<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the fiscal year ended September 30, 1996
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: (847) 405-5500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Class A Common Stock, $.0001 par value per share American Stock Exchange
(52,711,832 shares outstanding as of November 27, 1996)
Redeemable Exchangeable Warrants American Stock Exchange
(3,035,205 warrants outstanding as of November 27, 1996)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _____ No______
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 _____ 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 27, 1996, was approximately $310 million.
Documents Incorporated by Reference
The registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held February 5, 1997 is incorporated into Part III of this
Annual Report on Form 10-K.
<PAGE>
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 multiwall bag plants, a
preprint and graphics center, a cogeneration facility and through a wholly
owned, independently operated subsidiary, a specialty chemicals 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 or
expanded three converting plants.
On July 12, 1996, the Company contributed grocery bag manufacturing net
assets to S&G Packaging Company, L.L.C. (S&G Packaging), a joint venture with
Stone Container Corporation, in exchange for a 35 percent equity interest in the
new company. The Company has the option to purchase an additional 15 percent
interest within the next five years.
General
Corrugated containers are a safe and economical way to transport manufactured
and bulk goods. Increasingly, corrugated containers are also used as integrated
transportation and marketing devices 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
according to individual customer specifications.
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.
Generally, corrugated containers 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 from mills located 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 trim widths 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.
1
<PAGE>
Cellulose fiber, produced from woodchips, is the principal raw material
used in the manufacture of containerboard and kraft paper. 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.
In calendar 1995, industry trade associations estimated U.S. corrugated
product sales and multiwall bag sales to be $23.4 billion and $1.3 billion,
respectively. It has also been estimated that virgin containerboard and
unbleached kraft paper capacity utilization rates in the United States averaged
95 percent and 76 percent, respectively, in calendar 1995 and 92 percent and 73
percent, respectively, for the first nine months of calendar 1996.
Industry trade publications estimated that calendar year 1996 U.S.
containerboard and unbleached kraft paper annual capacities were 35.6 million
tons and 2.6 million tons, respectively. This represents an increase in
containerboard capacity of approximately 6 percent and a decrease in unbleached
kraft paper capacity of approximately 4 percent, 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 and solid fibre products
collectively represent approximately 85 percent of the Company's net sales while
containerboard and unbleached kraft paper represent approximately 15 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 16 percent of net sales in fiscal 1996 and
13 percent and 11 percent, respectively, in fiscal 1995 and fiscal 1994. The
Company's largest customer accounted for approximately 4 percent of the
Company's net sales in fiscal 1996 and approximately 3 percent and 2 percent,
respectively, in fiscal 1995 and fiscal 1994. 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 generally does not
exceed 3 percent of annual corrugated container sales at any particular time.
In general, each converting facility has its own sales force that 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, 1996 consisted of
approximately 130 salespersons. Sales and exchanges of containerboard and
unbleached kraft paper are the responsibility of a small centralized marketing
and sales group.
The Company exports linerboard and unbleached kraft paper, certain
converted products and specialty chemicals. Such sales totaled $71.5 million,
$113.9 million and $45.7 million in fiscal 1996, fiscal 1995 and fiscal 1994,
respectively. Fluctuations in export sales are primarily the result of changes
in selling prices for linerboard and unbleached kraft paper.
Products
Corrugated Products. The Company produces many varieties of corrugated
containers and sells the majority of its production to manufacturing end users.
Corrugated shipments were a record 13.3 billion square feet in fiscal 1996, an
increase of approximately 8 percent from the prior year. Shipments in fiscal
1996 benefited from an extra week in the fiscal year. Adjusting for the extra
week, corrugated shipments increased approximately 6 percent due to shipments
from a new sheet feeder plant and capacity additions related to the capital
investment program. From fiscal 1994 to fiscal 1995, corrugated shipments
decreased approximately 3 percent, primarily due to the sale or closing of two
corrugated container plants during fiscal 1994. Adjusting for the prior
year shipments from these two plants, corrugated shipments increased
approximately 1 percent in fiscal 1995.
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 1,243,300
tons in fiscal 1996 from 1,200,500 tons in the prior year. Adjusting for the
extra week in fiscal 1996, containerboard production increased approximately 2
percent versus the prior year despite "losing" approximately 60,000 tons of
production primarily due to market-driven downtime. During fiscal 1995, the
Company's production of containerboard increased slightly from 1,194,900 tons in
fiscal 1994. In addition to its own production, the Company has agreed to
purchase, at market prices, through 2004 approximately 24,000 tons per year of
containerboard from Newark Group Industries, Inc. During fiscal 1996, fiscal
1995 and fiscal 1994, the Company's corrugated plants consumed the equivalent of
approximately 80 percent, 78 percent and 82 percent, respectively, of the
Company's containerboard production and purchase commitments.
2
<PAGE>
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 were essentially flat in
fiscal 1996. The Company's multiwall bag shipments increased to a record 52,400
tons in fiscal 1995, an increase of approximately 2 percent from 51,500 tons in
fiscal 1994.
Grocery Bags and Sacks. Prior to contributing its grocery bag manufacturing
assets to S&G Packaging in July 1996, the Company shipped (for the 9 1/2 month
period) approximately 88,200 tons of grocery bags and sacks. The Company shipped
approximately 105,000 tons of grocery bags and sacks in fiscal 1995, a decrease
of approximately 10 percent versus shipments of 116,500 tons in the prior year.
The decrease 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. This decline was partially offset by
increased shipments of Gaylord Handle-Bags R.
Unbleached Kraft Paper. The Company is a supplier of unbleached kraft paper
to independent multiwall bag and grocery bag and sack converters. During
fiscal 1996, the Company produced 256,900 tons of unbleached kraft paper despite
the "loss" of approximately 20,000 tons primarily due to market-driven downtime.
This compares with 263,900 tons and 250,700 tons in fiscal 1995 and fiscal 1994,
respectively. In addition to its own production, the Company has agreed to
purchase approximately 35,000 tons per year of unbleached kraft paper from
Riverwood International U.S.A., Inc., through 1999. The Company has an agreement
to supply S&G Packaging with approximately 130,000 tons of unbleached kraft
paper per year. During fiscal 1996, the Company's multiwall bag and grocery bag
and sack plants consumed, or the Company sold pursuant to its paper supply
agreement, approximately 59 percent of its unbleached kraft paper production
and purchase commitments. During fiscal 1995 and fiscal 1994, the Company's
multiwall bag and grocery bag and sack plants consumed the equivalent of
approximately 54 percent and 58 percent, respectively, of the Company's
unbleached kraft paper production and purchase commitments.
Specialty Chemicals. Gaylord Chemical Corporation, a wholly owned,
independently operated, subsidiary of the Company, utilizes a process stream
from the 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, agricultural 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 1996, fiscal 1995 and fiscal 1994 were $18.2 million,
$16.7 million and $14.3 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 for 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 a specified amount of electricity representing the
cogeneration facility's anticipated excess capacity at the contract date to
Pacific Gas & Electric Company, subject to certain adjustments. Electricity
sales pursuant to this agreement were $6.6 million in both fiscal 1996 and
fiscal 1995 and $8.5 million in fiscal 1994.
Raw Materials
The Bogalusa, Louisiana mill uses approximately 75 percent pulpwood and
woodchips in the manufacture of containerboard and unbleached kraft paper, of
which 40 percent to 45 percent was supplied by Weyerhaeuser Company
(Weyerhaeuser), successor in interest to Hanson Natural Resources Company, 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 Weyerhaeuser
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.
3
<PAGE>
The Antioch, California mill uses 100 percent recycled fiber. Approximately
80 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
at market prices. 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 32 percent, 23 percent and 25 percent was supplied by
Weyerhaeuser in fiscal 1996, fiscal 1995 and fiscal 1994, respectively, with the
remainder generally purchased pursuant to annual contracts with a number of
different chip suppliers in the area. The contract with Weyerhaeuser provides
for a supply of wood chips at market prices through June 30, 1997, at which
time it will be renegotiated. Recycled fiber accounts for the remainder of the
mill's fiber requirements.
During fiscal 1996, the Company's performance, as compared to fiscal 1995,
was favorably affected by lower fiber costs, primarily due to significant
decreases in OCC prices. From its peak of $230 per ton in May 1995 the delivered
cost of OCC dropped to approximately $95 per ton in September 1996. The
secondary fiber market, however, is difficult to predict, and there can be no
assurance of the direction future OCC prices will take. In fiscal 1996, fiber
represented approximately 40 percent 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 a supply agreement through 1998 pursuant to
which Weyerhaeuser provides hog fuel for the production of steam at the Bogalusa
mill. In fiscal 1996, the Bogalusa mill produced all of its steam and generated
approximately 63 percent of its electricity requirements. During the same
period, the Antioch mill produced all of its steam and approximately 97 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 1996, energy costs accounted for approximately 8 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 require substantial capital and 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 1996.
In contrast to the containerboard and unbleached kraft paper segment of the
industry, the converting segment, which manufactures corrugated products and
multiwall bags, has comparatively low barriers to entry. Competition in
corrugated products and, to a lesser extent, multiwall bags, 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.
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 $4.3 million, $5.5
million and $2.3 million in fiscal 1996, fiscal 1995 and fiscal 1994,
respectively. The Company believes that it is in compliance in all material
respects with applicable federal, state and local environmental regulations.
4
<PAGE>
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 expected
to be issued late in 1996, or in early 1997, 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 $5 million to $7 million per year during
the three years following issuance 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 cost inflation.
Employees
At September 30, 1996, the Company employed approximately 3,900 people.
Approximately 62 percent of the Company's employees are hourly wage employees
most of whom are members of various labor unions. The Company's labor agreements
covering its employees at its Bogalusa, Antioch and Pine Bluff mills expire in
fiscal 2000, fiscal 2001 and fiscal 2002, respectively. In conjunction with the
renegotiation of the Antioch mill's labor contract, in fiscal 1995 certain
hourly employees accepted an early retirement option, which was designed to
reduce future unit labor costs. In fiscal 1996, the Company instituted a staff
reduction program to reduce future administrative and overhead costs. The
program eliminated approximately 8 percent of the Company's salaried positions.
At September 30, 1996, labor contracts at five of the Company's manufacturing
facilities covering approximately 16 percent of the Company's union employees
have expired or are scheduled to expire before the end of fiscal 1997. 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.
5
<PAGE>
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 and containerboard 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
St. Louis, Missouri Corrugated containers Owned
San Antonio, Texas Corrugated containers Leased
San Antonio, Texas Corrugated sheets Owned
Sunnyvale, California Corrugated sheets Owned
Tampa, Florida Corrugated containers Leased
Bag Plants:
Pine Bluff, Arkansas Multiwall bags Owned
Twinsburg, Ohio Multiwall bags Leased
Other Facilities:
Antioch, California Electricity cogeneration Owned
Bogalusa, Louisiana Specialty chemicals Owned
Livermore, California Preprinted linerboard Leased
6
<PAGE>
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.
The Antioch mill has one paper machine with the capacity to produce
recycled linerboard and corrugating medium using 100 percent recycled fiber.
The Pine Bluff mill has one paper machine with the capacity to produce
unbleached kraft paper and linerboard. The mill uses softwood pulp and recycled
fiber from DLK. 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 throughout the United States.
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
Not applicable
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. Mr. Pomerantz serves on the Board of
Directors and the Executive Committee of the American Forest & Paper
Association. Mr. Pomerantz formerly served on the Board of Directors of Stone
Container Corporation, a manufacturer of paper packaging products, and as
President of the Board of Regents for the state universities in Iowa.
7
<PAGE>
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 and Compensation Committee 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.
8
<PAGE>
Part II
Item 5. Market for Registrant's Common Stock, Warrants
and Related Stockholder Matters
The Company had 725 and 17 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 27, 1996.
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 July 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. On July 31, 1996, each remaining outstanding Warrant
became exercisable and could be exchanged for one share of Class A Common Stock.
As of September 30, 1996, the Company had outstanding 52,688,233 shares of Class
A Common Stock (including 3,167,725 shares held in trust for the benefit of the
Warrant holders) and 3,167,725 Warrants. See "Note 12 of Notes to Consolidated
Financial Statements."
Information with respect to quarterly high and low sales prices for the
Company's Class A Common Stock and Warrants for each quarterly period for
fiscal 1996, fiscal 1995 and fiscal 1994 is contained in "Note 19 of Notes to
Consolidated Financial Statements."
In the third quarter of fiscal 1996, the Company's Board of Directors
authorized the repurchase of up to 6 million shares of the Company's Class A
Common Stock. The shares may be repurchased from time to time on the open
market and will be used for general corporate purposes, including issuances in
connection with the Company's employee stock option plans and employee stock
purchase plan. In fiscal 1996, the Company repurchased 1,570,500 shares at a
cost of $11.6 million.
The Company neither declared nor paid any dividends on its common stock
during fiscal 1996, fiscal 1995 and fiscal 1994. 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 is limited
under the terms of its debt agreements. 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 1996 1995 1994 1993 1992
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales $922.0 $1,051.4 $784.4 $733.5 $ 722.8
Cost of goods sold 716.2 755.0 691.4 652.1 608.4
------ -------- ------ ------ ------
Gross margin 205.8 296.4 93.0 81.4 114.4
Selling and administrative costs (2) (99.1) (95.5) (81.0) (73.8) (77.0)
Non-recurring operating charges (2) (3) (8.1) (5.4) (15.5) (9.9) (58.9)
------ -------- ------ ------ ------
Operating earnings (loss) 98.6 195.5 (3.5) (2.3) (21.5)
Interest expense - net (78.3) (86.1) (80.3) (68.2) ( 110.8)
Other income (expense) - net (0.2) 0.6 (0.2) 0.5 (0.2)
------ -------- ------ ------ ------
Income (loss) before income taxes 20.1 110.0 (84.0) (70.0) (132.5)
Income tax benefit (expense) (4) (8.3) 24.2 - - -
------ -------- ------ ------ ------
Income (loss) before extraordinary
item and accounting change 11.8 134.2 (84.0) (70.0) (132.5)
Extraordinary gain (loss) (5) (3.2) - - 201.5 -
Accounting change (6) - - - (1.3) -
------ -------- ------ ------ ------
Net income (loss) $ 8.6 $ 134.2 $(84.0) $130.2 $(132.5)
====== ======== ====== ====== =======
Earnings per common and
common equivalent share:
Income (loss) before extraordinary
item and accounting change $ 0.22 $ 2.44 $(1.57) $(1.40) $ (8.54)
Extraordinary gain (loss) (5) (0.06) - - 4.04 -
Accounting change (6) - - - (0.03) -
------ -------- ------ ------ -------
Net income (loss) $ 0.16 $ 2.44 $(1.57) $ 2.61 $ (8.54)
====== ======== ====== ====== =======
Weighted average common and
common equivalent shares
outstanding (7) 54.7 55.1 53.6 49.8 15.5
====== ======== ====== ====== =======
September 30,
-------------------------------------------------
In millions 1996 1995 1994 1993 1992
Balance Sheet Data:
Current assets $236.1 $ 306.3 $206.7 $199.4 $ 229.7
Property - net 612.3 640.0 592.9 611.1 637.5
Other assets 84.6 41.7 43.5 49.6 34.5
------ -------- ------ ------ -------
Total assets $933.0 $ 988.0 $843.1 $860.1 $ 901.7
====== ======== ====== ====== =======
Current liabilities (8) $166.3 $ 149.9 $135.1 $ 99.5 $ 98.7
Pre-petition liabilities
subject to compromise (9) - - - - 907.1
Long-term debt (less current
maturities) 623.1 671.5 696.8 670.1 28.5
Other long-term liabilities and
deferred income taxes 29.1 53.4 35.0 36.9 23.1
------ -------- ------ ------ -------
Total liabilities 818.5 874.8 866.9 806.5 1,057.4
Stockholders' equity (deficit) 114.5 113.2 (23.8) 53.6 (155.7)
------ -------- ------ ------ -------
Total liabilities and
stockholders' equity $933.0 $ 988.0 $843.1 $860.1 $ 901.7
====== ======== ====== ====== =======
</TABLE>
10
<PAGE>
(1) The Company operates on a 52/53-week fiscal year. Fiscal 1996 was a 53-week
year, while fiscal 1992 through fiscal 1995 were 52-week years.
(2) The Company recognized fees and expenses in connection with a debt
restructuring during fiscal 1993 and fiscal 1992 of $7.8 million and $21.0
million (including approximately $4.0 million of employee retention costs which
were classified as "Selling and administrative costs"), respectively.
(3) In fiscal 1996, the Company recorded a $8.1 million charge against operating
earnings for costs associated with a staff reduction program.
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 1992, the Company recorded a non-cash pre-tax charge 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 Antioch, California 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 1996, the Company recorded an extraordinary loss of $3.2 million,
net of an income tax benefit of $2.3 million, on the early retirement of
approximately $75.2 million principal amount of the Company's publicly traded
debt. See "Note 3 of Notes to Consolidated Financial Statements."
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, the 10-1/4% Senior Subordinated PIK Notes Due 2001, shares
of Class A Common Stock and redeemable exchangeable warrants, which resulted in
a forgiveness of debt.
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.
(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 "Note 12
of Notes to Consolidated Financial Statements."
(8) The Company's 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, at September 30, 1992 amounts outstanding under
the Company's Export-Import Bank facility ($11.7 million) 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."
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 when 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 all four of the Company's
paper machines that produce unbleached kraft paper also have the capability to
produce containerboard.
From the fall of 1989 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, and reaching record
highs. Increases in industry containerboard capacity and softening demand for
corrugated containers contributed to an approximately 35 percent decrease in
published prices for linerboard between September 1995 and September 1996. Due
to increasing demand for corrugated containers and strong export demand for
linerboard resulting in lower inventories, November 1996 published industry
linerboard prices had increased approximately 6 percent from September 1996.
Results of Operations
Year ended September 30, 1996 (Fiscal 1996) Compared with Year ended September
30, 1995 (Fiscal 1995). Net sales for Fiscal 1996 were $922.0 million, a
decrease of approximately 12 percent compared with record net sales of $1,051.4
million for Fiscal 1995. Operating earnings for Fiscal 1996 were $98.6 million
compared with record operating earnings of $195.5 million for Fiscal 1995 after
non-recurring operating charges of $8.1 million and $5.4 million in Fiscal 1996
and Fiscal 1995, respectively. Net income was $8.6 million, or $0.16 per share,
after a $3.2 million extraordinary loss ($0.06 per share) on the early
retirement of debt, versus net income in Fiscal 1995 of $134.2 million, or $2.44
per share, including a $24.2 million income tax benefit.
Sales and earnings in Fiscal 1996 were adversely affected by declining
product prices which resulted in significantly lower average selling prices for
the Company's products compared with Fiscal 1995. Lower average selling prices
decreased operating earnings by approximately $151 million versus the prior
fiscal year. Average selling prices for the Company's domestic linerboard,
export linerboard and corrugated products decreased approximately 19 percent,
33 percent and 10 percent, respectively, in Fiscal 1996 compared with Fiscal
1995. Average selling prices for the Company's unbleached kraft paper and
multiwall bags decreased approximately 25 percent and 1 percent, respectively,
in Fiscal 1996 versus the prior year.
Sales and earnings for Fiscal 1996 benefited from record mill production.
Increased volume had a favorable effect on operating earnings of approximately
$8 million. Total mill production increased approximately 2 percent in Fiscal
1996 compared with the prior year. Production in Fiscal 1996 benefited from an
extra week in the fiscal year. Adjusting for the extra week in Fiscal 1996,
production was marginally higher despite approximately 80,000 tons of "lost"
production primarily due to market downtime. In Fiscal 1996, production of
linerboard increased approximately 2 percent to 3,351 tons per day (TPD,
calculated on the basis of the number of days in the period) from 3,298 TPD
while production of unbleached kraft paper decreased approximately 4 percent to
693 TPD from 725 TPD in the prior year.
12
<PAGE>
Corrugated shipments were a record 13.3 billion square feet in Fiscal 1996,
an increase of approximately 8 percent from Fiscal 1995. Adjusting for the extra
week, corrugated shipments increased approximately 6 percent due to shipments
from a new sheet feeder plant and capacity additions related to the capital
investment program. Multiwall bag shipments of 51,900 tons in Fiscal 1996 were
approximately equal to the prior year. Prior to contributing its grocery bag
manufacturing assets to S&G Packaging Company, L.L.C., (S&G Packaging), a joint
venture with Stone Container Corporation effected in July, 1996, the Company
shipped (for the 9 1/2-month period) 88,200 tons of grocery bags and sacks
versus 105,000 tons in Fiscal 1995.
Gross margin as a percentage of net sales for Fiscal 1996 decreased to 22.3
percent from 28.2 percent in the prior year. The decrease in margin is primarily
due to significantly lower average net selling prices for the Company's
products, partially offset by reduced fiber costs (primarily the cost of OCC)
which favorably affected operating earnings by approximately $72 million.
Selling and administrative costs for Fiscal 1996 were $3.6 million higher
than Fiscal 1995. The increase is primarily the result of increased professional
fees and group insurance costs, partially offset by a decrease in incentive
compensation as a result of reduced profitability.
Net interest expense decreased to $78.3 million in Fiscal 1996 from $86.1
million in Fiscal 1995. The decrease was primarily due to lower average debt
levels, partially offset by accretion in the discount on subordinated debt.
During fiscal 1996, the Company repurchased and retired $75.2 million
principal amount of its publicly traded debt securities. In conjunction with the
repurchase, $1.5 million of deferred financing fees were written off. These
transactions resulted in an extraordinary loss of $3.2 million net of an income
tax benefit of $2.3 million.
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
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.
13
<PAGE>
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 unit
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 primarily 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.
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 1996 was $164.4 million compared
with $194.2 million for the prior year. The unfavorable comparison to Fiscal
1995 was due to significantly lower selling prices for the Company's products.
Capital expenditures of $54.8 million in Fiscal 1996 decreased $4.1 million
from Fiscal 1995. In addition to the capital spending, the Company acquired
$5.6 million and $45.1 million of equipment financed by capital leases and debt
obligations secured by the assets acquired in Fiscal 1996 and Fiscal 1995,
respectively. 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. 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 1996, the Company incurred approximately
$3.8 million of costs for demolition and to maintain the East Mill, which were
partially offset by the sale of scrap. Demolition of the remaining structures
on the mill site could 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, 1996, balance sheet accruals for
demolition and asbestos removal were approximately $2.8 million and $15.3
million, respectively, and the net book value of the East Mill was $0.7 million.
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 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 1996 and Fiscal 1995, the
Company charged
14
<PAGE>
approximately $1.8 million and $8.3 million, respectively, of costs associated
with the Fiscal 1994 non-recurring operating charges to balance sheet accruals.
At September 30, 1996, the Company had balance sheet accruals for such costs of
$1.5 million (primarily lease termination costs) and anticipates incurring such
costs ratably over the next year.
In addition, the Company has remaining balance sheet accruals of
approximately $0.6 million for non-recurring operating charges (primarily lease
termination costs) recognized in previous years and anticipates incurring such
costs ratably over the next 15 months.
On July 12, 1996, the Company contributed grocery bag manufacturing net
assets with a carrying value of $32.3 million to S&G Packaging, in exchange for
a 35 percent equity interest in the new company. The Company has the option to
purchase an additional 15 percent interest within the next five years. The
financial results of S&G Packaging were reported on the equity method of
accounting.
The Company's Board of Directors has authorized the repurchase of up to 6
million shares of the Company's common stock. The shares may be repurchased
from time to time on the open market and will be used for general corporate
purposes, including issuances in connection with the Company's employee stock
option and employee stock purchase plans. During fiscal 1996, the Company
purchased approximately 1.6 million shares of its common stock, at a cost of
$11.6 million.
Liquidity
At September 30, 1996, the Company had cash and equivalents of $39.2 million, an
increase of $6.7 million from September 30, 1995 as cash provided by operations
exceeded cash used for investments and financing. Total debt decreased by $52.7
million from $687.1 million at September 30, 1995 to $634.4 million at September
30, 1996. The decrease in total debt was primarily due to the repurchase and
retirement of approximately $75.2 million principal amount of the Company's
publicly traded debt securities. This was partially offset by accretion in the
discount on subordinated debt of $31.2 million. The Company will continue to
evaluate the advisability of using future excess cash flow to reduce debt or
repurchase common stock.
In Fiscal 1996 the Company amended and restated its bank credit agreement
to (i) allow the S&G Packaging joint venture, (ii) allow the common stock
repurchase and (iii) modify certain financial covenants allowing the Company
greater financial flexibility. On May 15, 1996, the Subordinated Discount
Debentures became fully accreted, and cash interest began to accrue from that
date. The first cash interest payment on these securities is payable in the
first quarter of Fiscal 1997. This will result in a significant increase in the
Company's future cash requirements. At September 30, 1996, the Company had no
amounts outstanding and approximately $229 million of credit available under the
revolving portions of its credit agreements. At October 31, 1996, the Company
had cash and equivalents of $39.5 million and had no amounts outstanding and
approximately $224 million of credit available under the revolving portions of
its credit agreements. See "Note 9 of Notes to Consolidated Financial
Statements."
During Fiscal 1996, published industry prices for linerboard and unbleached
kraft paper decreased by approximately 35 percent and 30 percent, respectively,
with corresponding decreases in converted product prices. Strengthening industry
fundamentals, including year-over-year growth in demand for corrugated products
and record export shipments of linerboard allowed price increases of
approximately $30 per ton for both linerboard and unbleached kraft paper to be
realized in the Fall of 1996. The Company's delivered cost of OCC dropped from a
peak of $230 per ton in May of 1995, to approximately $105 per ton in October
1995. During Fiscal 1996 OCC prices were relatively stable, averaging
approximately $95 per ton. The secondary fiber market, however, is difficult to
predict, and there can be no assurance of the direction future OCC prices will
take.
Based upon October 1996 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
The Company will adopt the financial disclosure provisions of Financial
Accounting Standard No. 123 "Accounting for Stock-based Compensation" (FAS No.
123) in fiscal 1997. Adoption of the financial disclosure provisions of FAS No.
123 will not affect the Company's financial position, results of operations or
cash flows.
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, 1996 and 1995 18
Consolidated Statements of Operations for the Years
Ended September 30, 1996, 1995 and 1994 19
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1996, 1995 and 1994 20
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1996, 1995 and 1994 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, 1996
and 1995 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, 1996. Our audits also included the financial statement schedule
of the Company for each of the three years in the period ended September 30,
1996, 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,
1996 and 1995 and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1996 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 4, 1996
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
September 30, 1996 and 1995
In millions 1996 1995
------- -------
Assets
Current assets:
<S> <C> <C>
Cash and equivalents $ 39.2 $ 32.5
Trade receivables
(less allowances of $6.9 million and $6.5
million, respectively) (Note 9) 111.0 140.0
Inventories (Note 5) 70.4 73.1
Prepaid expenses 2.2 2.8
Deferred income taxes (Note 8) 5.1 49.6
Other 8.2 8.3
------- -------
Total current assets 236.1 306.3
Property - net (Notes 6 and 14) 612.3 640.0
Other assets:
Deferred charges (Note 7) 18.6 24.0
Deferred income taxes (Note 8) 16.8 -
Other (Notes 4 and 9) 49.2 17.7
------- -------
Total $ 933.0 $ 988.0
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt (Note 9) $ 11.3 $ 15.6
Trade payables 60.8 51.7
Accrued interest payable 27.3 9.7
Accrued and other liabilities (Note 10) 66.9 72.9
------- -------
Total current liabilities 166.3 149.9
Long-term debt (Note 9) 623.1 671.5
Other long-term liabilities (Note 10) 29.1 27.5
Deferred income taxes (Note 8) - 25.9
Commitments and contingencies (Note 16) - -
Stockholders' equity (Notes 11, 12 and 13)
Class A common stock - -
Capital in excess of par value 173.5 172.6
Retained deficit (Note 9) (46.1) (54.7)
Common stock in treasury - at cost (11.7) (0.4)
Recognition of minimum pension liability (Note 15) (1.2) (4.3)
------- -------
Total stockholders' equity 114.5 113.2
------- -------
Total $ 933.0 $ 988.0
======= =======
</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, 1996, 1995 and 1994
In millions, except per share data 1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Net sales $ 922.0 $1,051.4 $ 784.4
Cost of goods sold 716.2 755.0 691.4
------- -------- -------
Gross margin 205.8 296.4 93.0
Selling and administrative costs (99.1) (95.5) (81.0)
Non-recurring operating charges (Note 2) (8.1) (5.4) (15.5)
------- -------- -------
Operating earnings (loss) 98.6 195.5 (3.5)
Interest expense - net (Note 9) (78.3) (86.1) (80.3)
Other income (expense) - net (0.2) 0.6 (0.2)
------- -------- -------
Income (loss) before income taxes 20.1 110.0 (84.0)
Income tax (provision) benefit (Note 8) (8.3) 24.2 -
------- -------- -------
Income (loss) before extraordinary item 11.8 134.2 (84.0)
Extraordinary loss (Note 3) (3.2) - -
------- -------- -------
Net income (loss) $ 8.6 $ 134.2 $ (84.0)
======= ======== =======
Earnings per common and common equivalent share:
Income (loss) before extraordinary item $ 0.22 $ 2.44 $ (1.57)
Extraordinary loss (Note 3) (0.06) - -
------- -------- -------
Net income (loss) $ 0.16 $ 2.44 $ (1.57)
======= ======== ========
Average number of common and common
equivalent shares outstanding 54.7 55.1 53.6
======= ======== ========
</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, 1996, 1995 and 1994
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)
------ ------- ------ ------- ---------- --------- ------ ------- --------- ------------
Dollars in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 - - - - - - - - -
Adjustment 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 - - - - - - - - -
Adjustment of minimum
pension liability - - - - - - - - 0.3 0.3
Other 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
Net income - - - - - 8.6 - - - 8.6
Stock repurchased - - - - - - 1,570,500 (11.6) - (11.6)
Options exercised 122,981 - - - 0.6 - - - - 0.6
Restricted stock-net 22,500 - - - - - - - - -
Adjustment of minimum
pension liability - - - - - - - - 3.1 3.1
Other - - - - 0.3 - (35,725) 0.3 - 0.6
---------- ------ --------- ------ ------ ------ --------- ----- ------ ------
Balance at
September 30, 1996 54,270,011 $ - - $ - $173.5 $(46.1) 1,581,778 $(11.7) $ (1.2) $114.5
========== ====== ========= ====== ====== ====== ========= ===== ====== ======
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Gaylord Container Corporation and Subsidiaries
For the years ended September 30, 1996, 1995 and 1994
In millions 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash Flows From Operations:
Income (loss) before extraordinary item $ 11.8 $ 134.2 $ (84.0)
Adjustments to reconcile income (loss)
to net cash provided by operations:
Depreciation and amortization 64.5 64.8 61.2
Non-cash interest expense 31.2 46.7 41.3
Deferred income taxes 1.8 (28.0) -
Non-recurring charges 8.1 5.4 -
Asset write-down - - 13.4
Acquisition restructuring expenditures (0.7) (1.0) (2.9)
Change in current assets and liabilities,
excluding acquisitions and dispositions:
Receivables 29.4 (18.2) (18.6)
Inventories (1.7) (13.5) 1.6
Prepaid expenses and other current
assets 0.5 (3.2) (0.6)
Accounts payable and other accrued
liabilities 21.3 8.2 15.6
Other - net (1.8) (1.2) 2.7
------- ------- -------
Net cash provided by operations 164.4 194.2 29.7
------- ------- -------
Cash Flows From Investments:
Capital expenditures (54.8) (58.9) (40.4)
Capitalized interest (0.8) (2.3) (0.9)
Proceeds from asset sales 2.6 3.5 4.5
Other investments - net (0.5) (3.6) 1.9
------- ------- -------
Net cash used for investments (53.5) (61.3) (34.9)
------- ------- -------
Cash Flows From Financing:
Treasury stock purchases (11.6) - -
Early extinguishment of debt (77.7) (89.9) -
Senior debt repayments (15.6) (25.8) (5.4)
Debt issuance costs - (3.4) -
Other financing - net 0.7 1.3 0.4
------- ------- -------
Net cash used for financing (104.2) (117.8) (5.0)
------- ------- -------
Net increase (decrease) in cash and equivalents 6.7 15.1 (10.2)
Cash and equivalents, beginning of year 32.5 17.4 27.6
------- ------- -------
Cash and equivalents, end of year $ 39.2 $ 32.5 $ 17.4
======= ======= =======
</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
Nature of Operations - 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 and, through a wholly
owned, independently operated subsidiary, specialty chemicals. Corrugated
containers and sheets, multiwall bags and solid fibre products collectively
represent approximately 85 percent of the Company's net sales while
containerboard and unbleached kraft paper represent approximately 15 percent of
such sales. 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 it converts into multiwall bags or,
through a joint venture, into grocery bags and sacks or sells 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, a preprint and graphics
center, a cogeneration facility and, through a wholly owned, independently
operated subsidiary, a specialty chemical facility.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from such estimates.
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, 1996 and 1995 and for the years ended September 30, 1996 (Fiscal 1996),
September 30, 1995 (Fiscal 1995) and September 30, 1994 (Fiscal 1994) 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 1996 is a 53-week fiscal year, while Fiscal 1995 and Fiscal 1994 are
52-week fiscal years. Certain amounts for Fiscal 1995 and Fiscal 1994 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. In the balance sheet, however, trade receivables due from and trade
payables due to Exchange Partners are not eliminated because no contractual
right of offset exists.
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. The Company reviews its property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable.
Depreciation is computed using the straight-line method over estimated
useful lives ranging from 10 to 45 years for buildings and improvements and 3
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.
Investment in Affiliates - The equity method of accounting is applied to
affiliates in which the Company's ownership interest is greater than 20 percent
but less than or equal to 50 percent. Goodwill is recognized for investments in
affiliates where cost exceeds the equity in net assets acquired. In general,
goodwill is amortized over the average
22
<PAGE>
remaining useful life of the unconsolidated affiliate's property, plant and
equipment or such shorter period as circumstances indicate. The Company's
proportionate share of earnings in unconsolidated affiliates accounted for by
the equity method, net of amortization of goodwill, is included in "Other income
(expense) - net" on the Company's income statement. The cost method of
accounting is applied to affiliates in which the Company's ownership interest is
less than or equal to 20 percent.
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).
Business Segment - The Company manufactures paper packaging products
including corrugated containers, corrugated sheets, preprinted linerboard,
containerboard, unbleached kraft paper and multiwall bags.
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).
Pending Accounting Standard - The Company will adopt the financial
disclosure provisions of Financial Accounting Standard No. 123 "Accounting for
Stock-Based Compensation" (FAS No. 123) in fiscal 1997. Adoption of the
financial disclosure provisions of FAS No. 123 will not affect the Company's
financial position, results of operations or cash flows.
2. Non-Recurring Operating Charges
In the fourth quarter of Fiscal 1996, the Company recorded an $8.1 million
pre-tax charge for costs associated with a staff reduction program. The staff
reduction program, which eliminated approximately 8 percent of the Company's
salaried positions, will reduce future administrative and overhead costs. In
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, which will reduce future unit 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.
3. Extraordinary Item
During Fiscal 1996, the Company repurchased and retired approximately $75.2
million principal amount of its publicly traded debt securities. In conjunction
with the repurchases, approximately $1.5 million of deferred financing fees were
written off. These transactions resulted in an extraordinary loss of $3.2
million, net of an income tax benefit of $2.3 million.
4. Investment in Affiliates
On July 12, 1996, the Company contributed grocery bag manufacturing net assets
with a carrying value of $32.3 million (of which Property - net accounted for
$25.1 million), to S&G Packaging Company, L.L.C. (S&G Packaging), a joint
venture with Stone Container Corporation, in exchange for a 35 percent equity
interest in the new company. The Company has the option to purchase an
additional 15 percent interest within the next five years. Beginning July 13,
1996, the financial results of S&G Packaging were reported on the equity method
of accounting. Product sales to S&G Packaging during Fiscal 1996 were
approximately $6.8 million.
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.
Product sales to GCN during Fiscal 1996, Fiscal 1995 and Fiscal 1994 were
approximately $38.2 million, $62.0 million and $16.6 million, respectively.
The Company owns a 50 percent ownership interest in a corporation that
produces corrugated containers in Mexico. Product sales to this company during
Fiscal 1996 and Fiscal 1995 were approximately $6.4 million and $4.1 million,
respectively.
23
<PAGE>
5. Inventories
Inventories consist of:
September 30,
-------------------
In millions 1996 1995
-------- --------
Finished products $ 16.3 $ 17.4
In process 31.3 34.8
Raw materials 8.5 15.1
Supplies 14.3 15.8
-------- --------
70.4 83.1
LIFO valuation adjustment - (10.0)
-------- --------
Total $ 70.4 $ 73.1
======== ========
In Fiscal 1996, the Company's total inventory quantities decreased. At the
same time, inventory costs declined substantially, principally due to lower
raw material costs. As a result of the combination of quantity and cost
decreases, the LIFO valuation adjustment was reduced to zero. Approximately
$1.4 million of the change was due to the decrease in quantities, which
caused "Cost of goods sold" to be less than it would have been if such decrease
had not occurred.
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 1996 1995
-------- --------
Land $ 15.5 $ 15.4
Buildings and improvements 127.4 121.5
Machinery and equipment 848.5 841.8
Construction-in-progress 41.9 35.2
-------- --------
1,033.3 1,013.9
Accumulated depreciation (421.0) (373.9)
-------- --------
Total $ 612.3 $ 640.0
======== ========
7. Deferred Charges
Deferred charges consist of:
September 30,
-------------------
In millions 1996 1995
-------- --------
Deferred financing costs $ 40.1 $ 39.9
Capitalized start-up costs - 5.0
Intangibles 4.2 4.7
-------- --------
44.3 49.6
Accumulated amortization (25.7) (25.6)
-------- --------
Total $ 18.6 $ 24.0
======== ========
Amortization of deferred charges during Fiscal 1996, Fiscal 1995 and Fiscal
1994 was approximately $4.3 million, $7.4 million and $6.3 million,
respectively. During Fiscal 1996, the Company wrote off approximately $1.5
million of deferred financing fees related to the repurchase and retirement of
its publicly traded debt securities (see Note 3).
24
<PAGE>
8. Income Taxes
The components of the deferred income tax liabilities and assets, current and
non-current, are as follows:
September 30,
-------------------
In millions 1996 1995
-------- --------
Current
Deferred tax assets:
Net operating loss $ - $ 42.8
Inventory valuation 5.1 6.8
-------- --------
Deferred tax asset $ 5.1 $ 49.6
======== ========
Non-Current
Deferred tax assets:
Net operating loss $ 83.7 $ 93.6
Original issue discount 59.2 -
Asset write-down 41.0 49.0
Debt restructuring expenses 2.4 3.3
Other long-term liabilities 5.6 2.4
Deferred compensation 5.5 8.4
Other 11.8 8.1
-------- --------
Sub-total 209.2 164.8
-------- --------
Deferred tax liabilities:
Depreciation 178.6 177.2
Capitalized interest 12.2 11.9
Other 1.6 1.6
-------- --------
Sub-total 192.4 190.7
-------- --------
Net non-current deferred tax asset (liability) $ 16.8 $ (25.9)
======== ========
The current income tax provision for Fiscal 1996 and Fiscal 1995,
principally for state income taxes and Alternative Minimum Tax (AMT), was $4.2
million and $3.8 million, respectively. The deferred income tax provision for
Fiscal 1996 was $1.8 million, net of the deferred tax benefit related to the
extraordinary loss (see Note 3), and the deferred tax benefit for Fiscal 1995
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 1996,
Fiscal 1995 and Fiscal 1994 and their related deferred income tax provision
(benefit) follow:
Year Ended September 30,
------------------------------
In millions 1996 1995 1994
-------- -------- --------
Depreciation expense $ 1.4 $ 5.8 $ 7.3
Original issue discount (18.1) - -
Asset write-down 8.0 (0.6) (2.1)
Restructuring fees 0.9 0.9 (0.2)
Inventory differences 1.7 (0.8) (2.7)
Net operating loss 11.6 45.6 (33.0)
Change in valuation allowance - (75.3) 32.9
Other - net (3.7) (3.6) (2.2)
-------- -------- --------
Total deferred income tax
provision (benefit) $ 1.8 $ (28.0) $ -
======== ======== ========
Income tax benefits that would have been recognized in Fiscal 1994 were
offset by a change in the valuation allowance. This was 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>
In Fiscal 1996, the Company reclassified approximately $41 million of its
"Net operating loss" deferred tax asset to "Original issue discount." The
"Original issue discount" is not deductible on the Company's income tax return
until the related debt issue is repaid.
Although realization is not assured, management believes it is more likely
than not that all of the Company's deferred tax assets will be realized.
Management believes anticipated future taxable income, including but not limited
to the reversal of existing temporary differences and implementation of tax
planning strategies, if needed, will be sufficient to allow the future
realization of its deferred tax assets at September 30, 1996.
At September 30, 1996, the Company had cumulative regular net operating
loss carryforwards of approximately $211 million, which may be carried forward
and expire at various dates through the year 2010. At September 30, 1996, AMT
credits of approximately $7 million for tax purposes may be carried forward
indefinitely to be applied against regular tax.
A reconciliation of income tax provision (benefit) to the amount computed by
applying the statutory Federal income tax rates to the income (loss) before
taxes follows (dollars in millions):
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Percentage of Percentage of Percentage of
income before income before loss before
income income income
Amount taxes Amount taxes Amount taxes
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax $ 7.0 35% $ 38.5 35 % $(29.4) (35)%
State income taxes - net of
Federal benefit 1.4 7 6.6 6 (4.2) (5)
Limitation on use of net
operating losses - - - - 33.6 40
Reduction in valuation allowance - - (75.3) (68) - -
Other (0.1) - 6.0 5 - -
------ --------- ------ --------- ------ ---------
Total income tax provision (benefit) $ 8.3 42% $(24.2) (22)% $ - - %
====== ========= ====== ========= ====== =========
</TABLE>
9. Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following: September 30,
------------------
In millions 1996 1995
------- -------
<S> <C> <C>
Revolving Credit Facility (a) $ - $ -
Trade Receivables Facility (b) - -
Senior Notes, 11.5%, due May 2001 (d) 179.7 225.0
Pollution control and industrial revenue bonds,
interest at 5.7% to 8.3%, due at various dates to 2008 (e) 11.6 12.2
Capital lease obligations, interest at 7.6% to 11.8%,
due at various dates to 2002 (c) 16.2 19.0
Other senior debt, interest at 6.5% to 8.75%, due at
various dates to 1999 22.6 29.3
------- -------
Total senior debt 230.1 285.5
Senior Subordinated Discount Debentures, 12.75%, due
May 2005 (net of unamortized discount of $32.6 million
in Fiscal 1995) (f) 404.3 401.6
------- -------
Total debt 634.4 687.1
Less current maturities (11.3) (15.6)
------- -------
Total $ 623.1 $ 671.5
======= =======
</TABLE>
Scheduled aggregate annual principal payments due on long-term debt during
each of the next five years are (in millions) $11.3, $14.2, $8.6, $5.7 and
$183.6, respectively.
26
<PAGE>
(a) In Fiscal 1996, the Company amended its bank credit agreement (as
amended, the Bank Credit Agreement) to (i) allow the S&G Packaging joint
venture, (ii) allow the Company to repurchase its common stock and (iii) modify
certain financial covenants allowing the Company greater financial flexibility.
In Fiscal 1995, the Company amended and restated its prior 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 capital expenditure amounts and reduced the interest rate charged
on outstanding borrowings by 0.5 percent. At September 30, 1996, the Bank Credit
Agreement was comprised of the $175 million revolving credit facility due in
June 2000 (the Revolving Credit Facility), and a $7.3 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.
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, 1996, no amounts were outstanding under the Revolving Credit
Facility, $169.2 million of credit was available and $5.8 million of standby
letters of credit were outstanding. The highest outstanding principal balance
under the facility during Fiscal 1996 was $2.5 million, and the weighted
average interest rate was 10.2 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, 1996, the aggregate standby letter of credit commitment was
approximately $7.3 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) due in September, 1999. 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, 1996, no amounts
were outstanding under the Trade Receivable Facility and $60.3 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
1996 was $30.0 million and the weighted average interest rate was 8.2 percent.
At September 30, 1996 and 1995, the Company's consolidated balance sheet
included $91.8 million and $118.8 million, respectively, of accounts receivable
sold to GRC.
(c) In Fiscal 1996 and Fiscal 1995, in conjunction with the $250 million
capital expenditure program, the Company entered into various capital leases
with an aggregate value of approximately $1.1 million and $29.4 million,
respectively, 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 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. During Fiscal 1996,
the Company repurchased and retired $45.3 million principal amount of the Senior
Notes (see Note 3).
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, 1996 and 1995, such note
receivable was approximately $11.6 million and approximately $12.2 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
Company, in whole or in part, at declining redemption prices commencing
28
<PAGE>
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. During Fiscal 1996, the Company repurchased on the open
market and retired approximately $29.9 million principal amount of the
Subordinated Discount Debentures (see Note 3).
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. 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 material 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 and (ix) enter into certain transactions with affiliates.
10. Accrued and Other Liabilities
Accrued and other liabilities consist of the following:
September 30,
-------------------
In millions 1996 1995
-------- --------
Current
Accrued salaries and wages $ 27.0 $ 39.6
Other 39.9 33.3
-------- --------
Total current 66.9 72.9
-------- --------
Long-term
Accrued acquisition restructuring costs 1.3 2.0
Accrued pension expense 17.3 13.1
Casualty insurance liabilities 3.4 5.5
Other 7.1 6.9
-------- --------
Total long-term 29.1 27.5
-------- --------
Total $ 96.0 $ 100.4
======== ========
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. The Company's Certificate of Incorporation prohibits the issuance of
non-voting preferred stock.
12. Common Stock
At September 30, 1996 and 1995, 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 54,270,011 shares and 54,124,530 shares were issued,
respectively, and 52,688,233 shares and 54,077,527 shares were outstanding,
respectively.
At September 30, 1996 and 1995, 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 no shares were issued and outstanding. 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.
29
<PAGE>
The Company has outstanding Warrants to obtain one share of Class A Common
Stock per Warrant. At the time the Company issued the Warrants it also 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, a total of
13,836,754 Warrants were exchanged for Class A Common Stock in Fiscal 1995.
The remaining 18,008,701 Warrants became exercisable on July 31, 1996 and
expire on November 2, 2002. Each Warrant is exercisable into one share of Class
A Common Stock at an exercise price of $.0001 per Warrant, which amount was paid
with a portion of the consideration received from exchanging noteholders and is
non-refundable. 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 $16.65 per share.
In June 1995, the Board of Directors adopted a stockholders 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 the third quarter of Fiscal 1996, the Board authorized the repurchase of
up to 6,000,000 shares of Class A Common Stock and canceled a February 1989
authorization for the repurchase of up to 500,000 shares of Class A Common
Stock. During Fiscal 1996, the Company repurchased 1,570,500 shares of Class A
Common Stock and may repurchase additional shares from time to time on the open
market. Shares repurchased under the program are held as treasury stock. At
September 30, 1996 and 1995, 1,581,778 shares and 47,003 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 1996, Fiscal 1995 and Fiscal 1994 the Company issued
35,725 shares, 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 1996, Fiscal 1995 or Fiscal 1994. 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, 1996, the Company was prohibited from declaring or paying cash
dividends on its Common Stock, except under certain limited circumstances (see
Note 9).
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.
30
<PAGE>
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, 1996, the Company was authorized to issue 2,279,833
shares of Class A Common Stock, and had outstanding nonqualified stock options
covering 1,115,713 shares of Class A Common Stock at exercise prices from $2.56
per share to $11.63 per share. During Fiscal 1996, the Company granted
nonqualified stock options under the 1989 Plan covering 25,000 shares of Class A
Common Stock (none of which have been forfeited) at exercise prices ranging from
$7.31 per share to $9.00 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, 1996, options to purchase 839,559 shares of Class A Common
Stock at exercise prices ranging from $2.56 per share to $10.88 per share were
exercisable, 282,078 options had been exercised and 371,217 shares were
available for future grants under the 1989 Plan.
At September 30, 1996, the Company had granted 510,825 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
(as defined) or upon the recipient's retirement, death or disability. During
Fiscal 1996, the Company awarded 42,100 restricted shares of Class A Common
Stock (200 of which have been forfeited). As to the restricted shares granted
during Fiscal 1996, 100 shares, 11,800 shares, 20,000 shares, and 10,000 shares
will become 100 percent vested in fiscal 1997, fiscal 1998, fiscal 1999, and
fiscal 2001 respectively. As to 468,925 restricted shares granted prior to
Fiscal 1996, 414,525 shares were 100 percent vested at September 30, 1996 and
35,900 shares, 14,500 shares and 4,000 shares will become 100 percent vested in
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 become 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, 1996, the Company
had outstanding nonqualified stock options under the 1987 Plan covering 534,040
shares of Class A Common Stock at exercise prices ranging from $1.24 per share
to $8.38 per share. During Fiscal 1996, the Company granted nonqualified stock
options under the 1987 Plan covering 20,000 shares of Class A Common Stock (none
of which have been forfeited) at an exercise price of $7.88 per share. 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, 1996, options to purchase 503,006 shares of Class A Common
Stock at exercise prices ranging from $1.24 to $5.38 per share were exercisable
and 15,668 and 15,366 will become exercisable in fiscal 1997 and fiscal 1998,
respectively. At September 30, 1996, options for 306,415 shares had been
exercised and 14,012 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 (the Outside
Directors) in lieu of all or some specified portion of certain cash fees. The
Director Option Plan was terminated on September 26, 1991.
31
<PAGE>
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.
At September 30, 1996, options to purchase 59,000 shares of Class A Common
Stock at exercise prices of $3.50 and $12.50 per share were exercisable and
options for 56,700 shares had been exercised under the Director Option Plan.
The following table details stock option activity (excluding restricted stock)
for Fiscal 1996, Fiscal 1995 and Fiscal 1994:
Stock Options Exercise Price
------------- --------------------
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
Grants during Fiscal 1996 45,000 $7.31 - $ 9.00
Exercises (122,981) $1.24 - $ 8.63
Cancellations (52,936) $2.56 - $10.88
-------------
Balance at September 30, 1996 1,708,753 $1.24 - $12.50
=============
The following table details restricted stock activity for Fiscal 1996, Fiscal
1995 and Fiscal 1994:
Restricted Stock
----------------
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
Issued during Fiscal 1996 42,100
Cancellations (9,550)
----------------
Balance at September 30, 1996 510,825
================
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 lives of the
leases or the normal depreciable lives of the assets. 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, 1996 are as follows (in
millions):
Operating Capital
Fiscal Year Leases Leases
--------- ---------
1997 $ 8.8 $ 5.7
1998 6.8 4.8
1999 5.2 4.6
2000 4.3 3.2
2001 3.9 1.2
2002 and thereafter 19.8 -
--------- ---------
Total future minimum lease payments $ 48.8 19.5
=========
Less interest 3.3
---------
Present value of future minimum lease payments $ 16.2
=========
Rent expense for Fiscal 1996, Fiscal 1995 and Fiscal 1994 was $11.4
million, $11.7 million and $10.8 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.
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 unit labor costs.
In Fiscal 1996, the Company recorded a $5.2 million charge for pension
costs associated with the staff reduction program which will reduce future
administrative and overhead costs (see Note 2).
The components of net periodic pension cost follow:
Year Ended September 30,
---------------------------
In millions 1996 1995 1994
------- ------- -------
Service cost $ 4.5 $ 3.6 $ 4.1
Interest cost 9.8 8.5 7.8
Return on plan assets (19.7) (17.9) (2.7)
Net amortization and deferral 10.5 9.7 (5.3)
Staff reduction program 5.2 - -
Antioch mill early retirement - 5.4 -
------- ------- -------
Net pension cost $ 10.3 $ 9.3 $ 3.9
======= ======= =======
33
<PAGE>
Assumptions used to develop the net periodic pension costs were:
Year Ended September 30,
---------------------------
1996 1995 1994
------- ------- -------
Discount rate 7.5% 8.0% 7.0%
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, 1996, 1995 and 1994 was 7.5 percent, 7.5 percent and 8.0 percent,
respectively.
The status of the pension plan follows:
September 30,
-----------------
In millions 1996 1995
------- -------
Actuarial present value of benefit obligations:
Vested $ 121.3 $ 112.4
Nonvested 8.9 9.7
------- -------
Accumulated benefit obligation 130.2 122.1
Effect of salary progression 9.8 8.7
------- -------
Projected benefit obligation 140.0 130.8
Plan assets at market value (primarily government
securities, corporate bonds and common stocks) (126.7) (108.2)
------- -------
Plan assets less than projected benefit obligation 13.3 22.6
Unrecognized net gain (loss) 2.1 (11.1)
Prior service benefit not yet recognized in net
periodic pension cost (2.6) (2.6)
Adjustment required to recognize minimum pension
liability - 4.9
------- -------
Accrued pension liability $ 12.8 $ 13.8
======= =======
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 seven 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.
At September 30, 1996 and 1995, the actuarial present value of projected
benefit obligations for the supplemental retirement income payments described
above was approximately $10.2 million and $8.0 million, respectively. At
September 30, 1996, the actuarial present value of accumulated benefit
obligations exceeded the accrual for the vested portion of the obligations and
the Company recognized a minimum pension liability adjustment of $2.8 million
and a corresponding reduction to stockholders' equity of $1.2 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.
34
<PAGE>
The components of net periodic pension cost for the supplemental retirement
income payments follow:
Year Ended September 30,
---------------------------
In millions 1996 1995 1994
------- ------- -------
Service cost $ 0.5 $ 0.2 $ 0.2
Interest cost 0.6 0.4 0.3
Net amortization and deferral 0.2 0.2 0.2
------- ------- -------
Net pension cost $ 1.3 $ 0.8 $ 0.7
======= ======= =======
Assumptions used to develop the net periodic pension costs were:
Discount rate 7.5% 8.0% 7.0%
Expected rate of salary increases 5.0% 5.0% 0.0%
The discount rate used to determine the accrued pension liability at
September 30, 1996, 1995 and 1994 was 7.5 percent, 7.5 percent and 8.0 percent,
respectively.
Post-retirement Benefits Other Than Pensions - In connection with the
acquisition of certain of its facilities, the Company assumed a liability for
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.
The net post-retirement benefit cost for Fiscal 1996, Fiscal 1995 and
Fiscal 1994 was $1.6 million, $0.3 million and $0.3 million, respectively.
The benefit cost for Fiscal 1996 includes a charge of $1.1 million for post-
retirement medical costs for retirees related to the staff reduction program.
The Company funds benefit costs on a pay-as-you-go basis, and, for Fiscal
1996, Fiscal 1995 and Fiscal 1994, the Company made benefit payments of
approximately $0.7 million, $0.5 million and $0.5 million, respectively.
The following table sets forth the plan's funded status, reconciled with amounts
recognized in the Company's balance sheets.
September 30,
--------------
In millions 1996 1995
------ ------
Actuarial present value of post-retirement benefits:
Retirees $ 3.2 $ 3.8
Fully eligible active plan participants 1.3 0.2
Other active plan participants 0.3 0.5
------ ------
Accumulated post-retirement benefit obligation 4.8 4.5
Plan assets at market value - -
------ ------
Accumulated post-retirement benefit obligation 4.8 4.5
Unrecognized net loss (1.2) (1.6)
------ ------
Accrued post-retirement benefit obligation $ 3.6 $ 2.9
====== ======
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation at September 30, 1996 was 8.0 percent in 1997
declining 1.0 percent per year 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, 1995 was 9.0 percent in 1996
declining 1.0 percent per year to 6.0 percent in 1999 and thereafter. The
discount rate used in determining the accumulated post-retirement benefit
obligation at September 30, 1996 and 1995 was 7.5 percent. If the health care
cost trend rate assumptions were increased by 1 percent, the accumulated post-
retirement benefit obligation at September 30, 1996 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.
35
<PAGE>
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 1996, Fiscal 1995 and Fiscal
1994, the Company's cost relating to the Section 401K Plan was $5.1 million,
$1.6 million and $1.4 million, respectively. The Company's cost for Fiscal 1996
includes $3.5 million for deferred profit sharing contributions.
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 sell at market prices approximately 130,000
tons per year (subject to annual adjustments, as defined) of unbleached kraft
paper to S&G Packaging. The agreement expires five years after the Company no
longer has an ownership interest in S&G Packaging.
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 has an agreement to purchase at market prices, through 2004,
approximately 24,000 tons per year of containerboard from Newark Group
Industries, Inc.
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. On January 10, 1996, the court dismissed both
counts with prejudice, and plaintiff has appealed. 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.
On October 18 and December 4, 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 is a
derivative count brought on behalf of the Company against the individual
defendants, and the second is a direct count brought on behalf of the Company's
stockholders. Each count alleges 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 July 1995 were all
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 complaint asks the court, among
other things, to rescind the amendments and to prohibit the use of the
stockholder Rights Agreement from discouraging any bona fide acquirer. The
Company believes the allegations are without merit and on January 16, 1996 moved
to dismiss the consolidated complaint. The motion is fully briefed and argued,
and the Company is awaiting a decision.
36
<PAGE>
On October 23, 1995, a rail tank car exploded on the premises of the
Bogalusa, Louisiana plant of Gaylord Chemical Corporation, a wholly owned,
independently operated subsidiary of the Company. The accident resulted in the
venting of certain chemicals, including by-products 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. More than 140
lawsuits have been filed in both federal and state courts naming as defendants
Gaylord Chemical Corporation, and/or the Company, certain of their respective
officers and other unrelated corporations and individuals. The lawsuits allege
personal injury, property damage, economic loss, related injuries and fear of
injuries as a result of the accident. On April 1, 1996, the federal judge
dismissed all but one of the federal actions for failing to state claims under
federal law and remanded the remaining tort cases to the district court in
Washington Parish, Louisiana, where they have been consolidated. The remaining
federal action has been stayed.
On May 21, 1996, the Louisiana state court established a Plaintiff's
Liaison Committee (PLC) to coordinate and oversee the consolidated cases on
behalf of plaintiffs. On June 26, 1996, the PLC and defendants agreed to a Case
Management Order (CMO) that was subsequently entered by the Court. Pursuant to
this CMO, the plaintiffs filed a single Consolidated Master Petition against
Gaylord Chemical Corporation, the Company and twenty-one other defendants.
In this Consolidated Master Petition all claims against the individuals
(including the officers of Gaylord Chemical Corporation and the Company) have
been dropped. Also, pursuant to the terms of the CMO, all of the individual
actions filed before the Consolidated Master Petition have been, or shortly
will be, dismissed. The Consolidated Master Petition includes substantially
all of the claims and theories asserted in the prior lawsuits, including
negligence and strict liability, as well as several claims of statutory
liability. Compensatory and punitive damages are sought. The Company and its
subsidiary are vigorously contesting all of these claims.
On July 15, 1996 the state court certified these consolidated actions as a
single class action. The class was tentatively defined to include all those
persons or entities who claim to have been injured as a result of the October
23, 1995 incident. This definition may be amended, or subclasses established,
depending on the results of discovery. Written and document discovery is
proceeding.
In June and July several individual plaintiffs filed supervisory writs
seeking to challenge the validity of the Court's (i) May 21, 1996 Order
establishing the PLC; (ii) June 26, 1996 CMO; and (iii) July 15, 1996 Order
certifying these consolidated cases as a class action. Some, but not all, of
these supervisory writs have been fully briefed. Subsequent rulings by the
Louisiana Supreme Court have upheld the CMO.
In addition, the Company, its subsidiary and numerous other third party
companies have been named as defendants in seven actions brought by plaintiffs
in Mississippi state court, including two that name more than 6,000 individual
claimants. This case is not filed as a class action but seeks to allege claims
similar to those in the Louisiana state court. Defendants in the Mississippi
case have filed a motion to sever the actions on grounds of misjoinder. The
Company and its subsidiary are vigorously contesting these claims.
The Company and its subsidiary maintain insurance and have filed separate
suits seeking a declaratory judgment of coverage for the October 23, 1995
accident against their general liability and directors and officers liability
insurance carriers. These cases are currently pending in state court with the
liability cases. The carrier with the first layer of coverage under the general
liability policy has agreed to pay the Company's and its subsidiary's defense
costs under a reservation of rights.
The Company believes that the outcome of all litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
37
<PAGE>
17. Fair Value of Financial Instruments
The following 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 current 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, 1996 is as
follows:
Estimated
Carrying Fair
In millions Amount Value
-------- ---------
Assets
Cash and equivalents $ 39.2 $ 39.2
Trade receivables 111.0 111.0
Long-term notes receivable 11.9 12.5
Liabilities
Trade payables 60.8 60.8
Senior and subordinated notes 584.0 642.4
Capital lease obligations 16.2 16.2
Other senior debt 34.2 34.7
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, 1996. 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 1996 1995 1994
------- ------- --------
Cash paid for interest expense $ 28.6 $ 35.5 $ 37.8
Cash paid for income taxes 5.6 2.5 -
Supplemental schedule of non-cash investing
and financing activities:
Property additions 5.6 45.1 8.4
Increase in total debt 5.6 45.1 -
Increase in accrued and other liabilities - - 4.5
Increase in other long-term liabilities - - 3.9
Write-off of deferred financing fees 1.5 - -
38
<PAGE>
19. Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
Quarter
-------------------------------------
In millions, except per share data 1st 2nd 3rd 4th Year
------- ------- ------- ------- -------
Fiscal 1996
<S> <C> <C> <C> <C> <C>
Net sales $ 253.8 $ 219.3 $ 225.5 $ 223.4 $ 922.0
Gross margin 74.8 45.2 43.8 42.0 205.8
Income (loss) before extraordinary item 19.1 1.2 0.1 (8.6) 11.8
Extraordinary loss (2.6) - - (0.6) (3.2)
Net income (loss) 16.5 1.2 0.1 (9.2) 8.6
Earnings per common and common equivalent share:
Income (loss) before extraordinary item 0.35 0.02 0.0 (0.16) 0.22
Extraordinary loss (0.05) - - (0.01) (0.06)
Net income (loss) 0.30 0.02 0.0 (0.17) 0.16
Weighted average common and common
equivalent shares outstanding 55.0 55.1 55.1 53.6 54.7
Common stock price (AMEX) High 10 3/8 11 5/8 11 1/2 7 15/16 11 5/8
Low 7 1/16 7 1/2 7 11/16 5 3/8 5 3/8
Warrant price (AMEX) High 9 3/8 10 7/8 10 7/8 7 11/16 10 7/8
Low 6 1/2 7 1/4 7 5/8 5 3/4 5 3/4
Fiscal 1995
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
</TABLE>
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 1997 Annual Meeting and Directors in
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held February 5, 1997. 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
5, 1997 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
5, 1997 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
5, 1997 the section therein captioned Certain Transactions.
40
<PAGE>
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. No reports have been filed on Form 8-K during the current reporting
period.
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.
Exhibit Index
Number and Description of Exhibit
3.1(a) 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(a) Amended and Restated Bylaws of the Registrant, as amended,
incorporated by reference to Exhibit 3.1of 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)
(a) Incorporated by reference
(b) Filed with this Annual Report
41
<PAGE>
4.1(a) Amended and Restated Credit Agreement dated 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 Exhibit 4.1 of the June
30, 1995 Form 10-Q
4.2(a) First Amendment to Amended and Restated Credit Agreement dated as of
May 30, 1996 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 Exhibit 4.1
of the Registrant's Quarterly Report on Form 10-Q (No. 1-9915) for the quarter
ended June 30, 1996 filed under the Securities Exchange Act of 1934, as amended
(the June 30, 1996 Form 10-Q)
4.3(a) Second Amendment to Amended and Restated Credit Agreement dated as of
July 19, 1996 by and between the Registrant, the financial institutions
signatory thereto, Bankers Trust Company, as agent, incorporated by reference
to Exhibit 4.2 of June 30, 1996 Form 10-Q
4.4(a) 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
4.5(a) 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 (October 30, 1992 Form 8-K)
4.6(a) 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
4.7(a) 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
4.8(a) 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
4.9(a) 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
4.10(a) 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)
4.11(a) 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
4.12(a) 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
4.13(a) 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
(a) Incorporated by reference.
(b) Filed with this Annual Report.
42
<PAGE>
4.14(a) 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)
4.15(a) 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
4.16(b) Amendment No.1 to Receivables Purchase Agreement dated as of
November 7, 1996 between the Registrant and Gaylord Receivables Corporation
4.17(a) 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
4.18(a) 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
4.19(b) Extension of Credit Agreement dated as of September 27, 1996 between
Gaylord Receivables Corporation, the financial institutions signatory thereto
and Harris Trust and Savings Bank as Facility Agent
4.20(a) 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
4.21(a) 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(a) 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 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(a) 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
10.3(a) 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
10.4(a) 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
10.5(a) 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
10.6(a) 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
(a) Incorporated by reference.
(b) Filed with this Annual Report.
43
<PAGE>
10.7(a) 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
10.8(a) 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 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)
10.9(a) 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
10.10(a) 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
10.11(a) 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)
10.12(a) 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
10.13(a) 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
10.14(a) 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
10.15(a) 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
10.16(a) Employment Agreement by and between the Registrant and Marvin A.
Pomerantz dated as of May 18, 1988, incorporated by reference to Exhibit 10.1 of
the 1988 Debt Registration Statement
10.17(a) Amendment No. 1 to Employment Agreement between the Registrant and
Marvin A. Pomerantz dated February 8, 1989, incorporated by reference to Exhibit
10.25 of the Registrant's Registration Statement on Form S-1 (No. 33-29722), as
amended, filed under the Securities Act of 1933, as amended (the 1989 Debt
Registration Statement)
10.18(a) 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
10.19(a) 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
10.20(a) 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
(a) Incorporated by reference.
(b) Filed with this Annual Report.
44
<PAGE>
10.21(a) 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
10.22(a) 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
10.23(a) 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
10.24(a) 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
10.25(a) 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
10.26(a) S&G Packaging Company, L.L.C. Joint Venture Agreement dated as of
July 12, 1996 by and between the Registrant and Stone Container Corporation
incorporated by reference to Exhibit 10.1 of the June 1996 Form 10-Q
10.27(a) S&G Packaging Company, L.L.C. Limited Liability Company Agreement
dated as of July 12, 1996 incorporated by reference to Exhibit 10.2 of the June
1996 Form 10-Q
10.28(a) 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
10.29(a) 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
10.30(a) 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
10.31(a) Gaylord Container Corporation Retirement Plan
10.32(a) Gaylord Container Corporation Retirement Savings Plan
10.33(a) Gaylord Container Corporation Management Incentive Plan
10.34(a) Gaylord Container Corporation Key Performance Compensation Plan
10.35(a) Gaylord Container Corporation Shareholder Value Plan
10.36(a) Gaylord Container Corporation Supplemental Retirement Plan
21.1(a) Subsidiaries of the Registrant, incorporated by reference to Exhibit
21.1 of the 1993 Form 10-K
23.1(b) Consent of Deloitte & Touche LLP
24.1(b) Power of Attorney
27.1(b) Financial Data Schedule
(a) Incorporated by reference.
(b) 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 9th day of
December, 1996.
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 9th day of December, 1996, 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/ Mary Sue Coleman* Director
- ---------------------------
Mary Sue Coleman
/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>
<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, 1994:
<S> <C> <C> <C> <C> <C>
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
========== ========== ========== ========== =========
For the Year ended September 30, 1996:
Allowance for accounts receivable $ 6.5 $ 23.4 $ - $ (23.0) $ 6.9
========== ========== ========== ========== =========
Reserves - asset write-down $ 27.6 $ - $ - $ (3.5) $ 24.1
========== ========== ========== ========== =========
Reserves - allowance for abandonments $ 1.0 $ 0.2 $ - $ - $ 1.2
========== ========== ========== ========== =========
Reserves - purchase adjustments-accrued
restructuring costs $ 1.2 $ - $ 0.2 $ (0.8) $ 0.6
========== ========== ========== ========== =========
Reserves long-term - purchase
adjustments - accrued restructuring
costs $ 2.0 $ 0.1 $ (0.2) $ - $ 1.9
========== ========== ========== ========== =========
47
</TABLE>
September 27, 1996
Harris Trust and Savings Banks
111 West Monroe Street
Chicago, Illinois 60690
Attention: John M. Dillon, Emerging Majors-Illinois
Caisse Nationale De Credit Agricole
Chicago Branch
55 East Monroe Street
Chicago, Illinois 60603
Attention: Lisa Markham
Banco Di Napoli SpA
New York Branch
277 Park Avenue-Ground Floor
New York, NY 10172-0002
Attention: Franco Di Mario
Re: Gaylord Receivables Corporation - Extension of Credit Agreement
and Amendment to Receivables Purchase Agreement
Ladies and Gentlemen:
Reference is hereby made to that certain Revolving Credit Agreement dated
as of September 24, 1993 among Gaylord Receivables Corporation, Various
Financial Institutions, and Harris Trust and Savings Bank, as Facility Agent
and as Collateral Agent (referred to herein as the "Agreement"). Capitalized
terms not otherwise defined herein shall have the same meanings as ascribed to
them in the Agreement.
Please be advised that pursuant to Section 3.03(b) of the Agreement, GRC
has notified us as the Facility Agent that GRC wishes to extend the Scheduled
Commitment Termination Date by one year, from July 1, 1998 to July 1, 1999.
Pursuant to Section 3.03(b) of the Agreement, we are notifying each Lender
of this request.
Please be further advised that Gaylord and Standard & Poors have agreed
upon language to amend Section 8.2 of the Receivables Purchase Agreement with
respect to "automatic termination." A copy of this amendment is attached. If
you are in agreement with the request of GRC to extend the termination date and
have no objections to the
<PAGE>
amendment, please sign below and forward one original to the undersigned at
Harris Trust and Savings Bank, 111 West Monroe Street, Chicago, Illinois 60690
at your earliest convenience, but no later than October 9, 1996. If you do not
respond by the appointed date, your failure to act will be deemed as a refusal
to consent as provided in Section 3.03(c) of the Agreement.
Should you have any questions, please do not hesitate to contact the
undersigned at (312) 461-6780.
Very truly yours,
HARRIS TRUST AND SAVINGS BANK,
As Facility Agent
By /s/ John M. Dillon
------------------------
John M. Dillon
Vice President
The undersigned authorized officer hereby agrees to the extension request of GRC
pursuant to Section 3.03(b) of the Agreement to extend the Scheduled Commitment
Termination Date to July 1, 1999 and has no objection in the proposed amendment
to the Receivables Purchase Agreement.
HARRIS TRUST AND CAISSE NATIONAL DE CREDIT
SAVINGS BANK AGRICOLE, Chicago Branch
By /s/ John M. Dillon By /s/ Katherin L. Abbott
------------------------ ----------------------
Its Vice President Its First Vice President
------------------------ ----------------------
Date September 27, 1996 Date October 2, 1996
------------------------ ---------------------
BANCO DI NAPOLI SPA
New York Branch
By /s/ Francesco Di Mario
------------------------
Its Vice President
------------------------
Date October 1, 1996
------------------------
By /s/ Claude P. Mapes
------------------------
Its First Vice President
------------------------
Date October 1, 1996
------------------------
AMENDMENT NO. 1 TO
RECEIVABLES PURCHASE AGREEMENT
This Amendment ("Amendment") is made on this 7th day of November, 1996 by
and between Gaylord Container Corporation ("Seller") and Gaylord Receivables
Corporation ("Purchaser") to that certain Receivables Purchase Agreement dated
as of September 24, 1993 (the "Agreement").
WHEREAS, Seller and Purchaser for the mutual promises made herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, hereby agree as follows:
1. Capitalized terms not otherwise defined herein shall have the same
meaning ascribed to them in the Agreement. In the event of an inconsistency
between the terms of this Amendment and the terms of the Agreement, the terms
of this Amendment shall control and supersede.
2. Section 8.2 of the Agreement is hereby amended to add the following
language to the existing provision:
"In addition, if the Internal Revenue Service or PBGC files one or
more tax or ERISA Liens against the assets of the Seller (including
Receivables) then GRC shall not purchase any Receivables or Related
Assets from Seller, unless any such Lein has been removed or GRC has
made other arrangements with respect to such Leins, as a result of
which in either case S&P has confirmed the rating of all then
existing series of Investor Certificates."
3. Except as modified herein, the terms of the Agreement remain in full
force and effect.
IN WITNESS WHEREOF, the parties have have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the
date first above written.
GAYLORD CONTAINER CORPORATION
By /s/ Jeffrey B. Park
-------------------------
Title V.P. Corporate Controller
-------------------------
GAYLORD RECEIVABLES CORPORATION
By /s/ Cathie A. Curran
------------------------
Title Treasurer
------------------------
The foregoing Amendment is hereby consented to by the Trustee this ____ day
of ______________, 1996, written consent and approval of the same having being
received from the Majority Investors.
MANUFACTURERS AND TRADERS TRUST
COMPANY, as Trustee
By _______________________________
Title _______________________________
<PAGE>
CONSENT OF MAJORITY INVESTORS
To: Manufactures and Traders Trust Company, as Trustee
Re: Amendment to Receivables Purchase Agreement
The undersigned, as holder of a majority of the Investors Certificates of
the Gaylord Receivables Master Trust issued pursuant to the Pooling and
Servicing Agreement dated as of September 24, 1993 among Gaylord Receivables
Corporation, as Transferor, Gaylord Container Corporation as initial Servicer
and Manufactures and Traders Trust Company as Trustee, hereby consents to and
approves Amendment No. 1 (attached hereto) to the Receivables Purchase
Agreement dated as of September 24, 1993 by and between Gaylord Container
Corporation, as Seller, and Gaylord Receivables Corporation, as Purchaser.
Dated: November 7, 1996
GAYLORD CONTAINER CORPORATION
By /s/ Jeffrey B. Park
-------------------------
Its: V.P. Corporate Controller
-------------------------
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, and Registration Statement Nos. 33-25675,
33-33871, and 33-54367 on Form S-8 of our report dated November 4, 1996,
appearing in this Annual Report on Form 10-K of Gaylord Container Corporation
for the year ended September 30, 1996.
/s/ Deloitte & Touche LLP
- -------------------------
December 12, 1996
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 1996
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/ Mary Sue Coleman Director
- -------------------------------
Mary Sue Coleman
/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-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 39,200
<SECURITIES> 0
<RECEIVABLES> 111,000
<ALLOWANCES> 6,900
<INVENTORY> 70,400
<CURRENT-ASSETS> 236,100
<PP&E> 1,033,300
<DEPRECIATION> 421,000
<TOTAL-ASSETS> 933,000
<CURRENT-LIABILITIES> 166,300
<BONDS> 623,100
<COMMON> 173,500
0
0
<OTHER-SE> (59,000)
<TOTAL-LIABILITY-AND-EQUITY> 933,000
<SALES> 922,000
<TOTAL-REVENUES> 922,000
<CGS> 716,200
<TOTAL-COSTS> 823,400
<OTHER-EXPENSES> 200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,300
<INCOME-PRETAX> 20,100
<INCOME-TAX> 8,300
<INCOME-CONTINUING> 11,800
<DISCONTINUED> 0
<EXTRAORDINARY> (3,200)
<CHANGES> 0
<NET-INCOME> 8,600
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
