<PAGE>
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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 March 31, 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 May 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
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited): Page
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997 (audited) 1
Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 14
</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>
- --------------------------------------------------------------------------------------------------------------------------
March 31, 1998 December 31, 1997
(unaudited) (audited)
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 4,302 $ 2,141
Restricted cash (Note 9) 11,200 -
Accounts receivable, less allowance for doubtful
accounts of $2,068 and $2,727 54,808 55,209
Inventories (Note 6) 34,233 36,963
Income taxes recoverable - 6,900
Notes, advances and other receivables 5,922 2,638
Deferred income taxes 16,554 16,654
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 127,019 120,505
Property, plant and equipment, net of accumulated depreciation 167,304 181,549
Other assets 16,364 16,399
Goodwill and other intangibles, net of accumulated amortization 4,234 4,321
- --------------------------------------------------------------------------------------------------------------------------
$314,921 $322,774
======== ========
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 35,887 $ 48,237
Accrued liabilities (Note 7) 21,082 15,769
Current maturities of long-term debt and subordinated debt 3,098 3,303
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 60,067 67,309
Long-term debt, less current maturities 234,642 235,354
Subordinated debt, less current maturities 1,997 1,969
Deferred income taxes 9,304 9,404
Minority interest 1,531 1,508
Other liabilities 487 565
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Total liabilities 308,028 316,109
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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 6,234 6,006
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7,855 7,627
Less treasury stock, at cost (413,903 shares) 962 962
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Total stockholder's equity 6,893 6,665
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$314,921 $322,774
======== ========
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</TABLE>
The accompanying footnotes are an integral part of these financial statements.
1
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<TABLE>
<CAPTION>
FOUR M CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands)
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Three Months Ended March 31,
-----------------------------------------------
1998 1997
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<S> <C> <C>
Net sales $122,909 $117,896
Cost of goods sold 105,429 99,054
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Gross profit 17,480 18,842
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Selling, general and administrative expenses 9,735 11,706
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Income from operations 7,745 7,136
Other Income (expense):
Interest expense (6,925) (6,424)
Other (415) 85
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(7,340) (6,339)
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Income before provision for income taxes and
minority interest 405 797
Provision for income taxes 154 335
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Income before minority interest 251 462
Minority interest (23) 22
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 228 $ 484
======== ========
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</TABLE>
The accompanying footnotes are an integral part of these financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
FOUR M CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
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Three Months Ended March 31,
------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 228 $ 484
Adjustments to reconcile net income to net cash provided by
(used for) operating activities
Depreciation and amortization 3,975 3,594
Allowance for doubtful accounts (659) 201
Non-cash interest expense 29 -
Deferred income taxes - 1,489
Loss on sale of fixed assets 415 10
Change in assets and liabilities:
Accounts, advances, notes and other receivables 1,060 (5,063)
Inventories 2,730 5,016
Income taxes recoverable(payable) 6,900 (1,489)
Other assets, net of other liabilities (3,368) (1,382)
Accounts payable and accrued liabilities (7,373) (8,847)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 3,937 (5,987)
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Cash flows from investing activities:
Capital expenditures (4,741) (4,850)
Proceeds from sale of fixed assets 690 2,614
Sale of fixed assets of Dallas and Houston facilities 14,392 -
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 10,341 (2,236)
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Cash flows from financing activities:
Net borrowings (repayments) under revolving
credit agreements (80) 4,772
Secured term, mortgage, equipment and
other borrowings 31 2,070
Repayment of long-term debt (868) (667)
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Net cash provided by (used for) financing activities (917) 6,175
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Cash and cash equivalents:
Increase (decrease) in cash and cash equivalents 13,361 (2,048)
Cash and cash equivalents, beginning of period 2,141 2,431
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Cash and cash equivalents, end of period $15,502 $ 383
======= ========
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Supplemental cash flow information:
Cash paid during the period for:
Interest $ 1,318 $ 675
Income taxes $ 86 $ 46
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</TABLE>
The accompanying footnotes are an integral part of the 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 three months ended March 31, 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"). Intercompany accounts and
transactions have been eliminated.
The Company has certain 50% owned investments which are accounted for under the
equity method.
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 $.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.
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.
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 three months ended March 31,
1998:
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
(in thousands)
FOUR M ELIMINATION
CORPORATION GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED
----------- ---------- -------------- ------- ------------
<S> <C> <C> <C> <C> <C>
Current assets................ $ - $ 112,559 $ 14,460 $ - $ 127,019
Investment in affiliates...... 6,893 5,890 - (7,093) 5,690
Total assets.................. 6,893 285,092 30,029 (7,093) 314,921
Current liabilities........... - 50,998 9,069 - 60,067
Total liabilities............. - 281,419 26,609 - 308,028
Stockholder's equity.......... $ 6,893 $ 3,673 $ 3,420 $ (7,093) $ 6,893
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
(in thousands)
FOUR M ELIMINATION
CORPORATION GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED
----------- ---------- -------------- ------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.................. $ - $ 110,587 $ 12,322 $ - $ 122,909
Gross profit............... - 15,957 1,523 - 17,480
Income from operations .... - 7,242 503 - 7,745
Income before income
taxes...................... - 328 77 - 405
Net income (loss) of
subsidiaries............... 228 - - (228) -
Net income (loss)........... $ 228 $ 195 $ 33 $ (228) $ 228
</TABLE>
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
(in thousands)
FOUR M ELIMINATION
CORPORATION GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED
----------- ---------- -------------- ------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities................... $ - $ 3,682 $ 255 $ - $ 3,937
Net cash provided by (used
for) investing activities.... - 10,369 (28) - 10,341
Net cash provided by (used
for) financing activities.... - (1,169) 252 - (917)
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Increase in cash and cash
equivalents.................. - 12,882 479 - 13,361
Cash and cash equivalents,
beginning of period.......... - 1,745 396 - 2,141
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Cash and cash equivalents, end
of period.................... $ - $ 14,627 $ 875 $ - $ 15,502
-------------------------------------------------------------------------------
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</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
March 31, 1998, the Company advanced loans of $1.6 million under the
subordinated credit facility, which is fully reserved.
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 three month period ended March 31,
1998 of $ (0.9) million since its investment had no carrying value.
Summarized unaudited income statement information of Florida Coast for
the three months ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
Summarized Statement of Operations (in thousands):
Three Months
Ended
March 31, 1998
- ----------------------------------------------------------------------
<S> <C>
Net sales $44,659
Net operating loss 4,154
Interest expense 5,890
Net loss (1,736)
- ----------------------------------------------------------------------
</TABLE>
Pursuant to the Output Purchase Agreement, the Company and Stone
Container have each 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, Florida Coast has requested payment of $1.2 million
payable by June 5, 1998, which will be charged to the reserve. As a result of
increases in the price of linerboard, the St. Joe Mill is expected to generate
sufficient funds to cover its cash operating costs in 1998.
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>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Raw materials $26,072 $28,071
Work-in-process 1,587 1,801
Finished goods 6,574 7,091
--------- ---------
$34,233 $36,963
======== =======
</TABLE>
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities were approximately $21.1 million at March 31, 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. Accrued liabilities increased December
31, 1997 to March 31, 1998 primarily due to the bond interest accrual of $5.1
million.
7
<PAGE>
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 in trust under the terms of the Indenture governing the
Notes, and the remainder was used for working capital purposes.
8
<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.
RESULTS OF OPERATIONS
The following table sets 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 MARCH 31,
-------------------------------------------------
1998 1997
-------------------- ----------------------
PERCENT OF PERCENT OF
AMOUNT NET SALES AMOUNT NET SALES
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Net sales...................................... $ 122.9 100.0% $ 117.9 100.0%
Cost of goods sold............................. (105.5) (85.8) (99.1) (84.0)
------- ------ -------- ------
Gross profit................................... 17.4 14.2 18.8 16.0
Selling, general and
administrative expenses................... (9.7) (7.9) (11.7) (9.9)
------- ----- -------- -----
Income from operations......................... 7.7 6.3 7.1 6.1
Interest expense............................... (6.9) (5.6) (6.4) (5.5)
Other income (expense)......................... (0.4) (0.3) 0.1 0.1
------- ----- -------- ----
Income before provision 0.4 0.4
for income taxes and minority interest..... 0.8 0.7
Provision for income taxes..................... (0.2) (0.2) (0.3) (0.3)
------- ----- -------- -----
Income before minority interest................ $ 0.2 0.2% $ 0.5 0.4%
------------------------------------------------
------------------------------------------------
</TABLE>
THREE MONTH PERIOD ENDED MARCH 31, 1998 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 1997
Consolidated net sales of $122.9 million were achieved by the Company
for the three months ended March 31, 1998, which represented an increase of
4.2%, from $117.9 million in the three months ended March 31, 1997. Net sales
for the Company's converting facilities increased $3.5 million, or 3.1 %, to
$118.2 million for the three months ended March 31, 1998, from $114.7 million
for the three months ended March 31, 1997. The increase in net sales was
primarily as a result of the increased average selling prices offset by the
decrease in volume. Net sales at the Ft. Madison Mill for the three months
ended March 31, 1998 were $4.7 million as compared to net sales of $3.2 million
for the three months ended March 31, 1997. This increase was primarily as
a result of the increased selling price per ton of corrugating medium.
The Company's cost of goods sold, as a percentage of net sales,
increased to 85.8% for the three months ended March 31, 1998 from 84.0% for the
three months ended March 31, 1997. Cost of goods sold, as a percentage of net
sales, at the Company's converting facilities increased to 85.8% for the three
months ended March 31, 1998, from 83.3% for the three months ended March 31,
1997. The increases were primarily 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 85.7% for the three months ended March 31, 1998 from 118.0% for the three
months ended March 31, 1997 primarily as a result of the increased selling
price per ton of corrugating medium.
Gross profit decreased $1.4 million, or 7.4%, to $17.4 million for the
three months ended March 31, 1998 from $18.8 million for the three months ended
March 31, 1997. The Company's gross profit, as a percentage of net sales, for
the converting facilities decreased to 14.2% for the three months ended March
31, 1998 from 16.7% for the three months ended March 31, 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 $0.7
9
<PAGE>
million for the three months ended March 31, 1998 from $(0.6) million for the
three months ended March 31, 1997 primarily as a result of the increased selling
price per ton of corrugating medium.
Selling, general and administrative expenses decreased by $2.0 million
for the three months ended March 31, 1998. This decrease is primarily
attributable to the sale of the Dallas and Houston corrugating operations. As a
percentage of net sales, selling, general and administrative expenses decreased
to 7.9% for the three months ended March 31, 1998 compared to 9.9% for the three
months ended March 31, 1997 primarily as a result of an increase in average
selling prices.
As a result of the foregoing facts, income from operations increased
$0.6 million, or 8.5%, for the three months ended March 31, 1998, to $7.7
million from $7.1 million for the three months ended March 31, 1997. .
Interest expense increased $0.5 million, or 7.8%, to $6.9 million for
the three months ended March 31, 1998, from $6.4 million for the three month
period ended March 31, 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 three months ended
March 31, 1998 was $3.9 million compared to net cash used for operating
activities of $6.0 million for the three months ended March 31, 1997. Cash
provided by operating activities for the three months ended March 31, 1998 was
driven by net income of $0.6 million for the period, recovery of income taxes of
$6.9 million, and a $2.7 million decrease in inventory which was offset by a
$7.4 million decrease in accounts payable and accrued liabilities and a $1.1
million decrease in accounts, notes, advances and other receivables. .
Net cash provided by investing activities was $10.4 million for the
three months ended March 31, 1998 compared to net cash used for investing
activities of $2.2 million for the three months ended March 31, 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 $0.9 million for the three
months ended March 31, 1998 compared to net cash provided by financing
activities of $6.2 million for the three months ended March 31, 1997. The
difference was primarily due to the sale of the Company's Dallas and Houston
corrugating operations.
Capital expenditures for the three months ended March 31, 1998 were
$4.7 million as compared to $4.9 million for the three months ended March 31,
1997. The Company plans to spend approximately $12.7 million in 1998 on capital
expenditures.
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.
The Company is in compliance with these covenants as of March 31, 1998. On May
1, 1998, the Company had unused borrowing capacity of approximately $9.0 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 March 31, 1998, the
Company advanced loans of $1.6 million under the Subordinated Credit
Facility, which is fully reserved. Pursuant to the Output Purchase Agreement,
Florida Coast has requested payment of $1.2 million payable by June 5, 1998,
which will be charged to the reserve. As a result of increases in the price
of linerboard, the St. Joe Mill is expected to generate sufficient funds
to cover its cash operating costs in 1998.
10
<PAGE>
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 through the end of 1998.
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 tome, 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.
11
<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 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 the 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.
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).
12
<PAGE>
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.
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.
* Filed herewith
(B) REPORTS ON FORM 8-K
None
13
<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: May 11, 1998
FOUR M PAPER CORPORATION
By: /s/ Chris Mehiel
--------------------------------------
Chris Mehiel
Executive Vice President and Chief Financial
Officer
(Principal Accounting Officer)
Date: May 11, 1998
BOX USA GROUP, INC.
By: /s/ Chris Mehiel
--------------------------------------
Chris Mehiel
Executive Vice President and Chief Financial
Officer
(Principal Accounting Officer)
Date: May 11, 1998
PAGE PACKAGING CORPORATION
By: /s/ Chris Mehiel
--------------------------------------
Chris Mehiel
Executive Vice President and Chief Financial
Officer
(Principal Accounting Officer)
Date: May 11, 1998
14
<PAGE>
BOX USA, INC.
By: /s/ Chris Mehiel
--------------------------------------
Chris Mehiel
Executive Vice President and Chief Financial
Officer
(Principal Accounting Officer)
Date: May 11, 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: May 11, 1998
15
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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).
<PAGE>
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 Fourth 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.
* Filed herewith
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