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 June 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 .
For Quarter Ended June 30, 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 August 8, 1997, the registrant had outstanding 52,949,984 shares of
its $0.0001 par value Class A Common Stock (including 2,761,413 shares held in
trust for the benefit of the warrant holders) and 2,761,413 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 14 - 15
SIGNATURES 16
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS,
JUNE 30, 1997 AND SEPTEMBER 30, 1996
- ------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30,
1997 1996
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ASSETS (In millions)
CURRENT ASSETS:
Cash and equivalents $ 6.9 $ 39.2
Trade receivables (less allowances of
$7.4 million and $6.9 million, respectively) 104.1 111.0
Inventories (Note 2) 73.0 70.4
Deferred income taxes 5.1 5.1
Other current assets 17.2 10.4
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Total current assets 206.3 236.1
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PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 1,053.9 1,033.3
Less accumulated depreciation 463.4 421.0
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Property - net 590.5 612.3
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DEFERRED INCOME TAXES 49.2 16.8
OTHER ASSETS 67.0 67.8
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TOTAL $ 913.0 $ 933.0
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 11.0 $ 11.3
Trade payables 54.7 60.8
Accrued interest payable 8.1 27.3
Accrued and other liabilities 47.2 66.9
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Total current liabilities 121.0 166.3
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LONG-TERM DEBT 704.0 623.1
OTHER LONG-TERM LIABILITIES 27.9 29.1
COMMITMENTS AND CONTINGENCIES (Note 3) - -
STOCKHOLDERS' EQUITY:
Class A common stock - par value, $.0001 per share;
authorized 125,000,000 shares; issued 54,450,934
shares and 54,270,011 shares, respectively, and
outstanding 52,898,674 shares and 52,688,233
shares, respectively - -
Capital in excess of par value 174.7 173.5
Retained deficit (101.9) (46.1)
Common stock in treasury - at cost; 1,552,260
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 60.1 114.5
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TOTAL $ 913.0 $ 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
JUNE 30, 1997 AND 1996 (In millions, except per share data)
- ------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
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NET SALES $ 189.4 $ 225.5
COST OF GOODS SOLD 180.0 181.7
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GROSS MARGIN 9.4 43.8
SELLING AND ADMINISTRATIVE COSTS (20.6) (24.9)
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OPERATING EARNINGS (LOSS) (11.2) 18.9
INTEREST EXPENSE - Net (20.6) (18.8)
OTHER INCOME (EXPENSE) - Net (1.0) 0.1
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EARNINGS (LOSS) BEFORE TAXES AND
EXTRAORDINARY ITEM (32.8) 0.2
INCOME TAXES (12.9) 0.1
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EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM (19.9) 0.1
EXTRAORDINARY LOSS (Note 4) (7.7) -
------ ------
NET INCOME (LOSS) (27.6) $ 0.1
======
RETAINED DEFICIT:
BEGINNING OF PERIOD (74.3)
------
END OF PERIOD $(101.9)
======
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
EARNINGS (LOSS) BEFORE
EXTRAORDINARY ITEM $ (0.38) $ 0.00
EXTRAORDINARY LOSS (Note 4) (0.15) -
------ ------
NET INCOME (LOSS) $ (0.53) $ 0.00
====== ======
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 NINE MONTHS ENDED
JUNE 30, 1997 AND 1996 (In millions, except per share data)
- ---------------------------------------------------------------
NINE MONTHS ENDED JUNE 30,
-------------------------
1997 1996
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NET SALES $ 577.4 $ 698.6
COST OF GOODS SOLD 534.3 534.8
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GROSS MARGIN 43.1 163.8
SELLING AND ADMINISTRATIVE COSTS (61.5) (71.4)
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OPERATING EARNINGS (LOSS) (18.4) 92.4
INTEREST EXPENSE - Net (60.0) (57.9)
OTHER INCOME (EXPENSE)- Net (0.8) 0.3
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EARNINGS (LOSS) BEFORE TAXES AND
EXTRAORDINARY ITEM (79.2) 34.8
INCOME TAXES (31.1) 14.4
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EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM (48.1) 20.4
EXTRAORDINARY LOSS (Note 4) (7.7) (2.6)
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NET INCOME (LOSS) (55.8) $ 17.8
======
RETAINED DEFICIT:
BEGINNING OF PERIOD (46.1)
------
END OF PERIOD $(101.9)
======
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
EARNINGS (LOSS) BEFORE
EXTRAORDINARY ITEM $ (0.91) $ 0.37
EXTRAORDINARY LOSS (Note 4) (0.15) (0.05)
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NET INCOME (LOSS) $ (1.06) $ 0.32
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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.
3
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1996
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NINE MONTHS ENDED JUNE 30,
--------------------------
1997 1996
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(In millions)
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CASH FLOWS FROM OPERATIONS:
Earnings (loss) before extraordinary item $ (48.1) $ 20.4
Adjustments to reconcile earnings (loss) before
extraordinary item to net cash from operating
activities:
Depreciation and amortization 49.1 48.6
Non-cash interest expense - 31.2
Deferred tax provision (27.9) 13.7
Change in current assets and liabilities,
excluding acquisitions and disposition (46.0) 8.1
Other - net 0.3 (3.6)
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Net cash provided by (used for) operations (72.6) 118.4
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CASH FLOWS FROM INVESTMENTS:
Capital expenditures (22.8) (39.4)
Capitalized interest (0.7) (0.5)
Other investments - net (0.2) 1.8
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Net cash used for investments (23.7) (39.6)
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CASH FLOWS FROM FINANCING:
Senior debt - repayments (9.4) (12.5)
Early retirement of debt (Note 4) (189.7) (66.8)
Issuance of senior notes (Note 4) 225.0 -
Debt issuance costs (5.6) (1.5)
Revolver borrowings - net 43.0 -
Other financing - net 0.7 0.4
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Net cash provided by (used for) financing 64.0 (80.4)
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Net decrease in cash and equivalents (32.3) (0.1)
Cash and equivalents, beginning of period 39.2 32.5
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Cash and equivalents, end of period $ 6.9 $ 32.4
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for:
Interest $ 77.7 $ 27.4
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Income taxes $ 2.1 $ 2.9
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Write-off of deferred financing fees $ 2.8 $ 1.4
====== ======
Property additions $ 0.8 $ 1.1
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Increase in total debt $ 0.8 $ 1.1
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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
- ----------------------------------------------------
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 June 30, 1997 and the
results of operations for the three months and nine months ended June 30, 1997
and 1996 and cash flows for the nine months ended June 30, 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.
Certain amounts in the consolidated statements of cash flows have been
reclassified to conform to the current year presentation.
2. INVENTORIES
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JUNE 30, SEPTEMBER 30,
1997 1996
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(In millions)
Inventories consist of:
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Finished products $ 18.9 $ 16.3
In process 36.7 31.3
Raw materials 6.2 8.5
Supplies 14.4 14.3
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76.2 70.4
LIFO valuation adjustment (3.2) -
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Total $ 73.0 $ 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. The Illinois Court of Appeals heard oral
argument on July 7, 1997. 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 duties on two
5
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ----------------------------------------------------------------
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
(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 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, 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.
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 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
6
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ----------------------------------------------------------------
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, and
on June 20, 1997, a second CMO was filed. A class certification hearing was
held on July 28, 1997. The issue was not resolved and the hearing has been
scheduled to continue on August 21, 1997.
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. 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 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 judgment
cases is proceeding. Five of the nine excess level insurers have 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. The
Company is vigorously opposing these 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.
4. EXTRAORDINARY ITEM
------------------
During the third quarter of 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. 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 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
7
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
- ----------------------------------------------------------------
deferred financing fees were written off. The early retirement of debt
resulted in an extraordinary loss of $2.6 million, net of an income tax benefit
of $1.8 million.
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
- ---------------------
Third Quarter of Fiscal 1997 Compared with Third Quarter of Fiscal 1996
Net sales for the third quarter of fiscal 1997 were $189.4 million, a decrease
of approximately 16 percent compared with net sales of $225.5 million for the
third quarter of fiscal 1996. The operating loss for the current quarter was
$11.2 million compared with operating earnings of $18.9 million for the year-ago
quarter. The net loss for the current quarter totaled $27.6 million, or $0.53
per share and included a $7.7 million extraordinary loss ($0.15 per share) on
the early retirement of debt, compared with net income of $0.1 million, or $0.00
per share, for the year-ago quarter.
Sales and earnings in the third quarter of fiscal 1997 were adversely affected
by lower average selling prices for the Company's products, which decreased net
sales by approximately $27 million compared with the third quarter of fiscal
1996. In addition, net sales were reduced by $17 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 14 percent, 6 percent and 18
percent, respectively, in the third 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 13 percent and 3 percent,
respectively, in the current quarter compared with the prior-year quarter.
Sales in the third quarter of fiscal 1997 were favorably affected by higher mill
production and converted product shipments. The higher volume increased net
sales by approximately $8 million.
Quarter-over-quarter, total mill production increased to 4,329 tons per day
(TPD, calculated on the basis of the number of days in the period) from 4,278
TPD. Containerboard production in the third quarter of fiscal 1997 of 3,589 TPD
was marginally higher than 3,560 TPD in the prior-year quarter. Unbleached
kraft paper production in the current quarter increased approximately 3 percent
to 740 TPD from 718 TPD in the prior-year quarter.
Corrugated shipments totaled 3.5 billion square feet in the third quarter of
fiscal 1997, an increase of approximately 3 percent compared with 3.4 billion
square feet in the year-ago quarter. Multiwall bag shipments increased to 13.9
thousand tons in the current quarter compared with shipments of 12.6 thousand
tons in the third quarter of fiscal 1996.
Gross margin for the third quarter of fiscal 1997 decreased to $9.4 million from
$43.8 million in the prior-year quarter 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 ($3 million) reduced gross margin by
approximately $30 million.
Selling and administrative costs of $20.6 million for the current quarter
decreased from $24.9 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 percent
9
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equity interest in S&G Packaging, and a decrease in incentive compensation as
a result of reduced profitability.
Net interest expense increased from the prior-year quarter by $1.8 million to
$20.6 million in the third quarter of fiscal 1997 as a result of higher average
debt levels.
In the third quarter of fiscal 1997, the Company recorded a tax benefit of $12.9
million which corresponds to an effective tax rate of approximately 39 percent.
In the third quarter of fiscal 1996, the Company recorded a tax provision of
$0.1 million which corresponds to an effective rate of approximately 41 percent.
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 facilities. 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.
First Nine Months of Fiscal 1997 Compared with First Nine Months of Fiscal 1996
Net sales for the first nine months of fiscal 1997 were $577.4 million, a
decrease of approximately 17 percent compared with net sales of $698.6 million
for the first nine months of fiscal 1996. The operating loss for the current
period was $18.4 million compared with operating earnings of $92.4 million for
the year-ago period. The net loss for the current period totaled $55.8 million,
or $1.06 per share, and includes an extraordinary loss of $7.7 million ($0.15
per share) on the early retirement of debt, compared with net income of $17.8
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.
Lower average selling prices for the Company's products for the first nine
months of fiscal 1997 resulted in a decrease in net sales of approximately $112
million. In addition, net sales were adversely affected by approximately $56
million as a result of the exchange of the Company's grocery bag manufacturing
net assets for a 35 percent equity interest in S&G Packaging. Average selling
prices for the Company's domestic linerboard, export linerboard and corrugated
products decreased approximately 26 percent, 20 percent and 22 percent,
respectively, in the first nine 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 18 percent and
6 percent, respectively, in the first nine months of fiscal 1997 compared with
the year-ago period.
Sales and earnings in the first nine months of fiscal 1997 were favorably
affected by higher mill production and converted product shipments. Higher
volume increased net sales by approximately $46 million.
Total mill production in the first nine months of fiscal 1997 of 4,184 TPD
increased approximately 7 percent from 3,928 TPD in the year-ago period.
Containerboard production in the first nine months of fiscal 1997 of 3,432 TPD
increased approximately 6 percent from 3,241 TPD in the prior-year period.
Unbleached kraft paper production in the current period increased approximately
9 percent to 752 TPD from 687 TPD in the prior-year period. This favorable
volume variance is primarily due to an estimated 82 thousand tons of production
"lost" primarily due to market related taken during the first nine months of
fiscal 1996, compared with an estimated 20 thousand tons of "lost" production
10
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during the first nine months of fiscal 1997.
Corrugated shipments of approximately 10.1 billion square feet increased
approximately 6 percent in the first nine months of fiscal 1997 compared with
9.5 billion square feet shipped in the year-ago period. Multiwall bag shipments
increased to 43.0 thousand tons in the current period compared with shipments
of 37.2 thousand tons in the first nine months of fiscal 1996.
Gross margin for the first nine months of fiscal 1997 decreased to $43.1 million
from $163.8 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 ($10 million) reduced gross margin by
approximately $122 million. In addition, gross margin was adversely affected
by higher costs for fiber ($7 million), energy ($6 million) and labor ($5
million). These unfavorable variances were partially offset by increased volume
which increased gross margin by approximately $27 million.
Selling and administrative costs of $61.5 million for the current period
decreased from $71.4 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. Net interest expense increased from the prior-year
period by $2.1 million to $60.0 million in the first nine months of fiscal 1997
as a result of higher average debt levels.
In the first nine months of fiscal 1997, the Company recorded a tax benefit of
$31.1 million which corresponds to an effective tax rate of approximately 39
percent. In the first nine months of fiscal 1996, the Company recorded a tax
provision of $14.4 million which corresponds to an effective rate of
approximately 41 percent.
During the third quarter of fiscal 1997, the Company issued the New Notes and
used the proceeds to redeem and retire all its outstanding Old Notes and to
repay borrowings under the revolving portion of its credit facilities. 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 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. The early retirement of debt 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 nine months of fiscal 1997 was $72.6
million, compared with net cash provided by operations of $118.4 million for the
year-ago period. The unfavorable comparison to the prior-year period was
11
<PAGE>
primarily 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 $22.8 million in the first nine months of fiscal 1997
decreased by $16.6 million from $39.4 million in the first nine months of fiscal
1996. The Company has slowed its capital spending in response to unfavorable
industry conditions.
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 nine months of
fiscal 1997, East Mill related costs exceeded proceeds from asset disposals by
approximately $1.3 million. At June 30, 1997, balance sheet valuation
allowances for demolition and asbestos removal were approximately $0.6 million
and $15.3 million, respectively, and the net carrying value of the East Mill was
$1.9 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 $1.2 million of severance
costs to balance sheet accruals. At June 30, 1997, the Company had remaining
balance sheet accruals for severance payments of approximately $0.6 million and
anticipates making substantially all of such payments by September 1997. In
addition, the Company has remaining balance sheet accruals of approximately $1.7
million for non-recurring operating charges (primarily lease termination costs)
recognized prior to fiscal 1995. The Company anticipates incurring such costs
over the next six months.
Liquidity
At June 30, 1997, the Company had cash and equivalents of $6.9 million, a
decrease of $32.3 million from September 30, 1996, as cash used for operations
and investments exceeded cash provided by financing. In the third quarter of
fiscal 1997, the Company issued the New Notes and used the proceeds to redeem
and retire all its outstanding Old Notes and to repay borrowings under the
revolving portion of its credit facilities. Total debt increased by $80.6
million to $715.0 million at June 30, 1997 from $634.4 million at September 30,
1996 as a result of revolver borrowings and the issuance of the New Notes. At
June 30, 1997, the Company had $43 million of borrowings outstanding and
approximately $173 million of credit available under the revolving portions of
its credit agreements. The Company amended its bank credit agreement to allow
the issuance of the New Notes and modify the financial covenants to allow the
Company greater financial flexibility.
At June 30, 1997, the Company had primary working capital of $85.3 million, an
increase of $15.5 million from September 30, 1996 primarily due to the timing
of the semi-annual interest payments on the Company's publicly traded debt
securities, partially offset by lower accounts receivable. The decrease in
accounts receivable was primarily due to lower average net selling prices for
the Company's products.
The Company is currently implementing a linerboard price increase of $40 per ton
effective with orders entered for shipment on or after July 1, 1997 and has
announced a box price increase of 12 percent effective on July 28, 1997. There
can be no assurance, however, that this or any other price increase will be
realized.
12
<PAGE>
The Company's average delivered price for OCC has increased steadily during
fiscal 1997 and current indications are that this will continue into the fourth
fiscal quarter. The Company's average delivered cost of OCC increased
approximately 14 percent in the third quarter of fiscal 1997 compared with the
third quarter of fiscal 1996. Current prices are more than 30 percent higher
than average prices for the June 1997 quarter. The secondary fiber market,
however, is difficult to predict, and there can be no assurance of the direction
OCC prices will take in the future.
Assuming current fiber costs, maintenance levels of capital spending, and an
increase of at least $50 per ton in primary product prices from June levels (and
passed through to converted product prices) by the fourth quarter of fiscal
1998, 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. However, unless there is significant product price improvement
beginning in the fall of this year, the Company will seek additional covenant
modifications to its credit agreement to maintain continuing access to its
liquidity.
PENDING ACCOUNTING STANDARDS
- ----------------------------
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 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 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.
- ------------------------------------------------------------------------------
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.
On June 6, 1997, the Company signed an underwriting agreement to issue
$225 million aggregate principal amount of 9 3/4% Senior Notes due
2007. Proceeds from the sale of the securities were used to (i) redeem
and retire all of the Company's outstanding 11 1/2% Senior Notes
($179.7 million principal amount) due 2001 at a price equal to 104.93
percent of their principal amount, plus accrued interest thereon
through July 13, 1997 and (ii) repay borrowings under the revolving
portion of the Company's credit facilities.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Number and Description of Exhibit
---------------------------------
a) 4.1(b) Third Amendment to Amended and Restated Credit Agreement
dated as of May 20, 1997 by and between the Registrant, the
financial institutions signatory thereto, and Bankers Trust
Company, as Agent, incorporated by reference to Exhibit 4.5
of the Company's Registration on Form S-4 (No. 333-30423),
filed under the Securities Act of 1933, as amended (the 1997
Debt Registration Statement).
4.2(b) Fourth Amendment to Amended and Restated Credit Agreement
dated as of June 6, 1997 by and between the Registrant, the
financial institutions signatory thereto, and Bankers Trust
Company, as Agent, incorporated by reference to Exhibit 4.6
of the 1997 Debt Registration Statement.
27.1(a) Financial Data Schedule
14
<PAGE>
PART II. OTHER INFORMATION (CONCLUDED)
------------------------------------------
b) On June 19, 1997, the Company filed a Current Report on Form 8-K
describing the agreement to issue $225 million aggregate principal
amount of a new issue of 9 3/4% Senior Notes due 2007, and its
intention to use the proceeds to redeem all its outstanding
11 1/2% Senior Notes (aggregate principal amount of $179.7 million)
and to repay borrowings under its revolving credit facilities.
- ------------------------------------------------------------------------------
(a) Filed with this Quarterly Report.
(b) Incorporated by Reference
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: August 11, 1997 /s/ Marvin A. Pomerantz
------------------------------------
Marvin A. Pomerantz
Chairman and Chief Executive Officer
Date: August 11, 1997 /s/ Jeffrey B. Park
------------------------------------
Jeffrey B. Park
Vice President-Controller
(Principal Accounting Officer)
16
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