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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT AS UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 AS AMENDED AND RESTATED
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
For Quarter Ended March 31, 1994 Commission file number 1-9915
GAYLORD CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3472452
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Lake Cook Road, Suite 400
Deerfield, Illinois 60015
Telephone: (708) 405-5500
(Address, including zip code, and telephone number, including
area code, of registrant's principal offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes X No ___
As of May 9, 1994, the registrant had outstanding 48,353,395 shares
(including 31,845,533 shares held in trust for the benefit of the warrant
holders) of its $0.0001 par value Class A Common Stock, 31,845,533
redeemable exchangeable warrants and 5,266,273 shares of its $0.0001 par
value Class B Common Stock. One share of Class B Common Stock is
convertible into one share of Class A Common Stock at the option of the
holder thereof.
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PART I. FINANCIAL INFORMATION NUMBERS
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Item 1. Financial Statements. 1 - 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 7 - 11
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings. 12
Item 2. Changes in Securities. 12
Item 3. Defaults Upon Senior Securities. 12
Item 4. Submission of Matters to a Vote of Security Holders. 12
Item 5. Other Information. 12
Item 6. Exhibits and Reports on Form 8-K. 13
SIGNATURES 14
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS,
MARCH 31, 1994 AND SEPTEMBER 30, 1993
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MARCH 31, SEPTEMBER 30,
1994 1993
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ASSETS (In millions)
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CURRENT ASSETS:
Cash and equivalents $ 13.0 $ 27.6
Trade receivables (less allowances of
$4.1 million and $4.5 million, respectively) 102.7 103.2
Inventories (Note 3) 65.3 61.2
Other current assets 7.2 7.4
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Total current assets 188.2 199.4
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PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at cost 892.3 887.3
Less accumulated depreciation 301.3 276.2
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Property - Net 591.0 611.1
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OTHER ASSETS 44.7 49.6
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TOTAL $ 823.9 $ 860.1
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 2) $ 5.4 $ 5.7
Trade payables 39.2 43.7
Accrued and other liabilities 50.1 50.1
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Total current liabilities 94.7 99.5
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LONG-TERM DEBT (Note 2) 687.4 670.1
OTHER LONG-TERM LIABILITIES 29.0 32.6
DEFERRED INCOME TAXES 4.3 4.3
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Class A common stock - par value, $.0001 per share;
authorized 125,000,000 shares; issued 48,446,595
shares and 47,510,789 shares, respectively, and
outstanding 48,360,895 shares and 47,425,089
shares, respectively - -
Class B common stock - par value, $.0001 per share;
authorized 15,000,000 shares; issued and
outstanding 5,266,273 shares and 5,951,427 shares,
respectively - -
Capital in excess of par value 169.9 169.4
Retained deficit (150.5) (104.9)
Common stock in treasury - at cost; 85,700 shares (0.8) (0.8)
Recognition of minimum pension liability (10.1) (10.1)
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Total stockholders' equity 8.5 53.6
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TOTAL $ 823.9 $ 860.1
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</TABLE>
See notes to condensed consolidated financial statements.
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1994 AND 1993 (In millions, except per share data)
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March 31,
------------------------
1994 1993
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NET SALES $ 182.5 $ 181.5
COST OF GOODS SOLD 165.5 158.1
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GROSS MARGIN 17.0 23.4
SELLING AND ADMINISTRATIVE COSTS (19.6) (19.5)
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OPERATING EARNINGS (LOSS) (2.6) 3.9
INTEREST EXPENSE - Net (Note 2) (19.9) (15.5)
OTHER EXPENSE - Net (0.1) (0.2)
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LOSS BEFORE INCOME TAXES (22.6) (11.8)
INCOME TAXES - -
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NET LOSS (22.6) $ (11.8)
-------
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RETAINED DEFICIT:
BEGINNING OF PERIOD (127.9)
-------
END OF PERIOD $(150.5)
-------
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NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.42) $ (0.22)
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AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 53.6 53.4
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</TABLE>
See notes to condensed consolidated financial statements.
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
MARCH 31, 1994 AND 1993 (In millions, except per share data)
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March 31,
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1994 1993
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NET SALES $ 366.4 $ 358.3
COST OF GOODS SOLD 332.7 309.1
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GROSS MARGIN 33.7 49.2
SELLING AND ADMINISTRATIVE COSTS (39.7) (38.3)
DEBT RESTRUCTURING EXPENSES (Note 2) - (8.6)
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OPERATING EARNINGS (LOSS) (6.0) 2.3
INTEREST EXPENSE - Net (Note 2) (39.4) (27.5)
OTHER EXPENSE - Net (0.2) (0.3)
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LOSS BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND ACCOUNTING CHANGE (45.6) (25.5)
INCOME TAXES - -
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LOSS BEFORE EXTRAORDINARY ITEM AND
ACCOUNTING CHANGE (45.6) (25.5)
EXTRAORDINARY GAIN (Note 2) - 201.5
ACCOUNTING CHANGE (Note 1) - (1.3)
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NET INCOME (LOSS) (45.6) $ 174.7
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RETAINED DEFICIT:
BEGINNING OF PERIOD (104.9)
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END OF PERIOD $(150.5)
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EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
LOSS BEFORE EXTRAORDINARY ITEM AND
ACCOUNTING CHANGE $ (0.85) $ (0.55)
EXTRAORDINARY GAIN - 4.35
ACCOUNTING CHANGE - (0.03)
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NET INCOME (LOSS) $ (0.85) $ 3.77
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AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 53.5 46.3
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</TABLE>
See notes to condensed consolidated financial statements.
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
MARCH 31, 1994 AND 1993
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March 31,
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1994 1993
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(In millions)
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CASH FLOWS FROM OPERATIONS:
Loss before extraordinary item and
accounting change $(45.6) $(25.5)
Adjustments to reconcile loss before extraordinary
item and accounting change to net cash from
operating activities:
Depreciation and amortization 30.6 28.8
Non-cash interest expense 20.0 2.2
Change in current assets and liabilities,
excluding acquisitions and dispositions (11.7) 9.0
Other - net 3.5 1.4
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Net cash (used for) provided by operations (3.2) 15.9
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CASH FLOWS FROM INVESTMENTS:
Capital expenditures (13.5) (5.8)
Capitalized interest (0.3) (0.3)
Acquisition - (5.9)
Acquisition restructuring expenditures (1.7) (1.2)
Proceeds from asset sales 4.5 -
Other investments - net 2.4 -
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Net cash used for investments (8.6) (13.2)
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CASH FLOWS FROM FINANCING:
Revolver borrowings - net - -
Senior debt - repayments (2.7) (2.4)
Restructuring closing (Note 2) - (53.1)
Other financing - net (0.1) 2.7
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Net cash used for financing (2.8) (52.8)
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Net decrease in cash and equivalents (14.6) (50.1)
Cash and equivalents, beginning of period 27.6 64.5
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Cash and equivalents, end of period $ 13.0 $ 14.4
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for:
Interest expense $ 17.9 $ 14.6
Income taxes - -
Supplemental schedule of non-cash investing and
financial activities:
Fair value of non-cash assets acquired - 4.9
Liabilities assumed in acquisitions - -
</TABLE>
See notes to condensed consolidated financial statements.
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1. GENERAL
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all normal and recurring
adjustments and accruals necessary to present fairly the financial position
as of March 31, 1994 and the results of operations for the three and six
months ended March 31, 1994 and 1993 and cash flows for the six months ended
March 31, 1994 and 1993, including all the accounts of Gaylord Container
Corporation (including its subsidiaries, the Company), and are in conformity
with Securities and Exchange Commission (the Commission) Rule 10-01 of
Regulation S-X. In addition to the normal and recurring adjustments and
accruals, for the six months ended March 31, 1993, the Company recognized
"Debt Restructuring Expenses" of $8.6 million and an "Extraordinary Gain" of
$201.5 million related to a comprehensive debt restructuring (see Note 2)
and a charge of $1.3 million for an "Accounting Change" as described below.
In the three months and six months ended March 31, 1994, the Company
recognized a charge against operating earnings of approximately $2 million
for the loss on the sale and costs associated with the disposition of a
corrugated container plant in February 1994. The financial statements
should be read in conjunction with the audited consolidated financial
statements and the notes thereto on Form 10-K for the fiscal year ended
September 30, 1993.
On October 1, 1992, the Company adopted Financial Accounting Standard No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
and elected to immediately recognize its accumulated benefit obligation
under collective bargaining agreements at four of its facilities. As a
result, the Company recorded a charge to earnings of $1.3 million for the
effect of the "Accounting Change."
2. RESTRUCTURING/REFINANCING
On September 11, 1992, the Company filed a voluntary petition for relief and
a plan of reorganization (the Prepackaged Plan) under Chapter 11 of the
United States Bankruptcy Code. On November 2, 1992, the Company consummated
the Prepackaged Plan.
Upon consummation of the Prepackaged Plan, the Company issued (i) $182.3
million aggregate principal amount of 13-1/2% Senior Subordinated Debentures
Due 2003 (the 13-1/2% Senior Subordinated Notes) plus $20.7 million of
accrued interest from January 1, 1992 through November 1, 1992, (ii) $195.4
million aggregate principal amount of 10-1/4% Senior Subordinated PIK Notes
Due 2001 (the 10-1/4% Senior Subordinated Notes) plus $16.8 million of
accrued interest from January 1, 1992 through November 1, 1992 (including
$10.6 million of interest paid in additional 10-1/4% Senior Subordinated
Notes), (iii) approximately 6 million shares of the Company's Class A Common
Stock, par value $.0001 per share (Class A Common Stock) and (iv)
approximately 31.8 million redeemable exchangeable warrants (the Warrants)
to obtain one share of Class A Common Stock per Warrant, all in exchange for
$582.8 million aggregate principal amount of the Company's subordinated debt
plus approximately $134.5 million of accrued but unpaid interest thereon.
In addition, the Company repaid $26.2 million of principal outstanding under
its bank credit agreement.
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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Concurrent with the consummation of the Prepackaged Plan, the Company (i)
issued the number of shares of Class A Common Stock deliverable upon
exercise of the Warrants to a trustee, which will hold such shares in trust,
for the benefit of the holders of Warrants pending any such exercise, (ii)
filed with the Delaware Secretary of State the charter amendment which
amended the Company's Restated Certificate of Incorporation and (iii) closed
the post-restructuring credit agreement with its bank group.
The Company accounted for the consummation of the Prepackaged Plan in
accordance with the provisions of the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Accounting by Entities in
Reorganization Under the Bankruptcy Code." The exchange of subordinated
debt for the 13-1/2% Senior Subordinated Notes and the 10-1/4% Senior
Subordinated Notes, shares of Class A Common Stock and Warrants resulted in
a forgiveness of debt. The forgiveness of debt resulted in an extraordinary
gain of $201.5 million, net of $1.2 million of income taxes. The deferred
tax provision was recorded at less than the statutory tax rate due to the
recognition of deferred tax benefits which the Company was previously unable
to utilize due to limitations on its ability to carry-forward tax net
operating losses sustained in prior years. A provision of $1.2 million for
certain state income taxes was required due to limitations on the use of
such net operating loss carryforwards for state income tax purposes.
Approximately $4.0 million of interest expense on the Senior Subordinated
Notes for the period October 1, 1992 through November 1, 1992 reduced the
amount of the extraordinary gain recognized by the Company and therefore was
not reported as interest expense.
On May 18, 1993, the Company issued (i) $225 million aggregate principal
amount of 11-1/2% Senior Notes Due 2001 (the Senior Notes) and (ii)
approximately $434.2 million aggregate principal amount (approximately $300
million of gross proceeds) of 12-3/4% Senior Subordinated Discount
Debentures Due 2005 (the Subordinated Discount Debentures and together with
the Senior Notes, the Securities). Proceeds from the sale of the Securities
were used (i) to prepay $70 million outstanding under the term loan portion
of the Company's bank credit agreement, (ii) to redeem all outstanding
10-1/4% Senior Subordinated Notes ($208.2 million), plus accrued interest
thereon (approximately $9.8 million), (iii) to redeem all outstanding
13-1/2% Senior Subordinated Notes ($182.3 million), plus accrued interest
thereon (approximately $11.4 million), (iv) to pay fees and expenses of
approximately $19.7 million and (v) for general corporate purposes.
3. INVENTORIES
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MARCH 31, SEPTEMBER 30,
1994 1993
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(In millions)
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Inventories consist of:
Finished products $17.7 $13.3
In process 34.5 34.6
Raw materials 6.9 6.7
Supplies 9.3 9.4
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Total 68.4 64.0
LIFO valuation adjustment (3.1) (2.8)
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Total $65.3 $61.2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Second Quarter of Fiscal 1994 Compared with Second Quarter of Fiscal 1993.
Net sales for the second quarter of fiscal 1994 were $182.5 million,
marginally higher than net sales of $181.5 million for the second quarter of
fiscal 1993. The operating loss for the current quarter was $2.6 million
compared with operating earnings of $3.9 million for the year-ago second
quarter. Included in the second quarter fiscal 1994 results was a charge
against operating earnings of approximately $2 million for the loss on the
sale and costs associated with the disposition of a corrugated container
plant in February 1994. The Company reported a net loss of $22.6 million,
or $0.42 per share, versus a net loss of $11.8 million, or $0.22 per share.
A $25 per ton price increase for linerboard and a corresponding price
increase for corrugated containers were implemented during the first six
months of fiscal 1994. An additional $30 per ton price increase for
linerboard was realized late in the second quarter of fiscal 1994, and the
Company has announced a corresponding price increase for corrugated
containers effective for shipments subsequent to March 1994. Reversing a
trend of substantial decreases in linerboard prices that occurred throughout
fiscal 1993, average selling prices for the Company's linerboard increased
in the second quarter of fiscal 1994 as compared with the first quarter of
fiscal 1994. Average prices for the second quarter of fiscal 1994, however,
were still below the average for the year-ago quarter.
Sales and earnings in the second quarter of fiscal 1994 were adversely
affected by lower average selling prices for primary and certain converted
products as compared to the prior-year quarter. Lower average net selling
prices in the second quarter of fiscal 1994 reduced operating earnings by
approximately $4 million versus the year-ago quarter. Average selling
prices for the Company's domestic containerboard and unbleached kraft paper
decreased approximately 6 percent and 20 percent, respectively, in the
second quarter of fiscal 1994 compared with the prior-year quarter. In
addition, average selling prices for the Company's export containerboard
decreased approximately 7 percent from the prior-year quarter. Average
selling prices for the Company's corrugated products and grocery bags and
sacks decreased approximately 2 percent and 11 percent, respectively, in the
second quarter of fiscal 1994 compared with the year-ago quarter. Average
selling prices for the Company's multiwall bags increased approximately 3
percent in the second quarter of fiscal 1994 versus the year-ago quarter as
a result of changes in product mix.
Sales and earnings for the second quarter of fiscal 1994 benefited from
increased mill production and higher shipments of corrugated products and
multiwall bags. Increased volume had a positive effect on operating
earnings of approximately $3 million. Containerboard production of 3,356
tons per day (TPD, calculated on the basis of the number of days in the
period) increased approximately 4 percent from 3,228 TPD in the prior-year
quarter. Unbleached kraft paper production decreased slightly to 675 TPD
from 679 TPD in the second quarter of fiscal 1993 primarily due to the
temporary idling of one paper machine at the Company's Bogalusa, Louisiana
mill as a result of market conditions.
Corrugated shipments of approximately 3.1 billion square feet were
approximately 11 percent higher than the prior-year quarter. The majority
of the increase in corrugated shipments was attributable to the acquisition
of a corrugated sheet feeder plant in March 1993. Multiwall bag shipments
7
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of 13.2 thousand tons were approximately 6 percent higher than the year-ago
quarter's shipments of 12.5 thousand tons primarily as a result of an
increase in market emphasis in certain product lines. Grocery bag and sack
shipments decreased to 30.6 thousand tons, or approximately 10 percent,
versus shipments of 34.1 thousand tons in the year-ago quarter. The
decrease in grocery bag and sack shipments was consistent with the decline
reported by the industry during the same period.
Gross margin as a percentage of net sales for the second quarter of fiscal
1994 decreased to 9.3 percent from 12.9 percent in the prior-year quarter.
The margin decline was primarily due to lower selling prices for primary and
certain converted products. In addition, gross margin was adversely
affected by higher manufacturing costs primarily due to increased fiber
costs (approximately $2 million) associated with higher wood chip
transportation costs and secondary fiber prices and higher mill energy costs
due to increased prices (approximately $1 million). Gross margin was also
adversely affected by the approximately $2 million charge for the loss on
the sale and costs associated with the disposition of a corrugated container
plant during the second quarter of fiscal 1994. Selling and administrative
costs of $19.6 million for the second quarter of fiscal 1994 were
essentially unchanged when compared to the prior-year quarter.
Net interest expense increased from the prior-year quarter by $4.4 million
to $19.9 million in the second quarter of fiscal 1994. The increase in
interest expense in the second quarter of fiscal 1994 was primarily due to
the Company's debt refinancing in the third quarter of fiscal 1993 which
resulted in higher average debt levels and higher weighted average interest
rates.
First Six Months of Fiscal 1994 Compared With First Six Months of Fiscal
1993.
Net sales for the first six months of fiscal 1994 were $366.4 million,
approximately 2 percent higher than net sales of $358.3 million for the
first six months of fiscal 1993. The operating loss for the first six
months of fiscal 1994 was $6.0 million compared with operating earnings of
$2.3 million for the year-ago period after $8.6 million of debt
restructuring expenses. Included in the first six months of fiscal 1994
results was a charge against operating earnings of approximately $2 million
for the loss on the sale and costs associated with the disposition of a
corrugated container plant. The Company reported a net loss of $45.6
million, or $0.85 per share, in the first six months of fiscal 1994 versus
net income of $174.7 million, or $3.77 per share, after recording an
extraordinary gain of $201.5 million, or $4.35 per share, in the first six
months of fiscal 1993. In addition, net income in the first six months of
fiscal 1993 was reduced by $1.3 million, or $0.03 per share, for an
"Accounting Change" as a result of the Company's adoption of Financial
Accounting Standard No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The earnings per share amounts were
calculated based on 53.5 million weighted average shares and 46.3 million
weighted average shares outstanding for the first six months of fiscal 1994
and fiscal 1993, respectively. The increase in weighted average shares
outstanding in the current period was primarily due to the approximately
37.8 million shares issued in November 1992 upon consummation of the
Prepackaged Plan (as defined herein).
A $25 per ton price increase for linerboard and a corresponding price
increase for corrugated containers were implemented during the first six
months of fiscal 1994. An additional $30 per ton price increase for
linerboard was realized late in the second quarter of fiscal 1994, and the
Company has announced a corresponding price increase for corrugated
containers effective for shipments subsequent to March 1994.
8
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Sales and earnings in the first six months of fiscal 1994 were adversely
affected by lower average net selling prices for primary and certain
converted products as compared to the prior-year period. Lower average net
selling prices in the first six months of fiscal 1994 reduced operating
earnings by approximately $11 million versus the year-ago period. Average
selling prices for the Company's domestic containerboard and unbleached
kraft paper decreased approximately 6 percent and 16 percent, respectively,
in the first six months of fiscal 1994 compared with the first six months
of fiscal 1993. In addition, average selling prices for the Company's
export containerboard decreased approximately 10 percent from the prior-year
period. Average selling prices for the Company's corrugated products and
grocery bags and sacks decreased approximately 3 percent and 13 percent,
respectively, in the first six months of fiscal 1994 compared with the
year-ago period. Average selling prices for the Company's multiwall bags
increased approximately 2 percent in the first six months of fiscal 1994
versus the year-ago period as a result of changes in product mix.
Sales and earnings for the first six months of fiscal 1994 benefited from
increased mill production and higher shipments of corrugated products and
multiwall bags. Increased volume had a positive effect on operating
earnings of approximately $6 million. Containerboard production of 3,247
TPD increased approximately 2 percent from 3,189 TPD in the comparable
prior-year period. This was despite 6 days of scheduled maintenance down
time taken at the Company's Bogalusa mill in the first quarter of fiscal
1994. Unbleached kraft paper production increased 5 percent to 693 TPD from
662 TPD in the first six months of fiscal 1993, despite the temporary idling
of a paper machine at the Bogalusa mill in the second quarter of fiscal
1994.
Corrugated shipments of approximately 6.3 billion square feet were
approximately 15 percent higher than the prior-year. The majority of the
increase in corrugated shipments was attributable to the acquisition of a
corrugated sheet feeder plant in March 1993. Multiwall bag shipments of
25.3 thousand tons were approximately 5 percent higher than the first six
months of fiscal 1993 primarily as a result of an increase in market
emphasis in certain product lines. Grocery bag and sack shipments increased
to 64.4 thousand tons, an increase of approximately 3 percent versus
shipments of 62.3 thousand tons a year ago. These increased shipments were
primarily a result of increased production of the Gaylord Handle Bag, a
grocery sack with paper handles.
Gross margin as a percentage of net sales for the first six months of
fiscal 1994 decreased to 9.2 percent from 13.7 percent in the prior-year
period. The margin decline was primarily due to lower primary and certain
converted product selling prices. In addition, gross margin was adversely
affected by higher manufacturing costs primarily due to increased fiber
costs associated with higher wood chip transportation costs and secondary
fiber prices and higher mill energy costs due to increased prices. Gross
margin was also adversely affected by the approximately $2 million charge
for the loss on the sale and costs associated with the disposition of a
corrugated container plant during the second quarter of fiscal 1994.
Selling and administrative costs of $39.7 million for the first six months
of fiscal 1994 increased $1.4 million from the prior year primarily as a
result of additional compensation costs associated with a new compensation
plan for executive officers.
Operating earnings for the first six months of fiscal 1993 were adversely
affected by $8.6 million of debt restructuring expenses related to the
Company's comprehensive debt restructuring completed in November 1992.
Consummation of the Company's Prepackaged Plan resulted in an extraordinary
gain of $201.5 million, in the first six months of fiscal 1993.
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Net interest expense increased from the prior-year period by $11.9 million
to $39.4 million in the first six months of fiscal 1994. The increase in
interest expense in the first six months of fiscal 1994 was primarily due to
the Company's debt refinancing in the third quarter of fiscal 1993 which
resulted in higher average debt levels and higher weighted average interest
rates. In addition, consummation of the Prepackaged Plan in the first
quarter of fiscal 1993 resulted in abnormally low interest expense.
Approximately $4.0 million of interest expense on certain subordinated debt
for the period October 1, 1992 through November 1, 1992 reduced the amount
of the extraordinary gain recognized by the Company and therefore was not
reported as interest expense.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company has historically financed its operations through cash provided
by operations, borrowings under its bank credit agreement and the issuance
of debt and equity securities. The Company's principal uses of cash are to
pay operating expenses, fund capital expenditures and service debt.
Net cash used for operations for the first six months of fiscal 1994 was
$3.2 million, compared with net cash provided by operations of $15.9 million
a year ago. The unfavorable comparison to the prior-year period was
primarily due to increased investments in working capital, lower earnings
from operations and increased cash interest expense.
Capital expenditures of $13.5 million in the first six months of fiscal 1994
increased $7.7 million from the prior-year period. The Company has recently
developed a five-year capital plan that provides for spending of
approximately $50 million per year. The plan targets approximately 55
percent of the spending to enhance the capacity, flexibility and cost
effectiveness of the Company's converting facilities. Should industry
pricing conditions not improve as anticipated, however, the Company has the
ability to defer certain of these capital projects. The Company plans to
finance this five-year capital plan through cash provided by operations,
borrowings under its bank credit agreement and trade receivables facility.
In addition, certain of the assets acquired may be leased or financed by
debt obligations secured by those assets.
On September 24, 1993, the Company sold substantially all of its accounts
receivable to a wholly owned special purpose subsidiary, Gaylord Receivables
Corporation (GRC). GRC transferred the accounts receivable to a special
purpose trust in exchange for certain trust certificates representing
ownership interests in the accounts receivable. Concurrently, GRC and a
group of banks established a $70 million trade receivables-backed revolving
credit facility (the Trade Receivables Facility) collateralized by one
series of such trust certificates.
Consummation of Prepackaged Plan
On September 11, 1992, the Company filed a voluntary petition for relief and
a plan of reorganization (the Prepackaged Plan) under Chapter 11 of the
United States Bankruptcy Code. On November 2, 1992, the Company consummated
the Prepackaged Plan.
Upon consummation of the Prepackaged Plan, the Company issued (i) $182.3
million aggregate principal amount of 13-1/2% Senior Subordinated Debentures
Due 2003 plus accrued interest from January 1, 1992 through November 1,
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<PAGE> 13
1992, (ii) $195.4 million aggregate principal amount of 10-1/4% Senior
Subordinated PIK Notes Due 2001 plus accrued interest from January 1, 1992
through November 1, 1992, (iii) approximately 6 million shares of Class A
Common Stock, par value $.0001 per share (Class A Common Stock) and (iv)
approximately 31.8 million redeemable exchangeable warrants (the Warrants)
to obtain one share of Class A Common Stock per Warrant, all in exchange for
$582.8 million aggregate principal amount of the Company's old subordinated
debt plus approximately $134.5 million of accrued but unpaid interest
thereon. On May 18, 1993, the Company refinanced the debt issued in the
Prepackaged Plan.
Concurrent with the consummation of the Prepackaged Plan, the Company (i)
issued the number of shares of Class A Common Stock deliverable upon
exercise of the Warrants to a trustee, which will hold such shares in trust,
for the benefit of the holders of Warrants pending any such exercise, (ii)
amended the Company's Restated Certificate of Incorporation and (iii) closed
the post-restructuring credit agreement with its bank group.
Liquidity
As of March 31, 1994, the Company had cash and equivalents of $13.0 million,
a decrease of $14.6 million from September 30, 1993 as interest costs,
investments in working capital and capital expenditures exceeded earnings
before interest, taxes, depreciation and amortization. Total debt increased
by $17.0 million from $675.8 million at September 30, 1993 to $692.8 million
at March 31, 1994. The increase in total debt was the result of the
accretion of discount subordinated debt issued in May 1993. As of March 31,
1994, the Company had approximately $56 million of credit available under
its bank revolving credit facility and approximately $60 million of credit
available under its Trade Receivables Facility. No amounts were outstanding
under either the bank revolving credit facility or the Trade Receivables
Facility as of March 31, 1994. The Company is required to use Trade
Receivables Facility borrowing proceeds in excess of approximately $53
million to prepay quarterly installments due under the term loan facility of
the bank credit agreement, in order of maturity.
A $25 per ton price increase for linerboard and a corresponding price
increase for corrugated containers were implemented during the first six
months of fiscal 1994. An additional $30 per ton price increase for
linerboard was realized late in the second quarter of fiscal 1994. Price
increases for corrugated containers, unbleached kraft paper, multiwall bags
and grocery bags and sacks are currently being implemented. Although
current industry conditions are strong, there can be no assurance that such
additional increases can be successfully implemented or that the timing of
such additional increases will not be delayed.
The Company believes that cash provided by operations and borrowings
available under the Trade Receivables Facility and the bank revolving credit
facility will provide it with adequate liquidity to meet its debt service
obligations and other liquidity requirements over the next 12 to 24 months.
Failure to achieve significantly higher product prices in fiscal 1995,
however, could require additional modifications to certain of the financial
covenants in the bank credit agreement. Failure to obtain covenant
modifications, if necessary, or an erosion of product prices could have a
material adverse effect on the Company's liquidity and its ability to meet
its debt service obligations.
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<PAGE> 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any legal proceedings other than
litigation incidental to normal business activities. The outcome of
such litigation is not expected to have a material adverse effect on
the Company.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On February 2, 1994, the Company held its annual meeting of
stockholders at which the following issues were put to a vote by
the Company's Class A and Class B stockholders voting together as a
single class and entitled to 1 vote per share and 10 votes per
share, respectively:
The Company's Class B Directors were elected by the following vote:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
*Vernon E. Faulconer 104,816,852 50,005
John E. Goodenow 104,816,852 50,005
David B. Hawkins 104,816,852 50,005
John Hawkinson 104,816,564 50,293
Warren J. Hayford 104,816,852 50,005
Richard S. Levitt 104,816,852 50,005
Marvin A. Pomerantz 104,816,119 50,738
Thomas H. Stoner 104,816,852 50,005
</TABLE>
The adoption of the Shareholder Value Plan was approved by a
vote of 104,507,163 for; 334,570 against; 25,124 abstain.
The appointment of Deloitte & Touche to continue to serve as
the Company's independent auditors in fiscal 1994 was ratified
by a vote of 104,815,269 for; 34,864 against; 16,724 abstain.
*Mr. Vernon Faulconer resigned as a Class B Director effective
February 28, 1994. Mr. Ralph L. McDonald, Jr. was named by
the Board of Directors on May 10, 1994 to replace Mr.
Faulconer.
Item 5. Other Information.
Not applicable.
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<PAGE> 15
PART II. OTHER INFORMATION (CONCLUDED)
Item 6. Exhibits and Reports on Form 8-K.
a) Not applicable.
b) Not applicable.
13
<PAGE> 16
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.
GAYLORD CONTAINER CORPORATION
Date: May 11, 1994 /s/ Marvin A. Pomerantz
----------------------------
Marvin A. Pomerantz
Chairman and Chief Executive
Officer
Date: May 11, 1994 /s/ Jeffrey B. Park
----------------------------
Jeffrey B. Park
Vice President-Controller
(Principal Accounting
Officer)
14
