capital expenditures.
NOTE 10- INCOME TAXES
Deferred income taxes have been adjusted by $7.3 million, in conformity
with FASB 109, due to the uncertainty of future short-term profits.
NOTE 11- SUBSEQUENT EVENTS
On August 7, 1998, the stockholders of the Company entered into a stock
purchase agreement (the "Agreement") with Durango Packaging Corporation
("Durango") providing for the purchase by Durango of 100% of the outstanding
shares of Common Stock (the "Shares") of the Company. Pursuant to the
Agreement, the Stockholder will purchase for $26.3 million all of the
Company's interests in Box USA Paper Corporation (the owner of a 50% interest
in Florida Coast Holding), New Jersey, Fibre Marketing, Groveton Paperboard,
Inc. and the assets of Four M Paper Corporation (the owner of the Ft. Madison
Mill) (the "Extracted Assets"). The Agreement is subject to conditions,
including, but not limited to, (i) regulatory approvals, (ii) an agreement
with Stone Container to eliminate the Company's obligations under the Output
Purchase Agreement and the Subordinated Credit Facility relating to Florida
Coast (the "Florida Coast Agreement") and (iii) such other customary and
ordinary conditions.
8
<PAGE>
To facilitate the proposed Florida Coast Agreement, Florida Coast will
request from the holders of its 12-3/4% First Mortgage Notes due 2003 (the
"Florida Coast Notes") an amendment (the "Amendment") to the indenture under
which the Florida Coast Notes were issued to permit the termination of the
Output Purchase Agreement and the Subordinated Credit Facility. The Output
Purchase Agreement and the Subordinated Credit Facility are agreements
Florida Coast has with the Company and Stone Container (Note 5). In
place of the Output Purchase Agreement and the Subordinated Credit Facility,
Stone Container is proposing to enter into the Florida Coast Agreement pursuant
to which Stone Container will agree to pay directly, or contribute to Florida
Coast, the necessary funds to pay, (i) all installments of interest on the
Florida Coast Notes as each installment becomes due prior to the final maturity
of the Florida Coast Notes and (ii) all payments (other than interest on the
Florida Coast Notes) necessary to cover any cash short falls incurred by Florida
Coast to operate the St. Joe Mill or, if the St. Joe Mill is shut down, maintain
the St. Joe Mill during each shut down period other than as specified in the
Florida Coast Agreement. Stone Container would not be obligated or liable for
any payments of any kind whatsoever, including, without limitation, the payment
of principal on the Florida Coast Notes (whether upon maturity, acceleration
or otherwise). In connection with the St. Joe Mill, Durango will provide funds
to pay Stone Container a fee for entering into the Florida Coast Agreement.
On August 16, 1998, Florida Coast will shut down the St. Joe Mill due to
economic conditions in the industry. The length of the shut down has not yet
been determined. It is expected that the Company and Stone Container will
continue to provide the necessary funds for Florida Coast during the shut
down. In the event the transactions described above occur, only Stone Container
will then continue to fund any shortfall.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains forward looking statements that involve
known and unknown risks and uncertainties including, but not limited to, the
impact of competitive products, product demand and market acceptance risks,
fluctuations in operating results and other risks detailed from time to time in
the Company's filings with the Securities and Exchange Commission. These risks
could cause the Company's actual results for the current and future years to
differ materially from those expressed in any forward looking statements made
by, or on behalf of, the Company.
For Recent Developments with respect to the Company, see Note 11 to Consolidated
Financial Statements.
Results of Operations
The following tables set forth certain consolidated statement of operations
data and such data as a percentage of net sales for the periods indicated
(Dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------
1998 1997
--------- -------
Amount Percent of Amount Percent of
------ Net Sales ------ Net Sales
--------- ---------
<S> <C> <C> <C> <C>
Net sales...................................... $123.1 100.0% $116.1 100.0%
Cost of goods sold............................. (109.6) (89.0) (97.6) (84.0)
------- ------- ------- -------
Gross profit................................... 13.5 11.0 18.5 16.0
Selling, general and
administrative expenses................... (11.6) (9.5) (11.8) (10.2)
------- ------- ------- -------
Income from operations......................... 1.9 1.5 6.7 5.8
Interest expense............................... (6.6) (5.4) (6.2) (5.3)
Loss on joint venture contract................. (3.2) (2.6) - -
Other income (expense)......................... (0.1) - - -
Income (loss) before provision for
income taxes and minority interest....... (8.0) (6.5) 0.5 0.5
Provision for income taxes..................... (7.1) (5.8) (0.2) (0.2)
------- ------- ------- -------
Income (loss) before minority interest......... $(15.1) (12.3)% $ 0.3 0.3%
------------------------------------------------
------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
--------- -------
Amount Percent of Amount Percent of
------ Net Sales ------ Net Sales
---------- ----------
<S> <C> <C> <C> <C>
Net sales .............................. $ 246.1 100.0% $ 234.0 100.0%
Cost of goods sold ..................... (215.1) (87.4) (196.6) (84.0)
-------- ----- -------- -----
Gross profit ........................... 31.0 12.6 37.4 16.0
Selling, general and
administrative expenses ........... (21.3) (8.7) (23.6) (10.1)
-------- ----- -------- -----
Income from operations ................. 9.7 3.9 13.8 5.9
Interest expense ....................... (13.6) (5.5) (12.6) (5.4)
Loss on joint venture contract ........ (3.2) (1.3) -- --
Other income (expense) ................. (0.4) (0.2) 0.1 --
-------- ----- -------- -----
Income (loss) before provision for
income taxes and minority interest (7.5) (3.1) 1.3 0.5
Provision for income taxes ............. (7.3) (2.9) (0.5) (0.2)
-------- ----- -------- -----
Income (loss) before minority interest . $ (14.8) (6.0)% $ 0.8 0.3%
--------- ------ -------- ------
--------- ------ -------- ------
</TABLE>
10
<PAGE>
Three Month Period Ended June 30, 1998 Compared to Three Month Period Ended
June 30, 1997
Consolidated net sales of $123.1 million were achieved by the Company
for the three months ended June 30, 1998, which represented an increase of
6.0%, from $116.1 million in the three months ended June 30, 1997. Net sales
for the Company's converting facilities increased $3.9 million, or 3.4%, to
$118.2 million for the three months ended June 30, 1998, from $114.3 million
for the three months ended June 30, 1997. The increase in net sales was
primarily as a result of the increased average selling prices offset by the
decrease in volume resulting from the sale of the Dallas and Houston
corrugating operations. Net sales at the Ft. Madison Mill for the three months
ended June 30, 1998 were $5.0 million as compared to net sales of $1.8 million
for the three months ended June 30, 1997. This increase was primarily as a
result of the Ft. Madison Mill resuming full production in September 1997 and
the increased selling price per ton of corrugating medium in 1998.
The Company's cost of goods sold, as a percentage of net sales,
increased to 89.0% for the three months ended June 30, 1998, from 84.0% for
the three months ended June 30, 1997. Cost of goods sold, as a percentage of
net sales, at the Company's converting facilities increased to 89.2% for the
three months ended June 30, 1998, from 83.7% for the three months ended June
30, 1997. The increases were primarily as a result of the Company's absorption
of increased paper prices for both linerboard and corrugating medium. Cost of
goods sold, as a percentage of net sales, at the Ft. Madison Mill decreased to
83.7% for the three months ended June 30, 1998, from 125.7% for the three
months ended June 30, 1997 primarily as a result of the Ft. Madison Mill
resuming full production in September 1997 and the increased selling price per
ton of corrugating medium in 1998.
Gross profit decreased $5.0 million, or 2.7%, to $13.5 million for the
three months ended June 30, 1998, from $18.5 million for the three months
ended June 30, 1997. The Company's gross profit, as a percentage of net sales,
for the converting facilities decreased to 10.8% for the three months ended
June 30, 1998, from 16.3% for the three months ended June 30, 1997. The
decline in gross profit is attributable to the sale of the Company's Dallas
and Houston corrugating operations and the resultant reduction in volume.
Gross profit (loss) at the Ft. Madison Mill increased to $16.3 million for the
three months ended June 30, 1998, from $(25.7) million for the three months
ended June 30, 1997 primarily as a result of the Ft. Madison Mill resuming
full production in September 1997 and the increased selling price per ton of
corrugating medium in 1998.
Selling, general and administrative expenses decreased by $0.2
million for the three months ended June 30, 1998. As a percentage of net
sales, selling, general and administrative expenses decreased to 9.5% for the
three months ended June 30, 1998 compared to 10.2% for the three months ended
June 30, 1997.
As a result of the foregoing factors, income from operations
decreased $4.8 million, or 71.6%, for the three months ended June 30, 1998, to
$1.9 million from $6.7 million for the three months ended June 30, 1997.
Interest expense increased $0.4 million, or 6.5%, to $6.6 million for the
three months ended June 30, 1998, from $6.2 million for the three months ended
June 30, 1997.
Six Month Period Ended June 30, 1998 Compared to Six Month Period Ended
June 30, 1997
Consolidated net sales of $246.1 million were achieved by the
Company for the six months ended June 30, 1998, which represented an increase
of 5.2%, from $234.0 million in the six months ended June 30, 1997. Net sales
for the Company's converting facilities increased $7.4 million, or 3.2%, to
$236.4 million for the six months ended June 30, 1998, from $229.0 million for
the six months ended June 30, 1997. The increase in net sales was primarily as
a result of the increased average selling prices offset by the decrease in
volume resulting from the sale of the Dallas and Houston corrugating
operations. Net sales at the Ft. Madison Mill for the six months ended June
30, 1998 were $9.6 million as compared to net sales of $5.0 million for the
six months ended June 30, 1997. The increase was primarily as a result of the
Ft. Madison Mill resuming full production in September 1997 and the increased
selling price per ton of corrugating medium in 1998.
The Company's cost of good sold, as a percentage of net sales,
increased to 87.4% for the six months ended June 30, 1998, from 84.0% for the
six months ended June 30, 1997. Cost of goods sold, as a percentage of net
sales, at the Company's converting facilities increased to 87.5% for the six
months ended June 30, 1998, from 83.4% for the six months ended June 30, 1997.
The increases were primarily as a result of the Company's absorption of
increased paper prices for both linerboard and corrugating medium. Cost of
goods sold, as a percentage of net sales, at the Ft. Madison Mill decreased to
84.7% for the six months ended June 30, 1998, from 121.0% for the six months
ended June 30, 1997 primarily as a result of the Ft. Madison Mill resuming
full production in September 1997 and the increased selling price per ton of
corrugating medium in 1998.
11
<PAGE>
Gross profit decreased $6.4 million, or 17.1%, to $31.0 million for
the six months ended June 30, 1998, from $37.4 million for the six months ended
June 30, 1997. The Company's gross profit, as a percentage of net sales, for the
converting facilities decreased to 12.5% for the six months ended June 30, 1998,
from 16.6% for the six months ended June 30, 1997. The decline in gross profit
is attributable to the sale of the Company's Dallas and Houston corrugating
operations and the resultant reduction in volume. Gross profit (loss) at the Ft.
Madison Mill increased to $15.3 million for the six months ended June 30, 1998
from $(21.0) million for the six months ended June 30, 1997 primarily as a
result of the Ft. Madison Mill resuming full production in September 1997 and
the increased selling price per ton of corrugating medium in 1998.
As a result of the foregoing factors, income from operations decreased $4.1
million, or 29.7%, for the six months ended June 30, 1998, to $9.7 million
from $13.8 million for the six months ended June 30, 1997.
Interest expense increased $1.0 million, or 7.9%, to $13.6 million for
the six months ended June 30, 1998, from $12.6 million for the six months
ended June 30, 1997.
Liquidity and Capital Resources
Historically, the Company has relied on cash flows from operations and
bank borrowings to finance its working capital requirements and capital
expenditures.
Net cash provided by operating activities for the six months ended
June 30, 1998 was $5.6 million compared to net cash provided by operating
activities of $2.1 million for the six months ended June 30, 1997. Cash
provided by operating activities for the six months ended June 30, 1998 was
driven by a recovery of income taxes of $6.9 million, a $6.0 million decrease
in inventory, and a $7.3 million decrease in deferred taxes which was offset
by net loss of $14.8 million and a $6.9 million decrease in accounts payable
and accrued liabilities.
Net cash provided by investing activities was $6.7 million for the six
months ended June 30, 1998 compared to net cash used for investing activities
of $8.4 million for the six months ended June 30, 1997. This difference was
primarily due to the sale of fixed assets from the Company's Dallas and
Houston corrugating operations.
Net cash used for financing activities was $10.4 million for the six
months ended June 30, 1998 compared to net cash provided by financing
activities of $5.1 million for the six months ended June 30, 1997. This
difference was primarily due to the sale of Dallas and Houston corrugating
operations.
Capital expenditures for the six months ended June 30, 1998 were $8.5
million as compared to $11.1 million for the six months ended June 30, 1997.
The Company plans to spend approximately $12.7 million in 1998 on capital
expenditures which will be financed through a trust account pursuant to the
terms of the Indenture governing the Notes.
On May 30, 1996, the Company established a Credit Facility to finance
the Company's working capital needs. The Credit Facility will mature in 2001
and initially provided total borrowing of up to $80.0 million on a revolving
basis, subject to borrowing base limitations, and a requirement that unused
borrowing base availability must be at least $5.0 million. Effective December
5, 1997, the Credit Facility was modified, so as to among other things, (i)
reduce, per the Company's request, the borrowing capacity from $80.0 million
to $65.0 million; (ii) modify the base borrowing interest rate from the
lender's prime rate plus .5% to a sliding scale rate, based on performance, of
the lender's prime rate plus .5% to 1.0%; and (iii) reduce the minimum unused
borrowing base availability to $1.0 million, increasing on December 31, 1998
to $5.0 million. On May 11, 1998, the Credit Facility was amended, and Fibre
Marketing was made an additional borrower hereunder. The Company has received
waivers from NationsBank waiving the Company's compliance with certain
financial covenants as of June 30, 1998. On August 1, 1998, the Company had
unused borrowing capacity of approximately $8.5 million under the Credit
Facility.
Pursuant to the Subordinated Credit Facility, the Company will
provide, if needed, Florida Coast with up to $10.0 million of subordinated
indebtedness on a revolving credit basis. As of June 30, 1998, the Company had
not advanced any loans under the Subordinated Credit Facility. Pursuant to the
Output Purchase Agreement, the Company on August 7, 1998 paid to Florida Coast
$0.6 million, which was charged to the reserve. See Note 11 to Consolidated
Financial Statements.
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 debt service requirements and
working capital needs through the end of 1998.
12
<PAGE>
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.
The operations of the St. Joe Mill are subject to extensive and
changing environmental regulation by federal, state and local authorities.
Significant capital expenditures have been made in the past to comply with
water, air and solid and hazardous waste regulations at the St. Joe Mill. The
St. Joe Mill expects to make significant expenditures in the future. Capital
expenditures by the St. Joe Mill for environmental control equipment was
approximately $0.2 million in Fiscal 1997 and is budgeted to be approximately
$1.0 million in Fiscal 1998. In November 1997, the EPA issued its final rules,
informally known as the "cluster rules", which are more stringent than the
existing requirements for discharge of wastewaters under the Clean Water Act
and impose new requirements on air emissions under the Clean Air Act for the
pulp and paper industry. Although the final rules are less stringent, in some
respect, than as initially proposed, the Company currently believes that the
St. Joe Mill will be required to make capital expenditures of approximately
$30.0 million during the period of 1998 through 2005 in order to meet the
requirements of the new regulations. The Joint Venture Partners may determine
that, under the final regulations, the costs associated with the production of
mottled white linerboard are prohibitive and could therefore discontinue its
production. If the Joint Venture Partners determine to discontinue the
production of mottled white linerboard, the Company estimates the capital
spending that would be required to comply with the regulations would be
approximately $9.0 million. Because of the current higher margins associated
with mottled white linerboard, in the event the Joint Venture Partners
discontinue the production of mottled white linerboard, Florida Coast's
revenues and profit margins would decrease.
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.
Year 2000
The Company has implemented Year 2000 compliance programs designed to
ensure that its computer systems and applications will function properly
beyond 1999. The Company expects Year 2000 conversion programs to be
substantially completed by the end of 1999. The Company believes that adequate
resources, both internal and external, have been allocated for this purpose.
Spending for these Year 2000 compliance programs, including Fiscal 1998
spending, is not expected to be material and will be funded from operations.
However, there can be no assurance that the Company will identify all Year
2000 date conversion problems in its computer systems in advance of their
occurrence or that the Company will be able to successfully remedy all
problems that are discovered. Failure by the Company and/or their significant
vendors and customers to complete Year 2000 compliance programs in a timely
manner could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the revenue stream
and financial stability of existing customers may be adversely impacted by
Year 2000 problems, which could cause fluctuations in the Company's revenues
and operating profitability.
13
<PAGE>
Part II - Other Information
Item 1. 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 the Company, 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 the
Company or in the alternative, $150.0 million 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 the Suit is
without merit. The Company intends to defend against the Suit vigorously and
believes it has adequate defenses. Discovery is substantially completed, and
the Company expects the trial to commence in the latter part of 1998 or early
part of 1999. There can be no assurance that the outcome of the Suit will not
be adverse to the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) 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). Exhibits 10.7 and 12.1 are
incorporated by reference to the exhibit with the corresponding number filed
as part of the Company's Form 10-K for the transition period ended December
31, 1996. Exhibits 10.8 and 10.9 are incorporated by reference to the exhibit
with the corresponding number filed as part of the Company's reports on the
Form 10-Q for the periods ended March 31, 1997 and June 30, 1997,
respectively. Exhibit 10.10 is incorporated by reference to the exhibit with
the corresponding number filed as part of the Company's Form 10-K for the
fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
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").
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
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 Notes 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 the 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.
10.8 Second Amendment to Finance and Security Agreement.
10.9 Third Amendment to Finance and Security Agreement.
10.10 Fourth Amendment to Finance and Security Agreement.
12.1 Statement regarding computation of ratios.
21.1 Subsidiaries of the registrant.
27.1* Financial Data Schedule.
</TABLE>
* Filed herewith
(b) Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOUR M CORPORATION
By: /s/ Chris Mehiel
-------------------------------------------------
Chris Mehiel
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: August 14, 1998
FOUR M PAPER CORPORATION
By: /s/ Chris Mehiel
-------------------------------------------------
Chris Mehiel
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: August 14, 1998
BOX USA GROUP, INC.
By: /s/ Chris Mehiel
-------------------------------------------------
Chris Mehiel
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: August 14, 1998
PAGE PACKAGING CORPORATION
By: /s/ Chris Mehiel
-------------------------------------------------
Chris Mehiel
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: August 14, 1998
16
<PAGE>
BOX USA, INC.
By: /s/ Chris Mehiel
-------------------------------------------------
Chris Mehiel
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: August 14, 1998
FOUR M MANUFACTURING GROUP OF GEORGIA, INC.
By: /s/ Chris Mehiel
-------------------------------------------------
Chris Mehiel
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: August 14, 1998
17
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