<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, 1997
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Lake Cook Road, Suite 400, Deerfield, Illinois 60015
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(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
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Class A Common Stock, $.0001 par value per share American Stock Exchange
(53,027,091 shares outstanding as of November 26, 1997)
Redeemable Exchangeable Warrants American Stock Exchange
(1,931,979 warrants outstanding as of November 26, 1997)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment of this Form 10-K. ______
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under
a plan confirmed by a court. Yes _X_ No ___
The aggregate market value of voting stock held by non-affiliates of the
registrant, computed on the basis of the closing price of such stock as
reported on the composite tape on November 26, 1997, was approximately
$330 million.
Documents Incorporated by Reference
The registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held February 4, 1998 is incorporated into Part III of
this Annual Report on Form 10-K.
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Part I
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Item 1. Business
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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, four 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 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. The Company is currently
in the process of significantly expanding one converting plant and opened a
new converting facility early in fiscal 1998. The Company currently
anticipates that capital spending for fiscal 1998 and beyond will
approximate its annual depreciation and amortization expense. Capital
spending, however, will be adjusted from time to time as market conditions and
available cash flows dictate.
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 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, 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 (U.S.). 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.
Cellulose fiber, produced from wood chips, 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 1996, industry trade associations estimated U.S. corrugated
product sales and multiwall bag sales to be $20.8 billion and $1.3 billion,
respectively. It has also been estimated that virgin containerboard and
unbleached kraft paper capacity utilization rates in the U.S. averaged 93
percent and 76 percent, respectively, in calendar 1996 and 96 percent and 74
percent, respectively, for the first nine months of calendar 1997.
1
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Industry trade publications estimated that calendar 1997 U.S.
containerboard and unbleached kraft paper annual capacities were 36.9 million
tons and 2.6 million tons, respectively. This represents an increase in
containerboard capacity of approximately 4 percent, while unbleached kraft
paperboard capacity was unchanged, 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 80 percent of the Company's net sales
while the remaining 20 percent primarily consists of containerboard and
unbleached kraft paper 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 1997
and 16 percent and 13 percent, respectively, in fiscal 1996 and fiscal 1995.
The Company's largest customer accounted for approximately 3 percent of the
Company's net sales in fiscal 1997 and approximately 4 percent and 3 percent,
respectively, in fiscal 1996 and fiscal 1995. Corrugated containers are
generally produced to customer order for delivery from one 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, 1997 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 $66.4 million,
$71.5 million and $113.9 million in fiscal 1997, fiscal 1996 and fiscal 1995,
respectively. Fluctuations in export sales are primarily the result of
changes in selling prices for linerboard.
Products
Corrugated Products. The Company produces many varieties of corrugated
containers and sells the majority of its production to manufacturing end
users. The Company also produces corrugated sheets which are subsequently
converted into corrugated containers by independent manufacturers. Corrugated
shipments were a record 13.6 billion square feet in fiscal 1997, an increase
of more than 2 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 4 percent. From fiscal 1995 to
fiscal 1996, corrugated shipments increased approximately 6 percent adjusting
for the extra week in fiscal 1996, due to shipments from a new sheet feeder
plant and capacity additions related to the capital investment program.
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 to a record 1,263,200
tons in fiscal 1997 from 1,243,300 tons in the prior year despite the extra
week in fiscal 1996. Adjusting for the extra week in fiscal 1996, the
Company's production of containerboard increased approximately 2 percent from
1,200,500 tons in fiscal 1995. 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 1997, fiscal 1996 and fiscal 1995, the Company's corrugated plants
consumed the equivalent of approximately 82 percent, 80 percent and 78
percent, respectively, of the Company's containerboard production and purchase
commitments.
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Multiwall Bags. The Company produces many varieties of medium to large
multiwall bags and sells them to manufacturers and processors for packaging
their products. The Company's multiwall bag shipments increased approximately
10 percent in fiscal 1997 to 57,000 tons from 51,900 tons in fiscal 1996. The
Company's multiwall bag shipments were essentially flat in fiscal 1996
compared to fiscal 1995.
Unbleached Kraft Paper. The Company is a supplier of unbleached kraft
paper to independent multiwall bag and grocery bag and sack converters.
During fiscal 1997, the Company produced 278,600 tons of unbleached kraft
paper. This compares with 256,900 tons and 263,900 tons in fiscal 1996 and
fiscal 1995, respectively. The Company has an agreement to supply S&G
Packaging Company, L.L.C. (S&G Packaging), a joint venture with Stone
Container Corporation, with approximately 130,000 tons of unbleached kraft
paper per year. During fiscal 1997 and fiscal 1996, the Company's multiwall
bag plants consumed or the Company sold pursuant to its paper supply agreement
approximately 71 percent and 59 percent, respectively, of its unbleached kraft
paper production. During fiscal 1995, the Company's multiwall bag and grocery
bag and sack plants consumed the equivalent of approximately 54 percent 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 1997, fiscal 1996
and fiscal 1995 were $19.6 million, $18.2 million and $16.7 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 is engaged in the production and sale of grocery bags and
sacks through its 35 percent ownership interest in S&G Packaging.
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 $7.5 million
in fiscal 1997 and $6.6 million in each of fiscal 1996 and fiscal 1995.
Raw Materials
The Bogalusa, Louisiana mill uses approximately 75 percent pulpwood and wood
chips in the manufacture of containerboard and unbleached kraft paper, of
which approximately 40 to 45 percent was supplied by Weyerhaeuser Company
(Weyerhaeuser), successor in interest to Hanson Natural Resources Company, in
each of the last three fiscal years. 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. Recycled fiber accounts for the remainder of the mill's fiber
requirements.
The Antioch, California mill uses 100 percent recycled fiber. During
fiscal 1997, approximately 80 percent of the old corrugated containers (OCC)
used as a source of recycled fiber at the Antioch mill were 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 was purchased on the open market.
3
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The Pine Bluff, Arkansas mill uses approximately 75 percent wood chips,
of which approximately 31 percent, 32 percent and 23 percent was purchased
from Weyerhaeuser, pursuant to a supply contract, in fiscal 1997, fiscal 1996
and fiscal 1995, 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, 1999, at which time the Company anticipates it will be
renegotiated. Recycled fiber accounts for the remainder of the mill's fiber
requirements.
During fiscal 1997, the Company's financial results were adversely
effected by higher fiber costs. Average delivered prices for OCC increased
$11 per ton, or approximately 12 percent from $93 per ton in fiscal 1996, due
to an increase in domestic demand. In addition, average wood chip prices in
fiscal 1997 increased approximately 10 percent as a result of higher demand
and unusually wet weather in the southern U.S. The fiber market is difficult
to predict and there can be no assurance of the future direction of OCC and
wood chip prices. In fiscal 1997, 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 2003 pursuant to
which Weyerhaeuser will provide hog fuel (which consists of bark and other
residual fiber from trees) at stated prices. The remainder of the hog fuel
used by the Bogalusa mill is either purchased on the open market or is
generated at several chip mills with which the Company has long-term supply
agreements. In fiscal 1997, the Bogalusa mill produced all of its steam and
generated approximately 65 percent of its electricity requirements. During
the same period, the Antioch mill produced all of its steam and approximately
94 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 1997, energy costs accounted for approximately 10 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 35 percent of the Company's pulpwood and wood chip requirements
in fiscal 1997.
In contrast to paper mills which manufacture containerboard and
unbleached kraft paper, converting facilities, which produce corrugated
products and multiwall bags, have 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 $1 million, $4
million and $5 million in fiscal 1997, fiscal 1996 and fiscal 1995,
respectively. The Company believes that it is in compliance in all material
respects with applicable federal, state and local environmental regulations.
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In November 1997, the Environmental Protection Agency promulgated new
air standards for pulping processes together with new water quality discharge
limitations into what is commonly referred to as the "Cluster Rule"
regulations for pulp and paper mills. Phase I of the Cluster Rule as it
relates to air quality is applicable to kraft, soda, sulfite, or semi-chemical
pulping processes, mechanical pulping processes, and processes using secondary
or non-wood fibers. New effluent (water) quidelines contained in the Cluster
Rule are applicable to bleached paper grade kraft, soda, and paper grade
sulfite mills only. Effluent guidelines for non-bleached paper mills, the
segment in which the Company participates, (i.e., unbleached kraft,
semi-chemical, dissolving kraft, dissolving sulfite, and non-wood chemical
pulp) are yet to be promulgated. The Company continues to evaluate the
potential impact of the proposed rules on its operations and capital
expenditures. 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 certainty and will depend on several factors including the
actual requirements imposed under the final rules, new developments in process
control technology and the impact of inflation.
Employees
At September 30, 1997, the Company employed approximately 4,000 people.
Approximately 68 percent of the Company's employees are hourly wage employees
who are members of various labor unions. The Company's labor agreements
covering its employees at its Bogalusa, Antioch and Pine Bluff mills expire in
fiscal 2000, fiscal 2001 and fiscal 2002, respectively. At September 30,
1997, labor contracts covering approximately 3 percent of the Company's union
employees had expired, and were subsequently renegotiated. In addition, labor
contacts covering approximately 16 percent of the Company's union employees
are scheduled to expire before the end of fiscal 1998. 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. 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.
5
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Item 2. Properties
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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
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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
Tipton, Indiana (1) Corrugated sheets 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
(1) The facility was opened in October 1997, and production is expected to
begin in the first quarter of fiscal 1998.
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The Bogalusa mill has five paper machines with the capacity to produce
linerboard, corrugating medium and unbleached kraft paper. The mill uses
softwood and hardwood pulp and recycled fiber from OCC and double lined kraft
(DLK) clippings.
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 U.S.
Item 3. Legal Proceedings
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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
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No matters were submitted to a vote of security holders in the fourth quarter
of fiscal 1997
Executive Officers of the Registrant
Marvin A. Pomerantz has served as Chairman, Chief Executive Officer and a
director of the Company since its organization in 1986. Since 1980, Mr.
Pomerantz has served as Chairman or President and a director of Mid-America
Group, Ltd., a real estate investment company. From 1980 to 1982, he served
as President of the Diversified Group, and later as Executive Vice President
of Navistar. Mr. Pomerantz formerly served as President of the Board of
Regents for the state universities in Iowa and formerly served on the Board of
Directors of Stone Container Corporation, a manufacturer of paper packaging
products. He formerly served on the Board of Directors and the Executive
Committee of the American Forest and Paper Association.
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 1978 to 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 is currently serving as a Director of
AMCOL International Corporation, a diversified specialty mineral, chemical and
environmental company.
Daniel P. Casey has served as Executive Vice President and Chief
Financial Officer of the Company since February 1990. From July 1988 through
February 1990, Mr. Casey served as Senior Vice President-Financial and Legal
Affairs for the Company and from January 1988 through June 1988 in the same
position for each of 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 each of 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.
7
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Part 2
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Item 5. Market for Registrant's Common Stock, Warrants
and Related Stockholder Matters
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The Company had 596 and 15 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 26, 1997.
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, 1997, the Company had outstanding
53,026,961 shares of Class A Common Stock (including 2,192,319 shares held in
trust for the benefit of the Warrant holders) and 2,192,319 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 1997, fiscal 1996 and fiscal 1995 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. No shares were repurchased in fiscal 1997.
The Company neither declared nor paid any dividends on its common stock
during fiscal 1997, fiscal 1996 and fiscal 1995. 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."
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Item 6. Selected Financial Data
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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)
Income Statement Data: ---------------------------------------------------------
In millions, except per share data 1997 1996 1995 1994 1993
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales $ 759.3 $ 922.0 $1,051.4 $ 784.4 $ 733.5
Cost of goods sold 717.3 716.2 755.0 691.4 652.1
------ ------ ------- ------ ------
Gross margin 42.0 205.8 296.4 93.0 81.4
Selling and administrative costs (81.1) (99.1) (95.5) (81.0) (73.8)
Non-recurring operating charges (2) (3) - (8.1) (5.4) (15.5) (9.9)
------ ------ ------- ------ ------
Operating earnings (loss) (39.1) 98.6 195.5 (3.5) (2.3)
Interest expense - net (80.7) (78.3) (86.1) (80.3) (68.2)
Other income (expense) - net (1.6) (0.2) 0.6 (0.2) 0.5
------ ------ ------- ------ ------
Income (loss) before income taxes (121.4) 20.1 110.0 (84.0) (70.0)
Income tax benefit (expense) (4) 47.1 (8.3) 24.2 - -
------ ------ ------- ------ ------
Income (loss) before extraordinary
item and accounting change (74.3) 11.8 134.2 (84.0) (70.0)
Extraordinary gain (loss) (5) (7.7) (3.2) - - 201.5
Accounting change (6) - - - - (1.3)
------ ------ ------- ------ ------
Net income (loss) $ (82.0) $ 8.6 $ 134.2 $ (84.0) $ 130.2
====== ====== ======= ====== ======
Earnings per common and
common equivalent share:
Income (loss) before extraordinary
item and accounting change $ (1.40) $ 0.22 $ 2.44 $ (1.57) $ (1.40)
Extraordinary gain (loss) (5) (0.15) (0.06) - - 4.04
Accounting change (6) - - - - (0.03)
------ ------ ------- ------ ------
Net income (loss) $ (1.55) $ 0.16 $ 2.44 $ (1.57) $ 2.61
====== ====== ======= ====== ======
Weighted average common and
common equivalent shares outstanding 52.8 54.7 55.1 53.6 49.8
====== ====== ======= ====== ======
September 30,
Balance Sheet Data: ---------------------------------------------------------
In millions 1997 1996 1995 1994 1993
------ ------ ------- ------ ------
Current assets $ 204.2 $ 236.1 $ 306.3 $ 206.7 $ 199.4
Property - net 586.1 612.3 640.0 592.9 611.1
Other assets 139.6 84.6 41.7 43.5 49.6
------ ------ ------- ------ ------
Total assets $ 929.9 $ 933.0 $ 988.0 $ 843.1 $ 860.1
====== ====== ======= ====== ======
Current liabilities $ 167.3 $ 166.3 $ 149.9 $ 135.1 $ 99.5
Long-term debt (less current maturities) 701.7 623.1 671.5 696.8 670.1
Other long-term liabilities and
deferred income taxes 26.3 29.1 53.4 35.0 36.9
------ ------ ------- ------ ------
Total liabilities 895.3 818.5 874.8 866.9 806.5
Stockholders' equity (deficit) 34.6 114.5 113.2 (23.8) 53.6
------ ------ ------- ------ ------
Total liabilities and
stockholders' equity $ 929.9 $ 933.0 $ 988.0 $ 843.1 $ 860.1
====== ====== ======= ====== ======
</TABLE>
9
<PAGE>
(1) The Company operates on a 52/53-week fiscal year. Fiscal 1997 and
fiscal 1993 through fiscal 1995 were 52-week years, while fiscal 1996 was a
53-week year.
(2) The Company recognized fees and expenses in connection with a debt
restructuring during fiscal 1993 of $7.8 million.
(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. See
"Note 2 of Notes to Consolidated Financial Statements."
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.
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.
(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) During fiscal 1997, the Company issued $225 million principal amount of
9 3/4% Senior Notes due 2007 and used the proceeds to redeem and retire all
its outstanding 11 1/2% Senior Notes ($179.7 million principal amount) due
2001 and to repay borrowings under the revolving portion of its credit
facilities. The early retirement of debt resulted in an extraordinary loss of
$7.7 million, net of an income tax benefit of $5.0 million. 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 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 in connection with a voluntary petition for relief and a prepackaged
plan of reorganization under Chapter 11 of the United States Bankruptcy Code.
(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."
10
<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. Between September 1996 and July 1997 published industry
prices for linerboard decreased an additional 10 percent before recovering in
the fourth quarter of fiscal 1997. At September 1997, published prices for
linerboard were essentially unchanged from September 1996 levels. Due to
year-over-year growth in corrugated product shipments, strong export demand
for linerboard and reduced containerboard mill operating rates to control
inventories, November 1997 published industry prices for linerboard had
increased approximately 15 percent from September 1997 and more than 25
percent from their low point in fiscal 1997.
Results of Operations
Year ended September 30, 1997 (Fiscal 1997) Compared with Year ended September
30, 1996 (Fiscal 1996). Net sales for Fiscal 1997 were $759.3 million, a
decrease of approximately 18 percent compared with net sales of $922.0 million
for Fiscal 1996. The operating loss for Fiscal 1997 was $39.1 million
compared with operating earnings of $98.6 million for Fiscal 1996 after
non-recurring operating charges of $8.1 million. The net loss was $82.0
million, or $1.55 per share, after a $7.7 million extraordinary loss ($0.15
per share) on the early retirement of debt, versus net income in Fiscal 1996
of $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.
Sales and earnings in Fiscal 1997 were adversely affected by declining
product prices which resulted in significantly lower average selling prices
for the Company's products compared with Fiscal 1996. Lower average selling
prices decreased net sales by approximately $132 million versus the prior
fiscal year. In addition, net sales were lower by $57 million as a result of
the exchange of the Company's grocery bag manufacturing assets for a 35
percent equity interest in S&G Packaging Company, L.L.C. (S&G Packaging), a
joint venture with Stone Container Corporation, in the fourth quarter of
Fiscal 1996. Average selling prices for the Company's domestic linerboard,
export linerboard and corrugated products decreased approximately 20 percent,
16 percent and 19 percent, respectively, in Fiscal 1997 compared with Fiscal
1996. Average selling prices for the Company's unbleached kraft paper and
multiwall bags decreased approximately 13 percent and 5 percent, respectively,
in Fiscal 1997 versus the prior year.
Sales in Fiscal 1997 benefited from record mill production. Increased
volume had a favorable effect on net sales of approximately $26 million.
Total mill production increased approximately 3 percent in Fiscal 1997
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 increased approximately 5 percent in Fiscal 1997. In Fiscal 1997,
11
<PAGE>
production of linerboard increased approximately 4 percent to 3,470 tons per
day (TPD, calculated on the basis of the number of days in the period) from
3,351 TPD while production of unbleached kraft paper increased approximately
10 percent to 765 TPD from 693 TPD in the prior year.
Corrugated shipments were a record 13.6 billion square feet in Fiscal
1997, an increase of more than 2 percent from Fiscal 1996. Adjusting for the
extra week in Fiscal 1996, corrugated shipments increased approximately 4
percent. Multiwall bag shipments were a record 57,000 tons in Fiscal 1997, an
increase of approximately 10 percent from Fiscal 1996.
Gross margin for Fiscal 1997 decreased to $42.0 million from $205.8
million in the prior-year period primarily due to lower selling prices for the
Company's products. Lower average net selling prices, including the effect of
higher containerboard and unbleached kraft paper costs on the Company's
converting facilities ($16 million) reduced gross margin by approximately $148
million. In addition, gross margin was adversely affected by higher costs for
fiber ($24 million), energy ($7 million) and labor ($2 million). These
unfavorable variances were partially offset by higher volume which increased
gross margin by approximately $17 million.
Selling and administrative costs for Fiscal 1997 were $18.0 million
lower than Fiscal 1996. The decrease is primarily the result of the exchange
of the Company's grocery bag and sack manufacturing net assets for its
interest in S&G Packaging and a decrease in incentive compensation as a result
of reduced profitability.
Net interest expense increased to $80.7 million in Fiscal 1997 from
$78.3 million in Fiscal 1996, primarily due to higher average debt levels.
During the third quarter of Fiscal 1997, the Company issued $225 million
principal amount of 9 3/4% Senior Notes due 2007 (the New Notes) and used the
proceeds to redeem and retire all its outstanding 11 1/2% Senior Notes ($179.7
million principal amount) due 2001 (the Old Notes) and to repay borrowings
under the revolving portion of its credit agreements. In conjunction with the
redemption, approximately $2.8 million of deferred financing fees were written
off. The early retirement of debt resulted in an extraordinary loss of $7.7
million, net of an income tax benefit of $5.0 million.
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, 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 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
net sales by approximately $181 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 net sales of
approximately $49 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,
12
<PAGE>
production of linerboard increased approximately 2 percent to 3,351 TPD from
3,298 TPD while production of unbleached kraft paper decreased approximately 4
percent to 693 TPD from 725 TPD in the prior year.
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 in July, 1996, the Company
shipped 88,200 tons of grocery bags and sacks (for the 9 1/2-month period)
versus 105,000 tons in Fiscal 1995.
Gross margin for Fiscal 1996 decreased to $205.8 million from $296.4
million in the prior year primarily due to lower selling prices for the
Company's products. Lower average net selling prices, net of the effect of
lower containerboard and unbleached kraft paper costs on the Company's
converting operations ($30 million), reduced gross margin by approximately
$151 million. The effect of lower selling prices was partially offset by
reduced fiber costs (primarily the cost of OCC) and increased volume which
favorably affected gross margin by approximately $72 million and $8 million,
respectively.
In the fourth quarter of Fiscal 1996, the Company recorded a $8.1
million pre-tax charge for costs associated with a staff reduction program.
The staff reductions, 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 was designed
to reduce future unit labor costs.
Selling and administrative costs for Fiscal 1996 were $3.6 million
higher than Fiscal 1995. The increase was 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.
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 used for operations for Fiscal 1997 was $66.5 million compared
with cash provided by operations of $164.4 million for the prior year. The
unfavorable comparison to Fiscal 1996 was due to lower operating earnings and
two semi-annual interest payments in Fiscal 1997 on the Company's Senior
Subordinated Discount Debentures due 2005, on which interest had previously
been accreting.
Capital expenditures of $31.1 million in Fiscal 1997 decreased $23.7
million from Fiscal 1996. In addition to the capital spending, the Company
acquired $2.4 million and $5.6 million of equipment financed by capital leases
or debt obligations secured by the assets acquired in Fiscal 1997 and Fiscal
1996, 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 is currently in
the process of significantly expanding one converting plant and opened a new
converting facility early in fiscal 1998. The Company currently anticipates
that its capital spending for fiscal 1998 an beyond will approximate its
annual depreciation and amortization expense. Capital spending, however, will
be adjusted from time to time as market conditions and available cash flows
dictate.
13
<PAGE>
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 1997, the Company incurred
approximately $3.5 million of costs for demolition and to maintain the East
Mill, such costs 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. Management
believes that it will be able to dispose of the East Mill while avoiding a
substantial portion of the previously recognized demolition and asbestos
removal costs. In addition, management believes that by avoiding such costs,
the value the Company will receive upon disposition of these assets will be
substantially less than their previously recorded book value. Accordingly,
the Company has reduced the carrying value of the East Mill by approximately
$9.0 million and recognized a corresponding reduction in its balance sheet
accruals for demolition and asbestos removal. At September 30, 1997, balance
sheet accruals for demolition and asbestos removal were approximately $7.0
million and the net book value of the East Mill was $2.8 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
1997, Fiscal 1996 and Fiscal 1995, the Company charged approximately $0.8
million, $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, 1997, the Company had balance sheet accruals for such costs of
$0.7 million (primarily lease termination costs) and anticipates incurring
such costs in fiscal 1998.
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. No shares were repurchased during
Fiscal 1997. 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, 1997, the Company had cash and equivalents of $6.1 million, a
decrease of $33.1 million from September 30, 1996 as cash used for operations
and investments exceeded cash provided by financing. Total debt increased by
$81.7 million from $634.4 million at September 30, 1996 to $716.1 million at
September 30, 1997. The increase in total debt was primarily due to
borrowings under the revolving portions of the Company's credit agreements.
During Fiscal 1997, the Company issued the New Notes. The Company used
the proceeds of the offering to redeem and retire all the outstanding Old
Notes; to pay a redemption premium of $8.9 million, accrued interest of $3.4
million, fees and expenses of $5.5 million; and to repay $27.5 million of
borrowings outstanding under the revolving portions of its credit agreements.
In Fiscal 1997 the Company amended its bank credit agreement to allow the
issuance of the New Notes and to modify certain financial covenants to
increase its financial flexibility. At September 30, 1997, the Company had
$47.0 million outstanding and approximately $165 million of credit available
under the revolving portions of its credit agreements. See "Note 9 of Notes
to Consolidated Financial Statements."
At September 30, 1997, the Company had primary working capital of $112.8
million, a decrease of $7.8 million from September 30, 1996, primarily due to
lower accounts receivable. The decrease in accounts receivable was primarily
due to lower average net selling prices for the Company's products.
14
<PAGE>
During Fiscal 1997, published industry prices for linerboard decreased
approximately 10 percent from September 1996 with corresponding decreases in
converted product prices, before recovering during the fourth quarter.
Strengthening industry fundamentals, including year-over-year growth in
corrugated product shipments, strong export demand for linerboard and reduced
containerboard mill operating rates to control inventories, resulted in a $40
per ton increase in published industry prices for containerboard in August
1997 (and subsequent increases in converted product prices). Further,
published industry prices for containerboard increased an additional $50 per
ton in October 1997, and the Company has announced a corresponding price
increase for converted products.
Average delivered prices for OCC increased $11 per ton, or approximately
12 percent from $93 per ton in Fiscal 1996, due to an increase in domestic
demand. In addition, average wood chip prices in Fiscal 1997 increased
approximately 10 percent as a result of higher demand and unusually wet
weather in the southern U.S. The fiber market is difficult to predict and
there can be no assurance of the future direction of OCC and wood chip prices.
Based upon current prices and raw material costs, and assuming
maintenance levels of capital spending, 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. Unless there is
continuing price improvement however, the Company will need to seek covenant
modifications to its credit agreement to maintain continued access to its
liquidity.
Pending Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" which simplifies
the computation of earnings per share. The statement is effective for
financial statements issued for periods ending after December 15, 1997. The
statement will be adopted in fiscal 1998 and will not impact the results of
operations, financial position or cash flows of the Company or have a material
impact on its earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which
establishes standards for the reporting and display of comprehensive income
and its components in financial statements. The statement is effective for
fiscal years beginning after December 15, 1997. The statement will be adopted
in fiscal 1999 and will not impact the results of operations, financial
position or cash flows of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which changes the way public companies
report information about segments of their business. The statement is
effective for fiscal years beginning after December 15, 1997. The statement
will be adopted in fiscal 1999 and will not impact the results of operations,
financial position or cash flows of the Company.
Other
The Company is conducting a review of its computer systems to identify those
areas that could be affected by the "Year 2000" issue and is developing a plan
to resolve the issue. The Company believes that, by modifying existing
software, and converting to new software, the Year 2000 problem can be
resolved without significant operational difficulties. The financial impact
is not anticipated to be material to the Company's results of operations,
financial position or cash flows.
Forward-looking statements in this filing, including those in the footnotes to
the financial statements, are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to risks and uncertainties and actual results could
differ materially. Such risks and uncertainties include, but are not limited
to, general economic and business conditions, competitive market pricing,
increases in raw material, energy and other manufacturing costs, fluctuations
in demand for the Company's products, potential equipment malfunctions and
pending litigation.
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, 1997 and 1996 18
Consolidated Statements of Operations for the Years
Ended September 30, 1997, 1996 and 1995 19
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1997, 1996 and 1995 20
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1997, 1996 and 1995 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, 1997
and 1996 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, 1997. Our audits also included the financial
statement schedule of the Company for each of the three years in the period
ended September 30, 1997, 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,
1997 and 1996 and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1997 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
October 30, 1997
17
<PAGE>
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
September 30, 1997 and 1996
<TABLE>
<CAPTION>
In millions 1997 1996
------ ------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 6.1 $ 39.2
Trade receivables
(less allowances of $5.5 and $6.9,
respectively) (Note 9) 100.6 111.0
Inventories (Note 5) 77.4 70.4
Prepaid expenses 5.4 2.2
Deferred income taxes (Note 8) 4.7 5.1
Other 10.0 8.2
------ ------
Total current assets 204.2 236.1
Property - net (Notes 6 and 14) 586.1 612.3
Other assets:
Deferred charges (Note 7) 18.0 18.6
Deferred income taxes (Note 8) 71.2 16.8
Other (Notes 4 and 9) 50.4 49.2
------ ------
Total $ 929.9 $ 933.0
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt (Note 9) $ 14.4 $ 11.3
Trade payables 65.2 60.8
Accrued interest payable 26.3 27.3
Accrued and other liabilities (Note 10) 61.4 66.9
------ ------
Total current liabilities 167.3 166.3
------ ------
Long-term debt (Note 9) 701.7 623.1
Other long-term liabilities (Note 10) 26.3 29.1
Commitments and contingencies (Note 16) - -
Stockholders' equity (Notes 11, 12 and 13)
Class A common stock - -
Capital in excess of par value 175.6 173.5
Retained deficit (Note 9) (128.1) (46.1)
Common stock in treasury - at cost (11.4) (11.7)
Recognition of minimum pension liability (Note 15) (1.5) (1.2)
------ ------
Total stockholders' equity 34.6 114.5
------ ------
Total $ 929.9 $ 933.0
====== ======
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
Consolidated Statements of Operations
- ------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
For The Years Ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
In millions, except per share data 1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Net sales $ 759.3 $ 922.0 $1,051.4
Cost of goods sold 717.3 716.2 755.0
------ ------- -------
Gross margin 42.0 205.8 296.4
Selling and administrative costs (81.1) (99.1) (95.5)
Non-recurring operating charges (Note 2) - (8.1) (5.4)
------ ------- -------
Operating earnings (loss) (39.1) 98.6 195.5
Interest expense - net (Note 9) (80.7) (78.3) (86.1)
Other income (expense) - net (1.6) (0.2) 0.6
------ ------- -------
Income (loss) before income taxes (121.4) 20.1 110.0
Income tax (provision) benefit (Note 8) 47.1 (8.3) 24.2
------ ------- -------
Income (loss) before extraordinary item (74.3) 11.8 134.2
Extraordinary loss (Note 3) (7.7) (3.2) -
------ ------- -------
Net income (loss) $ (82.0) $ 8.6 $ 134.2
====== ======= =======
Earnings per common and common equivalent share:
Income (loss) before extraordinary item $ (1.40) $ 0.22 $ 2.44
Extraordinary loss (Note 3) (0.15) (0.06) -
------ ------- -------
Net income (loss) $ (1.55) $ 0.16 $ 2.44
====== ======= =======
Average number of common and common
equivalent shares outstanding 52.8 54.7 55.1
====== ======= =======
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
Consolidated Statements of Stockholders' Equity
- ------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
For The Years Ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Total
Common stock Capital in Retained Minimum stockholders'
---------------------------------------
Class A Class B excess of earnings Treasury stock pension equity
------------------ ------------------ ----------------
Dollars in millions Shares Dollars Shares Dollars par value (deficit) Shares Dollars liability (deficit)
--------- ------- ------- ------- ---------- --------- ------ ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 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 Commmon
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
Net income - - - - - (82.0) - - - (82.0)
Options exercised 244,953 - - - 1.8 - - - - 1.8
Restricted stock-net 58,200 - - - - - - - - -
Adjustment of minimum
pension liability - - - - - - - - (0.3) (0.3)
Other - - - - 0.3 - (35,575) 0.3 - 0.6
---------- ----- --------- ----- ------ ------ --------- ----- ------ -----
Balance at
September 30, 1997 54,573,164 $ - - $ - $ 175.6 $(128.1) 1,546,203 $(11.4) $ (1.5) $ 34.6
========== ===== ========= ===== ====== ====== ========= ===== ====== =====
See notes to consolidated financial statements.
</TABLE>
20
<PAGE>
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
For The Years Ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
In millions 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operations:
Net income (loss) $ (82.0) $ 8.6 $ 134.2
Adjustments to reconcile net income (loss)
to net cash provided by
(used for) operations:
Extraordinary loss 7.7 3.2 -
Depreciation and amortization 65.1 64.5 64.8
Non-cash interest expense - 31.2 46.7
Deferred income taxes (48.9) 1.8 (28.0)
Non-recurring charges - 8.1 5.4
Acquisition restructuring expenditures (0.4) (0.7) (1.0)
Change in current assets and liabilities,
excluding acquisitions and dispositions:
Receivables 12.0 29.4 (18.2)
Inventories (6.7) (1.7) (13.5)
Prepaid expenses and other current assets (4.9) 0.5 (3.2)
Accounts payable and other accrued liabilities (7.5) 21.3 8.2
Other - net (0.9) (1.8) (1.2)
------ ------- ------
Net cash provided by (used for) operations (66.5) 164.4 194.2
------ ------- ------
Cash Flows From Investments:
Capital expenditures (31.1) (54.8) (58.9)
Capitalized interest (0.8) (0.8) (2.3)
Proceeds from asset sales 1.9 2.6 3.5
Other investments - net (3.7) - (3.6)
------ ------- ------
Net cash used for investments (33.7) (53.0) (61.3)
------ ------- ------
Cash Flows From Financing:
Treasury stock purchases - (11.6) -
Early extinguishment of debt (Notes 3 and 9) (189.7) (77.7) (89.9)
Issuance of senior notes (Notes 3 and 9) 225.0 - -
Senior debt repayments (10.4) (15.6) (25.8)
Debt issuance costs (5.6) (0.5) (3.4)
Revolving credit agreement borrowings - net 47.0 - -
Other financing - net 0.8 0.7 1.3
------ ------- ------
Net cash provided by (used for) financing 67.1 (104.7) (117.8)
------ ------- ------
Net increase (decrease) in cash and equivalents (33.1) 6.7 15.1
Cash and equivalents, beginning of year 39.2 32.5 17.4
------ ------- ------
Cash and equivalents, end of year $ 6.1 $ 39.2 $ 32.5
====== ======= ======
See notes to consolidated financial statements.
</TABLE>
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 80 percent of the Company's net sales while the
remaining 20 percent primarily consists of containerboard and unbleached kraft
paper 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, four 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, 1997 and 1996 and for the years ended September 30, 1997 (Fiscal
1997), September 30, 1996 (Fiscal 1996) and September 30, 1995 (Fiscal 1995)
include all the accounts of the Company after elimination of intercompany
transactions and balances. The Company operates on a 52/53-week fiscal year.
Fiscal 1997 and Fiscal 1995 were 52-week fiscal years, while Fiscal 1996 was a
53-week fiscal year. Certain amounts on the Consolidated Statement of Cash
Flows for Fiscal 1996 and Fiscal 1995 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 which the Company has 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 a
contractual right of offset does not exist.
Cash and Equivalents - The Company considers all highly liquid debt
instruments, including time deposits, bank repurchase agreements and commercial
paper, with an original or purchased 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.
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 Company's equity in net assets acquired.
In general, goodwill is amortized over the average remaining useful life of the
22
<PAGE>
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" in the
Company's statement of operations. 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" (see Note 8).
Business Segment - The Company is an integrated manufacturer of 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).
2. Non-Recurring Operating Charges
In the fourth quarter of Fiscal 1996, the Company recorded a $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 was designed to reduce future unit labor
costs.
3. Extraordinary Items
During Fiscal 1997, the Company issued $225 million principal amount of 9 3/4%
Senior Notes due 2007 (the New Notes) and used the proceeds to redeem and
retire all its outstanding 11 1/2% Senior Notes ($179.7 million principal
amount) due 2001 (the Old Notes) and to repay borrowings under the revolving
portion of its credit agreements. In conjunction with the redemption,
approximately $2.8 million of deferred financing fees were written off. The
early retirement of debt resulted in an extraordinary loss of $7.7 million, net
of an income tax benefit of $5.0 million.
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 approximately $32.3 million (of which Property - net
accounted for approximately $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 increase its ownership interest by an additional 15 percent before
July 2001. 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 1997 and Fiscal 1996 were approximately $38.4 million
and $6.8 million, respectively.
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 1997, Fiscal 1996 and Fiscal 1995 were
approximately $30.8 million, $38.2 million and $62.0 million, respectively.
The Company has a 50 percent ownership interest in two corporations that,
through wholly owned subsidiaries, produce corrugated sheets and corrugated
containers in Mexico. Product sales to these companies during Fiscal 1997,
Fiscal 1996, and Fiscal 1995 were approximately $4.9 million, $6.4 million and
$4.1 million, respectively.
23
<PAGE>
5. Inventories
<TABLE>
<CAPTION>
Inventories consist of:
September 30,
------------------
In millions 1997 1996
------- ------
<S> <C> <C>
Finished products $ 22.5 $ 16.3
In process 39.3 31.3
Raw materials 9.2 8.5
Supplies 15.0 14.3
------ ------
86.0 70.4
LIFO valuation adjustment (8.6) -
------ ------
Total $ 77.4 $ 70.4
====== ======
</TABLE>
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.
6. Property - Net
Property consists of:
<TABLE>
<CAPTION>
September 30,
------------------
In millions 1997 1996
------- -------
<S> <C> <C>
Land $ 17.6 $ 15.5
Buildings and improvements 142.7 127.4
Machinery and equipment 884.4 848.5
Construction-in-progress 16.8 41.9
------- -------
1,061.5 1,033.3
Accumulated depreciation (475.4) (421.0)
------- -------
Total $ 586.1 $ 612.3
======= =======
</TABLE>
7. Deferred Charges
Deferred charges consist of:
<TABLE>
<CAPTION>
September 30,
-----------------
In millions 1997 1996
------ ------
<S> <C> <C>
Deferred financing costs $ 39.0 $ 40.1
Intangibles 4.2 4.2
------ ------
43.2 44.3
Accumulated amortization (25.2) (25.7)
------ ------
Total $ 18.0 $ 18.6
====== ======
</TABLE>
Amortization of deferred charges during Fiscal 1997, Fiscal 1996 and Fiscal
1995 was approximately $3.6 million, $4.3 million and $7.4 million,
respectively. During Fiscal 1997, the Company wrote off approximately $2.8
million of deferred financing fees related to the refinancing of the Old Notes,
and deferred approximately $5.5 million of financing fees related to the New
Notes. 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:
<TABLE>
<CAPTION>
September 30,
----------------
In millions 1997 1996
----- -----
CURRENT
<S> <C> <C>
Deferred tax assets:
Inventory valuation $ 4.7 $ 5.1
----- -----
Deferred tax asset $ 4.7 $ 5.1
===== =====
NON-CURRENT
Deferred tax assets:
Net operating loss $137.2 $ 83.7
Original issue discount 58.6 59.2
Asset write-down 41.9 41.0
Debt restructuring expenses 1.7 2.4
Other long-term liabilities 3.0 5.6
Deferred compensation 9.5 5.5
Other 12.7 11.8
----- -----
Sub-total 264.6 209.2
----- -----
Deferred tax liabilities:
Depreciation 179.1 178.6
Capitalized interest 12.5 12.2
Other 1.8 1.6
----- -----
Sub-total 193.4 192.4
----- -----
Net non-current deferred tax asset $ 71.2 $ 16.8
===== =====
</TABLE>
The current income tax provision for Fiscal 1997, Fiscal 1996 and Fiscal
1995, principally for state income taxes and Alternative Minimum Tax (AMT), was
$1.9 million, $4.2 million and $3.8 million, respectively. The deferred income
tax benefit for Fiscal 1997 and Fiscal 1995 was $54.0 million and $28.0
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). 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 1997, Fiscal
1996 and Fiscal 1995 and their related deferred income tax provision
(benefit) follow:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
In millions 1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Depreciation expense $ 0.5 $ 1.4 $ 5.8
Original issue discount 0.6 (18.1) -
Asset write-down (0.9) 8.0 (0.6)
Restructuring fees 0.7 0.9 0.9
Inventory differences 0.4 1.7 (0.8)
Net operating loss (53.5) 11.6 45.6
Change in valuation allowance - - (75.3)
Other - net (1.8) (3.7) (3.6)
----- ----- -----
Total deferred income tax
provision (benefit) $(54.0) $ 1.8 $(28.0)
===== ===== =====
</TABLE>
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 a previously recorded valuation allowance to zero.
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, 1997.
At September 30, 1997, the Company had cumulative regular net operating
loss carryforwards of approximately $350 million, which may be carried forward
and expire at various dates through the year 2012. At September 30, 1997, AMT
net operating losses of approximately $131 million are available to be carried
25
<PAGE>
back or carried forward. It is estimated that approximately $26 million of the
AMT net operating loss will be carried back to Fiscal 1996. The remaining AMT
net operating loss of $105 million may be carried forward through the year
2012. At September 30, 1997, AMT credits of approximately $5 million for tax
purposes are expected to be refunded (during fiscal 1998) as a result of the
AMT net operating loss carry back and approximately $4 million 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,
-------------------------------------------------------------------------------------
1997 1996 1995
--------------------- ---------------------- -----------------------
Percentage of Percentage of Percentage of
Loss before Income before Income before
income income income
Amount taxes Amount taxes Amount taxes
------- ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax $ (42.5) (35)% $ 7.0 35% $ 38.5 35 %
State income taxes - net of
Federal benefit (4.6) (4) 1.4 7 6.6 6
Reduction in valuation allowance - - - - (75.3) (68)
Other - - (0.1) - 6.0 5
------ ----- ------ --- ------ -----
Total income tax provision (benefit) $ (47.1) (39)% $ 8.3 42% $ (24.2) (22)%
====== ===== ====== === ====== =====
</TABLE>
9. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
----------------
In millions 1997 1996
------ ------
<S> <C> <C>
Revolving Credit Facility (a) $ - $ -
Trade Receivables Facility (b) 47.0 -
Senior Notes, 9.75%, due June 2007 (c) 225.0 -
Senior Notes, 11.5%, due May 2001 (d) - 179.7
Pollution control and industrial revenue bonds,
interest at 5.7% to 8.3%, due at various dates to 2008 (e) 11.6 11.6
Capital lease obligations, interest at 7.6% to 11.8%, due at
various dates to 2002 (f) 12.6 16.2
Other senior debt, interest at 6.5% to 9.0%, due at various
dates to 1999 15.6 22.6
------ ------
Total senior debt 311.8 230.1
Senior Subordinated Discount Debentures, 12.75%, due
May 2005 (g) 404.3 404.3
------ ------
Total debt 716.1 634.4
Less current maturities (14.4) (11.3)
------ ------
Total $ 701.7 $ 623.1
====== ======
</TABLE>
Scheduled aggregate annual principal payments due on long-term debt during
each of the next five years are (in millions) $14.4, $8.7, $5.8, $4.1 and $0.1,
respectively.
(a) At September 30, 1997, the Company's bank credit agreement (the Bank
Credit Agreement) was comprised of a $175 million revolving credit facility due
in June 2000 (the Revolving Credit Facility) and a $3.8 million standby letter
of credit facility maturing in April 1999 (the L/C Facility). In Fiscal 1997,
the Bank Credit Agreement was amended to permit the refinancing of the Old
Notes (see Note 3) and to modify certain financial covenants allowing the
Company greater financial flexibility. 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. 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 $30 million of letters of credit, which reduce the
facility by a like amount, may be issued under this agreement. At
26
<PAGE>
September 30, 1997, no amounts were outstanding under the Revolving Credit
Facility, $158.9 million of credit was available and $6.1 million of letters of
credit were outstanding. The highest outstanding principal balance under the
facility during Fiscal 1997 was $18.0 million, and the weighted average
interest rate was 8.8 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. 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 July, 2000.
By mutual agreement with the lenders, the Company has the ability annually
to extend the term by one year. 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.
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, 1997, $47.0
million was outstanding under the Trade Receivable Facility and $5.6 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 1997 was $54.0 million and the weighted average interest rate
was 6.5 percent. At September 30, 1997 and 1996, the Company's consolidated
balance sheet included $85.2 million and $91.8 million, respectively, of
accounts receivable sold to GRC.
(c) In June 1997, the Company issued $225.0 million aggregate principal
amount of 9 3/4% Senior Notes Due 2007 (the New Notes). The New Notes are
general unsecured obligations of the Company and rank pari passu in right of
payment to all senior indebtedness of the Company, including indebtedness under
the Bank Credit Agreement, and rank senior in right of payment to the
Subordinated Discount Debentures (as defined below). Indebtedness under the
Bank Credit Agreement, however, is secured by liens on substantially all of
the assets of the Company. Interest on the New Notes is payable semiannually
on June 15 and December 15. The New Notes will mature on June 15, 2007 and
are subject to redemption on or after June 15, 2002 at the option of the
Company, in whole or in part, at declining redemption prices commencing at
104.875 percent of the principal amount and declining to 100 percent of the
principal amount at June 15, 2005 and thereafter, plus accrued interest to the
27
<PAGE>
date of redemption. In addition, prior to June 15, 2000, the Company, at its
option, may redeem up to 33 percent of the aggregate principal amount of the
New Notes originally issued with the net cash proceeds of one or more equity
offerings (as defined) at the redemption prices described above, plus
accrued and unpaid interest, if any, to the date of redemption, provided that
at least $100.0 million aggregate principal amount of the New Notes remain
outstanding after any such redemption.
Upon the occurrence of a change of control (as defined) each holder of the
New Notes has the right to require the Company to repurchase such holder's New
Notes at a price equal to 101 percent of the principal amount, plus accrued
interest to the date of the repurchase. In addition, the Company will be
required to make an offer to repurchase the New Notes at 100 percent of the
principal amount, plus accrued interest to the date of repurchase, in the event
of certain asset sales.
(d) In June 1997, the Company redeemed all of the outstanding 11 1/2%
Senior Notes Due 2001 pursuant to their terms (see Note 3).
(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, 1997 and 1996, such
note receivable was approximately $9.7 million and $11.6 million,
respectively, and was classified as "Other assets."
(f) Commencing in Fiscal 1995, in conjunction with the $250 million capital
expenditure program, the Company entered into various capital leases with a
cumulative aggregate value of approximately $31.3 million to finance equipment
at its converting facilities. The capital leases had initial 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.
(g) 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 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), (c) and (g) 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.
28
<PAGE>
10. Accrued and Other Liabilities
Accrued and other liabilities consist of the following:
<TABLE>
<CAPTION>
September 30,
------------------
In millions 1997 1996
------- -------
<S> <C> <C>
CURRENT
Accrued salaries and wages $ 24.6 $ 27.0
Other 36.8 39.9
------- -------
Total current 61.4 66.9
------- -------
LONG-TERM
Accrued acquisition restructuring costs 0.9 1.3
Accrued pension expense 18.9 17.3
Casualty insurance liabilities 1.3 3.4
Other 5.2 7.1
------- -------
Total long-term 26.3 29.1
------- -------
Total $ 87.7 $ 96.0
======= =======
</TABLE>
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, 1997 and 1996, 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 54,573,164 shares and 54,270,011 shares were issued,
respectively, and 53,026,961 shares and 52,688,233 shares were outstanding,
respectively.
At September 30, 1997 and 1996, 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.
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 Company's Board of Directors adopted a stockholder Rights
Agreement that provides for the distribution of one Preferred Share Purchase
Right on each share of Class A Common Stock. Generally, the rights become
exercisable after a person or group announces a tender offer for, or acquires,
15 percent or more of the outstanding Class A Common Stock. In that event,
29
<PAGE>
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 Company's Board of Directors
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. No shares were repurchased in Fiscal
1997. Shares repurchased under the program are held as treasury stock. At
September 30, 1997, and 1996, 1,546,203 shares and 1,581,778 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 1997, Fiscal 1996 and Fiscal
1995 the Company issued 35,575 shares, 35,725 shares and 35,975 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 1997, Fiscal 1996 or Fiscal 1995. 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, 1997, 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 maintained three stock-based plans during Fiscal 1997 pursuant to
which stock options may be granted: (i) the 1989 Long-Term Incentive Plan (the
1989 Plan), (ii) the 1987 Key Employee Stock Option Plan (the 1987 Plan) and
(iii) the 1997 Long-Term Incentive Plan (the 1997 Plan).
The Company has adopted the disclosure-only provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-based Compensation" (FAS No.
123). FAS No. 123 requires pro forma recognition of compensation expense for
stock options based on the fair value of the options at the date of grant.
Pro forma compensation expense for stock options granted in Fiscal 1997 and
Fiscal 1996, computed in a manner consistent with the provisions of FAS No.
123, would have reduced the Company's net earnings and earnings per share by
de minimus amounts (less than $0.01 per share).
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in Fiscal 1997 and Fiscal 1996: expected
volatility of 55 percent; risk-free interest rate of 6.0 percent; and expected
lives of 5.0 years.
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, 1997, the Company was authorized to issue
2,279,833 shares of Class A Common Stock, and had outstanding nonqualified
stock options covering 1,275,308 shares of Class A Common Stock at exercise
prices from $2.56 per share to $11.63 per share. During Fiscal 1997, the
Company granted nonqualified stock options under the 1989 Plan covering
325,000 shares of Class A Common Stock (32,000 of which have been forfeited)
at exercise prices ranging from $5.88 per share to $9.63 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.
30
<PAGE>
At September 30, 1997, options to purchase 890,143 shares of Class A Common
Stock at exercise prices ranging from $2.56 per share to $11.63 per share were
exercisable, 383,782 options had been exercised and 51,718 shares were
available for future grants under the 1989 Plan.
At September 30, 1997, the Company had granted 627,200 restricted shares of
Class A Common Stock (58,175 of which have been forfeited) 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 1997, the Company
awarded 63,000 restricted shares of Class A Common Stock (none of which have
been forfeited). As to the restricted shares granted during Fiscal 1997, 5,000
shares, 25,000 shares, 13,000 shares, and 20,000 shares will become 100
percent vested in fiscal 1998, fiscal 1999, fiscal 2000, and fiscal 2002
respectively. As to 506,025 restricted shares granted prior to Fiscal 1997,
459,425 shares were 100 percent vested at September 30, 1997 and 15,600
shares, 21,000 shares and 10,000 shares will become 100 percent vested in
fiscal 1998, fiscal 1999 and fiscal 2001, 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 1987 Plan was terminated according to its terms in Fiscal
1997. The Company has reserved 854,467 shares of Class A Common Stock in
connection with grants under the 1987 Plan. At September 30, 1997, the Company
had outstanding nonqualified stock options under the 1987 Plan covering
395,657 shares of Class A Common Stock at exercise prices ranging from $3.63
per share to $8.94 per share. During Fiscal 1997, the Company granted
nonqualified stock options under the 1987 Plan covering 15,000 shares of Class
A Common Stock (none of which have been forfeited) at exercise prices ranging
from $6.13 per share to $8.94 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, 1997, options to purchase 365,657 shares of Class A Common
Stock at exercise prices ranging from $3.63 to $8.38 per share were
exercisable and 13,332, 11,669 and 4,999 options will become exercisable in
fiscal 1998, fiscal 1999 and fiscal 2000, respectively. At September 30,
1997, options for 457,132 shares had been exercised.
1997 Plan - The 1997 Plan provides for grants of stock options, stock
appreciation rights in tandem with options, restricted stock, performance
awards and any combination of the foregoing to certain directors, officers and
key employees of the Company and its subsidiaries.
The Company has reserved 2,000,000 shares of Class A Common Stock for
issuance pursuant to the 1997 Plan. At September 30, 1997, no stock options
had been granted under the 1997 Plan.
Director Option Plan - An Outside Director Option Plan (the Director Option
Plan authorized grants of stock options to each director who was not an
employee of the Company in lieu of all or some specified portion of certain
cash fees. The Director Option Plan was terminated on September 26, 1991.
The Company has reserved 115,700 shares of Class A Common Stock in
connection with grants under the Director Option Plan. In the aggregate, the
Company granted options on 121,000 shares (5,300 of which have been forfeited)
of Class A Common Stock at exercise prices of $3.50 and $12.50 per share in
lieu of $220,000 of cash fees payable with respect to fiscal 1991 and fiscal
1990.
At September 30, 1997, options to purchase 59,000 shares of Class A Common
Stock at exercise prices of $3.50 and $12.50 per share were outstanding and
exercisable and options for 56,700 shares had been exercised under the
Director Option Plan.
31
<PAGE>
The following table details stock option activity (excluding restricted stock)
for Fiscal 1997, Fiscal 1996 and Fiscal 1995:
<TABLE>
<CAPTION>
Stock Options Exercise Price
------------- --------------
<S> <C> <C>
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
Grants during Fiscal 1997 340,000 $5.88 - $ 9.63
Exercises (244,953) $1.24 - $ 5.25
Cancellations (73,835) $2.56 - $11.63
-------------
Balance at September 30, 1997 1,729,965 $2.56 - $12.50
=============
</TABLE>
Additional information regarding options outstanding as of September 30, 1997
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- -------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- --------------- ----------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.56 - $3.75 1,089,599 4.04 $ 3.43 1,089,599 $ 3.43
$4.00 - $5.88 33,000 7.04 $ 5.12 23,000 $ 4.79
$6.13 - $8.38 316,000 9.04 $ 7.02 20,001 $ 7.95
$8.63 - $12.50 291,366 7.44 $10.51 182,200 $10.73
----------- --------- --------- ---------- --------
$2.56 - $12.50 1,729,965 5.59 $ 5.31 1,314,800 $ 4.54
=========== ========= ========= ========== ========
</TABLE>
The following table details restricted stock activity for Fiscal 1997, Fiscal
1996 and Fiscal 1995:
<TABLE>
<CAPTION>
Restricted Stock
----------------
<S> <C>
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
Issued during Fiscal 1997 63,100
Cancellations (4,800)
----------------
Balance at September 30, 1997 569,125
================
</TABLE>
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 assets are capitalized based on the
lease contract provisions. Capitalized amounts are amortized over either the
term of the lease or the normal depreciable lives of the assets. All other
leases are defined as operating leases. Lease payments related to operating
leases are charged to expense as incurred.
Future minimum lease payments at September 30, 1997 are as follows (in
millions):
<TABLE>
<CAPTION>
Operating Capital
Fiscal Year Leases Leases
--------- ---------
<S> <C> <C>
1998 $ 11.2 $ 5.0
1999 8.6 4.8
2000 7.1 3.3
2001 5.9 1.7
2002 5.6 -
2003 and thereafter 23.2 -
--------- ---------
Total future minimum lease payments $ 61.6 14.8
=========
Less interest 2.2
---------
Present value of future minimum lease payments $ 12.6
=========
</TABLE>
32
<PAGE>
Rent expense for Fiscal 1997, Fiscal 1996 and Fiscal 1995 was $13.8
million, $11.4 million and $11.7 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 certain designated employees of
the Company whose earned pension benefits would otherwise be restricted by
maximum benefit limitations imposed by Internal Revenue Service regulations.
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). 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 which was
designed to reduce future unit labor costs.
The components of net periodic pension cost follow:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
In millions 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost $ 4.1 $ 4.5 $ 3.6
Interest cost 10.5 9.8 8.5
Return on plan assets (35.9) (19.7) (17.9)
Net amortization and deferral 25.6 10.5 9.7
Staff reduction program - 5.2 -
Antioch mill early retirement - - 5.4
------ ------ ------
Net pension cost $ 4.3 $ 10.3 $ 9.3
====== ====== ======
</TABLE>
Assumptions used to develop the net periodic pension costs were:
Year Ended September 30,
-------------------------
1997 1996 1995
----- ----- -----
Discount rate 7.5% 7.5% 8.0%
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 status of the pension plan follows:
<TABLE>
<CAPTION>
September
----------------
In millions 1997 1996
------ ------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $ 125.2 $ 121.3
Nonvested 7.1 8.9
------ ------
Accumulated benefit obligation 132.3 130.2
Effect of salary progression 14.0 9.8
------ ------
Projected benefit obligation 146.3 140.0
Plan assets at market value (primarily government
securities, corporate bonds and common stocks) (154.1) (126.7)
------ ------
Plan assets less than (in excess of) projected
benefit obligation (7.8) 13.3
Unrecognized net gain 27.6 2.1
Prior service benefit not yet recognized in net
periodic pension cost (2.7) (2.6)
------ ------
Accrued pension liability $ 17.1 $ 12.8
====== ======
</TABLE>
The Company's funding policy is to contribute annually amounts necessary to
satisfy the statutory requirements of ERISA.
33
<PAGE>
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 current or retired 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, 1997 and 1996, the actuarial present value of projected
benefit obligations for the supplemental retirement income payments described
above was approximately $11.5 million and $10.2 million, respectively. At
September 30, 1997, 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 $3.0 million
and a corresponding reduction to stockholders' equity of $1.5 million.
Funding for the supplemental retirement income payments is not subject to the
statutory requirements of ERISA and no assets have been set aside to satisfy
the liability. Required supplemental annual retirement income payments will
be made from general corporate funds.
The components of net periodic pension cost for the supplemental retirement
income payments follow:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
In millions 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost $ 0.6 $ 0.5 $ 0.2
Interest cost 0.8 0.6 0.4
Net amortization and deferral 0.2 0.2 0.2
------ ------ ------
Net pension cost $ 1.6 $ 1.3 $ 0.8
====== ====== ======
</TABLE>
Assumptions used to develop the net periodic pension costs were:
Discount rate 7.5% 7.5% 8.0%
Expected rate of salary increases 5.0% 5.0% 5.0%
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 1997, Fiscal 1996 and
Fiscal 1995 was $0.4 million, $1.6 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 (see Note 2). The Company funds benefit costs on a pay-as-you-go
basis, and, for Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company made
benefit payments of approximately $0.5 million, $0.7 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:
<TABLE>
<CAPTION>
September 30,
-------------
In millions 1997 1996
----- -----
<S> <C> <C>
Actuarial present value of post-retirement benefits:
Retirees $ 3.3 $ 3.2
Fully eligible active plan participants 0.7 1.3
Other active plan participants 0.4 0.3
----- -----
Accumulated post-retirement benefit obligation 4.4 4.8
Plan assets at market value - -
----- -----
Accumulated post-retirement benefit obligation 4.4 4.8
Unrecognized net loss (1.0) (1.2)
----- -----
Accrued post-retirement benefit obligation $ 3.4 $ 3.6
===== =====
</TABLE>
34
<PAGE>
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation at September 30, 1997 was 7.0 percent in
1998 declining to 6.0 percent in 1999 and thereafter. The assumed health care
cost trend rate used in measuring the accumulated post-retirement benefit
obligation at September 30, 1996 was 8.0 percent in 1997 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, 1997 and 1996 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, 1997 would be increased by approximately
$0.2 million or 5 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 1 percent.
Savings Plan - In October 1987, the Company established a defined
contribution retirement savings plan (Section 401K Plan) covering
substantially all salaried employees of the Company subject to certain service
requirements for different aspects of participation. The Section 401K Plan
provides for employees to make contributions on a pre-tax basis up to a
maximum of 15 percent of their compensation (as defined) each year, with their
maximum annual contribution determined pursuant to Internal Revenue Service
regulations. Prior to January 1, 1994, the Company contributed to each
participant's plan account an amount equal to 50 percent of the participant's
contribution up to a maximum of 2 percent of the participant's compensation.
Subsequent to January 1, 1994, the Company contributed to each participant's
plan account an amount equal to 75 percent of the participant's contribution
up to a maximum of 3 percent of the participant's compensation. The Company
may also make additional discretionary contributions to the Section 401K Plan.
For Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company's cost relating to
the Section 401K Plan was $1.6 million, $5.1 million and $1.6 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 $6.8 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 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 the plaintiff appealed. On September 29, 1997, the
Illinois Court of Appeals affirmed, in all respects, dismissal of the
complaint. Plaintiff's appeal of that decision to the Illinois Supreme Court
is pending. 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 the decision on appeal.
On October 18 and December 4, 1995, the Company, its directors and certain
of its officers were named in complaints which have been consolidated in the
Court of Chancery of the state of Delaware alleging breach of fiduciary duties
on two counts. The first count is a putative class action and the second is
35
<PAGE>
an alleged derivative claim brought on behalf of the Company against the
individual defendants. Both counts allege that the Company's stockholder
Rights Agreement (as defined), adopted on June 12, 1995, amendments to the
Company's charter and by-laws, adopted on July 21, 1995, and a redemption of
Warrants in June 1995 all were designed to entrench the individual defendants
in their capacities as directors and officers at the expense of stockholders
who otherwise would have been able to take advantage of a sale of the Company.
The complaint asks the court, among other things, to rescind the amendments
and prohibit the use of the stockholder Rights Agreement to discourage any
bona fide acquirer. In the alternative, the plaintiffs seek compensatory
damages. On December 19, 1996, the Delaware Chancery Court denied the
Company's motion to dismiss the complaint in its entirety. The case is now in
the discovery stage. The Company believes that, after investigation of the
facts, the allegations are without merit and is defending itself vigorously.
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
160 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. Discovery in the remaining federal action, a suit to recover
alleged clean-up costs, was ordered coordinated with the Louisiana state
action.
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 the CMO, the plaintiffs filed a single Consolidated Master
Petition against Gaylord Chemical Corporation, the Company and twenty-one
other defendants. In the Consolidated Master Petition all claims against
individual defendants (including the officers of Gaylord Chemical Corporation
and the Company) were dropped. 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 subsidiaries are vigorously contesting all of these claims.
On July 15, 1996 the Louisiana 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 accident. On March 27, 1997, the Louisiana
Court of Appeal for the First Circuit reversed the trial court's order
granting class certification, defining the class, approving class notice,
requiring all notice forms be notarized and appointing the plaintiffs'
attorneys to the PLC. The Court of Appeal ordered the trial court to conduct
a new class certification hearing to allow additional evidence on the adequacy
of class representatives and class counsel and instructed the trial court to
create a concise geographic definition of the class of individuals allegedly
impacted. Finally, the Court of Appeal instructed the trial judge to approve
a new class notice form that permits the use of notice of claim forms and/or
proof of claim forms only after a determination of liability, if any. The
Louisiana Supreme Court declined to review that decision. On May 23, 1997,
the trial court reappointed the PLC with several new members. On
June 20, 1997, a second CMO was entered by the court. Pursuant to this second
CMO, a Second Consolidated Amended Master Petition (SCAMP) was filed on June,
20 1997. The SCAMP includes substantially all the claims and theories
asserted in the original Consolidated Master Petition. No officers of Gaylord
Chemical Corporation or the Company are named as defendants in the SCAMP.
Pursuant to the second CMO, the status of all lawsuits pending before the
filing of the SCAMP, some of which name officers of Gaylord Chemical
Corporation or the Company as defendants, will be determined by the trial court
after class certification. Following a hearing held in July, August and
September, 1997 the trial court certified a class on November 10, 1997. The
class consists of allegedly injured parties in the city of Bogalusa, parts of
Washington Parish, Louisiana, and parts of Marion, Walthall
36
<PAGE>
and Pike Counties in Mississippi. Defendants have filed supervisory writs
with the Court of Appeal challenging the trial court's class certification
ruling. Those writs are currently pending.
In addition, the Company, Gaylord Chemical Corporation and numerous other
third party companies have been named as defendants in eleven actions brought
by plaintiffs in Mississippi state court, who claim injury as a result of the
October 23, 1995 accident at the Bogalusa facility. Included among these
cases are eleven actions which purport to be on behalf of over 11,000
individuals. These cases are not filed as a class action but have been
consolidated before a single judge in Hinds County, Mississippi. All of these
cases seek to allege claims similar to those in the Louisiana state court. To
date, discovery in these consolidated cases has been coordinated with the
ongoing discovery in the Louisiana class action. The Company and Gaylord
Chemical Corporation are vigorously contesting these claims.
The Company and Gaylord Chemical Corporation maintain insurance and have
filed separate suits seeking a declaratory judgement 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
Louisiana 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 Gaylord Chemical Corporation's defense costs under a reservation
of rights. The primary carrier and the nine excess level insurers moved for
summary judgment before the trial court claiming that coverage for the
accident is excluded because of a pollution exclusion contained in these
policies. On November 20, 1997, the trial court denied all of the motions.
The Company believes the outcome of such litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
17. Fair Value of Financial Instruments
The 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,
1997, and 1996 are as follows:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
In millions Amount Value Amount Value
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Assets
Cash and equivalents $ 6.1 $ 6.1 $ 39.2 $ 39.2
Trade receivables 100.6 100.6 111.0 111.0
Long-term notes receivable 9.9 10.3 11.9 12.5
Liabilities
Trade payables 65.2 65.2 60.8 60.8
Senior and subordinated notes 629.3 666.3 584.0 642.4
Capital lease obligations 12.6 12.6 16.2 16.2
Other senior debt 74.2 74.7 34.2 34.7
</TABLE>
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 were based on pertinent
information available to the Company at September 30, 1997 and 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.
37
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
In millions 1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Cash paid for interest expense $ 79.5 $ 28.6 $ 35.5
Cash paid for income taxes 1.9 5.6 2.5
Supplemental schedule of non-cash investing
and financing activities:
Property additions 2.4 5.6 45.1
Increase in total debt 0.8 5.6 45.1
Increase in accrued and other liabilities 1.6 - -
Write-off of deferred financing fees 2.8 1.5 -
</TABLE>
19. Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
Quarter
-------------------------------------
In millions, except per share data 1st 2nd 3rd 4th Year
------- ------- ------- ------- --------
Fiscal 1997
<S> <C> <C> <C> <C> <C>
Net sales $ 195.6 $ 192.4 $ 189.4 $ 181.9 $ 759.3
Gross margin 21.4 12.3 9.4 (1.1) 42.0
Loss before extraordinary item (9.7) (18.5) (19.9) (26.2) (74.3)
Extraordinary loss - - (7.7) - (7.7)
Net loss (9.7) (18.5) (27.6) (26.2) (82.0)
Earnings per common and common equivalent share:
Loss before extraordinary item (0.18) (0.35) (0.38) (0.49) (1.40)
Extraordinary loss - - (0.15) - (0.15)
Net loss (0.18) (0.35) (0.53) (0.49) (1.55)
Weighted average common and common
equivalent shares outstanding 52.7 52.8 52.8 53.0 52.8
Common stock price (AMEX) - High 8 7/16 7 1/4 8 5/8 10 1/8 10 1/8
- Low 6 1/8 6 1/16 5 1/2 7 9/16 5 1/2
Warrant price (AMEX) - High 8 1/4 7 1/4 8 3/8 9 3/4 9 3/4
- Low 6 1/8 6 1/8 5 5/8 8 5 5/8
Fiscal 1996
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 0.00 (0.16) 0.22
Extraordinary loss (0.05) - - (0.01) (0.06)
Net income (loss) 0.30 0.02 0.00 (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
</TABLE>
38
<PAGE>
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures
- ------------------------------------------------------------------------------
Not applicable.
Part 3
- ------------------------------------------
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 1998 Annual Meeting and Directors in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held February 4, 1998. 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 4, 1998 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 4, 1998 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 4, 1998 the section therein captioned Certain Transactions.
39
<PAGE>
Part 4
- ------------------------------------------
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), No. 33-54367 (filed June 29, 1994) and No. 333-39809 (filed November 7,
1997):
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 3.1 of the Registrant's Current
Report on Form 8-K filed on July 5, 1995 under the Securities Act of
1934, as amended (the July 5, 1995 Form 8-K)
4.1(a) Indenture dated as of June 12, 1997, among the Company and State
Street Bank and Trust Company, as successor to Fleet National Bank,
as Trustee, (Including the forms of Series A and Series B 9 3/4%
Senior Notes), incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-4 (No. 333-30423) filed
under the Securities Act of 1933, as amended (the 1997 Debt
Registration Statement)
(a) Incorporated by reference
(b) Filed with this Annual Report
40
<PAGE>
4.2(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
4.3(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)
4.4(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, and Bankers Trust Company, as agent,
incorporated by reference to Exhibit 4.2 of June 30, 1996 Form 10-Q
4.5(a) Third Amendment to Amended and Restated Credit Agreement dated as of
May 20, 1997 by and between the Company, the financial institutions
signatory thereto, and Bankers Trust Company, as agent, incorporated
by reference to Exhibit 4.5 of the 1997 Debt Registration Statement
4.6(a) Fourth Amendment to Amended and Restated Credit Agreement dated as of
June 6, 1997 by and between the Company, the financial institutions
signatory thereto, and Bankers Trust Company, as agent, incorporated
by reference to Exhibit 4.6 of the 1997 Debt Registration Statement
4.7(b) Fifth Amendment to Amended and Restated Credit Agreement dated as of
September 30, 1997 by and between the Company, the financial
institutions signatory thereto and Bankers Trust Company, as agent
4.8(a) Registration Rights Agreement dated as of June 5, 1997 among the
Company, BT Securities Corporation, Bear, Stearns & Co. Inc. and
Solomon Brothers Inc, incorporated by reference to Exhibit 4.7 of
the 1997 Debt Registration Statement
4.9(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
4.10(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)
4.11(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
4.12(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
4.13(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
(a) Incorporated by reference
(b) Filed with this Annual Report
41
<PAGE>
4.14(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
4.15(a) Form of Indenture between the Registrant and Ameritrust Texas,
National Association as Trustee, relating to the Registrant's 12-3/4%
Senior Subordinated Discount Debentures Due 2005, incorporated by
reference to Exhibit 4(c) 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)
4.16(a) Specimen Certificate of the Registrant's 12-3/4% Senior Subordinated
Discount Debentures Due 2005, incorporated by reference to Exhibit
4(d) of the 1993 Debt Registration Statement
4.17(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)
4.18(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
4.19(a) Amendment No.1 to Receivables Purchase Agreement dated as of November
7, 1996 between the Company and Gaylord Receivables Corporation,
incorporated by reference to Exhibit 3.16 of the Company's Annual
Report on Form 10-K (No. 1-9915) for the year ended September 30,
1996, filed under the Securities Exchange Act of 1934, as amended
(the 1996 Form 10-K)
4.20(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
4.21(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
4.22(a) 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,
incorporated by reference to Exhibit 4.19 of the 1996 Form 10-K
4.23(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
4.24(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
(a) Incorporated by reference
(b) Filed with this Annual Report
42
<PAGE>
4.25(b) Extension of Credit Agreement dated as of September 2, 1997 between
Gaylord Receivables Corporation, the financial institutions signatory
thereto and Harris Trust and Savings Bank as Facility Agent
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
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
(a) Incorporated by reference
(b) Filed with this Annual Report
43
<PAGE>
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 Company and Marvin A.
Pomerantz dated June 1, 1997, incorporated by reference to Exhibit
10.18 of the 1997 Debt Registration Statement
10.20(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
10.21(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
10.22(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
10.23(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
10.24(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
10.25(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
10.26(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
(a) Incorporated by reference
(b) Filed with this Annual Report
44
<PAGE>
10.27(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
10.28(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 30, 1996 Form 10-Q
10.29(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
10.30(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
10.31(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
10.32(a) Gaylord Container Corporation 1997 Long-Term Incentive Plan,
incorporated by reference to Exhibit 28.1 of the Registrant's
Registration Statement on Form S-8 (No. 333-39809) filed under the
Securities Act of 1933, as amended
10.33(a) Description of Gaylord Container Corporation Management Incentive
Plan, incorporated by reference to Exhibit 10.31 of Amendment No.3 to
the Company's Registration Statement on Form S-4 (No. 333-30423)
Filed under the Securities Act of 1933, as amended (Amendment No. 3
to the 1997 Debt Registration Statement
10.34(a) Gaylord Container Corporation Shareholder Value Plan, incorporated by
reference to Exhibit A of the Company's Proxy Statement for its 1994
Annual Meeting held December 10, 1993
10.35(a) Gaylord Container Corporation Supplemental Retirement Plan,
incorporated by reference to Exhibit 10.33 of Amendment No. 3 to the
1997 Debt Registration Statement
10.36(a) Gaylord Container Corporation Supplemental Executive Retirement Plan,
incorporated by reference to Exhibit 10.36 of the Company's Annual
Report on Form 10-K (No. 1-9915) for the year ended September 30,
1995, filed under the Securities Exchange Act of 1934, as amended
21.1(a) Subsidiaries of the Registrant, incorporated by reference to Exhibit
21.1 of the Amendment No.1 to the Company's Registration Statement on
Form S-4 (No. 333-30423) filed under the Securities Act of 1933, as
amended
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 8th day of
December, 1997.
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 8th day of December, 1997, 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/ Charles S. Johnson* Director
- ---------------------------
Charles S. Johnson
/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
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
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
For the Year ended September 30, 1997:
Allowance for accounts receivable $ 6.9 $ 21.9 $ - $ (23.3) $ 5.5
Reserves - asset write-down $ 24.1 $ - $ (9.0) $ (3.6) $ 11.5
Reserves - allowance for abandonments $ 1.2 $ - $ (0.1) $ (0.5) $ 0.6
Reserves - purchase adjustments-accrued
restructuring costs $ 0.6 $ - $ 1.4 $ (0.8) $ 1.2
Reserves long-term - purchase
adjustments - accrued restructuring
costs $ 1.9 $ 0.5 $ (1.5) $ - $ 0.9
47
</TABLE>
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 1997
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
/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/ Charles S. Johnson Director
- ------------------------------
Charles S. Johnson
/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
FIFTH AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This Fifth Amendment to Amended and Restated Credit Agreement
(this "Amendment"), dated as of September 30, 1997, is by and among
Gaylord Container Corporation, a Delaware corporation (the
"Borrower"), the undersigned financial institutions in their
capacities as lenders (collectively, the "Banks"), and Bankers
Trust Company, as agent (the "Agent") for the Banks.
W I T N E S S E T H :
WHEREAS, the Borrower, the Banks and the Agent are parties to
that certain Amended and Restated Credit Agreement dated as of
November 17, 1986 and amended and restated as of June 30, 1995, and
as further amended as of May 30, 1996, as of July 19, 1996, as of
May 20, 1997 and as of June 6, 1997 (as amended, restated,
supplemented or otherwise modified and in effect from time to time,
the "Credit Agreement"), pursuant to which the Banks have provided
to the Borrower credit facilities and other financial
accommodations; and
WHEREAS, the Borrower has requested that the Agent and the
Banks amend the Credit Agreement in certain respects as set forth
herein and the Banks and the Agent are agreeable to the same,
subject to the terms and conditions hereof;
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants contained herein, and other good and valuable
consideration the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Terms capitalized herein and not otherwise
defined herein are used with the meanings ascribed to such terms in
the Credit Agreement.
2. Amendments to Credit Agreement. The Credit Agreement is,
as of the Effective Date (as defined below), hereby amended as
follows:
(a) Section 5.1(j) of the Credit Agreement is hereby
amended by deleting such Section in its entirety and replacing it
with the following:
"(j)Adjusted Consolidated Net Worth. The
Borrower's Adjusted Consolidated Net Worth as of the end
of each Fiscal Quarter ending on or after the Fiscal
Quarter ended in June, 1996 as specified below shall not
be less than the applicable amount set forth in the table
below:
<PAGE>
Minimum Adjusted
Fiscal Quarter Ended Consolidated Net Worth
---------------------- ----------------------
Fiscal Quarter ended in June, 1996 $ 100,000,000
Fiscal Quarter ended in September, 1996 $ 94,000,000
Fiscal Quarter ended in December, 1996 $ 80,000,000
Fiscal Quarter ended in March, 1997 $ 68,000,000
Fiscal Quarter ended in June, 1997 $ 58,000,000
Fiscal Quarter ended in September, 1997 $ 48,000,000
Fiscal Quarter ended in December, 1997 $ 27,000,000
Fiscal Quarter ended in March, 1998 $ 9,000,000
Fiscal Quarter ended in June, 1998 $ 21,000,000
Fiscal Quarter ended in September, 1998 $ 24,000,000
Fiscal Quarter ended in December, 1998 $ 25,000,000
Fiscal Quarter ended in March, 1999 $ 27,000,000
Fiscal Quarter ended in June, 1999 $ 38,000,000
Fiscal Quarter ended in September, 1999
and each Fiscal Quarter ended thereafter $ 50,000,000"
(b) Section 5.1(l) of the Credit Agreement is hereby
amended by deleting subsection (i) thereof in its entirety and
replacing it with the following:
"(i) Maintain for each Fiscal Quarter, a ratio
(the "Interest Coverage Ratio") of (A) EBITDA for the
four preceding Fiscal Quarters ending on the last day of
the Fiscal Quarter set forth below to (B) Interest
Expense of the Borrower for the same four Fiscal
Quarters, which is equal to or greater than those set
forth below:
2
<PAGE>
Fiscal Quarter Interest Coverage Ratio
-------------- -----------------------
ending June 30, 1996 2.27 to 1.00
ending September 30, 1996 1.80 to 1.00
ending December 31, 1996 1.07 to 1.00
ending March 31, 1997 0.81 to 1.00
ending June 30, 1997 0.50 to 1.00
ending September 30, 1997 0.25 to 1.00
ending December 31, 1997 0.10 to 1.00
ending March 31, 1998 0.10 to 1.00
ending June 30, 1998 0.70 to 1.00
ending September 30, 1998 1.00 to 1.00
ending December 31, 1998 1.20 to 1.00
ending March 31, 1999 1.40 to 1.00
ending June 30, 1999 1.65 to 1.00
ending September 30, 1999
and each Fiscal Quarter
ending thereafter 1.95 to 1.00"
3. Borrower's Representations and Warranties. In order to
induce the Agent and the Banks to enter into this Amendment, the
Borrower hereby represents and warrants to the Agent and the Banks
that:
(i) the Borrower has the right, power and capacity
and has been duly authorized and empowered by all
requisite corporate and shareholder action to enter into,
execute, deliver and perform this Amendment and all
agreements, documents and instruments executed and
delivered pursuant to this Amendment;
(ii) this Amendment constitutes the Borrower's
legal, valid and binding obligation, enforceable against
it, except as enforcement thereof may be subject to the
effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting
creditors' rights generally and general principles of
equity (regardless of whether such enforcement is sought
in a proceeding in equity or at law or otherwise);
3
<PAGE>
(iii) the Borrower's execution, delivery and
performance of this Amendment do not and will not violate
its Certificate of Incorporation or By-laws, any law,
rule, regulation, order, writ, judgment, decree or award
applicable to it or any contractual provision to which it
is a party or to which it or any of its property is
subject;
(iv) no authorization or approval or other action
by, and no notice to or filing or registration with, any
governmental authority or regulatory body (other than
those which have been obtained and are in force and
effect) is required in connection with its execution,
delivery and performance of this Amendment and all
agreements, documents and instruments executed and
delivered pursuant to this Amendment; and
(v) no Event of Default or Unmatured Event of
Default exists under the Credit Agreement or would exist
after giving effect to the transactions contemplated by
this Amendment.
4. Conditions to Effectiveness of Amendment. This Amendment
shall become effective on the date (the "Effective Date") each of
the following conditions precedent is satisfied:
(a) Execution and Delivery. The Borrower, the Agent,
and the Required Banks shall have executed and delivered this
Amendment.
(b) No Defaults. No Unmatured Event of Default or
Event of Default under the Credit Agreement (as amended hereby)
shall have occurred and be continuing.
(c) Representations and Warranties. The
representations and warranties of the Borrower contained in this
Amendment and in the Credit Agreement (as amended hereby) shall be
true and correct in all material respects as of the Effective Date,
with the same effect as though made on such date, except to the
extent that any such representation or warranty relates to an
earlier date, in which case such representation or warranty shall
be true and correct in all material respects as of such earlier
date.
(d) Deliveries. The Borrower shall have duly executed
and delivered to the Agent a certificate of a Responsible Officer
of the Borrower dated as of the Effective Date certifying as to the
conditions precedent set forth in Sections 5(b) and (c) of this
Amendment.
5. Miscellaneous. The parties hereto hereby further agree
as follows:
(a) Costs, Expenses and Taxes. The Borrower hereby
agrees to pay all reasonable fees, costs and expenses of the Agent
incurred in connection with the negotiation, preparation and
execution of this Amendment and the transactions contemplated
hereby, including, without limitation, the reasonable fees and
expenses of Winston & Strawn, counsel to the Agent.
(b) Counterparts. This Amendment may be executed in one
or more counterparts, each of which, when executed and delivered,
shall be deemed to be an original and all of which counterparts,
4
<PAGE>
taken together, shall constitute but one and the same document with
the same force and effect as if the signatures of all of the
parties were on a single counterpart, and it shall not be necessary
in making proof of this Amendment to produce more than one (1) such
counterpart.
(c) Headings. Headings used in this Amendment are for
convenience of reference only and shall not affect the construction
of this Amendment.
(d) Integration. This Amendment and the Credit
Agreement (as amended hereby) constitute the entire agreement among
the parties hereto with respect to the subject matter hereof.
(e) Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS
AND DECISIONS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO
CONFLICT OF LAWS PRINCIPLES).
(f) Binding Effect. This Amendment shall be binding
upon and inure to the benefit of and be enforceable by the
Borrower, the Agent and the Banks and their respective successors
and assigns. Except as expressly set forth to the contrary herein,
this Amendment shall not be construed so as to confer any right or
benefit upon any Person other than the Borrower, the Agent and the
Banks and their respective successors and permitted assigns.
(g) Amendment; Waiver. The parties hereto agree and
acknowledge that nothing contained in this Amendment in any manner
or respect limits or terminates any of the provisions of the Credit
Agreement or any of the other Basic Agreements other than as
expressly set forth herein and further agree and acknowledge that
the Credit Agreement (as amended hereby) and each of the other
Basic Agreements remain and continue in full force and effect and
are hereby ratified and confirmed. Except to the extent expressly
set forth herein, the execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any rights, power or
remedy of the Banks or the Agent under the Credit Agreement or any
other Basic Agreement, nor constitute a waiver of any provision of
the Credit Agreement or any other Basic Agreement. No delay on the
part of any Bank or the Agent in exercising any of their respective
rights, remedies, powers and privileges under the Credit Agreement
or any of the Basic Agreements or partial or single exercise
thereof, shall constitute a waiver thereof. None of the terms and
conditions of this Amendment may be changed, waived, modified or
varied in any manner, whatsoever, except in accordance with Section
9.1 of the Credit Agreement.
[signature page follows]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto
duly authorized, as of the date first written above.
GAYLORD CONTAINER CORPORATION
By: /s/ Thomas M. Steffen
---------------------
Name: Thomas M. Steffen
--------------------
Title: Assistant Treasurer
---------------------
BANKERS TRUST COMPANY, in its individual
capacity and as Agent
By: /s/ Robert R. Telesca
-------------------------
Name: Robert R. Teselsca
-------------------------
Title: Assistant Vice President
-------------------------
THE BANK OF NEW YORK
By: /s/ R. Wes Towns
------------------------------
Name: R. Wes Towns
------------------------------
Title: Vice President & Division Head
------------------------------
6
<PAGE>
BANKERS TRUST (DELAWARE)
By: /s/ Donna G. Mithcell
-------------------------------
Name: Donna G. Mithcell
-------------------------------
Title: Vice President
-------------------------------
CAISSE NATIONAL DE CREDIT AGRICOLE
By: _________________________________________
Name: _______________________________________
Title: ________________________________________
HARRIS TRUST AND SAVINGS BANK
By: /s/ John M. Dillon
-------------------------------
Name: John M. Dillon
-------------------------------
Title: Vice President
-------------------------------
NATIONSBANK, N.A.
By: _________________________________________
Name: _______________________________________
Title: ________________________________________
CHRISTIANIA BANK
By: /s/ Carl-Petter Svendsen
----------------------------------
Name: Carl-Petter Svendsen
----------------------------------
Title: First Vice President
----------------------------------
7
<PAGE>
HELLER FINANCIAL, INC.
By: /s/ Stephen M. Metivier
------------------------------------
Name: Stephen M. Metivier
------------------------------------
Title: AVP
------------------------------------
TRANSAMERICA BUSINESS CREDIT CORP.
By: /s/ Perry Vavoules
------------------------------------
Name: Perry Vavoules
------------------------------------
Title: Senior Vice President
------------------------------------
NATIONAL BANK OF CANADA
By: _________________________________________
Name: _______________________________________
Title: ________________________________________
By: _________________________________________
Name: _______________________________________
Title: ________________________________________
8
September 2, 1997
Gaylord Receivables Corporation
1013 Centre Road, Suite 350
Wilmington, DE 19805
Attention: Catherine A. Curran
Gaylord Container Corporation
500 Lake Cook Road
Suite 400 Deerfield, Illinois 60015
Attention: Catherine A. Curran
Re: Extension Request Revolving Credit 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 (the "Agreement"). Capitalized terms not otherwise
used herein shall have the same meaning as ascribed to them in the Agreement.
GRC has notified the Facility Agent of its desire to extend the Scheduled
Commitment Termination Date by July 1, 1999 to July 3, 2000 pursuant to
Section 3.03(b) of the Agreement. Please be advised that the Facility Agent
has notified each Lender of such extension request.
Please be further advised that pursuant to Section 3.03 of the Agreement
that the Facility Agent hereby notifies GRC and S & P of the decisions of all
of the Lenders to grant the request of GRC to extend the Scheduled Commitment
Termination Date to July 3, 2000. Therefore, pursuant to Section 3.03 of the
Agreement, the Scheduled Commitment Termination Date is hereby extended to
July 3, 2000.
<PAGE>
Gaylord Receivables Corporation
Gaylord Container Corporation
September 2, 1997
Page 2
If you have questions, please contact me 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
cc: Standard & Poors
Harris Trust and Savings Bank
Banco Di Napoil SpA
Caisse Nationale De Credit Agricole
Manufacturers and Traders Trust Company
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration
Statement Nos. 33-25675, 33-32221, 33-33977, 33-33871, 33-54367
and 333-39809 on Form S-8 of our report dated October 30, 1997,
appearing in this Annual Report on Form 10-K of Gaylord Container
Corporation for the year-ended September 30, 1997.
/s/ Deloitte & Touche LLP
- -------------------------
December 8, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,100
<SECURITIES> 0
<RECEIVABLES> 100,600
<ALLOWANCES> 5,500
<INVENTORY> 77,400
<CURRENT-ASSETS> 204,200
<PP&E> 1,061,500
<DEPRECIATION> 475,400
<TOTAL-ASSETS> 929,900
<CURRENT-LIABILITIES> 167,300
<BONDS> 701,700
0
0
<COMMON> 175,600
<OTHER-SE> (141,000)
<TOTAL-LIABILITY-AND-EQUITY> 929,900
<SALES> 759,300
<TOTAL-REVENUES> 759,300
<CGS> 717,300
<TOTAL-COSTS> 798,400
<OTHER-EXPENSES> 1,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,700
<INCOME-PRETAX> (121,400)
<INCOME-TAX> (47,100)
<INCOME-CONTINUING> (74,300)
<DISCONTINUED> 0
<EXTRAORDINARY> (7,700)
<CHANGES> 0
<NET-INCOME> (82,000)
<EPS-PRIMARY> (1.55)
<EPS-DILUTED> (1.55)
</TABLE>
