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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, 1998
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, 1998 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 May 6, 1998, the registrant had outstanding 53,186,317 shares of its
$0.0001 par value Class A Common Stock (including 1,822,478 shares held in
trust for the benefit of the warrant holders) and 1,822,478 redeemable
exchangeable warrants to obtain Class A Common Stock.
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PAGE
PART I. FINANCIAL INFORMATION NUMBERS
- ------------------------------ -------
Item 1. Financial Statements 1 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 14
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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<TABLE>
<CAPTION>
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS,
MARCH 31, 1998 AND SEPTEMBER 30, 1997
- ------------------------------------------------------------------------------
MARCH 31, SEPTEMBER 30,
1998 1997
--------- -------------
<S> <C> <C>
ASSETS (In millions)
CURRENT ASSETS:
Cash and equivalents $ 5.9 $ 6.1
Trade receivables (less allowances of
$5.3 million and $5.5 million, respectively) 117.8 100.6
Inventories (Note 2) 89.4 77.4
Deferred income taxes 4.7 4.7
Other current assets 13.2 15.4
------- -------
Total current assets 231.0 204.2
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PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 1,086.7 1,061.5
Less accumulated depreciation 502.0 475.4
------- -------
Property - net 584.7 586.1
------- -------
DEFERRED INCOME TAXES 96.5 71.2
OTHER ASSETS 71.1 68.4
------- -------
TOTAL $ 983.3 $ 929.9
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 13.7 $ 14.4
Trade payables 54.2 65.2
Accrued interest payable 11.6 26.3
Accrued and other liabilities 52.0 61.4
------- -------
Total current liabilities 131.5 167.3
------- -------
LONG-TERM DEBT 847.2 701.7
OTHER LONG-TERM LIABILITIES 26.0 26.3
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY (DEFICIT):
Class A common stock - par value, $.0001 per share;
authorized 125,000,000 shares; issued 54,712,139
shares and 54,573,164 shares, respectively; and
outstanding 53,182,220 shares and 53,026,961
shares, respectively - -
Capital in excess of par value 177.0 175.6
Retained deficit (185.6) (128.1)
Common stock in treasury - at cost; 1,529,919
shares and 1,546,203 shares, respectively (11.3) (11.4)
Recognition of minimum pension liability (1.5) (1.5)
------- -------
Total stockholders' equity (deficit) (21.4) 34.6
------- -------
TOTAL $ 983.3 $ 929.9
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
1
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<TABLE>
<CAPTION>
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 (In millions, except per share data)
- ------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
1998 1997
-------- --------
<S> <C> <C>
NET SALES $ 219.1 $ 192.4
COST OF GOODS SOLD 197.5 180.1
-------- --------
GROSS MARGIN 21.6 12.3
SELLING AND ADMINISTRATIVE COSTS (22.7) (20.4)
-------- --------
OPERATING LOSS (1.1) (8.1)
INTEREST EXPENSE - Net (20.6) (20.0)
OTHER EXPENSE - Net (2.4) (0.6)
-------- --------
LOSS BEFORE TAXES AND EXTRAORDINARY ITEM (24.1) (28.7)
INCOME TAX BENEFIT (9.3) (10.2)
-------- --------
NET LOSS BEFORE EXTRAORDINARY ITEM (14.8) (18.5)
EXTRAORDINARY LOSS (Note 4) (23.9) -
-------- --------
NET LOSS (38.7) $ (18.5)
========
RETAINED DEFICIT:
BEGINNING OF PERIOD (146.9)
--------
END OF PERIOD $ (185.6)
========
LOSS PER COMMON SHARE: (A)
LOSS BEFORE EXTRAORDINARY ITEM $ (0.28) $ (0.35)
EXTRAORDINARY LOSS (Note 4) (0.45) -
-------- --------
NET LOSS $ (0.73) $ (0.35)
======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: (A) 53.1 52.8
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
(A) Diluted loss per share and corresponding average potential shares
outstanding have not been presented because of their antidilutive nature
(see Note 5).
2
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<TABLE>
<CAPTION>
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
MARCH 31, 1998 AND 1997 (In millions, except per share data)
- ------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
NET SALES $ 416.7 $ 388.0
COST OF GOODS SOLD 383.6 354.3
-------- --------
GROSS MARGIN 33.1 33.7
SELLING AND ADMINISTRATIVE COSTS (43.3) (40.9)
-------- --------
OPERATING LOSS (10.2) (7.2)
INTEREST EXPENSE - Net (41.7) (39.4)
OTHER INCOME (EXPENSE) - Net (2.6) 0.2
-------- --------
LOSS BEFORE TAXES AND EXTRAORDINARY ITEM (54.5) (46.4)
INCOME TAX BENEFIT (20.9) (18.2)
-------- --------
NET LOSS BEFORE EXTRAORDINARY ITEM (33.6) (28.2)
EXTRAORDINARY LOSS (Note 4) (23.9) -
-------- --------
NET LOSS (57.5) $ (28.2)
========
RETAINED DEFICIT:
BEGINNING OF PERIOD (128.1)
--------
END OF PERIOD $ (185.6)
========
LOSS PER COMMON SHARE: (A)
LOSS BEFORE EXTRAORDINARY ITEM $ (0.63) $ (0.53)
EXTRAORDINARY LOSS (Note 4) (0.45) -
-------- --------
NET LOSS $ (1.08) $ (0.53)
======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: (A) 53.1 52.7
======== ========
See notes to condensed consolidated financial statements.
(A) Diluted loss per share and corresponding average potential shares
outstanding have not been presented because of their antidilutive nature
(see Note 5).
3
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</TABLE>
<TABLE>
<CAPTION>
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
MARCH 31, 1998 AND 1997
- ------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31,
--------------------------
1998 1997
-------- --------
(In millions)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net loss $ (57.5) $ (28.2)
Adjustments to reconcile net loss
to net cash from operating activities:
Extraordinary loss 23.9 -
Depreciation and amortization 33.0 32.7
Deferred tax provision (10.5) (16.4)
Change in current assets and liabilities,
excluding acquisitions and disposition (59.8) (22.5)
Other - net 1.7 -
------ ------
Net cash used for operations (69.2) (34.4)
------ ------
CASH FLOWS FROM INVESTMENTS:
Capital expenditures (23.9) (14.4)
Capitalized interest (0.7) (0.5)
Other investments - net 0.8 0.3
------ ------
Net cash used for investment (23.8) (14.6)
------ ------
CASH FLOWS FROM FINANCING:
Senior debt - repayments (6.2) (6.0)
Early retirement of debt (436.9) -
Issuance of Senior Notes 200.0 -
Issuance of Senior Subordinated Notes 250.0 -
Debt issuance costs (9.5) 0.1
Revolving credit agreement borrowings - net 94.5 25.5
Other financing - net 0.9 0.3
------ ------
Net cash provided by financing 92.8 19.9
------ ------
Net decrease in cash and equivalents (0.2) (29.1)
Cash and equivalents, beginning of period 6.1 39.2
------ ------
Cash and equivalents, end of period $ 5.9 $ 10.1
====== ======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (refunded) for:
Interest $ 42.3 $ 38.6
====== ======
Income taxes $ (5.1) $ 0.2
====== ======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Write-off of deferred financing fees $ 6.1 $ -
====== ======
Property additions $ 8.9 $ 0.8
====== ======
Increase in total debt $ 10.5 $ 0.8
======= =======
Decrease in accrued and other liabilities $ 1.6 $ -
======= ======
</TABLE>
See notes to condensed consolidated financial statements.
4
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
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 March 31, 1998, the results of operations for the three
months and six months ended March 31, 1998 and 1997, and cash flows
for the six months ended March 31, 1998 and 1997, 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, 1997. Certain amounts in the consolidated
statement of cash flows have been reclassified to conform to the
current year presentation.
2. INVENTORIES
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<TABLE>
<CAPTION>
Inventories consist of:
MARCH 31, SEPTEMBER 30,
1998 1997
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(In millions)
<S> <C> <C>
Finished products $ 24.1 $ 22.5
In process 49.0 39.3
Raw materials 12.5 9.2
Supplies 14.3 15.0
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99.9 86.0
LIFO valuation adjustment (10.5) (8.6)
------- -------
Total $ 89.4 $ 77.4
======= =======
</TABLE>
3. CONTINGENCIES
-------------
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 were 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 petition for leave to appeal that decision to the Illinois
Supreme Court was denied on February 4, 1998.
On October 18 and December 4, 1995, the Company, its directors and
certain of its officers were named in complaints which have been
5
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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 an alleged derivative claim
brought on behalf of the Company against the individual defendants.
Both counts allege that (i) the Company's stockholder Rights
Agreement, adopted on June 12, 1995 and approved by the Company's
shareholders on June 28, 1995; (ii) amendments to the Company's
charter and by-laws, adopted on July 21, 1995; and (iii)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, which seek unspecified damages, 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.
6
<PAGE>
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 is finally resolved. 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 and
Pike Counties in Mississippi. Defendants' suspensive appeal
challenging the geographic boundaries of the class is currently
pending in the Louisiana Court of Appeal. The trial court entered a
stay of all class notice and related issues until the defendants'
suspensive appeal on geographic boundaries is resolved.
In addition, the Company, Gaylord Chemical Corporation and numerous
other third party companies have been named as defendants in twelve
actions brought by plaintiffs in Mississippi state court, who claim
injury as a result of the October 23, 1995 accident at the Bogalusa
facility. These cases, which purported to be on behalf of over 11,000
individuals, were not filed as a class action but rather have all been
consolidated before a single judge in Hinds County, Mississippi. All
of these cases allege claims similar to those in Louisiana State
Court. To date, discovery in the consolidated cases has been
coordinated with the ongoing discovery in the Louisiana class action.
Following several rulings by the Mississippi Trial Court judge, over
7,000 individuals' claims in these consolidated actions have been
either: (1) dismissed for failure to comply with outstanding discovery
orders or (2) voluntarily withdrawn. As with the Louisiana class
action, the Company and Gaylord Chemical Corporation are vigorously
contesting all claims in Mississippi arising out of the October 23,
1995 explosion. In addition, the Company and Gaylord Chemical
Corporation have filed cross-claims for indemnity and contribution
7
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against co-defendants in both of the Mississippi and Louisiana
actions. The Mississippi trial court set September 8, 1998 for an
initial trial of twenty individual plaintiffs. Ten of the initial
plaintiffs will be selected by the trial court from a group of twenty
proposed by the defendants and ten will be selected from a similar
group proposed by the plaintiffs. This initial trial is currently set
to cover all liability issues for the plaintiffs whose cases will be
tried.
The Company and Gaylord Chemical Corporation maintain insurance and
have filed separate suits seeking 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 before the same judge who
is hearing the liability class action. 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 pollution
exclusions contained in these policies. On November 20, 1997, the
trial court denied all of the motions, and the insurers filed
supervisory writs with the Court of Appeal contesting that ruling. On
April 30, 1998 the Court of Appeal affirmed denial of the motions.
The Court of Appeal also denied the insurers' emergency application to
stay discovery; discovery in the coverage action is underway.
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 second quarter of fiscal 1998, the Company issued $200
million principal amount of 9 3/8% Senior Notes due 2007 and $250
million principal amount of 9 7/8% Senior Subordinated Notes due 2008
and used the proceeds to defease all of its outstanding 12 3/4% Senior
Subordinated Discount Debentures ($404.3 million outstanding principal
amount) due 2005 (the Old Notes). The Old Notes are callable on May
15, 1998 and will be redeemed and retired on that date. In
conjunction with the defeasance, approximately $6.1 million of
deferred financing fees were written off, a call premium of
approximately $25.8 million was paid, and approximately $6.8 million
of unaccrued net interest was paid. The early retirement of debt
resulted in an extraordinary loss of $23.9 million, net of an income
tax benefit of $14.8 million.
5. ADOPTION OF NEW ACCOUNTING STANDARD
-----------------------------------
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (FAS No. 128). FAS
No. 128 requires the presentation of both basic earnings per share and
diluted earnings per share. Diluted earnings per share will not be
presented in periods where the effect is antidilutive (that is,
results in increased earnings per share or decreased net loss per
share).
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Second Quarter of Fiscal 1998 Compared with Second Quarter of Fiscal
1997
Net sales for the second quarter of fiscal 1998 were $219.1 million,
an increase of approximately 14 percent compared with net sales of
$192.4 million for the second quarter of fiscal 1997. The operating
loss for the current quarter was $1.1 million compared with $8.1
million for the year-ago quarter. The net loss for the current
quarter totaled $38.7 million, or $0.73 per common share, and included
a $23.9 million ($0.45 per common share) extraordinary loss on the
early retirement of debt, compared with a net loss of $18.5 million,
or $0.35 per common share, for the year-ago quarter.
Sales in the second quarter of fiscal 1998 were favorably affected by
higher average selling prices for the Company's products which
increased net sales by approximately $16 million compared with the
second quarter of fiscal 1997. Average selling prices for the
Company's domestic linerboard, export linerboard and corrugated
products increased approximately 20 percent, 20 percent and 8 percent,
respectively, in the second quarter of fiscal 1998 compared with the
prior-year quarter. Average selling prices for the Company's
unbleached kraft paper and multiwall bags increased approximately 11
percent and 5 percent, respectively, in the current quarter compared
with the prior-year quarter. Net sales in the second quarter of
fiscal 1998 were also favorably affected by higher volume, primarily
corrugated shipments, which increased net sales by approximately $11
million compared to the prior-year quarter.
Corrugated shipments totaled approximately 3.5 billion square feet in
the second quarter of fiscal 1998 compared with approximately 3.3
billion square feet in the second quarter of fiscal 1997. This
increase is primarily the result of the opening of a new sheet feeder
plant during the first quarter of fiscal 1998. Multiwall bag
shipments increased to 16.1 thousand tons in the current quarter
compared with shipments of 15.0 thousand tons in the second quarter of
fiscal 1997.
Quarter-over-quarter, total mill production increased to 4,315 tons
per day (TPD, calculated on the basis of the number of days in the
period) from 4,229 TPD. Containerboard production in the second
quarter of fiscal 1998 was 3,647 TPD compared with production of 3,394
TPD in the prior-year quarter. Unbleached kraft paper production in
the current quarter decreased to 668 TPD from 835 TPD in the
prior-year quarter, primarily due to approximately 4,000 tons of
"lost" production as a result of market related downtime.
Gross margin for the second quarter of fiscal 1998 increased to $21.6
million from $12.3 million in the prior-year quarter primarily due to
higher selling prices for the Company's products. Higher average net
selling prices, including the effect of higher containerboard and
unbleached kraft paper costs on the Company's converting facilities
($3 million) increased gross margin by approximately $13 million. In
addition, gross margin was favorably affected by higher volume ($4
million). These favorable variances were partially offset by higher
fiber costs ($10 million). The increased fiber costs are primarily
due to higher prices for wood chips and, to a lesser extent, old
9
<PAGE>
corrugated containers (OCC), as the average delivered cost of wood
chips and OCC increased approximately 24 percent and 8 percent,
respectively, compared to the prior-year quarter. The increase in
wood chips is the result of unexpectedly wet weather in the southern
United States.
Selling and administrative costs were $22.7 million for the current
quarter compared with selling and administrative costs of $20.4
million in the prior-year quarter.
Net interest expense of $20.6 million in the second quarter of fiscal
1998 increased from the prior-year quarter by $0.6 million primarily
as a result of higher average debt levels. Increased borrowings
increased interest expense by approximately $2.6 million compared to
the prior-year quarter, while lower average borrowing costs reduced
interest expense by approximately $2.0 million. The lower average
borrowing costs were the result of the refinancing of the Company's 12
3/4% Senior Subordinated Discount Debentures.
In the second quarter of fiscal 1998, the Company recorded a tax
benefit of $9.3 million which corresponds to an effective tax rate of
approximately 38 percent. In the second quarter of fiscal 1997, the
Company recorded a tax benefit of $10.2 million which corresponds to
an effective rate of approximately 36 percent.
During the second quarter of fiscal 1998, the Company issued $200
million principal amount of 9 3/8% Senior Notes due 2007 and $250
million principal amount of 9 7/8% Senior Subordinated Notes due 2008
(collectively the New Notes) and used the proceeds to defease all of
its outstanding 12 3/4% Senior Subordinated Discount Debentures
($404.3 million outstanding principal amount) due 2005 (the Old
Notes). The Old Notes are callable on May 15, 1998 and will be
redeemed and retired on that date. In conjunction with the
defeasance, approximately $6.1 million of deferred financing fees were
written off. The early retirement of debt resulted in an
extraordinary loss of $23.9 million, net of an income tax benefit of
$14.8 million.
First Six Months of Fiscal 1998 Compared with First Six Months of
Fiscal 1997
Net sales for the first six months of fiscal 1998 were $416.7 million,
an increase of approximately 7 percent compared with net sales of
$388.0 million for the first six months of fiscal 1997. The operating
loss for the current period was $10.2 million compared with $7.2
million for the year-ago period. The net loss for the current period
totaled $57.5 million, or $1.08 per common share, and included a $23.9
million ($0.45 per common share) extraordinary loss on the early
retirement of debt, compared with a net loss of $28.2 million, or
$0.53 per common share, for the year-ago period.
Sales in the first six months of fiscal 1998 were favorably affected
by higher average selling prices for the Company's products which
increased net sales by approximately $15 million compared with the
prior-year period. Average selling prices for the Company's domestic
linerboard, export linerboard and corrugated products increased
approximately 19 percent, 11 percent and 3 percent, respectively, in
the first six months of fiscal 1998 compared with the prior-year
period. Average selling prices for the Company's unbleached kraft
paper and multiwall bags increased approximately 10 percent and 3
10
<PAGE>
percent, respectively, in the current period compared with the prior-year
period. Net sales in the first six months of fiscal 1998 were
also favorably affected by higher volume, primarily corrugated
shipments, which increased net sales by approximately $14 million
compared to the year-ago period.
Corrugated shipments totaled approximately 6.8 billion square feet in
the first six months of fiscal 1998 compared with 6.6 billion square
feet in the first six months of fiscal 1997. Multiwall bag shipments
increased to 31.0 thousand tons in the current period compared with
shipments of 29.1 thousand tons in the first six months of fiscal
1997.
Period-over-period, total mill production increased to 4,196 tons per
day from 4,113 TPD. Containerboard production in the first six months
of fiscal 1998 was 3,463 TPD compared with production of 3,354 TPD in
the prior-year period. Unbleached kraft paper production in the
current period decreased to 733 TPD from 759 TPD in the prior-year
period.
Gross margin for the first six months of fiscal 1998 decreased
slightly to $33.1 million from $33.7 million in the prior-year period.
Gross margin was adversely affected by higher costs for fiber ($20
million) and materials ($2 million). The increase in fiber costs is
primarily due to higher prices for both wood chips and, to a lesser
extent, old corrugated containers (OCC). The average delivered cost
of wood chips and OCC increased approximately 24 percent and 14
percent, respectively, in the first six months of fiscal 1998 compared
to the first six months of fiscal 1997. These unfavorable variances
were partially offset by the effect of higher selling prices for the
Company's products and higher volume ($5 million). Higher average net
selling prices, including the effect of lower containerboard and
unbleached kraft paper costs on the Company's converting facilities
($1 million) increased gross margin by approximately $16 million.
Selling and administrative costs were $43.3 million for the current
period compared with selling and administrative costs of $40.9 million
in the prior-year period.
Net interest expense of $41.7 million in the first six months of
fiscal 1998 increased from the prior-year period by $2.3 million
primarily as a result of higher average debt levels. Higher average
debt levels increased interest expense by approximately $5.1 million
compared to the prior-year period, while lower average borrowing costs
reduced interest expense by approximately $2.8 million. The lower
average borrowing costs are the result of the refinancing of the
Company's 12 3/4% Senor Subordinated Discount Debentures in the second
quarter of fiscal 1998, and the refinancing of the Company's 11 1/2%
Senior Notes due 2001 in fiscal 1997.
In the first six months of fiscal 1998, the Company recorded a tax
benefit of $20.9 million which corresponds to an effective tax rate of
approximately 38 percent. In the first six months of fiscal 1997, the
Company recorded a tax benefit of $18.2 million which corresponds to
an effective rate of approximately 39 percent.
During the second quarter of fiscal 1998, the Company issued the New
Notes and used the proceeds to defease all its outstanding Old Notes.
The Old Notes are callable on May 15, 1998 and will be redeemed and
retired on that date. In conjunction with the defeasance,
11
<PAGE>
approximately $6.1 million of deferred financing fees were written
off. The early retirement of debt resulted in an extraordinary loss
of $23.9 million, net of an income tax benefit of $14.8 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 1998
was $69.2 million, compared with net cash used for operations of $34.4
million for the year-ago period. The unfavorable comparison to the
prior-year period was primarily due to increased primary working
capital.
Capital expenditures of $23.9 million in the first six months of
fiscal 1998 increased by $9.5 million from $14.4 million in the first
six months of fiscal 1997. In addition to the capital spending, the
Company acquired $10.5 million of equipment financed by a capital
lease.
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. 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 the first six months of fiscal 1998 the Company incurred
approximately $1.7 million of costs for demolition and maintenance of
the East Mill, such costs are net of proceeds from scrap sales.
Removal of the remaining structures on the mill site will require the
Company to incur costs for demolition and asbestos removal. The
Company has deferred incurring substantial expenditures for demolition
and asbestos removal until all uncertainties regarding disposition of
the mill assets have been resolved. At March 31, 1998, balance sheet
accruals for demolition and asbestos removal were approximately $5.5
million, and the net book value of the East Mill was $4.5 million.
Liquidity
At March 31, 1998, the Company had cash and equivalents of $5.9
million, a decrease of $0.2 million from September 30, 1997, as cash
used for operations and investments were essentially offset by cash
provided by financing. In the second quarter of fiscal 1998, the
Company issued the New Notes and used the proceeds to defease all its
outstanding Old Notes. Total debt increased by $144.8 million to
$860.9 million at March 31, 1998 from $716.1 million at September 30,
1997 primarily as a result of increased revolver borrowings. The
increase in revolver borrowings was primarily due to increased primary
working capital ($40 million), semi-annual interest payments on the
Company's public debt securities ($37 million) and capital
expenditures ($24 million). In addition, the Company increased total
debt by $45 million in connection with the defeasance of the Old Notes
during the second quarter of fiscal 1998 as described above. At March
12
<PAGE>
31, 1998, the Company had $141.5 million of borrowings outstanding and
approximately $96 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.
At March 31, 1998, the Company had primary working capital of $153.0
million compared to $112.8 million at September 30, 1997 largely due
to higher trade receivables and seasonally higher inventories. The
increase in trade receivables was primarily due to higher average net
selling prices for the Company's products. The increased inventory is
primarily the result of higher inventory levels at the Company's mills
and converting facilities.
Strengthening industry fundamentals, including year-over-year growth
in corrugated product shipments and strong export demand for
linerboard, resulted in a $50 per ton increase in published industry
prices for containerboard in October 1997 (and subsequent increases in
converted product prices).
During the first six months of fiscal 1998, the Company's average wood
chip prices increased approximately 24 percent compared with the first
six months of fiscal 1997 as a result of higher demand and unusually
wet weather in the timberlands of the southern United States. In
addition, the Company's average delivered price for OCC increased
approximately 14 percent in the first six months of fiscal 1998
compared with the first six months of fiscal 1997. OCC prices in the
first six months of fiscal 1998, however, were more than 17 percent
lower than average prices for the fourth quarter of fiscal 1997. The
fiber markets, however, are difficult to predict, and there can be no
assurance of the future direction of wood chip and OCC prices.
Assuming current selling prices, fiber costs and maintenance levels of
capital spending, 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. While
under its existing bank credit agreement, the Company would be
required to seek modifications to financial covenants to maintain
continued access to that liquidity after the end of the third fiscal
quarter, the Company has instead chosen to secure a new replacement
bank facility. In furtherance thereof, the Company has received and
accepted a written commitment from a lender to provide a new bank credit
facility including a term loan and a revolving credit facility totaling
$275 million to refinance, replace and expand the existing $175
million bank credit facility. Any term loan proceeds in excess of the
outstanding amount under the current bank credit facility will be used to
pay expenses and repay a portion of the existing trade receivables-backed
revolving credit facility. The new facility will have a maturity of 2003
or beyond, contain terms and conditions that are normal and customary for
a facility of this sort, and be secured by substantially all of the assets
of the Company. It is expected that the closing of this new facility will
be consummated prior to the end of the third fiscal quarter.
PENDING ACCOUNTING STANDARDS
- ----------------------------
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
13
<PAGE>
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 Company has not yet completed its analysis of
which operating segments, if any, it will report on.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employer's
Disclosures about Pensions and other Postretirement Benefits" which
standardizes the disclosure requirements for pensions and other
postretirement benefits. 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 has conducted a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is
engaged in a comprehensive project to modify its systems for Year 2000
compliance. The Company believes that, by modifying existing
software, and/or converting to new software, the Year 2000 issue can
be resolved without significant operational difficulties. Based on
current estimates, the Company expects to spend approximately $6
million through fiscal 1999 to correct the Year 2000 issue. In addition,
the Company believes that many of its customers, suppliers and financial
institutions are also impacted by the Year 2000 issue which could affect
the Company. The Company is therefore conducting an assessment of the
compliance efforts of the Company's major customers, suppliers and
financial institutions. At this time, the Company is unable to determine
the impact of these third party compliance efforts, if any, on the
Company's results of operations, financial position or cash flow.
----------------------------------------------------------
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 or information
technology malfunctions and pending litigation. For
additional information see the Company's annual report on
Form 10-K for the most recent fiscal year.
14
<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 February 13, 1998, the Company signed a purchase
agreement to issue $200 million aggregate principal amount
of 9 3/8% Senior Notes due 2007 and $250 million aggregate
principal amount of 9 7/8% Senior Subordinated Notes due
2008. Proceeds from the sale of the securities were used to
defease all of the Company's outstanding 12 3/4% Senior
Subordinated Discount Debentures ($404.3 million principal
amount) due 2005 (the Old Notes) at a price equal to 106.93
percent of their principal amount, plus accrued interest
thereon through May 15, 1998. The Old Notes are callable on
May 15, 1998 and will be redeemed and retired on that date.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On February 4, 1998, 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 nine directors were re-elected by the following vote:
For Withheld
Mary Sue Coleman 49,286,443 431,637
Harve A. Ferrill 49,289,743 428,337
John E. Goodenow 49,295,593 422,487
David B. Hawkins 49,280,393 437,687
Warren J. Hayford 49,295,268 422,812
Charles S. Johnson 49,269,443 448,637
Ralph L. MacDonald Jr. 49,295,343 422,737
Marvin A. Pomerantz 49,276,718 441,362
Thomas H. Stoner 49,296,343 421,737
An amendment to the Company's Shareholder Value Plan was approved by a
vote of 47,275,387 for; 2,355,132 against; 87,561 abstain.
The appointment of Deloitte & Touche LLP to continue to serve as the
Company's independent auditors in fiscal 1998 was ratified by a vote
of 49,499,929 for; 157,540 against; 60,611 abstain.
15
<PAGE>
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Number and Description of Exhibit
---------------------------------
a) 4.1(b) Sixth Amendment to Amended and Restated Credit
Agreement dated as of February 13, 1998 by and
between the Company, the financial institutions
signatory thereto, and Bankers Trust Company as
agent, incorporated by reference to Exhibit 4.26 of the
Company's Registration Statement on Form S-4
(No. 333-48495), filed under the Securities Act of 1933,
as amended
27.1(a) Financial Data Schedule
b) No reports on Form 8-K were filed for the quarter ended
March 31, 1998.
- ------------------------------------------------------------------------------
(a) Filed with this Quarterly Report.
(b) Incorporated by Reference
16
<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: May 14, 1998 /s/ Marvin A. Pomerantz
------------------------------------
Marvin A. Pomerantz
Chairman and Chief Executive Officer
Date: May 14, 1998 /s/ Jeffrey B. Park
------------------------------------
Jeffrey B. Park
Vice President-Controller
(Principal Accounting Officer)
17
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<PERIOD-END> MAR-31-1998
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