- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996 Commission File No.
333-8023
333-8023-01
------------
FLORIDA COAST PAPER COMPANY, L.L.C.
FLORIDA COAST PAPER FINANCE CORP.
(Exact names of registrants as specified in their charters)
Delaware 59-3379704
Delaware 59-3379707
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
600 U.S. Highway 98, Port St. Joe, FL 32456
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (904) 227-1171
---------
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 No X
------ --------
As of November 14, 1996, there were 40,000 units of Florida Coast Paper
Company, L.L.C.'s Common Member Interest outstanding and there were 1,000 shares
of Common Stock of Florida Coast Paper Finance Corp. outstanding.
Page 1 of 18
Exhibit index begins on page 16
<PAGE>
FLORIDA COAST PAPER COMPANY, L.L.C.
FLORIDA COAST PAPER FINANCE CORP.
1996 QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30,1996
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements (Unaudited): Page
Consolidated Balance Sheet as of September 30, 1996
and the Balance Sheet of St. Joe Forest Products
Company - Linerboard Mill Operations (the "Predecessor")
as of December 31, 1995 1
Consolidated Statement of Operations for the three months
ended September 30, 1996 and Statement of Operations of the
Predecessor for the three months ended September 30, 1995 2
Consolidated Statement of Operations for the four month period
from May 30, 1996 to September 30, 1996 and the Predecessor's
Statements of Operations for the five month period from
January 1, 1996 to May 30, 1996 and the nine
months ended September 30, 1995 3
Consolidated Statement of Cash Flows for the four month period
from May 30, 1996 to September 30, 1996 and the Predecessor's
Statements of Cash Flows for the five month period from
January 1, 1996 to May 30, 1996 and the nine
months ended September 30, 1995 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II - Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
<PAGE>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
FLORIDA COAST PAPER COMPANY, L.L.C.
BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Predecessor Florida Coast
December 31, 1995 September 30, 1996
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................... $ -- $ 7,990
Accounts receivable from Joint Venture Partners ............. -- 11,641
Accounts receivable ......................................... 9,249 1,045
Inventories ................................................. 14,632 13,560
Other ....................................................... 1,143 1,211
-------- ---------
Total current assets .................................... 25,024 35,477
-------- ---------
Property, plant and equipment, net of accumulated
depreciation ............................................ 169,424 188,927
Deferred debt issuance costs ................................ -- 8,010
-------- ---------
Total assets ................................................ $194,448 $ 232,384
-------- ---------
Current liabilities:
Accounts payable ............................................ $ 7,746 $ 10,993
Amounts due to Joint Venture Partners ....................... -- 150
Accrued liabilities ......................................... 1,354 6,287
Accrued interest ............................................ -- 7,012
Accrued reserves ............................................ 2,056 --
-------- ---------
Total current liabilities ............................... 11,156 24,442
-------- ---------
Long-term debt:
Notes ....................................................... -- 165,000
Seller Note ................................................. -- 10,445
Accrued reserves ................................................. 2,379 --
Deferred income taxes ............................................ 33,553 --
Commitments and contingencies (Note 5)
Total liabilities ....................................... 47,088 199,887
Members' equity:
Contributed capital ......................................... -- 40,000
Accumulated deficit ......................................... -- (7,503)
Total members' equity ................................... -- 32,497
Equity in net assets ............................................. 147,360 --
-------- ---------
Total liabilities and equity ..................................... $194,448 $ 232,384
======== =========
The accompanying footnotes are an integral part of these financial statements.
</TABLE>
<PAGE>
FLORIDA COAST PAPER COMPANY, L.L.C.
STATEMENT OF OPERATIONS
Three months ended September 30, 1995 and 1996
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Predecessor Florida Coast
Three months ended Three months ended
September 30, 1995 September 30, 1996
------------------------------ -----------------------------
<S> <C> <C>
Net sales................................................. $ 44,670 $ 43,496
Cost of sales............................................. 38,511 43,393
Selling, general and administrative
expenses............................................. 772 464
-------- ---------
Operating profit (loss).............................. 5,387 (361)
------- ---------
Other income (expense):
Interest income...................................... 680 149
Interest expense..................................... -- (5,742)
Other income, net.................................... 36 277
-------- ---------
Income (loss) before income taxes......................... 6,103 (5,677)
Provision (benefit) for income taxes...................... 2,261 (312)
---------- ---------
Net income (loss)......................................... $ 3,842 $ (5,365)
========== =========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
-2-
<PAGE>
FLORIDA COAST PAPER COMPANY, L.L.C.
STATEMENT OF OPERATIONS
Nine months ended September 30, 1995 and 1996
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Florida Coast
------------------------------------------- -----------------
Five month period Four month period
Nine months ended ended ended
September 30, 1995 May 30, 1996 September 30, 1996
------------------ -------------- -------------------
<S> <C> <C> <C>
Net sales ...................................... $177,158 $ 67,670 $ 57,775
Cost of sales .................................. 135,192 68,979 57,871
Selling, general and administrative
expenses ....................................... 2,663 1,409 723
-------- -------- --------
Operating profit (loss) .................... 39,303 (2,178) (819)
-------- -------- --------
Other income (expense):
Interest income ............................ 1,388 -- 173
Interest expense ........................... -- -- (7,698)
Other income, net .......................... 1,291 152 404
-------- -------- --------
Income (loss) before income taxes .............. 41,982 (2,566) (7,940)
Provision (benefit) for income taxes ........... 15,558 (951) (437)
-------- -------- --------
Net income (loss) .............................. $ 26,424 $ (1,615) $ (7,503)
======== ======== ========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
-3-
<PAGE>
FLORIDA COAST PAPER COMPANY, L.L.C.
STATEMENT OF CASH FLOWS
Nine months ended September 30, 1995 and 1996
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Florida Coast
------------------------------------------------- ------------------------
Nine months ended Five month period ended Four month period ended
September 30, 1995 May 30, 1996 September 30, 1996
------------------ ------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ............................. $ 26,424 $ (1,615) $ (7,503)
Adjustments to reconcile net income
(loss) to cash provided by operating
activities:
Depreciation .................................. 17,761 10,335 4,457
Amortization of deferred debt issuance
costs and deferred interest
expense .................................... -- -- 685
Increase (decrease) in deferred income
taxes ......................................... 2,265 (198) --
Changes in operating assets and
liabilities:
Accounts receivable ........................ 3,711 3,324 (6,879)
Inventories, net ........................... (3,900) 630 778
Other current assets ....................... (893) (304) (901)
Accounts payable ........................... (6,270) 402 1,454
Amounts due to Joint Venture
Partners ................................ -- -- 150
Accrued liabilities ........................ 3,193 820 4,490
Accrued interest ........................... -- -- 7,012
-------- -------- ---------
Cash provided by operating activities ......... 42,291 13,394 3,743
-------- ---------
Cash Flows from investing activities:
Capital expenditures for property, plant
and equipment .............................. (16,875) (4,160) (2,219)
Payments made for business acquired ........... -- -- (200,284)
-------- -------- ---------
Cash used in investing activities .......... (16,875) (4,160) (202,503)
-------- -------- ---------
Cash flows from financing activities:
Change in intercompany accounts ............... (38,977) (9,234) --
Borrowings .................................... -- -- 175,500
Repayment on borrowings ....................... -- -- (500)
Capital contributions from Joint Venture
Partners ................................... -- -- 40,000
Payment of debt issuance costs ................ -- -- (8,250)
-------- -------- ---------
Cash (used in) provided by financing
activities .............................. (38,977) (9,234) 206,750
-------- -------- ---------
Net (decrease) increase in cash and cash
equivalents ................................... (13,561) -- 7,990
Cash and cash equivalents at
beginning of period ........................... 13,561 -- --
-------- -------- ---------
Cash and cash equivalents at end of
period ........................................ $ -- $ -- $ 7,990
======== ======== =========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
-4-
<PAGE>
FLORIDA COAST PAPER COMPANY, L.L.C.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - Nature of Operations
Florida Coast Paper Company, L.L.C. (the "Company" or "Florida Coast") was
formed for the purpose of purchasing a paperboard mill (the "Mill") from St. Joe
Forest Products Company ("SJFP"), a wholly owned subsidiary of St. Joe Paper
Company ("SJPC"). Florida Coast is a joint venture between Stone Container
Corporation ("Stone") and Four M Corporation ("Four M") (together, "the Joint
Venture Partners").
On November 1, 1995, SJPC, SJFP, St. Joe Container Company ("SJCC"), Four M
and Florida Coast entered into an Asset Purchase Agreement, as amended (the
"Acquisition Agreement"), pursuant to which, on May 30, 1996, Florida Coast
acquired the assets of the Mill for a purchase price of $185.0 million for the
fixed assets, plus approximately $17.4 million for working capital, subject to
an adjustment for changes in working capital which is described in Note 5. The
funds required to consummate the purchase of the Mill and pay related
transaction costs consisted of (1) $165.0 million from the proceeds of the
issuance of 12 3/4% Series A First Mortgage Notes due 2003 (the "Old Notes"),
(2) $40.0 million of equity contributed by Florida Coast Paper Holding Co.,
L.L.C. and its subsidiary, and (3) a $10.0 million subordinated note of Florida
Coast issued to SJFP pursuant to the Acquisition Agreement (the "Seller Note").
The Mill is engaged in the manufacture of mottled white and unbleached kraft
linerboard.
Florida Coast Paper Finance Corp. ("Finance Corp.") is a wholly owned
subsidiary of Florida Coast that was incorporated for the purpose of serving as
co-issuer of the Old Notes in order to facilitate the offering of the Old Notes
and Florida Coast's offer to exchange its Old Notes for its registered 12 3/4%
Series B First Mortgage Notes due 2003 (the "Notes"). Finance Corp. does not
have any revenues; therefore, separate financial statements of Finance Corp.
have not been included in the financial statements included herein.
NOTE 2 - Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the financial statements, footnote disclosures and other information
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed. The financial statements,
footnote disclosures and other information included herein should be read in
conjunction with the financial statements and the notes thereto included in
Florida Coast's financial statements as of June 30, 1996 and for the period from
May 30, 1996 to June 30, 1996 and for the year ended December 31, 1995 with
respect to SJPC included in the Registration Statement on Form S-4, as amended,
that was filed with the Securities and Exchange Commission.
The accompanying unaudited financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to fairly present
Florida Coast's financial position as of September 30, 1996 and the results of
operations for the three months ended September 30, 1996 and the period from May
30, 1996 to September 30, 1996 and cash
-5-
<PAGE>
flows for the period between May 30, 1996 and September 30, 1996 and SJFP's
financial position as of December 31, 1995 and the results of operations for the
three and nine month periods ended September 30, 1995 and the period from
January 1, 1996 to May 30, 1996 and the cash flows for the nine months ended
September 30, 1995 and the period from January 1, 1996 to May 30, 1996. Results
for interim periods are not necessarily indicative of results for the entire
year.
The results of operations for the three and nine month periods ended
September 30, 1995 and the period from January 1, 1996 to May 30, 1996, cash
flows for the nine month period ended September 30, 1995 and the period from
January 1, 1996 to May 30, 1996 and the statement of financial position as of
December 31, 1995 do not reflect the results of operations of SJFP's wholly
owned subsidiaries.
NOTE 3 - Related Party Transactions
St Joe Forest Products - Linerboard Mill Operations
For the results of operations for the three and nine month periods ended
September 30, 1995 and the period from January 1, 1996 to May 30, 1996, cash
flows for the nine month period ended September 30, 1995 and the period from
January 1, 1996 to May 30, 1996 and for the statement of financial position as
of December 31, 1995:
The intercompany transactions described below may or may not be indicative
of what such transactions would have been had SJFP operated either as an
unaffiliated entity or in affiliation with another entity.
An allocation of costs of overhead of SJPC is included in selling, general
and administrative expenses, SJPC provided services for SJFP in treasury,
taxes, benefits administration and legal support and other financial
systems and support, SJPC's budgeted overhead was allocated based on a
formula that equally weighted each of its subsidiary's proportional share
of payroll, sales and fixed assets. This formula is considered by
management to be a reasonable measure of the use of corporate resources by
each subsidiary. SJFP was billed approximately $240,000, $720,000 and
$400,000 for such services for the three and nine months ended September
30, 1995 and the period from January 1, 1996 to May 30, 1996, respectively.
Sales to SJCC, a wholly owned subsidiary of SJFP, amounted to approximately
$26,203,000, $88,106,000 and $36,834,000 representing approximately 47,000,
167,000 and 78,000 tons for the three and nine months ended September 30,
1995 and the period from January 1, 1996 to May 30, 1996, respectively.
Pricing for these transactions was based on the prices published in Pulp &
Paper Week Price Watch: Paper and Paperboard, an industry trade
publication. In addition, SJFP purchased both linerboard and corrugating
medium for SJCC from outside suppliers. The price paid by SJFP for this
rollstock was negotiated with each supplier. SJCC was charged for this
rollstock at the prices published in Pulp & Paper Week.
-6-
<PAGE>
Purchases of pulpwood and wood chips from St. Joseph Land and Development
Company, a wholly owned subsidiary of SJFP, amounted to approximately
$12,098,000, $41,564,000 and $16,932,000 representing approximately
451,000, 1,526,000 and 570,000 tons for the three and nine months ended
September 30, 1995 and the period from January 1, 1996 to May 30, 1996,
respectively.
SJFP shipped the majority of its product via Appalachicola Northern
Railroad, a subsidiary of SJPC. Amounts billed for freight amounted to
approximately $811,000, $3,281,000 and $1,241,000 for the three and nine
months ended September 30, 1995 and the period from January 1, 1996 to May
30, 1996, respectively.
Florida Coast
For the results of operations for the three months ended September 30, 1996
and the period from May 30, 1996 to September 30, 1996, cash flows for the
period from May 1, 1996 to September 30, 1996 and for the statement of financial
position as of September 30, 1996:
Pursuant to the Output Purchase Agreement, each of the Joint Venture
Partners has agreed to purchase from Florida Coast one-half of the Mill's
entire linerboard production at a price that is $25 per ton below the price
of such product published in Pulp & Paper Week, an industry trade
publication, subject to a minimum purchase price, which minimum purchase
price is intended to generate sufficient funds to cover cash operating
costs, cash interest expense and maintenance capital expenditures.
Furthermore, in addition to an initial investment of $40 million in Florida
Coast, the Joint Venture Partners have severally agreed to provide Florida
Coast with a $20 million subordinated line of credit for general corporate
purposes (the "Subordinated Credit Facility"). At September 30, 1996, there
was no balance outstanding under the Subordinated Credit Facility.
At September 30, 1996, pursuant to the Output Purchase Agreement, each of
the Joint Venture Partners was required to pay the Company an additional
$3,337,500 for the linerboard produced by the Mill during the three month
period ended September 30, 1996 to enable the Company to generate
sufficient funds to cover cash operating costs, cash interest expense and
maintenance capital expenditures. These amounts have been included in net
sales for the three month period ended September 30, 1996.
Florida Coast had net receivables from the Joint Venture Partners of
approximately $11,641,000 at September 30, 1996.
Stone provides certain services to the Company including engineering,
purchasing, transportation and computer information services. The Company
has also entered into a procurement agreement with Stone pursuant to which
Stone will procure wood fiber, at market values, on behalf of the Company.
-7-
<PAGE>
NOTE 4 - Inventories
Inventories of SJFP as of December 31, 1995 and Florida Coast as of
September 30, 1996 are summarized as follows:
December 31, 1995 September 30,1996
----------------- -----------------
(Dollars in thousands)
Raw materials and supplies $10,746 $12,085
Finished goods and work in progress 3,886 1,475
------- -------
Total inventories $14,632 $13,560
======= =======
NOTE 5 - Commitments and Contingencies
Florida Coast is involved in certain litigation primarily arising in the
normal course of business, none of which, in the opinion of management, is
expected to have a material adverse effect on Florida Coast's financial
position, liquidity, or results of operations.
Florida Coast is subject to costs arising out of environmental laws and
regulations, which include obligations to remove or limit the effects on the
environment of the disposal or release of certain wastes or substances at
various sites. It is Florida Coast's policy to accrue and charge against
earnings environmental cleanup costs when it is probable that a liability has
been incurred and an amount is reasonably estimable. As assessments and cleanups
proceed, these accruals are reviewed and adjusted, if necessary, as additional
information becomes available.
Florida Coast is currently a party to, or involved in, legal proceedings
involving environmental matters such as alleged discharges into water or soil.
Environmental liabilities are paid over an extended period and the timing of
such payments cannot be predicted with any confidence. Based on information
presently available, management believes that the ultimate disposition of
currently known matters will not have a material effect on the financial
position, liquidity or results of operations of Florida Coast.
The Acquisition Agreement discussed in Note 1 provides for a post-closing
adjustment to adjust for actual working capital acquired at May 30, 1996. SJFP
has delivered to Florida Coast its preliminary balance sheet as of May 30, 1996
and, based on such balance sheet, has paid approximately $2,148,000 to Florida
Coast as a purchase price adjustment. Florida Coast believes that the purchase
price adjustment amount is understated and has notified SJFP of its position
pursuant to the Acquisition Agreement.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following discussion and analysis should be read in conjunction with
the financial statements of the Predecessor and the Company and the notes
thereto included elsewhere in this Form 10-Q. The results of operations of the
Predecessor for the period from January 1, 1996 to May 30, 1996 and the results
of operations of the Company for the period from May 30, 1996 to September 30,
1996 have been combined to present the results of operations for the nine months
ended September 30, 1996.
The linerboard market is highly cyclical and sensitive to changes in
industry capacity and economic conditions, which in turn, will impact the
selling prices for the Company's products. Selling prices for the Mill's
products have historically been the primary determinant of the Mill's financial
performance. Recently, prices for the Mill's products have declined as a result
of increased capacity in the industry and decreased demand for such products.
Consequently, in December 1995 and January 1996, one of the Mill's paper
machines was temporarily shut down for maintenance and to decrease excess
inventory. In order to prevent excess increases in inventory, the Mill
experienced further downtime of both of its paper machines from April 7, 1996
through May 6, 1996. In addition, both of the Mill's paper machines were shut
down during July 1996 for annual maintenance.
Pursuant to the Output Purchase Agreement, each of the Joint Venture
Partners will purchase from the Company one-half of the Mill's entire linerboard
production at a price that is $25 per ton below the price of such product
published in Pulp & Paper Week, an industry trade publication, under the section
entitled "Price Watch: Paper and Paperboard," subject to a minimum purchase
price, which minimum purchase price is intended to generate sufficient funds to
cover cash operations cost, cash interest expense and maintenance capital
expenditures. The Company must also use its best efforts to operate the Mill at
a production rate not less than the average capacity utilization rate of
domestic linerboard producers.
At September 30, 1996, pursuant to the Output Purchase Agreement, each of
the Joint Venture Partners was required to pay the Company an additional
$3,337,500 for the linerboard produced by the Mill during the three month period
ended September 30, 1996 to enable the Company to generate sufficient funds to
cover cash operating costs, cash interest expense and maintenance capital
expenditures. Since such price adjustments pursuant to the Output Purchase
Agreement are made retroactively on a quarterly basis, the Company anticipates
that it will need to draw down on the Subordinated Credit Facility to supplement
its cash flow in order to meet its 1996 debt service requirements.
-9-
<PAGE>
Results of Operations
The following table sets forth certain statement of operations data
and such data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------------------------------- -------------------------------------------
1996
1995 1996 1995 (Combined)
----------------------------------------------- ------------------------------------------
Percent of Percent of Percent of Percent of
Amount Net Sales Amount Net Sales Amount Net Sales Amount Net Sales
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales ............... $ 44.7 100% $ 43.5 100% $ 177.2 100% $ 125.4 100%
Cost of sales ........... 38.5 86.1 43.4 99.8 135.2 76.3 126.9 101.2
Selling, general and
administrative ........ 0.8 1.8 0.5 1.1 2.7 1.5 2.1 1.7
Other income (expense) .. 0.7 1.5 (5.3) (12.2) 2.7 1.5 (6.9) (5.5)
Income (loss) before
provision for
income taxes ...... 6.1 13.6 (5.7) (13.1) 42.0 23.7 (10.5) (8.4)
Provision (benefit)
for income taxes ... 2.3 5.1 (0.3) (0.7) 15.6 8.8 (1.4) (1.1)
Net income (loss) ....... $ 3.8 8.5% $ (5.4) (12.4)% $ 26.4 14.9% $ (9.1) (7.3)%
</TABLE>
The discussion which follows concerning the third quarter results of
operations combines the five month period ended May 30, 1996 of the Predecessor
and the four month period ended September 30, 1996 of the Company in order to
establish the third quarter period for comparison purposes only.
Nine Months Ended September 30, 1996 (Combined) Compared to Nine Months Ended
September 30, 1995
Net sales declined $51.8 million, or 29.2%, to $125.4 million for the nine
months ended September 30, 1996 from $177.2 million for the nine months ended
September 30, 1995. This decline was attributable to declines in both sales
volume and unit prices. Sales volume declined 5.6% to approximately 307,311 tons
for the nine months ended September 30, 1996 from approximately 325,455 tons for
the nine months ended September 30, 1995. The decline in volume which occurred
during the period from January 1, 1996 to May 30, 1996 was due, in part, to a
decrease in industry wide demand. In addition, the Mill's paper machines were
periodically shut down during the nine months ended September 30, 1996 in order
to stabilize inventory and for annual maintenance. Average gross selling prices
per ton for unbleached kraft and mottled white linerboard decreased
approximately 24.9% and approximately 19.4%, respectively. The mottled white
linerboard shipments decreased to 39.4% of total shipments from 54.3%, while
unbleached kraft linerboard shipments increased from 45.7% to 60.6% primarily as
a result of competition from a new manufacturer.
Cost of sales decreased $8.3 million, or 6.1%, to $126.9 million for the
nine months ended September 30, 1996 from $135.2 million for the nine months
ended September 30,
-10-
<PAGE>
1995. This decline was primarily due to a 5.6% decline in sales volume. In
addition, cost of sales as a percentage of net sales increased to 101.2% for the
nine months ended September 30, 1996 from 76.3% in the nine months ended
September 30, 1995 primarily due to the decreases in selling prices and sales
volume.
The Company's selling, general and administrative expenses decreased $0.6
million, or 22%, to $2.1 million for the nine month period ended September 30,
1996 from $2.7 million in the nine month period ended September 30, 1995. This
decline was due, in part, to the elimination of the Mill's sales department
which is no longer necessary as a result of the Output Purchase Agreement.
For the reasons noted above and as a result of a $7.7 million increase in
the Company's interest expense arising under the Notes, the Company's net income
(loss) decreased to $(9.1) million in the nine month period ended September 30,
1996 from $26.4 million in the nine month period ended September 30, 1995.
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Net sales declined $1.2 million, or 2.7%, to $43.5 million for the three
months ended September 30, 1996 from $44.7 million for the three months ended
September 30, 1995. Average gross selling prices per ton for unbleached kraft
and mottled white linerboard decreased approximately 37.6% and approximately
34.8%, respectively. These decreases in average gross selling prices were only
partially offset by a 48.1% increase in sales volume to approximately 116,636
tons for the three months ended September 30, 1996 from 78,745 tons for the
three months ended September 30, 1995.
Cost of sales increased $4.9 million, or 12.7%, to $43.4 million for the
three months ended September 30, 1996 from $38.5 million for the three months
ended September 30, 1995 primarily as a result of increased sales volume. In
addition, cost of sales as a percentage of net sales increased to 99.8% for the
three months ended September 30, 1996 from 86.1% for the three months ended
September 30, 1995 primarily due to decreases in selling prices.
The Company's selling, general and administrative expenses decreased $0.3
million, or 37.5%, to $0.5 million for the three month period ended September
30, 1996 from $0.8 million in the three month period ended September 30, 1995.
This decline was due, in part, to the elimination of the Mill's sales department
which is no longer necessary as a result of the Output Purchase Agreement.
For the reasons noted above and as a result of a $5.7 million increase in
the Company's interest expense under the Notes, the Company's net income (loss)
decreased to $(5.4) million in the three month period ended September 30, 1996
from $3.8 million in the three month period ended September 30, 1995.
-11-
<PAGE>
Liquidity and Capital Resources
Historically, the Mill has met its liquidity requirements through cash
flows from operations and intercompany advances from SJPC. The Company's
principal liquidity requirements consist of debt service under the Notes and
funding of capital expenditures.
The Company has outstanding approximately $175.5 million of indebtedness,
consisting of the Notes and the Seller Note. Pursuant to the terms of the Seller
Note, the Company expects to pay interest in kind on the Seller Note. To the
extent the Company borrows funds under the Subordinated Credit Facility,
additional interest and principal payments will be required. Since the price
adjustments made pursuant to the Output Purchase Agreement are made
retroactively on a quarterly basis, the Company anticipates that it will need to
draw down on the Subordinated Credit Facility to supplement its cash flow in
order to meet its 1996 debt service requirements.
The Company's cash provided by operating activities decreased to $17.1
million in the nine months ended September 30, 1996 from $42.3 million in the
nine months ended September 30, 1995 primarily due to the decrease in net income
which was partially offset by changes in working capital requirements. Cash used
in investing activities increased to $(206.7) million in the nine month period
ended September 30, 1996 from $(16.9) million in the nine month period ended
September 30, 1995 as a result of the acquisition. Cash provided by financing
activities was $197.5 million in the nine month period ended September 30, 1996,
due principally to the issuance of the Notes and the capital contributions of
members. During the nine months ended September 30, 1995, $39.0 million was used
in financing activities.
Although there can be no assurance, the Company believes that cash
generated from operations together with amounts available under the Subordinated
Credit Facility will be sufficient to meet its debt service requirements,
capital expenditure needs and working capital needs for the foreseeable future.
The Company's future operating performance and ability to service the Notes and
repay other indebtedness of the Company will be subject to future economic
conditions and financial, business and other factors, many of which are not in
the Company's control.
Environmental Matters
The operations of the Mill are subject to extensive and changing
environmental regulation by federal, state and local authorities. St. Joe has in
the past made significant capital expenditures to comply with water, air and
solid and hazardous waste regulations. The Company expects to make significant
expenditures in the future. The Company has budgeted approximately $2.0 million
for environmental matters in each of 1996 and 1997. The Company anticipates that
a majority of these costs will be capital expenditures related to additional
asbestos removal and disposal and modifications in anticipation of the proposed
"cluster rules." The cluster rules have not been finally adopted and remain
subject to
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<PAGE>
modification. The Company is considering and evaluating the potential impact of
the proposed cluster rules on its operations and capital expenditures over the
next several years. The Company estimates the capital spending that may be
required to comply with a majority of the final regulations could be $27.0
million over a three-year period beginning in 1997 (but could reach as high as
$67.0 million under the currently proposed regulations). The Company may
determine that, under the final regulations, the costs associated with the
production of mottled white linerboard may be prohibitive and may discontinue
its production. Because of the current higher margins associated with mottled
white linerboard, in the event the Company discontinues the production of
mottled white linerboard, its revenues and profit margins will decrease. If the
Company determines to discontinue the production of mottled white linerboard,
the Company estimates the capital spending that may be required to comply with
the majority of the final regulations could be $5.0 million over a three-year
period beginning in 1997 (but could reach as high as $45.0 million under the
currently proposed regulations). The ultimate financial impact of the
regulations on the Company cannot be accurately estimated at this time but will
depend on the nature of the final regulations, the timing of required
implementation and the cost and availability of new technology.
Wastewater from the Mill is handled by the City of Port St. Joe Industrial
Wastewater Treatment Plant ("IWTP") under a permit issued by the City of Port
St. Joe ("CPSJ"). The Company will bear the preponderate costs of operating the
IWTP pursuant to an agreement with the IWTP and other industrial users of the
IWTP. The wastewater is discharged from the IWTP into the Gulf County Canal. The
ability of CPSJ to take wastewater from the Company is dependent upon CPSJ
maintaining its National Pollutant Discharge Elimination System permit. CPSJ is
appealing the recent permit issued by the EPA and is objecting to certain
parameters and conditions of the permit. The Company will cooperate with CPSJ
and believes that an unsuccessful appeal would neither impair IWTP's ability to
accept its wastewater nor substantially affect its costs.
In addition, based on historical exceedances of state ground water quality
standards, the Florida Department of Environmental Protection (the "DEP") has
asked CPSJ to conduct ground water monitoring in the vicinity of the IWTP.
Pursuant to the agreement with the IWTP and other industrial users, the Company
may bear a share of remedial costs, if any, to address the ground water
contamination. At this time, the Company cannot estimate the likelihood of
remediation or any associated costs, or predict if the cost would have a
material adverse affect on the Company's business or financial condition.
In March 1996, the EPA announced plans to propose a new Clean Air Act
regulation that may impose additional restrictions on the air emissions from
combustion sources at the Mill. Although the EPA is not expected to publish the
rule in proposed form until late 1996, based on the Company's current
understanding of the rule, the Company estimates that it may result in the
incurrence of capital costs of approximately $5.0 million to $10.0 million.
These capital costs are expected to be incurred over a three-year period after
the rule becomes final.
The Company has detected contamination of ground water from historical
black liquor spills on the Mill property. Based on the concentrations detected,
the Company believes that
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<PAGE>
no remediation will be required. In the event remediation is required, however,
the Company estimates that its costs will be approximately $2.1 million. The
potential remediation costs for the black liquor ground water contamination are
subject to limited indemnification by SJFP and SJPC (collectively, the "Paper
Indemnitors").
The ultimate financial impact of the proposed environmental regulations on
the Company will depend on the nature of the final regulations, the timing of
required implementation and the cost and availability of new technology. Based
on the environmental regulations as currently proposed or in effect, the Company
believes that the environmental liabilities known to the Company will not have a
material adverse effect on the financial condition, results of operations or
liquidity of the Company. However, there can be no assurance that the ultimate
impact of the foregoing environmental contingencies, in the aggregate, could
have a material adverse effect on the financial condition, results of operations
and liquidity of the Company.
Pursuant to the Acquisition Agreement, the Paper Indemnitors have agreed to
indemnify the Company for certain environmental matters based on activities
prior to May 30, 1996. There can be no assurance that this indemnification will
be sufficient to reimburse the Company for all environmental liabilities.
Part II - Other Information
Item 1. Legal Proceedings
On July 19, 1996, a civil action was filed in the Superior Court of Fulton
County, Georgia (the "Suit") by Sid Dunken, a former employee of Four M,
individually and on behalf of D&M Partnership, a Georgia partnership, against
Four M, Box USA Group, Inc., Four M Manufacturing Group of Georgia, Inc. and
Dennis Mehiel. The Company is not a defendant in the suit; however, the
complaint alleges that Dunken is entitled to an equity interest in Four M which
includes Four M's interest in the Company. In the alternative, the complaint
seeks $150,000,000 in compensatory damages from the defendants, as well as
punitive damages and attorneys' fees. On September 23, 1996, Four M filed an
answer in response to the complaint. Four M has advised the Company that it
believes that the Suit is without merit, intends to defend against the Suit
vigorously and believes that it has adequate defenses. However, the Suit is in a
very preliminary stage, and there can be no assurance that the outcome of the
Suit will not be adverse to Four M.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
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<PAGE>
2.1 Asset Purchase Agreement, dated as of November 1, 1995, among the
Company, St. Joe Forest Products Company, St. Joe Container Company, St.
Joe Paper Company and Four M Corporation ("Four M").**
3.1 Certificate of Formation of Florida Coast Paper Company, L.L.C. (the
"Company").**
3.2 Certificate of Incorporation of Florida Coast Paper Finance Corp.
("Finance Corp.").**
3.7 By-laws of Finance Corp.**
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 3/4% Series A and Series B First Mortgage 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, Finance Corp. and Bear Stearns & Co. Inc. (the "Initial
Purchaser").**
10.1 Output Purchase Agreement, dated as of May 30, 1996, among the Company,
Four M and Stone Container Corporation ("Stone").**
10.2 Mortgage Security Agreement, dated as of May 30, 1996, between the
Company, and the Trustee.**
10.3 Security Agreement, dated as of May 30, 1996, between the Company and the
Trustee.**
10.4 Subordinated Credit Agreement, dated as of May 30, 1996, among the
Company, Four M and Stone.**
10.5 Environmental Indemnity Agreement, dated as of May 30, 1996, between the
Company and Four M.**
10.6 Wood Fiber Procurement and Services Agreement, dated as of May 30, 1996,
between the Company and Four M.**
10.7 Indenture of Lease, dated as of May 30, 1996, between the Company and Box
USA Group, Inc.**
27.1 Financial Data Schedule.*
_______________________________
* Filed herewith.
** Incorporated by reference to the Registration Statement on Form S-4 of
the Company, as amended (the "Registration Statement"), as filed with
the Securities and Exchange Commission (the "SEC") on July 12, 1996.
(b) Reports on Form 8-K
No reports of Form 8-K have been filed by the Company during the period
covered by this report.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
FLORIDA COAST PAPER COMPANY,
L.L.C.
By: /s/Green Long
-------------
Name: Green Long
Title: Chief Financial Officer (Principal
Accounting Officer and duly authorized
signatory)
FLORIDA COAST PAPER FINANCE CORP.
By: /s/Green Long
-------------
Name: Green Long
Title: Principal Financial Officer (Principal
Accounting Officer and duly authorized
signatory)
Date: November 14, 1996
-16-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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