FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
For Quarter Ended March 31, 1997 Commission file number 1-9915
GAYLORD CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3472452
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Lake Cook Road, Suite 400
Deerfield, Illinois 60015
Telephone: (847) 405-5500
(Address, including zip code, and telephone number, including
area code, of registrant's principal offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
As of April 30, 1997, the registrant had outstanding 52,795,665 shares of
its $0.0001 par value Class A Common Stock (including 2,796,740 shares held
in trust for the benefit of the warrant holders) and 2,796,740 redeemable
exchangeable warrants to obtain Class A Common Stock.
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PAGE
PART I. FINANCIAL INFORMATION NUMBERS
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Item 1. Financial Statements 1 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 13
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS,
MARCH 31, 1997 AND SEPTEMBER 30, 1996
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MARCH 31, SEPTEMBER 30,
1997 1996
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ASSETS (In millions)
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CURRENT ASSETS:
Cash and equivalents $ 10.1 $ 39.2
Trade receivables (less allowances of
$7.0 million and $6.9 million, respectively) 99.0 111.0
Inventories (Note 2) 77.6 70.4
Deferred income taxes 5.1 5.1
Other current assets 14.7 10.4
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Total current assets 206.5 236.1
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PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 1,046.8 1,033.3
Less accumulated depreciation 449.7 421.0
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Property - net 597.1 612.3
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DEFERRED INCOME TAXES 33.2 16.8
OTHER ASSETS 65.7 67.8
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TOTAL $ 902.5 $ 933.0
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 11.0 $ 11.3
Trade payables 53.6 60.8
Accrued interest payable 27.3 27.3
Accrued and other liabilities 50.2 66.9
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Total current liabilities 142.1 166.3
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LONG-TERM DEBT 644.8 623.1
OTHER LONG-TERM LIABILITIES 28.7 29.1
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Class A common stock - par value, $.0001 per share;
authorized 125,000,000 shares; issued 54,352,181
shares and 54,270,011 shares, respectively, and
outstanding 52,791,003 shares and 52,688,233
shares, respectively - -
Capital in excess of par value 173.9 173.5
Retained deficit (74.3) (46.1)
Common stock in treasury - at cost; 1,561,178
shares and 1,581,778 shares, respectively (11.5) (11.7)
Recognition of minimum pension liability (1.2) (1.2)
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Total stockholders' equity 86.9 114.5
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TOTAL $ 902.5 $ 933.0
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</TABLE>
See notes to condensed consolidated financial statements.
1
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 (In millions, except per share data)
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THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
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NET SALES $ 192.4 $ 219.3
COST OF GOODS SOLD 180.1 174.1
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GROSS MARGIN 12.3 45.2
SELLING AND ADMINISTRATIVE COSTS (20.4) (24.0)
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OPERATING EARNINGS (LOSS) (8.1) 21.2
INTEREST EXPENSE - Net (20.0) (19.3)
OTHER INCOME (EXPENSE) - Net (0.6) 0.1
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EARNINGS (LOSS) BEFORE TAXES (28.7) 2.0
INCOME TAXES (10.2) 0.8
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NET INCOME (LOSS) (18.5) $ 1.2
======
RETAINED DEFICIT:
BEGINNING OF PERIOD (55.8)
------
END OF PERIOD $ (74.3)
======
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.35) $ 0.02
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AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 52.8 55.1
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</TABLE>
See notes to condensed consolidated financial statements.
2
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1996 (In millions, except per share data)
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SIX MONTHS ENDED MARCH 31,
--------------------------
1997 1996
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NET SALES $ 388.0 $ 473.1
COST OF GOODS SOLD 354.3 353.1
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GROSS MARGIN 33.7 120.0
SELLING AND ADMINISTRATIVE COSTS (40.9) (46.5)
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OPERATING EARNINGS (LOSS) (7.2) 73.5
INTEREST EXPENSE - Net (39.4) (39.1)
OTHER INCOME - Net 0.2 0.2
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EARNINGS (LOSS) BEFORE TAXES AND
EXTRAORDINARY ITEM (46.4) 34.6
INCOME TAXES (18.2) 14.3
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EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM (28.2) 20.3
EXTRAORDINARY LOSS (Note 4) - (2.6)
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NET INCOME (LOSS) (28.2) $ 17.7
======
RETAINED DEFICIT:
BEGINNING OF PERIOD (46.1)
------
END OF PERIOD $ (74.3)
======
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
EARNINGS (LOSS) BEFORE
EXTRAORDINARY ITEM $ (0.53) $ 0.37
EXTRAORDINARY LOSS (Note 4) - (0.05)
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NET INCOME (LOSS) $ (0.53) $ 0.32
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AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 52.7 55.1
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</TABLE>
See notes to condensed consolidated financial statements.
3
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1996
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SIX MONTHS ENDED MARCH 31,
--------------------------
1997 1996
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(In millions)
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CASH FLOWS FROM OPERATIONS:
Earnings (loss) before extraordinary item $(28.2) $ 20.3
Adjustments to reconcile earnings (loss) before
extraordinary item to net cash from operating
activities:
Depreciation and amortization 32.7 32.7
Non-cash interest expense - 24.5
Deferred income taxes (16.4) 13.1
Change in current assets and liabilities,
excluding acquisitions and dispositions (22.5) 4.5
Other - net - (2.2)
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Net cash provided by (used for) operations (34.4) 92.9
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CASH FLOWS FROM INVESTMENTS:
Capital expenditures (14.4) (29.4)
Capitalized interest (0.5) (0.3)
Other investments - net 0.4 (0.1)
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Net cash used for investments (14.5) (29.8)
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CASH FLOWS FROM FINANCING:
Senior debt - repayments (6.0) (9.3)
Early retirement of debt (Note 4) - (66.8)
Revolver borrowings - net 25.5 -
Other financing - net 0.3 0.3
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Net cash provided by (used for) financing 19.8 (75.8)
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Net decrease in cash and equivalents (29.1) (12.7)
Cash and equivalents, beginning of period 39.2 32.5
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Cash and equivalents, end of period $ 10.1 $ 19.8
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for:
Interest $ 38.6 $ 15.9
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Income taxes $ 0.2 $ 1.6
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Write-off of deferred financing fees $ - $ 1.4
====== ======
Property Additions $ 0.8 $ -
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</TABLE>
See notes to condensed consolidated financial statements.
4
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1. GENERAL
-------
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all normal and recurring adjustments and accruals
necessary to present fairly the financial position as of March 31, 1997 and the
results of operations for the three months and six months ended March 31, 1997
and 1996 and cash flows for the six months ended March 31, 1997 and 1996,
including all the accounts of Gaylord Container Corporation (including its
subsidiaries, the Company), and are in conformity with Securities and Exchange
Commission Rule 10-01 of Regulation S-X. The financial statements should be
read in conjunction with the audited consolidated financial statements and the
notes thereto on Form 10-K for the fiscal year ended September 30, 1996.
2. INVENTORIES
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MARCH 31, SEPTEMBER 30,
1997 1996
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(In millions)
Inventories consist of:
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Finished products $21.2 $16.3
In process 42.7 31.3
Raw materials 6.5 8.5
Supplies 14.5 14.3
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84.9 70.4
LIFO valuation adjustment (7.3) -
---- ----
Total $77.6 $70.4
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3. CONTINGENCIES
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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 below:
The Company and certain of its officers and directors have been named in a civil
suit filed in Cook County (Illinois) Circuit Court alleging that they omitted
or misrepresented facts about the Company's operations in connection with the
Company's initial public offering of stock in 1988 and in certain periodic
reports. The complaint, a purported class action, originally sought unspecified
damages under the Illinois Consumer Fraud and Deceptive Practices Act and for
common law fraud. On January 10, 1996, the court dismissed both counts with
prejudice, and plaintiff has appealed. A similar lawsuit, based on the same
factual allegations, but alleging violations of Federal securities laws and
filed in the United States District Court for the Northern District of Illinois,
was voluntarily dismissed by the same plaintiff in July 1993. The Company
believes that, after investigation of the facts, the allegations in the
complaint are without merit, and the Company is vigorously defending itself.
On October 18 and December 4, 1995, the Company, its directors and certain of
its officers were named in complaints which have been consolidated in the Court
of Chancery of the state of Delaware alleging breach of fiduciary
5
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ----------------------------------------------------------------
duties on two counts. The first count is a putative class action and the second
is an alleged derivative claim brought on behalf of the Company against the
individual defendants. Both counts allege that the Company's stockholder
Rights Agreement, adopted on June 12, 1995, amendments to the Company's charter
and by-laws, adopted on July 21, 1995, and 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 preliminary discovery stage. The
Company believes 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 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.
Also, pursuant to the terms of the CMO, all of the individual actions filed
before the Consolidated Master Petition have been, or are scheduled to be,
dismissed. The Consolidated Master Petition includes substantially all of the
claims and theories asserted in the prior lawsuits, including negligence and
strict liability, as well as several claims of statutory liability.
Compensatory and punitive damages are sought. The Company and its 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
6
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ----------------------------------------------------------------
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. The district court in Washington Parish has scheduled a
hearing on May 23, 1997 to re-appoint counsel to the PLC pursuant to the First
Circuit's decision.
In addition, the Company, its subsidiary 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 two
actions which purport to be on behalf of over 9,000 individuals. All these
cases seek to allege claims similar to those in the Louisiana state court. On
March 24, 1997, the trial judge in Hinds County, Mississippi entered a
Temporary Case Management Order consolidating all cases for discovery and
pre-trial purposes. Discovery in these cases is underway and is scheduled to
conclude in January 1998. No trial date has been set. The Company and its
subsidiary are vigorously contesting these claims.
The Company and its subsidiary maintain insurance and have filed separate suits
seeking a declaratory 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 its subsidiary's
defense costs under a reservation of rights. Discovery in these declaratory
judgement cases is proceeding.
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.
4. EXTRAORDINARY ITEM
------------------
During the first quarter of fiscal 1996, the Company repurchased and retired
approximately $65.3 million principal amount of its publicly traded debt
securities. In conjunction with the repurchase, approximately $1.4 million of
deferred financing fees were written off. These transactions resulted in an
extraordinary loss of $2.6 million, net of an income tax benefit of $1.8
million.
7
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
- ----------------------------------------------------------------
5. ADOPTION OF NEW ACCOUNTING STANDARD
-----------------------------------
Effective October 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123) by
electing to continue to apply the intrinsic value-based method of accounting
for stock-based compensation. The Company will provide, if material, the
required pro forma disclosures pertaining to its stock-based compensation in its
year-end fiscal 1997 financial statement footnotes.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Second Quarter of Fiscal 1997 Compared with Second Quarter of Fiscal 1996.
Net sales for the second quarter of fiscal 1997 were $192.4 million, a decrease
of approximately 12 percent compared with net sales of $219.3 million for the
second quarter of fiscal 1996. The operating loss for the current quarter was
$8.1 million compared with operating earnings of $21.2 million for the year-ago
quarter. The net loss for the current quarter totaled $18.5 million, or $0.35
per share, compared with net income of $1.2 million, or $0.02 per share, for
the year-ago quarter.
Sales and earnings in the second quarter of fiscal 1997 were adversely affected
by lower average selling prices for the Company's products, which decreased
operating earnings by approximately $38 million compared with the second quarter
of fiscal 1996. Average selling prices for the Company's domestic linerboard,
export linerboard and corrugated products decreased approximately 24 percent, 26
percent and 22 percent, respectively, in the second quarter of fiscal 1997
compared with the prior-year quarter. Average selling prices for the
Company's unbleached kraft paper and multiwall bags decreased approximately 18
percent and 5 percent, respectively, in the current quarter compared with the
prior-year quarter.
Sales and earnings in the second quarter of fiscal 1997 were favorably affected
by higher mill production and corrugated shipments. Higher volume increased
operating earnings by approximately $16 million.
Quarter-over-quarter, total mill production increased to 4,229 tons per day
(TPD, calculated on the basis of the number of days in the period) from 3,599
TPD. Containerboard production in the second quarter of fiscal 1997 of 3,394
TPD increased approximately 13 percent from 3,014 TPD in the prior-year quarter.
Unbleached kraft paper production in the current quarter increased approximately
43 percent to 835 TPD from 585 TPD in the prior-year quarter. This favorable
volume variance is primarily due to an estimated 57 thousand tons of production
"lost" due to non-maintenance downtime taken during the second quarter of fiscal
1996, compared with an estimated 15 thousand tons during the second quarter of
fiscal 1997.
Corrugated shipments totaled 3.3 billion square feet in the second quarter of
fiscal 1997, an increase of approximately 10 percent compared with 3.0 billion
square feet in the year-ago quarter. Multiwall bag shipments increased to
15.0 thousand tons in the current quarter compared with shipments of 12.0
thousand tons in the second quarter of fiscal 1996.
Gross margin as a percentage of net sales for the second quarter of fiscal 1997
decreased to 6.4 percent from 20.6 percent in the prior-year quarter primarily
due to lower selling prices for the Company's products, partially offset by
improved volume. In addition, gross margin was adversely affected by higher
gas prices ($3 million) and higher wood costs ($3 million) due to the unusually
wet weather in the U.S. South.
Selling and administrative costs of $20.4 million for the current quarter
decreased from $24.0 million in the prior-year quarter. The favorable
comparison in selling and administrative costs is primarily due to the
exchange of the Company's grocery bag and sack manufacturing assets for a 35
9
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percent equity interest in S&G Packaging Company, L.L.C., a joint venture with
Stone Container Corporation, in the fourth quarter of fiscal 1996. Net interest
expense increased from the prior-year quarter by $0.7 million to $20.0 million
in the second quarter of fiscal 1997 as a result of higher average debt levels.
In the second quarter of fiscal 1997, the Company recorded a tax benefit of
$10.2 million which corresponds to an effective tax rate of approximately 36
percent. This was due to a reduction in the Company's estimated
annual tax benefit rate to 39 percent from 45 percent in the first fiscal
quarter. In the second quarter of fiscal 1996, the Company recorded a tax
provision of $0.8 million which corresponded to an effective rate of
approximately 40 percent.
First Six Months of Fiscal 1997 Compared with First Six Months of Fiscal 1996
Net sales for the first six months of fiscal 1997 were $388.0 million, a
decrease of approximately 18 percent compared with net sales of $473.1 million
for the first six months of fiscal 1996. The operating loss for the current
period was $7.2 million compared with operating earnings of $73.5 million for
the year-ago period. The net loss for the current period totaled $28.2 million,
or $0.53 per share, compared with net income of $17.7 million, or $0.32 per
share (including a $2.6 million extraordinary loss ($0.05 per share) on the
early retirement of debt), for the year-ago period.
Sales and earnings in the first six months of fiscal 1997 were adversely
affected by lower average selling prices for the Company's products, which
decreased operating earnings by approximately $93 million compared with the
prior-year period. Average selling prices for the Company's domestic
linerboard, export linerboard and corrugated products decreased approximately
30 percent, 29 percent and 24 percent, respectively, in the first six months
of fiscal 1997 compared with the comparable prior-year period. Average selling
prices for the Company's unbleached kraft paper and multiwall bags decreased
approximately 22 percent and 7 percent, respectively, in the first six months
of fiscal 1997 compared with the year-ago period.
Sales and earnings in the first six months of fiscal 1997 were favorably
affected by higher mill production and corrugated shipments. Higher volume
increased operating earnings by approximately $22 million.
Total mill production in the first six months of fiscal 1997 of 4,113 TPD
increased approximately 10 percent from 3,751 TPD in the year-ago period.
Containerboard production in the first six months of fiscal 1997 of 3,354 TPD
increased approximately 9 percent from 3,080 TPD in the prior-year period.
Unbleached kraft paper production in the current period increased approximately
13 percent to 759 TPD from 671 TPD in the prior-year period. This favorable
volume variance is primarily due to an estimated 74 thousand tons of production
"lost" due to non-maintenance downtime taken during the first six months of
fiscal 1996, compared with an estimated 15 thousand tons "lost" during the
first six months of fiscal 1997.
Corrugated shipments of approximately 6.6 billion square feet increased
approximately 8 percent in the first six months of fiscal 1997 compared with
6.1 billion square feet shipped in the year-ago period. Multiwall bag
shipments increased to 29.1 thousand tons in the current period compared with
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shipments of 24.6 thousand tons in the first six months of fiscal 1996.
Gross margin as a percentage of net sales for the first six months of fiscal
1997 decreased to 8.7 percent from 25.4 percent in the prior-year period
primarily due to lower selling prices for the Company's products, partially
offset by improved volume. In addition, gross margin was adversely affected by
higher gas prices ($4 million) and wood costs ($3 million).
Selling and administrative costs of $40.9 million for the current period
decreased from $46.5 million in the prior-year period. The favorable
comparison in selling and administrative costs is primarily due to the
exchange of the Company's grocery bag and sack manufacturing assets for a 35
percent equity interest in S&G Packaging Company, L.L.C., a joint venture with
Stone Container Corporation, in the fourth quarter of fiscal 1996. Net interest
expense increased from the prior-year period by $0.3 million to $39.4 million in
the first six months of fiscal 1997.
In the first six months of fiscal 1997, the Company recorded a tax benefit of
$18.2 million which corresponds to an effective tax rate of approximately 39
percent. In the first six months of fiscal 1996, the Company recorded a
tax provision of $14.3 million which corresponded to an effective rate of
approximately 41 percent.
During the first quarter of fiscal 1996, the Company repurchased and retired
approximately $65.3 million principal amount of its publicly traded debt
securities. In conjunction with the repurchase, approximately $1.4 million of
deferred financing fees were written off. These transactions resulted in an
extraordinary loss of $2.6 million, net of an income tax benefit of $1.8
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 the first six months of fiscal 1997 was $34.4
million, compared with net cash provided by operations of $92.9 million for the
year-ago period. The unfavorable comparison to the prior-year period was
primarily due to reduced earnings and the first semi-annual interest payment in
November 1996 on the Company's Senior Subordinated Discount Debentures due
2005, on which interest had previously been accreting.
Capital expenditures of $14.4 million in the first six months of fiscal 1997
decreased by $15.0 million from $29.4 million in the first six months of fiscal
1996.
In 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. For the first six months of
fiscal 1997, East Mill related costs exceeded proceeds from asset disposals by
approximately $0.5 million. At March 31, 1997,
11
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balance sheet valuation allowances for demolition and asbestos removal were
approximately $1.6 million and $15.3 million, respectively, reducing the
carrying value of the East Mill to $1.2 million.
In the fourth quarter of fiscal 1996, the Company recognized a $8.1 million
pre-tax charge primarily for enhanced retirement benefits and post-retirement
medical costs, and severance payments associated with a staff reduction program.
In fiscal 1997, the Company charged approximately $1.1 million of severance
costs to balance sheet accruals. At March 31, 1997, the Company had remaining
balance sheet accruals for severance payments of approximately $0.7 million and
anticipates making substantially all of such payments by September 1997. In
addition, the Company has remaining balance sheet accruals of approximately $1.8
million for non-recurring operating charges (primarily lease termination costs)
recognized prior to fiscal 1995. The Company anticipates incurring such costs
over the next nine months.
Liquidity
At March 31, 1997, the Company had cash and equivalents of $10.1 million, a
decrease of $29.1 million from September 30, 1996, as cash used for
operations and investments exceeded cash provided by financing. Total debt
increased by $21.4 million to $655.8 million at March 31, 1997 from $634.4
million at September 30, 1996 as a result of revolver borrowings. At March 31,
1997, the Company had $25.5 million of borrowings outstanding and approximately
$184 million of credit available under the revolving portions of its credit
agreements.
The Company announced price increases for containerboard and kraft paper to take
effect in the fall of 1996. Although the Company realized higher prices for
these products during the first fiscal quarter, containerboard prices declined
to the pre-increase levels in early January and resulted in retroactive pricing
adjustments which were recorded in the first quarter of fiscal 1997. On April
22 the Company announced to its customers that it was raising linerboard prices
by $50 per ton effective with orders entered for delivery on or after June 2,
1997. There can be no assurance, however, that this price increase will be
realized.
During the second quarter of fiscal 1997, primary product prices declined
approximately 8 percent from the prior quarter. Based upon March 1997 product
prices and fiber costs, and assuming that capital spending is limited to
maintenance levels, the Company believes that cash provided by operations and
amounts available under its credit agreements will provide adequate liquidity
to meet its debt service obligations and other liquidity requirements over the
next 12 to 24 months. Continued access to that liquidity, however, would
require modifications to certain financial covenants in the Company's bank
credit agreement.
PENDING ACCOUNTING STANDARD
- ---------------------------
In march 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.
12
<PAGE>
___________________________________________________________________________
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. For additional information see the Company's annual report on Form
10-K for the most recent fiscal year.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any legal proceedings other than litigation
incidental to normal business activities, except as described in "Note 3
of Notes to Condensed 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 2. Changes in Securities.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On February 5, 1997, the Company held its annual meeting of stockholders
at which the following issues were voted upon by holders of the Company's
common stock:
The Company's ten directors were re-elected by the following vote:
For Withheld
---------- ---------
Mary Sue Coleman 48,905,552 2,051,948
Harve A. Ferrill 48,912,652 2,044,848
John E. Goodenow 48,914,652 2,042,848
David B. Hawkins 48,913,652 2,043,848
John Hawkinson 48,907,652 2,049,848
Warren J. Hayford 48,909,652 2,047,848
Richard S. Levitt 48,913,652 2,043,848
Ralph L. MacDonald Jr. 48,915,652 2,041,848
Marvin A. Pomerantz 48,906,352 2,051,148
Thomas H. Stoner 48,912,902 2,044,598
Stockholders approved the Gaylord Container Corporation 1997 Long-Term
Equity Incentive Plan by a vote of 37,792,627 for; 10,008,791 against;
1,542,750 withheld.
The appointment of Deloitte & Touche LLP to continue to serve as the
Company's independent auditors in fiscal 1997 was ratified by a vote of
49,298,284 for; 273,248 against; 1,385,968 withheld.
Item 5. Other Information.
Not applicable.
14
<PAGE>
PART II - OTHER INFORMATION - CONCLUDED
Item 6. Exhibits and Reports on Form 8-K.
Number and Description of Exhibit
a) 27.1(a) Financial Data Schedule
b) Not applicable.
(a) Filed with this Quarterly Report.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GAYLORD CONTAINER CORPORATION
Date: April 30, 1997 /s/ Marvin A. Pomerantz
-------------------------------
Marvin A. Pomerantz
Chairman and Chief Executive Officer
Date: April 30, 1997 /s/ Jeffrey B. Park
------------------------------
Jeffrey B. Park
Vice President-Controller
(Principal Accounting Officer)
16
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