Form 10-K Securities and Exchange Commission
Washington DC 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
- --- of 1934
For the fiscal year ended September 30, 1995
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 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
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (708) 405-5500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Class A Common Stock, $.0001 par value per share American Stock Exchange
(54,078,327 shares outstanding as of November 30, 1995)
Redeemable Exchangeable Warrants American Stock Exchange
(18,008,701 warrants outstanding as of November 30, 1995)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X_____ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. ______
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 ______
The aggregate market value of voting stock held by non-affiliates of the
registrant, computed on the basis of the closing price of such stock as reported
on the composite tape on November 30, 1995, was approximately $460 million.
Documents Incorporated by Reference
The registrant s Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held February 8, 1996 is incorporated into Part III of this
Annual Report on Form 10-K.
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Part I
Item 1. Business
Development
Gaylord Container Corporation (including its subsidiaries, the Company) acquired
businesses which had been owned by Crown Zellerbach Corporation on November 17,
1986 for approximately $260 million. Since its inception, the Company has
expanded its business through strategic acquisitions and capital investments.
The Company financed the acquisitions and capital expenditures with cash
provided by operations, borrowings under its credit agreements and the issuance
of debt and equity securities. The Company's facilities currently consist of
three containerboard and unbleached kraft paper mills, 14 corrugated container
plants, three corrugated sheet feeder plants, two grocery bag and sack plants,
two multiwall bag plants, a specialty chemicals facility, a preprint and
graphics center and a cogeneration facility.
In September 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. In November 1992, the Prepackaged Plan was consummated.
In fiscal 1994, the Company initiated a five-year capital plan that provides for
a total investment of approximately $250 million. The plan targets approximately
60 percent of the capital spending to enhance the capacity, flexibility and cost
effectiveness of the Company's converting facilities with the remainder to be
invested in its paper mills. In fiscal 1995, as part of the capital plan, the
Company opened one new converting plant and relocated and expanded three
converting plants.
General
The corrugated container is unrivaled in most industrial applications for
providing an economical and safe means of transporting products. In addition,
corrugated containers are increasingly utilized as an integrated transportation
and marketing device in the form of point-of-sale displays. The major corrugated
container end-use markets are food, beverage and agricultural products; paper
and fiber products; petroleum, petrochemical resins, plastics and rubber
products; glass and metal containers; electronic appliances; and electrical and
other machinery. Most corrugated containers are produced and sold under
individual customer orders.
Containerboard, consisting of linerboard and corrugating medium, is the
principal raw material used in the manufacture of corrugated containers.
Linerboard provides the strength component of a container while corrugating
medium provides rigidity. Corrugating medium is fluted and laminated to
linerboard in corrugated container and corrugated sheet feeder plants to produce
corrugated sheets. The sheets are subsequently printed, cut, folded and glued in
corrugated container or corrugated sheet plants to produce corrugated
containers.
Corrugated containers generally are delivered by truck because of the large
number of customers and demand for timely service. The dispersion of customers
and the high bulk, low density and value of corrugated containers make shipping
costs a relatively high percentage of total costs. As a result, corrugated
container plants tend to be located close to customers to minimize freight
costs.
To reduce the cost of shipping containerboard from mills to widely dispersed
corrugated plants and to reduce waste by closely matching the width of paper
rolls to their corrugators, vertically integrated containerboard manufacturers
routinely exchange containerboard from mills in one location for containerboard
having a similar value elsewhere in the United States. Producers also exchange
containerboard to take advantage of manufacturing efficiencies resulting from
operating paper machines in their most efficient basis weight ranges and to
obtain paper grades they do not produce.
Unbleached kraft paper is the principal raw material used in the manufacture of
multiwall bags and grocery bags and sacks. Multiwall bags are used by producers
in such industries as pet food, chemical, agricultural, food, metal, plastics
and rubber. Multiwall bags and grocery bags and sacks are manufactured through a
process of printing, cutting, folding and gluing kraft paper to meet customer
specifications.
The basic raw material used in the manufacture of containerboard and unbleached
kraft paper is cellulose fiber (which is produced primarily from wood chips).
The industry's use of recycled fiber, however, has been increasing. Fiber costs
are generally the largest cost component in the manufacture of containerboard
and unbleached kraft paper.
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In calendar 1994, corrugated product sales and grocery and multiwall bag sales
by U.S. manufacturers were estimated by industry trade associations to be $18.7
billion and $1.6 billion, respectively. It has also been estimated that
containerboard and unbleached kraft paper capacity utilization rates in the
United States averaged 98 percent and 92 percent, respectively, in calendar 1994
and 98 percent and 84 percent, respectively, for the first nine months of
calendar 1995. Annual capacity for U.S. containerboard and unbleached kraft
paper in calendar 1995 is estimated to be 33.7 million tons and 2.7 million
tons, respectively. This represents an increase in containerboard and unbleached
kraft paper capacity of approximately 6 percent and approximately 1 percent,
respectively, compared with the prior year.
Demand for corrugated containers, containerboard and unbleached kraft paper is
affected by the level of growth of economic activity and, in the case of
containerboard, the strength of the U.S. dollar. For further information
regarding the industry and factors that influence prices and the demand for
paper packaging products, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - General."
Sales
Corrugated containers and sheets, multiwall bags, grocery bags and sacks and
solid fibre products collectively represent approximately 80 percent of the
Company's net sales while containerboard and unbleached kraft paper represent
approximately 20 percent of such sales. Sales of the Company's products are not
seasonal to any significant degree.
The Company sells its products to thousands of customers, with the 10 largest
accounting for approximately 13 percent of net sales in fiscal 1995 and 11
percent in both fiscal 1994 and fiscal 1993. The Company's largest customer,
excluding affiliated companies, accounted for approximately 3 percent of the
Company's net sales in fiscal 1995 and approximately 2 percent in both fiscal
1994 and fiscal 1993. Corrugated containers are generally produced to customer
order for delivery from four to ten days after receipt of the order. As a
result, the Company's backlog at any particular time generally does not exceed 3
percent of corrugated container sales.
In general, each converting facility has its own sales force which is
responsible for marketing and distribution to local customers. A national
account sales force handles converted product sales to large customers who
utilize centralized purchasing for multiple locations. In total, the Company's
sales force for converted products at September 30, 1995 consisted of
approximately 135 salespersons. Sales and exchanges of containerboard and
unbleached kraft paper are the responsibility of a centralized marketing and
sales group.
The Company exports linerboard and unbleached kraft paper, certain converted
products and specialty chemicals. Such sales totaled $113.9 million, $45.7
million and $37.2 million in fiscal 1995, fiscal 1994 and fiscal 1993,
respectively. Export sales more than doubled in fiscal 1995 primarily as a
result of higher selling prices for linerboard and exports of unbleached kraft
paper, which was not exported in prior years.
Products
Corrugated Products. The Company produces many varieties of corrugated
containers and sells the majority of its production to manufacturing end users.
Corrugated shipments of 12.3 billion square feet in fiscal 1995 were
approximately 3 percent lower than the prior year. Shipments for fiscal 1994
include sales from two corrugated container plants that were subsequently sold
or closed. Adjusting for the prior year shipments from these two plants,
corrugated shipments increased approximately 1 percent in fiscal 1995. From
fiscal 1993 to fiscal 1994, corrugated shipments increased approximately 7
percent. The increase was primarily due to the acquisition of a corrugated sheet
feeder plant in March 1993.
Containerboard. The Company's containerboard mills in the aggregate have the
ability to manufacture containerboard in a broad spectrum of grades and weights.
Production of containerboard increased slightly to a record 1,200,500 tons in
fiscal 1995 from 1,194,900 tons in the prior year. The increase in production
was achieved despite the temporary idling of the Company's Bogalusa, Louisiana
and Antioch, California mills in the fourth quarter of fiscal 1995 to avoid a
build up of inventories, which resulted in approximately 35,000 tons of "lost"
production. In addition, extended down time at the Bogalusa mill in the first
quarter of fiscal 1995 to install a new extended nip press resulted in
approximately 10,000 tons of "lost" production. During fiscal 1994, the
Company's production of containerboard increased approximately 4 percent from
1,151,900 tons in fiscal 1993. During fiscal 1995, fiscal 1994 and fiscal 1993,
the Company's corrugated plants consumed the equivalent of approximately 78
percent, 82 percent and 80 percent, respectively, of the Company's
containerboard production.
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Multiwall Bags. The Company produces many varieties of medium to large multiwall
bags and sells them to manufacturers and processors for packaging their
products. The Company's multiwall bag shipments increased to a record 52,400
tons in fiscal 1995, an increase of approximately 2 percent from fiscal 1994.
The Company's multiwall bag shipments increased to 51,500 tons in fiscal 1994,
an increase of approximately 6 percent from 48,700 tons in fiscal 1993. The
increase in multiwall bag shipments in fiscal 1994 was primarily the result of
increases in market share in certain product lines.
Grocery Bags and Sacks. The Company produces grocery bags and sacks in a variety
of sizes and sells them to wholesale and retail distributors for packaging their
products. The Company shipped approximately 105,000 tons of grocery bags and
sacks in fiscal 1995, a decrease of approximately 10 percent from 116,500 tons
in the prior fiscal year. The decrease in shipments in fiscal 1995 was primarily
the result of reduced demand for standard grocery sacks as a result of greater
displacement by plastic bags as prices for grocery sacks increased. This decline
was partially offset by increased shipments of Gaylord Handle-Bags R. The
Company shipped approximately 116,500 tons of grocery bags and sacks in fiscal
1994, a decrease of approximately 9 percent versus shipments of 128,600 tons in
the prior year. The decline in shipments in fiscal 1994 was primarily due to the
consolidation of two grocery bag and sack plants and reduced demand for standard
grocery sacks, partially offset by a significant increase in shipments of
Gaylord Handle-Bags.
Unbleached Kraft Paper. The Company is a leading supplier of unbleached kraft
paper to independent multiwall bag and grocery bag and sack converters. During
fiscal 1995, the Company produced 263,900 tons of unbleached kraft paper
compared with 250,700 tons and 241,100 tons in fiscal 1994 and fiscal 1993,
respectively. In addition to its own production, the Company has agreed to
purchase through 1999 approximately 35,000 tons per year of unbleached kraft
paper from Riverwood International U.S.A., Inc. During fiscal 1995, fiscal 1994
and fiscal 1993, the Company's multiwall bag and grocery bag and sack plants
consumed the equivalent of approximately 54 percent, 58 percent and 66 percent,
respectively, of the Company's unbleached kraft paper production and purchase
commitments.
Specialty Chemicals. The Company, through its independently operated, wholly
owned subsidiary, Gaylord Chemical Corporation, utilizes a process stream from
its Bogalusa, Louisiana paper mill manufacturing operations to produce dimethyl
sulfide (DMS) and dimethyl sulfoxide (DMSO). DMS is a low boiling-point liquid
used as a presulfiding agent for catalysts for the petroleum industry, a natural
gas odorant, a processing aid in ethylene production and a feedstock for the
manufacture of DMSO. DMSO is used as a solvent for a wide range of complex
manufacturing processes used in the chemical, agrichemical and pharmaceutical
industries. Management believes that Gaylord Chemical Corporation is the sole
domestic producer of DMSO and estimates that Gaylord Chemical Corporation
produces 35 to 40 percent of the world's supply of DMSO. Sales of these products
for fiscal 1995, fiscal 1994 and fiscal 1993 were $16.7 million, $14.3 million
and $14.9 million, respectively.
Other Products. At its Bogalusa, Louisiana corrugated container plant, the
Company produces solid fibre products which are primarily used as beverage
carriers and pallet substitutes. Solid fibre is produced using technology and
manufacturing processes similar to those used with corrugated containers.
The Company operates a cogeneration facility at its Antioch, California mill,
which produces steam and electricity for the mill. Pursuant to a long-term
agreement, the Company sells to Pacific Gas & Electric Company, subject to
certain adjustments, a specified amount of electricity produced by the
cogeneration facility, which represented the cogeneration facility's anticipated
excess capacity at the contract date. Electricity sales pursuant to this
agreement were $6.6 million, $8.5 million, and $8.7 million in fiscal 1995,
fiscal 1994 and fiscal 1993, respectively.
Raw Materials
The Bogalusa, Louisiana mill uses approximately 75 percent pulpwood and wood
chips in the manufacture of containerboard and unbleached kraft paper, of which
approximately 40 to 45 percent was supplied by a division of Hanson Natural
Resources Company (Hanson) in the last three fiscal years and the remainder was
purchased on the open market. The Company has certain agreements through 2016
pursuant to which Hanson is committed to supply the Company with significant
quantities of wood chips, roundwood and stumpage at prices based on independent
market transactions and, through 1998, hog fuel (which consists of bark and
other residual fiber from trees) at prices derived from prices of an alternative
fuel. Recycled fiber accounts for the remainder of the mill's fiber
requirements.
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The Antioch, California mill uses 100 percent recycled fiber. Approximately 40
percent of the old corrugated containers (OCC) used as a source of recycled
fiber at the Antioch mill are supplied under contracts with several suppliers.
Contract prices are based on published industry prices, as defined. Upon
expiration of such contracts, the Company believes it will be able to negotiate
new contracts with these or other suppliers to provide significant quantities of
OCC at market prices. The remainder is purchased on the open market.
The Pine Bluff, Arkansas mill uses approximately 75 percent wood chips, of which
approximately 23 percent, 25 percent and 33 percent were supplied by
Weyerhaeuser Company (Weyerhaeuser) in fiscal 1995, fiscal 1994 and fiscal 1993,
respectively, with the remainder generally purchased pursuant to annual
contracts with a number of different chip suppliers in the area. The Company has
negotiated a two year contract with Weyerhaeuser to provide significant
quantities of wood chips at market prices. The contract term is effective until
June 30, 1997, at which time it will be renegotiated. Recycled fiber accounts
for the remainder of the mill's fiber requirements.
During fiscal 1995, the Company's performance was adversely affected by higher
fiber costs, primarily due to significant increases in OCC prices, which more
than tripled from January 1994 to May 1995. From their peak of $230 per ton in
May 1995 the delivered cost of OCC has dropped to approximately $90 per ton in
November 1995. The secondary fiber market, however, is difficult to predict, and
there can be no assurance of the direction OCC prices will take in the future.
In fiscal 1995, fiber represented approximately one-half of the Company's
containerboard and unbleached kraft paper production costs and future increases
in fiber prices would adversely affect the Company's profitability.
Energy
The Company's mills require significant amounts of steam and electricity in
their operation. The Company has entered into long-term supply agreements with
James River Corporation of Nevada and Hanson pursuant to which these companies
provide hog fuel for the production of steam at the Bogalusa mill. In fiscal
1995, the Bogalusa mill produced all of its steam and generated approximately 66
percent of its electricity requirements. During the same period, the Antioch
mill produced all of its steam and approximately 90 percent of its electricity.
The Antioch mill has a contract to sell electricity from its cogeneration
facility to a public utility through 2013. See "Products." Certain aspects of
the energy operations of the Bogalusa mill and the Antioch mill are regulated by
the Federal Energy Regulatory Commission. The Pine Bluff mill produces all of
its own steam, but purchases all of its electricity from a local public utility.
In fiscal 1995, energy costs accounted for approximately 7 percent of the
Company's containerboard and unbleached kraft paper production costs and future
increases in energy prices would adversely affect the Company's profitability.
Competition
Many of the Company's competitors are substantially larger and have
significantly greater financial resources; however, the most important
competitive factors are price, quality and service. The manufacture of
containerboard and unbleached kraft paper is capital intensive with high
barriers to entry because new facilities take at least two years to construct.
Many of the Company's larger competitors own timberlands. Although the Company
does not own timberlands, it has fiber supply agreements described in "Raw
Materials." Such agreements covered approximately 40 percent of the Company's
pulpwood and wood chip requirements in fiscal 1995.
In contrast to the containerboard and unbleached kraft paper segment of the
industry, the converting segment, which manufactures corrugated products,
multiwall bags and grocery bags and sacks, has comparatively low barriers to
entry. Competition in corrugated products and, to a lesser extent, multiwall
bags and grocery bags and sacks, is primarily localized, with proximity to
customers an important factor in minimizing shipping costs. There are a
substantial number of competitors in each of the geographic areas in which the
Company's converting facilities are located. Many of such competing facilities
are owned by other integrated producers.
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Environmental Matters
Compliance with federal, state and local environmental requirements,
particularly relating to air and water quality and waste disposal, is a
significant factor in the Company's business. The Company made capital
expenditures for environmental purposes of approximately $5.5 million, $2.3
million and $1.9 million in fiscal 1995, fiscal 1994 and fiscal 1993,
respectively. The Company believes that it is in compliance in all material
respects with applicable federal, state and local environmental regulations.
In December 1993, the Environmental Protection Agency (EPA) proposed regulations
implementing portions of the Clean Air Act of 1990 and the Clean Water Act
applicable to the pulp and paper industry known as the "cluster rules." The EPA
has indicated that significant changes to the regulations will be considered
prior to the adoption of the final regulations which are to be issued in 1996,
with compliance required within three years from that date. The Company is
evaluating the potential impact of the proposed rules on its operations and
capital expenditures over the next several years. Preliminary estimates indicate
that the Company could be required to make capital expenditures of approximately
$3 million to $7 million per year between 1996 and 1998 to meet the requirements
of the proposed rules. The ultimate financial impact of the regulations cannot
be predicted with any reasonable certainty and will depend on several factors
including the actual requirements imposed under the final rules, new
developments in control process technology and inflation.
The Company is unable to predict the effect of additional environmental
regulations that may be adopted in the future. The Company believes that it has
the management and technical expertise to respond to anticipated future changes
in environmental requirements.
On October 23, 1995, a rail tank car accident occurred at the Bogalusa,
Louisiana plant of Gaylord Chemical Corporation, a wholly owned subsidiary of
the Company. The accident resulted in the venting of nitrogen tetroxide, a raw
material used by the plant to produce DMSO. Lawsuits seeking compensatory and
punitive damages have been filed in both state and federal courts in Louisiana
naming Gaylord Chemical Corporation, the Company, and certain of their
respective officers and other unrelated corporate and individual defendants. The
lawsuits, generally purported class actions, seek to allege claims based on,
among other things, negligence, strict liability and violations of the federal
Comprehensive Environmental Response, Compensation and Liability Act. The
Company and its subsidiary are vigorously contesting the claims. The Company
maintains insurance and has filed actions seeking a declaratory judgement of
insurance coverage against its general liability and directors and officers
liability insurance carriers. The Company believes the outcome of such
litigation will not have a material adverse effect on the Company's financial
position, results of operations or cash flows. See "Note 16 of Notes to
Consolidated Financial Statements."
Employees
At September 30, 1995, the Company employed approximately 4,100 people.
Approximately 66 percent of the Company's employees are hourly wage employees
who are members of various labor unions. The Company's labor agreements covering
its employees at its Pine Bluff, Bogalusa and Antioch mills expire in fiscal
1996, fiscal 2000 and fiscal 2001, respectively. In conjunction with the
renegotiation of the Antioch mill's labor contract, certain hourly employees
accepted an early retirement option, which was designed to reduce future labor
costs. At September 30, 1995, labor contracts at seven of the Company's
manufacturing facilities covering approximately 24 percent of the Company's
union employees have expired, or are scheduled to expire, before the end of
fiscal 1996. The Company believes it has satisfactory relations with its
employees and their unions and, based on previous experience, does not
anticipate any significant difficulties in renegotiating labor contracts as they
expire.
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Item 2. Properties
Manufacturing Properties
The Company's plants are maintained in generally good condition and management
believes they are suitable for their specific purposes. Set forth below is
certain information concerning these facilities:
Owned/
Plant Products Leased
Mills:
Antioch, California Containerboard Owned
Bogalusa, Louisiana Containerboard and
unbleached kraft paper Owned
Pine Bluff, Arkansas Unbleached kraft paper Owned
Corrugated Plants:
Antioch, California Corrugated containers Owned
Atlanta, Georgia Corrugated containers Owned
Bogalusa, Louisiana Corrugated containers
and solid fibre Owned
Carol Stream, Illinois Corrugated containers Owned
City of Industry,
California Corrugated sheets Owned
Dallas, Texas Corrugated containers Leased
Gilroy, California Corrugated containers Leased
Greenville, South
Carolina Corrugated containers Owned
Marion, Ohio Corrugated containers Owned
Newark, Delaware Corrugated containers Owned
Phoenix, Arizona Corrugated containers Owned
Raleigh, North Carolina Corrugated containers Owned
San Antonio, Texas Corrugated containers Leased
San Antonio, Texas Corrugated sheets Owned
St. Louis, Missouri Corrugated containers Owned
Sunnyvale, California Corrugated sheets Leased
Tampa, Florida Corrugated containers Leased
Bag Plants:
Alsip, Illinois Grocery bags and sacks Leased
Monroe, Louisiana Grocery bags and sacks Leased
Pine Bluff, Arkansas Multiwall bags Owned
Twinsburg, Ohio Multiwall bags and
grocery sacks Leased
Other Facilities:
Antioch, California Electricity cogeneration Owned
Bogalusa, Louisiana Specialty chemicals Owned
Livermore, California Preprinted linerboard Leased
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The Bogalusa mill has five paper machines with the capacity to produce
linerboard, corrugating medium and unbleached kraft paper. The mill uses
softwood and hardwood pulp and recycled fiber from OCC and double lined kraft
(DLK) clippings. In fiscal 1995, fiscal 1994 and fiscal 1993, the mill produced
an average of 2,642 tons per day (TPD, calculated on the basis of the number of
days in the period), 2,630 TPD and 2,542 TPD, respectively, of containerboard
and unbleached kraft paper.
The Antioch mill has one paper machine with the capacity to produce recycled
linerboard and corrugating medium using 100 percent recycled fiber. The Antioch
mill produced an average of 901 TPD, 894 TPD and 858 TPD of containerboard in
fiscal 1995, fiscal 1994 and fiscal 1993, respectively.
The Pine Bluff mill has one paper machine with the capacity to produce
unbleached kraft paper. The mill uses softwood pulp and recycled fiber from DLK.
In fiscal 1995, fiscal 1994 and fiscal 1993 the mill produced an average of 480
TPD, 447 TPD and 427 TPD, respectively, of unbleached kraft paper.
The Company's corrugated container and corrugated sheet feeder plants shipped
12.3 billion square feet, 12.7 billion square feet and 11.9 billion square feet
of corrugated products in fiscal 1995, fiscal 1994 and fiscal 1993,
respectively. The Company's multiwall bag plants shipped 52,400 tons, 51,500
tons and 48,700 tons of multiwall bags in fiscal 1995, fiscal 1994 and fiscal
1993, respectively. The Company shipped 105,000 tons, 116,500 tons and 128,600
tons of grocery bags and sacks in fiscal 1995, fiscal 1994 and fiscal 1993,
respectively. See "Business - Products."
Other Properties
The Company leases its executive and general and administrative offices in
Deerfield, Illinois. It also leases numerous warehouse facilities and sales
offices.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings other than litigation
incidental to normal business activities, except as described in "Note 16 of
Notes to Consolidated Financial Statements." The Company believes the outcome
of such litigation will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
On July 21, 1995, the Company held a special meeting of stockholders at which
the following issues were put to a vote by holders of the Company's Class A
Common Stock and Class B Common Stock voting together as a single class and
entitled to one vote per share and 10 votes per share, respectively:
The amendment to the Company's Certificate of Incorporation to include a
requirement that any stockholder action be taken only at a meeting of the
stockholders was approved by a vote of 82,594,060 for; 2,340,479 against; 12,152
withheld.
The amendment to the Company's Certificate of Incorporation to include a
requirement that special meetings of stockholders may be called only by the
Chairman of the Board of Directors of the Company or by an affirmative vote of
the majority of the members of the Board of Directors then in office was
approved by a vote of 82,531,946 for; 2,402,458 against; 12,287 withheld.
The amendment to the Company's Certificate of Incorporation to include a
provision which increases the stockholder vote required for amendment of the
by-laws of the Company and certain sections of the Certificate of Incorporation
from a majority vote to a two-thirds vote of the outstanding shares of capital
stock of the Company entitled to vote was approved by a vote of 82,623,034 for;
2,313,953 against; 9,704 withheld.
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The amendment to the Company's Certificate of Incorporation to include a
provision pursuant to which the Company will be governed by Section 203 of the
General Corporation Law of the State of Delaware (DGCL) was approved by a vote
of 82,568,309 for; 2,296,735 against; 81,647 withheld.
The amendment to the Company's Certificate of Incorporation to include a
provision which increases the stockholder vote required for amendment of the
above-referenced provisions of the Company's Certificate of Incorporation from a
majority vote to two-thirds of the outstanding shares of capital stock of the
Company entitled to vote was approved by a vote of 82,600,229 for; 2,330,150
against; 16,312 withheld.
The amendment to the Company's Certificate of Incorporation to delete a
provision no longer required following the Company's financial restructuring in
fiscal 1992 was approved by a vote of 83,302,095 for; 1,631,384 against; 13,212
withheld.
The proposal to delete Article VIII from the Company's by-laws pursuant to which
the Company had elected not to be governed by DGCL Section 203 was approved by a
vote of 82,545,086 for; 2,320,242 against; 81,363 withheld.
Executive Officers of the Registrant
Marvin A. Pomerantz has served as Chairman, Chief Executive Officer and a
director of the Company from the date of its organization. In 1971, Mr.
Pomerantz was named Vice President of Continental Can Company, Inc. and in
January 1975 was named Vice President and General Manager of its Forest Products
Brown Systems Operation. Since 1980, Mr. Pomerantz has served as Chairman or
President and a director of Mid-America Group, Ltd., an Iowa corporation engaged
primarily in real estate investment. From 1980 to 1982, he served as President
of the Diversified Group of Navistar International Corporation, formerly
International Harvester Corporation, a manufacturer of trucks, and Executive
Vice President of Navistar. Currently, Mr. Pomerantz serves on the Board of
Directors and the Executive Committee of the American Forest & Paper Association
and as President of the Board of Regents for the state universities in Iowa. Mr.
Pomerantz formerly served on the Board of Directors of Stone Container
Corporation, a manufacturer of paper packaging products.
Dale E. Stahl has served as President and Chief Operating Officer of the Company
since August 1988. From March 1988 through August 1988, Mr. Stahl served as a
Vice President of the Company. From March 1978 through March 1988, he was
employed by Union Camp Corporation, an integrated paper packaging manufacturer,
starting in sales and ultimately being promoted to Vice President-General
Manager of the container division. He serves on the Board of Directors of AMCOL
International Corporation.
Daniel P. Casey has served as Executive Vice President of the Company since
February 1990. From July 1988 through February 1990, he served as Senior Vice
President-Financial and Legal Affairs for the Company and from January 1988
through June 1988 in the same position for both the Company and Mid-America
Packaging, Inc. (Mid-America), which merged with the Company in June 1988. From
March 1987 through January 1988, Mr. Casey served as Vice President-Financial
and Legal Affairs for both the Company and Mid-America.
Lawrence G. Rogna has served as Senior Vice President of the Company since
February 1990. From December 1988 through February 1990, Mr. Rogna served as
Vice President-Human Resources of the Company. From 1981 to 1988 he was employed
by Rohr Industries, Inc., a manufacturer of components for aircraft and space
vehicles, where he served as Vice President, Human Resources from 1983 to 1988.
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Part II
Item 5. Market for Registrant's Common Stock, Warrants and Related Stockholder
Matters
The Company had 682 and 28 holders of record of its Class A Common Stock, par
value $.0001 per share (Class A Common Stock) and redeemable exchangeable
Warrants (Warrants), respectively, at November 30, 1995.
The Company's Class A Common Stock and Warrants are listed and traded on the
American Stock Exchange under the symbols GCR and GCRWS, respectively. On July
31, 1995, all of the Company's 5,250,082 outstanding shares of Class B Common
Stock, par value $.0001 per share (Class B Common Stock) automatically converted
into an equal number of shares of Class A Common Stock.
In June 1995, the Company redeemed 25 percent of its 31,845,533 outstanding
Warrants, and subsequently, a portion of the remaining Warrants were exchanged
pursuant to a Special Exercise on July 31, 1995. In the two transactions, a
total of 13,836,754 Warrants were exchanged for an equal number of shares of
Class A Common Stock. Each remaining Warrant is exercisable on or after July 31,
1996 for one share of Class A Common Stock subject to adjustment and unless
redeemed or exchanged earlier by the Company. As of September 30, 1995, the
Company had outstanding 54,077,527 shares of Class A Common Stock (including
18,008,701 shares held in trust for the benefit of the Warrant holders) and
18,008,701 Warrants. See "Note 12 of Notes to Consolidated Financial
Statements." For changes in the Company's charter and by-law provisions see
"Submission of Matters to a Vote of Security Holders."
Information with respect to quarterly high and low sales prices for the Class A
Common Stock and Warrants for each quarterly period for fiscal 1995, fiscal 1994
and fiscal 1993 is contained in "Note 19 of Notes to Consolidated Financial
Statements."
The Company neither declared nor paid any dividends on either its Class A Common
Stock or Class B Common Stock during fiscal 1995, fiscal 1994 and fiscal 1993.
The Company does not currently intend to pay cash dividends on its Class A
Common Stock, but intends instead to retain future earnings for reinvestment in
the business and for repayment of debt. The Company's ability to declare or pay
dividends or distributions on its capital stock or to repurchase or redeem
shares of its capital stock (Restricted Payments) is limited under the terms of
its debt agreements. At September 30, 1995, the Company was prohibited from
making Restricted Payments, except in certain limited circumstances. See "Note 9
of Notes to Consolidated Financial Statements."
9
<PAGE>
Item 6. Selected Financial Data
The following table sets forth selected historical consolidated financial data
for the Company. The data set forth below should be read in conjunction with the
Company's consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
<TABLE>
<CAPTION>
Year Ended September 30, (1)
--------------------------------------------------
In millions, except per share data 1995 1994 1993 1992 1991
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales $1,051.4 $ 784.4 $ 733.5 $ 722.8 $ 723.8
Cost of goods sold 755.0 691.4 652.1 608.4 630.6
------- ----- ----- ----- -----
Gross margin 296.4 93.0 81.4 114.4 93.2
Selling and administrative costs (2) (95.5) (81.0) (73.8) (77.0) (69.6)
Non-recurring operating charges (2)(3) (5.4) (15.5) (9.9) (58.9) (135.1)
------- ----- ----- ----- -----
Operating earnings (loss) 195.5 (3.5) (2.3) (21.5) (111.5)
Interest expense - net (86.1) (80.3) (68.2) (110.8) (107.0)
Other income (expense) - net 0.6 (0.2) 0.5 (0.2) (1.0)
------- ----- ----- ----- -----
Income (loss) before income taxes 110.0 (84.0) (70.0) (132.5) (219.5)
Income tax benefit (4) 24.2 - - - 39.2
------- ----- ----- ----- -----
Income (loss) before extraordinary
item and accounting change 134.2 (84.0) (70.0) (132.5) (180.3)
Extraordinary gain (5) - - 201.5 - -
Accounting change (6) - - (1.3) - -
------- ----- ----- ----- -----
Net income (loss) $ 134.2 $ (84.0) $ 130.2 $(132.5) $(180.3)
======= ===== ===== ===== =====
Earnings per common and
common equivalent share:
Income (loss) before extraordinary
item and accounting change $ 2.44 $ (1.57) $(1.40) $ (8.54) $(11.68)
Extraordinary gain (5) - - 4.04 - -
Accounting change (6) - - (0.03) - -
------- ----- ----- ----- -----
Net income (loss) $ 2.44 $ (1.57) $ 2.61 $ (8.54) $(11.68)
======= ===== ===== ===== =====
Weighted average common and
common equivalent shares
outstanding (7) 55.1 53.6 49.8 15.5 15.4
======= ===== ===== ===== =====
September 30,
----------------------------------------------------
In millions 1995 1994 1993 1992 1991
Balance Sheet Data:
Current assets $ 306.3 $ 206.7 $ 199.4 $ 229.7 $ 205.5
Property - net 640.0 592.9 611.1 637.5 669.8
Other assets 41.7 43.5 49.6 34.5 90.4
------- ----- ----- ----- -----
Total assets $ 988.0 $ 843.1 $ 860.1 $ 901.7 $ 965.7
======= ===== ===== ===== =====
Current liabilities (8) $ 149.9 $ 135.1 99.5 $ 98.7 $ 931.0
Pre-petition liabilities
subject to compromise (9) - - - 907.1 -
Long-term debt (less
current maturities) 671.5 696.8 670.1 28.5 29.7
Other long-term liabilities and
deferred income taxes 53.4 35.0 36.9 23.1 28.0
------- ----- ----- ------- -----
Total liabilities 874.8 866.9 806.5 1,057.4 988.7
Stockholders equity (deficit) 113.2 (23.8) 53.6 (155.7) (23.0)
------- ----- ----- ------- -----
Total liabilities and
stockholders equity (deficit) $ 988.0 $ 843.1 $ 860.1 $ 901.7 $ 965.7
======= ===== ===== ======= =====
</TABLE>
10
<PAGE>
(1) The Company operates on a 52/53 week fiscal year. Fiscal 1991 through fiscal
1995 were 52-week years.
(2) The Company recognized fees and expenses in connection with a debt
restructuring during fiscal 1993, fiscal 1992 and fiscal 1991 of $7.8 million,
$21.0 million (including approximately $4.0 million of employee retention costs
which were classified as "Selling and administrative costs") and $9.9 million,
respectively. See "Note 2 of Notes to Consolidated Financial Statements."
(3) In fiscal 1995, the Company recorded a $5.4 million charge against operating
earnings for costs associated with an optional early retirement program.
In fiscal 1994, the Company recorded charges against operating earnings of $15.5
million primarily for various asset write-downs and other costs associated with
the relocation of three facilities, the closure of a corrugated container plant
and the sale of a corrugated container plant. See "Note 2 of Notes to
Consolidated Financial Statements."
In fiscal 1993, the Company recorded a pre-tax charge of $2.1 million for the
consolidation of certain grocery bag and sack manufacturing facilities.
In fiscal 1991, the Company recorded a non-cash pre-tax charge of $125.2 million
primarily consisting of the write-down of the Antioch, California virgin fiber
mill's fixed assets to their then estimated recovery value net of estimated
carrying costs. The Company recorded a non-cash pre-tax charge in fiscal 1992 of
$32.9 million primarily consisting of an asset write-down, a provision for
future demolition costs, costs of asbestos removal and estimated carrying costs
pending disposition of the virgin fiber mill.
In fiscal 1992, the Company recorded a pre-tax charge of approximately $9.0
million for the cost of acquiring the remaining ownership interest in Gaylord
Bag Partnership and Bay Sheets, Inc.
(4) In fiscal 1995, the Company recorded a $24.2 million income tax benefit
primarily due to the recognition of tax benefits about which substantial doubt
as to their realization had previously existed. See "Note 8 of Notes to
Consolidated Financial Statements."
(5) In fiscal 1993, the Company recorded an extraordinary gain of $201.5
million, net of $1.2 million of income taxes, as a result of the forgiveness of
debt pursuant to the terms of the Prepackaged Plan. See "Note 3 of Notes to
Consolidated Financial Statements."
(6) The Company adopted Financial Accounting Standard No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" (FAS No. 106), on
October 1, 1992. As a result, the Company recorded a charge to earnings of $1.3
million for the effect of an "Accounting Change" in fiscal 1993 related to the
immediate recognition of its accumulated benefit obligation pursuant to the
provisions of FAS No. 106. See "Note 15 of Notes to Consolidated Financial
Statements."
(7) In November 1992, pursuant to the terms of the Prepackaged Plan, the
Company issued 6 million shares of Class A Common Stock and approximately 31.8
million Warrants to obtain one share of Class A Common Stock per Warrant. See
"Notes 3 and 12 of Notes to Consolidated Financial Statements."
(8) The Company's failure to pay interest on its subordinated debt in fiscal
1991 and fiscal 1992 was an event of default under the subordinated debt
indentures and under the Company's prior bank credit agreement, and its failure
to pay principal when due under its prior bank credit agreement was an event of
default under the Company's Export-Import Bank facility agreement. As a result,
the Company's subordinated notes ($580.4 million) and all amounts outstanding
under the bank credit agreement ($201.5 million) were subject to acceleration
and at September 30, 1991 were classified as Current liabilities. In addition,
at September 30, 1992 and 1991 amounts outstanding under the Company's
Export-Import Bank facility ($11.7 million and $13.8 million, respectively)
could have been subject to acceleration and were classified as "Current
liabilities."
(9) As a result of the consummation of the Prepackaged Plan, the Company's
subordinated notes ($582.8 million aggregate principal amount plus $134.5
million accrued but unpaid interest less $11.4 million of related deferred
financing costs) and all amounts outstanding under the bank credit agreement
($201.2 million) were subject to compromise and at September 30, 1992 were
classified as "Pre-petition liabilities subject to compromise." See "Notes 3
and 9 of Notes to Consolidated Financial Statements."
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Demand for corrugated containers, containerboard and unbleached kraft paper is
cyclical and has historically corresponded to changes in the rate of growth in
the U.S. economy and exchange rates for the U.S. dollar. Growth in the U.S.
economy generally stimulates demand for packaging products. In addition,
weakness of the U.S. dollar versus the currencies of the United States' major
trading partners stimulates domestic demand for corrugated products and makes
export sales of containerboard more price competitive.
The cyclicality of demand is accentuated by the inelasticity of supply due to
the capital intensive nature of the industry. Because productive capacity cannot
be added quickly, during periods of rising demand containerboard and unbleached
kraft paper inventory levels tend to fall, exerting upward pressure on prices.
In periods where capacity exceeds demand, efforts to control inventory levels
are limited because containerboard and unbleached kraft paper mills operate most
economically near capacity operating levels.
Demand for unbleached kraft paper has declined in recent years due to
displacement by plastics. The Company can vary its production of unbleached
kraft paper, depending on market conditions, because three of the Company's four
paper machines that produce unbleached kraft paper also have the capability to
produce containerboard.
From the fall of 1989 and through the fall of 1993, published linerboard and
grocery sack paper transaction prices declined approximately 27 percent and 34
percent, respectively. Published prices for linerboard and grocery sack paper
recovered significantly throughout fiscal 1994 and fiscal 1995, increasing
approximately 80 percent and 84 percent, respectively, reaching record highs.
With increases in industry containerboard capacity and softening demand for
corrugated containers resulting in rising inventories, November 1995 published
industry linerboard prices had declined approximately 6 percent from September
1995.
Results of Operations
Year Ended September 30, 1995 (Fiscal 1995) Compared With Year Ended September
30, 1994 (Fiscal 1994).
Net sales for Fiscal 1995 were a record $1,051.4 million, an increase of
approximately 34 percent compared with net sales of $784.4 million for Fiscal
1994. Operating earnings for Fiscal 1995 were a record $195.5 million compared
with an operating loss of $3.5 million for Fiscal 1994 after $5.4 million and
$15.5 million of non-recurring operating charges in Fiscal 1995 and Fiscal 1994,
respectively. Net income was a record $134.2 million, or $2.44 per share,
including a $24.2 million income tax benefit, versus a net loss in Fiscal 1994
of $84.0 million, or $1.57 per share.
Sales and earnings in Fiscal 1995 benefited from a series of product price
increases resulting in significantly higher average selling prices for the
Company's products compared with Fiscal 1994. Higher average selling prices
increased operating earnings by approximately $279 million versus the prior
fiscal year. Average selling prices for the Company's domestic linerboard,
export linerboard and corrugated products increased approximately 43 percent, 84
percent and 30 percent, respectively, in Fiscal 1995 compared with Fiscal 1994.
Average selling prices for the Company's unbleached kraft paper, grocery bags
and sacks and multiwall bags increased approximately 41 percent, 72 percent and
8 percent, respectively, in Fiscal 1995 versus the prior year.
Sales and earnings for Fiscal 1995 also benefited from record mill production.
The increase in production was achieved despite the temporary idling of the
Bogalusa, Louisiana and Antioch, California mills in the fourth quarter of
Fiscal 1995 to avoid a build-up of inventories, which resulted in approximately
35,000 tons of "lost" production. In addition, extended down time at the
Bogalusa mill in the first quarter of Fiscal 1995 to install a new extended nip
press resulted in approximately 10,000 tons of "lost" production. Increased
volume had a positive effect on operating earnings of approximately $6 million.
The volume variance includes the benefit of fixed costs eliminated with the sale
or closure of two corrugated container plants in Fiscal 1994, net of incremental
fixed operating costs associated with capital investments to expand capacity in
the Company's converting operations. Total mill production increased
approximately 1 percent in Fiscal 1995 compared with the prior year. In Fiscal
1995, production of linerboard increased slightly to 3,298 TPD from 3,282 TPD
while production of unbleached kraft paper increased approximately 5 percent to
725 TPD from 689 TPD in the prior year.
Corrugated shipments of 12.3 billion square feet for Fiscal 1995 were
approximately 3 percent lower than Fiscal 1994; however, shipments for Fiscal
1994 include production from two corrugated container plants that were
subsequently sold or closed. Adjusting for the prior-year shipments from these
12
<PAGE>
two plants, corrugated shipments increased approximately 1 percent year over
year. Multiwall bag shipments of 52,400 tons in Fiscal 1995 were approximately 2
percent higher than the prior year. Grocery bag and sack shipments were 105,000
tons, a decrease of approximately 10 percent versus shipments of 116,500 tons in
Fiscal 1994. The decline in shipments in Fiscal 1995 was primarily due to
reduced demand for standard grocery sacks as a result of greater displacement by
plastic bags as prices for grocery sacks increased, partially offset by
increased shipments of Gaylord Handle-Bags.
Gross margin as a percentage of net sales for Fiscal 1995 increased to 28.2
percent from 11.9 percent in the prior year. The margin improvement, primarily
due to significantly higher average selling prices for the Company's products,
was partially offset by increased fiber costs (primarily the cost of OCC) which
adversely affected operating earnings by approximately $65 million. Year over
year, average OCC prices increased approximately 78 percent in Fiscal 1995. In
addition, operating earnings were adversely affected by a $5.4 million
non-recurring charge for costs associated with an early retirement option
accepted by certain hourly employees at the Antioch mill, to reduce future labor
costs, higher labor costs for incentive programs tied to improved profitability
(approximately $7 million) and general inflation of other manufacturing costs.
Selling and administrative costs for Fiscal 1995 were $14.5 million higher than
Fiscal 1994. The increase is primarily the result of higher incentive
compensation costs related to improved profitability.
Net interest expense increased to $86.1 million in Fiscal 1995 from $80.3
million in Fiscal 1994. The increase was primarily due to higher accretion of
the discount on subordinated debt of $5.4 million.
In the fourth quarter of Fiscal 1995, the Company recorded a $28.0 million
income tax benefit due to the recognition of tax benefits about which
substantial doubt as to their realization had previously existed. In general,
the Company has regular and Alternative Minimum Tax (AMT) operating loss
carryforwards that exceed its earnings for Fiscal 1995. The Company recorded a
current tax provision of $3.8 million in Fiscal 1995 primarily because Internal
Revenue Service regulations limit the use of AMT operating loss carryforwards to
90 percent of AMT income.
Year Ended September 30, 1994 (Fiscal 1994) Compared With Year Ended September
30, 1993 (Fiscal 1993).
Net sales for Fiscal 1994 were $784.4 million, an increase of approximately 7
percent compared with net sales of $733.5 million for Fiscal 1993. The operating
loss for Fiscal 1994 was $3.5 million compared with an operating loss of $2.3
million for Fiscal 1993 after $15.5 million and $9.9 million of non-recurring
operating charges in Fiscal 1994 and Fiscal 1993, respectively.
The net loss in Fiscal 1994 was $84.0 million, or $1.57 per share, versus net
income of $130.2 million, or $2.61 per share, after recording an extraordinary
gain of $201.5 million, or $4.04 per share, for the forgiveness of debt, in
Fiscal 1993. Net income in Fiscal 1993 was reduced by a charge of $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" (FAS No. 106). The earnings per
share amounts were calculated based on 53.6 million weighted average shares and
49.8 million weighted average shares outstanding for Fiscal 1994 and Fiscal
1993, respectively. The increase in weighted average shares was primarily due to
the additional shares issued upon consummation of the Prepackaged Plan being
outstanding for a full year in Fiscal 1994.
Sales and earnings in Fiscal 1994 benefited from a series of product price
increases which resulted in higher average selling prices for linerboard,
corrugated products and multiwall bags compared with Fiscal 1993. Higher average
selling prices in Fiscal 1994 increased operating earnings by approximately $34
million versus the prior fiscal year. Almost all of the pricing improvement
occurred in the second half of the fiscal year as price increases for linerboard
and unbleached kraft paper were passed through to converted products, and the
cumulative benefit of the increases was realized. Average selling prices for the
Company's linerboard, corrugated products and multiwall bags increased
approximately 7 percent, 3 percent and 1 percent, respectively, in Fiscal 1994
compared with the prior year. Average selling prices for the Company's
unbleached kraft paper and grocery bags and sacks decreased approximately 4
percent and 8 percent, respectively, in Fiscal 1994 versus Fiscal 1993 as
selling prices for these products continued to decline during the first half of
Fiscal 1994 before recovering in the second half of the year.
Sales and earnings for Fiscal 1994 also benefited from higher mill production
and corrugated product and multiwall bag shipments. Increased volume had a
positive effect on operating earnings of approximately $17 million. Production
of linerboard increased approximately 4 percent to 3,282 TPD from 3,165 TPD and
unbleached kraft paper production increased approximately 4 percent to 689 TPD
in Fiscal 1994 from 662 TPD in the prior year.
Corrugated shipments of 12.7 billion square feet for Fiscal 1994 were
approximately 7 percent higher than Fiscal 1993. The majority of the increase in
the Company's corrugated shipments was attributable to the acquisition of a
corrugated sheet feeder plant in March 1993. Multiwall bag shipments of 51,500
13
<PAGE>
tons in Fiscal 1994 were approximately 6 percent higher than the prior year
primarily as a result of increases in market share in certain product lines.
Grocery bag and sack shipments were 116,500 tons, a decrease of approximately 9
percent versus shipments of 128,600 tons in Fiscal 1993. The decline in
shipments in Fiscal 1994 is primarily as a result of the consolidation of two
grocery bag and sack plants, partially offset by significant increases in
shipments of Gaylord Handle-Bags.
Gross margin as a percentage of net sales for Fiscal 1994 increased to 11.9
percent from 11.1 percent in the prior year. The margin improvement was due to
higher average selling prices, partially offset by increased fiber costs
(approximately $30 million) primarily for OCC. Year over year, fiber costs
increased approximately 29 percent in Fiscal 1994. Further, operating earnings
were adversely affected by higher mill energy costs (approximately $3 million)
due to increased prices, increased maintenance and supplies costs (approximately
$2 million) and general inflation of other manufacturing costs.
Selling and administrative costs for Fiscal 1994 were $7.2 million higher than
Fiscal 1993. The increase is primarily the result of higher incentive
compensation costs and the cost of enhanced marketing efforts related to
increased sales volume.
Operating earnings were adversely affected by $15.5 million of non-recurring
operating charges in Fiscal 1994. These charges included (i) $9.9 million
primarily for equipment abandonments, asset write-downs, lease termination costs
and other costs related to the relocation of three of the Company's converting
facilities (ii) $3.5 million for costs associated with closure of a corrugated
container plant and (iii) $2.1 million for a loss on the sale and costs
associated with the disposition of a corrugated container plant. The
non-recurring operating charges in Fiscal 1993 included $7.8 million of debt
restructuring costs and $2.1 million for costs associated with the consolidation
of two grocery bag plants. Consummation of the Prepackaged Plan resulted in an
extraordinary gain of $201.5 million in Fiscal 1993.
Net interest expense increased to $80.3 million in Fiscal 1994 from $68.2
million in Fiscal 1993. The increase 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. Non-cash interest
expense increased to $41.3 million in Fiscal 1994 from $15.9 million in Fiscal
1993, primarily due to accretion of subordinated debt issued in May 1993.
Liquidity and Capital Resources
General
The Company has historically financed its operations through cash provided by
operations, borrowings under its credit agreements 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 provided by operations for Fiscal 1995 was $194.2 million compared with
$29.7 million for the prior year. The favorable comparison to Fiscal 1994 was
due to significantly higher selling prices for the Company's products.
Capital expenditures of $58.9 million in Fiscal 1995 increased $18.5 million
from Fiscal 1994. In addition to the $58.9 million of capital spending, the
Company acquired $45.1 million of equipment financed by capital leases and debt
obligations secured by the assets acquired. In Fiscal 1994, the Company
initiated a five-year capital plan that provides for a total investment of
approximately $250 million. The plan targets approximately 60 percent of the
spending to enhance the capacity, flexibility and cost effectiveness of the
Company's converting facilities with the remainder to be invested in its paper
mills. In Fiscal 1995, as part of the capital plan, the Company opened one new
converting plant and relocated and expanded three converting plants. The Company
has the ability to adjust the timing of certain capital projects depending upon
industry conditions. The Company plans to finance the remainder of the five-year
capital plan with cash provided by operations, debt obligations secured by the
assets acquired, or borrowings under its revolving credit facilities.
At the end of fiscal 1992, the Company determined it would be unlikely that its
Antioch, California virgin fiber mill (the East Mill), which was closed in
fiscal 1991, could be sold as a mill site or that the East Mill, or some portion
thereof, could be operated economically by the Company. The Company believed,
and continues to believe, that the most likely outcome will be the sale of
individual assets and the subsequent demolition of the remaining structures on
the mill site. In Fiscal 1995, the Company incurred approximately $2.0 million
of costs to maintain the East Mill, which was partially offset by the sale of
scrap. Demolition of the remaining structures on the mill site will require the
Company to incur costs for asbestos removal. The Company has deferred incurring
substantial expenditures for demolition and asbestos removal until all
uncertainties regarding disposition of the mill assets have been resolved. At
September 30, 1995, balance sheet accruals for demolition and asbestos removal
were approximately $5.2 million and $15.3 million, respectively, and the net
book value of the East Mill was $1.4 million.
14
<PAGE>
In Fiscal 1994, the Company recognized non-recurring operating charges of $15.5
million. These charges included (i) $9.9 million primarily for equipment
abandonments, asset write-downs, lease termination costs and other costs related
to the relocation of three of the Company's converting facilities (ii) $3.5
million for costs associated with the closure of a corrugated container plant
and (iii) $2.1 million for a loss on the sale and costs associated with the
disposition of a corrugated container plant. In Fiscal 1995, the Company charged
approximately $8.3 million of costs associated with the Fiscal 1994
non-recurring operating charges to balance sheet accruals. At September 30,
1995, the Company had balance sheet accruals for such costs of $3.4 million. In
addition, the Company has remaining balance sheet accruals of approximately $1.0
million for non-recurring operating charges (primarily lease termination costs)
recognized in previous years and anticipates incurring such costs ratably over
the next two years.
Liquidity
At September 30, 1995, the Company had cash and equivalents of $32.5 million, an
increase of $15.1 million from September 30, 1994 as cash provided by operations
exceeded cash used for investments and financing. Total debt decreased by $24.2
million from $711.3 million at September 30, 1994 to $687.1 million at September
30, 1995. The decrease in total debt was primarily due to senior debt repayments
of $115.7 million, $87.5 million of which were prepayments of the term-loan
portion of the Company's bank credit agreement, repaying the loan in its
entirety. This was partially offset by accretion of the discount on subordinated
debt and new capital leases and secured financing associated with the capital
plan described above.
On June 30, 1995, the Company amended and restated its bank credit agreement.
The amendment increased the revolving credit facility from $66 million to $175
million, extended the maturity of the revolving credit facility to June 30, 2000
and permitted open market purchases or redemptions of up to $100 million of the
Company's publicly traded debt securities. At September 30, 1995, the Company
had no amounts outstanding and approximately $237 million of credit available
under the revolving portions of its credit agreements. At October 29, 1995, the
Company had $10.5 million outstanding and approximately $226 million of credit
available under the revolving portions of its credit agreements. See "Note 9 to
Notes to Consolidated Financial Statements."
Subsequent to Fiscal 1995, the Company repurchased $65.3 million principal
amount of its publicly traded debt securities. In conjunction with the
repurchase, approximately $1.4 million of deferred financing fees will be
written off. These transactions will result in an extraordinary loss of $2.6
million (including the write-off of deferred financing fees) in the first
quarter of fiscal 1996. The Company has made debt reduction a priority and will
continue to evaluate the advisability of using future excess cash flow to reduce
debt.
During Fiscal 1995, the Company implemented price increases totaling $140 per
ton for linerboard and unbleached kraft paper and corresponding price increases
for converted products. With increases in containerboard capacity and softening
demand for corrugated containers resulting in rising industry inventories,
November 1995 published industry prices had declined approximately $30 per ton,
or 6 percent from September 1995. The effect of higher product prices has been
partially offset by increased fiber costs, particularly the price of OCC, which
more than tripled from January 1994 to May 1995. From a peak of $230 per ton in
May 1995, the delivered cost of OCC has dropped to approximately $90 per ton in
November 1995. The secondary fiber market, however, is difficult to predict, and
there can be no assurance of the direction OCC prices will take in the future.
Based upon November 1995 product prices and fiber costs, the Company believes
that cash provided by operations and borrowings available under its credit
agreements will provide adequate liquidity to meet debt service obligations and
other liquidity requirements over the next 12 to 24 months.
Pending Accounting Standard
Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation"
(FAS No. 123), which encourages entities to adopt a fair value based method of
accounting for compensation costs of employee stock compensation plans, was
issued in October 1995. FAS No. 123 allows an entity to continue the
application of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," however, pro forma footnote
disclosures of net income and earnings per share, as if the fair value based
method of accounting defined by this statement had been applied, are required.
The Company will be required to adopt FAS No. 123 in fiscal 1996. The Company
has not decided whether it will adopt the fair value based method of accounting
for compensation costs of employee stock compensation plans or the footnote
disclosure requirements prescribed by FAS No. 123. Therefore, the Company is
unable to predict the impact the adoption of FAS No. 123 will have on its
financial position or results of operations.
15
<PAGE>
Item 8. Financial Statements and Supplementary Data
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
Index to Financial Statements
Page
- --------------------------------------------------------------------
Independent Auditors' Report 17
Consolidated Balance Sheets at September 30, 1995 and 1994 18
Consolidated Statements of Operations for the Years
Ended September 30, 1995, 1994 and 1993 19
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1995, 1994 and 1993 20
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1995, 1994 and 1993 21
Notes to Consolidated Financial Statements 22
16
<PAGE>
Independent Auditors' Report
Gaylord Container Corporation:
We have audited the accompanying consolidated balance sheets of Gaylord
Container Corporation and its subsidiaries (the Company) at September 30, 1995
and 1994 and the related consolidated statements of operations, of stockholders'
equity and of cash flows for each of the three years in the period ended
September 30, 1995. Our audits also included the financial statement schedule of
the Company for each of the three years in the period ended September 30, 1995,
listed in Item 14a. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 1995
and 1994 and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information shown therein.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Chicago, Illinois
November 1, 1995
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
GAYLORD CONTAINER CORPORATION AND
SUBSIDIARIES
September 30, 1995 and 1994
In millions
1995 1994
------ ------
Assets
Current assets:
<S> <C> <C>
Cash and equivalents $ 32.5 $ 17.4
Trade receivables (less allowances of $6.5
million and $3.7 million, respectively) (Note 9) 140.0 121.8
Inventories (Note 5) 73.1 59.6
Prepaid expenses 2.8 3.1
Deferred income taxes (Note 8) 49.6 -
Other 8.3 4.8
----- -----
Total current assets 306.3 206.7
Property - net (Notes 6 and 14) 640.0 592.9
Other assets:
Deferred charges (Note 7) 24.0 28.1
Other (Note 9) 17.7 15.4
----- -----
Total $988.0 $ 843.1
===== =====
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt (Note 9) $ 15.6 $ 14.5
Trade payables 51.7 58.6
Accrued interest payable 9.7 10.4
Accrued and other liabilities (Note 10) 72.9 51.6
----- -----
Total current liabilities 149.9 135.1
----- -----
Long-term debt (Note 9) 671.5 696.8
Other long-term liabilities (Note 10) 27.5 30.7
Deferred income taxes (Note 8) 25.9 4.3
Commitments and contingencies (Note 16) - -
Stockholders' equity (deficit) (Notes 11, 12 and 13):
Class A common stock - -
Class B common stock - -
Capital in excess of par value 172.6 170.5
Retained deficit (Note 9) (54.7) (188.9)
Common stock in treasury - at cost (0.4) (0.8)
Recognition of minimum pension liability (Note 15) (4.3) (4.6)
----- -----
Total stockholders' equity (deficit) 113.2 (23.8)
----- -----
Total $988.0 $843.1
===== =====
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
GAYLORD CONTAINER CORPORATION AND
SUBSIDIARIES
For the years ended September 30, 1995, 1994 and 1993
In millions except per share data
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales $1,051.4 $ 784.4 $ 733.5
Cost of goods sold 755.0 691.4 652.1
------- ----- -----
Gross margin 296.4 93.0 81.4
Selling and administrative costs (95.5) (81.0) (73.8)
Non-recurring operating charges (Note 2) (5.4) (15.5) (9.9)
------- ----- -----
Operating earnings (loss) 195.5 (3.5) (2.3)
Interest expense - net (Note 9) (86.1) (80.3) (68.2)
Other income (expense) - net 0.6 (0.2) 0.5
------- ----- -----
Income (loss) before income taxes 110.0 (84.0) (70.0)
Income tax benefit (Note 8) 24.2 - -
------- ----- -----
Income (loss) before extraordinary
item and accounting change 134.2 (84.0) (70.0)
Extraordinary gain (Note 3) - - 201.5
Accounting change (Note 1) - - (1.3)
------- ----- -----
Net income (loss) $ 134.2 $(84.0) $130.2
======= ===== =====
Earnings per common and common equivalent share:
Income (loss) before extraordinary
item and accounting change $ 2.44 $(1.57) $(1.40)
Extraordinary gain (Note 3) - - 4.04
Accounting change (Note 1) - - (0.03)
------- ----- -----
Net income (loss) $ 2.44 $(1.57) $ 2.61
======= ===== =====
Average number of common and common
equivalent shares outstanding 55.1 53.6 49.8
======= ====== =====
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Gaylord Container Corporation and Subsidiaries
For the years ended September 30, 1995, 1994 and 1993
Total
-------------Common stock----------- Capital in Retained Minimum stockholders'
-----Class A----- -----Class B----- excess of earnings --Treasury stock- pension equity
Shares Dollars Shares Dollars par value (deficit) Shares Dollars liability (deficit)
------ ------- ------ ------- --------- -------- -------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1992 9,622,664 $0.1 5,983,809 $0.1 $ 80.9 $(235.1) 85,700 $(0.8) $(0.9) $(155.7)
Net income - - - - - 130.2 - - - 130.2
Debt restructuring
(Note 3) 37,845,543 (0.1) - (0.1) 88.2 - - - - 88.0
Restricted stock - net 10,200 - - - - - - - - -
Recognition of minimum
pension liability - - - - - - - - (9.2) (9.2)
Other 32,382 - (32,382) - 0.3 - - - - 0.3
---------- ---- --------- ---- ---- ----- ------ ---- ---- -----
Balance at
September 30, 1993 47,510,789 - 5,951,427 - 169.4 (104.9) 85,700 (0.8) (10.1) 53.6
Net loss - - - - - (84.0) - - - (84.0)
Options exercised 124,416 - - - 0.7 - - - - 0.7
Restricted stock - net 190,500 - - - - - - - - -
Reversal of minimum
pension liability - - - - - - - - 5.5 5.5
Other 685,154 - (685,154) - 0.4 - (2,722) - - 0.4
---------- ---- --------- ---- ----- ----- ------ ---- ---- ----
Balance at
September 30, 1994 48,510,859 - 5,266,273 - 170.5 (188.9) 82,978 (0.8) (4.6) (23.8)
Net income - - - - - 134.2 - - - 134.2
Options exercised 306,648 - - - 1.5 - - - - 1.5
Mandatory conversion
of Class B Common
Stock (Note 12) 5,250,082 - (5,250,082) - - - - - - -
Restricted stock - net 40,750 - - - - - - - - -
Reversal of minimum
pension liability - - - - - - - - 0.3 0.3
Other (Note 12) 16,191 - (16,191) - 0.6 - (35,975) 0.4 - 1.0
---------- ---- --------- ---- ----- ----- ------ ---- ---- -----
Balance at
September 30, 1995 54,124,530 $ - - $ - $172.6 $ (54.7) 47,003 $(0.4) $(4.3) $113.2
========== ==== ========= ==== ===== ===== ====== ==== ==== =====
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Gaylord Container Corporation and Subsidiaries
For the years ended September 30, 1995, 1994 and 1993
In millions 1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Cash Flows From Operations:
Income (loss) before extraordinary
item and accounting change $134.2 $(84.0) $(70.0)
Adjustments to reconcile income
(loss) to net cash provided by operations:
Depreciation and amortization 64.8 61.2 61.1
Non-cash interest expense 46.7 41.3 15.9
Deferred income taxes (28.0) - -
Early retirement charge 5.4 - -
Asset write-down - 13.4 2.1
Loss (gain) on asset dispositions 0.2 2.1 (0.6)
Acquisition restructuring expenditures (1.0) (2.9) (2.5)
Change in current assets and
liabilities, excluding
acquisitions and dispositions:
Receivables (18.2) (18.6) 0.2
Inventories (13.5) 1.6 (4.8)
Prepaid expenses and other current assets (3.2) (0.6) (0.7)
Accounts payable and other
accrued liabilities 8.2 15.6 11.1
Other - net (1.4) 0.6 1.2
----- ----- -----
Net cash provided by operations 194.2 29.7 13.0
----- ----- -----
Cash Flows From Investments:
Capital expenditures (58.9) (40.4) (23.7)
Capitalized interest (2.3) (0.9) (0.5)
Proceeds from asset sales 3.5 4.5 0.4
Acquisitions - - (5.9)
Other investments - net (3.6) 1.9 0.4
----- ----- -----
Net cash used for investments (61.3) (34.9) (29.3)
----- ----- -----
Cash Flows From Financing:
Issuance of senior notes (Note 9) - - 225.0
Issuance of subordinated debentures (Note 9) - - 300.0
Refinancing - debt redeemed (Note 9) - - (460.5)
Restructuring closing (Note 3) - - (53.1)
Senior debt repayments (115.7) (5.4) (13.8)
Debt issuance costs (3.4) - (21.3)
Other financing - net 1.3 0.4 3.1
----- ----- -----
Net cash used for financing (117.8) (5.0) (20.6)
----- ----- -----
Net increase (decrease) in cash and equivalents 15.1 (10.2) (36.9)
Cash and equivalents, beginning of year 17.4 27.6 64.5
----- ----- -----
Cash and equivalents, end of year $ 32.5 $ 17.4 $ 27.6
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
Notes to Consolidated Financial Statements
Gaylord Container Corporation and Subsidiaries
1. General/Summary of Significant Accounting Policies
General - Gaylord Container Corporation (including its subsidiaries, the
Company) is engaged in the integrated production, conversion and sale of paper
packaging products. The Company is a major national manufacturer and distributor
of corrugated containers, corrugated sheets, containerboard, unbleached kraft
paper, multiwall bags, grocery bags and sacks and specialty chemicals.
Corrugated containers are produced to customer order primarily for use in
shipping their products and as point-of-sale displays. Containerboard,
consisting of linerboard and corrugating medium, is the principal raw material
used to manufacture corrugated containers and corrugated sheets. The Company
also produces unbleached kraft paper which is converted by the Company into bags
and sacks for sale to a wide range of industries or sold to independent
converters.
The Company's facilities, which are located throughout the United States,
consist of three containerboard and paper mills, 14 corrugated container plants,
three sheet feeder plants, two multiwall bag plants, two grocery bag and sack
plants, a specialty chemicals facility, a preprint and graphics center and a
cogeneration facility.
Summary of Significant Accounting Policies - The Company's accounting policies
conform to generally accepted accounting principles. Significant policies
followed are described below:
Basis of Consolidation - The consolidated financial statements at September 30,
1995 and 1994 and for the years ended September 30, 1995 (Fiscal 1995),
September 30, 1994 (Fiscal 1994) and September 30, 1993 (Fiscal 1993) include
all of the accounts of the Company after elimination of intercompany
transactions and balances. The Company operates on a 52/53 week fiscal year.
Fiscal 1995, Fiscal 1994 and Fiscal 1993 are 52-week fiscal years. Certain
amounts for Fiscal 1994 and Fiscal 1993 have been reclassified to conform with
the current-year presentation.
Revenue Recognition - Sales are recognized when the Company's products are
shipped. Shipments to companies with reciprocal purchase agreements (Exchange
Partners) are not recognized as sale transactions in the statement of
operations. These shipments are accounted for in the same manner as intercompany
transactions and are eliminated in the statement of operations.
Cash and Equivalents - The Company considers all highly liquid debt instruments,
including time deposits, bank repurchase agreements and commercial paper, with
an original maturity of three months or less, to be cash equivalents.
Inventories are stated at the lower of cost or market value. Cost includes
materials, transportation, direct labor and manufacturing overhead. Cost is
determined by the last-in, first-out (LIFO) method of inventory valuation.
Property is stated at cost, including interest expense capitalized during
construction periods. Maintenance and repairs are charged to expense as
incurred.
Depreciation is computed using the straight-line method over estimated useful
lives ranging from 10 to 45 years for buildings and improvements and three to 20
years for machinery and equipment.
Deferred Financing Costs - Costs incurred in connection with the issuance of
long-term debt or other financing arrangements are capitalized. Amortization of
deferred financing costs is computed using the straight-line method over the
term of the related debt and is reported as interest expense.
Start-Up Costs incurred in bringing major new or expanded facilities into
operation are capitalized and charged to expense over periods of not more than
five years.
Income Taxes - Deferred income taxes are provided using the liability method for
those items for which the period of reporting differs for financial reporting
and income tax purposes in accordance with Financial Accounting Standard No.
109, "Accounting for Income Taxes" (FAS No. 109), which was adopted effective
October 1, 1992 (see Note 8). There was no cumulative impact on the Company's
effective tax rate from the adoption of FAS No. 109 due to the Company's
previous adoption of Financial Accounting Standard No. 96, "Accounting for
Income Taxes."
Post-retirement Benefits Other Than Pensions - On October 1, 1992, the Company
adopted Financial Accounting Standard No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," (FAS No. 106) and elected to
immediately recognize its accumulated benefit obligation. See Note 15.
22
<PAGE>
Business Segment - The Company manufactures paper packaging products including
corrugated containers, corrugated sheets, preprinted linerboard, containerboard,
unbleached kraft paper, multiwall bags and grocery bags and sacks.
Net Income per Common and Common Equivalent Share is based on the weighted
average number of common shares outstanding during the period plus the weighted
average number of common shares issuable upon exercise of outstanding stock
options (see Note 13) for which the market price of the related stock exceeds
the exercise price of the option, less shares which could have been purchased
with the assumed proceeds from the sale of such stock (treasury stock method).
2. Non-Recurring Operating Charges
In the fourth quarter of Fiscal 1995, the Company recorded a $5.4 million
non-recurring charge for costs associated with an early retirement option
accepted by certain hourly employees at the Antioch, California mill, to reduce
future labor costs. In Fiscal 1994, the Company recorded non-recurring operating
charges of $15.5 million for asset write-downs and other costs associated with
the relocation, closure or sale of certain converting facilities. In Fiscal
1993, the Company incurred $9.9 million of non-recurring operating charges for
debt restructuring costs and costs associated with the consolidation of two
grocery bag plants.
3. Extraordinary Gain
In September 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. In November 1992, the Company consummated the Prepackaged Plan
and emerged from bankruptcy.
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 Company exchanged all of its then outstanding
subordinated debt for newly issued 13-1/2% Senior Subordinated Debentures Due
2003 and 10-1/4% Senior Subordinated PIK Notes Due 2001 (collectively, the
Senior Subordinated Notes), shares of Class A Common Stock (as defined herein)
and redeemable exchangeable warrants (the Warrants), which 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 carryforward tax 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.
The Senior Subordinated Notes were redeemed in a refinancing in May 1993 (see
Note 9).
4. Investment in Affiliates
The Company owns a 50 percent interest in Gaylord Central National, Inc. (GCN),
a joint venture corporation formed with Central National-Gottesman, Inc. GCN is
the primary agent for the Company's export sales of containerboard and
unbleached kraft paper. Product sales to GCN during Fiscal 1995, Fiscal 1994 and
Fiscal 1993 were approximately $62.0 million, $16.6 million and $12.7 million,
respectively. The increase in product sales to GCN in Fiscal 1995 was primarily
the result of higher selling prices for linerboard and exports of unbleached
kraft paper, which was not exported in prior years.
In Fiscal 1995, the Company purchased a 50 percent ownership interest in La
Presa Container, Inc. (OCC-Baja). The joint venture corporation produces
corrugated containers in Mexico. Product sales to OCC-Baja during Fiscal 1995
were approximately $4.1 million.
23
<PAGE>
5. Inventories
Inventories consist of:
September 30,
----------------
In millions 1995 1994
------- -------
Finished products $ 17.4 $ 13.0
In process 34.8 38.7
Raw materials 15.1 8.6
Supplies 15.8 9.6
------- -------
83.1 69.9
LIFO valuation adjustment (10.0) (10.3)
------- -------
Total $ 73.1 $ 59.6
====== ======
As a result of a LIFO inventory liquidation in Fiscal 1994, the Company's "Cost
of Goods Sold" in Fiscal 1994 was approximately $0.2 million less than it would
have been had a liquidation not occurred.
6. Property - Net
Property consists of:
September 30,
----------------
In millions 1995 1994
------- ------
Land $ 15.4 $ 15.1
Buildings and improvements 121.5 117.3
Machinery and equipment 841.8 753.4
Construction-in-progress 35.2 31.6
------- -------
1,013.9 917.4
Accumulated depreciation (373.9) (324.5)
------- -------
Total $640.0 $ 592.9
====== ======
7. Deferred Charges
Deferred charges consist of:
September 30,
------------------
In millions 1995 1994
--------- --------
Deferred financing costs $ 39.9 $ 36.3
Capitalized start-up costs 5.0 10.0
Cost in excess of net assets acquired 3.7 3.7
Other 1.0 2.3
------- -------
49.6 52.3
Accumulated amortization (25.6) (24.2)
------- -------
Total $ 24.0 $ 28.1
====== ======
Amortization of deferred charges during Fiscal 1995, Fiscal 1994 and Fiscal 1993
was approximately $7.4 million, $6.3 million and $7.3 million, respectively.
24
<PAGE>
8. Income Taxes
The components of the deferred income tax assets and liabilities, current and
non-current, are as follows:
September 30,
------------------
In millions 1995 1994
-------- --------
Current
Deferred tax assets:
Net operating loss $ 42.8 $ -
Inventory valuation 6.8 -
------- -------
Deferred tax asset $ 49.6 $ -
====== =======
Non-Current
Deferred tax liabilities:
Depreciation $177.2 $ 171.4
Capitalized interest 11.9 11.0
Other 1.6 1.6
------- -------
190.7 184.0
------- -------
Deferred tax assets:
Net operating loss 93.6 182.0
Asset write-down 49.0 48.4
Debt restructuring expenses 3.3 4.2
Other long-term liabilities 2.4 4.2
Deferred compensation 8.4 5.2
Inventory valuation - 6.0
Other 8.1 5.0
------- -------
Sub-total 164.8 255.0
Less: Valuation allowance - (75.3)
------- -------
164.8 179.7
------- -------
Deferred tax liability $ 25.9 $ 4.3
====== =======
The current income tax provision for Fiscal 1995, principally for state income
taxes and Alternative Minimum Tax (AMT), was $3.8 million and the deferred
income tax benefit was $28.0 million. Deferred income taxes result from
temporary differences in the period of reporting revenues, expenses and credits
in the financial statements and income tax return. Such temporary differences
for Fiscal 1995, Fiscal 1994 and Fiscal 1993 and their related deferred income
tax provision (benefit) follow:
Year Ended September 30,
------------------------------
In millions 1995 1994 1993
------- ------- -------
Depreciation expense $ 5.8 $ 7.3 $ 20.1
Asset write-down (0.6) (2.1) (0.5)
Debt restructuring expenses 0.9 (0.2) (0.8)
Inventory differences (0.8) (2.7) (0.4)
Net operating loss 45.6 (33.0) (44.7)
Change in valuation allowance (75.3) 32.9 28.0
Other - net (3.6) (2.2) (1.7)
------ ------ ------
Total deferred income tax benefit $(28.0) $ - $ -
====== ====== ======
Income tax benefits that would have been recognized under FAS No. 109 in Fiscal
1994 and Fiscal 1993 were offset by the change in the valuation allowance
required under FAS No. 109. This was required due to substantial uncertainty
regarding realization of such benefits as a result of the Company's substantial
net operating loss carryforwards. In Fiscal 1995, the future realization of tax
benefits relating to prior net operating losses became more likely than not due
to the Company's improved operating performance and future economic outlook.
Thus in Fiscal 1995, the Company reduced the valuation allowance to zero.
25
<PAGE>
The Company's use of its cumulative regular and AMT net operating loss
carryforwards generated prior to filing the Prepackaged Plan was limited by the
Internal Revenue Code due to the issuance of Class A Common Stock and Warrants
in the Prepackaged Plan. The Company elected to reduce each of the cumulative
regular and AMT net operating loss carryforwards by approximately $168 million
to eliminate the annual limitation on the use of its cumulative regular and AMT
net operating loss carryforwards.
At September 30, 1995, the Company had cumulative regular and AMT net operating
losses of approximately $341 million and $53 million, respectively, which may be
carried forward and expire at various dates through the year 2010. At September
30, 1995, AMT credits of approximately $3 million for tax purposes may be
carried forward indefinitely to be applied against regular tax.
A reconciliation of income tax expense (benefit) to the amount computed by
applying the statutory Federal income tax rates to the income (loss) before
income taxes follows (dollars in millions):
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1995 1994 1993
------------------ ------------------- -------------------
Percentage of Percentage of Percentage of
income before loss before loss before
income income income
Amount taxes Amount taxes Amount taxes
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax $ 38.5 35% $ (29.4) (35)% $ (24.5) (35)%
State income taxes-net of Federal benefit 6.6 6 (4.2) (5) (3.5) (5)
Limitation on use
of net operating losses - - 33.6 40 28.0 40
Reduction in valuation allowance (75.3) (68) - - - -
Other 6.0 5 - - - -
---- --- ---- --- ---- ---
Total income tax benefit $(24.2) (22)% $ - -% $ - -%
==== === ==== === ==== ===
</TABLE>
9. Long-Term Debt
Long-term debt consists of the following:
September 30,
----------------------
In millions 1995 1994
--------- ---------
Term Loan, varying interest rates (a) $ - $ 96.3
Revolving Credit Facility, varying interest rates (a) - -
Trade Receivables Facility, varying interest rates (b) - -
Senior Notes, 11.5%, due May 2001 (d) 225.0 225.0
Pollution control and industrial revenue bonds,
interest at 4.7% to 8.3%, due at various dates
to 2008 (e) 12.2 12.4
Capital lease obligations, interest at 8.5%
to 11.8%, due at various dates to 2002 (c) 19.0 -
Other senior debt, interest at 6.5% to 13.5%,
due at various dates to 1999 29.3 22.7
------ -------
Total senior debt 285.5 356.4
Senior Subordinated Discount Debentures, 12.75%,
due May 2005 (net of unamortized discount of
$32.6 million and $79.3 million, respectively) (f) 401.6 354.9
------ -------
Total debt 687.1 711.3
Less: Current maturities (15.6) (14.5)
------ -------
Total $671.5 $696.8
====== ======
Scheduled aggregate annual principal payments due on long-term debt during each
of the next five years are (in millions) $15.6, $11.1, $9.5, $8.3 and $5.4,
respectively.
26
<PAGE>
(a) On June 30, 1995, the Company amended and restated its bank credit agreement
(as amended and restated, the Bank Credit Agreement). Among other changes, the
amendment increased the revolving credit facility from $66 million to $175
million, extended the maturity date of the revolving credit facility from
September 1997 to June 2000, allowed the purchase or redemption of up to $100
million of public debt securities, increased the level of permitted capital
expenditures by approximately $25 million per year for the next two years,
allowed 100 percent carry-over of unexpended permitted capital expenditure
amounts and reduced the interest rate charged on outstanding borrowings by 0.5
percent. At September 30, 1995, the Bank Credit Agreement was comprised of the
$175 million revolving credit facility due in June 2000 (the Revolving Credit
Facility), and a $17 million standby letter of credit facility with a final
maturity in April 1999 (the L/C Facility).
The Company is required to maintain and is in compliance with certain financial
covenants including tests for current ratio, minimum net worth and minimum
interest coverage ratio. The level of the Company's annual capital expenditures
is also limited by the Bank Credit Agreement. All obligations under the Bank
Credit Agreement are secured by liens on substantially all of the Company's
assets. In connection with a trade receivables-backed revolving credit facility,
the Company sells on an ongoing basis substantially all of its accounts
receivable to a wholly owned special purpose subsidiary, and such accounts
receivable are not subject to a lien under the Bank Credit Agreement. See (b)
below.
A term loan was prepaid in full (without penalty) in Fiscal 1995, and no amounts
may be borrowed on this loan in the future. The highest outstanding principal
balance during Fiscal 1995 was $96.3 million and the weighted average interest
rate was 9.1 percent.
The Revolving Credit Facility provides the ability to borrow funds and to repay
such funds in whole or in part from time to time without incurring any
prepayment penalty. Up to $25 million of standby letters of credit, which reduce
the facility by a like amount, may be issued under this agreement. At September
30, 1995, no amounts were outstanding under the Revolving Credit Facility,
$166.8 million of credit was available and approximately $8.2 million of standby
letters of credit were outstanding. The highest outstanding principal balance
under the facility during Fiscal 1995 was $2.0 million and the weighted average
interest rate was 11.1 percent. A commitment fee of 0.375 percent per year is
paid on the unused portion of the facility.
The L/C Facility provides for standby letter of credit loans which are incurred
only in the event that the standby letters of credit are drawn due to nonpayment
of principal or interest on certain debt instruments, which are secured by these
standby letters of credit. The standby letter of credit commitment is
permanently reduced periodically to reflect principal repayments. The Company
has the right to prepay the standby letter of credit loans in whole or in part
from time to time without incurring any prepayment penalty. At September 30,
1995, the aggregate standby letter of credit commitment was approximately $17.0
million. A fee of 2.75 percent per annum is payable on outstanding letters of
credit under both the Revolving Credit Facility and the L/C Facility.
The Company has various interest rate options for Bank Credit Agreement
borrowings based on one or a combination of the following three rates: (i) prime
rate loans at the prime rate in effect from time to time plus a borrowing margin
of 1.5 percent per annum, (ii) certificate of deposit (CD) rate loans at the
relevant CD rate plus a borrowing margin of 2.625 percent per annum, or (iii)
Eurodollar rate loans at the relevant Eurodollar rate plus a borrowing margin of
2.5 percent per annum. The Company has the option of incurring Eurodollar and CD
rate loans for 30, 60, 90, 120 or 180-day periods. Interest is payable monthly.
(b) In September 1993, the Company established a wholly owned special purpose
subsidiary, Gaylord Receivables Corporation (GRC). Concurrently, GRC and a group
of banks established a $70 million trade receivables-backed revolving credit
facility (the Trade Receivable Facility). In accordance with the provisions of
this program, GRC purchases (on an on-going basis) substantially all of the
accounts receivable of the Company. GRC transfers the accounts receivable to a
trust in exchange for certain trust certificates representing ownership
interests in the accounts receivable. The trust certificates received by GRC
from the trust are solely the assets of GRC. In the event of liquidation of GRC,
the creditors of GRC would be entitled to satisfy their claims from GRC's assets
prior to any distribution to the Company.
27
<PAGE>
GRC has various interest rate options for Trade Receivable Facility borrowings
based on one or a combination of the following two rates: (i) prime rate loans
at the higher of (a) the prime rate in effect from time to time or (b) the
Federal Funds Rate plus 0.5 percent per annum, or (ii) LIBOR rate loans at the
relevant LIBOR rate plus a borrowing margin of 0.75 percent per annum. Interest
is payable monthly. GRC is obligated to pay a commitment fee of 0.5 percent per
annum on the unused credit available under the Trade Receivable Facility. Credit
availability under the Trade Receivable Facility is based on a borrowing base
formula (as defined). As a result, the full amount of the facility may not be
available at all times. At September 30, 1995, no amounts were outstanding under
the Trade Receivable Facility and $70 million of credit was available to GRC
pursuant to the borrowing base formula. At October 29, 1995 the Company had
$10.5 million outstanding under the Trade Receivable Facility and $59.5 million
of credit was available to GRC pursuant to the borrowing base formula. The
highest outstanding principal balance under the Trade Receivable Facility during
Fiscal 1995 was $10.5 million and the weighted average interest rate was 8.9
percent. At September 30, 1995 and 1994, the Company's consolidated balance
sheet included $118.8 million and $106.3 million, respectively, of accounts
receivable sold to GRC.
(c) In Fiscal 1995, in conjunction with the $250 million capital expenditure
program, the Company entered into various capital leases with an aggregate value
of approximately $29.4 million to finance equipment at its converting
facilities. The capital leases have terms ranging from five to seven years. The
capital leases contain certain covenants which are standard for these types of
obligations, but do not contain any restrictive operating or financial
covenants.
(d) In May 1993, the Company issued $225 million aggregate principal amount of
11-1/2% Senior Notes Due 2001 (the Senior Notes). The Senior Notes are general
unsecured obligations of the Company and rank senior in right of payment to the
Subordinated Discount Debentures (as defined in (f) below) and all other
existing and future subordinated indebtedness of the Company. The Senior Notes
rank pari passu with all senior debt of the Company, including indebtedness
under the Bank Credit Agreement. Indebtedness under the Bank Credit Agreement,
however, is secured by liens on substantially all of the assets of the Company.
Interest on the Senior Notes is payable semiannually on May 15 and November 15.
The Senior Notes will mature on May 15, 2001 and are subject to redemption on or
after May 15, 1997 at the option of the Company, in whole or in part, at
declining redemption prices commencing at 104.93 percent of the principal amount
and declining to 100 percent of the principal amount at May 15, 2000 and
thereafter, plus accrued interest to the date of redemption.
Upon the occurrence of a change of control (as defined), each holder of the
Senior Notes has the right to require the Company to repurchase such holder's
Senior Notes at a price equal to 101 percent of the principal amount thereof,
plus accrued interest to the date of repurchase. In addition, the Company will
be required to make an offer to repurchase the Senior Notes at 100 percent of
the principal amount, plus accrued interest to the date of repurchase, in the
event of certain asset sales.
(e) The pollution control and industrial revenue bonds were assumed by the
Company from Crown Zellerbach Corporation (Crown Zellerbach). The Company also
acquired a note receivable from Crown Zellerbach for an amount and with terms
identical to those of the bonds. At September 30, 1995 and September 30, 1994,
such note receivable was approximately $12.2 million and approximately $12.4
million, respectively, and was classified as "Other assets."
(f) In May 1993 the Company issued 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). The Subordinated Discount Debentures are general unsecured
obligations of the Company and are subordinated in right of payment to all
senior debt of the Company. The Subordinated Discount Debentures were issued at
approximately 69 percent of their principal amount. Commencing May 15, 1996,
interest will accrue until maturity on the Subordinated Discount Debentures at
the rate of 12.75 percent per annum. Interest on the Subordinated Discount
Debentures is payable semiannually on May 15 and November 15, commencing
November 15, 1996. The Subordinated Discount Debentures will mature on May 15,
2005 and are subject to redemption on or after May 15, 1998 at the option of the
28
<PAGE>
Company, in whole or in part, at declining redemption prices commencing at
106.38 percent of the principal amount and declining to 100 percent of the
principal amount at May 15, 2003 and thereafter, plus accrued interest to the
date of redemption.
Upon the occurrence of a change of control (as defined), each holder of the
Subordinated Discount Debentures has the right to require the Company to
repurchase such holder's Subordinated Discount Debentures at a price equal to
101 percent of the principal amount thereof, plus accrued interest to the date
of repurchase; provided that, prior to May 15, 1996, such purchase will be at a
price equal to 101 percent of the accreted value of the Subordinated Discount
Debentures. In addition, the Company will be required to make an offer to
repurchase the Subordinated Discount Debentures at 100 percent of the principal
amount, or accreted value thereof, plus accrued interest to the date of
repurchase, in the event of certain asset sales.
The Company has various restrictions under (a), (d) and (f) which limit, among
other things, its ability to (i) incur additional obligations for money
borrowed, (ii) incur certain liens on the Company's assets, (iii) make capital
expenditures, (iv) incur guarantees, (v) acquire the assets or capital stock of
other businesses, (vi) dispose of any assets constituting collateral, (vii) make
any voluntary prepayments of any indebtedness for money borrowed, (viii) pay,
declare, or distribute dividends on or repurchase its capital stock or warrants,
except in certain limited circumstances and (ix) enter into certain transactions
with affiliates.
Subsequent to September 30, 1995, the Company repurchased approximately $65.3
million principal amount of its publicly traded debt securities. In conjunction
with the repurchase, approximately $1.4 million of deferred financing fees will
be written off. These transactions will result in an extraordinary loss of $2.6
million (including the write-off of deferred financing fees) in the first
quarter of fiscal 1996.
10. Accrued and Other Liabilities
Accrued and other liabilities consist of the following:
September 30,
-------------------
In millions 1995 1994
-------- -------
Current:
Accrued salaries and wages $ 39.6 $ 23.6
Other 33.3 28.0
----- -----
Total current 72.9 51.6
----- -----
Long-Term:
Accrued acquisition restructuring costs 2.0 3.1
Accrued pension expense 13.1 9.2
Casualty insurance liabilities 5.5 7.6
Other 6.9 10.8
----- -----
Total long-term 27.5 30.7
----- -----
Total $100.4 $ 82.3
===== =====
11. Preferred Stock
The Company is authorized to issue up to 25,000,000 shares of preferred stock.
The right of the holders of Class A Common Stock (see Note 12) voting as a class
are not to be limited by the grant of voting rights to any series of preferred
stock. Upon consummation of the Prepackaged Plan, the Company's Certificate of
Incorporation was amended to prohibit the issuance of non-voting preferred
stock.
12. Common Stock
At September 30, 1995 and 1994, the Company had authorized capital stock of
125,000,000 shares of Class A Common Stock, par value $.0001 per share (Class A
Common Stock), of which 54,124,530 shares and 48,510,859 shares were issued,
respectively, and 54,077,527 shares and 48,427,881 shares were outstanding,
respectively.
29
<PAGE>
At September 30, 1995 and 1994, the Company had authorized capital stock of
15,000,000 shares of Class B Common Stock, par value $.0001 per share (Class B
Common Stock and together with the Class A Common Stock, the Common Stock), of
which zero shares and 5,266,273 shares were issued and outstanding,
respectively. On July 31, 1995, all of the Company's 5,250,082 then outstanding
shares of Class B Common Stock automatically converted into an equal number of
shares of Class A Common Stock pursuant to the terms of the Prepackaged Plan.
Pursuant to the Prepackaged Plan, the Company issued approximately 31.8 million
Warrants to obtain one share of Class A Common Stock per Warrant.
Contemporaneously with the issuance of the Warrants, the Company issued an equal
number of shares of Class A Common Stock to the Warrant Trustee for issuance
upon exercise of the Warrants (the Trust Stock). The Warrants are exercisable
only for the shares of Trust Stock held by the Warrant Trustee and the Company
has no obligation to issue or deliver shares of stock pursuant to the Warrants.
The Warrant Trustee has agreed to hold the Trust Stock in trust and to deliver
shares of Trust Stock upon exercise of the Warrants by the holders thereof or
exchange of the Warrants on behalf of the Company. The Warrant Trustee will vote
all shares of Trust Stock in proportion to all other votes by holders of the
Common Stock, except upon the occurrence of certain votes (as defined).
In June 1995, the Company redeemed 25 percent of its 31,845,533 outstanding
Warrants, and subsequently, a portion of the remaining Warrants were exchanged
pursuant to a "Special Exercise on July 31, 1995." As a result, 13,836,754
Warrants were exchanged for Class A Common Stock.
The remaining 18,008,701 Warrants will be exercisable on or after July 31, 1996
and expire on November 2, 2002. Each Warrant will be exercisable into one share
of Class A Common Stock at an exercise price of $.0001 per Warrant, which amount
was paid upon consummation of the Prepackaged Plan with a portion of the
consideration received from exchanging noteholders and is non-refundable. The
Company may elect to exchange each unexercised Warrant for a fraction of one
share of Class A Common Stock if the average market price of the Class A Common
Stock exceeds specified exchange prices ($13.65 in calendar 1995 and $16.65 in
calendar 1996 and thereafter). The Company will have the option to redeem any or
all of the unexercised Warrants for one share of Class A Common Stock or for
cash at any time at the applicable exchange price.
In June 1995, the Board of Directors adopted a stockholder Rights Agreement that
provides for the distribution of one Preferred Share Purchase Right on each
share of Class A Common Stock. Generally, the rights become exercisable after a
person or group announces a tender offer for, or acquires, 15 percent or more of
the outstanding Class A Common Stock. In that event, each right becomes
exercisable to purchase one one-hundredth of a share of junior participating
preferred stock for $50. If 15 percent of the outstanding Class A Common Stock
is acquired, each right (other than the rights held by the acquiring person)
becomes exercisable to purchase, for $50, shares of Class A Common Stock with
a market value of $100. The rights will expire on June 30, 2005 and may be
redeemed by the Company for $0.0001 per right at any time prior to the date on
which 15 percent or more of the Class A Common Stock is acquired.
In February 1989, the Board authorized the repurchase of up to 500,000 shares of
Class A Common Stock. Shares purchased under the program are held as treasury
stock. The Company has no current intention to repurchase additional shares. At
September 30, 1995 and 1994, 47,003 shares and 82,978 shares, respectively, of
Class A Common Stock were held as treasury stock.
In July 1994, the Company established a stock purchase plan (the Plan) for all
full-time employees. The Plan permits employees to invest up to 10 percent of
their after-tax compensation (as defined) for the purchase of shares of Class A
Common Stock. All brokerage fees for the purchase of such shares are paid by the
Company. During Fiscal 1995 and Fiscal 1994, the Company issued 35,975 shares
and 2,722 shares, respectively, of Class A Common Stock held as treasury stock
to satisfy employee purchases pursuant to the Plan.
The Company neither declared nor paid dividends on its Common Stock during
Fiscal 1995, Fiscal 1994 or Fiscal 1993. The Company does not currently intend
to pay cash dividends on its Common Stock, but intends instead to retain future
earnings for reinvestment in the business and for repayment of debt. At
September 30, 1995, the Company was prohibited from declaring or paying cash
dividends on its Common Stock, except under certain limited circumstances (see
Note 9).
30
<PAGE>
13. Stock Option Plans
The Company maintains three stock-based plans pursuant to which stock options
may be granted at no less than the market price of the Class A Common Stock on
the date of grant: (i) the 1989 Long-Term Incentive Plan (the 1989 Plan), (ii)
the 1987 Key Employee Stock Option Plan (the 1987 Plan) and (iii) the Outside
Director Stock Option Plan (the Director Option Plan), which was terminated in
September 1991.
1989 Plan - The 1989 Plan authorizes the Company to grant options (including
both incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the Code), and nonqualified stock options),
stock appreciation rights, stock indemnification rights, restricted stock and
performance awards to officers and key employees. The Company has granted only
nonqualified stock options and restricted stock under the 1989 Plan. At
September 30, 1995, the Company was authorized to issue 2,279,833 shares of
Class A Common Stock, and had outstanding nonqualified stock options covering
1,204,617 shares of Class A Common Stock at exercise prices from $2.56 per share
to $11.625 per share. In general, the options have 10-year terms and vest at the
rate of 33-1/3 percent per year commencing approximately one year after the date
of grant so long as the optionee remains continuously in the employ of the
Company or one of its subsidiaries; provided, however, that 100 percent of such
options will vest immediately upon a change in control of the Company (as
defined) or the optionee's death or disability.
At September 30, 1995, options to purchase 605,008 shares of Class A Common
Stock at exercise prices ranging from $2.56 per share to $4.25 per share were
exercisable, 210,410 options had been exercised and 386,531 shares were
available for future grants under the 1989 Plan.
At September 30, 1995, the Company had outstanding 478,275 restricted shares of
Class A Common Stock under the 1989 Plan. Such shares are restricted in that
unvested shares will be forfeited in the event that the optionee's employment
terminates other than due to death, disability or retirement. The restricted
shares will vest 100 percent in the event of a change in control of the Company
or upon the recipient's retirement, death or disability. During Fiscal 1995, the
Company awarded 47,800 restricted shares of Class A Common Stock (2,000 of which
have been forfeited). As to the restricted shares granted during Fiscal 1995,
5,000 shares and 40,800 shares will become 100 percent vested in fiscal 1996 and
fiscal 1997, respectively. As to 432,475 restricted shares granted prior to
Fiscal 1995, 240,875 shares were 100 percent vested at September 30, 1995 and
179,600, 8,000, 3,000 and 1,000 will become 100 percent vested in fiscal 1996,
fiscal 1997, fiscal 1998 and fiscal 1999, respectively.
1987 Plan - The 1989 Plan superseded the 1987 Plan under which no additional
options may be granted except for shares of Class A Common Stock which became
available after September 30, 1988 due to expiration, termination without
exercise, unexercisability or forfeiture of any option granted under the 1987
Plan. The Company has reserved 854,467 shares of Class A Common Stock in
connection with grants under the 1987 Plan. At September 30, 1995, the Company
had outstanding nonqualified stock options under the 1987 Plan covering 557,153
shares of Class A Common Stock at exercise prices ranging from $1.24 per share
to $8.375 per share. During Fiscal 1995, the Company granted nonqualified stock
options under the 1987 Plan covering 5,000 shares of Class A Common Stock (none
of which have been forfeited) at an exercise price of $8.375. The options have
10-year terms and vest at the rate of 33-1/3 percent per year commencing
approximately one year after the date of grant so long as the optionee remains
continuously in the employ of the Company or one of its subsidiaries; provided,
however, that 100 percent of such options will vest immediately upon a change in
control of the Company (as defined) or the optionee's death or disability.
At September 30, 1995, options to purchase 521,563 shares of Class A Common
Stock at exercise prices ranging from $1.24 to $5.375 per share were exercisable
and 23,257, 10,666 and 1,667 will become exercisable in fiscal 1996, fiscal 1997
and fiscal 1998, respectively. At September 30, 1995, options for 275,002 shares
had been exercised and 22,312 shares were available for future grants.
Director Option Plan - The Director Option Plan authorized grants of stock
options to each director who was not an employee of the Company to receive stock
options in lieu of all or some specified portion of certain cash fees. The
Director Option Plan was terminated on September 26, 1991.
The Company has reserved 115,700 shares of Class A Common Stock in connection
with grants under the Director Option Plan. In the aggregate, the Company
granted options on 121,000 shares (5,300 of which have been forfeited) of Class
A Common Stock at exercise prices of $3.50 and $12.50 per share in lieu of
$220,000 of cash fees payable with respect to fiscal 1991 and fiscal 1990.
31
<PAGE>
At September 30, 1995, options to purchase 77,900 shares of Class A Common Stock
at exercise prices of $3.50 and $12.50 per share were exercisable and options
for 37,800 shares had been exercised under the Director Option Plan.
The following table details stock option activity (excluding restricted stock)
for Fiscal 1995, Fiscal 1994 and Fiscal 1993:
Stock Options Exercise Price
--------------------------------
Balance at September 30, 1992 1,359,879 $1.24 - $12.50
Grants during Fiscal 1993 452,500 $2.56 - $ 3.75
Cancellations (59,956) $2.56 - $ 4.38
---------
Balance at September 30, 1993 1,752,423 $1.24 - $12.50
Grants during Fiscal 1994 357,000 $3.75 - $ 6.25
Exercises (124,416) $1.24 - $ 3.75
Cancellations (91,904) $1.24 - $ 3.75
---------
Balance at September 30, 1994 1,893,103 $1.24 - $12.50
Grants during Fiscal 1995 294,000 $8.00 - $11.63
Exercises (306,648) $1.24 - $ 4.25
Cancellations (40,785) $1.24 - $ 8.63
---------
Balance at September 30, 1995 1,839,670 $1.24 - $12.50
=========
The following table details restricted stock activity for Fiscal 1995, Fiscal
1994 and Fiscal 1993:
Restricted Stock
----------------
Balance at September 30, 1992 236,825
Issued during Fiscal 1993 11,400
Cancellations (1,200)
-------
Balance at September 30, 1993 247,025
Issued during Fiscal 1994 213,600
Cancellations (23,100)
-------
Balance at September 30, 1994 437,525
Issued during Fiscal 1995 47,800
Cancellations (7,050)
-------
Balance at September 30, 1995 478,275
=======
32
<PAGE>
14. Leases
The Company has capital leases for certain equipment and leasehold improvements
included in Property-net. The present value of future minimum lease payments
relating to these leased assets are capitalized based on the lease contract
provisions. Capitalized amounts are amortized over either the term of the lease
or the normal depreciable life of the asset. All other leases are defined as
operating leases. Lease expenses related to operating leases are charged to
expense as incurred.
Future minimum lease payments at September 30, 1995 are as follows (in
millions):
Operating Capital
Fiscal Year Leases Leases
--------- -------
1996 $ 11.0 $ 5.6
1997 9.1 5.4
1998 6.8 4.5
1999 5.3 4.3
2000 4.4 3.0
2001 and thereafter 23.0 1.3
------- ------
Total future minimum lease payments $ 59.6 24.1
======
Less interest 5.1
------
Present value of future minimum lease payments $ 19.0
======
Rent expense for Fiscal 1995, Fiscal 1994 and Fiscal 1993 was $11.7 million,
$10.8 million and $10.2 million, respectively.
15. Employee Benefit Plans
Pension Plan - The Company has a noncontributory defined benefit pension plan
covering substantially all employees who are age 21 or older and have one or
more years of service. Pension benefits provided for certain union hourly
employees are established pursuant to the collective bargaining agreements in
effect with their respective unions. For hourly employees the normal retirement
benefit is determined by multiplying years of benefit service by a dollar amount
benefit factor separately determined for each bargaining unit. For salaried
employees, the plan generally provides a normal retirement benefit equal to the
greater of the benefit accrued at June 30, 1987 or 1.0 percent of final average
earnings (as defined) multiplied by years of credited service before January 1,
1994 plus 1.25 percent of final average earnings multiplied by years of credited
service after January 1, 1994 less 1.0 percent of primary Social Security
benefits for each year of credited service. The Company has an excess benefit
plan covering officers of the Company whose earned pension benefits would
otherwise be restricted by maximum benefit limitations imposed by Internal
Revenue Service regulations.
At September 30, 1995, the actuarial present value of accumulated benefit
obligations exceeded the fair market value of plan assets, and the Company
recognized a minimum pension liability adjustment of $4.9 million and a
corresponding reduction to stockholders' equity of $2.4 million. See below for
the impact on the minimum pension liability of a supplemental executive
retirement plan. The balance sheet provisions of Financial Accounting Standard
No. 87, "Employers' Accounting For Pensions" do not impact the Company's
required contributions under the Employee Retirement Income Security Act (ERISA)
or pension expense recognized for financial reporting.
In Fiscal 1995, the Company recorded a $5.4 million charge for costs associated
with an early retirement option accepted by certain hourly employees of the
Antioch mill, to reduce future labor costs.
33
<PAGE>
The components of net periodic pension cost follow:
Year Ended September 30,
-----------------------------
In millions 1995 1994 1993
------- ------- -------
Service cost $ 3.6 $ 4.1 $ 2.8
Interest cost 8.5 7.8 7.4
Return on plan assets (17.9) (2.7) (12.1)
Net amortization and deferral 9.7 (5.3) 4.7
Antioch mill early retirement 5.4 - -
----- ----- -----
Net pension cost $ 9.3 $ 3.9 $ 2.8
===== ===== =====
Assumptions used to develop the net periodic pension costs were:
Discount rate 8.0% 7.0% 8.5%
Expected rate of return on plan assets 9.0% 9.0% 9.0%
Expected rate of salary increases 5.0% 5.0% 5.0%
The discount rate used to determine the accrued pension liability at September
30, 1995 and 1994 was 7.5 percent and 8.0 percent, respectively. The discount
rate which will be used to determine net periodic pension cost in fiscal 1996 is
7.5 percent.
The status of the pension plan follows:
September 30,
-------------------
In millions 1995 1994
------- --------
Actuarial present value of benefit obligations:
Vested $112.4 $ 93.6
Nonvested 9.7 6.8
----- -----
Accumulated benefit obligation 122.1 100.4
Effect of salary progression 8.7 8.2
----- ------
Projected benefit obligation 130.8 108.6
Plan assets at market value (primarily government
securities, corporate bonds and common stock) (108.2) (92.0)
----- -----
Plan assets less than projected benefit obligations 22.6 16.6
Unrecognized net loss (11.1) (12.1)
Prior service benefit not yet recognized in
net periodic pension cost (2.6) (1.3)
Adjustment required to recognize minimum pension liability 4.9 5.2
----- -----
Accrued pension liability $ 13.8 $ 8.4
===== =====
The Company's funding policy is to contribute annually amounts necessary to
satisfy the statutory requirements of ERISA.
Supplemental Executive Retirement Plans - Under the terms of their employment
agreements, Marvin A. Pomerantz (Chairman, Chief Executive Officer and a
Director of the Company) and Warren J. Hayford (Former Vice Chairman and a
Director of the Company) will receive supplemental annual retirement income
payments at age 65 equal to approximately 50 percent of their average base
salary and bonus for their four most highly compensated years of service with
the Company, less primary Social Security benefits and any amounts received
under the Company's pension plan. The agreements also provide for the reduction
of benefits for early retirement. Mr. Hayford elected early retirement on
December 31, 1992 and is receiving benefits under the supplemental retirement
plan. An additional supplemental retirement plan covering four officers provides
annual retirement payments at age 65 equal to 60 percent of their average base
salary and bonus for the four highest of the last seven years prior to
retirement, less primary Social Security and any amounts received under the
Company's pension plan. Benefits are reduced for early retirement.
34
<PAGE>
At September 30, 1995 and 1994, the actuarial present value of projected benefit
obligations for the supplemental retirement income payments described above was
approximately $8.0 million and $6.1 million, respectively. At September 30,
1995, the actuarial present value of accumulated benefit obligations exceeded
the accrual for the vested portion of the obligation and the Company recognized
a minimum pension liability adjustment of $2.9 million and a corresponding
reduction to stockholders' equity of $1.9 million. Funding for the supplemental
retirement income payments is not subject to the statutory requirements of
ERISA, and no assets have been set aside to satisfy the liability. Required
supplemental annual retirement income payments will be made from general
corporate funds.
The components of net periodic pension cost for the supplemental executive
retirement plans follow:
Year Ended September 30,
---------------------------
In millions 1995 1994 1993
------- -------- --------
Service cost $ 0.2 $ 0.2 $ 0.6
Interest cost 0.4 0.3 0.3
Return on plan assets - - -
Net amortization and deferral 0.2 0.2 0.1
----- ----- -----
Net pension cost $ 0.8 $ 0.7 $ 1.0
===== ===== =====
Assumptions used to develop the net periodic pension costs were:
Discount rate 8.0% 7.0% 8.5%
Expected rate of return on plan assets - - -
Expected rate of salary increases 5.0% 0.0% 0.0%
The discount rate used to determine the accrued pension liability at September
30, 1995 and 1994 was 7.5 percent and 8.0 percent, respectively. The discount
rate which will be used to determine net periodic pension cost in fiscal 1996 is
7.5 percent.
Post-retirement Benefits Other Than Pensions - In connection with the
acquisition of its facilities, the Company assumed a liability for the estimated
cost of providing post-retirement medical coverage to age 65 for 96 salaried
employees who elected to take early retirement prior to June 30, 1987. In
addition, the Company has obligations to provide post-retirement medical
benefits to age 65 pursuant to collective bargaining agreements at four of its
facilities.
On October 1, 1992, the Company adopted FAS No. 106. Pursuant to the provisions
of FAS No. 106, the Company elected to immediately recognize its accumulated
benefit obligation under collective bargaining agreements at its facilities. As
a result, the Company recorded a charge to earnings in Fiscal 1993 for the
effect of an "Accounting Change" of $1.3 million. The net post-retirement
benefit cost for each of Fiscal 1995, Fiscal 1994 and Fiscal 1993 was $0.3
million. The Company funds benefit costs on a pay-as-you-go basis, and, for each
of Fiscal 1995, Fiscal 1994 and Fiscal 1993, the Company made benefit payments
of approximately $0.5 million.
The following table sets forth the plan's funded status, reconciled with amounts
recognized in the Company's balance sheet:
September 30,
-------------------
In millions 1995 1994
------- --------
Actuarial present value of post-retirement
benefits:
Retirees $ 3.8 $ 1.7
Fully eligible active plan participants 0.2 0.8
Other active plan participants 0.5 0.6
---- ----
Accumulated post-retirement benefit obligation 4.5 3.1
Plan assets at market value - -
---- ----
Accumulated post-retirement benefit
obligation in excess of plan assets $ 4.5 $ 3.1
==== ====
35
<PAGE>
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation at September 30, 1995 was 9.0 percent in 1996
gradually declining to 6.0 percent in 1999 and thereafter. The assumed health
care cost trend rate used in measuring the accumulated post-retirement benefit
obligation at September 30, 1994 was 10.0 percent in 1995 gradually declining to
6.0 percent in 1999 and thereafter. The discount rate used in determining the
accumulated post-retirement benefit obligation at September 30, 1995 and 1994
was 7.5 percent and 8.0 percent, respectively. If the health care cost trend
rate assumptions were increased by 1 percent, the accumulated post-retirement
benefit obligation at September 30, 1995 would be increased by approximately
$0.1 million, or 2 percent. The effect of this change on the sum of the service
cost and interest cost components of net periodic post-retirement benefit costs
would be an increase of approximately 3 percent.
Savings Plan - In October 1987, the Company established a defined contribution
retirement savings plan (Section 401K Plan) covering substantially all salaried
employees of the Company subject to certain service requirements for different
aspects of participation. The Section 401K Plan provides for employees to make
contributions on a pre-tax basis up to a maximum of 15 percent of their
compensation (as defined) each year, with their maximum annual contribution
determined pursuant to Internal Revenue Service regulations. Prior to January 1,
1994, the Company contributed to each participant's plan account an amount equal
to 50 percent of the participant's contribution up to a maximum of 2 percent of
the participant's compensation. Subsequent to January 1, 1994, the Company
contributed to each participant's plan account an amount equal to 75 percent of
the participant's contribution up to a maximum of 3 percent of the participant's
compensation. The Company may also make additional discretionary contributions
to the Section 401K Plan. For Fiscal 1995, Fiscal 1994 and Fiscal 1993, the
Company's cost relating to the Section 401K Plan was $1.6 million, $1.4 million
and $2.0 million, respectively.
16. Commitments and Contingencies
The Company has various agreements which provide for the purchase at market
prices of wood chips, hog fuel (bark and other residual fiber from trees) and
stumpage.
The Company has a commitment to sell electricity from its cogeneration facility
to a utility through 2013. The Company does not intend to terminate this
contract; however, if terminated, penalties of approximately $8.3 million could
be imposed.
The Company has an agreement to purchase at market prices through 1999 the
entire production of an unbleached kraft paper machine at a Riverwood
International U.S.A., Inc. pulp and paper mill. The capacity of this machine is
estimated to be 35,000 tons per year.
The Company is not a party to any legal proceedings other than litigation
incidental to normal business activities, except as described below:
The Company and certain of its officers and directors have been named in a civil
suit filed in Cook County (Illinois) Circuit Court alleging that they omitted or
misrepresented facts about the Company's operations in connection with the
Company's initial public offering of stock in 1988 and in certain periodic
reports. The complaint, a purported class action, originally sought unspecified
damages under the Illinois Consumer Fraud and Deceptive Practices Act and for
common law fraud. The court has dismissed with prejudice the count premised on
the Illinois Consumer Fraud and Deceptive Practices Act, and plaintiff has
attempted to replead a count based on common law fraud, which the Company has
moved to dismiss. A similar lawsuit, based on the same factual allegations, but
alleging violations of Federal securities laws and filed in the United States
District Court for the Northern District of Illinois, was voluntarily dismissed
by the same plaintiff in July 1993. The Company believes that, after
investigation of the facts, the allegations in the complaint are without merit,
and the Company is vigorously defending itself and its officers and directors.
36
<PAGE>
On October 18, 1995, the Company, its directors and certain of its officers were
named in complaints in the Court of Chancery of the state of Delaware alleging
breach of fiduciary duties on two counts. The first count is a putative class
action brought on the behalf of the Company's stockholders, and the second is a
derivative count brought on behalf of the Company against the individual
defendants. Both counts allege that the Company's stockholder Rights Agreement,
adopted on June 12, 1995, amendments to the Company's charter and by-laws,
adopted on July 21, 1995, and redemption of Warrants in June 1995 all were
designed to entrench the individual defendants in their capacities as directors
and officers at the expense of stockholders who otherwise would have been able
to take advantage of a sale of the Company. The complaints ask the court, among
other things, to rescind the amendments and prohibit the use of the stockholder
Rights Agreement to discourage any bona fide acquirer. In the alternative, the
plaintiffs seek compensatory damages. The Company believes the allegations are
without merit and is vigorously defending itself.
On October 23, 1995, a rail tank car accident occurred at the Bogalusa,
Louisiana plant of Gaylord Chemical Corporation, a wholly owned subsidiary of
the Company. The accident resulted in the venting of nitrogen tetroxide, a raw
material used by the plant to produce dimethyl sulfoxide, a solvent used in the
manufacture of pharmaceutical and agricultural chemicals. Approximately 49
lawsuits have been filed in both state and federal courts in Louisiana naming
Gaylord Chemical Corporation, the Company, certain of their respective officers
and other unrelated corporate and individual defendants. The 13 federal actions
have been consolidated in the Eastern District of Louisiana and the 36 state
actions were removed from state court in Washington Parish, Louisiana and are
pending with the federal actions. The lawsuits, primarily purported class
actions, seek to assert claims based on, among other things, negligence, strict
liability and violations of the federal Comprehensive Environmental Response,
Compensation and Liability Act. Compensatory and punitive damages are sought.
The Company and its subsidiary are vigorously contesting the claims. The Company
maintains insurance and has filed actions seeking a declaratory judgment of
insurance coverage against its general liability and directors and officers
liability insurance carriers. The insurers have not filed answers, but the
primary carrier under the general liability policy has agreed to pay defense
costs under a reservation of rights.
The Company believes the outcome of such litigation will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
17. Fair Value of Financial Instruments
The Company adopted Financial Accounting Standard No. 107, "Disclosure About
Fair Value of Financial Instruments" (FAS No. 107), for the year ended September
30, 1993. The following disclosure of the fair value of financial instruments is
made in accordance with the requirements of FAS No. 107. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgment is
required, however, in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a market exchange.
The use of different market assumptions and/or methodologies could have a
material effect on the estimated fair value amounts. The estimated fair value of
financial instruments at September 30, 1995 is as follows:
Estimated
Carrying Fair
Amount Value
In millions -------- ---------
Assets
Cash and equivalents $ 32.5 $ 32.5
Trade receivables 140.0 140.0
Long-term notes receivable 12.7 13.1
Liabilities
Trade payables 51.7 51.7
Senior and subordinated notes 626.6 662.8
Capital lease obligations 19.0 19.0
Other senior debt 41.5 41.5
37
<PAGE>
Cash and equivalents, trade receivables, trade payables and capital lease
obligations - The carrying amount of these items are a reasonable estimate of
their fair value.
Senior and subordinated notes - Estimated fair value is based on estimates
obtained from dealers/brokers.
Long-term notes receivable and other senior debt - Interest rates that are
currently available to the Company for similar terms and remaining maturities
are used to estimate fair value.
The fair value estimates presented herein are based on pertinent information
available to the Company at September 30, 1995. Although the Company is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been revalued for purposes of these financial
statements since that date, and current estimates of fair value may differ
significantly from the amounts presented herein.
The Company is not a party to any lending or borrowing arrangements that are
considered to be derivative financial instruments.
18. Supplemental Cash Flow Disclosures
The balance sheet effects of non-cash transactions which are not reflected in
the consolidated statements of cash flows and other supplemental cash flow
disclosures are as follows:
Year Ended September 30,
--------------------------------
In millions 1995 1994 1993
--------- --------- ---------
Cash paid for interest expense $ 35.5 $ 37.8 $ 42.4
===== ===== =====
Supplemental schedule of non-cash
investing and financing activities:
Fair value of non-cash assets acquired - - 4.9
===== ===== =====
Property additions 45.1 8.4 -
===== ===== =====
Increase in total debt 45.1 - -
===== ===== =====
Increase in accrued and other liabilities - 4.5 -
===== ===== =====
Increase in other long-term liabilities - 3.9 -
===== ===== =====
Write-off of deferred financing fees - - 11.4
===== ===== =====
Exchange of old subordinated debt - - 582.8
===== ===== =====
Cancellation of accrued interest on old
subordinated debt exchanged - - 134.5
===== ===== =====
Issuance of Senior Subordinated Notes - - 377.7
===== ===== =====
Accrued interest from January 1, 1992
through November 1, 1992 paid in
additional 10-1/4% Senior Subordinated
PIK Notes Due 2001 - - 10.6
===== ===== =====
Deferred tax on extraordinary gain - - 1.2
===== ===== =====
Issuance of Class A Common Stock - - 18.0
===== ===== =====
Issuance of Class A Common Stock
to Warrant Trustee - - 70.0
===== ===== =====
38
<PAGE>
19. Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
Quarter
-------------------------------------------------
In millions, except per share data 1st 2nd 3rd 4th Year
------- ------- ------- ------- --------
Fiscal 1995
<S> <C> <C> <C> <C> <C>
Net sales $241.2 $256.3 $285.2 $268.7 $1,051.4
Gross margin 57.1 74.5 85.4 79.4 296.4
Net income 11.8 27.5 39.8 55.1 134.2
Net income per common and common
equivalent share 0.21 0.51 0.72 1.00 2.44
Weighted average common and common
equivalent shares outstanding 54.9 55.1 55.2 55.2 55.1
Common stock price (AMEX)
High 9 3/4 13 7/8 15 1/2 13 3/8 15 1/2
Low 7 1/2 7 3/4 7 3/4 9 7 1/2
Warrant price (AMEX)
High 8 1/8 10 7/8 11 7/8 11 1/2 11 7/8
Low 5 7/8 6 1/2 7 1/4 8 1/4 5 7/8
Fiscal 1994
Net sales $183.9 $182.5 $203.2 $214.8 $ 784.4
Gross margin 16.7 19.1 23.9 33.3 93.0
Net loss (23.0) (22.6) (19.7) (18.7) (84.0)
Net loss per common and common
equivalent share (0.43) (0.42) (0.37) (0.35) (1.57)
Weighted average common and common
equivalent shares outstanding 53.5 53.6 53.6 53.7 53.6
Common stock price (AMEX)
High 4 3/4 6 7/8 6 1/4 8 3/4 8 3/4
Low 2 4 3/8 4 3/8 5 1/4 2
Warrant price (AMEX)
High 4 5 3/8 4 3/4 7 1/8 7 1/8
Low 1 5/8 3 1/4 3 1/8 3 7/8 1 5/8
Fiscal 1993
Net sales $176.8 $181.5 $188.0 $187.2 $ 733.5
Gross margin 25.8 23.4 15.5 16.7 81.4
Loss before extraordinary item
and accounting change (13.7) (11.8) (24.0) (20.5) (70.0)
Extraordinary item 201.5 - - - 201.5
Accounting change (1.3) - - - (1.3)
Net income (loss) 186.5 (11.8) (24.0) (20.5) 130.2
Earnings per common and common
equivalent share:
Loss before extraordinary item
and accounting change (0.35) (0.22) (0.45) (0.38) (1.40)
Extraordinary item 5.14 - - - 4.04
Accounting change (0.03) - - - (0.03)
Net income (loss) 4.76 (0.22) (0.45) (0.38) 2.61
Weighted average common and common
equivalent shares outstanding (a) 39.2 53.4 53.4 53.4 49.8
Common stock price (AMEX)
High 3 3/4 4 3 1/4 2 3/4 4
Low 2 3/8 2 5/8 2 3/16 1 7/8 1 7/8
Warrant price (AMEX)
High 3 1/4 3 1/2 2 9/16 2 1/4 3 1/2
Low 1 13/16 2 1/4 1 5/8 1 3/8 1 3/8
(a) On November 2, 1992, upon consummation of the Prepackaged Plan, the Company
issued approximately 37.8 million shares of Class A Common Stock (including
shares issuable upon exercise of Warrants) and approximately 31.8 million
Warrants. (See Note 12).
39
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
See the section captioned Executive Officers of the Registrant under Part I of
this Report for information concerning the Company's executive officers.
For information concerning the directors of the Company, see the sections
captioned Nominees for Election at the 1996 Annual Meeting and Directors in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held February 8, 1996. Said sections are incorporated by
reference herein.
Item 11. Executive Compensation
There is incorporated by reference herein from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held February
8, 1996 the sections therein captioned Executive Compensation and Employment
Agreements.
Item 12. Security Ownership of Certain Beneficial Owners and Management
There is incorporated by reference herein from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held February
8, 1996 the section therein captioned Information With Respect to Certain
Stockholders.
Item 13. Certain Relationships and Related Transactions
There is incorporated by reference herein from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held February
8, 1996 the section therein captioned Certain Transactions.
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
a. Financial Statement Schedule. The following Financial Statement Schedule is
filed with this Annual Report on Form 10-K on the pages indicated:
Description Page
- ------------------------------------------------------------------------
II. Valuation and Qualifying Accounts and Reserves 47
All other schedules have been omitted because the information is either not
required or is included in the Consolidated Financial Statements or Notes to
Consolidated Financial Statements listed under Item 8.
b. On July 5, 1995, the Company filed a Current Report on Form 8-K describing
the adoption by the Board of Directors of a stockholder Rights Agreement and an
amendment of the Company's by-laws.
c. Exhibits. Each Exhibit is listed according to the number assigned to it in
the Exhibit Table of Item 601 of Regulation S-K. For the purposes of complying
with the amendments to the rules governing Form S-8 (effective July 13, 1990)
under the Securities Act of 1933, the undersigned registrant hereby undertakes
as follows, which undertaking shall be incorporated by reference into
registrant's Registration Statements on Form S-8 No. 33-25675 (filed November
28, 1988), No. 33-32221 (filed November 27, 1989), No. 33-33977 (filed March 21,
1990), No. 33-33871 (filed March 21, 1990) and No. 33-54367 (filed June 29,
1994):
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expense incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
40
<PAGE>
Exhibit Index
Number and Description of Exhibit
3.1 Amended and Restated Certificate of Incorporation of the Registrant, as of
July 21, 1995, incorporated by reference to Exhibit 3.1 of the Registrant's
Quarterly Report on Form 10-Q (No. 1-9915) for the quarter ended June 30, 1995
filed under the Securities Exchange Act of 1934, as amended (the June 30, 1995
Form 10-Q)
3.2 Amended and Restated by-laws of the Registrant, as amended, incorporated by
reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed
on July 5, 1995 under the Securities Act of 1934, as amended (the July 5,
1995 Form 8-K)
4.1 Credit Agreement dated as of November 17, 1986, as amended and restated as
of June 30, 1995 by and between the Registrant, the financial institutions
signatory thereto, Bankers Trust Company, as Agent and Co-Manager and
Wells Fargo Bank National Association, as Co-Manager, incorporated by
reference to the June 30, 1995 Form 10-Q
4.2 Credit Agreement dated as of October 31, 1989 between the Registrant and
the Export-Import Bank of the United States incorporated by reference to
Exhibit 4.21 of the Registrant's Annual Report on Form 10-K (No. 1-9915)
for the year ended September 30, 1990, filed under the Securities Exchange
Act of 1934, as amended
4.3 Specimen Certificate for the Class A Common Stock, par value $.0001 per
share, of the Registrant, incorporated by reference to Exhibit 4.5 of the
Registrant's Current Report on Form 8-K filed on October 30,1992 under the
Securities Exchange Act of 1934, as amended (the October 30, 1992 Form
8-K)
4.4 Warrant Agreement between the Registrant and Harris Trust and Savings Bank,
as Warrant Agent, relating to the Registrant's Redeemable Exchangeable
Warrants, incorporated by reference to Exhibit 4.3 of the October 30, 1992
Form 8-K
4.5 Specimen Certificate for the Redeemable Exchangeable Warrants of the
Registrant, incorporated by reference to Exhibit 4.6 of the October 30,
1992 Form 8-K
4.6 Trust Agreement between the Registrant and Harris Trust and Savings Bank,
as Warrant Agent, relating to the Class A Common Stock obtainable upon
exercise of the Redeemable Exchangeable Warrants, incorporated by
reference to Exhibit 4.4 of the October 30, 1992 Form 8-K
4.7 Rights Agreement, dated June 12, 1995, between the Registrant and Harris
Trust and Savings Bank as Rights Agent, including the form of Certificate
of Designation, Preferences and Rights of Junior Participating Preferred
Stock, Series A, attached thereto, as Exhibit A, the form of Rights
Certificate attached thereto as Exhibit B and the Summary of Rights attached
thereto as Exhibit C, incorporated by reference to Exhibit 4.1 of the July
5, 1995 Form 8-K
4.8 Form of Indenture between the Registrant and Shawmut Bank Connecticut,
National Association as Trustee, relating to the Registrant's 11-1/2%
Senior Notes Due 2001, incorporated by reference to Exhibit 4(a) of the
Registrant's Registration Statement on Form S-3 (No. 33-60016), as
amended, filed under the Securities Act of 1933, as amended (the 1993 Debt
Registration Statement)
4.9 Specimen Certificate of the Registrant s 11-1/2% Senior Notes Due 2001,
incorporated by reference to Exhibit 4(b) of the 1993 Debt Registration
Statement
(a) Filed with this Annual Report
41
<PAGE>
4.10 Form of Indenture between the Registrant and Ameritrust Texas, National
Association as Trustee, relating to the Registrant's 13-3/4% Senior
Subordinated Discount Debentures Due 2005, incorporated by reference to
Exhibit 4(c) of the 1993 Debt Registration Statement
4.11 Specimen Certificate of the Registrant's 13-3/4 % Senior Subordinated
Discount Debentures Due 2005, incorporated by reference to Exhibit 4(d) of
the 1993 Debt Registration Statement
4.12 Subscription and Stockholder Agreement dated as of September 24, 1993
between the Registrant and Gaylord Receivables Corporation, incorporated
by reference to Exhibit 4.13 of the Registrant's Annual Report on Form 10-K
(No. 1-9915) for the year ended September 30, 1993, filed under the Securities
Exchange Act of 1934, as amended (the 1993 Form 10-K)
4.13 Receivables Purchase Agreement dated as of September 24, 1993 between the
Registrant and Gaylord Receivables Corporation, incorporated by reference
to Exhibit 4.14 of the 1993 Form 10-K
4.14 Gaylord Receivables Master Pooling and Servicing Agreement dated as of
September 24, 1993 between the Registrant and Gaylord Receivables
Corporation, incorporated by reference to Exhibit 4.15 of the 1993 Form 10-K
4.15 Revolving Credit Agreement dated as of September 24, 1993 between Gaylord
Receivables Corporation, the financial institutions signatory thereto and
Harris Trust and Savings Bank as Facility Agent, incorporated by reference
to Exhibit 4.16 of the 1993 Form 10-K
4.16 Security Agreement dated as of September 24, 1993 between Gaylord
Receivables Corporation and Harris Trust and Savings Bank, incorporated by
reference to Exhibit 4.17 of the 1993 Form 10-K
4.17 Series 1993-1 A-RI Supplemental Issuance Agreement dated as of September
24, 1993 by and between the Registrant, Gaylord Receivables Corporation
and Manufacturers and Traders Trust Company, as Trustee, incorporated by
reference to Exhibit 4.1 of the Registrant's Quarterly Report on Form 10-Q
(No. 1-9915) for the quarter ended December 31, 1993, filed under the Securities
Exchange Act of 1934, as amended
10.1 Employee Benefits Agreement, as amended, by and between the Registrant,
Crown Zellerbach Corporation and Gaylord Holdings Limited dated as of
March 28, 1986, incorporated by reference to Exhibit 10.5 of the
Registrant's Registration Statement on Form S-1 (No. 33-13455), as
amended, filed under the Securities Act of 1933, as amended (the 1986 Debt
Registration Statement)
10.2 Bogalusa Hog Fuel Supply Agreement by and between the Registrant and
Cavenham Forest Industries, Inc. dated as of March 28, 1986, incorporated
by reference to Exhibit 10.8 of the 1986 Debt Registration Statement
10.3 Bogalusa Hog Fuel Supply Agreement (St. Francisville) by and between the
Registrant and Crown Zellerbach Corporation dated as of March 31, 1986,
incorporated by reference to Exhibit 10.9 of the 1986 Debt Registration
Statement
(a) Filed with this Annual Report
42
<PAGE>
10.4 Bogalusa Sawmill Agreement by and between the Registrant and Cavenham
Forest Industries, Inc. dated as of March 28, 1986, incorporated by
reference to Exhibit 10.11 of the 1986 Debt Registration Statement
10.5 Bogalusa Timberland Agreement by and between the Registrant and Cavenham
Forest Industries, Inc. dated as of March 28, 1986, incorporated by
reference to Exhibit 10.12 of the 1986 Debt Registration Statement
10.6 Transfer and Assumption Agreement by and between the Registrant and Gaylord
Container Limited dated as of November 17, 1986, incorporated by reference
to Exhibit 10.16 of the 1986 Debt Registration Statement
10.7 Undertaking by and between the Registrant and Crown Zellerbach Corporation
dated as of May 2, 1986, incorporated by reference to Exhibit 10.17 of the
1986 Debt Registration Statement
10.8 Transaction Agreement by and between James River Corporation of Virginia
and Crown Zellerbach Corporation dated as of December 14, 1985, incorporated
by reference to Exhibit 10.18 of the 1986 Debt Registration Statement
10.9 Chip Supply Agreement by and between the Registrant and Fibreboard
Corporation dated as of February 22, 1988, incorporated by reference to
Exhibit 10.19 of the Registrant's Registration Statement on Form S-1 (No.
33-21227), as amended, filed under the Securities Act of 1933, as amended
(the 1988 Debt Registration Statement)
10.10 Wood Chip Purchase and Sale Agreement by and between the Registrant and
Louisiana-Pacific Corporation dated as of February 22, 1988, incorporated
by reference to Exhibit 10.20 of the 1988 Debt Registration Statement
10.11 Stockholder Agreement by and among the Registrant and the Persons listed
on the signature pages thereto dated as of June 1, 1988, incorporated by
reference to Exhibit 10.22
10.12 Agreement among the Registrant and the Persons listed on the signature
pages thereto dated as of June 1, 1988, incorporated by reference to Exhibit
10.23 of the 1988 Debt Registration Statement
10.13 Bogalusa Roundwood Supply and Cutting Rights Agreement by and between the
Registrant and Cavenham Forest Industries, Inc. dated as of March 28, 1986,
incorporated by reference to Exhibit 10.10 of the 1986 Debt Registration
Statement
10.14 Letters dated March 1, 1991 and March 19, 1991 between the Registrant and
Cavenham Forest Industries, Inc., amending the Bogalusa Roundwood Supply and
Cutting Rights Agreement dated as of March 28, 1986, incorporated by reference
to Exhibit 10(e) of the Registrant's Proxy Statement - Prospectus on Form S-4
(No. 33-41799) as amended, filed under the Securities Act of 1933, as amended
(the 1991 Proxy Statement - Prospectus)
10.15 Bogalusa Wood Chip Supply Agreement by and between the Registrant and
Cavenham Forest Industries, Inc., dated as of March 28, 1986, incorporated
by reference to Exhibit 10.13 of the 1986 Debt Registration Statement
(a) Filed with this Annual Report
43
<PAGE>
10.16 Letters dated March 1, 1991 and March 19, 1991 between the Registrant and
Cavenham Forest Industries, Inc. amending the Bogalusa Wood Chip Supply
Agreement dated as of March 28, 1986, incorporated by reference to Exhibit
10(i) of the 1991 Proxy Statement - Prospectus
10.17 Power Purchase Agreement by and between Pacific Gas & Electric Company and
Crown Zellerbach Corporation dated as of December 29, 1982, incorporated
by reference to Exhibit 10.14 of the 1986 Debt Registration Statement
10.18 Indemnification Agreement by and between the Registrant, Crown Zellerbach
Corporation and Cavenham Forest Industries, Inc. dated as of November 17,
1986 regarding Power Purchase Agreement by and between Pacific Gas & Electric
Company and Crown Zellerbach Corporation dated as of December 29, 1982,
incorporated by reference to Exhibit 10.15 of the 1986 Debt Registration
Statement
10.19 Employment Agreement by and between the Registrant and Marvin A. Pomerantz
dated January 1, 1993, incorporated by reference to Exhibit 10.20 of the 1993
Form 10-K
10.20 Employment Agreement by and between the Registrant and Warren J. Hayford
dated as of May 18, 1988, incorporated by reference to Exhibit 10.2 of the 1988
Debt Registration Statement
10.21 Amendment No. 1 to Employment Agreement between the Registrant and Warren
J. Hayford dated February 8, 1989, incorporated by reference to Exhibit
10.26 of the 1989 Debt Registration Statement
10.22 Employment Letter Agreement by and between the Registrant and Dale E.
Stahl, dated as of November 22, 1993, incorporated by reference to Exhibit
10.25 of the 1993 Form 10-K
10.23 Employment Letter Agreement by and between the Registrant and Daniel P.
Casey, dated as of November 22, 1993, incorporated by reference to Exhibit
10.27 of the 1993 Form 10-K
10.24 Employment Letter Agreement by and between the Registrant and Lawrence G.
Rogna, dated as of November 22, 1993, incorporated by reference to Exhibit
10.29 of the 1993 Form 10-K
10.25 Stock Retention Agreement dated June 25, 1992 between the Registrant and
Mid-America Group, Ltd., incorporated by reference to Exhibit 10(nn) of the 1991
Proxy Statement - Prospectus
10.26 Stock Retention Agreement dated June 25, 1992 between the Registrant and
Warren J. Hayford, incorporated by reference to Exhibit 10(pp) of the 1991
Proxy Statement - Prospectus
10.27 Gaylord Container Corporation 1987 Key Employee Stock Option Plan,
incorporated by reference to Exhibit 28 of the Registrant's Registration
Statement on Form S-8 (No. 33-25675) filed under the Securities Act of
1933, as amended
(a) Filed with this Annual Report
44
<PAGE>
10.28 Gaylord Container Corporation 1989 Long-Term Incentive Plan, incorporated
by reference to Exhibit 28.1 of the Registrant's Registration Statement on
Form S-8 (No. 33-33977) filed under the Securities Act of 1933, as amended
10.29 Gaylord Container Corporation Outside Director Stock Option Plan,
incorporated by reference to Exhibit 28 of the Registrant's Registration
Statement on Form S-8 (No. 33-33871) filed under the Securities Act of
1933, as amended
10.30 Gaylord Container Retirement Plan
10.31 Gaylord Retirement Savings Plan
10.32 Gaylord Retirement Savings Plan for Hourly Employees
10.33 Gaylord Container Corporation Management Incentive Plan
10.34 Gaylord Container Corporation Shareholder Value Plan
10.35 Gaylord Container Corporation Supplemental Retirement Plan
10.36(a) Gaylord Container Corporation Supplemental Executive Retirement Plan
10.37(a) Deferred Compensation Plan for Non-employee Directors
21.1 Subsidiaries of the Registrant, incorporated by reference to Exhibit 21.1
of the 1993 Form 10-K
23.1(a) Consent of Deloitte & Touche LLP
24.1(a) Power of Attorney
27.1(a) Financial Data Schedule
(a) Filed with this Annual Report.
45
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 12th day of
December, 1995.
Gaylord Container Corporation
By /s/ Marvin A. Pomerantz
--------------------------
Marvin A. Pomerantz
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on the 12th day of December, 1995, by the following
persons on behalf of the Registrant and in the capacities indicated.
Signature Title
/s/ Marvin A. Pomerantz Chairman, Chief Executive Officer and Director
- ------------------------
Marvin A. Pomerantz (Principal Executive Officer)
/s/ Daniel P. Casey Executive Vice President
- ------------------------
Daniel P. Casey (Principal Financial Officer)
/s/ Jeffrey B. Park Vice President-Corporate Controller
- ------------------------
Jeffrey B. Park (Principal Accounting Officer)
/s/ Frank E. Babb* Director
- -------------------------
Frank E. Babb
/s/ Norman H. Brown Jr.* Director
- -------------------------
Norman H. Brown Jr.
/s/ Harve A. Ferrill* Director
- -------------------------
Harve A. Ferrill
/s/ John E. Goodenow* Director
- -------------------------
John E. Goodenow
/s/ David B. Hawkins* Director
- -------------------------
David B. Hawkins
/s/ John Hawkinson* Director
- -------------------------
John Hawkinson
/s/ Warren J. Hayford* Director
- -------------------------
Warren J. Hayford
/s/ Richard S. Levitt* Director
- -------------------------
Richard S. Levitt
/s/ Ralph L. MacDonald Jr.* Director
- -------------------------
Ralph L. MacDonald Jr.
/s/ Thomas H. Stoner* Director
- -------------------------
Thomas H. Stoner
*By Daniel P. Casey
Attorney-in-fact
46
<PAGE>
Gaylord Container Corporation and Subsidiaries
Schedule II - Valuation and Qualifying Accounts and Reserves
</TABLE>
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged to Balance
beginning costs and other at end of
In Millions of year expenses accounts Deductions year
--------- --------- ---------- ---------- ---------
For the Year ended September 30, 1993:
<S> <C> <C> <C> <C> <C>
Allowance for accounts receivable $ 3.8 $ 13.1 $ - $(12.4) $ 4.5
===== ===== ===== ===== =====
Reserves - asset write-down $ 31.6 $ - $ - $ (0.9) $ 30.7
===== ===== ===== ===== =====
Reserves - purchase adjustments-
accrued restructuring costs $ 4.3 $ 2.6 $ - $ (2.5) $ 4.4
===== ===== ===== ===== =====
Reserves long-term - purchase
adjustments - accrued
restructuring costs $ 4.6 $ - $ (2.1) $ - $ 2.5
===== ===== ===== ===== =====
For the Year ended September 30, 1994:
Allowance for accounts receivable $ 4.5 $ 9.9 $ - $(10.7) $ 3.7
===== ===== ===== ===== =====
Reserves - asset write-down $ 30.7 $ - $ - $ (1.1) $ 29.6
===== ===== ===== ===== =====
Reserves - allowance for abandonments $ - $ 5.3 $ - $ - $ 5.3
===== ===== ===== ===== =====
Reserves - purchase adjustments-
accrued restructuring costs $ 4.4 $ - $ (0.3) $ (2.9) $ 1.2
===== ===== ===== ===== =====
Reserves long-term - purchase
adjustments- accrued
restructuring costs $ 2.5 $ 0.4 $ 0.2 $ - $ 3.1
===== ===== ===== ===== =====
For the Year ended September 30, 1995:
Allowance for accounts receivable $ 3.7 $26.7 $ - $(23.9) $ 6.5
===== ===== ===== ===== =====
Reserves - asset write-down $ 29.6 $ - $ - $ (2.0) $ 27.6
===== ===== ===== ===== =====
Reserves - allowance for abandonments $ 5.3 $ - $ - $ (4.3) $ 1.0
===== ===== ===== ===== =====
Reserves - purchase adjustments-accrued
restructuring costs $ 1.2 $ - $ 1.2 $ (1.2) $ 1.2
===== ===== ===== ===== =====
Reserves long-term - purchase
adjustments- accrued
restructuring costs $ 3.1 $ 0.1 $ (1.2) $ - $ 2.0
===== ===== ===== ===== =====
47
</TABLE>
GAYLORD CONTAINER CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE 1
Introduction
1.1 The Plan and Its Effective Date. Gaylord
Container Corporation Supplemental Executive Retirement Plan (the
"plan") has been established by Gaylord Container Corporation, a
Delaware corporation (the "company"), effective June 1, 1995 (the
"effective date").
1.2 Purpose. The company maintains the Gaylord
Container Retirement Plan (the "retirement plan"), which is
intended to meet the requirements of a "qualified plan" under the
Internal Revenue Code. The purpose of this plan is to provide to
a select group of management or highly compensated employees
benefits in addition to those provided under the retirement plan.
ARTICLE 2
Participation and Benefits
2.1 Eligibility. The persons designated by the
Compensation Committee of the Board of Directors (the
"committee"), shall be participants in the plan. On the
effective date, the following persons have been designated as
participants:
Dale E. Stahl President and Chief Operating
Officer
Daniel P. Casey Executive Vice President and
Chief Financial Officer
Lawrence G. Rogna Senior Vice President
R. Bruce Grimm Vice President, Primary Products
Sales & Marketing
2.2 Normal Benefits. Subject to the provisions of
section 2.3 of the plan and the conditions and limitations of the
plan, a participant shall be entitled to receive under this plan
an annual pension benefit in an amount equal to the excess of (a)
over (b) below:
(a) the participant's "final average pay"
multiplied by the "applicable percentage."
(b) the benefit payable under the retirement plan
plus the participant's annual primary Social Security
benefit, as defined in the retirement plan.
A participant's final average pay shall be the average
of the participant's base salary plus incentive awards, excluding
awards under the Shareholder Value Plan, for each of the four
<PAGE>
calendar years during the last seven calendar years of the
participant s employment for which such total base salary plus
incentive awards received by such participant was greatest.
A participant's applicable percentage shall be
determined in accordance with the following table, based on the
participant's age on the date of termination of employment.
Age % Final Average Pay
65 60%
64 57.5
63 55
62 50
61 45
60 40
55 35
2.3 Termination Prior to Age 55. A participant who
retires or terminates employment on or after age 55 with five
years of service shall be entitled to the normal age 55 benefit
set forth in section 2.2. If a participant terminates employment
prior to age 55 with five years of service, his benefit shall be
his normal age 55 benefit multiplied by a fraction, the numerator
of which is his actual years of service and the denominator of
which is the number of years of service he would have if he
terminated employment on the day he attains age 55.
If a participant terminates employment before being
credited with five years of service, his benefit shall be further
reduced in accordance with the following schedule:
Years of Service % of Benefit Payable
1 20%
2 40
3 60
4 80
2.4 Change in Control. Notwithstanding anything
herein, in the event of a "change in control," the right of a
participant to elect a lump sum payment shall be absolute and not
subject to the consent of the committee and the benefit payable
to a participant who has not attained age 55 shall be the normal
age 55 benefit without the reduction set forth in section 2.3. A
"change in control" shall be deemed to have occurred if and when
(a) any person (as such term in defined in Section 3(a)(9), 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934) is or
becomes a beneficial owner, directly or indirectly, of securities
of the company representing 25% or more of the combined voting
power of the company's then outstanding securities, or (b) during
any period of 24 consecutive months, commencing before or after
the date of the "change in control," individuals who at the
beginning of such 24-month period were directors of the company
cease for any reason to constitute at least a majority of the
Board of Directors of the company.
2.5 Pre-retirement Death Benefit. If a participant
dies before he has begun to receive benefits under the plan, his
spouse shall receive a lump sum payment in the amount equal to
50% of the present actuarial value of the participant's benefit
payable as if he had retired or terminated employment on the date
of his death.
<PAGE>
2.6 Payment of Benefits. A participant's benefit
under this plan shall be paid to him, and in the event of his
death prior to his receipt of all benefits payable under the
plan, to his beneficiary, in the normal or optional form of
payment elected by or otherwise applicable to participant under
the retirement plan; provided that participant may elect at any
time prior to retirement to receive payment in a lump sum;
provided, further, that such election must be on file with the
company prior to the first day of the year in which the
participant retires or otherwise terminates his employment and
provided, further, that such lump sum election shall be permitted
only with the consent of the committee at its sole discretion.
In calculating the amount of a lump sum or installment payments,
actuarial equivalence shall be calculated based on the actuarial
assumptions as set forth in section 7.5 of the retirement plan;
provided, that if the lump sum payment as calculated in
accordance with section 7.5 of the retirement plan is in excess
of $25,000, the amount payable as a lump sum shall be
recalculated using an interest rate equal to 120% of the interest
rate specified in the retirement plan; provided, further, that in
no event shall the value determined in such recalculation be less
than $25,000.
2.7 Funding. Benefits payable under this plan to a
participant or his beneficiary shall be paid directly by the
company. The company shall not be required to segregate on its
books or otherwise any amount to be used for payment of benefits
under this plan.
2.8 Termination for Serious Misconduct. In the event
a participant is terminated for serious misconduct, as defined
below, no amount shall be payable to such participant under the
plan. "Serious Misconduct" means embezzlement or
misappropriation of corporate funds, other acts of dishonesty,
commission of a felony, willful refusal to perform or substantial
disregard of the duties imposed by his employment contract with
Gaylord, significant violation of any statutory or common law
duty of loyalty to Gaylord, or repeated acts tending to bring
Gaylord into public disgrace or disrepute, including but not
limited to, alcohol, drug or other substance abuse.
ARTICLE 3
General Provisions
3.1 Committee. This plan shall be administered by the
committee responsible for administration of the retirement plan.
The committee shall have, to the extent appropriate, the same
powers, rights, duties and obligations with respect to this plan
as it has with respect to the retirement plan.
3.2 Beneficiary. A participant's "beneficiary" under
this plan means any person who becomes entitled to benefits under
the retirement plan because of the participant's death; provided
that, if a participant dies while his benefits under this plan
are payable to him in installments, his beneficiary under this
plan shall be either (i) the person or persons designated by him
by signing and filing a beneficiary designation form in the time
and manner prescribed by the committee or if the beneficiary
designated in (i) above dies before the date of the participant's
death, any one or more of the participant's estate and his
relatives by blood or marriage, in such proportions as the
committee shall determine.
<PAGE>
3.3 Employment Rights. Establishment of the plan
shall not be construed to give any participant the right to be
retained in the company's service or to any benefits not
specifically provided by the plan.
3.4 Interests Not Transferable. Except as to
withholding of any tax under the laws of the United States or any
state, the interests of the participants and their beneficiaries
under the plan are not subject to the claims of their creditors
and may not be voluntarily or involuntarily transferred,
assigned, alienated or encumbered. No participant shall have any
right to any benefit payments hereunder prior to his termination
of employment with the company and all other Gaylord Companies,
as defined in the retirement plan.
3.5 Payment with Respect to Incapacitated Participants
or Beneficiaries. If any person entitled to benefits under the
plan is under a legal disability or in the committee's opinion is
incapacitated in any way so as to be unable to manage his
financial affairs, the committee may direct the payment of such
benefit to such person's legal representative or to a relative or
friend of such person for such person's benefit, or the committee
may direct the application of such benefits for the benefit of
such person in any manner which the committee may select that is
consistent with the plan. Any payments made in accordance with
the foregoing provisions of this section shall be a full and
complete discharge of any liability for such payments.
3.6 Limitation of Liability. To the extent permitted
by law, no person (including the company, its Board of Directors,
the committee, any present or former member of the company's
Board of Directors or the committee, and any present or former
officer of the company) shall be personally liable for any act
done or omitted to be done in good faith in the administration of
the plan.
3.7 Controlling Law. The laws of Illinois shall be
controlling in all matters relating to the plan.
3.8 Gender and Number. Where the context admits,
words in the masculine gender shall include the feminine gender,
the plural shall include the singular and the singular shall
include the plural.
3.9 Action by the Company. Any action required of or
permitted by the company under the plan shall be by resolution of
the committee.
3.10 Successor to the Company. The term "company" as
used in the plan shall include any successor to the company by
reason of merger, consolidation, the purchase of all or
substantially all of the company's assets or otherwise.
ARTICLE 4
Amendment and Termination
While the company expect to continue the plan, it must
necessarily reserve and hereby does reserve the right to amend
the plan from time to time or to terminate the plan at any time;
provided that no amendment of the plan, nor the termination of
<PAGE>
the plan may cause the reduction or cessation of any benefits
that were accrued as of the date of such amendment or termination
and otherwise would be payable under this plan, but for such
amendment or termination.
IN WITNESS WHEREOF, this plan has been executed on
behalf of the company by its duly authorized officers as of the
day and year first above written.
GAYLORD CONTAINER CORPORATION
By: /s/ Marvin A. Pomerantz
Its: Chairman and Chief Executive Officer
ATTEST:
By: /s/ David F. Tananka
Its: Vice President, General Counsel
DEFERRAL ELECTION
I hereby elect to defer receipt of all fees payable to me as
compensation for service on the Board of Directors of the Corporation until I
have ceased to be a director of the Corporation.
I further elect that the amount to be paid to me at such time shall be
determined in accordance with Option _______ below:
(Select A or B)
OPTION A: The amount payable shall be the amount obtained
as if all retainer and fees payable with respect to each fiscal year
covered by this election were invested on October 1 during that fiscal
year in an accumulation account earning interest at an annual rate for
each fiscal year of 300 basis points over the six-month T-bill rate in
effect on October 1 for such fiscal year until the date of termination
of my service as a member of the Board.
OPTION B: The amount payable shall be the sale proceeds that
would be obtained if all retainer and fees payable to me with respect
to each fiscal year covered by this election were used to purchase
shares of Class A common stock of the Corporation (the "Stock") at a
price representing a 15% discount off the closing price for the Stock
on the American Stock Exchange on October 1 of such fiscal year (or,
if October 1 is not a day when the American Stock Exchange is open for
trading, on the last day prior to October 1 when the American Stock
Exchange was open for trading) and the Stock (including any stock
dividends issued with respect to the Stock during such deferral
period) were sold on the date of termination of my service as a member
of the Board.
This election shall be irrevocable for the fiscal year beginning
October 1, 1995 and for each subsequent year unless I file a written revocation
of my election on or before any September 15 with respect to the following
fiscal year.
___________________________ _______________________________
Date Signature
_______________________________
Print Name
INDEPENDENT AUDITORS' CONSENT
Gaylord Container Corporation:
We consent to the incorporation by reference in Registration Statement Nos.
33-32221 and 33-33977 on Form S-8/S-3, Registration Statement Nos. 33-25675,
33-33871, and 33-54367 on Form S-8, and in the Prospectuses which are part of
such Registration Statements of our report, dated November 1, 1995, appearing
in this Annual Report on Form 10-K of Gaylord Container Corporation for the
year ended September 30, 1995.
/s/ Deloitte & Touche LLP
- -------------------------
December 14, 1995
POWER OF ATTORNEY
Each of the undersigned, being a director or officer, or both, of GAYLORD
CONTAINER CORPORATION, a Delaware corporation (the "Corporation"), does hereby
constitute and appoint each of Marvin A. Pomerantz and Daniel P. Casey as his
true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Corporation's Form 10-K for the Corporation's 1995
fiscal year and to file same, together with all exhibits thereto and other
attachments and documents in connection therewith, with the Securities and
Exchange Commission, the American Stock Exchange and any other regulatory
authority, and to sign, file or deliver such further documents and to take
such further actions in connection therewith as each of the undersigned might
or could do in person and as each such attorney and agent deems necessary or
desirable; and each of the undersigned does hereby fully ratify and confirm
all that said attorneys and agents, or any of them, or the substitute of any
of them, shall do or cause to be done by virtue hereof.
Signature Title
- --------------------------- ----------------------------------------------
- ------------------------------- Chairman, Chief Executive Officer and Director
Marvin A. Pomerantz
- ------------------------------- Executive Vice President
Daniel P. Casey (Principal Financial Officer)
- ------------------------------- Vice President-Corporate Controller
Jeffrey B. Park (Principal Accounting Officer)
/s/ Frank E. Babb Director
- -------------------------------
Frank E. Babb
/s/ Norman H. Brown Jr. Director
- -------------------------------
Norman H. Brown Jr.
/s/ Harve A. Ferrill Director
- -------------------------------
Harve A. Ferrill
/s/ John E. Goodenow Director
- -------------------------------
John E. Goodenow
/s/ David B. Hawkins Director
- -------------------------------
David B. Hawkins
/s/ John Hawkinson Director
- -------------------------------
John Hawkinson
/s/ Warren J. Hayford Director
- -------------------------------
Warren J. Hayford
/s/ Richard S. Levitt Director
- -------------------------------
Richard S. Levitt
/s/ Ralph L. MacDonald Jr. Director
- -------------------------------
Ralph L. MacDonald Jr.
/s/ Thomas H. Stoner Director
- -------------------------------
Thomas H. Stoner
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 32500
<SECURITIES> 0
<RECEIVABLES> 140,000
<ALLOWANCES> 6,500
<INVENTORY> 73,100
<CURRENT-ASSETS> 306,300
<PP&E> 1,013,900
<DEPRECIATION> 373,900
<TOTAL-ASSETS> 988,000
<CURRENT-LIABILITIES> 149,900
<BONDS> 671,500
<COMMON> 172,600
0
0
<OTHER-SE> (59,400)
<TOTAL-LIABILITY-AND-EQUITY> 988,000
<SALES> 1,051,400
<TOTAL-REVENUES> 1,051,400
<CGS> 755,000
<TOTAL-COSTS> 855,900
<OTHER-EXPENSES> (600)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,100
<INCOME-PRETAX> 110,000
<INCOME-TAX> (24,200)
<INCOME-CONTINUING> 134,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 134,200
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 2.44
</TABLE>
