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Registration Statement No. 333-48495
Filed Pursuant to Rule 424(b)(3)
PROSPECTUS
MARCH 31, 1998
GAYLORD CONTAINER CORPORATION
OFFER TO EXCHANGE ITS 9 3/8% SENIOR NOTES DUE 2007, SERIES B FOR ANY AND ALL OF
ITS OUTSTANDING 9 3/8% SENIOR NOTES DUE 2007, SERIES A AND ITS 9 7/8% SENIOR
SUBORDINATED NOTES DUE 2008, SERIES B FOR ANY AND ALL OF ITS OUTSTANDING 9 7/8%
SENIOR SUBORDINATED NOTES DUE 2008, SERIES A.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON APRIL
29, 1998, UNLESS EXTENDED.
Gaylord Container Corporation, a Delaware corporation (the "Company") hereby
offers (the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange: (i) $1,000 principal amount of its 9 3/8%
Senior Notes due 2007, Series B (the "Senior Exchange Notes"), which will have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which this Prospectus is a part,
for each $1,000 principal amount of its outstanding 9 3/8% Senior Notes due
2007, Series A (the "Old Senior Notes"), of which $200,000,000 principal amount
is outstanding and (ii) $1,000 principal amount of its 9 7/8% Senior
Subordinated Notes due 2008, Series B (the "Senior Subordinated Exchange Notes"
and, together with the Senior Exchange Notes, the "Exchange Notes"), which will
have been registered under the Securities Act, pursuant to a Registration
Statement of which this Prospectus is a part, for each $1,000 principal amount
of its outstanding 9 7/8% Senior Subordinated Notes due 2008, Series A (the "Old
Senior Subordinated Notes" and, together with the Old Senior Notes, the "Old
Notes") of which $250,000,000 principal amount is outstanding. The form and
terms of the Exchange Notes are the same as the form and term of the Old Notes
except that (i) the Exchange Notes will bear a Series B designation, (ii) the
Exchange Notes will have been registered under the Securities Act and,
therefore, will not bear legends restricting the transfer thereof and (iii)
holders of the Exchange Notes will not be entitled to certain rights of holders
of Old Notes under the Registration Rights Agreements (as defined). The Senior
Exchange Notes will evidence the same debt as the Old Senior Notes (which they
replace) and will be issued under and be entitled to the benefits of the
Indenture dated as of February 23, 1998 (the "Senior Note Indenture") by and
among the Company and State Street Bank and Trust Company, as trustee, governing
the Senior Notes. The Senior Subordinated Exchange Notes will evidence the same
debt as the Old Senior Subordinated Notes (which they replace) and will be
issued under and be entitled to the benefits of the Indenture dated as of
February 23, 1998 (the "Senior Subordinated Note Indenture" and, together with
the Senior Note Indenture, the "Indentures") by and among the Company and Chase
Bank of Texas, National Association, as trustee, governing the Senior
Subordinated Notes. See "The Exchange Offer" and "Description of Notes." The Old
Senior Notes and the Senior Exchange Notes are sometimes referred to herein
collectively as the "Senior Notes," the Old Senior Subordinated Notes and the
Senior Subordinated Exchange Notes are sometimes referred to herein collectively
as the "Senior Subordinated Notes" and the Senior Notes and the Senior
Subordinated Notes are sometimes referred to herein collectively as the "Notes."
The proceeds of the Initial Offering (as defined) were used to redeem (the
"Redemption") all of the Company's 12 3/4% Senior Subordinated Discount
Debentures due 2005 (the "Old Debentures"). The Initial Offering and the
Redemption are collectively referred to herein as the "Refinancing." See "The
Refinancing."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time on April 29, 1998,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
See "The Exchange Offer."
Interest on the Senior Notes will accrue from their date of original
issuance and will be payable semiannually in arrears on June 15 and December 15
of each year, commencing June 15, 1998, at the rate of 9 3/8% per annum. The
Senior Notes will mature on June 15, 2007. The Senior Notes are redeemable, in
whole or in part, at the option of the Company on or after June 15, 2002, at the
redemption prices set forth herein, plus accrued and unpaid interest, if any, to
the date of redemption. In addition, prior to June 15, 2000, the Company, at its
option, may redeem up to 33% of the aggregate principal amount of the Senior
Notes originally issued with the net cash proceeds of one or more Equity
Offerings (as defined) at a redemption price equal to 109.375% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
redemption; provided that at least $100 million of the aggregate principal
amount of the Senior Notes originally issued remain outstanding following such
redemption.
(Cover page continued on following page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DESCRIPTION OF CERTAIN RISKS
TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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(Cover page continued)
Interest on the Senior Subordinated Notes will accrue from the date of
original issuance and will be payable semiannually in arrears on February 15 and
August 15 of each year, commencing August 15, 1998, at the rate of 9 7/8% per
annum. The Senior Subordinated Notes will mature on February 15, 2008. The
Senior Subordinated Notes are redeemable, in whole or in part, at the option of
the Company on or after February 15, 2003, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the date of redemption. In
addition, prior to February 15, 2001, the Company, at its option, may redeem up
to 33% of the aggregate principal amount of the Senior Subordinated Notes
originally issued with the net cash proceeds of one or more Equity Offerings at
a redemption price equal to 109.875% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of redemption; provided that at
least $125 million of the aggregate principal amount of the Senior Subordinated
Notes originally issued remain outstanding following such redemption.
The Senior Notes will be general unsecured obligations of the Company, will
rank pari passu in right of payment to all senior indebtedness of the Company,
including indebtedness under the Credit Agreement (as defined) and the 9 3/4%
Senior Notes (as defined), will be structurally subordinated to all indebtedness
of the subsidiaries of the Company that do not become Subsidiary Guarantors (as
defined), including the Trade Receivable Facility (as defined), and will rank
senior in right of payment to the Senior Subordinated Notes. The Senior
Subordinated Notes will be general unsecured obligations of the Company, will be
subordinate in right of payment to all Senior Debt (as defined) of the Company,
including indebtedness under the Credit Agreement, the 9 3/4% Senior Notes and
the Senior Notes, will be structurally subordinated to all indebtedness of the
subsidiaries of the Company that do not become Subsidiary Guarantors, including
the Trade Receivable Facility, and will rank pari passu in right of payment to
all existing and future senior subordinated indebtedness of the Company. There
are currently no Subsidiary Guarantors of the Notes. All indebtedness under the
Credit Agreement is secured by substantially all of the assets of the Company.
At December 31, 1997, there was $64 million of indebtedness outstanding under
the Credit Agreement (and there was approximately $93 million of credit
available under the revolving portion of the Credit Agreement as well as undrawn
letters of credit of approximately $12 million) and the total outstanding
indebtedness under the Trade Receivable Facility was $54 million (no additional
amounts of credit were available under the Trade Receivable Facility). See
"Description of Notes."
Upon a Change of Control (as defined), each holder of the Notes will have
the right to require the Company to repurchase such holder's Notes at a price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase. Upon the occurrence of a Change of Control
prior to June 15, 2002, the Company, at its option, may redeem all, but not less
than all, of the outstanding Senior Notes at a redemption price equal to 100% of
the principal amount thereof, plus the applicable Make-Whole Premium (as
defined). Upon the occurrence of a Change of Control prior to February 15, 2003,
the Company, at its option, may redeem all, but not less than all, of the
outstanding Senior Subordinated Notes at a redemption price equal to 100% of the
principal amount thereof, plus the applicable Make-Whole Premium. In addition,
the Company will be obligated to offer to repurchase the Notes at 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase in the event of certain asset sales. See "Description of Notes."
The Old Notes were sold by the Company on February 23, 1998 (the "Issue
Date") to BT Alex. Brown Incorporated, Donaldson Lufkin & Jenrette Securities
Corporation, Bear Stearns & Co. Inc., Salomon Brothers Inc and NationsBanc
Montgomery Securities LLC (the "Initial Purchasers") in a transaction not
registered under the Securities Act in reliance upon an exemption under the
Securities Act (the "Initial Offering"). The Initial Purchasers subsequently
placed the Old Notes with (i) qualified institutional buyers in reliance upon
Rule 144A under the Securities Act and (ii) qualified buyers outside the United
States in reliance upon Regulation S under the Securities Act. Accordingly, the
Old Notes may not be reoffered, resold or otherwise transferred in the United
States unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is available.
The Exchange Notes are being offered hereunder in order to satisfy the
obligations of the Company under the Registration Rights Agreements entered into
by the Company and the Initial Purchasers in connection with the Initial
Offering (the "Registration Rights Agreements"). See "The Exchange Offer."
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(Cover page continued)
Based upon an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in certain no-action letters issued to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes may be offered for resale, resold
and otherwise transferred by any holder thereof (other than any such holder that
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes. See "The Exchange Offer -- Resale of the Exchange
Notes." Holders of Old Notes wishing to accept the Exchange Offer must represent
to the Company, as required by the Registration Rights Agreements, that such
conditions have been met. Each broker-dealer (a "Participating Broker-Dealer")
that receives Exchange Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a participating Broker-Dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of Exchange Notes received in exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any Participating Broker-Dealer for use in connection with any such
resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to bear the expenses of the Exchange Offer. No underwriter is
being used in connection with the Exchange Offer.
There has not previously been any public market for the Old Notes or the
Exchange Notes. The Company does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. See "Risk Factors -- Absence of a Public Market
Could Adversely Affect the Value of Exchange Notes." Moreover, to the extent
that Old Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Old Notes could be adversely
affected.
The Exchange Notes will be available initially only in book-entry form.
Except as described under "Book-Entry; Delivery and Form," the Company expects
that the Exchange Notes issued pursuant to the Exchange Offer will be
represented by Global Notes (as defined), which will be deposited with, or on
behalf of, the Depository Trust Company ("DTC") and registered in its name or in
the name of Cede & Co., its nominee. Beneficial interests in the Global Notes
representing the Exchange Notes will be shown on, and transfers thereof will be
effected through, records maintained by DTC and its participants. After the
initial issuance of the Global Notes, notes in certificated form will be issued
in exchange for the Global Notes only under limited circumstances as set forth
in the indenture. See "Book-Entry; Delivery and Form."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY.
PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES ARE NOT TO CONSTRUE THE
CONTENTS OF THIS PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR
SHOULD CONSULT ITS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX,
BUSINESS, FINANCIAL AND RELATED ASPECTS OF THE EXCHANGE NOTES. NEITHER THE
COMPANY NOR ANY OTHER PERSON IS MAKING ANY REPRESENTATION TO ANY PROSPECTIVE
INVESTOR IN THE EXCHANGE NOTES REGARDING THE LEGALITY OF AN INVESTMENT THEREIN
BY SUCH PERSON UNDER APPROPRIATE LEGAL INVESTMENT OR SIMILAR LAWS.
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MARKET DATA
MARKET DATA USED THROUGHOUT THIS PROSPECTUS WERE OBTAINED FROM INTERNAL
COMPANY SURVEYS AND INDUSTRY PUBLICATIONS. INDUSTRY PUBLICATIONS GENERALLY STATE
THAT THE INFORMATION CONTAINED THEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED
TO BE RELIABLE, BUT THAT THE ACCURACY AND COMPLETENESS OF SUCH INFORMATION IS
NOT GUARANTEED. THE COMPANY HAS NOT INDEPENDENTLY VERIFIED THIS MARKET DATA.
SIMILARLY, INTERNAL COMPANY SURVEYS, WHILE BELIEVED BY THE COMPANY TO BE
RELIABLE, HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT SOURCES.
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS 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.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act, and the rules and regulations promulgated thereunder, covering the Exchange
Offer contemplated hereby. This Prospectus does not contain all the information
set forth in the Exchange Offer Registration Statement. For further information
with respect to the Company and the Exchange Offer, reference is made to the
Exchange Offer Registration Statement. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Exchange Offer Registration Statement,
reference is made to the exhibit for a more complete description of the document
or matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. The Exchange Offer Registration Statement, including the exhibits
thereto, and periodic reports and other information filed by the Company with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and inspected at the Commission's regional offices at 7 World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, Suite 1400,
500 West Madison Street, Chicago, Illinois 60601. Copies of such materials can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of such site is http://www.sec.gov.
In addition, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any Notes
remain outstanding, it will furnish to the holders of the Notes and, to the
extent permitted by applicable law or regulation, file with the Commission (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
was required to file such Forms, including for each a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
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to the annual information only, a report thereof by the Company's independent
certified public accountants and (ii) all reports that would be required to be
filed on Form 8-K if it were required to file such reports. In addition, for so
long as any of the Notes remain outstanding, the Company has agreed to make
available to any prospective purchaser of the Notes or beneficial owner of the
Notes, in connection with any sale thereof, the information required by Rule
144A(d)(4) under the Securities Act.
The Company, a corporation organized under the laws of the state of
Delaware, has its principal executive office located at 500 Lake Cook Road,
Suite 400, Deerfield, Illinois; telephone number is (847) 405-5500.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents heretofore filed with the Commission pursuant to
the Exchange Act (File No. 1-9915) are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997.
2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 1997.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this Prospectus
and prior to the Expiration Date, shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of the filing of such
reports and documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in any other subsequently filed document which also is incorporated or
deemed to be incorporated by reference herein) modifies or supersedes such
previous statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Registration
Statement.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A PROSPECTUS IS DELIVERED A COPY
OF ANY AND ALL OF THE INFORMATION THAT HAS BEEN INCORPORATED BY REFERENCE IN
THIS PROSPECTUS (NOT INCLUDING EXHIBITS TO THE INFORMATION INCORPORATED BY
REFERENCE UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO
THE INFORMATION THAT THE PROSPECTUS INCORPORATES) UPON WRITTEN OR ORAL REQUEST
TO DAVID F. TANAKA, VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY OF
THE COMPANY, 500 LAKE COOK ROAD, SUITE 400, DEERFIELD, ILLINOIS 60015,
TELEPHONE: (847) 405-5500. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUEST SHOULD BE MADE BY APRIL 22, 1998 (FIVE BUSINESS DAYS PRIOR TO THE
EXPIRATION DATE).
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PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by, and
should be read in conjunction with, the more detailed information and financial
statements, including notes thereto, appearing elsewhere in or incorporated by
reference into this Prospectus. Reference is made to "Risk Factors" which
contains certain factors that investors should consider prior to tendering Old
Notes in exchange for Exchange Notes. Unless otherwise stated in this Prospectus
or unless the context otherwise requires, the "Company" refers to Gaylord
Container Corporation and its subsidiaries, and references to financial
information presented on a "pro forma basis" give effect to the Refinancing.
THE COMPANY
The Company is a major national manufacturer and distributor of brown paper
and brown paper packaging products. The Company produces linerboard and
unbleached kraft paper at its paper mills located in Bogalusa, Louisiana;
Antioch, California; and Pine Bluff, Arkansas. Through its network of 20
converting facilities, the Company converts the majority of its primary mill
products into corrugated containers and sheets and multiwall bags for the food,
beverage, agricultural and other industries. As of September 30, 1997, the
Company was the ninth largest domestic producer of linerboard with approximately
1.35 million tons of annual capacity and the fourth largest producer of
unbleached kraft paper with approximately 0.28 million tons of annual capacity.
Since its inception in 1986, the Company has made significant capital
expenditures primarily to expand capacity, install advanced paper making
technology, improve product quality, realize operating efficiencies and maintain
its existing facilities. As part of a major capital expenditure program
completed in fiscal 1990, the Company invested approximately $240 million to
expand capacity, improve operating efficiencies and enhance product quality at
the Company's mills, providing the Company with a high-quality, cost-effective
mill system. Mill productive capacity has increased by more than 65% compared to
1987 levels. The Company believes that all of its mills are low-cost producers
in their respective segments and that its Bogalusa mill is one of the premier
mills in the industry. The focus of the Company's current capital plan for the
five year period beginning in fiscal 1994 is on its converting operations, with
approximately 60% of the budgeted $250 million for that period allocated to
upgrading and expanding the Company's corrugated container, sheet feeder and bag
plants. The goal of the converting plant capital program is to increase capacity
and to achieve quality enhancements and cost efficiencies similar to those at
the Company's mills.
The Company's operating strategy is to maintain or improve its position as
a low-cost, high-quality producer of linerboard, unbleached kraft paper and
related converted products. Specifically, the Company has emphasized production
of high-performance linerboard, high-recycled content linerboard and packaging
products, and the use of multicolor packaging graphics, because it believes
these products represent the higher-growth segments of the brown paper packaging
industry. Further, the Company's goal is to become 100% forward integrated over
time by increasing converting capacity to a level that equals or exceeds its
mill productive capacity. The Company will also continue to seek growth
opportunities including acquisitions and other strategic investments.
Approximately 94% of the Company's linerboard productive capacity is
capable of manufacturing high-performance grades of linerboard, which have the
same performance characteristics as standard grades of linerboard, but achieve
these levels using less fiber which results in a lower basis weight. Basis
weight is the weight of linerboard per 1,000 square feet. When converted into a
corrugated container, high-performance linerboard, using the same square footage
as standard linerboard, reduces weight while maintaining performance
characteristics, and thus, is more economical.
The Company is also a major producer in the growing recycled linerboard and
packaging segments of the brown paper industry. The Antioch mill uses 100%
recycled fiber, and the Company as a whole uses approximately 820 thousand tons
annually of pre- and post-consumer waste as a fiber source. Recycled fiber
provides approximately 45% of the Company's fiber needs.
The Company continues to emphasize the use of high-quality packaging
graphics through a preprint linerboard facility, state-of-the-art multicolor
print capabilities at its converting facilities and
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computer-aided-design systems at its corrugated container facilities to meet
customers' growing demand for these products and services. The Company believes
participation in this segment provides higher margins and a more stable customer
base.
Consistent with its long term operating strategy, the Company intends to
continue to sell primary mill product to independent converters and to the
export market, and to purchase mill product in the open market. The Company
believes that increased forward integration will reduce the impact of primary
product price volatility on its profits, provide more stable demand (which
enhances efficiency) for the Company's mill production and increase its product
distribution capabilities. In fiscal 1997, the Company converted the equivalent
of approximately 82% of its linerboard production and converted or sold to its
grocery bag joint venture approximately 71% of its unbleached kraft paper
production. The Company intends to continue to increase converting capacity
through internal expansion, converting plant acquisitions and strategic joint
ventures.
THE REFINANCING
The Company believes that the Refinancing provides lower interest rates,
extended maturities and additional financial flexibility, thus enhancing the
Company's ability to implement its operating strategy.
The net proceeds of the Initial Offering were used to defease the
outstanding Old Debentures in accordance with the terms of the Old Debenture
Indenture (as defined). Upon consummation of the Offering, the Company deposited
with the Old Debenture Trustee U.S. Treasury securities having a maturity of May
14, 1998, and a future value sufficient to redeem the Old Debentures, and pay
the call premium and accrued and unpaid interest through May 14, 1998. The Old
Debentures will be redeemed by the Old Debenture Trustee on May 15, 1998.
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THE INITIAL OFFERING
Old Notes..................... The Old Notes were sold by the Company on
February 23, 1998 to the Initial Purchasers
pursuant to a Purchase Agreement dated February
13, 1998 (the "Purchase Agreement"). The
Initial Purchasers subsequently resold the Old
Notes to (i) qualified institutional buyers
pursuant to Rule 144A under the Securities Act
and (ii) qualified buyers outside the United
States in reliance upon Regulation S under the
Securities Act.
Registration Rights
Agreements.................... Pursuant to the Purchase Agreement, the Company
and the Initial Purchasers entered into the
Registration Rights Agreements each dated as of
February 23, 1998 and each of which grant the
holders of the Old Notes certain exchange and
registration rights. The Exchange Offer is
intended to satisfy such exchange rights which
terminate upon the consummation of the Exchange
Offer. Upon consummation of the Exchange Offer,
the Company will have no further obligation
under the Registration Rights Agreements to
register Old Notes except in the limited
circumstances in which the Company has agreed
to file a Shelf Registration Statement. See
"Prospectus Summary -- The Exchange
Offer -- Untendered Old Notes" and "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer."
THE EXCHANGE OFFER
Securities Offered............ $200,000,000 aggregate principal amount of
9 3/8% Senior Notes due 2007, Series B (the
"Senior Exchange Notes"), and $250,000,000
aggregate principal amount 9 7/8% Senior
Subordinated Notes due 2008, Series B (the
"Senior Subordinated Exchange Notes" and,
together with the Senior Exchange Notes, the
"Exchange Notes").
The Exchange Offer............ $1,000 principal amount of Senior Exchange
Notes in exchange for each $1,000 principal
amount of Old Senior Notes. As of the date
hereof, $200,000,000 aggregate principal amount
of Old Senior Notes are outstanding. $1,000
principal amount of Senior Subordinated
Exchange Notes in exchange for each $1,000
principal amount of Old Senior Subordinated
Notes. As of the date hereof, $250,000,000
aggregate principal amount of Old Senior
Subordinated Notes are outstanding. The Company
will issue the Exchange Notes to holders on or
promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters
issued to third parties, the Company believes
that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by any holder thereof (other than
any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under
the Securities Act) without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary
course of such holder's business and that such
holder does not intend to participate and has
no arrangement or understanding with any person
to participate in the distribution of such
Exchange Notes.
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Any Participating Broker-Dealer that acquired
Old Notes for its own account as a result of
market-making activities or other trading
activities may be a statutory underwriter. Each
Participating Broker-Dealer that receives
Exchange Notes for its own account pursuant to
the Exchange Offer must acknowledge that it
will deliver a prospectus in connection with
any resale of such Exchange Notes. The Letter
of Transmittal states that by so acknowledging
and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that
it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may
be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in
connection with resales of Exchange Notes
received in exchange for Old Notes where such
Old Notes were acquired by such Participating
Broker-Dealer as a result of market-making
activities or other trading activities. The
Company has agreed that, for a period of 180
days after the Expiration Date, it will make
this Prospectus available to any Participating
Broker-Dealer for use in connection with any
such resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer
with the intention to participate, or for the
purpose of participating, in a distribution of
the Exchange Notes can not rely on the position
of the staff of the Commission enunciated in
no-action letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any resale transaction. Failure
to comply with such requirements in such
instance may result in such holder incurring
liability under the Securities Act for which
the holder is not indemnified by the Company.
Expiration Date............... 5:00 p.m., New York City time, on April 29,
1998 unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange
Offer is extended.
Accrued Interest on the
Exchange
Notes and the Old Notes..... Each Exchange Note will bear interest from its
issuance date. Holders of Old Notes that are
accepted for exchange will receive, in cash,
accrued interest thereon to, but not including,
the issuance date of the Exchange Notes. Such
interest will be paid with the first interest
payment on the Exchange Notes (June 15, 1998 in
the case of the Senior Exchange Notes and
August 15, 1998 in the case of the Senior
Subordinated Exchange Notes). Interest on the
Old Notes accepted for exchange will cease to
accrue upon issuance of the Exchange Notes.
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. See "The Exchange Offer --
Conditions."
Procedures for Tendering Old
Notes......................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such
4
<PAGE> 10
Letter of Transmittal, or such facsimile,
together with the Old Notes and any other
required documentation to the Exchange Agent
(as defined) at the address set forth herein.
By executing the Letter of Transmittal, each
holder represents to the Company that, among
other things, the Exchange Notes acquired
pursuant to the Exchange Offer are being
obtained in the ordinary course of business of
the person receiving such Exchange Notes,
whether or not such person is the holder, that
neither the holder nor any such other person
has any arrangement or understanding with any
person to participate in the distribution of
such Exchange Notes and that neither the holder
nor any such other person is an "affiliate," as
defined under Rule 405 of the Securities Act,
of the Company. See "The Exchange Offer --
Purpose and Effect of the Exchange Offer" and
"-- Procedures for Tendering."
Untendered Old Notes.......... Following the consummation of the Exchange
Offer, holders of Old Notes eligible to
participate but who do not tender their Old
Notes will not have any further exchange rights
and such Old Notes will continue to be subject
to certain restrictions on transfer.
Accordingly, the liquidity of the market for
such Old Notes could be adversely affected.
Consequences of Failure to
Exchange.................... The Old Notes that are not exchanged pursuant
to the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
resold only (i) to the Company, (ii) pursuant
to Rule 144A or Rule 144 under the Securities
Act or pursuant to some other exemption under
the Securities Act, (iii) outside the United
States to a foreign person pursuant to the
requirements of Rule 904 under the Securities
Act, or (iv) pursuant to an effective
registration statement under the Securities
Act. See "The Exchange Offer -- Consequences of
Failure to Exchange."
Federal Income Tax
Considerations................ The Company believes that the exchange of Old
Notes for Exchange Notes pursuant to the
Exchange Offer will not be treated as an
"exchange" for federal income tax purposes
because the Exchange Notes will not be
considered to differ materially in kind or
extent from the Old Notes.
Shelf Registration
Statement..................... If any holder of the Old Notes (other than any
such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under
the Securities Act) is not eligible under
applicable securities laws to participate in
the Exchange Offer, and such holder has
satisfied certain conditions relating to the
provision of information to the Company for use
therein, the Company has agreed to register the
Old Notes on a shelf registration statement
(the "Shelf Registration Statement") and use
its best efforts to cause it to be declared
effective by the Commission as promptly as
practical on or after the consummation of the
Exchange Offer. The Company has agreed to
maintain the effectiveness of the Shelf
Registration Statement for, under certain
circumstances, a maximum of two years, to cover
resales of the Old Notes held by any such
holders.
5
<PAGE> 11
Special Procedures for
Beneficial
Owners...................... Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such
owner must, prior to completing and executing
the Letter of Transmittal and delivering its
Old Notes, either make appropriate arrangements
to register ownership of the Old Notes in such
owner's name or obtain a properly completed
bond power from the registered holder. The
transfer of registered ownership may take
considerable time. The Company will keep the
Exchange Offer open for not less than twenty
business days in order to provide for the
transfer of registered ownership.
Guaranteed Delivery
Procedures.................... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply
with the procedures for book-entry transfer)
prior to the Expiration Date must tender their
Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer --
Guaranteed Delivery Procedures."
Withdrawal Rights............. Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Old Notes and
Delivery of Exchange Notes.... The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The Exchange
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange Offer --
Terms of the Exchange Offer."
Use of Proceeds............... There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange
Offer.
Exchange Agent................ State Street Bank and Trust Company is serving
as Exchange Agent in connection with the
exchange offer of Senior Exchange Notes for Old
Senior Notes. Chase Bank of Texas, National
Association is serving as Exchange Agent in
connection with the exchange offer for Senior
Subordinated Exchange Notes for Old Senior
Subordinated Notes. State Street Bank and Trust
Company and Chase Bank of Texas, National
Association are collectively referred to herein
as the "Exchange Agent."
THE EXCHANGE NOTES
General....................... The form and terms of the Exchange Notes are
the same as the form and terms of the Old Notes
(which they replace) except that (i) the
Exchange Notes bear a Series B designation,
(ii) the Exchange Notes have been registered
under the Securities Act and, therefore, will
not bear legends restricting the transfer
thereof,
6
<PAGE> 12
and (iii) the holders of Exchange Notes will
not be entitled to certain rights under the
Registration Rights Agreements, including the
provisions providing for an increase in the
interest rate on the Old Notes in certain
circumstances relating to the timing of the
Exchange Offer, which rights will terminate
when the Exchange Offer is consummated. See
"The Exchange Offer -- Purpose and Effect of
the Exchange Offer." The Exchange Notes will
evidence the same debt as the Old Notes and
will be entitled to the benefits of the
Indentures. See "Description of Notes."
THE SENIOR EXCHANGE NOTES
Maturity Date................. June 15, 2007.
Interest Rate and Payment
Dates......................... The Senior Exchange Notes will bear interest at
a rate of 9 3/8% per annum. Interest on the
Senior Exchange Notes will accrue from the date
of issuance and is payable semi-annually on
each June 15 and December 15, commencing June
15, 1998.
Ranking....................... The Senior Exchange Notes will be, as the Old
Senior Notes (which they replace) are, general
unsecured obligations of the Company, will rank
pari passu in right of payment to all senior
indebtedness of the Company including
indebtedness under the Credit Agreement and the
9 3/4% Senior Notes, will be structurally
subordinated to all indebtedness of the
subsidiaries of the Company that do not become
Subsidiary Guarantors, including the Trade
Receivable Facility, and will rank senior in
right of payment to the Senior Subordinated
Notes. All indebtedness under the Credit
Agreement is secured by substantially all of
the assets of the Company. At December 31,
1997, there was $64 million of indebtedness
outstanding under the Credit Agreement (and
there was approximately $93 million of credit
available under the revolving portion of the
Credit Agreement as well as undrawn letters of
credit of approximately $12 million) and the
total outstanding indebtedness under the Trade
Receivable Facility was $54 million (no
additional amounts of credit were available
under the Trade Receivable Facility). See
"Management's Discussion and Analysis of
Financial Condition and Results of Operations
-- Liquidity and Capital Resources" and
"Description of Notes."
Optional Redemption........... The Senior Notes are redeemable, in whole or in
part at the option of the Company on or after
June 15, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest,
if any, to the date of redemption. In addition,
prior to June 15, 2000 the Company, at its
option, may redeem up to 33% of the aggregate
principal amount of the Senior Notes originally
issued with the net cash proceeds of one or
more Equity Offerings at a redemption price
equal to 109.375% of the principal amount
thereof, plus accrued and unpaid interest, if
any, to the date of redemption; provided that
at least $100 million aggregate principal
amount of the Senior Notes remain outstanding
after any such redemption. See "Description of
Notes -- Certain Terms of the Senior Notes --
Optional Redemption."
7
<PAGE> 13
Change of Control............. Upon a Change of Control, each holder of the
Senior Notes will have the right to require the
Company to repurchase all or a portion of such
holder's Senior Notes at a price equal to 101%
of their principal amount, plus accrued and
unpaid interest, if any, to the date of
repurchase. In addition, upon the occurrence of
a Change of Control prior to June 15, 2002, the
Company, at its option, may redeem all, but not
less than all, of the outstanding Senior Notes
at a redemption price equal to 100% of the
principal amount thereof plus the applicable
Make-Whole Premium. See "Description of Notes
-- Certain Terms of the Senior Notes -- Change
of Control." There can be no assurance that, in
the event of a Change of Control, the Company
will have, or be able to obtain, sufficient
funds to repurchase the Senior Notes or that
the Company will be permitted to do so under
the Credit Agreement or any other indebtedness
outstanding at such time. See "Risk Factors --
Purchase of the Notes Upon Change of Control."
As defined, a "Change of Control" may not
include certain transactions which involve the
transfer of additional voting power to certain
affiliates or significant corporate
transactions not involving transfers of voting
power in excess of certain levels.
Offers to Purchase............ In the event of certain asset sales, the
Company will be required to offer to repurchase
the Senior Notes at 100% of their principal
amount, plus accrued and unpaid interest, if
any, to the date of repurchase, with the net
proceeds of such asset sales.
Certain Covenants............. The Senior Note Indenture imposes certain
limitations on the ability of the Company and
its Restricted Subsidiaries (as defined) to,
among other things, incur additional
indebtedness, incur liens, pay dividends or
make certain other restricted payments or
restricted investments, consummate certain
asset sales, enter into certain transactions
with affiliates, impose restrictions on the
ability of a subsidiary to pay dividends or
make certain payments to the Company and its
Restricted Subsidiaries, merge or consolidate
with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of
all or substantially all of the Company's
assets. These restrictions are subject to a
number of important qualifications and
exceptions.
THE SENIOR SUBORDINATED EXCHANGE NOTES
Maturity Date................. February 15, 2008.
Interest Rate and Payment
Dates......................... The Senior Subordinated Exchange Notes will
bear interest at a rate of 9 7/8% per annum.
Interest on the Senior Subordinated Exchange
Notes will accrue from the date of issuance and
is payable semi-annually on each February 15
and August 15, commencing August 15, 1998.
Ranking....................... The Senior Subordinated Exchange Notes will be,
as the Old Senior Subordinated Notes (which
they replace) are, general unsecured
obligations of the Company, will be subordinate
in right of payment to all Senior Debt (as
defined) of the Company including indebtedness
under the Credit Agreement, the 9 3/4% Senior
Notes and the Senior Notes, will be
structurally subordinated to all indebtedness
of the subsidiaries of the Company that
8
<PAGE> 14
do not become Subsidiary Guarantors, including
the Trade Receivable Facility, and will rank
pari passu in right of payment to the existing
and future senior subordinated indebtedness of
the Company. All indebtedness under the Credit
Agreement is secured by substantially all of
the assets of the Company. At December 31,
1997, there was $64 million of indebtedness
outstanding under the Credit Agreement (and
there was approximately $93 million of credit
available under the revolving portion of the
Credit Agreement as well as undrawn letters of
credit of approximately $12 million) and the
total outstanding indebtedness under the Trade
Receivable Facility was $54 million (no
additional amounts of credit were available
under the Trade Receivable Facility). See
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations -- Liquidity and Capital Resources"
and "Description of Notes."
Optional Redemption........... The Senior Subordinated Notes are redeemable,
in whole or in part at the option of the
Company on or after February 15, 2003, at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the
date of redemption. In addition, prior to
February 15, 2001, the Company, at its option,
may redeem up to 33% of the aggregate principal
amount of the Senior Subordinated Notes
originally issued with the net cash proceeds of
one or more Equity Offerings at a redemption
price equal to 109.875% of the principal amount
thereof, plus accrued and unpaid interest, if
any, to the date of redemption; provided that
at least $125 million aggregate principal
amount of the Senior Subordinated Notes remain
outstanding after any such redemption. See
"Description of Notes -- Certain Terms of the
Senior Subordinated Notes -- Optional
Redemption."
Change of Control............. Upon a Change of Control, each holder of the
Senior Subordinated Notes will have the right
to require the Company to repurchase all or a
portion of such holder's Senior Subordinated
Notes at a price equal to 101% of their
principal amount, plus accrued and unpaid
interest, if any, to the date of repurchase. In
addition, upon the occurrence of a Change of
Control prior to February 15, 2003, the
Company, at its option, may redeem all, but not
less than all, of the outstanding Senior
Subordinated Notes at a redemption price equal
to 100% of the principal amount thereof plus
the applicable Make-Whole Premium. See
"Description of Notes -- Certain Terms of the
Senior Subordinated Notes -- Change of
Control." There can be no assurance that, in
the event of a Change of Control, the Company
will have, or be able to obtain, sufficient
funds to repurchase the Senior Subordinated
Notes or that the Company will be permitted to
do so under the Credit Agreement, the Senior
Notes, the 9 3/4% Senior Notes or any other
indebtedness outstanding at such time. See
"Risk Factors -- Purchase of the Notes Upon
Change of Control." As defined, a "Change of
Control" may not include certain transactions
which involve the transfer of additional voting
power to certain affiliates or significant
corporate transactions not involving transfers
of voting power in excess of certain levels.
9
<PAGE> 15
Offers to Purchase............ In the event of certain asset sales, the
Company will be required to offer to repurchase
the Senior Subordinated Notes at 100% of their
principal amount, plus accrued and unpaid
interest, if any, to the date of repurchase,
with the net proceeds of such asset sales.
Certain Covenants............. The Senior Subordinated Note Indenture imposes
certain limitations on the ability of the
Company and its Restricted Subsidiaries to,
among other things, incur additional
indebtedness, including indebtedness which is
subordinate to rights of payment to any Senior
Debt and senior in right of payment to the
Senior Subordinated Notes, pay dividends or
make certain other restricted payments or
restricted investments, consummate certain
asset sales, enter into certain transactions
with affiliates, impose restrictions on the
ability of a subsidiary to pay dividends or
make certain payments to the Company and its
Restricted Subsidiaries, merge or consolidate
with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of
all or substantially all of the Company's
assets. These restrictions are subject to a
number of important qualifications and
exceptions.
For additional information regarding the Notes, see "Description of Notes."
USE OF PROCEEDS
There will be no cash proceeds to the Company from the exchange pursuant to
the Exchange Offer. The Company used the proceeds of the Initial Offering to
redeem the Old Debentures pursuant to the Redemption. See "Use of Proceeds."
RISK FACTORS
See "Risk Factors" beginning on page 13 for a discussion of certain factors
that should be considered before tendering Old Notes in exchange for Exchange
Notes. These risk factors are generally applicable to the Old Notes as well as
the Exchange Notes.
10
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary historical consolidated financial data of the Company
for the years ended September 30, 1993, 1994, 1995, 1996 and 1997 (other than
operating data) were derived from the historical audited consolidated financial
statements of the Company. The following selected historical consolidated
financial data of the Company as of December 31, 1997 and for the three months
ended December 31, 1996 and 1997 were derived from unaudited consolidated
financial statements of the Company, which, in the opinion of the Company,
reflect all adjustments necessary for a fair presentation of the results for the
unaudited periods. The following selected unaudited pro forma consolidated
income statement and other data have been prepared to give effect to the
Refinancing as if such transaction occurred on October 1, 1996. The "As
Adjusted" balance sheet data have been prepared to give effect to the
Refinancing as if such transaction occurred on December 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED SEPTEMBER 30,(1) ENDED DECEMBER 31,
---------------------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1996 1997 1997(2) 1996 1997 1997(2)
---- ---- ---- ---- ---- --------- ---- ---- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................... $ 733.5 $ 784.4 $1,051.4 $ 922.0 $ 759.3 $759.3 $195.6 $197.6 $197.6
Gross margin................... 81.4 93.0 296.4 205.8 42.0 42.0 21.4 11.5 11.5
Selling and administrative
costs........................ (73.8) (81.0) (95.5) (99.1) (81.1) (81.1) (20.5) (20.6) (20.6)
Non-recurring charges.......... (9.9) (15.5) (5.4) (8.1) -- -- -- -- --
Operating earnings (loss)...... (2.3) (3.5) 195.5 98.6 (39.1) (39.1) 0.9 (9.1) (9.1)
Interest expense -- net........ (68.2) (80.3) (86.1) (78.3) (80.7) (72.9) (19.4) (21.1) (19.1)
Income (loss) before income
taxes........................ (70.0) (84.0) 110.0 20.1 (121.4) (113.6) (17.7) (30.4) (28.4)
Income tax benefit (expense)... -- -- 24.2 (8.3) 47.1 44.1 8.0 11.6 10.9
Income (loss) before
extraordinary item and
accounting change............ (70.0) (84.0) 134.2 11.8 (74.3) (69.5) (9.7) (18.8) (17.5)
Extraordinary item and
accounting change............ 200.2 -- -- (3.2) (7.7) (7.7) -- -- --
Net income (loss).............. 130.2 (84.0) 134.2 8.6 (82.0) (77.2) (9.7) (18.8) (17.5)
Earnings per share(3):
Basic:
Income (loss) before
extraordinary item and
accounting change........ (1.40) (1.57) 2.49 0.22 (1.40) (1.31) (0.18) (0.35) (0.33)
Extraordinary item and
accounting change........ 4.01 -- -- (0.06) (0.15) (0.15) -- -- --
Net income (loss).......... 2.61 (1.57) 2.49 0.16 (1.55) (1.46) (0.18) (0.35) (0.33)
Diluted:
Income before extraordinary
item and accounting
change................... -- -- 2.44 0.22 -- -- -- -- --
Extraordinary item and
accounting change........ -- -- -- (0.06) -- -- -- -- --
Net income................. -- -- 2.44 0.16 -- -- -- -- --
Cash dividends per share....... -- -- -- -- -- -- -- -- --
Ratio of earnings to fixed
charges(4)................... -- -- 2.2x 1.2x -- -- -- -- --
Deficit of earnings to fixed
charges(4)................... $ 70.5 $ 84.9 -- -- $ 122.2 $114.4 $ 17.9 $ 30.7 $ 28.7
OTHER DATA:
Net cash provided by (used for)
operations................... $ 13.0 $ 29.7 $ 194.2 $ 164.4 $ (66.5) $(38.2) $(54.0)
Net cash used for
investments.................. (29.3) (34.9) (61.3) (53.5) (33.7) (8.2) (14.7)
Net cash provided by (used for)
financing.................... (20.6) (5.0) (117.8) (104.2) 67.1 10.7 68.2
Depreciation and
amortization(5).............. 61.1 61.2 64.8 64.5 65.1 16.3 16.6
Capital expenditures........... 23.7 40.4 58.9 54.8 31.1 8.4 14.6
EBITDA(5)...................... 63.9 69.6 260.4 167.9 22.9 16.4 6.7
Ratio of EBITDA to interest
expense -- net............... 0.9x 0.9x 3.0x 2.1x 0.3x 0.8x 0.3x
OPERATING DATA:
Production:
Containerboard (thousand
tons)...................... 1,151.9 1,194.9 1,200.5 1,243.3 1,263.2 301.5 298.5
Unbleached kraft paper
(thousand tons)............ 241.1 250.7 263.9 256.9 278.6 62.0 72.4
Shipments:
Corrugated containers
(billion square feet)...... 11.9 12.7 12.3 13.3 13.6 3.3 3.3
Multiwall bags (thousand
tons)...................... 48.7 51.5 52.4 51.9 57.0 14.1 14.9
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
SEPTEMBER 30, -----------------------
------------------------------------------ AS
1993 1994 1995 1996 1997 ACTUAL ADJUSTED
---- ---- ---- ---- ---- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $ 99.9 $ 71.6 $156.4 $ 69.8 $ 36.9 $ 81.0 $ 87.3
Property -- net....................................... 611.1 592.9 640.0 612.3 586.1 592.2 592.2
Total assets.......................................... 860.1 843.1 988.0 933.0 929.9 954.8 975.6
Long-term debt........................................ 670.1 696.8 671.5 623.1 701.7 780.0 835.4
Stockholders' equity (deficit)........................ 53.6 (23.8) 113.2 114.5 34.6 16.1 (12.2)
</TABLE>
11
<PAGE> 17
(1) The Company operates on a 52/53 week fiscal year. Fiscal 1993 through fiscal
1995 and fiscal 1997, were 52-week years and fiscal 1996 was a 53-week year.
Certain information under Other Data has been reclassified to conform with
the current year presentation.
(2) The summary unaudited pro forma consolidated income statement and other data
have been prepared to give effect to the issuance of $200 million principal
amount of the Company's 9 3/8% Senior Notes due 2007 and $250 million
principal amount of the Company's 9 7/8% Senior Subordinated Notes due 2008,
and the redemption of $404.3 million principal amount of the Company's
12 3/4% Senior Subordinated Discount Debentures due 2005 as if such
transaction occurred on October 1, 1996. Pro forma interest expense for the
year ended September 30, 1997 and the three months ended December 31, 1997
has been increased by the interest expense relating to the Notes ($44.5
million and $11.1 million, respectively, including the amortization of
related deferred financing costs) and reduced by the interest expense
relating to the Old Debentures ($52.3 million and $13.1 million,
respectively, including the amortization of related deferred financing
costs). The redemption premium (approximately $25.8 million) and write-off
of deferred financing fees associated with the Old Debentures, together with
certain other items, are expected to result in an extraordinary loss of
approximately $28.3 million which is net of an income tax benefit of $17.5
million. The extraordinary loss is not reflected in the pro forma income
statement data.
(3) Earnings per share amounts have been restated for the fiscal years ended
September 30, 1993, 1994, 1995, 1996 and 1997 to reflect the adoption of
Financial Accounting Standard No. 128, "Earnings Per Share" effective
October 1, 1997. Diluted earnings per share is not presented in periods were
the effect is antidilutive (that is, results in increased earnings per share
or decreased net loss per share).
(4) The ratio of earnings to fixed charges is determined by dividing the sum of
earnings before extraordinary item, interest expense, taxes and one-third of
rent expense by the sum of interest expense and one-third of rent expense.
For the fiscal years ended September 30, 1993, 1994 and 1997 and the three
months ended December 31, 1996 and 1997, earnings before fixed charges were
insufficient to cover fixed charges by $70.5 million, $84.9 million, $122.2
million, $17.9 million and $30.7 million, respectively. On a pro forma basis
for the fiscal year ended September 30, 1997 and the three months ended
December 31, 1997, earnings before fixed charges were insufficient to cover
fixed charges by $114.4 million and $28.7 million, respectively.
(5) "EBITDA" represents, for any relevant period, the sum of operating earnings,
depreciation of property, plant and equipment, amortization of intangible
assets included in operating earnings and non-recurring charges. The amounts
shown for depreciation and amortization include $4.8 million, $3.6 million,
$5.3 million, $3.3 million, $3.1 million, $0.8 million and $0.8 million of
amortization of deferred financing costs included in interest expense for
the fiscal years ended September 30, 1993, 1994, 1995, 1996 and 1997 and the
three months ended December 31, 1996 and 1997, respectively. EBITDA is not a
measure of financial performance under generally accepted accounting
principles, should not be construed as an alternative to operating income or
to cash flows from operating activities (as determined in accordance with
generally accepted accounting principles), and does not necessarily indicate
that cash flow will be sufficient to fund cash requirements. The Company
understands that certain investors believe that EBITDA provides useful
information regarding the Company's ability to service debt and to utilize
cash for other purposes. EBITDA should not be considered in isolation or as
a substitute for net income, cash flows from operations, or other income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's operating performance,
profitability or liquidity. In addition, EBITDA may not be comparable to
other similarly titled measures of other companies.
12
<PAGE> 18
RISK FACTORS
In addition to the other information set forth in this Prospectus, holders
of the Old Notes should carefully consider the following risk factors before
tendering Old Notes in exchange for Exchange Notes. The risk factors set forth
below are generally applicable to the Old Notes as well as the Exchange Notes.
LEVERAGE
At December 31, 1997, the Company had $794.6 million of total debt,
including $401.9 million of Senior Debt (including undrawn letters of credit of
approximately $12 million), $16.1 million of stockholders' equity and
approximately $93 million of credit available under the revolving portion of the
credit facilities. On a pro forma basis as of December 31, 1997, the Refinancing
would have increased total debt by approximately $55.4 million, including $209.7
million of Senior Debt, and decreased stockholders' equity by approximately
$28.3 million. In addition, subject to the restrictions in the Credit Agreement,
the 9 3/4% Senior Note Indenture (as defined), the Senior Note Indenture and the
Senior Subordinated Note Indenture, the Company may incur additional
indebtedness from time to time to finance acquisitions or capital expenditures
or for other purposes. See "Description of Other Indebtedness and Other
Obligations."
For the fiscal year ended September 30, 1997 and for the three months ended
December 31, 1997, on a pro forma basis after giving effect to the Refinancing
as if it had occurred on October 1, 1996, the Company's earnings before fixed
charges would have been insufficient to cover fixed charges by $114.4 million
and $28.7 million, respectively.
The level of the Company's indebtedness could have important consequences
to holders of the Notes, including: (i) a substantial portion of the Company's
cash flow from operations must be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital, capital expenditures or
acquisitions may be limited; and (iii) the Company's level of indebtedness could
limit its flexibility in reacting to changes in the industry and economic
conditions generally. Some of the Company's competitors currently operate on a
less leveraged basis and have significantly greater operating and financing
flexibility than the Company. The Company's ability to pay interest on the Notes
and to satisfy its other debt obligations will depend upon its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, some of which are beyond its control. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RANKING
The Senior Exchange Notes will be, as the Old Senior Notes (which they
replace) are, general unsecured obligations of the Company and will rank pari
passu in right of payment to all senior indebtedness of the Company, including
indebtedness under the Credit Agreement and the 9 3/4% Senior Notes. All
indebtedness under the Credit Agreement is secured by substantially all of the
assets of the Company. As of December 31, 1997, there was $64 million of
indebtedness outstanding under the Credit Agreement, and there was approximately
$93 million of credit available under the Credit Agreement. As of December 31,
1997, the Company also had approximately $12 million of undrawn letters of
credit outstanding under the Credit Agreement. In addition, certain other senior
indebtedness of the Company is secured by the properties financed with such
indebtedness. The Senior Exchange Notes will rank, as the Old Senior Notes
(which they replace), senior in right of payment to the Senior Subordinated
Notes. In the event of a bankruptcy, liquidation or reorganization of the
Company, in the event of a Change of Control or a significant asset disposition
or in the event that any default in payment of any secured indebtedness, holders
of secured indebtedness of the Company will be entitled to payment in full from
the proceeds of all assets of the Company pledged to secure such indebtedness
prior to any payment of such proceeds to holders of the Senior Notes.
Consequently, there can be no assurances that the Company will have sufficient
funds to make such payments to holders of the Senior Notes. See "Description of
Notes" and "Description of Other Indebtedness and Other Obligations."
13
<PAGE> 19
The Senior Subordinated Exchange Notes will be, as the Old Senior
Subordinated (which they replace), are, general unsecured obligations of the
Company, will be subordinate in right of payment to all Senior Debt of the
Company, including indebtedness under the Credit Agreement, the 9 3/4% Senior
Notes and the Senior Notes, and will rank pari passu in right of payment to all
existing and future senior subordinated indebtedness of the Company. After
giving effect to the Refinancing, at December 31, 1997, the total amount of
outstanding debt that would have been senior to the Senior Subordinated Notes
was approximately $611.6 million, including approximately $12 million of undrawn
letters of credit under the Credit Agreement. In the event of a bankruptcy,
liquidation or reorganization of the Company, in the event of a Change of
Control or a significant asset disposition or in the event that any default in
payment of any debt constituting such Senior Debt occurs, holders of Senior Debt
will be entitled to payment in full from the proceeds of all assets of the
Company prior to any payment of such proceeds to holders of the Senior
Subordinated Notes. Consequently, there can be no assurances that the Company
will have sufficient funds to make such payments to holders of the Senior
Subordinated Notes. See "Description of Notes -- Subordination" and "Description
of Other Indebtedness and Other Obligations."
The Exchange Notes will be, as the Old Notes (which they replace) are,
structurally subordinated to existing and future liabilities of the Company's
subsidiaries, including trade payables and the Trade Receivable Facility, as to
the assets of such subsidiaries except, in the case of the Senior Notes,
subsidiaries that become Subsidiary Guarantors. As of December 31, 1997,
liabilities (including trade payables) of the subsidiaries of the Company were
approximately $57 million, including $54 million under the Trade Receivable
Facility (no additional amounts of credit were available under the Trade
Receivable Facility).
INDUSTRY AND CYCLICAL FACTORS
Demand for corrugated containers, containerboard and unbleached kraft paper
is cyclical and has historically corresponded to changes in the rate of growth
in the U.S. economy and exchange rates for the U.S. dollar. Growth in the U.S.
economy generally stimulates demand for packaging products. In addition,
weakness of the U.S. dollar versus the currencies of the United States' major
trading partners stimulates domestic demand for corrugated products and makes
export sales of containerboard more price competitive.
The cyclicality of demand is accentuated by the inelasticity of supply due
to the capital intensive nature of the industry. Because productive capacity
cannot be added quickly, during periods of rising demand containerboard and
unbleached kraft paper inventory levels tend to fall, exerting upward pressure
on prices. In periods when capacity exceeds demand, efforts to control inventory
levels are limited because containerboard and unbleached kraft paper mills
operate most economically near capacity operating levels.
Adverse pricing conditions have affected the paper and corrugated container
industry generally since the fall of 1995 and, as a result, the Company's cash
flow levels have been substantially reduced. While favorable pricing conditions
have resulted in a cumulative increase of $90 per ton in published
containerboard prices (with corresponding increases in corrugated container
prices) since July 1997, unless there is additional significant price
improvement beginning in the spring of 1998, the Company will be required to
seek modifications to certain financial covenants in the Credit Agreement. There
can be no assurance that current industry conditions will continue to improve or
will not deteriorate. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of Other Indebtedness and Other Obligations."
In recent years, a number of domestic and foreign producers have increased
their utilization of recycled fiber. This increased utilization of recycled
fiber has resulted in greater volatility of recycled fiber costs. The volatility
of recycled fiber costs may be particularly acute when containerboard prices
increase. In addition, the Company's average cost of wood chips has been
increasing due to greater demand for wood chips in the timberlands of the
Southern United States. There can be no assurance that wood chip costs will not
increase further. See "Business -- Raw Materials."
14
<PAGE> 20
COMPETITION
Many of the Company's competitors are substantially larger and have
significantly greater financial resources; however, the most important
competitive factors are price, quality and service. The manufacture of
containerboard and unbleached kraft paper is capital intensive with high
barriers to entry because new facilities require substantial capital and take at
least two years to construct. Many of the Company's larger competitors own
timberlands. Although the Company does not own timberlands, it has fiber supply
agreements covering a substantial portion of its fiber needs. Such agreements
covered approximately 35% of the Company's pulpwood and wood chip requirements
in fiscal 1997.
In contrast to paper mills which manufacture containerboard and unbleached
kraft paper, converting facilities which produce corrugated products and
multiwall bags have comparatively low barriers to entry. Competition in
corrugated products and, to a lesser extent, multiwall bags, is primarily
localized, with proximity to customers an important factor in minimizing
shipping costs. There are a substantial number of competitors in each of the
geographic areas in which the Company's converting facilities are located. Many
of such competing facilities are owned by other integrated producers.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indentures restrict, among other things, the Company's ability to incur
additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur liens (in the case of the Senior Note Indenture), impose
restrictions on the ability of a subsidiary to pay dividends or make certain
payments to the Company and incur certain indebtedness, merge or consolidate
with any other person or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the assets of the Company.
The Credit Agreement contains certain restrictions on the Company's
operations and contains requirements that the Company achieve and maintain
certain financial ratios. Such restrictions include, among other things,
limitations on the ability of the Company and its subsidiaries to incur
additional indebtedness, to create, incur or permit the existence of certain
liens, to make certain investments, to make capital expenditures above certain
levels, to make certain sales of assets, to make certain payments with respect
to its outstanding stock, to effect certain fundamental changes and to enter
into certain types of transactions. There can be no assurance that the Company
will be able to achieve and maintain compliance with the prescribed financial
ratio tests or other requirements of the Credit Agreement. Failure to achieve or
maintain compliance with such financial ratio tests or other requirements under
the Credit Agreement would result in an event of default and could lead to the
acceleration of the Company's obligations under the Credit Agreement as well as
the acceleration of other indebtedness of the Company which, by the terms of the
instruments creating, evidencing or governing such indebtedness, would be in
default upon an acceleration under the Credit Agreement. All indebtedness under
the Credit Agreement is secured by substantially all of the assets of the
Company. See "Description of Other Indebtedness and Other Obligations -- Credit
Agreement."
The 9 3/4% Senior Note Indenture restricts, among other things, the
Company's ability to incur additional indebtedness, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, incur liens, incur certain indebtedness,
impose restrictions on the ability of a subsidiary to pay dividends or make
certain payments to the Company, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company.
ENVIRONMENTAL MATTERS
Compliance with federal, state and local environmental requirements,
particularly relating to air and water quality, waste disposal and the cleanup
of contaminated soil and groundwater, is a significant factor in the Company's
business. The Company made capital expenditures for environmental purposes of
approximately $1 million, $4 million and $5 million in fiscal 1997, fiscal 1996
and fiscal 1995, respectively. Inherent in manufacturing operations and the real
estate ownership activity of the Company is the risk of environmental
liabilities as a result of both current and past operations, which cannot be
predicted with certainty. The
15
<PAGE> 21
Company has incurred and will continue to incur costs, on an ongoing basis,
associated with environmental regulatory compliance in its business. The Company
believes that it is in compliance in all material respects with applicable
federal, state and local environmental regulations. Although the Company will
attempt to be in compliance with all existing environmental regulatory
requirements, any newly adopted legislation or regulations, and changed
interpretation of existing legislation or regulations, there can be no assurance
that the Company will be in compliance, and any such noncompliance could have a
material adverse effect on the Company. See "Business -- Environmental Matters."
LITIGATION
The Company is a party to various legal proceedings, including litigation
incidental to normal business activities and other litigation described in
"Business -- Legal Proceedings." 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. There can be no assurance,
however, that such litigation will not have such a material adverse effect.
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF EXCHANGE NOTES
The Old Notes were issued to, and the Company believes are currently owned
by, a relatively small number of beneficial owners. Prior to the Exchange Offer,
there has not been any public market for the Old Notes. The Old Notes have not
been registered under the Securities Act and will be subject to restrictions on
transferability to the extent that they are not exchanged for Exchange Notes by
holders who are entitled to participate in this Exchange Offer. The holders of
Old Notes (other than any such holder that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) who are not eligible to
participate in the Exchange Offer are entitled to certain registration rights,
and the Company is required to file a Shelf Registration Statement with respect
to such Old Notes. The Exchange Notes will constitute new issues of securities
with no established trading market. The Company does not intend to list the
Exchange Notes on any national securities exchange or seek the admission thereof
to trading in the National Association of Securities Dealers Automated Quotation
System. The Initial Purchasers have advised the Company that they currently
intend to make a market in the Exchange Notes, but they are not obligated to do
so and may discontinue such market making at any time. In addition, such market
making activity will be subject to the limits imposed by the Securities Act and
the Exchange Act and may be limited during the Exchange Offer and the pendency
of the Shelf Registration Statement. Accordingly, no assurance can be given that
an active public or other market will develop for the Exchange Notes or as to
the liquidity of the trading market for the Exchange Notes. If a trading market
does not develop or is not maintained, holders of the Exchange Notes may
experience difficulty in reselling the Exchange Notes or may be unable to sell
them at all. If a market for the Exchange Notes develops, any such market may be
discontinued at any time.
If a public trading market develops for the Exchange Notes, future trading
prices of such securities will depend on many factors including, among other
things, prevailing interest rates, the Company's results of operations and
market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the Exchange Notes may trade at a discount from their
principal amount.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Company of
such Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for Exchange Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof, and, upon
consummation of the Exchange Offer certain registration rights under the
Registration Rights Agreements will terminate. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the
16
<PAGE> 22
purpose of participating in a distribution of the Exchange Notes may be deemed
to have received restricted securities, and if so, will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution." To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Old Notes could be adversely affected. See "The Exchange Offer."
PURCHASE OF THE NOTES UPON CHANGE OF CONTROL
Upon a Change of Control (such as, for example, the acquisition of a
majority of the outstanding voting stock of the Company by a third party), each
holder of the Notes will have the right to require that the Company offer to
purchase all or a portion of such holder's Notes at 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase. The
source of funds for any such purchase will be the Company's available cash or
cash generated from operations or other sources, including borrowings, sales of
assets, sales of equity or funds provided by a new controlling person. However,
there can be no assurance that in the event of a Change of Control, the Company
will have or be able to obtain sufficient funds to repurchase the Notes, or that
the Company will be permitted to do so under the Credit Agreement or any other
indebtedness outstanding at such time. See "Description of Notes -- Change of
Control."
17
<PAGE> 23
THE COMPANY
GENERAL
The Company is a major national manufacturer and distributor of brown paper
and brown paper packaging products. The Company produces linerboard and
unbleached kraft paper at its paper mills located in Bogalusa, Louisiana;
Antioch, California; and Pine Bluff, Arkansas. Through its network of 20
converting facilities, the Company converts the majority of its primary mill
products into corrugated containers and sheets and multiwall bags for the food,
beverage, agricultural and other industries. As of September 30, 1997, the
Company was the ninth largest domestic producer of linerboard with approximately
1.35 million tons of annual capacity and the fourth largest producer of
unbleached kraft paper with approximately 0.28 million tons of annual capacity.
Since its inception in 1986, the Company has made significant capital
expenditures primarily to expand capacity, install advanced paper making
technology, improve product quality, realize operating efficiencies and maintain
its existing facilities. As part of a major capital expenditure program
completed in fiscal 1990, the Company invested approximately $240 million to
expand capacity, improve operating efficiencies and enhance product quality at
the Company's mills, providing the Company with a high-quality, cost-effective
mill system. Mill productive capacity has increased by more than 65% compared to
1987 levels. The Company believes that all of its mills are low-cost producers
in their respective segments and that its Bogalusa mill is one of the premier
mills in the industry. The focus of the Company's current capital plan for the
five year period beginning in fiscal 1994 is on its converting operations, with
approximately 60% of the budgeted $250 million for that period allocated to
upgrading and expanding the Company's corrugated container, sheet feeder and bag
plants. The goal of the converting plant capital program is to increase capacity
and to achieve quality enhancements and cost efficiencies similar to those at
the Company's mills.
OPERATING STRATEGY
The Company's operating strategy is to maintain or improve its position as
a low-cost, high-quality producer of linerboard, unbleached kraft paper and
related converted products. Specifically, the Company has emphasized production
of high-performance linerboard, high-recycled content linerboard and packaging
products, and the use of multicolor packaging graphics, because it believes
these products represent the higher-growth segments of the brown paper packaging
industry. Further, the Company's goal is to become 100% forward integrated over
time by increasing converting capacity to a level that equals or exceeds its
mill productive capacity. The Company will also continue to seek growth
opportunities including acquisitions and other strategic investments.
High-Performance Linerboard. Approximately 94% of the Company's linerboard
productive capacity is capable of manufacturing high-performance grades of
linerboard, which have the same performance characteristics as standard grades
of linerboard, but achieve these levels using less fiber which results in a
lower basis weight. Basis weight is the weight of linerboard per 1,000 square
feet. When converted into a corrugated container, high-performance linerboard,
using the same square footage as standard linerboard, reduces weight while
maintaining performance characteristics, and thus, is more economical.
Recycled Linerboard and Recycled Packaging. The Company is also a major
producer in the growing recycled linerboard and packaging segments of the brown
paper industry. The Antioch mill uses 100% recycled fiber, and the Company as a
whole uses approximately 820 thousand tons annually of pre- and post-consumer
waste as a fiber source. Recycled fiber provides approximately 45% of the
Company's fiber needs.
Enhanced Graphic Capabilities. The Company continues to emphasize the use
of high-quality packaging graphics through a preprint linerboard facility,
state-of-the-art multicolor print capabilities at its converting facilities and
computer-aided-design systems at its corrugated container facilities to meet
customers' growing demand for these products and services. The Company believes
participation in this segment provides higher margins and a more stable customer
base.
18
<PAGE> 24
Integration. Consistent with its long term operating strategy, the Company
intends to continue to sell primary mill product to independent converters and
to the export market, and to purchase mill product in the open market. The
Company believes that increased forward integration will reduce the impact of
primary product price volatility on its profits, provide more stable demand
(which enhances efficiency) for the Company's mill production and increase its
product distribution capabilities. In fiscal 1997, the Company converted the
equivalent of approximately 82% of its linerboard production and converted or
sold to its grocery bag joint venture approximately 71% of its unbleached kraft
paper production. The Company intends to continue to increase converting
capacity through internal expansion, converting plant acquisitions and strategic
joint ventures.
THE REFINANCING
The Company believes that the Refinancing provides lower interest rates,
extended maturities and additional financial flexibility, thus enhancing the
Company's ability to implement its operating strategy.
The net proceeds of the Initial Offering were used to defease the
outstanding Old Debentures in accordance with the terms of the Old Debenture
Indenture. Upon consummation of the Offering, the Company deposited with the Old
Debenture Trustee U.S. Treasury securities having a maturity of May 14, 1998,
and a future value sufficient to redeem the Old Debentures, and pay the call
premium and accrued and unpaid interest through May 14, 1998. The Old Debentures
will be redeemed by the Old Debenture Trustee on May 15, 1998.
19
<PAGE> 25
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreements.
The Company will not receive any cash proceeds from the issuance of the Exchange
Notes offered hereby. In consideration for issuing the Exchange Notes
contemplated in this Prospectus, the Company will receive Old Notes in like
principal amount, the form and terms of which are the same as the form and terms
of the Exchange Notes (which replace the Old Notes), except as otherwise
described herein. The Old Notes surrendered in exchange for Exchange Notes will
be retired and canceled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase or decrease in the indebtedness
of the Company. As such, no effect has been given to the Exchange Offer in the
pro forma statements or capitalization table.
The net proceeds from the Initial Offering were used to consummate the
Redemption and pay related fees and expenses. The remainder of the funds
necessary to consummate the Redemption were provided by borrowings under the
revolving portions of the Company's credit facilities.
20
<PAGE> 26
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of December 31, 1997 and as adjusted to give effect to the
Refinancing as if it occurred on such date. The information presented below
should be read in conjunction with the financial statements and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN MILLIONS)
<S> <C> <C>
Current maturities of long-term debt....................... $ 14.6 $ 14.6
------- -------
Long-term debt (less current maturities):
Credit Agreement and Trade Receivable Facility debt(1)... 118.0 127.7
Other senior debt........................................ 32.7 32.7
9 3/4% Senior Notes due 2007............................. 225.0 225.0
9 3/8% Senior Notes due 2007............................. -- 200.0
12 3/4% Senior Subordinated Discount Debentures due 2005. 404.3 --
9 7/8% Senior Subordinated Notes due 2008................ -- 250.0
------- -------
Total long-term debt................................ 780.0 835.4
------- -------
Stockholders' equity:
Class A Common Stock..................................... -- --
Capital in excess of par value........................... 175.8 175.8
Retained deficit(2)...................................... (146.9) (175.2)
Common stock in treasury-at cost......................... (11.3) (11.3)
Recognition of minimum pension liability................. (1.5) (1.5)
------- -------
Total stockholders' equity (deficit)................ 16.1 (12.2)
------- -------
Total capitalization................................ $ 810.7 $ 837.8
======= =======
</TABLE>
- -------------------------
(1) At December 31, 1997, the Company had approximately $12 million of undrawn
letters of credit issued under the Credit Agreement and approximately $93
million of credit available under the revolving portions of the credit
facilities.
(2) As of December 31, 1997, the Refinancing would have resulted in an
extraordinary loss of approximately $28.3 million, net of an income tax
benefit of $17.5 million.
21
<PAGE> 27
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following selected historical consolidated financial data of the Company
for the years ended September 30, 1993, 1994, 1995, 1996 and 1997 (other than
operating data) were derived from the historical audited consolidated financial
statements of the Company. The following selected historical consolidated
financial data of the Company as of December 31, 1997 and for the three months
ended December 31, 1996 and 1997 were derived from unaudited consolidated
financial statements of the Company, which, in the opinion of the Company,
reflect all adjustments necessary for a fair presentation of the results for the
unaudited periods. The following selected unaudited pro forma consolidated
income statement and other data have been prepared to give effect to the
Refinancing as if such transaction occurred on October 1, 1996. The "As
Adjusted" balance sheet data have been prepared to give effect to the
Refinancing as if such transaction occurred on December 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED SEPTEMBER 30,(1) ENDED DECEMBER 31,
---------------------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1996 1997 1997(2) 1996 1997 1997(2)
---- ---- ---- ---- ---- --------- ---- ---- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................... $ 733.5 $ 784.4 $1,051.4 $ 922.0 $ 759.3 $759.3 $195.6 $197.6 $197.6
Gross margin................... 81.4 93.0 296.4 205.8 42.0 42.0 21.4 11.5 11.5
Selling and administrative
costs........................ (73.8) (81.0) (95.5) (99.1) (81.1) (81.1) (20.5) (20.6) (20.6)
Non-recurring charges.......... (9.9) (15.5) (5.4) (8.1) -- -- -- -- --
Operating earnings (loss)...... (2.3) (3.5) 195.5 98.6 (39.1) (39.1) 0.9 (9.1) (9.1)
Interest expense -- net........ (68.2) (80.3) (86.1) (78.3) (80.7) (72.9) (19.4) (21.1) (19.1)
Income (loss) before income
taxes........................ (70.0) (84.0) 110.0 20.1 (121.4) (113.6) (17.7) (30.4) (28.4)
Income tax benefit (expense)... -- -- 24.2 (8.3) 47.1 44.1 8.0 11.6 10.9
Income (loss) before
extraordinary item and
accounting change............ (70.0) (84.0) 134.2 11.8 (74.3) (69.5) (9.7) (18.8) (17.5)
Extraordinary item and
accounting change............ 200.2 -- -- (3.2) (7.7) (7.7) -- -- --
Net income (loss).............. 130.2 (84.0) 134.2 8.6 (82.0) (77.2) (9.7) (18.8) (17.5)
Earnings per share(3):
Basic:
Income (loss) before
extraordinary item and
accounting change........ (1.40) (1.57) 2.49 0.22 (1.40) (1.31) (0.18) (0.35) (0.33)
Extraordinary item and
accounting change........ 4.01 -- -- (0.06) (0.15) (0.15) -- -- --
Net income (loss).......... 2.61 (1.57) 2.49 0.16 (1.55) (1.46) (0.18) (0.35) (0.33)
Fully diluted:...............
Income before extraordinary
item and accounting
change................... -- -- 2.44 0.22 -- -- -- -- --
Extraordinary item and
accounting change........ -- -- -- (0.06) -- -- -- -- --
Net income................. -- -- 2.44 0.16 -- -- -- -- --
Cash dividends per share....... -- -- -- -- -- -- -- -- --
Ratio of earnings to fixed
charges(4)................... -- -- 2.2x 1.2x -- -- -- -- --
Deficit of earnings to fixed
charges(4)................... $ 70.5 $ 84.9 -- -- $ 122.2 $114.4 $ 17.9 $ 30.7 $ 28.7
OTHER DATA:
Net cash provided by (used for)
operations................... $ 13.0 $ 29.7 $ 194.2 $ 164.4 $ (66.5) $(38.2) $(54.0)
Net cash used for
investments.................. (29.3) (34.9) (61.3) (53.5) (33.7) (8.2) (14.7)
Net cash provided by (used for)
financing.................... (20.6) (5.0) (117.8) (104.2) 67.1 10.7 68.2
Depreciation and
amortization(5).............. 61.1 61.2 64.8 64.5 65.1 16.3 16.6
Capital expenditures........... 23.7 40.4 58.9 54.8 31.1 8.4 14.6
EBITDA(5)...................... 63.9 69.6 260.4 167.9 22.9 16.4 6.7
Ratio of EBITDA to interest
expense -- net............... 0.9x 0.9x 3.0x 2.1x 0.3x 0.8x 0.3x
OPERATING DATA:
Production:
Containerboard (thousand
tons)...................... 1,151.9 1,194.9 1,200.5 1,243.3 1,263.2 301.5 298.5
Unbleached kraft paper
(thousand tons)............ 241.1 250.7 263.9 256.9 278.6 62.0 72.4
Shipments:
Corrugated containers
(billion square feet)...... 11.9 12.7 12.3 13.3 13.6 3.3 3.3
Multiwall bags (thousand
tons)...................... 48.7 51.5 52.4 51.9 57.0 14.1 14.9
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, 1997
------------------------------------------ --------------------------
1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED
---- ---- ---- ---- ---- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 99.9 $ 71.6 $156.4 $ 69.8 $ 36.9 $ 81.0 87.3
Property -- net...................................... 611.1 592.9 640.0 612.3 586.1 592.2 592.2
Total assets......................................... 860.1 843.1 988.0 933.0 929.9 954.8 975.6
Long-term debt....................................... 670.1 696.8 671.5 623.1 701.7 780.0 835.4
Stockholders' equity (deficit)....................... 53.6 (23.8) 113.2 114.5 34.6 16.1 (12.2)
</TABLE>
22
<PAGE> 28
(1) The Company operates on a 52/53 week fiscal year. Fiscal 1993 through fiscal
1995 and fiscal 1997, were 52-week years and fiscal 1996 was a 53-week year.
Certain information under Other Data has been reclassified to conform with
the current year presentation.
(2) The summary unaudited pro forma consolidated income statement and other data
have been prepared to give effect to the issuance of $200 million principal
amount of the Company's 9 3/8% Senior Notes due 2007 and $250 million
principal amount of the Company's 9 7/8% Senior Subordinated Notes due 2008,
and the redemption of $404.3 million principal amount of the Company's
12 3/4% Senior Subordinated Discount Debentures due 2005 as if such
transaction occurred on October 1, 1996. Pro forma interest expense for the
year ended September 30, 1997 and the three months ended December 31, 1997
has been increased by the interest expense relating to the Notes ($44.5
million and $11.1 million, respectively, including the amortization of
related deferred financing costs) and reduced by the interest expense
relating to the Old Debentures ($52.3 million and $13.1 million,
respectively, including the amortization of related deferred financing
costs). The redemption premium (approximately $25.8 million) and write-off
of deferred financing fees associated with the Old Debentures, together with
certain other items, are expected to result in an extraordinary loss of
approximately $28.3 million which is net of an income tax benefit of $17.5
million. The extraordinary loss is not reflected in the pro forma income
statement data.
(3) Earnings per share amounts have been restated for the fiscal years ended
September 30, 1993, 1994, 1995, 1996 and 1997 to reflect the adoption of
Financial Accounting Standard No. 128, "Earnings Per Share" effective
October 1, 1997. Diluted earnings per share is not presented for periods
where the effect is antidilutive (that is, results in increased earnings per
share or decreased net loss per share).
(4) The ratio of earnings to fixed charges is determined by dividing the sum of
earnings before extraordinary item, interest expense, taxes and one-third of
rent expense by the sum of interest expense and one-third of rent expense.
For the fiscal years ended September 30, 1993, 1994 and 1997 and the three
months ended December 31, 1996 and 1997, earnings before fixed charges were
insufficient to cover fixed charges by $70.5 million, $84.9 million, $122.2
million, $17.9 million and $30.7 million, respectively. On a pro forma basis
for the fiscal year ended September 30, 1997 and the three months ended
December 31, 1997, earnings before fixed charges were insufficient to cover
fixed charges by $114.4 million and $28.7 million, respectively.
(5) "EBITDA" represents, for any relevant period, the sum of operating earnings,
depreciation of property, plant and equipment, amortization of intangible
assets included in operating earnings and non-recurring charges. The amounts
shown for depreciation and amortization include $4.8 million, $3.6 million,
$5.3 million, $3.3 million, $3.1 million, $0.8 million and $0.8 million of
amortization of deferred financing costs included in interest expense for
the fiscal years ended September 30, 1993, 1994, 1995, 1996 and 1997 and the
three months ended December 31, 1996 and 1997, respectively. EBITDA is not a
measure of financial performance under generally accepted accounting
principles, should not be construed as an alternative to operating income or
to cash flows from operating activities (as determined in accordance with
generally accepted accounting principles), and does not necessarily indicate
that cash flow will be sufficient to fund cash requirements. The Company
understands that certain investors believe that EBITDA provides useful
information regarding the Company's ability to service debt and to utilize
cash for other purposes. EBITDA should not be considered in isolation or as
a substitute for net income, cash flows from operations, or other income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's operating performance,
profitability or liquidity. In addition, EBITDA may not be comparable to
other similarly titled measures of other companies.
23
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Demand for corrugated containers, containerboard and unbleached kraft paper
is cyclical and has historically corresponded to changes in the rate of growth
in the U.S. economy and exchange rates for the U.S. dollar. Growth in the U.S.
economy generally stimulates demand for packaging products. In addition,
weakness of the U.S. dollar versus the currencies of the United States' major
trading partners stimulates domestic demand for corrugated products and makes
export sales of containerboard more price competitive.
The cyclicality of demand is accentuated by the inelasticity of supply due
to the capital intensive nature of the industry. Because productive capacity
cannot be added quickly, during periods of rising demand containerboard and
unbleached kraft paper inventory levels tend to fall, exerting upward pressure
on prices. In periods when capacity exceeds demand, efforts to control inventory
levels are limited because containerboard and unbleached kraft paper mills
operate most economically near capacity operating levels.
Demand for unbleached kraft paper has declined in recent years due to
displacement by plastics. The Company can vary its production of unbleached
kraft paper, depending on market conditions, because all four of the Company's
paper machines that produce unbleached kraft paper also have the capability to
produce containerboard.
From the fall of 1989 through the fall of 1993, published linerboard and
grocery sack paper transaction prices declined approximately 27 percent and 34
percent, respectively. Published prices for linerboard and grocery sack paper
recovered significantly throughout fiscal 1994 and fiscal 1995, increasing
approximately 80 percent and 84 percent, respectively, and reaching record
highs. Increases in industry containerboard capacity and softening demand for
corrugated containers contributed to an approximately 35 percent decrease in
published prices for linerboard between September 1995 and September 1996.
Between September 1996 and July 1997 published industry prices for linerboard
decreased an additional 10 percent before recovering in the fourth quarter of
fiscal 1997. At September 1997, published prices for linerboard were essentially
unchanged from September 1996 levels. Due to year-over-year growth in corrugated
product shipments, strong export demand for linerboard and reduced
containerboard mill operating rates to control inventories, October 1997
published industry prices for linerboard had increased approximately 15 percent
from September 1997 and more than 25 percent from their low point in fiscal
1997.
FIRST QUARTER OF FISCAL 1998 COMPARED WITH FIRST QUARTER OF FISCAL 1997
Net sales for the first quarter of fiscal 1998 were $197.6 million compared
with net sales of $195.6 million for the first quarter of fiscal 1997. The
operating loss for the current quarter was $9.1 million compared with operating
earnings of $0.9 million for the year-ago quarter. The net loss for the current
quarter totaled $18.8 million, or $0.35 per common share, compared with a net
loss of $9.7 million, or $0.18 per common share, for the year-ago quarter.
Sales in the first quarter of fiscal 1998 were favorably affected by higher
unbleached kraft paper production which increased net sales by approximately $2
million. Quarter-over-quarter, total mill production increased to 4,076 tons per
day (TPD, calculated on the basis of the number of days in the period) from
3,997 TPD. Unbleached kraft paper production in the current quarter increased
approximately 17 percent to 796 TPD from 681 TPD in the prior-year quarter.
Containerboard production in the first quarter of fiscal 1998 was 3,280 TPD
compared with production of 3,316 TPD in the prior-year quarter.
Corrugated shipments totaled approximately 3.3 billion square feet in both
the first quarter of fiscal 1998 and fiscal 1997. Multiwall bag shipments
increased to 14.9 thousand tons in the current quarter compared with shipments
of 14.1 thousand tons in the first quarter of fiscal 1997.
Average selling prices for the Company's corrugated products decreased
approximately 2 percent in the current quarter compared with the prior-year
quarter. Average selling prices for the Company's domestic linerboard increased
approximately 18 percent in the first quarter of fiscal 1998 compared with the
prior-year
24
<PAGE> 30
quarter while average selling prices for export linerboard were essentially
unchanged. Average selling prices for the Company's unbleached kraft paper
increased approximately 9 percent in the current quarter compared with the
prior-year quarter while average selling prices for multiwall bags increased
less than one percent.
Gross margin for the first quarter of fiscal 1998 decreased to $11.5
million from $21.4 million in the prior-year quarter primarily due to higher
fiber costs ($9 million). The increase in fiber costs is primarily due to higher
prices for both wood chips and old corrugated containers ("OCC"). The average
delivered cost of wood chips and OCC increased approximately 24 percent and 18
percent, respectively, in the first quarter of fiscal 1998 compared to the first
quarter of fiscal 1997.
Selling and administrative costs were $20.6 million for the current quarter
compared with selling and administrative costs of $20.5 million in the
prior-year quarter.
Net interest expense of $21.1 million in the first quarter of fiscal 1998
increased from the prior-year quarter by $1.7 million primarily as a result of
higher average debt levels.
In the first quarter of fiscal 1998, the Company recorded a tax benefit of
$11.6 million which corresponds to an effective tax rate of approximately 38
percent. In the first quarter of fiscal 1997, the Company recorded a tax benefit
of $8.0 million which corresponds to an effective rate of approximately 45
percent.
YEAR ENDED SEPTEMBER 30, 1997 (FISCAL 1997) COMPARED WITH YEAR ENDED SEPTEMBER
30, 1996 (FISCAL 1996)
Net sales for fiscal 1997 were $759.3 million, a decrease of approximately
18 percent compared with net sales of $922.0 million for fiscal 1996. The
operating loss for fiscal 1997 was $39.1 million compared with operating
earnings of $98.6 million for fiscal 1996 after non-recurring operating charges
of $8.1 million. The net loss was $82.0 million, or $1.55 per diluted share,
after a $7.7 million extraordinary loss ($0.15 per diluted share) on the early
retirement of debt, versus net income in fiscal 1996 of $8.6 million, or $0.16
per diluted share, after a $3.2 million extraordinary loss ($0.06 per diluted
share) on the early retirement of debt.
Sales and earnings in fiscal 1997 were adversely affected by declining
product prices which resulted in significantly lower average selling prices for
the Company's products compared with fiscal 1996. Lower average selling prices
decreased net sales by approximately $132 million versus the prior fiscal year.
In addition, net sales were lower by $57 million as a result of the exchange of
the Company's grocery bag manufacturing assets for a 35 percent equity interest
in S&G Packaging Company, L.L.C.( "S&G Packaging"), a joint venture with Stone
Container Corporation, in the fourth quarter of fiscal 1996. Average selling
prices for the Company's domestic linerboard, export linerboard and corrugated
products decreased approximately 20 percent, 16 percent and 19 percent,
respectively, in fiscal 1997 compared with fiscal 1996. Average selling prices
for the Company's unbleached kraft paper and multiwall bags decreased
approximately 13 percent and 5 percent, respectively, in fiscal 1997 versus the
prior year.
Sales in fiscal 1997 benefited from record mill production. Increased
volume had a favorable effect on net sales of approximately $26 million. Total
mill production increased approximately 3 percent in fiscal 1997 compared with
the prior year. Production in fiscal 1996 benefited from an extra week in the
fiscal year. Adjusting for the extra week in fiscal 1996, production increased
approximately 5 percent in fiscal 1997. In fiscal 1997, production of linerboard
increased approximately 4 percent to 3,470 TPD from 3,351 TPD while production
of unbleached kraft paper increased approximately 10 percent to 765 TPD from 693
TPD in the prior year.
Corrugated shipments were a record 13.6 billion square feet in fiscal 1997,
an increase of more than 2 percent from fiscal 1996. Adjusting for the extra
week in fiscal 1996, corrugated shipments increased approximately 4 percent.
Multiwall bag shipments were a record 57,000 tons in fiscal 1997, an increase of
approximately 10 percent from fiscal 1996.
Gross margin for fiscal 1997 decreased to $42.0 million from $205.8 million
in the prior-year period primarily due to lower selling prices for the Company's
products. Lower average net selling prices, including the effect of higher
containerboard and unbleached kraft paper costs on the Company's converting
facilities
25
<PAGE> 31
($16 million) reduced gross margin by approximately $148 million. In addition,
gross margin was adversely affected by higher costs for fiber ($24 million),
energy ($7 million) and labor ($2 million). These unfavorable variances were
partially offset by higher volume which increased gross margin by approximately
$17 million.
Selling and administrative costs for fiscal 1997 were $18.0 million lower
than fiscal 1996. The decrease is primarily the result of the exchange of the
Company's grocery bag and sack manufacturing net assets for its interest in S&G
Packaging and a decrease in incentive compensation as a result of reduced
profitability.
Net interest expense increased to $80.7 million in fiscal 1997 from $78.3
million in fiscal 1996, primarily due to higher average debt levels.
During the third quarter of fiscal 1997, the Company issued $225 million
principal amount of 9 3/4% Senior Notes due 2007 and used the proceeds to redeem
and retire all its outstanding 11 1/2% Senior Notes due 2001 ($179.7 million
principal amount) and to repay borrowings under the revolving portion of its
credit agreements. In conjunction with the redemption, approximately $2.8
million of deferred financing fees were written off. The early retirement of
debt resulted in an extraordinary loss of $7.7 million, net of an income tax
benefit of $5.0 million.
During fiscal 1996, the Company repurchased and retired $75.2 million
principal amount of its publicly traded debt securities. In conjunction with the
repurchase, $1.5 million of deferred financing fees were written off. These
transactions resulted in an extraordinary loss of $3.2 million net of an income
tax benefit of $2.3 million.
YEAR ENDED SEPTEMBER 30, 1996 (FISCAL 1996) COMPARED WITH YEAR ENDED SEPTEMBER
30, 1995 (FISCAL 1995)
Net sales for fiscal 1996 were $922.0 million, a decrease of approximately
12 percent compared with record net sales of $1,051.4 million for fiscal 1995.
Operating earnings for fiscal 1996 were $98.6 million compared with record
operating earnings of $195.5 million for fiscal 1995 after non-recurring
operating charges of $8.1 million and $5.4 million in fiscal 1996 and fiscal
1995, respectively. Net income was $8.6 million, or $0.16 per diluted share,
after a $3.2 million extraordinary loss ($0.06 per diluted share) on the early
retirement of debt, versus net income in fiscal 1995 of $134.2 million, or $2.44
diluted per share, including a $24.2 million income tax benefit.
Sales in fiscal 1996 were adversely affected by declining product prices
which resulted in significantly lower average selling prices for the Company's
products compared with fiscal 1995. Lower average selling prices decreased net
sales by approximately $181 million versus the prior fiscal year. Average
selling prices for the Company's domestic linerboard, export linerboard and
corrugated products decreased approximately 19 percent, 33 percent and 10
percent, respectively, in fiscal 1996 compared with fiscal 1995. Average selling
prices for the Company's unbleached kraft paper and multiwall bags decreased
approximately 25 percent and 1 percent, respectively, in fiscal 1996 versus the
prior year.
Sales and earnings for fiscal 1996 benefited from record mill production.
Increased volume had a favorable effect on net sales of approximately $49
million. Total mill production increased approximately 2 percent in fiscal 1996
compared with the prior year. Production in fiscal 1996 benefited from an extra
week in the fiscal year. Adjusting for the extra week in fiscal 1996, production
was marginally higher despite approximately 80,000 tons of "lost" production
primarily due to market downtime. In fiscal 1996, production of linerboard
increased approximately 2 percent to 3,351 TPD from 3,298 TPD while production
of unbleached kraft paper decreased approximately 4 percent to 693 TPD from 725
TPD in the prior year.
Corrugated shipments were a record 13.3 billion square feet in fiscal 1996,
an increase of approximately 8 percent from fiscal 1995. Adjusting for the extra
week, corrugated shipments increased approximately 6 percent due to shipments
from a new sheet feeder plant and capacity additions related to the capital
investment program. Multiwall bag shipments of 51,900 tons in fiscal 1996 were
approximately equal to the prior year. Prior to contributing its grocery bag
manufacturing assets to S&G Packaging in July 1996, the Company shipped 88,200
tons of grocery bags and sacks (for the 9 1/2-month period) versus 105,000 tons
in fiscal 1995.
26
<PAGE> 32
Gross margin for fiscal 1996 decreased to $205.8 million from $296.4
million in the prior year primarily due to lower selling prices for the
Company's products. Lower average net selling prices, net of the effect of lower
container board and unbleached kraft paper costs on the Company's converting
operations ($30 million), reduced gross margin by approximately $151 million.
The effect of lower selling prices was partially offset by reduced fiber costs
(primarily the cost of OCC) and increased volume which favorably affected gross
margin by approximately $72 million and $8 million, respectively.
In the fourth quarter of fiscal 1996, the Company recorded a $8.1 million
pre-tax charge for costs associated with a staff reduction program. The staff
reductions, which eliminated approximately 8 percent of the Company's salaried
positions, will reduce future administrative and overhead costs. In fiscal 1995,
the Company recorded a $5.4 million non-recurring charge for costs associated
with an early retirement option accepted by certain hourly employees at the
Antioch, California mill, which was designed to reduce future unit labor costs.
Selling and administrative costs for fiscal 1996 were $3.6 million higher
than fiscal 1995. The increase was primarily the result of increased
professional fees and group insurance costs, partially offset by a decrease in
incentive compensation as a result of reduced profitability.
Net interest expense decreased to $78.3 million in fiscal 1996 from $86.1
million in fiscal 1995. The decrease was primarily due to lower average debt
levels, partially offset by accretion in the discount on subordinated debt.
During fiscal 1996, the Company repurchased and retired $75.2 million
principal amount of its publicly traded debt securities. In conjunction with the
repurchase, $1.5 million of deferred financing fees were written off. These
transactions resulted in an extraordinary loss of $3.2 million, net of an income
tax benefit of $2.3 million.
LIQUIDITY AND CAPITAL RESOURCES
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 quarter of fiscal 1998 was $54.0
million, compared with net cash used for operations of $38.2 million for the
year-ago period. The unfavorable comparison to the prior-year period was
primarily due to reduced operating earnings and increased working capital.
Capital expenditures of $14.6 million in the first quarter of fiscal 1998
increased by $6.2 million from $8.4 million in the first quarter of fiscal 1997.
Capital expenditures of $31.1 million in fiscal 1997 decreased $23.7 million
from fiscal 1996. In addition to the capital spending, the Company acquired $2.4
million and $5.6 million of equipment financed by capital leases or debt
obligations secured by the assets acquired in fiscal 1997 and fiscal 1996,
respectively. In fiscal 1994, the Company initiated a five-year capital plan
that provides for a total investment of approximately $250 million. The plan
targets approximately 60 percent of the spending to enhance the capacity,
flexibility and cost effectiveness of the Company's converting facilities with
the remainder to be invested in its paper mills. The Company is currently in the
process of significantly expanding one converting plant and opened a new
converting facility early in fiscal 1998. The Company currently anticipates that
its capital spending for fiscal 1998 and beyond will approximate its annual
depreciation and amortization expense. Capital spending, however, will be
adjusted from time to time as market conditions and available cash flows
dictate.
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 quarter of fiscal 1998 the Company incurred
approximately $0.8 million of costs for demolition and maintenance of the East
Mill, such costs are net of proceeds from scrap sales. Demolition of the
remaining structures on the mill site will require the Company to incur costs
for
27
<PAGE> 33
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 December 31, 1997, balance
sheet accruals for demolition and asbestos removal were approximately $6.4
million, and the net book value of the East Mill was $3.6 million.
At December 31, 1997, the Company had cash and equivalents of $5.6 million,
a decrease of $0.5 million from September 30, 1997, as cash used for operations
and investments were largely offset by cash provided by financing. Total debt
increased by $78.5 million to $794.6 million at December 31, 1997 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 semi-annual
interest payments on the Company's public debt securities ($37 million), capital
expenditures ($15 million) and seasonal increases in primary working capital
($17 million). At December 31, 1997, the Company had $118 million of borrowings
outstanding and approximately $93 million of credit available under the
revolving portions of its credit agreements.
At December 31, 1997, the Company had primary working capital of $129.7
million compared to $112.8 million at September 30, 1997 primarily due to higher
inventories and lower trade payables. The increased inventory is primarily the
result of seasonally 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 quarter of fiscal 1998, the Company's average wood chip
prices increased approximately 24 percent compared with the first quarter 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 18 percent in the first quarter
of fiscal 1998 compared with the first quarter of fiscal 1997. OCC prices in the
first quarter of fiscal 1998, however, were more than 16 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. Unless there is significant product price improvement beginning
in the spring of this year, however, the Company will be required to seek
covenant modifications to its credit agreement to maintain continued access to
its liquidity.
OTHER
The Company is conducting a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is developing a
plan to resolve the issue. The Company believes that, by modifying existing
software, and/or converting to new software, the Year 2000 issue can be resolved
without significant operational difficulties. The financial impact of this issue
is not anticipated to be material to the Company's results of operations,
financial position or cash flows. 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 review being conducted
includes 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
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS 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
28
<PAGE> 34
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.
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 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 on which operating segments, if any, it will report.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' 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.
29
<PAGE> 35
BUSINESS
DEVELOPMENT
The Company acquired businesses which had been owned by Crown Zellerbach
Corporation on November 17, 1986 for approximately $260 million. Since its
inception, the Company has expanded its business through strategic acquisitions
and capital investments. The Company financed the acquisitions and capital
expenditures with cash provided by operations, borrowings under its credit
agreements and the issuance of debt and equity securities. The Company's
facilities currently consist of three containerboard and unbleached kraft paper
mills, 14 corrugated container plants, four corrugated sheet feeder plants, two
multiwall bag plants, a preprint and graphics center, a cogeneration facility
and through a wholly owned, independently operated subsidiary, a specialty
chemicals facility.
In fiscal 1994, the Company initiated a five-year capital plan that
provides for a total investment of approximately $250 million. The plan targets
approximately 60 percent of the capital spending to enhance the capacity,
flexibility and cost effectiveness of the Company's converting facilities with
the remainder to be invested in its paper mills. In fiscal 1995, as part of the
capital plan, the Company opened one new converting plant and relocated or
expanded three converting plants. The Company is currently in the process of
significantly expanding one converting plant and opened a new converting
facility early in fiscal 1998. The Company currently anticipates that capital
spending for fiscal 1998 and beyond will approximate its annual depreciation and
amortization expense. Capital spending, however, will be adjusted from time to
time as market conditions and available cash flows dictate.
GENERAL
Corrugated containers are a safe and economical way to transport
manufactured and bulk goods. Increasingly, corrugated containers are also used
as integrated transportation and marketing devices in the form of point-of-sale
displays. The major corrugated container end-use markets are food, beverage and
agricultural products; paper and fiber products; petroleum, petrochemical
resins, plastics and rubber products; glass and metal containers; electronic
appliances; and electrical and other machinery. Most corrugated containers are
produced and sold according to individual customer specifications.
Containerboard, consisting of linerboard and corrugating medium, is the
principal raw material used in the manufacture of corrugated containers.
Linerboard provides the strength component of a container while corrugating
medium provides rigidity. Corrugating medium is fluted and laminated to
linerboard in corrugated container and corrugated sheet feeder plants to produce
corrugated sheets. The sheets are subsequently printed, cut, folded and glued in
corrugated container or corrugated sheet plants to produce corrugated
containers.
Generally, corrugated containers are delivered by truck because of the
large number of customers and demand for timely service. The dispersion of
customers and the high bulk, low density and value of corrugated containers make
shipping costs a relatively high percentage of total costs. As a result,
corrugated plants tend to be located close to customers to minimize freight
costs.
To reduce the cost of shipping containerboard from mills to widely
dispersed corrugated plants, vertically integrated containerboard manufacturers
routinely exchange containerboard from mills in one location for containerboard
having a similar value from mills located elsewhere in the United States (U.S.).
Producers also exchange containerboard to take advantage of manufacturing
efficiencies resulting from operating paper machines in their most efficient
basis weight ranges and trim widths and to obtain paper grades they do not
produce.
Unbleached kraft paper is the principal raw material used in the
manufacture of multiwall bags and grocery bags and sacks. Multiwall bags are
used by producers in such industries as pet food, chemical, agricultural, food,
metal, plastics and rubber. Multiwall bags and grocery bags and sacks are
manufactured through a process of printing, cutting, folding and gluing kraft
paper to meet customer specifications.
30
<PAGE> 36
Cellulose fiber, produced from wood chips, is the principal raw material
used in the manufacture of containerboard and kraft paper. The industry's use of
recycled fiber, however, has been increasing. Fiber costs are generally the
largest cost component in the manufacture of containerboard and unbleached kraft
paper.
In calendar 1996, industry trade associations estimated U.S. corrugated
product sales and multiwall bag sales to be $20.8 billion and $1.3 billion,
respectively. It has also been estimated that virgin containerboard and
unbleached kraft paper capacity utilization rates in the U.S. averaged 93
percent and 76 percent, respectively, in calendar 1996 and 96 percent and 74
percent, respectively, for the first nine months of calendar 1997.
Industry trade publications estimated that calendar 1997 U.S.
containerboard and unbleached kraft paper annual capacities were 36.9 million
tons and 2.6 million tons, respectively. This represents an increase in
containerboard capacity of approximately 4 percent, while unbleached kraft
paperboard capacity was unchanged, compared with the prior year.
Demand for corrugated containers, containerboard and unbleached kraft paper
is affected by the level of growth of economic activity and, in the case of
containerboard, the strength of the U.S. dollar. For further information
regarding the industry and factors that influence prices and the demand for
paper packaging products, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General."
SALES
Corrugated containers and sheets, multiwall bags and solid fibre products
collectively represent approximately 80 percent of the Company's net sales while
the remaining 20 percent primarily consists of containerboard and unbleached
kraft paper sales. Sales of the Company's products are not seasonal to any
significant degree.
The Company sells its products to thousands of customers, with the 10
largest accounting for approximately 16 percent of net sales in fiscal 1997 and
16 percent and 13 percent, respectively, in fiscal 1996 and fiscal 1995. The
Company's largest customer accounted for approximately 3 percent of the
Company's net sales in fiscal 1997 and approximately 4 percent and 3 percent,
respectively, in fiscal 1996 and fiscal 1995. Corrugated containers are
generally produced to customer order for delivery from one to ten days after
receipt of the order. As a result, the Company's backlog generally does not
exceed 3 percent of annual corrugated container sales at any particular time.
In general, each converting facility has its own sales force that is
responsible for marketing and distribution to local customers. A national
account sales force handles converted product sales to large customers who
utilize centralized purchasing for multiple locations. In total, the Company's
sales force for converted products at September 30, 1997 consisted of
approximately 130 salespersons. Sales and exchanges of containerboard and
unbleached kraft paper are the responsibility of a small centralized marketing
and sales group.
The Company exports linerboard and unbleached kraft paper, certain
converted products and specialty chemicals. Such sales totaled $66.4 million,
$71.5 million and $113.9 million in fiscal 1997, fiscal 1996 and fiscal 1995,
respectively. Fluctuations in export sales are primarily the result of changes
in selling prices for linerboard.
PRODUCTS
CORRUGATED PRODUCTS. The Company produces many varieties of corrugated
containers and sells the majority of its production to manufacturing end users.
The Company also produces corrugated sheets which are subsequently converted
into corrugated containers by independent manufacturers. Corrugated shipments
were a record 13.6 billion square feet in fiscal 1997, an increase of more than
2 percent from the prior year. Shipments in fiscal 1996 benefited from an extra
week in the fiscal year. Adjusting for the extra week, corrugated shipments
increased approximately 4 percent. From fiscal 1995 to fiscal 1996, corrugated
shipments increased approximately 6 percent adjusting for the extra week in
fiscal 1996, due to shipments from a new sheet feeder plant and capacity
additions related to the capital investment program.
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CONTAINERBOARD. The Company's containerboard mills in the aggregate have
the ability to manufacture containerboard in a broad spectrum of grades and
weights. Production of containerboard increased to a record 1,263,200 tons in
fiscal 1997 from 1,243,300 tons in the prior year despite the extra week in
fiscal 1996. Adjusting for the extra week in fiscal 1996, the Company's
production of containerboard increased approximately 2 percent from 1,200,500
tons in fiscal 1995. In addition to its own production, the Company has agreed
to purchase, at market prices, through 2004 approximately 24,000 tons per year
of containerboard from Newark Group Industries, Inc. During fiscal 1997, fiscal
1996 and fiscal 1995, the Company's corrugated plants consumed the equivalent of
approximately 82 percent, 80 percent and 78 percent, respectively, of the
Company's containerboard production and purchase commitments.
MULTIWALL BAGS. The Company produces many varieties of medium to large
multiwall bags and sells them to manufacturers and processors for packaging
their products. The Company's multiwall bag shipments increased approximately 10
percent in fiscal 1997 to 57,000 tons from 51,900 tons in fiscal 1996. The
Company's multiwall bag shipments were essentially flat in fiscal 1996 compared
to fiscal 1995.
UNBLEACHED KRAFT PAPER. The Company is a supplier of unbleached kraft paper
to independent multiwall bag and grocery bag and sack converters. During fiscal
1997, the Company produced 278,600 tons of unbleached kraft paper. This compares
with 256,900 tons and 263,900 tons in fiscal 1996 and fiscal 1995, respectively.
The Company has an agreement to supply S&G Packaging Company, L.L.C. (S&G
Packaging), a joint venture with Stone Container Corporation, with approximately
130,000 tons of unbleached kraft paper per year. During fiscal 1997 and fiscal
1996, the Company's multiwall bag plants consumed or the Company sold pursuant
to its paper supply agreement approximately 71 percent and 59 percent,
respectively, of its unbleached kraft paper production. During fiscal 1995, the
Company's multiwall bag and grocery bag and sack plants consumed the equivalent
of approximately 54 percent of the Company's unbleached kraft paper production
and purchase commitments.
SPECIALTY CHEMICALS. Gaylord Chemical Corporation, a wholly owned,
independently operated, subsidiary of the Company, utilizes a process stream
from the Bogalusa, Louisiana paper mill manufacturing operations to produce
dimethyl sulfide (DMS) and dimethyl sulfoxide (DMSO). DMS is a low boiling-point
liquid used as a presulfiding agent for catalysts for the petroleum industry, a
natural gas odorant, a processing aid in ethylene production and a feedstock for
the manufacture of DMSO. DMSO is used as a solvent for a wide range of complex
manufacturing processes used in the chemical, agricultural and pharmaceutical
industries. Management believes that Gaylord Chemical Corporation is the sole
domestic producer of DMSO and estimates that Gaylord Chemical Corporation
produces 35 to 40 percent of the world's supply of DMSO. Sales of these products
for fiscal 1997, fiscal 1996 and fiscal 1995 were $19.6 million, $18.2 million
and $16.7 million, respectively.
OTHER PRODUCTS. At its Bogalusa, Louisiana corrugated container plant, the
Company produces solid fibre products which are primarily used as beverage
carriers and pallet substitutes. Solid fibre is produced using technology and
manufacturing processes similar to those used for corrugated containers.
The Company is engaged in the production and sale of grocery bags and sacks
through its 35 percent ownership interest in S&G Packaging.
The Company operates a cogeneration facility at its Antioch, California
mill, which produces steam and electricity for the mill. Pursuant to a long-term
agreement, the Company sells a specified amount of electricity representing the
cogeneration facility's anticipated excess capacity at the contract date to
Pacific Gas & Electric Company, subject to certain adjustments. Electricity
sales pursuant to this agreement were $7.5 million in fiscal 1997 and $6.6
million in each of fiscal 1996 and fiscal 1995.
RAW MATERIALS
The Bogalusa, Louisiana mill uses approximately 75 percent pulpwood and
wood chips in the manufacture of containerboard and unbleached kraft paper, of
which approximately 40 to 45 percent was supplied by Weyerhaeuser Company
(Weyerhaeuser), successor in interest to Hanson Natural Resources Company, in
each of the last three fiscal years. The remainder was purchased on the open
market. The Company has
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certain agreements through 2016 pursuant to which Weyerhaeuser is committed to
supply the Company with significant quantities of wood chips, roundwood and
stumpage at prices based on independent market transactions. Recycled fiber
accounts for the remainder of the mill's fiber requirements.
The Antioch, California mill uses 100 percent recycled fiber. During fiscal
1997, approximately 80 percent of the old corrugated containers (OCC) used as a
source of recycled fiber at the Antioch mill were supplied under contracts with
several suppliers at market prices. Upon expiration of such contracts, the
Company believes it will be able to negotiate new contracts with these or other
suppliers to provide significant quantities of OCC at market prices. The
remainder was purchased on the open market.
The Pine Bluff, Arkansas mill uses approximately 75 percent wood chips, of
which approximately 31 percent, 32 percent and 23 percent was purchased from
Weyerhaeuser, pursuant to a supply contract, in fiscal 1997, fiscal 1996 and
fiscal 1995, respectively, with the remainder generally purchased pursuant to
annual contracts with a number of different chip suppliers in the area. The
contract with Weyerhaeuser provides for a supply of wood chips at market prices
through June 30, 1999, at which time the Company anticipates it will be
renegotiated. Recycled fiber accounts for the remainder of the mill's fiber
requirements.
During fiscal 1997, the Company's financial results were adversely effected
by higher fiber costs. Average delivered prices for OCC increased $11 per ton,
or approximately 12 percent from $93 per ton in fiscal 1996, due to an increase
in domestic demand. In addition, average wood chip prices in fiscal 1997
increased approximately 10 percent as a result of higher demand and unusually
wet weather in the southern U.S. The fiber market is difficult to predict and
there can be no assurance of the future direction of OCC and wood chip prices.
In fiscal 1997, fiber represented approximately 40 percent of the Company's
containerboard and unbleached kraft paper production costs and future increases
in fiber prices would adversely affect the Company's profitability.
ENERGY
The Company's mills require significant amounts of steam and electricity in
their operation. The Company has a supply agreement through 2003 pursuant to
which Weyerhaeuser will provide hog fuel (which consists of bark and other
residual fiber from trees) at stated prices. The remainder of the hog fuel used
by the Bogalusa mill is either purchased on the open market or is generated at
several chip mills with which the Company has long-term supply agreements. In
fiscal 1997, the Bogalusa mill produced all of its steam and generated
approximately 65 percent of its electricity requirements. During the same
period, the Antioch mill produced all of its steam and approximately 94 percent
of its electricity. The Antioch mill has a contract to sell electricity from its
cogeneration facility to a public utility through 2013. See "Products." Certain
aspects of the energy operations of the Bogalusa mill and the Antioch mill are
regulated by the Federal Energy Regulatory Commission. The Pine Bluff mill
produces all of its own steam, but purchases all of its electricity from a local
public utility.
In fiscal 1997, energy costs accounted for approximately 10 percent of the
Company's containerboard and unbleached kraft paper production costs and future
increases in energy prices would adversely affect the Company's profitability.
COMPETITION
Many of the Company's competitors are substantially larger and have
significantly greater financial resources; however, the most important
competitive factors are price, quality and service. The manufacture of
containerboard and unbleached kraft paper is capital intensive with high
barriers to entry because new facilities require substantial capital and take at
least two years to construct. Many of the Company's larger competitors own
timberlands. Although the Company does not own timberlands, it has fiber supply
agreements described in "Raw Materials." Such agreements covered approximately
35 percent of the Company's pulpwood and wood chip requirements in fiscal 1997.
In contrast to paper mills which manufacture containerboard and unbleached
kraft paper, converting facilities, which produce corrugated products and
multiwall bags, have comparatively low barriers to entry.
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Competition in corrugated products and, to a lesser extent, multiwall bags, is
primarily localized, with proximity to customers an important factor in
minimizing shipping costs. There are a substantial number of competitors in each
of the geographic areas in which the Company's converting facilities are
located. Many of such competing facilities are owned by other integrated
producers.
ENVIRONMENTAL MATTERS
Compliance with federal, state and local environmental requirements,
particularly relating to air and water quality and waste disposal, is a
significant factor in the Company's business. The Company made capital
expenditures for environmental purposes of approximately $1 million, $4 million
and $5 million in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The
Company believes that it is in compliance in all material respects with
applicable federal, state and local environmental regulations.
In November 1997, the Environmental Protection Agency promulgated new air
standards for pulping processes together with new water quality discharge
limitations into what are commonly referred to as the "Cluster Rule" regulations
for pulp and paper mills. Phase I of the Cluster Rule as it relates to air
quality is applicable to kraft, soda, sulfite, or semi-chemical pulping
processes, mechanical pulping processes, and processes using secondary or
non-wood fibers. New effluent (water) guidelines contained in the Cluster Rule
are applicable to bleached paper grade kraft, soda, and paper grade sulfite
mills only. Effluent guidelines for non-bleached paper mills, the segment in
which the Company participates, (i.e., unbleached kraft, semi-chemical,
dissolving kraft, dissolving sulfite, and non-wood chemical pulp) are yet to be
promulgated. The Company continues to evaluate the potential impact of the
proposed rules on its operations and capital expenditures. Preliminary estimates
indicate that the Company could be required to make capital expenditures of
approximately $5 million to $7 million per year during the three years following
issuance to meet the requirements of the proposed rules. The ultimate financial
impact of the regulations cannot be predicted with certainty and will depend on
several factors including the actual requirements imposed under the final rules,
new developments in process control technology and the impact of inflation.
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DESCRIPTION OF PROPERTIES
MANUFACTURING PROPERTIES. The Company's plants are maintained in generally
good condition and management believes they are suitable for their specific
purposes. Set forth below is certain information concerning these facilities:
<TABLE>
<CAPTION>
PLANT PRODUCTS OWNED/LEASED
----- -------- ------------
<S> <C> <C>
Mills:
Antioch, California......... Containerboard Owned
Bogalusa, Louisiana......... Containerboard and unbleached kraft paper Owned
Pine Bluff, Arkansas........ Containerboard and unbleached kraft paper Owned
Corrugated Plants:
Antioch, California......... Corrugated containers Owned
Atlanta, Georgia............ Corrugated containers Owned
Bogalusa, Louisiana......... Corrugated containers and solid fibre Owned
Carol Stream, Illinois...... Corrugated containers Owned
City of Industry,
California................ Corrugated sheets Owned
Dallas, Texas............... Corrugated containers Leased
Gilroy, California.......... Corrugated containers Leased
Greenville, South Carolina.. Corrugated containers Owned
Marion, Ohio................ Corrugated containers Owned
Newark, Delaware............ Corrugated containers Owned
Phoenix, Arizona............ Corrugated containers Owned
Raleigh, North Carolina..... Corrugated containers Owned
St. Louis, Missouri......... Corrugated containers Owned
San Antonio, Texas.......... Corrugated containers Leased
San Antonio, Texas.......... Corrugated sheets Owned
Sunnyvale, California....... Corrugated sheets Owned
Tampa, Florida.............. Corrugated containers Leased
Tipton, Indiana............. Corrugated sheets Leased
Bag Plants:
Pine Bluff, Arkansas........ Multiwall bags Owned
Twinsburg, Ohio............. Multiwall bags Leased
Other Facilities:
Antioch, California......... Electricity cogeneration Owned
Bogalusa, Louisiana......... Specialty chemicals Owned
Livermore, California....... Preprinted linerboard Leased
</TABLE>
The Bogalusa mill has five paper machines with the capacity to produce
linerboard, corrugating medium and unbleached kraft paper. The mill uses
softwood and hardwood pulp and recycled fiber from OCC and double lined kraft
("DLK") clippings.
The Antioch mill has one paper machine with the capacity to produce
recycled linerboard and corrugating medium using 100% recycled fiber.
The Pine Bluff mill has one paper machine with the capacity to produce
unbleached kraft paper and linerboard. The mill uses softwood pulp and recycled
fiber from DLK. See "-- Products."
OTHER PROPERTIES. The Company leases its executive and general and
administrative offices in Deerfield, Illinois. It also leases numerous warehouse
facilities and sales offices throughout the United States.
EMPLOYEES
At September 30, 1997, the Company employed approximately 4,000 people.
Approximately 68 percent of the Company's employees are hourly wage employees
who are members of various labor unions. The
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Company's labor agreements covering its employees at its Bogalusa, Antioch and
Pine Bluff mills expire in fiscal 2000, fiscal 2001 and fiscal 2002,
respectively. At September 30, 1997, labor contracts covering approximately 3
percent of the Company's union employees had expired, and were subsequently
renegotiated. In addition, labor contacts covering approximately 16 percent of
the Company's union employees are scheduled to expire before the end of fiscal
1998. The Company believes it has satisfactory relations with its employees and
their unions and, based on previous experience, does not anticipate any
significant difficulties in renegotiating labor contracts as they expire. In
conjunction with the renegotiation of the Antioch mill's labor contract, in
fiscal 1995 certain hourly employees accepted an early retirement option, which
was designed to reduce future unit labor costs.
LEGAL PROCEEDINGS
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 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 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 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
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Corporation, the Company and twenty-one other defendants. In the Consolidated
Master Petition all claims against individual defendants (including the officers
of Gaylord Chemical Corporation and the Company) were dropped. The Consolidated
Master Petition includes substantially all of the claims and theories asserted
in the prior lawsuits, including negligence and strict liability, as well as
several claims of statutory liability. Compensatory and punitive damages are
sought. The Company and its subsidiaries are vigorously contesting all of these
claims.
On July 15, 1996 the Louisiana state court certified these consolidated
actions as a single class action. The class was tentatively defined to include
all those persons or entities who claim to have been injured as a result of the
October 23, 1995 accident. On March 27, 1997, the Louisiana Court of Appeal for
the First Circuit reversed the trial court's order granting class certification,
defining the class, approving class notice, requiring all notice forms be
notarized and appointing the plaintiffs' attorneys to the PLC. The Court of
Appeal ordered the trial court to conduct a new class certification hearing to
allow additional evidence on the adequacy of class representatives and class
counsel and instructed the trial court to create a concise geographic definition
of the class of individuals allegedly impacted. Finally, the Court of Appeal
instructed the trial judge to approve a new class notice form that permits the
use of notice of claim forms and/or proof of claim forms only after a
determination of liability, if any. The Louisiana Supreme Court declined to
review that decision. On May 23, 1997, the trial court reappointed the PLC with
several new members. On June 20, 1997, a second CMO was entered by the court.
Pursuant to this second CMO, a Second Consolidated Amended Master Petition
(SCAMP) was filed on June 20, 1997. The SCAMP includes substantially all the
claims and theories asserted in the original Consolidated Master Petition. No
officers of Gaylord Chemical Corporation or the Company are named as defendants
in the SCAMP.
Pursuant to the second CMO, the status of all lawsuits pending before the
filing of the SCAMP, some of which name officers of Gaylord Chemical Corporation
or the Company as defendants, will be determined by the trial court after class
certification. 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 have filed supervisory writs with the Court of Appeal
challenging the trial court's class certification ruling. Those writs are
currently pending.
In addition, the Company, Gaylord Chemical Corporation and numerous other
third party companies have been named as defendants in 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 7,400 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 against co-defendants in both
of the Mississippi and Louisiana actions.
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 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 have filed supervisory writs with the Court of Appeal
contesting that ruling. Those writs are pending.
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.
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<PAGE> 43
DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER OBLIGATIONS
CREDIT AGREEMENT
General. On June 30, 1995, the Company entered into the Amended and
Restated Credit Agreement among various financial institutions, Bankers Trust
Company, as agent (the "Agent") and the Company (the "Credit Agreement"). The
Credit Agreement provided for (a) the refinancing of existing term loans,
revolving loans and standby letter of credit loans and (b) an increase in the
existing revolving credit facility.
Term Loans. The outstanding amount of term loans which were refinanced
under the Credit Agreement was $42,704,208.05 as of June 30, 1995. The Company
prepaid the entire amount of such outstanding term loans prior to September 30,
1995 and did not incur any related prepayment premium or penalty. No amounts are
available to be reborrowed under this facility.
Revolving Credit Facility. The revolving credit facility provides for
borrowings of up to $175 million and expires by its terms and is payable in full
on June 30, 2000. The Company is permitted to issue up to $30 million of letters
of credit as part of its revolving credit facility. The Company has the right to
prepay the revolving credit facility in whole or in part from time to time
without incurring any prepayment premium or penalty. Amounts borrowed under the
revolving credit facility may be repaid and reborrowed.
The revolving credit facility also includes a swing line loan facility. The
swing line loan facility allows the Company to make same day borrowings up to
the lesser of $25 million or the amount currently undrawn and available under
the revolving credit facility. Amounts outstanding under the swing line loan
facility reduce amounts available under the revolving credit facility.
Letter of Credit Loan Facility. The outstanding balance of a promissory
note issued by the Company to the Export-Import Bank of the United States and an
instrument issued at the time of the acquisition by the Company of certain
assets of the Container Products Division of Fibreboard Corporation are the two
obligations collateralized by the letter of credit facility under the Credit
Agreement. Standby letter of credit loans can be incurred only in the event that
either of the two outstanding standby letters of credit are drawn due to the
nonpayment of principal or interest by the Company on the underlying debt
instruments. The standby letter of credit loan commitments are reduced
periodically to reflect principal repayments on the underlying debt instruments.
If the standby letter of credit loans are incurred, the Company will be
required to repay certain of such loans in equal semi-annual installments on the
last business day of the Company's second and fourth fiscal quarters, commencing
with the first such date that the relevant standby letter of credit loans have
been in existence and ending on April 30, 1999. Certain other standby letter of
credit loans will be required to be repaid immediately. Under the Credit
Agreement, the Company will continue to have the right to prepay the standby
letter of credit loans in whole or in part from time to time without incurring
any prepayment premium or penalty. As of December 31, 1997, the aggregate
standby letter of credit commitment was approximately $3.8 million.
Collateral. Indebtedness under the Credit Agreement is secured by a first
priority security interest in substantially all of the Company's assets and a
pledge of all of the outstanding common stock of each of Gaylord Chemical, GMA
Sales Corporation and Gaylord Container de Mexico, S.A. de C.V., each a
subsidiary of the Company.
Interest Rates. Interest accrues on indebtedness under the Credit Agreement
at one or a combination (at the Company's election) of the following: (a) prime
rate loans are payable at a rate per annum which is the Prime Rate (as defined
in the Credit Agreement) plus a borrowing margin of one and one-half percent
(1 1/2%) per annum; (b) certificate of deposit rate loans are payable at a rate
per annum which is the relevant CD Rate (as defined in the Credit Agreement)
plus a borrowing margin of two and five-eighths percent (2 5/8%) per annum; (c)
eurodollar rate loans are payable at a rate per annum which is the relevant
Eurodollar Rate (as defined in the Credit Agreement) plus a borrowing margin of
two and one-half percent (2 1/2%) per annum; and (d) overdue principal and (to
the extent permitted by law) overdue interest in respect of each loan bears
interest at a rate per annum equal to two percent (2%) per annum above the Prime
Rate plus one and one-half
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percent (1 1/2%). Interest is computed based on actual days elapsed in a 360-day
year, payable monthly, and with respect to eurodollar rate loans and certificate
of deposit rate loans, subject to compensation, increased cost, indemnification
and other standard Eurodollar Rate and CD Rate pricing provisions. The Company
has the option upon the expiration of any interest period to convert all or any
part of the outstanding borrowings to any of such three interest rate options,
subject to certain customary exceptions. Whenever the Company desires to borrow
under the Credit Agreement, the Company selects the type of loan and interest
rate in a notice of borrowing delivered to the Agent at least one business day
in advance of the proposed funding date in the case of a loan at the Prime Rate,
at least two business days in advance of the proposed funding date in the case
of a loan at the CD Rate, and three business days in the case of a loan at the
Eurodollar Rate. Swing line loans (as defined in the Credit Agreement) are
automatically borrowed at the Prime Rate option described above.
Commitment Fees. The Company is obligated to pay the Agent, for pro rata
distribution to the Banks (according to commitments), an unused commitment fee
computed at the rate of (a) 3/8 of 1% per annum from June 30, 1995 until such
time as outstanding revolving loans under the Credit Agreement equal or exceed
$66 million and thereafter, at a rate of 1/2 of 1% per annum (on the basis of
actual days elapsed in a 365/366-day year, as applicable) with respect to the
unutilized revolving loan commitment.
Affirmative Covenants and Financial Tests. The Credit Agreement contains
various covenants regarding financial reporting, compliance with laws,
maintenance of corporate existence and maintenance of adequate insurance
coverage. In addition, the Credit Agreement requires that the Company must
maintain a specified minimum interest coverage ratio, minimum net worth, and
minimum current ratio. Certain financial covenants were modified in the third
quarter of fiscal 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Negative Covenants. The Credit Agreement contains covenants which, among
other things, limit the Company's ability to (a) incur additional obligations
for borrowed money, (b) create or permit liens on the Company's assets, (c) make
capital expenditures, (d) make guarantees, (e) acquire the assets or capital
stock of other businesses, (f) merge or consolidate, (g) dispose of any accounts
receivable and assets constituting collateral of the Banks, (h) make
investments, (i) make any voluntary prepayments of any indebtedness for money
borrowed (other than under the Credit Agreement), (j) pay dividends and (k)
enter into transactions with affiliates.
Events of Default. The Credit Agreement contains customary events of
default (subject to cure periods where applicable) including, but not limited
to, failure to pay principal, interest or other amounts due to the Banks, breach
of representations and warranties contained in the Credit Agreement and related
collateral documents, failure to meet covenants contained in the Credit
Agreement, cross-defaults to other indebtedness in an amount of $1 million or
more, certain events of bankruptcy or insolvency, attachment of judgments of $1
million or more, determination of certain liabilities related to ERISA (as
defined), uninsured damage to the Company's property in excess of $5 million and
a change of control of the Company.
AMENDMENTS TO THE CREDIT AGREEMENT
The Company entered into certain amendments to the Credit Agreement to
permit the Refinancing.
OLD DEBENTURES
As of December 31, 1997, the Company had outstanding $404,327,000 aggregate
principal amount of the 12 3/4% Old Debentures. The Company issued $434,222,000
in aggregate principal amount (discounted to $299,999,638 at the issue date) of
the Old Debentures under an Indenture dated as of May 18, 1993 (the "Old
Debenture Indenture"), between the Company and Chase Bank of Texas N.A. as
Successor Trustee (the "Old Debenture Trustee"). In fiscal 1996, the Company
repurchased on the open market and retired approximately $29.9 million principal
amount of the Old Debentures. The Old Debentures are unsecured obligations of
the Company and are subordinated in right of payment to all Senior Debt (as
defined in the Old Debenture Indenture) of the Company which term includes the
Credit Agreement, the 9 3/4% Notes and the Senior Notes offered hereby. The Old
Debentures are redeemable at the option of the Company, in whole or
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in part, at any time on or after May 15, 1998, initially at 106.38% of their
principal amount, plus accrued interest, declining to 100% of their principal
amount, plus accrued interest on or after May 15, 2003. Under the terms of the
Old Debenture Indenture, notice of a redemption of the Old Debentures must be
delivered at least 30 days but not more than 60 days before the date of any such
redemption.
9 3/4% SENIOR NOTES
As of December 31, 1997, the Company had outstanding $225,000,000 aggregate
principal amount of the 9 3/4% Senior Notes. The 9 3/4% Senior Notes were issued
under an Indenture dated as of June 12, 1997, between the Company and State
Street Bank and Trust Company, as Trustee (the "9 3/4% Senior Note Indenture").
The 9 3/4% Senior Notes are senior unsecured obligations of the Company and will
rank pari passu with the Senior Notes. The 9 3/4% Senior Notes will mature on
June 15, 2007. The 9 3/4% Senior Notes are redeemable at the Company's option,
in whole or in part, at any time on or after June 15, 2002, initially at
104.875% of their principal amount, plus accrued interest, declining to 100% of
their principal amount, plus accrued interest on or after June 15, 2005. Under
the terms of the 9 3/4% Senior Note Indenture, notice of a redemption of the
9 3/4% Senior Notes must be delivered at least 30 days but not more than 60 days
before the date of any such redemption. The 9 3/4% Senior Note Indenture
contains certain restrictive covenants that among other things, limit the
ability of the Company and its subsidiaries to incur indebtedness, incur liens,
pay dividends or make other restricted payments or restricted investments,
consummate certain asset sales, enter into transactions with affiliates, impose
restrictions on the ability of a subsidiary to pay dividends or make certain
payments to the Company or restricted subsidiaries, engage in mergers and
consolidations or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the Company's assets.
TRADE RECEIVABLE FACILITY
In September 1993, the Company established a $70.0 million trade
receivables backed revolving credit facility (the "Trade Receivable Facility")
pursuant to which a wholly owned, special purpose subsidiary, Gaylord
Receivables Corporation ("GRC") purchases (on an ongoing basis) substantially
all of the accounts receivable of the Company. Concurrently, GRC and a group of
banks established the Trade Receivable Facility which is due in July, 2000. GRC
transfers the accounts receivable to a trust in exchange for certain trust
certificates representing ownership interests in the accounts receivable. The
trust certificates received by GRC from the trust are solely the assets of GRC.
In the event of liquidation of GRC, the creditors of GRC would be entitled to
satisfy their claims from GRC's assets prior to any distribution to the Company.
GRC has various interest rate options for Trade Receivable Facility
borrowings based on one or a combination of the following two rates: (i) prime
rate loans at the higher of (a) the prime rate in effect from time to time or
(b) the relevant federal funds rate plus 0.5 percent per annum, or (ii) LIBOR
rate loans at the relevant LIBOR rate plus a borrowing margin of 0.5 percent per
annum. Interest is payable monthly. GRC is obligated to pay a commitment fee of
0.375 percent per annum on the unused credit available under the Trade
Receivable Facility. Credit availability under the Trade Receivable Facility is
based on a borrowing base formula. As a result, the full amount of the facility
may not be available at all times. At December 31, 1997, $54 million was
outstanding under the Trade Receivable Facility and no additional credit was
available to GRC pursuant to the borrowing base formula. The highest outstanding
principal balance under the Trade Receivable Facility during fiscal 1997 was
$54.0 million and the weighted average interest rate was 6.5 percent. At
December 31, 1997 and 1996, the Company's consolidated balance sheet included
$90.1 million and $86.1 million, respectively, of accounts receivable sold to
GRC.
DESCRIPTION OF NOTES
The Senior Exchange Notes offered hereby will be issued as a separate
series under the Senior Note Indenture dated as of February 23, 1998 by and
between the Company and State Street Bank and Trust Company, as trustee (the
"Senior Note Trustee"). The Senior Subordinated Exchange Notes, will be issued
as a separate series under an the Senior Subordinated Note Indenture dated as of
February 23, 1998 by and between the Company and Chase Bank of Texas, National
Association, as trustee (the "Senior Subordinated Note Trustee"). The form and
terms of the New Notes are the same as the form and terms of the Old Notes
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<PAGE> 46
(which they replace) except that (i) the New Notes bear a Series B designation,
(ii) the New Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof, and (iii) the holders of
New Notes will not be entitled to certain rights under the Registration Rights
Agreements, including the provisions providing for an increase in the interest
rate on the Old Notes in certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when the Exchange Offer is
consummated.
The following summary of certain provisions of the Indentures does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to
all of the provisions of the Indentures (copies of which can be obtained from
the Company upon request), including the definitions of certain terms therein
and those terms made a part of the Indentures by reference to the TIA as in
effect on the date of the Indentures. The definitions of certain capitalized
terms used in the following summary are set forth under "Certain Definitions."
For purposes of this section, references to the "Company" include only Gaylord
Container Corporation and not its subsidiaries.
The Senior Notes are general unsecured obligations of the Company and rank
pari passu in right of payment to all senior indebtedness of the Company,
including all obligations of the Company under the Credit Agreement and the
9 3/4% Senior Notes. The Senior Notes rank senior in right of payment to the
obligations of the Company under the Senior Subordinated Notes.
The Senior Subordinated Notes are general unsecured obligations of the
Company, subordinate in right of payment to all Senior Debt of the Company,
including indebtedness under the Credit Agreement, the 9 3/4% Senior Notes and
the Senior Notes, and rank pari passu in right of payment to all existing and
future senior subordinated indebtedness of the Company.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Senior
Note Trustee will act as Paying Agent and Registrar for the Senior Notes and the
Senior Subordinated Trustee will act as Paying Agent and Registrar for the
Senior Subordinated Notes. The Notes may be presented for registration or
transfer and exchange at the offices of the respective Registrar. The Company
may change any Paying Agent and Registrar without notice to holders. The Company
will pay principal (and premium, if any) on the Notes at the respective
Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the respective Trustee's corporate trust office or by
check mailed to the registered address of holders. Any Notes that remain
outstanding after the completion of the Exchange Offer, together with the
Exchange Notes issued in connection with the Exchange Offer, will be treated as
a single class of securities under the Senior Note Indenture and the Senior
Subordinated Note Indenture, respectively.
CERTAIN TERMS OF THE SENIOR NOTES
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes are limited in aggregate principal amount to $200,000,000
and will mature on June 15, 2007. Interest on the Senior Notes will accrue at
the rate of 9 3/8% per annum and will be payable semi-annually on each June 15
and December 15, commencing on June 15, 1998, to the persons who are registered
holders at the close of business on each June 1 and December 1 immediately
preceding the applicable interest payment date. Interest on the Senior Notes
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from and including the date of issuance. The Company
shall pay interest on overdue principal from time to time on demand at the rate
of 10 3/8% per annum; it shall pay interest on overdue installments of interest
(without regard to any applicable grace periods) from time to time on demand at
the rate of 10 3/8% per annum. Interest will be computed on the basis of a
360-day year comprising twelve 30-day months.
OPTIONAL REDEMPTION
The Senior Notes will be redeemable, at the Company's option, in whole at
any time or in part from time to time, on or after June 15, 2002 at the
following redemption prices (expressed as percentages of the principal
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<PAGE> 47
amount) if redeemed during the twelve-month period commencing on June 15 of the
year set forth below, plus, in each case, accrued and unpaid interest, if any,
thereon to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 104.688%
2003........................................................ 103.125%
2004........................................................ 101.563%
2005 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to June 15, 2000, the
Company may redeem up to 33% of the aggregate principal amount of Senior Notes
with the net proceeds from one or more Equity Offerings of the Company at a
redemption price equal to 109.375% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon to the date of redemption; provided,
however, that, after giving effect to any such redemption, at least $100 million
aggregate principal amount of the Senior Notes originally issued remain
outstanding. Any such redemption must occur on or prior to 120 days after the
receipt of such net proceeds.
In addition, upon the occurrence of a Change of Control prior to June 15,
2002, the Company, at is option, may redeem all, but not less than all, of the
outstanding Senior Notes at a redemption price equal to 100% of the principal
amount thereof plus the applicable Make-Whole Premium (a "Change of Control
Redemption"). The Company shall give not less than 30 nor more than 60 days
notice of such redemption within 30 days following a Change of Control. See
"-- Change of Control."
CERTAIN TERMS OF THE SENIOR SUBORDINATED NOTES
PRINCIPAL, MATURITY AND INTEREST
The Senior Subordinated Notes are limited in aggregate principal amount to
$250,000,000 and will mature on February 15, 2008. Interest on the Senior
Subordinated Notes will accrue at the rate of 9 7/8% per annum and will be
payable semi-annually on each February 15 and August 15, commencing on August
15, 1998, to the persons who are registered holders at the close of business on
each February 1 and August 1 immediately preceding the applicable interest
payment date. Interest on the Senior Subordinated Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from and including the date of issuance. The Company shall pay interest on
overdue principal from time to time on demand at the rate of 10 7/8% per annum;
it shall pay interest on overdue installments of interest (without regard to any
applicable grace periods) from time to time on demand at the rate of 10 7/8% per
annum. Interest will be computed on the basis of a 360-day year comprising
twelve 30-day months.
OPTIONAL REDEMPTION
The Senior Subordinated Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on or after February 15, 2003
at the following redemption prices (expressed as percentages of the principal
amount) if redeemed during the twelve-month period commencing on February 15 of
the year set forth below, plus, in each case, accrued and unpaid interest, if
any, thereon to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 105.063%
2004........................................................ 103.375%
2005........................................................ 101.688%
2006 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to February 15, 2001, the
Company may redeem up to 33% of the aggregate principal amount of Senior
Subordinated Notes with the net proceeds from one or more Equity Offerings of
the Company at a redemption price equal to 109.875% of the principal amount
thereof, plus accrued and unpaid interest, if any, thereon to the date of
redemption; provided, however, that, after
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<PAGE> 48
giving effect to any such redemption, $125 million of the aggregate principal
amount of the Senior Subordinated Notes originally issued remain outstanding.
Any such redemption must occur on or prior to 120 days after the receipt of such
net proceeds.
In addition, upon the occurrence of a Change of Control prior to February
15, 2003, the Company, at its option, may redeem all, but not less than all, of
the outstanding Senior Subordinated Notes at a redemption price equal to 100% of
the principal amount thereof plus the applicable Make-Whole Premium. The Company
shall give not less than 30 nor more than 60 days notice of such redemption
within 30 days following a Change of Control. See "--Change of Control."
SUBORDINATION
The payment of all Obligations on the Senior Subordinated Notes is
subordinated in right of payment to the prior payment in full in cash or cash
equivalents of all obligations on Senior Debt. Upon any payment or distribution
of assets to creditors upon any dissolution or winding up or total or partial
liquidation or reorganization of the Company whether voluntary or involuntary or
in bankruptcy, insolvency, receivership or other proceedings, all obligations
due or to become due upon all Senior Debt shall first be paid in full in cash or
cash equivalents, or such payment duly provided for, before any payment or
distribution is made on account of any obligations on the Senior Subordinated
Notes, or for the acquisition of any of the Senior Subordinated Notes for cash
or property or otherwise. If any default occurs and is continuing in the payment
when due, whether at maturity, upon any redemption, by declaration or otherwise,
of any principal of or interest on any Senior Debt, no payment shall be made by
or on behalf of the Company or any other Person on its or their behalf with
respect to any obligations on the Senior Subordinated Notes or to acquire any of
the Senior Subordinated Notes for cash or property or otherwise. In addition, if
any other event of default occurs and is continuing (or if such an event of
default would occur upon any payment with respect to the Senior Subordinated
Notes) with respect to any Designated Senior Debt, as such event of default is
defined in the instrument creating or evidencing such Designated Senior Debt
permitting the holders of such Designated Senior Debt then outstanding to
accelerate the maturity thereof and if the representative for the respective
issue of Designated Senior Debt gives written notice of the event of default to
the Senior Subordinated Note Trustee (a "Default Notice"), then, unless and
until all events of default have been cured or waived or have ceased to exist or
the Senior Subordinated Trustee, receives notice from the representative for the
respective issue of Designated Senior Debt terminating the Blockage Period (as
defined below), during the 180 days after the delivery of such Default Notice
(the "Blockage Period"), neither the Company nor any other Person on its behalf
shall (x) make any payment with respect to any obligations on the Senior
Subordinated Notes or (y) acquire any of the Senior Subordinated Notes for cash
or property or otherwise. Notwithstanding anything herein to the contrary, in no
event will a Blockage Period extend beyond 180 days from the date of delivery of
a Default Notice and only one such Blockage Period may be commenced within any
360 consecutive days. No event of default which existed or was continuing on the
date of the commencement of any Blockage Period with respect to the Designated
Senior Debt shall be, or be made, the basis for commencement of a second
Blockage Period by the Representative of such Designated Senior Debt whether or
not within a period of 360 consecutive days, unless such event of default shall
have been cured or waived for a period of not less than 90 consecutive days.
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the holders of the Senior Subordinated Notes, may recover less, ratably, than
holders of Senior Debt.
Giving effect to the issuance of the Notes and the application of the
proceeds therefrom, at December 31, 1997, the total amount of outstanding debt
that would have been senior to the Senior Subordinated Notes was approximately
$611.6 million, including approximately $12 million of undrawn letters of credit
under the Credit Agreement.
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CERTAIN COVENANTS
EACH OF THE INDENTURES CONTAINS, AMONG OTHERS, THE FOLLOWING COVENANTS.
EXCEPT AS OTHERWISE SPECIFIED, ALL OF THE COVENANTS DESCRIBED BELOW APPEAR IN
EACH OF THE INDENTURES.
Limitation on Restricted Payments. The Indentures provide that the Company
shall not, and shall not permit any of its Restricted Subsidiaries to, directly
or indirectly, (a) declare or pay any dividend or make any distribution (other
than dividends or distributions payable in Qualified Capital Stock of the
Company) on shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, other than the exchange of such
Capital Stock for Qualified Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled final maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company or its Restricted
Subsidiaries that is subordinate or junior in right of payment to the Senior
Notes or the Senior Subordinated Notes, as the case may be, or (d) make any
Investment (other than Permitted Investments) (each of the foregoing actions set
forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after giving
effect thereto, (i) a Default or an Event of Default shall have occurred and be
continuing, (ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant or (iii) the
aggregate amount of Restricted Payments made subsequent to the Issue Date (the
amount expended for such purposes, if other than in cash, shall be the fair
market value of such property as determined by the Board of Directors of the
Company in good faith) shall exceed the sum, without duplication, of: (w) 50% of
the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income
shall be a loss, minus 100% of such loss) of the Company earned during the
period beginning on the first day of the fiscal quarter of the Company
commencing after the Issue Date and ending on the last day of the most recent
fiscal quarter ending at least 45 days prior to the date the Restricted Payment
occurs (treating such period as a single accounting period); (x) 100% of the
aggregate net proceeds, including the fair market value of property other than
cash as determined by the Board of Directors of the Company in good faith,
received by the Company from any Person (other than a Restricted Subsidiary of
the Company) from the issuance and sale subsequent to the Issue Date of
Qualified Capital Stock of the Company or of debt securities of the Company that
have been converted into Qualified Capital Stock (excluding (A) Qualified
Capital Stock made as a distribution on any Capital Stock or as interest on any
Indebtedness and (B) any net proceeds from issuances and sales of Qualified
Capital Stock financed directly or indirectly using funds borrowed from the
Company or any Restricted Subsidiary of the Company, until and to the extent
such borrowing is repaid), (y) $50 million and (z) the amount of the net
reduction in Investments made as Restricted Payments in accordance with this
sentence in Unrestricted Subsidiaries resulting from (1) the payment of cash
dividends or the repayment in cash of the principal of loans or the cash return
on any Investment, in each case to the extent received by the Company or any
wholly owned Restricted Subsidiary of the Company from Unrestricted
Subsidiaries, (2) to the extent that any Investment in an Unrestricted
Subsidiary that was made after the date of this Indenture is sold for cash or
otherwise liquidated or repaid for cash, the after-tax cash return of capital
with respect to such Investment (less the cost of disposition, if any) or (3)
the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries, such
aggregate amount of the net reduction in such Investments not to exceed, in the
case of any Unrestricted Subsidiary, the amount of such Investments made as
Restricted Payments previously made by the Company or any Restricted Subsidiary
in such Unrestricted Subsidiary, which amount was included in the calculation of
the amount of Restricted Payments.
Notwithstanding the foregoing, these provisions do not prohibit: (1) the
payment of any dividend, making of any distribution or consummation of
irrevocable redemption within 60 days after the date of declaration of such
dividend, making of such distribution or giving of such notice if the dividend,
distribution or redemption would have been permitted on the date of declaration;
(2) the acquisition of Capital Stock or Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes, either (i) in exchange
for shares of Qualified Capital Stock or (ii) through the application of net
proceeds of a substantially concurrent sale for
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<PAGE> 50
cash (other than to a Restricted Subsidiary of the Company) of shares of
Qualified Capital Stock; (3) the acquisition of Indebtedness of the Company that
is subordinate or junior in right of payment to the Senior Notes or the Senior
Subordinated Notes, as the case may be, either (i) in exchange for Indebtedness
of the Company that is subordinate or junior in right of payment to the Senior
Notes or the Senior Subordinated Notes, as the case may be, at least to the
extent that the Indebtedness being acquired is subordinated to the Senior Notes
or the Senior Subordinated Notes, as the case may be, and has no scheduled
principal prepayment dates prior to the earlier of (a) at least one year after
the scheduled final maturity date of the Senior Notes or the Senior Subordinated
Notes, as the case may be, or (b) the scheduled final maturity date of the
Indebtedness being exchanged, (ii) through the application of net proceeds of a
substantially concurrent sale for cash (other than to a Restricted Subsidiary of
the Company) of Indebtedness of the Company that is subordinate or junior in
right of payment to the Senior Notes or the Senior Subordinated Notes, as the
case may be, at least to the extent that the Indebtedness being acquired is
subordinated to the Senior Notes or the Senior Subordinated Notes, as the case
may be, and has no scheduled principal prepayment dates prior to the earlier of
(a) the scheduled final maturity date of the Senior Notes or the Senior
Subordinated Notes, as the case may be, or (b) the scheduled final maturity date
of the Indebtedness being refinanced or (iii) any combination of clauses (i) and
(ii) above; (4) the elimination of fractional shares or warrants; (5) the
purchase for value of shares of Capital Stock of the Company (x) held by
directors, officers or employees upon death, disability, retirement, termination
of employment or (y) to fund capital stock-based, long-term incentive programs,
not to exceed $4 million in the aggregate; (6) in the case of the Senior Note
Indenture, the repurchase of any Senior Subordinated Notes in accordance with
(i) the "Limitation on Asset Sales" and "Change of Control" covenants hereunder
and under the Senior Subordinated Note Indenture; (7) in the case of the Senior
Note Indenture, the redemption or repurchase by the Company of up to $200
million aggregate principal amount of Old Debentures through the application of
(a) up to $200 million of net cash proceeds of a substantially concurrent sale
or incurrence (other than to or from a Restricted Subsidiary of the Company) of
secured or unsecured Indebtedness of the Company that ranks pari passu with the
9 3/4% Senior Notes as to payment, (b) up to $100 million of cash from
operations of the Company or (c) any combination of (a) and (b), (8) Restricted
Payments for the redemption, repurchase or other acquisition of shares of
Capital Stock of the Company in satisfaction of indemnification or other claims
arising under any merger, consolidation, asset purchase or investment or similar
acquisition agreement permitted under the Indenture, pursuant to which such
shares of Capital Stock were issued and (9) repurchases of Capital Stock deemed
to occur upon exercise of employee or director stock options; provided that in
the case of clauses (2), (3), (4), (5), (6), (7) and (8), no Default or Event of
Default shall have occurred or be continuing at the time of such payment or as a
result thereof. In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date, amounts expended pursuant to clauses (1), (2),
(4), (5), (6), 7(b) and (8) shall be included in such calculation; provided that
amounts expended pursuant to clause (2) shall constitute Restricted Payments
only to the extent any amounts are credited pursuant to clause (iii)(x) of the
next preceding paragraph.
Limitation on Incurrence of Additional Indebtedness. The Indentures provide
that the Company shall not, and shall not permit any of its Restricted
Subsidiaries to, after the Issue Date, directly or indirectly, create, incur,
assume, guarantee, acquire or become liable, contingently or otherwise, or
otherwise become responsible for the payment of any Indebtedness other than
Permitted Indebtedness. Notwithstanding the foregoing limitations, the Company
and, subject to compliance with the covenant "Guarantees by Restricted
Subsidiaries," Restricted Subsidiaries may incur Indebtedness if (i) no Default
or Event of Default shall have occurred and be continuing at the time of or as a
consequence of the incurrence of such Indebtedness and (ii) the Consolidated
Fixed Charge Coverage Ratio of the Company, measured on the date of the
incurrence of such Indebtedness, is greater than 2.0:1. No Indebtedness incurred
pursuant to the next preceding sentence shall be included in calculating any
limitation set forth in the definition of Permitted Indebtedness. Upon the
repayment of Indebtedness which may have been incurred pursuant to more than one
provision of the Indentures, the Company may, in its sole discretion designate
which provision such Indebtedness shall have been incurred under.
Guarantees by Restricted Subsidiaries. The Senior Note Indenture provides
that the Company will cause any Borrowing Restricted Subsidiary to become a
Subsidiary Guarantor by executing a guarantee (the "Senior Note Guarantee") of
payment of the Senior Notes by such Borrowing Restricted Subsidiary and the
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<PAGE> 51
Senior Subordinated Note Indenture provides that the Company will cause any
Borrowing Restricted Subsidiary to become a Subsidiary Guarantor by executing a
guarantee (the "Senior Subordinated Note Guarantee," and together with the
Senior Note Guarantee the "Guarantees"), (1) if, at the time the Restricted
Subsidiary first becomes a Borrowing Restricted Subsidiary, the total Investment
of the Company and the Restricted Subsidiaries in such Borrowing Restricted
Subsidiary and in all other Borrowing Restricted Subsidiaries that are not
Subsidiary Guarantors, is more than 15% of Total Tangible Assets (the "15%
Investment Threshold"), or (2) if, at the time a Borrowing Restricted Subsidiary
increases the amount of Restricted Subsidiary Indebtedness (excluding for this
purpose, incurrences of indebtedness under a revolving credit facility that do
not exceed the maximum committed borrowings thereunder), the 15% Investment
Threshold is met, or (3) if, at the time the Company or any Restricted
Subsidiary makes a capital contribution or other equity investment in excess of
$1 million during any six-month period in any Borrowing Restricted Subsidiary,
the 15% Investment Threshold is met. The Senior Subordinated Note Guarantee will
be subordinate to the Senior Note Guarantee to the same extent that the Senior
Subordinated Notes are subordinated to the Senior Notes. If any such incurrence
of liability of such Restricted Subsidiary is provided in respect of
Indebtedness that is expressly subordinated to the Senior Notes, the guarantee
or other instrument provided by such Restricted Subsidiary in respect of such
subordinated Indebtedness shall be subordinated to the Guarantees pursuant to
subordination provisions no less favorable to holders of the Senior Notes than
those contained in the Senior Subordinated Note Indenture. A Borrowing
Restricted Subsidiary shall be released as a Subsidiary Guarantor (i) at such
time as it ceases to be a Borrowing Restricted Subsidiary or (ii) upon the
election of the Company, if, after giving effect to such election, the 15%
Investment Threshold is not met.
Limitations on Transactions with Affiliates. The Indentures provide that
the Company shall not, and shall not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into or permit to exist any transaction
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with or for the benefit of, an
Affiliate of the Company or any Restricted Subsidiary (other than transactions
between the Company and a wholly owned Restricted Subsidiary of the Company) (an
"Affiliate Transaction"), other than Affiliate Transactions on terms that are no
less favorable in the aggregate than those that might reasonably have been
obtained or are obtainable in a comparable transaction on an arm's-length basis
from a person that is not an Affiliate; provided that neither the Company nor
any of its Restricted Subsidiaries shall enter into an Affiliate Transaction or
series of related Affiliate Transactions involving or having a value of $10
million or more, unless a majority of disinterested members of the Board of
Directors of the Company determines in good faith as evidenced by a board
resolution that the terms are no less favorable in the aggregate to the Company
than those that might reasonably have been obtained in a comparable transaction
on an arm's-length basis from a Person that is not an Affiliate; provided,
however, that (i) any employment agreement or stock option agreement entered
into by the Company or any of its Restricted Subsidiaries in the ordinary course
of business, (ii) transactions permitted under the covenant described above
under "Certain Covenants -- Limitation on Restricted Payments," (iii) the
payment of reasonable fees and expenses to directors of the Company or its
Restricted Subsidiaries, (iv) any issuance of securities or other payments,
awards or grants in cash, securities or otherwise pursuant to, or the funding of
employment arrangements, stock options and stock ownership plans of the Company
entered into in the ordinary course of business and (v) transactions pursuant to
agreements existing on the Issue Date or any amendment thereto or any
transactions contemplated thereby (including pursuant to any amendment thereto)
in any replacement agreement thereto, so long as any such amendment or
replacement is not more disadvantageous to the holders in any material respect
than the original agreement as in effect on the Issue Date, in each case, shall
not be deemed Affiliate Transactions.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indentures provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or permit to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (a) pay dividends or
make any other distributions on its Capital Stock, (b) make loans or advances or
to pay any Indebtedness or other obligation owed to the Company or a Restricted
Subsidiary of the Company or (c) transfer any of its property or assets to the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture;
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(3) customary nonassignment provisions of any lease governing a leasehold
interest of the Company or any Restricted Subsidiary of the Company; (4) any
instrument governing Acquired Indebtedness, which encumbrance or restriction is
not applicable to the Company or any Restricted Subsidiary of the Company, or
the properties or assets of the Company or any Restricted Subsidiary of the
Company, other than the Person, the properties or assets so acquired; (5)
agreements existing on the Issue Date; (6) any Trade Receivable Facility; (7)
customary nonassignment provisions in contracts entered into in the ordinary
course of business, (8) Indebtedness of a Restricted Subsidiary permitted to be
incurred under the Indentures or (9) an agreement effecting a refinancing,
modification, replacement, renewal, restatement, refunding, deferral, extension,
substitution, supplement, reissuance or resale of Indebtedness issued, assumed
or incurred pursuant to an agreement referred to in clause (2), (4), (5), (6) or
(8) above; provided, however, that the provisions relating to such encumbrance
or restriction contained in any such refinancing, replacement or substitution
agreement are not less favorable to the Company or Restricted Subsidiary, as the
case may be, in any material respect in the reasonable judgment of the Board of
Directors of the Company than the provisions relating to such encumbrance or
restriction contained in agreements referred to in such clause (2), (4), (5),
(6) or (8).
Limitation on Asset Sales. The Indentures provide that the Company will
not, and will not permit any of its Restricted Subsidiaries to, consummate an
Asset Sale unless (a) the Company or the applicable Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at least
equal to the fair market value of the assets sold or otherwise disposed of (as
determined in good faith by the Board of Directors of the Company, (b) at least
75% of the consideration received by the Company or the Restricted Subsidiary,
as the case may be, from such Asset Sale shall be cash or Cash Equivalents and
is received at the time of such disposition; provided, however, that this
condition shall not apply to a transaction whereby the Company or any Restricted
Subsidiary effects an Asset Sale by the exchange of assets or property for
Productive Assets or to the sale or other disposition of all or any portion of
the Company's East Mill assets located in Antioch, California, provided,
further, that the amount of (A) any liabilities of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated in right
of payment to the Notes) that are assumed by the transferee of any such assets
shall be deemed to be cash for purposes of this provision and (B) any notes or
other obligations received by the Company or such Restricted Subsidiary from
such transferee that are immediately converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received) shall be deemed to be
cash for purposes of this provision, and (c) the Company shall (i) apply, or
cause such Restricted Subsidiary to apply, such Net Cash Proceeds of such Asset
Sale within 270 days of the consummation of such Asset Sale (A) to prepay
indebtedness ranking pari passu with the Senior Notes, senior indebtedness of a
Subsidiary Guarantor or debt of a Restricted Subsidiary that is not a Subsidiary
Guarantor or, in the case of any debt under a revolving credit facility, effect
a reduction in the committed availability under any such revolving credit
facility, in the case of the Senior Notes, or Senior Debt, in the case of the
Senior Subordinated Notes or (B) to make an offer to purchase the Senior Notes
and, to the extent required by the documentation governing such indebtedness and
on a pro rata basis, indebtedness ranking pari passu with the Senior Notes, and,
in the event the holders of the Senior Notes and holders of other indebtedness
ranking pari passu with the Senior Notes tender an amount of such indebtedness
less than the total available Net Cash Proceeds offered to such holders, to
purchase Senior Subordinated Notes, at a price equal to 100% of the principal
amount of such Notes plus accrued interest thereon to the date of purchase
pursuant to an offer to purchase made by the Company as set forth below (a "Net
Proceeds Offer"), or (ii)(A) commit, or cause such Restricted Subsidiary to
commit (such commitments to include amounts anticipated to be expended pursuant
to the Company's capital investment plan (x) as adopted by the Board of
Directors of the Company and (y) evidenced by the filing of an officer's
certificate with the Trustee stating that the total amount of the Net Cash
Proceeds of such Asset Sale is less than the aggregate amount contemplated to be
expended pursuant to such capital investment plan within 24 months of the
consummation of such Asset Sale) within 270 days of the consummation of such
Asset Sale, to apply the Net Cash Proceeds of such Asset Sale to reinvest in
Productive Assets and (B) apply, or cause such Restricted Subsidiary to apply,
pursuant to such commitment (which includes amounts actually expended under the
capital investment plan authorized by the Board of Directors of the Company),
such Net Cash Proceeds of such Asset Sale within 24 months of the consummation
of such Asset Sale; provided that if any commitment under this clause (ii) is
terminated or rescinded after the 225th day after the consummation of such Asset
Sale, the Company
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or such Restricted Subsidiary, as the case may be, shall have 45 days after such
termination or rescission to (1) apply such Net Cash Proceeds pursuant to clause
(c)(i) above or (2) to commit, or cause such Restricted Subsidiary to commit, to
apply the Net Cash Proceeds of such Asset Sale to reinvest in Productive Assets;
provided that in any such case, such proceeds must be applied pursuant to clause
(c)(i) above or such commitment, as the case may be, no later than 24 months
after the consummation of such Asset Sale or (iii) any combination of the
foregoing; provided, further, that if at any time any non-cash consideration
received by the Company or any Restricted Subsidiary of the Company, as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash, then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with clause (c) above; and provided, further, that the
Company may defer making a Net Proceeds Offer until the aggregate Net Cash
Proceeds from Asset Sales to be applied equals or exceeds $10 million. Pending
the final application of any such Net Cash Proceeds the Company or such
Restricted Subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any.
Each Net Proceeds Offer will be mailed to holders of Notes as shown on the
register of holders of Notes within 270 days except, in the case of the Senior
Subordinated Notes for so long as the Senior Notes and 9 3/4% Senior Notes are
outstanding, 330 days, will specify the purchase date (which will be no earlier
than 30 days nor later than 45 days from the date such notice is mailed) and
will otherwise comply with the procedures set forth in the Indentures. Upon
receiving notice of a Net Proceeds Offer, holders of Notes may elect to tender
their Notes in whole or in part in integral multiples of $1,000. To the extent
holders of the Senior Notes or Senior Subordinated Notes, as the case may be,
properly tender Notes in an amount exceeding the applicable Net Proceeds Offer,
such Senior Notes or Senior Subordinated Notes, as the case may be, of tendering
holders will be repurchased on a pro rata basis (based upon the principal amount
tendered).
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer.
Merger, Consolidation and Sale of Assets. The Indentures provide that the
Company may not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its assets to,
another Person or adopt a plan of liquidation, unless (a) either the Company
shall be the survivor of such merger or consolidation or the surviving Person is
a corporation, partnership, limited liability company or trust organized and
existing under the laws of the United States, any state thereof or the District
of Columbia and such surviving Person shall expressly assume, by a supplemental
indenture, all the obligations of the Company under the Notes and the related
Indentures; (b) immediately after giving effect to such transaction (on a pro
forma basis, including any Indebtedness incurred or anticipated to be incurred
in connection with such transaction), the Company or the surviving Person is
able to incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the "Limitation on Incurrence of Additional
Indebtedness" covenant, (c) immediately after giving effect to such transaction
and the assumption of the obligations set forth in clause (a) above and the
incurrence of any Indebtedness to be incurred in connection therewith, no
Default or Event of Default shall have occurred and be continuing and (d) the
Company has delivered to the Trustee an Officers' Certificate and Opinion of
Counsel, each stating that such consolidation, merger, or transfer or adoption
and such supplemental indenture comply with the Indentures, that the surviving
Person (if other than the Company) agrees to be bound thereby and that all
conditions precedent in the Indentures relating to such transaction have been
satisfied. Notwithstanding the foregoing clauses (b), (c) and (d), any
Restricted Subsidiary of the Company may consolidate with, merge into or
transfer all or part of its properties and assets to the Company. For purposes
of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a
single transaction or series of transactions) of all or substantially all of the
properties and assets of one or more Restricted Subsidiaries, the Capital Stock
of which constitutes all or substantially all of the properties and assets of
the Company, shall be deemed to be the transfer of all or substantially all of
the properties and assets of the Company.
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THE SENIOR NOTE INDENTURE CONTAINS THE FOLLOWING ADDITIONAL COVENANTS
Limitation on Liens. The Senior Note Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, create,
incur, assume or suffer to exist any Liens upon their respective assets, except
for (a) Liens securing Indebtedness under the Credit Agreement, (b) Permitted
Liens, (c) Liens securing Acquired Indebtedness, (d) Liens existing on the Issue
Date, (e) Liens securing Indebtedness to the extent incurred to refinance,
replace, renew or refund secured Indebtedness existing on the Issue Date or
Acquired Indebtedness, (f) Liens securing pollution control bonds and industrial
revenue bonds, (g) Liens securing Indebtedness permitted to be incurred pursuant
to clauses (viii) or (ix) of the definition of Permitted Indebtedness, (h) Liens
securing Indebtedness pursuant to clauses (vii) or (xi) of the definition of
Permitted Indebtedness; provided, however, that if such Indebtedness is incurred
to finance the cost of the property subject to a Lien securing such
Indebtedness, the principal amount of the Indebtedness secured by such Lien
shall not exceed 100% of the cost of the property subject thereto plus related
financing costs, (i) Liens in favor of the Trustee and the trustee in respect of
any other outstanding indebtedness of the Company, (j) Liens granted in
connection with the redemption of the Old Debentures, or (k) any replacement,
extension, renewal, amendment or modification, in whole or in part, of any Lien
described above; provided that to the extent any such clause limits the amount
secured or the assets subject to such Liens, no extension or renewal will
increase the amount or assets secured by or subject to such Liens.
Limitation on Incurrence of Subordinated Indebtedness. The Senior Note
Indenture prohibits the Company from incurring Indebtedness that is subordinated
by written agreement in right of payment to any other Indebtedness of the
Company, unless the Indebtedness to be incurred is subordinated to the Senior
Notes to substantially the same extent as it is subordinated to such other
indebtedness pursuant to such written agreement.
THE SENIOR SUBORDINATED NOTE INDENTURE CONTAINS THE FOLLOWING ADDITIONAL
COVENANT
Prohibition on Incurrence of Senior Subordinated Debt. The Senior
Subordinated Note Indenture prohibits the Company from incurring or suffering to
exist Indebtedness which constitutes Senior Debt with respect to the Senior
Subordinated Note but is subordinated by written agreement in right of payment
to any other Senior Debt of the Company.
CHANGE OF CONTROL
The Indentures provide that upon the occurrence of a Change of Control,
each holder will have the right to require that the Company repurchase all or a
portion of such holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
repurchase. The Senior Subordinated Indenture shall provide that, prior to the
repurchase of Senior Subordinated Notes the Company covenants to (i) repay in
full all Senior Debt the terms of which require repayment upon a Change of
Control or offer to repay in full all such Indebtedness and to repay the
Indebtedness owed to each holder of such Indebtedness which has accepted such
offer, or (ii) obtain the requisite consents under all Senior Debt to permit the
repurchase of the Senior Subordinated Notes as provided below. The Company shall
first comply with the covenant in the preceding sentence before it shall be
required to repurchase Senior Subordinated Notes pursuant to the provisions
described below.
Within 30 days following the date upon which the Change of Control
occurred, the Company will send, by first class mail, a notice to each holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"); provided that the Change of Control Payment Date for the Senior
Subordinated Notes shall be a date subsequent to the Change of Control Payment
Date established by the Company for repurchase of the Senior Notes. Holders
electing to have a Note purchased pursuant to a Change of Control Offer will be
required to surrender the Note, with the form entitled "Option of Holder to
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Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the
address specified in the notice prior to the close of business on the business
day prior to the Change of Control Payment Date.
Because the Indentures provide that, upon the occurrence of a Change of
Control, the Company will establish a Change of Control Payment Date with
respect to the Senior Subordinated Notes on a date subsequent to the Change of
Control Payment Date established by the Company with respect to the Senior
Notes, the subordination provisions relating to the Senior Subordinated Notes
will prohibit the Company from repurchasing any tendered Senior Subordinated
Notes upon a Change of Control unless and until all of the Senior Notes tendered
for repurchase are first repurchased.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer.
EVENTS OF DEFAULT
The following events are defined in the Indentures as "Events of Default":
(a) the failure to pay interest on any Senior Notes or Senior Subordinated
Notes, as the case may be, for a period of 30 days after such interest becomes
due and payable (whether or not such payment shall be prohibited by the
subordination provisions of the Indenture), (b) the failure to pay the principal
on any Senior Notes or Senior Subordinated Notes, as the case may be, when such
principal becomes due and payable, at maturity, upon acceleration or redemption
or pursuant to an offer to purchase required by the applicable Indenture
(whether or not such payment shall be prohibited by the subordination provisions
of the applicable Indenture); (c) a default in the observance or performance of
any other covenant or agreement contained in the Senior Note Indenture or the
Senior Subordinated Note Indenture, as the case may be, which default continues
for a period of 30 days after the Company receives written notice of the default
by the applicable Trustee or holders of at least 25% in principal amount of the
Senior Notes or Senior Subordinated Notes, as the case may be; (d) the failure
to pay at stated maturity the principal amount of any Indebtedness of the
Company or any Restricted Subsidiary of the Company, or the acceleration of the
stated maturity of any such Indebtedness, if the aggregate principal amount of
such Indebtedness, together with the principal amount of any other such
Indebtedness in default for failure to pay principal at stated maturity or that
has been accelerated, aggregates $20 million or more at any time; (e) one or
more judgments in an aggregate amount in excess of $20 million shall have been
rendered against the Company or any of its Restricted Subsidiaries and such
judgments remain undischarged or unstayed for a period of 60 days after such
judgment or judgments become final and non-appealable and (f) certain events of
bankruptcy, insolvency or reorganization affecting the Company or any of its
Restricted Subsidiaries.
Upon the occurrence of any Event of Default specified in the Senior Note
Indenture, the Senior Note Trustee or the holders of at least 25% in principal
amount of outstanding Senior Notes may declare the principal of and accrued
interest on all the Senior Notes to be due and payable by written notice to the
Company. Upon any such declaration, such amount shall be immediately due and
payable. Upon the occurrence of an Event of Default specified in the Senior
Subordinated Note Indenture, the Senior Subordinated Note Trustee or the holders
of at least 25% in principal amount of outstanding Senior Subordinated Notes may
declare the principal amount and accrued interest on all Senior Subordinated
Notes to be due and payable. If an Event of Default with respect to bankruptcy,
insolvency or reorganization proceedings occurs and is continuing, then such
amount shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of either Trustee or any holder of Notes.
The Indentures provide that, at any time after a declaration of
acceleration with respect to any issue of the Notes as described in the
preceding paragraph, the holders of a majority in principal amount of the such
outstanding Notes may rescind and cancel such declaration and its consequences
(i) if the rescission would not conflict with any judgment or decree, (ii) if
all existing Events of Default have been cured or waived except nonpayment of
principal or interest that has become due solely because of the acceleration,
(iii) if, to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid, (iv) if the
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Company has paid the Senior Note Trustee or the Senior Subordinated Note
Trustee, as the case may be, its reasonable compensation and reimbursed the
Senior Note Trustee or the Senior Subordinated Note Trustee, as the case may be,
for its expenses, disbursements and advances and (v) if, in the event of the
cure or waiver of a Default or Event of Default of the type described in clause
(f) the description above of Events of Default, the Senior Note Trustee or the
Senior Subordinated Note Trustee, as the case may be, shall have received an
Officers' Certificate and an Opinion of Counsel that such Default has been cured
or waived. The holders of a majority in principal amount of the applicable issue
of Notes may waive any existing Default or Event of Default under the applicable
Indenture, and its consequences, except a default in the payment of the
principal of or interest on any of such Notes.
SATISFACTION AND DISCHARGE OF INDENTURES; DEFEASANCE
The Company may terminate its obligations under the Indentures at any time
by delivering all outstanding Senior Notes or Senior Subordinated Notes, as the
case may be, to the appropriate Trustee for cancellation. The Company, at its
option, (i) will be discharged from any and all obligations with respect to the
Senior Notes or Senior Subordinated Notes, as the case may be (except for
certain obligations of the Company to register the transfer or exchange of such
Notes, replace stolen, lost or mutilated Notes, maintain paying agencies and
hold moneys for payment in trust), or (ii) need not comply with certain of the
restrictive covenants with respect to the Indenture if the Company deposits with
the applicable Trustee, in trust, money, U.S. Legal Tender or U.S. Government
Obligations that, through the payment of interest thereon and principal thereof
in accordance with their terms, will provide money in an amount sufficient to
pay all the principal of and interest on the Senior Notes or Senior Subordinated
Notes, as the case may be, on the dates such payments are due in accordance with
the terms of such Senior Notes or Senior Subordinated Notes as well as the
applicable Trustee's fees and expenses. To exercise any such option, the Company
is required to deliver to the Senior Note Trustee or the Senior Subordinated
Note Trustee, as the case may be, (A) an Opinion of Counsel to the effect that
the holders of such Senior Notes or Senior Subordinated Notes, as the case may
be, will not recognize income, gain or loss for federal income tax purposes as a
result of the deposit and related defeasance and will be subject to federal
income tax on the same amount and in the same manner and at the same times as
would have been the case if such option had not been exercised and, in the case
of a discharge pursuant to clause (i) above, accompanied by a ruling to such
effect received from or published by the IRS, and (B) an Officers' Certificate
and an Opinion of Counsel to the effect that all conditions precedent to the
defeasance have been satisfied. Notwithstanding the foregoing, the Opinion of
Counsel required by clause (A) above need not be delivered if all Notes of the
applicable issue not theretofore delivered to the applicable Trustee for
cancellation (i) have become due and payable, (ii) will become due and payable
on the maturity date within one year or (iii) are to be called for redemption
within one year under arrangements satisfactory to the Trustee for the giving of
notice of redemption by the applicable Trustee in the name, and at the expense,
of the Company.
REPORTS TO HOLDERS
The Company shall file with the Senior Note Trustee and the Senior
Subordinated Note Trustee, within 15 days after filing with the Commission,
copies of the annual reports and of the information, documents and other reports
(or copies of such portions of any of the foregoing as the Commission may by
rules and regulations prescribe) that the Company files with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. In the event the Company is
no longer subject to these periodic reporting requirements of the Exchange Act,
it will nonetheless continue to file reports with the Commission and the Senior
Note Trustee and the Senior Subordinated Note Trustee as if it were subject to
such periodic reporting requirements. Regardless of whether the Company is
required to furnish such reports to its stockholders pursuant to the Exchange
Act, the Company shall cause its consolidated financial statements, comparable
to that which would have been required to appear in annual or quarterly reports,
to be delivered to the holders of the Notes.
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MODIFICATION OF THE INDENTURE
From time to time, the Company and the Senior Note Trustee and the Senior
Subordinated Note Trustee, as the case may be, without the consent of the
holders of the Senior Notes and the Senior Subordinated Notes may amend the
applicable Indenture for certain specified purposes, including curing
ambiguities, defects or inconsistencies so long as such change does not, in the
opinion of the applicable Trustee, adversely affect the rights of any of the
holders in any material respect. In formulating its opinion on such matters, the
applicable Trustee will be entitled to rely on such evidence as it deems
appropriate, including, without limitation, solely on an Opinion of Counsel.
Other modifications and amendments of the Indentures may be made with the
consent of the holders of a majority in principal amount of the then outstanding
Notes issued under such Indenture, except that, without the consent of each
holder of the Notes affected thereby, no amendment may (i) change the principal
amount of Notes whose holders must consent to an amendment, supplement or waiver
of any provision of the Indentures, (ii) reduce the rate or extend the time for
payment of interest on any Notes, (iii) reduce the principal amount of any
Notes, (iv) change the maturity date of any Notes or alter the optional
redemption provisions in the Indentures or the Notes in a manner adverse to any
holder, (v) make any changes in the provisions concerning waivers of Defaults or
Events of Default by holders or the rights of holders to recover the principal
of, interest on or optional redemption payment with respect to any Notes, (vi)
make the principal of, or interest on, any Notes payable with anything or in any
manner other than as provided for in the Indentures and the Notes or (vii) with
respect to the Senior Subordinated Notes, make any change in the subordination
provisions that adversely effect the holders of the Senior Subordinated Notes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indentures. Reference is made to the Indentures for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or assumed in connection with the acquisition of assets from such
Person and not incurred by such Person in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary of the Company or
such acquisition.
"Affiliate" means a Person who directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common control with,
the Company. The term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing. Notwithstanding the foregoing, any Person
established in connection with any Trade Receivable Facility shall not be deemed
an Affiliate. For purposes of the covenant "Limitation on Transactions with
Affiliates," the term "Affiliate" shall include any Person who, as a result of
any transaction described in the "Limitation on Transactions with Affiliates"
covenant, would become an Affiliate.
"Asset Acquisition" means (i) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or shall be merged
with the Company or any Restricted Subsidiary of the Company or (ii) the
acquisition by the Company or any Restricted Subsidiary of the Company of assets
of any Person or any division or line of business of such Person.
"Asset Sale" means the sale, lease (other than an operating lease),
assignment or other disposition (including, without limitation, dispositions
pursuant to Sale and Leaseback Transactions) by the Company or one of its
Restricted Subsidiaries to any Person other than the Company or one of its
Restricted Subsidiaries of (i) any capital stock of any Restricted Subsidiary,
(ii) all or substantially all of the properties and assets of any division or
line of business of the Company or any Restricted Subsidiary of the Company or
(iii) any other assets of the Company or any of its Restricted Subsidiaries
greater than $5 million individually, other than those assets sold in the
ordinary course of business of the Company or such Restricted Subsidiary,
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respectively. For the purposes of this definition, the term "Asset Sale" shall
not include (i) Capital Stock of the Company, (ii) any transfer of trade
receivables or related assets pursuant to any Trade Receivable Facility, (iii)
any sale, issuance, conveyance, transfer, lease or other disposition of
properties or assets that is governed by the provisions set forth under the
"Merger, Consolidation and Sale of Assets" covenant, (iv) an issuance of Capital
Stock by a Restricted Subsidiary to the Company or to a wholly owned Restricted
Subsidiary, (v) a disposition consisting of a Permitted Investment or Restricted
Payment permitted by the "Limitation on Restricted Payments" covenant, (vi) the
surrender or waiver of contract rights or the settlement, release or surrender
of contract, tort or other claims of any kind, (vii) the grant in the ordinary
course of business of any license of patents, trademarks, registrations thereof
and other similar intellectual property, (viii) the sale or discount, in each
case without recourse, of accounts receivables arising in the ordinary course of
business, but only in connection with the compromise or collection thereof, (ix)
the sale for cash or exchange of specific items of equipment, so long as the
purpose of each such sale or exchange is to acquire (and results within 90 days
of such sale or exchange in the acquisition of) replacement items of equipment
which are the functional equivalent of the item of equipment so sold or
exchanged and (x) disposals or replacements of obsolete equipment in the
ordinary course of business.
"Borrowing Restricted Subsidiary" shall mean any Restricted Subsidiary that
incurs, or otherwise becomes liable for, in excess of $5.0 million of Restricted
Subsidiary Indebtedness.
"Capital Stock" means (i) with respect to any Person, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, including each class of common stock and preferred stock of
such Person and (ii) with respect to the Company or any other Person formed
other than as a corporation, any and all partnership, membership or other equity
interests of the Company or such other Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof, (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation or Moody's Investors
Service, (iii) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at least
A-1 from Standard & Poor's Corporation or at least P-1 from Moody's Investors
Service, (iv) certificates of deposit or bankers' acceptances maturing within
one year from the date of acquisition thereof issued by any commercial bank
organized under the laws of the United States of America or any state thereof or
the District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than $250
million, (v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered into
with any bank meeting the qualifications specified in clause (iv) above and (vi)
investments in money market funds which invest substantially all their assets in
securities of the types described in clauses (i) through (v) above.
"Change of Control" means if at any time any Person or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) acquires, in one or
more transactions, (i) beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) of 50% or more of the voting power represented by all
voting securities of the Company or (ii) the power to elect a majority of the
Board of Directors of the Company; provided, however, that voting securities
beneficially owned by or voting power controlled by such Person or group will
not be deemed to include common stock beneficially owned or voting power
controlled so long as it is beneficially owned or controlled directly or
indirectly by Mid-America Group, Ltd. (but only so long as MAG is controlled by
Mr. Marvin A. Pomerantz and/or his spouse or their respective heirs or lineal
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descendants), or Mr. Marvin A. Pomerantz or Mr. Warren J. Hayford, their
respective spouses or their respective heirs or lineal descendants.
"Commodity Agreements" means without limitation any commodity futures
contract, commodity option agreement or other similar agreement or arrangement
entered into by the Company designed to protect the Company against fluctuations
in the prices of commodities used in the ordinary course of business and not
entered into for any other purpose.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income, (ii) to the extent
Consolidated Net Income has been reduced thereby, all income taxes of such
Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP
for such period (other than income taxes attributable to extraordinary, unusual
or nonrecurring gains or losses), Consolidated Interest Expense, amortization
expense (including write-off of deferred financing costs) and depreciation
expense and (iii) other non-cash items other than non-cash interest reducing
Consolidated Net Income (other than such items incurred in the ordinary course
of business consistent with past practice) less other non-cash items increasing
Consolidated Net Income (other than such items incurred in the ordinary course
of business consistent with past practice), all as determined on a consolidated
basis for such Person and its Restricted Subsidiaries in conformity with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four most
recent full fiscal quarters for which financial information is available (the
"Four Quarter Period") ending not more than 135 days prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such
Person for the Four Quarter Period. In addition to and without limitation of the
foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the Four Quarter Period to (1) the incurrence or repayment of
any Indebtedness of such Person or any of its Restricted Subsidiaries at any
time subsequent to the last day of the Four Quarter Period and on or prior to
the Transaction Date, as if such incurrence or repayment, as the case may be
(and the application of the proceeds thereof), occurred on the first day of the
Four Quarter Period and (ii) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA associated with such
Asset Acquisition) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Indebtedness or Acquired
Indebtedness) occurred on the first day of the Four Quarter Period. If such
Person or any of its Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if such Person or any Restricted
Subsidiary of such Person had directly incurred or otherwise assumed such
guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed
Charges," (1) interest on Indebtedness determined on a fluctuating basis as of
the Transaction Date and that will continue to be so determined thereafter shall
be deemed to have accrued at a fixed rate per annum equal to the rate of
interest on such Indebtedness in effect on the Transaction Date, (2) if interest
on any Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period, (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by Interest Rate Agreements, shall be deemed to accrue at the rate per
annum resulting after giving effect to the operation of such Interest Rate
Agreements and (4) the permanent retirement of any Indebtedness during the Four
Quarter Period or at any time subsequent to the last day of the Four Quarter
Period and on or prior to the Transaction Date shall be given effect as if it
occurred at the beginning of such Four Quarter Period.
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"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense and
(ii) the product of (x) the amount of all dividend payments on any series of
preferred stock of such Person (except dividends for such period which are
accrued but unpaid) times (y) a fraction, the numerator of which is one and the
denominator of which is one minus the then current effective consolidated
federal, state and local tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the aggregate of all cash and non-cash interest expense (minus
amortization or write-off of deferred financing costs included in cash or
non-cash interest expense and minus interest income and capitalized interest)
with respect to all outstanding Indebtedness of such Person and its Restricted
Subsidiaries, including the net costs associated with Interest Rate Agreements,
for such period determined on a consolidated basis in conformity with GAAP.
Consolidated Interest Expense of the Company shall not include any prepayment
premiums or amortization of original issue discount or deferred financing costs.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided that there shall be excluded therefrom (a) gains and losses from Asset
Sales (without regard to the $5 million limitation set forth in the definition
thereof) or abandonments or reserves relating thereto, (b) items classified as
extraordinary, nonrecurring or unusual gains and losses, and the related tax
effects, (c) the net income (or loss) of any Person acquired in a pooling of
interests transaction accrued prior to the date it becomes a Restricted
Subsidiary of the Company or is merged or consolidated with the Company or any
Restricted Subsidiary, (d) the net income of any Restricted Subsidiary to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by contract, operation of law
or otherwise and (e) for the purpose of calculating Consolidated Net Income for
clause (iii)(w) of the first paragraph of the covenant "Limitation on Restricted
Payments," the net income (or loss) of any Person, other than a Restricted
Subsidiary, except to the extent of cash dividends or distributions (net of tax,
if applicable) paid to the Company or a Restricted Subsidiary of the Company by
such Person.
"Credit Agreement" means the Credit Agreement dated as of November 17,
1986, and amended and restated as of June 30, 1995, among the Company, the
financial institutions party thereto in their capacities as lenders thereunder,
and Bankers Trust Company as agent for the banks, as the same may be amended
from time to time, and any agreement evidencing the refinancing, modification,
replacement, renewal, restatement, refunding, deferral, extension, substitution,
supplement, reissuance or resale thereof, whether including any additional
obligors or with the same or any different agent or group of lenders.
"Currency Agreements" means without limitation any foreign exchange
contract, currency swap agreement, cross currency agreement, currency option
agreement, forward currency agreement, or other similar agreement or arrangement
entered into by the Company designed to protect the Company against fluctuations
in foreign exchange rates and not entered into for any other purpose.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (i) Indebtedness under or in respect of the
Credit Agreement, (ii) the Senior Notes, (iii) the 9 3/4% Senior Notes and (iv)
any other Indebtedness constituting Senior Debt which, at the time of
designation, has an aggregate principal amount of at least $50 million and is
specifically designated in the instrument evidencing such Senior Debt as
"Designated Senior Debt" by the Company.
"Disqualified Capital Stock" means any Capital Stock that, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the sole option of the holder thereof, in whole or in part, on or prior to
the final maturity date of the Notes.
"Equity Offering" means an offering of Common Stock of the Company
resulting in net proceeds to the Company in excess of $20 million.
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"Indebtedness" means with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money, (ii) all indebtedness of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all Capitalized Lease Obligations of such Person, (iv) all indebtedness of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all indebtedness under any title retention
agreement, (v) all indebtedness of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations and (vii) all
indebtedness of any other Person of the type referred to in clauses (i) through
(vi) that is secured by any first Lien on any property or asset of such Person,
the amount of such indebtedness being deemed to be the lesser of the value of
such property or asset or the amount of the indebtedness so secured, but
excluding trade accounts payable arising in the ordinary course of business that
are not overdue in excess of 90 days or the subject of a good faith dispute.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement or other similar agreement or
arrangement entered into by the Company designed to protect the Company against
fluctuations in interest rates and not entered into for any other purpose.
"Investment" means any transfer or delivery of cash, stock or other
property of value in exchange for indebtedness, stock or other security or
ownership interest by way of loan, advance (excluding any advances to officers
and employees in the ordinary course of business) or capital contribution. The
amount of any non-cash Investment (other than a Permitted Investment) or any
Investment in an Unrestricted Subsidiary shall be the fair market value of such
Investment, as determined in good faith by management of the Company unless the
fair market value of such Investment exceeds $10 million, in which case such
fair market value shall also be determined in good faith by the Board of
Directors or other equivalent governing body of the Company at the time such
Investment is made. For purposes of the covenant "Limitations on Restricted
Payments," (i) "Investment" in a Subsidiary shall include the portion
(proportionate to the Company's Capital Stock in such Subsidiary) of the fair
market value (as determined in good faith by the Board of Directors) of such
Subsidiary at the time that such Subsidiary is designated an Unrestricted
Subsidiary; provided that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's Capital Stock
in such Subsidiary) of the fair market value (as determined in good faith by the
Board of Directors) of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case determined in good faith by the Board of Directors.
"Issue Date" means the date of original issuance of the Old Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Make-Whole Premium" with respect to a Note means an amount equal to the
greater of (i) 1.0% of the outstanding principal amount of such Note and (ii)
the excess of (a) the present value of the remaining interest, premium and
principal payments due on such Note as if such Note were redeemed on June 15,
2002, in the case of the Senior Notes, and February 15, 2003, in the case of the
Senior Subordinated Notes, computed using a discount rate equal to the Treasury
Rate plus 62.5 basis points, over (b) the outstanding principal amount of such
Note.
"Net Cash Proceeds" means, (i) with respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents received by the Company or any of its Restricted Subsidiaries from
such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions), (b) taxes paid or payable ((1)
including, without limitation, income taxes reasonably estimated to be actually
payable as a result of any disposition of property within two years of the date
of disposition and (2) after taking into account any reduction in tax liability
due to available tax credits or deductions and any tax sharing arrangements),
(c) a reasonable reserve
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for the after-tax cost of any indemnification obligations (fixed and/or
contingent) attributable to seller's indemnities to the purchaser undertaken by
the Company or any of its Restricted Subsidiaries in connection with such Asset
Sale and (d) repayment of Indebtedness that is required to be repaid in
connection with such Asset Sale or (ii) with respect to the sale of Capital
Stock by any Person, the aggregate net proceeds received by such Person after
payment of expenses, commissions, underwriting discounts and other similar
charges incurred in connection therewith, whether such proceeds are in cash or
in property (valued at the fair market value thereof, as determined in good
faith by the Board of Directors or other equivalent governing body of such
Person, at the time of receipt, whose determination shall be evidenced by a
board resolution).
"9 3/4% Senior Notes" means the Company's $225,000,000 aggregate principal
amount of 9 3/4% Senior Notes due 2007.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Old Debentures" means the Company's 12 3/4% Senior Subordinated Discount
Debentures due 2005.
"Permitted Indebtedness" means, without duplication, (i) the Notes and any
Guarantees thereof, (ii) Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon (other than permanent reductions as a result of any
refinancing thereof permitted hereunder), (iii) Indebtedness of the Company and
its Restricted Subsidiaries incurred pursuant to the Credit Agreement in an
aggregate principal amount not to exceed $225 million, (iv) Indebtedness of the
Company and its Restricted Subsidiaries incurred pursuant to Interest Rate
Agreements, (v) intercompany Indebtedness by and among the Company and/or its
wholly owned Restricted Subsidiaries, (vi) Indebtedness of the Company and its
Restricted Subsidiaries (including Acquired Indebtedness) pursuant to pollution
control bonds and industrial revenue bonds not to exceed the sum of the
aggregate amount thereof outstanding on the Issue Date plus $25 million, (vii)
Indebtedness of the Company and its Restricted Subsidiaries (including Acquired
Indebtedness) evidenced by purchase money obligations and Capitalized Lease
Obligations not to exceed $50 million in fiscal year 1998 and $25 million in any
subsequent fiscal year; provided that any portion of the $25 million ($50
million in the case of fiscal 1998) that is not incurred in any fiscal year may
be carried over to successive fiscal years; provided, further, that the maximum
amount that may be incurred in any one fiscal year shall not exceed $50 million,
(viii) additional Indebtedness of the Company and its Restricted Subsidiaries
(including Acquired Indebtedness) incurred for any purpose not to exceed, at any
time outstanding, $200 million (that may be, but need not be, incurred in whole
or in part under the Credit Agreement), (ix) Indebtedness incurred pursuant to
the Trade Receivable Facility, (x) Indebtedness of the Company or its Restricted
Subsidiaries incurred under one or more instruments in connection with any
refinancing, modification, replacement, renewal, restatement, refunding,
deferral, extension, substitution, supplement, reissuance or resale (a
"refinancing") of existing or future Indebtedness of such entity; provided that
any such incurrence and related refinancing, together, shall not (1) result in
an increase in the aggregate principal amount of such Indebtedness (except to
the extent such increase is a result of an incurrence or refinancing of
additional Indebtedness otherwise permitted by the Indenture or such increase
does not exceed the amount of premiums, fees and expenses (including
underwriting discounts) relating to such refinancing, modification, replacement,
renewal, restatement, refunding, deferral, extension, substitution, supplement,
reissuance or resale of such existing or future Indebtedness) of the Company and
its Restricted Subsidiaries and (2) create Indebtedness where the Weighted
Average Life to Maturity at the time of such refunded, refinanced, modified,
replaced, renewed, restated, deferred, extended, substituted, supplemented,
reissued or resold Indebtedness is incurred is less than the Weighted Average
Life to Maturity of the Indebtedness being refunded, refinanced, modified,
replaced, renewed, restated, deferred, extended, substituted, supplemented,
reissued or resold; and provided, further, that with respect to the refinancing
of Indebtedness incurred pursuant to clauses (v), (vi), (vii), (xvi) and (xvii),
such Indebtedness may only be refinanced with Indebtedness permitted to be
incurred under such respective clause, (xi) Indebtedness of the Company and its
Restricted Subsidiaries arising in connection with the acquisition or
refinancing of property so long as recourse with respect to such Indebtedness is
limited only to the property being acquired or refinanced or any amendment,
restatement, deferral, extension, modification, refinancing, refunding, renewal,
replacement, substitution,
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supplement, reissuance or resale thereof so long as recourse is limited to the
property being refinanced, (xii) Indebtedness of the Company and its Restricted
Subsidiaries incurred after the Issue Date relating to letters of credit
available or outstanding under the Credit Agreement (or any successor thereto),
(xiii) surety obligations of the Company and its Restricted Subsidiaries entered
into in the ordinary course of business, (xiv) Indebtedness of the Company and
its Restricted Subsidiaries incurred to finance the purchase of insurance in the
ordinary course of business, (xv) Indebtedness of the Company and its Restricted
Subsidiaries incurred arising from the honoring by a bank or other financial
institution of a check or draft inadvertently drawn against insufficient funds
in the ordinary course of business, provided that such Indebtedness is
extinguished within two business days of notice of any such incurrence, (xvi)
Indebtedness of the Company and its Restricted Subsidiaries arising from
guarantees of loans and advances by third parties to employees and officers of
the Company or its subsidiaries, not to exceed $1 million in the aggregate,
(xvii) Indebtedness of the Company and its Restricted Subsidiaries arising from
the repurchase of Common Stock not to exceed $4 million (xviii) Indebtedness of
the Company and its Restricted Subsidiaries arising from Currency Agreements and
Commodity Agreements, (xix) the 9 3/4% Senior Notes and (xx) the Old Debentures.
"Permitted Investments" means in the case of the Company or its Restricted
Subsidiaries, (i) an Investment related to the business of the Company and its
Restricted Subsidiaries as it is conducted on the Issue Date, including, but not
limited to, subsidiaries, joint ventures or other business alliances formed in
the ordinary course of business, (ii) Investments in the Company by any
Restricted Subsidiary or Investments by the Company or any Restricted Subsidiary
(including acquisitions) in any other Person, if after giving effect of any such
Investment, such Person would be a wholly owned Restricted Subsidiary of the
Company, (iii) Investments in cash and Cash Equivalents, (iv) Investments in
Productive Assets, (v) Investments in any Person in connection with the Trade
Receivable Facility, (vi) Investments existing on the date of this Indenture,
(vii) loans and advances to employees and officers of the Company and its
Restricted Subsidiaries not in excess of $1 million at any one time outstanding,
(viii) accounts receivable created or acquired in the ordinary course of
business, (ix) Interest Rate Agreements, Currency Agreements and Commodity
Agreements entered into in the ordinary course of the Company's business and
otherwise in compliance with this Indenture, (x) Investments in Unrestricted
Subsidiaries in an amount at any one time outstanding not to exceed $25 million,
(xi) guarantees by the Company of Indebtedness otherwise permitted to be
incurred by Restricted Subsidiaries of the Company under the Indentures and
(xii) Investments received by the Company or its Restricted Subsidiaries as
consideration for asset sales, including Asset Sales; provided in the case of an
Asset Sale, such Asset Sale is effected in compliance with the covenant
described above under "Certain Covenants -- Limitation on Asset Sales."
"Permitted Liens" means (i) Liens for taxes, assessments and governmental
charges to the extent not required to be paid, (ii) statutory Liens of landlords
and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or
other like Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by an appropriate
process of law, and for which a reserve or other appropriate provision, if any,
as shall be required by GAAP shall have been made, (iii) pledges or deposits in
the ordinary course of business to secure lease obligations or nondelinquent
obligations under workers' compensation, unemployment insurance or similar
legislation, (iv) Liens to secure the performance of public statutory
obligations that are not delinquent, appeal bonds, performance bonds or other
obligations of a like nature (other than for borrowed money), (v) easements,
rights-of-way, restrictions, minor defects or irregularities in title and other
similar charges or encumbrances not interfering in any material respect with the
business of the Company or any of its Subsidiaries, (vi) Liens upon specific
items of inventory or other goods and proceeds of any Person securing such
Person's obligations in respect of bankers' acceptances issued or created for
the account of such Person to facilitate the purchase, shipment or storage of
such inventory or other goods in the ordinary course of business, (vii) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof, (viii) Liens in favor of custom and revenue
authorities arising as a matter of law to secure payment of nondelinquent
customs duties in connection with the importation of goods, (ix) judgment and
attachment Liens not giving rise to a Default or Event of Default, (x) leases or
subleases granted to others not interfering in any material respect with the
business of the
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Company or any Subsidiary, (xi) Liens encumbering customary initial deposits and
margin deposits, and other Liens incurred in the ordinary course of business
that are within the general parameters customary in the industry, in each case
securing Indebtedness under Interest Rate Agreements, Currency Agreements,
Commodity Agreements and forward contracts, option futures contracts, futures
options or similar agreements or arrangements designed to protect the Company or
any Subsidiary from fluctuations in the price of commodities, (xii) Liens
encumbering deposits made in the ordinary course of business to secure
nondelinquent obligations arising from statutory, regulatory, contractual or
warranty requirements of the Company or its Subsidiaries for which a reserve or
other appropriate provision, if any, as shall be required by GAAP shall have
been made, (xiii) Liens arising out of consignment or similar arrangements for
the sale of goods entered into by the Company or any Subsidiary in the ordinary
course of business in accordance with industry practice, (xiv) any interest or
title of a lessor in the property subject to any lease, whether characterized as
capitalized or operating, other than any such interest or title resulting from
or arising out of default by the Company or any Subsidiary of its obligations
under such lease, (xv) Liens arising from filing UCC financing statements for
precautionary purposes in the connection with true leases of personal property
that are otherwise permitted under this Indenture and under which the Company or
any Subsidiary is lessee, (xvi) Liens on property of a Person existing at the
time such Person is acquired by, merged into or consolidated with the Company or
any Restricted Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company or such Restricted Subsidiary; (xvii) Liens to secure the
payment of all or a part of the purchase price of property or assets acquired or
constructed in the ordinary course of business on or after the date of the
Indentures, provided that (a) such property or assets are used in the same or
similar line of business as the Company was engaged in on the Issue Date, (b) at
the time of incurrence of any such Lien, the aggregate principal amount of the
obligations secured by such Lien shall not exceed the lesser of the cost or fair
market value of the assets or property (or portions thereof) so acquired or
constructed, (c) each such Lien shall encumber only the assets or property (or
portions thereof) so acquired or constructed and shall be attached to such
property within 180 days of the purchase or construction thereof and (d) and
Indebtedness secured by such Lien shall have been permitted to be incurred under
the covenant "Limitation on Incurrence of Additional Indebtedness," and (xviii)
Liens of landlords or of mortgagees of landlords arising by operation of law,
provided that the rental payments secured thereby are not yet due and payable;
(xix) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that (a) are
not incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of business)
and (b) do not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of business by
the Company or such Restricted Subsidiary.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Productive Assets" means assets (including Capital Stock) of a kind used
or usable in the business of the Company and its Restricted Subsidiaries as it
is conducted on the Issue Date.
"Qualified Capital Stock" means any stock that is not Disqualified Capital
Stock.
"Restricted Subsidiary" means any direct or indirect Subsidiary of any
Person that is not an Unrestricted Subsidiary of such Person.
"Restricted Subsidiary Indebtedness" means (a) Indebtedness (other than
Indebtedness under any Trade Receivable Facility, intercompany Indebtedness or
Indebtedness outstanding on the Issue Date, including any refinancing of
Indebtedness outstanding on the Issue Date to the extent it does not increase
the principal amount of such Indebtedness) incurred by a Restricted Subsidiary
(other than a Subsidiary Guarantor), or (b) the direct or indirect assumption,
guarantee (other than a Guarantee) or other obligation of any Restricted
Subsidiary (other than a Subsidiary Guarantor) for any Indebtedness of the
Company or any other Restricted Subsidiary by way of the pledge of any
intercompany note or otherwise, or (c) the total amount of committed borrowings
under revolving credit facilities under which the Restricted Subsidiary (other
than a Subsidiary Guarantor) is a borrower or guarantor, but "Restricted
Subsidiary Indebtedness"
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shall not include any Indebtedness of the Restricted Subsidiary evidenced by
purchase money obligations or Capitalized Lease Obligations provided for under
clause (vii) and Indebtedness provided for under clause (xi) of the definition
of Permitted Indebtedness in an aggregate amount not to exceed $75 million for
all Restricted Subsidiaries.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Senior Debt," for purposes of the Senior Subordinated Notes, means the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition in bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on any Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Senior Subordinated Notes. Without limiting the generality of the foregoing,
"Senior Debt" shall include the monetary obligations of the Company under or
with respect to: (a) the Credit Agreement (including any post-petition interest
in any proceeding pursuant to the Bankruptcy Laws, whether or not allowed, at
the applicable rate under such agreement),(b) the Senior Notes and (c) the
9 3/4% Senior Notes. Notwithstanding the foregoing, Senior Debt shall not
include (i) any Indebtedness, if the instrument creating or evidencing the same
or the assumption or guarantee thereof expressly provides that such Indebtedness
shall not be senior in right of payment to the Senior Subordinated Notes, (ii)
the Senior Subordinated Notes, (iii) any Indebtedness of the Company to a
Subsidiary of the Company, (iv) Indebtedness to, or guaranteed on behalf of, any
shareholder, director, officer or employee of the Company or any Subsidiary
(including, without limitation, amounts owed for compensation), (v) Indebtedness
to trade creditors and other amounts incurred in connection with obtaining
goods, materials or services, (vi) Indebtedness represented by Disqualified
Capital Stock, (vii) Indebtedness incurred in violation of the provisions set
forth under "Limitation on Incurrence of Additional Indebtedness," as such
covenant may be amended from time to time, (viii) Indebtedness incurred in
violation of the provisions set forth under "Prohibition on Incurrence of Senior
Subordinated Debt," as such covenant may be amended from time to time and (ix)
the Old Debentures.
"Subsidiary," with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest to elect the
governing body or Persons thereof under ordinary circumstances is at the time,
directly or indirectly, owned by such Person.
"Subsidiary Guarantor" means each of the Company's Restricted Subsidiaries
that becomes a guarantor of the Notes by executing a supplemental indenture in
which such Restricted Subsidiary agrees to be bound by the terms of the
Indentures; provided that any person constituting a Subsidiary Guarantor as
described above shall cease to constitute a Subsidiary Guarantor when its
respective Subsidiary Guarantee is released in accordance with the terms
thereof.
"Total Tangible Assets" means the Company's total consolidated assets minus
all intangible assets, determined in accordance with GAAP.
"Trade Receivable Facility" means the arrangements that have been or may be
entered into by the Company or one or more of its Restricted Subsidiaries
pursuant to which the Company or one or more of its Restricted Subsidiaries may
either transfer to any other Person or grant a security interest in any trade
receivables (whether now existing or arising in the future) and any assets
related to such trade receivables including, without limitation, all collateral
securing such trade receivables and all material contracts and all guarantees or
other Obligations in respect of such trade receivables of the Company or one or
more of its Restricted Subsidiaries.
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"Unrestricted Subsidiary" means any Subsidiary of the Company, whether
existing, newly formed or newly acquired, designated as an Unrestricted
Subsidiary by the Board of Directors of the Company and any Subsidiary of an
Unrestricted Subsidiary; provided, however, that at the time of such designation
(i) no Default or Event of Default shall have occurred and be continuing, (ii)
no portion of any Indebtedness or any other obligation (contingent or otherwise)
of such Subsidiary (a) is guaranteed by, or is otherwise the subject of credit
support provided by the Company or any of its Restricted Subsidiaries, (b) is
recourse to or obligates the Company or any of its Restricted Subsidiaries in
any way or (c) subjects any property or asset of the Company or any of its
Restricted Subsidiaries directly or indirectly, contingently or otherwise, to
the satisfaction of such Indebtedness or other obligation, (iii) neither the
Company nor any of its Restricted Subsidiaries has any contract, or agreement,
arrangement or understanding with such Subsidiary other than on terms as
favorable to the Company or such Restricted Subsidiary as those that might be
obtained at the time from Persons that are not Affiliates of the Company and
(iv) neither the Company nor any of its Restricted Subsidiaries has any
obligations (a) to subscribe for additional shares of Capital Stock of such
Subsidiary or (b) to maintain or preserve such Subsidiary's financial condition
or to cause such Subsidiary achieve certain levels of operating results. Any
such designation by the Company's Board of Directors shall be evidenced to each
Trustee by filing with such Trustee a certified certificate stating that such
designation complies with the foregoing conditions. The Company's Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing, including, without limitation, under the covenants described above
under the caption "Limitations on Incurrence of Additional Indebtedness"
assuming the incurrence by the Company and its Restricted Subsidiaries at the
time of such designation of all existing Indebtedness of the Unrestricted
Subsidiary to be so designated as a Restricted Subsidiary. In the event of any
disposition involving the Company in which the Company is not the Surviving
Person, the Board of Directors of the Surviving Person may (x) prior to such
disposition, designate any of its Subsidiaries, and any of the Company's
Subsidiaries being acquired pursuant to such disposition that are not Restricted
Subsidiaries, as Unrestricted Subsidiaries, and (y) after such disposition,
designate any of its direct or indirect Subsidiaries as an Unrestricted
Subsidiary under the same conditions and in the same manner as the Company under
the terms of the Indenture.
"U.S. Legal Tender" means such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"wholly owned Restricted Subsidiary" means any Restricted Subsidiary of
which all of the outstanding voting securities or other equity ownership
interest (other than directors qualifying or similar shares required to be held
by third parties in accordance with applicable law, not in any event to exceed 5
percent of the total outstanding voting securities) are owned by the Company or
any wholly owned Restricted Subsidiary of the Company.
BOOK-ENTRY; DELIVERY AND FORM
Each of the Senior Exchange Notes and the Senior Subordinated Exchange
Notes initially will be represented by permanent global certificates in
definitive, fully registered form (collectively, the "Global Notes"). The Global
Notes will be deposited on their date of issuance with, or on behalf of DTC and
registered in the name of a nominee of DTC.
The Global Notes. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount of Notes of
the individual beneficial interests represented by such Global Notes to the
respective accounts of
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persons who have accounts with such depositary and (ii) ownership of beneficial
interests in the Global Notes will be shown on, and the transfer of such
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchasers and ownership of beneficial interests in the Global Notes will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. QIBs may hold their interests in the Global
Notes directly through DTC if they are participants in such system, or
indirectly through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Notes for all purposes
under the Indentures. No beneficial owner of an interest in any of the Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indentures with respect
to the Notes.
Payments of the principal of, premium (if any) and interest (including
Additional Interest) on the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Additional Interest) in
respect of the Global Notes, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Notes as shown on the records of DTC or its nominee. The
Company also expects that payments by participants to owners of beneficial
interests in the Global Notes held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Note for any reason,
including to sell Notes to persons in states which require physical delivery of
the Notes, or to pledge such securities, such holder must transfer its interest
in the Global Notes, in accordance with the normal procedures of DTC and with
the procedures set forth in the Indentures.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Notes
for Certificated Securities, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among participants of DTC, it is
under no obligation to perform such procedures, and such
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procedures may be discontinued at any time. Neither the Company nor either
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Certificated Notes. If DTC is at any time unwilling or unable to continue
as a depositary for the Global Notes and a successor depositary is not appointed
by the Company within 90 days, Certificated Notes will be issued in exchange for
the Global Notes.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on February 23, 1998 to
the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently resold the Old Notes to qualified institutional buyers
in reliance on Rule 144A under the Securities Act and to qualified buyers
outside the United States in reliance upon Regulation S under the Securities
Act. As a condition of the Purchase Agreement, the Company entered into the
Registration Rights Agreements with the Initial Purchasers pursuant to which the
Company has agreed, for the benefit of the holders of the Old Notes, at the
Company's expense, to use its best efforts to (i) file the Exchange Offer
Registration Statement within 60 days after the date of the original issue of
the Old Notes with the Commission with respect to the Exchange Offer for the New
Notes; (ii) use its best efforts to cause the Exchange Offer Registration
Statement to be declared effective under the Securities Act within 150 days
after the date of the original issuance of the Old Notes and (iii) use its best
efforts to consummate the Exchange Offer within 180 days after the date of the
original issuance of the Old Notes. Upon the Exchange Offer Registration
Statement being declared effective, the Company will offer the New Notes in
exchange for surrender of the Old Notes. The Company will keep the Exchange
Offer open for not less than 20 business days (or longer if required by
applicable law) after the date on which notice of the Exchange Offer is mailed
to the holders of the Old Notes. For each Old Note surrendered to the Company
pursuant to the Exchange Offer, the holder of such Old Note will receive a New
Note having a principal amount equal to that of the surrendered Old Note.
Interest on each Old Note will accrue from the last interest payment date on
which interest was paid on the Old Note surrendered in exchange therefor or, if
no interest has been paid on such Old Note, from the date of its original issue.
Interest on each New Note will accrue from the date of its original issue.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Notes will in general be
freely tradeable after the Exchange Offer without further registration under the
Securities Act. However, any purchaser of Old Notes who is an "affiliate" of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing the New Notes (i) will not be able to rely on the interpretation of
the staff of the Commission, (ii) will not be able to tender its Old Notes in
the Exchange Offer and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of the Old Notes, unless such sale or transfer is made pursuant to an
exemption from such requirements.
As contemplated by these no-action letters and the Registration Rights
Agreements, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging and does not intend to engage, in the distribution of
the New Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act, and (v) the
holder or any such other person acknowledges that if such holder or any other
person participates in the Exchange Offer for the purpose of distributing the
New Notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes and cannot rely on those no-action letters. As indicated above, each
Participating Broker-Dealer that receives a New Note for its own account in
exchange for Old Notes must acknowledge that it (i) acquired the Old Notes
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for its own account as a result of market-making activities or other trading
activities, (ii) has not entered into any arrangement or understanding with the
Company or any "affiliate" of the Company (within the meaning of Rule 405 under
the Securities Act) to distribute the New Notes to be received in the Exchange
Offer and (iii) will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes. For a
description of the procedures for resales by Participant Broker-Dealers, see
"Plan of Distribution."
In the event that changes in the law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect such an Exchange
Offer, or if for any other reason the Exchange Offer is not consummated within
180 days of the date of the original issuance of the Old Notes, the Company will
(i) file the Shelf Registration Statement covering resales of the Old Notes;
(ii) use its best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act and (iii) use its best efforts to
keep effective the Shelf Registration Statement until the earlier of two years
after its effective date and such time as all of the applicable Notes have been
sold thereunder. The Company will, in the event of the filing of the Shelf
Registration Statement, provide to each applicable holder of the Old Notes
copies of the prospectus which is a part of the Shelf Registration Statement,
notify each such holder when the Shelf Registration Statement has become
effective and take certain other actions as are required to permit unrestricted
resale of the Old Notes. A holder of Old Notes that sells such Old Notes
pursuant to the Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreements which are
applicable to such a holder (including certain indemnification obligations). In
addition, each holder of the Old Notes will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the applicable Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and to benefit from the provisions
set forth in the following paragraph.
Although the Company intends to file the registration statement described
above, there can be no assurance that such registration statement will be filed,
or, if filed, that it will become effective. If the Company fails to comply with
the above provisions or if such registration statement fails to become
effective, then, as liquidated damages, additional interest (the "Additional
Interest") shall become payable with respect to the Notes as follows:
(i) if the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within 60 days following the Issue Date, Additional
Interest shall accrue on the Notes over and above the stated interest at a
rate of 0.50% per annum for the first 90 days commencing on the 61st day
after the issue Date, such Additional Interest rate increasing by an
additional 0.50% per annum at the beginning of each subsequent 90-day
period;
(ii) if the Exchange Offer Registration Statement or Shelf
Registration Statement is not declared effective within 150 days following
the Issue Date, Additional Interest shall accrue on the Notes over and
above the stated interest at a rate of 0.50% per annum for the first 90
days commencing on the 151st day after the Issue Date, such Additional
Interest rate increasing by an additional 0.50% per annum at the beginning
of each subsequent 90-day period; or
(iii) If (A) the Company has not exchanged all Old Notes validly
tendered in accordance with the terms of the Exchange Offer on or prior to
180 days after the Issue Date or (B) the Exchange Offer Registration
Statement ceases to be effective at any time prior to the time that the
Exchange Offer is consummated or (C) if applicable, the Shelf Registration
Statement has been declared effective and such Shelf Registration Statement
ceases to be effective at any time prior to the second anniversary of the
Issue Date (unless all the Notes have been sold thereunder), then
Additional Interest shall accrue on the Notes over and above the stated
interest at a rate of 0.50% per annum for the first 90 days commencing on
(x) the 181st day after the issue Date with respect to the Notes validly
tendered and not exchanged by the Company, in the case of (A) above, or (y)
the day the Exchange Offer Registration Statement ceases to be effective or
usable for its intended purpose in the case of (B) above, or (z) the day
such
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Shelf Registration Statement ceases to be effective in the case of (C)
above, such Additional Interest rate increasing by an additional 0.50% per
annum at the beginning of each subsequent 90-day period;
provided, however, that the Additional Interest rate on the Notes may not exceed
in the aggregate 1.0% per annum; and provided further, that (1) upon the filing
of the Exchange Offer Registration Statement or Shelf Registration Statement (in
the case of clause (i) above), (2) upon the effectiveness of the Exchange Offer
Registration Statement or Shelf Registration Statement (in the case of clause
(ii) above), or (3) upon the exchange of Exchange Notes for all Old Notes
tendered (in the case of clause (iii)(A) above), or upon the effectiveness of
the Exchange Offer Registration Statement which had ceased to remain effective
(in the case of clause (iii)(B) above), or upon the effectiveness of the Shelf
Registration Statement which had ceased to remain effective (in the case of
clause (iii)(C) above), Additional Interest on the Notes as a result of such
clause (or the relevant subclause thereof), as the case may be, shall cease to
accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash, on the same original interest payment dates
as the Notes. The amount of Additional Interest will be determined by
multiplying the applicable Additional Interest rate by the principal amount of
the Notes multiplied by a fraction, the numerator of which is the number of days
such Additional Interest rate was applicable during such period (determined in
the basis of a 360-day year comprised of twelve 30-day months), and the
denominator of which is 360.
Holders of Old Notes will be required to make certain representations to
the Company (as described in the Registration Rights Agreements) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreements in order to have their Old Notes included
in the Shelf Registration Statement and benefit from the provisions regarding
Additional Interest set forth above.
The summary herein of certain provisions of the Registration Rights
Agreements does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreements,
copies of which are filed as exhibits to the Exchange Offer Registration
Statement of which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for such Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Old Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Old Notes except that (i) the Exchange Notes bear a Series B designation
and a different CUSIP Number from the Old Notes, (ii) the Exchange Notes have
been registered under the Securities Act and hence will not bear legends
restricting the transfer thereof and (iii) the holders of the Exchange Notes
will not be entitled to certain rights under the Registration Rights Agreements,
including the provisions providing for an increase in the interest rate on the
Old Notes in certain circumstances relating to the timing of the Exchange Offer,
all of which rights will terminate when the Exchange Offer is consummated. The
Exchange Notes will evidence the same debt as the Old Notes and will be entitled
to the benefits of the Indentures.
As of the date of this Prospectus, $200,000,000 aggregate principal amount
of Old Senior Notes and $250,000,000 aggregate principal amount of Old Senior
Subordinated Notes were outstanding. The Company
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has fixed the close of business on March 30, 1998 as the record date for the
Exchange Offer for purposes of determining the persons to whom this Prospectus
and the Letter of Transmittal will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware, or the Indentures in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
April 29, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "-- Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from their date of issuance. Holders
of Old Senior Notes that are accepted for exchange will receive, in cash,
accrued interest thereon to, but not including, the date of issuance of the
Senior Exchange Notes. Such interest will be paid with the first interest
payment on the Senior Exchange Notes on June 15, 1998. Holders of Old Senior
Subordinated Notes that are accepted for exchange will receive, in cash accrued
interest thereon to, but not including, the date of issuance of the Senior
Subordinated Exchange Notes. Such interest will be paid with the first interest
payment on the Senior Subordinated Exchange Notes on August 15, 1998. Interest
on the Old Notes accepted for exchange will cease to accrue upon issuance of the
Exchange Notes.
Interest on the Senior Exchange Notes is payable semi-annually on each June
15 and December 15, commencing on June 15, 1998. Interest on the Senior
Subordinated Exchange Notes is payable semiannually on each February 15 and
August 15, commencing on August 15, 1998.
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PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal or submit an Agent's Message
in connection with a book-entry transfer, and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Old Notes and any
other required documents, to the Exchange Agent prior to 5:00 p.m., New York
City time, on the Expiration Date. To be tendered effectively, the Old Notes,
Letter of Transmittal or Agent's Message and other required documents must be
completed and received by the Exchange Agent at the address set forth below
under "Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date. Delivery of the Old Notes may be made by book-entry transfer in accordance
with the procedures described below. Confirmation of such book-entry transfer
must be received by the Exchange Agent prior to the Expiration Date.
The term "Agent's Message" means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent forming a part of a
confirmation of a book-entry, which states that such book-entry transfer
facility has received an express acknowledgment from the participant in such
book-entry transfer facility tendering the Old Notes that such participant has
received and agrees: (i) to participate in the Automated Tender Option Program
("ATOP"); (ii) to be bound by the terms of the Letter of Transmittal; and (iii)
that the Company may enforce such agreement against such participant.
By executing the Letter of Transmittal or Agent's Message, each holder will
make to the Company the representations set forth above in the third paragraph
under the heading "-- Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal or Agent's Message.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
67
<PAGE> 73
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at the book-entry transfer facility, The Depository Trust Company
(the "Book-Entry Transfer Facility"), for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, unless an Agent's Message is received by the Exchange Agent
in compliance with ATOP, an appropriate Letter of Transmittal properly completed
and duly executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under such procedures. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in their sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available; (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) (or, in the case of a book-entry
transfer, an Agent's Message) together with the certificate(s) representing
the Old Notes (or a confirmation of book-entry transfer of such Notes into
the Exchange Agent's account at the Book-Entry Transfer Facility), and any
68
<PAGE> 74
other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), together with a Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees (or, in the case of a book-entry transfer, an Agent's
Message) and all other documents required by the Letter of Transmittal are
received by the Exchange Agent upon five New York Stock Exchange trading
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case of
Old Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited), (iii) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Old Notes register the transfer of such Old Notes
into the name of the person withdrawing the tender and (iv) specify the name in
which any such Old Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
69
<PAGE> 75
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Old
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the sole
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and return
all tendered Old Notes to the tendering holders, (ii) extend the Exchange Offer
and retain all Old Notes tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of holders to withdraw such Old Notes (see "--
Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with respect
to the Exchange Offer and accept all properly tendered Old Notes which have not
been withdrawn.
SENIOR NOTES EXCHANGE AGENT
The State Street Bank and Trust Company has been appointed as Exchange
Agent for the exchange of Senior Exchange Notes for Old Senior Notes pursuant to
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
By Mail: Overnight Courier:
State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Trust Department Corporate Trust Department
P.O. Box 778 Two International Place
Boston, Massachusetts 02102 Boston, Massachusetts 02110
Attention: Sandra Szczsponik Attention: Sandra Szczsponik
By Hand in New York (as Drop Agent): By Hand in Boston:
State Street Bank and Trust Company, N.A. State Street Bank and Trust Company
61 Broadway Two International Place
Concourse Level, Corporate Trust Window Fourth Floor, Corporate Trust Department
New York, New York 10006 Boston, Massachusetts 02110
Facsimile Transmission: Confirm by Telephone:
(For Eligible Institutions Only) (617) 664-5314
(617) 664-5290
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
70
<PAGE> 76
SENIOR SUBORDINATED NOTES EXCHANGE AGENT
Chase Bank of Texas, National Association has been appointed as Exchange
Agent for the exchange of Senior Subordinated Exchange Notes for Old Senior
Subordinated Notes pursuant to the Exchange Offer. Questions and requests for
assistance, requests for additional copies of this Prospectus or the Letter of
Transmittal and requests for Notice of Guaranteed Delivery should be directed to
the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand or Overnight Delivery Service:
Chase Bank of Texas, National Association Chase Bank of Texas, National Association
Corporate Trust Services Corporate Trust Services
P.O. Box 2320 1201 Main Street, 18th Floor
Dallas, Texas 75221-2320 Dallas, Texas 75202
Attention: Frank Ivins Attention: Frank Ivins
Facsimile Transmissions: Confirm by Telephone:
(For Eligible Institutions Only) (For Eligible Institutions Only)
(214) 672-5932 (214) 672-5125 or
(800) 275-2048
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes, which is face value, as reflected in the Company's accounting records on
the date of exchange. Accordingly, no gain or loss for accounting purposes will
be recognized by the Company. The expenses of the Exchange Offer will be
expensed over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so long as the Old Notes are eligible for resale pursuant to Rule 144A, to
a person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iii) outside
the United States to a foreign person in a transaction meeting the requirements
of Rule 904 under the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
71
<PAGE> 77
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the Company believes that a holder or other person who receives Exchange Notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who receives Exchange Notes in exchange for Old Notes in the ordinary
course of business and who is not participating, does not intend to participate,
and has no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Exchange Notes, such holder cannot rely
on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreements, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Exchange Offer for the purpose
of distributing the Exchange Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on those no-action letters. As
indicated above, each Participating Broker-Dealer that receives Exchange Notes
for its own account in exchange for Old Notes must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
The form and terms of the Exchange Notes are the same as the form and terms
of the Old Notes (which they replace) except that (i) the Exchange Notes bear a
Series B designation, (ii) the Exchange Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof, and (iii) the holders of Exchange Notes will not be entitled to certain
rights under the Registration Rights Agreements, including the provisions
providing for an increase in the interest rate on the Old Notes in certain
circumstances relating to the timing of the Exchange Offer, which rights will
terminate when the Exchange Offer is consummated.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based on the current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "Service") will not take a
contrary view, and no ruling from the Service has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conditions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders. Certain holders (including
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) may be subject to special rules not discussed
below. The Company recommends that each holder
72
<PAGE> 78
consult such holder's own tax advisor as to the particular tax consequences of
exchanging such holder's Old Notes for Exchange Notes, including the
applicability and effect of any state, local or foreign tax laws.
The Company believes that the exchange of Old Notes for Exchange Notes
pursuant to the Exchange Offer will not be treated as an "exchange" for federal
income tax purposes because the Exchange Notes will not be considered to differ
materially in kind or extent from the Old Notes. Rather, the Exchange Notes
received by a holder will be treated as a continuation of the Old Notes in the
hands of such holder. As a result, there will be no federal income tax
consequences to holders exchanging Old Notes for Exchange Notes pursuant to the
Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that for a period of 180 days after the Expiration Date, they will make
this Prospectus, as amended or supplemented, available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, until
June 30, 1998 (90 days after the commencement of the Exchange Offer), all
dealers effecting transactions in the Exchange Notes may be required to deliver
a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker Dealers. Exchange Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such Exchange Notes. Any Participating Broker-Dealer that resells the
Exchange Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Exchange Notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
EXPERTS
The consolidated financial statements as of September 30, 1997 and 1996 and
for each of the three years in the period ended September 30, 1997 included and
incorporated by reference in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are included
and incorporated by reference herein, and have been so included in reliance upon
the reports of such firm given their authority as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the issuance of the Exchange Notes offered hereby will be
passed upon for the Company by Kirkland & Ellis (a partnership including
professional corporations), Chicago, Illinois.
73
<PAGE> 79
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at September 30, 1997 and
1996...................................................... F-3
Consolidated Statements of Operations for the Years Ended
September 30, 1997, 1996 and 1995......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1997, 1996 and 1995............. F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Condensed Consolidated Balance Sheets at December
31, 1997 and September 30, 1996........................... F-30
Unaudited Consolidated Statements of Operations for the
three months ended December 31, 1997 and 1996............. F-31
Unaudited Consolidated Statements of Cash Flows for the
three months ended December 31, 1997 and 1996............. F-32
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-33
</TABLE>
F-1
<PAGE> 80
INDEPENDENT AUDITORS' REPORT
Gaylord Container Corporation:
We have audited the accompanying consolidated balance sheets of Gaylord
Container Corporation and its subsidiaries (the Company) at September 30, 1997
and 1996 and the related consolidated statements of operations, of stockholders'
equity and of cash flows for each of the three years in the period ended
September 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at September 30,
1997 and 1996 and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
October 30, 1997 (February 13, 1998 as to Note 19)
F-2
<PAGE> 81
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 6.1 $ 39.2
Trade receivables (less allowances of $5.5 and $6.9,
respectively) (Note 9)................................. 100.6 111.0
Inventories (Note 5)...................................... 77.4 70.4
Prepaid expenses.......................................... 5.4 2.2
Deferred income taxes (Note 8)............................ 4.7 5.1
Other..................................................... 10.0 8.2
------ ------
Total current assets................................... 204.2 236.1
Property -- net (Notes 6 and 14)............................ 586.1 612.3
Other assets:
Deferred charges (Note 7)................................. 18.0 18.6
Deferred income taxes (Note 8)............................ 71.2 16.8
Other (Notes 4 and 9)..................................... 50.4 49.2
------ ------
Total.................................................. $929.9 $933.0
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 9)............. $ 14.4 $ 11.3
Trade payables............................................ 65.2 60.8
Accrued interest payable.................................. 26.3 27.3
Accrued and other liabilities (Note 10)................... 61.4 66.9
------ ------
Total current liabilities.............................. 167.3 166.3
------ ------
Long-term debt (Note 9)..................................... 701.7 623.1
Other long-term liabilities (Note 10)....................... 26.3 29.1
Commitments and contingencies (Note 16)..................... -- --
Stockholders' equity (Notes 11, 12 and 13)
Class A common stock...................................... -- --
Capital in excess of par value............................ 175.6 173.5
Retained deficit (Note 9)................................. (128.1) (46.1)
Common stock in treasury -- at cost....................... (11.4) (11.7)
Recognition of minimum pension liability (Note 15)........ (1.5) (1.2)
------ ------
Total stockholders's equity............................ 34.6 114.5
------ ------
Total................................................ $929.9 $933.0
====== ======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 82
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $ 759.3 $922.0 $1,051.4
Cost of goods sold.......................................... 717.3 716.2 755.0
------- ------ --------
Gross margin................................................ 42.0 205.8 296.4
Selling and administrative costs............................ (81.1) (99.1) (95.5)
Non-recurring operating charges (Note 2).................... -- (8.1) (5.4)
------- ------ --------
Operating earnings (loss).............................. (39.1) 98.6 195.5
Interest expense -- net (Note 9)............................ (80.7) (78.3) (86.1)
Other income (expense) -- net............................... (1.6) (0.2) 0.6
------- ------ --------
Income (loss) before income taxes........................... (121.4) 20.1 110.0
Income tax (provision) benefit (Note 8)..................... 47.1 (8.3) 24.2
------- ------ --------
Income (loss) before extraordinary item..................... (74.3) 11.8 134.2
Extraordinary loss (Note 3)................................. (7.7) (3.2) --
------- ------ --------
Net income (loss)...................................... $ (82.0) $ 8.6 $ 134.2
======= ====== ========
Earnings (loss) per share (Note 19):
Basic:
Income (loss) before extraordinary item................... $ (1.40) $ 0.22 $ 2.49
Extraordinary loss (Note 3)............................... (0.15) (0.06) --
------- ------ --------
Net income (loss)......................................... $ (1.55) $ 0.16 $ 2.49
======= ====== ========
Diluted(1):
Income before extraordinary item.......................... $ -- $ 0.22 $ 2.44
Extraordinary loss (Note 3)............................... -- (0.06) --
------- ------ --------
Net income................................................ $ -- $ 0.16 $ 2.44
======= ====== ========
</TABLE>
- ---------------
(1) Not presented where the effect of potential shares is antidilutive.
See notes to consolidated financial statements.
F-4
<PAGE> 83
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------
CLASS A CLASS B CAPITAL IN RETAINED TREASURY STOCK
-------------------- -------------------- EXCESS OF EARNINGS -------------------
SHARES DOLLARS SHARES DOLLARS PAR VALUE (DEFICIT) SHARES DOLLARS
------ ------- ------ ------- ---------- --------- ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994.... 48,510,859 $-- 5,266,273 $-- $170.5 $(188.9) 82,978 $ (0.8)
Net income....................... -- -- -- -- -- 134.2 -- --
Options exercised................ 306,648 -- -- -- 1.5 -- -- --
Mandatory conversion of Class B
Common Stock (Note 12)......... 5,250,082 -- (5,250,082) -- -- -- -- --
Restricted stock -- net.......... 40,750 -- -- -- -- -- -- --
Adjustment of minimum pension
liability...................... -- -- -- -- -- -- -- --
Other............................ 16,191 -- (16,191) -- 0.6 -- (35,975) 0.4
---------- --- ---------- --- ------ ------- --------- ------
Balance at September 30, 1995.... 54,124,530 -- -- -- 172.6 (54.7) 47,003 (0.4)
Net income....................... -- -- -- -- -- 8.6 -- --
Stock repurchased................ -- -- -- -- -- -- 1,570,500 (11.6)
Options exercised................ 122,981 -- -- -- 0.6 -- -- --
Restricted stock -- net.......... 22,500 -- -- -- -- -- -- --
Adjustment of minimum pension
liability...................... -- -- -- -- -- -- -- --
Other............................ -- -- -- -- 0.3 -- (35,725) 0.3
---------- --- ---------- --- ------ ------- --------- ------
Balance at September 30, 1996.... 54,270,011 -- -- -- 173.5 (46.1) 1,581,778 (11.7)
Net income....................... -- -- -- -- -- (82.0) -- --
Options exercised................ 244,953 -- -- -- 1.8 -- -- --
Restricted stock -- net.......... 58,200 -- -- -- -- -- -- --
Adjustment of minimum pension
liability...................... -- -- -- -- -- -- -- --
Other............................ -- -- -- -- 0.3 -- (35,575) 0.3
---------- --- ---------- --- ------ ------- --------- ------
Balance at September 30, 1997.... 54,573,164 $-- -- $-- $175.6 $(128.1) 1,546,203 $(11.4)
========== === ========== === ====== ======= ========= ======
<CAPTION>
TOTAL
MINIMUM STOCKHOLDERS'
PENSION EQUITY
LIABILITY (DEFICIT)
--------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Balance at September 30, 1994.... $(4.6) $(23.8)
Net income....................... -- 134.2
Options exercised................ -- 1.5
Mandatory conversion of Class B
Common Stock (Note 12)......... -- --
Restricted stock -- net.......... -- --
Adjustment of minimum pension
liability...................... 0.3 0.3
Other............................ -- 1.0
----- ------
Balance at September 30, 1995.... (4.3) 113.2
Net income....................... -- 8.6
Stock repurchased................ -- (11.6)
Options exercised................ -- 0.6
Restricted stock -- net.......... -- --
Adjustment of minimum pension
liability...................... 3.1 3.1
Other............................ -- 0.6
----- ------
Balance at September 30, 1996.... (1.2) 114.5
Net income....................... -- (82.0)
Options exercised................ -- 1.8
Restricted stock -- net.......... -- --
Adjustment of minimum pension
liability...................... (0.3) (0.3)
Other............................ -- 0.6
----- ------
Balance at September 30, 1997.... $(1.5) $ 34.6
===== ======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 84
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income (loss)........................................... $ (82.0) $ 8.6 $ 134.2
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operations:
Extraordinary loss........................................ 7.7 3.2 --
Depreciation and amortization............................. 65.1 64.5 64.8
Non-cash interest expense................................. -- 31.2 46.7
Deferred income taxes..................................... (48.9) 1.8 (28.0)
Non-recurring charges..................................... -- 8.1 5.4
Acquisition restructuring expenditures.................... (0.4) (0.7) (1.0)
Change in current assets and liabilities, excluding
acquisitions and dispositions:
Receivables............................................ 12.0 29.4 (18.2)
Inventories............................................ (6.7) (1.7) (13.5)
Prepaid expenses and other current assets.............. (4.9) 0.5 (3.2)
Accounts payable and other accrued liabilities......... (7.5) 21.3 8.2
Other -- net.............................................. (0.9) (1.8) (1.2)
------- ------- -------
Net cash provided by (used for) operations.................. (66.5) 164.4 194.2
------- ------- -------
CASH FLOWS FROM INVESTMENTS:
Capital expenditures...................................... (31.1) (54.8) (58.9)
Capitalized interest...................................... (0.8) (0.8) (2.3)
Proceeds from asset sales................................. 1.9 2.6 3.5
Other investments -- net.................................. (3.7) -- (3.6)
------- ------- -------
Net cash used for investments............................... (33.7) (53.0) (61.3)
------- ------- -------
CASH FLOWS FROM FINANCING:
Treasury stock purchases.................................. -- (11.6) --
Early extinguishment of debt (Notes 3 and 9).............. (189.7) (77.7) (89.9)
Issuance of senior notes (Notes 3 and 9).................. 225.0 -- --
Senior debt repayments.................................... (10.4) (15.6) (25.8)
Debt issuance costs....................................... (5.6) (0.5) (3.4)
Revolving credit agreement borrowings -- net.............. 47.0 -- --
Other financing -- net.................................... 0.8 0.7 1.3
------- ------- -------
Net cash provided by (used for) financing................... 67.1 (104.7) (117.8)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............. (33.1) 6.7 15.1
Cash and equivalents, beginning of year..................... 39.2 32.5 17.4
------- ------- -------
Cash and equivalents, end of year........................... $ 6.1 $ 39.2 $ 32.5
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 85
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Gaylord Container Corporation (including its
subsidiaries, the Company) is engaged in the integrated production, conversion
and sale of paper packaging products. The Company is a major national
manufacturer and distributor of corrugated containers, corrugated sheets,
containerboard, unbleached kraft paper, multiwall bags and, through a wholly
owned, independently operated subsidiary, specialty chemicals. Corrugated
containers and sheets, multiwall bags and solid fibre products collectively
represent approximately 80 percent of the Company's net sales while the
remaining 20 percent primarily consists of containerboard and unbleached kraft
paper sales. Corrugated containers are produced to customer order primarily for
use in shipping their products and as point-of-sale displays. Containerboard,
consisting of linerboard and corrugating medium, is the principal raw material
used to manufacture corrugated containers and corrugated sheets. The Company
also produces unbleached kraft paper which it converts into multiwall bags or,
through a joint venture, into grocery bags and sacks or sells to independent
converters.
The Company's facilities, which are located throughout the United States,
consist of three containerboard and paper mills, 14 corrugated container plants,
four sheet feeder plants, two multiwall bag plants, a preprint and graphics
center, a cogeneration facility and, through a wholly owned, independently
operated subsidiary, a specialty chemical facility.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from such estimates.
Summary of Significant Accounting Policies -- The Company's accounting policies
conform to generally accepted accounting principles. Significant policies
followed are described below:
Basis of Consolidation -- The consolidated financial statements at
September 30, 1997 and 1996 and for the years ended September 30, 1997 (Fiscal
1997), September 30, 1996 (Fiscal 1996) and September 30, 1995 (Fiscal 1995)
include all the accounts of the Company after elimination of intercompany
transactions and balances. The Company operates on a 52/53-week fiscal year.
Fiscal 1997 and Fiscal 1995 were 52-week fiscal years, while Fiscal 1996 was a
53-week fiscal year. Certain amounts for Fiscal 1996 and Fiscal 1995 have been
reclassified to conform with the current year presentation.
Revenue Recognition -- Sales are recognized when the Company's products are
shipped. Shipments to companies with which the Company has reciprocal purchase
agreements (Exchange Partners) are not recognized as sale transactions in the
statement of operations. In the balance sheet, however, trade receivables due
from and trade payables due to Exchange Partners are not eliminated because a
contractual right of offset does not exist.
Cash and Equivalents -- The Company considers all highly liquid debt
instruments, including time deposits, bank repurchase agreements and commercial
paper, with an original or purchased maturity of three months or less, to be
cash equivalents.
Inventories are stated at the lower of cost or market value. Cost includes
materials, transportation, direct labor and manufacturing overhead. Cost is
determined by the last-in, first-out (LIFO) method of inventory valuation.
Property is stated at cost, including interest expense capitalized during
construction periods. Maintenance and repairs are charged to expense as
incurred. The Company reviews its property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable.
Depreciation is computed using the straight-line method over estimated
useful lives ranging from 10 to 45 years for buildings and improvements and 3 to
20 years for machinery and equipment.
F-7
<PAGE> 86
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Financing Costs -- Costs incurred in connection with the issuance
of long-term debt or other financing arrangements are capitalized. Amortization
of deferred financing costs is computed using the straight-line method over the
term of the related debt and is reported as interest expense.
Investment in Affiliates -- The equity method of accounting is applied to
affiliates in which the Company's ownership interest is greater than 20 percent
but less than or equal to 50 percent. Goodwill is recognized for investments in
affiliates where cost exceeds the Company's equity in net assets acquired. In
general, goodwill is amortized over the average remaining useful life of the
unconsolidated affiliate's property, plant and equipment or such shorter period
as circumstances indicate. The Company's proportionate share of earnings in
unconsolidated affiliates accounted for by the equity method, net of
amortization of goodwill, is included in "Other income (expense) -- net" in the
Company's statement of operations. The cost method of accounting is applied to
affiliates in which the Company's ownership interest is less than or equal to 20
percent.
Income Taxes -- Deferred income taxes are provided using the liability
method for those items for which the period of reporting differs for financial
reporting and income tax purposes in accordance with Financial Accounting
Standard No. 109, "Accounting for Income Taxes" (see Note 8).
Business Segment -- The Company is an integrated manufacturer of paper
packaging products including corrugated containers, corrugated sheets,
preprinted linerboard, containerboard, unbleached kraft paper and multiwall
bags.
Earnings (Loss) Per Share -- Amounts previously reported have been restated
upon the adoption of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (see Note 19).
2. NON-RECURRING OPERATING CHARGES
In the fourth quarter of Fiscal 1996, the Company recorded a $8.1 million
pre-tax charge for costs associated with a staff reduction program. The staff
reduction program, which eliminated approximately 8 percent of the Company's
salaried positions, will reduce future administrative and overhead costs. In
Fiscal 1995, the Company recorded a $5.4 million non-recurring charge for costs
associated with an early retirement option accepted by certain hourly employees
at the Antioch, California mill, which was designed to reduce future unit labor
costs.
3. EXTRAORDINARY ITEMS
During Fiscal 1997, the Company issued $225 million principal amount of
9 3/4% Senior Notes due 2007 (the New Notes) and used the proceeds to redeem and
retire all its outstanding 11 1/2% Senior Notes ($179.7 million principal
amount) due 2001 (the Old Notes) and to repay borrowings under the revolving
portion of its credit agreements. In conjunction with the redemption,
approximately $2.8 million of deferred financing fees were written off. The
early retirement of debt resulted in an extraordinary loss of $7.7 million, net
of an income tax benefit of $5.0 million.
During Fiscal 1996, the Company repurchased and retired approximately $75.2
million principal amount of its publicly traded debt securities. In conjunction
with the repurchases, approximately $1.5 million of deferred financing fees were
written off. These transactions resulted in an extraordinary loss of $3.2
million, net of an income tax benefit of $2.3 million.
4. INVESTMENT IN AFFILIATES
On July 12, 1996, the Company contributed grocery bag manufacturing net
assets with a carrying value of approximately $32.3 million (of which
Property -- net accounted for approximately $25.1 million), to S&G Packaging
Company, L.L.C. (S&G Packaging), a joint venture with Stone Container
Corporation, in
F-8
<PAGE> 87
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exchange for a 35 percent equity interest in the new company. The Company has
the option to increase its ownership interest by an additional 15 percent before
July 2001. Beginning July 13, 1996, the financial results of S&G Packaging were
reported on the equity method of accounting. Product sales to S&G Packaging
during Fiscal 1997 and Fiscal 1996 were approximately $38.4 million and $6.8
million, respectively.
The Company owns a 50 percent interest in Gaylord Central National, Inc.
(GCN), a joint venture corporation formed with Central National-Gottesman, Inc.
GCN is the primary agent for the Company's export sales of containerboard.
Product sales to GCN during Fiscal 1997, Fiscal 1996 and Fiscal 1995 were
approximately $30.8 million, $38.2 million and $62.0 million, respectively.
The Company has a 50 percent ownership interest in two corporations that,
through wholly owned subsidiaries, produce corrugated sheets and corrugated
containers in Mexico. Product sales to these companies during Fiscal 1997,
Fiscal 1996, and Fiscal 1995 were approximately $4.9 million, $6.4 million and
$4.1 million, respectively.
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Finished products........................................... $22.5 $16.3
In process.................................................. 39.3 31.3
Raw materials............................................... 9.2 8.5
Supplies.................................................... 15.0 14.3
----- -----
86.0 70.4
LIFO valuation adjustment................................... (8.6) --
----- -----
Total.................................................. $77.4 $70.4
===== =====
</TABLE>
In Fiscal 1996, the Company's total inventory quantities decreased. At the
same time, inventory costs declined substantially, principally due to lower raw
material costs. As a result of the combination of quantity and cost decreases,
the LIFO valuation adjustment was reduced to zero. Approximately $1.4 million of
the change was due to the decrease in quantities, which caused "Cost of goods
sold" to be less than it would have been if such decrease had not occurred.
6. PROPERTY -- NET
Property consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Land.................................................... $ 17.6 $ 15.5
Buildings and improvements.............................. 142.7 127.4
Machinery and equipment................................. 884.4 848.5
Construction-in-progress................................ 16.8 41.9
-------- --------
1,061.5 1,033.3
Accumulated depreciation................................ (475.4) (421.0)
-------- --------
Total.............................................. $ 586.1 $ 612.3
======== ========
</TABLE>
F-9
<PAGE> 88
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEFERRED CHARGES
Deferred charges consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Deferred financing costs................................... $ 39.0 $ 40.1
Intangibles................................................ 4.2 4.2
------ ------
43.2 44.3
Accumulated amortization................................... (25.2) (25.7)
------ ------
Total................................................. $ 18.0 $ 18.6
====== ======
</TABLE>
Amortization of deferred charges during Fiscal 1997, Fiscal 1996 and Fiscal
1995 was approximately $3.6 million, $4.3 million and $7.4 million,
respectively. During Fiscal 1997, the Company wrote off approximately $2.8
million of deferred financing fees related to the refinancing of the Old Notes,
and deferred approximately $5.5 million of financing fees related to the New
Notes. During Fiscal 1996, the Company wrote off approximately $1.5 million of
deferred financing fees related to the repurchase and retirement of its publicly
traded debt securities (see Note 3).
8. INCOME TAXES
The components of the deferred income tax liabilities and assets, current
and non-current, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Current
Deferred tax assets:
Inventory valuation...................................... $ 4.7 $ 5.1
------ ------
Deferred tax asset......................................... $ 4.7 $ 5.1
====== ======
Non-Current
Deferred tax assets:
Net operating loss....................................... $137.2 $ 83.7
Original issue discount.................................. 58.6 59.2
Asset write-down......................................... 41.9 41.0
Debt restructuring expenses.............................. 1.7 2.4
Other long-term liabilities.............................. 3.0 5.6
Deferred compensation.................................... 9.5 5.5
Other.................................................... 12.7 11.8
------ ------
Sub-total............................................. 264.6 209.2
------ ------
Deferred tax liabilities:
Depreciation............................................. 179.1 178.6
Capitalized interest..................................... 12.5 12.2
Other.................................................... 1.8 1.6
------ ------
Sub-total............................................. 193.4 192.4
------ ------
Net non-current deferred tax asset......................... $ 71.2 $ 16.8
====== ======
</TABLE>
The current income tax provision for Fiscal 1997, Fiscal 1996 and Fiscal
1995, principally for state income taxes and Alternative Minimum Tax (AMT), was
$1.9 million, $4.2 million and $3.8 million,
F-10
<PAGE> 89
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. The deferred income tax benefit for Fiscal 1997 and Fiscal 1995
was $54.0 million and $28.0 million, respectively. The deferred income tax
provision for Fiscal 1996 was $1.8 million, net of the deferred tax benefit
related to the extraordinary loss (see Note 3). Deferred income taxes result
from temporary differences in the period of reporting revenues, expenses and
credits in the financial statements and income tax return. Such temporary
differences for Fiscal 1997, Fiscal 1996 and Fiscal 1995 and their related
deferred income tax provision (benefit) follow:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Depreciation expense.................................. $ 0.5 $ 1.4 $ 5.8
Original issue discount............................... 0.6 (18.1) --
Asset write-down...................................... (0.9) 8.0 (0.6)
Restructuring fees.................................... 0.7 0.9 0.9
Inventory differences................................. 0.4 1.7 (0.8)
Net operating loss.................................... (53.5) 11.6 45.6
Change in valuation allowance......................... -- -- (75.3)
Other -- net.......................................... (1.8) (3.7) (3.6)
------ ------ ------
Total deferred income tax provision (benefit)....... $(54.0) $ 1.8 $(28.0)
====== ====== ======
</TABLE>
In Fiscal 1995, the future realization of tax benefits relating to prior
net operating losses became more likely than not due to the Company's improved
operating performance and future economic outlook. Thus in Fiscal 1995, the
Company reduced a previously recorded valuation allowance to zero.
Although realization is not assured, management believes it is more likely
than not that all of the Company's deferred tax assets will be realized.
Management believes anticipated future taxable income, including but not limited
to the reversal of existing temporary differences and implementation of tax
planning strategies, if needed, will be sufficient to allow the future
realization of its deferred tax assets at September 30, 1997.
At September 30, 1997, the Company had cumulative regular net operating
loss carryforwards of approximately $350 million, which may be carried forward
and expire at various dates through the year 2012. At September 30, 1997, AMT
net operating losses of approximately $131 million are available to be carried
back or carried forward. It is estimated that approximately $26 million of the
AMT net operating loss will be carried back to Fiscal 1996. The remaining AMT
net operating loss of $105 million may be carried forward through the year 2012.
At September 30, 1997, AMT credits of approximately $5 million for tax purposes
are expected to be refunded (during fiscal 1998) as a result of the AMT net
operating loss carry back and approximately $4 million may be carried forward
indefinitely to be applied against regular tax.
F-11
<PAGE> 90
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income tax provision (benefit) to the amount computed
by applying the statutory Federal income tax rates to the income (loss) before
taxes follows (Dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
PERCENTAGE OF PERCENTAGE OF
PERCENTAGE OF INCOME INCOME
LOSS BEFORE BEFORE BEFORE
AMOUNT INCOME TAXES AMOUNT INCOME TAXES AMOUNT INCOME TAXES
------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax..... $(42.5) (35)% $ 7.0 35% $ 38.5 35%
State income taxes -- net of
Federal benefit................ (4.6) (4) 1.4 7 6.6 6
Reduction in valuation
allowance...................... -- -- -- -- (75.3) (68)
Other............................ -- -- (0.1) -- 6.0 5
------ --- ----- -- ------ ---
Total income tax provision
(benefit)................. $(47.1) (39)% $ 8.3 42% $(24.2) (22)%
====== === ===== == ====== ===
</TABLE>
9. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Revolving Credit Facility (a)............................... $ -- $ --
Trade Receivables Facility (b).............................. 47.0 --
Senior Notes, 9.75%, due June 2007 (c)...................... 225.0 --
Senior Notes, 11.5%, due May 2001 (d)....................... -- 179.7
Pollution control and industrial revenue bonds, interest at
5.7% to 8.3%, due at various dates to 2008 (e)............ 11.6 11.6
Capital lease obligations, interest at 7.6% to 11.8%, due at
various dates to 2002 (f)................................. 12.6 16.2
Other senior debt, interest at 6.5% to 9.0%, due at various
dates to 1999............................................. 15.6 22.6
------ ------
Total senior debt 311.8 230.1
Senior Subordinated Discount Debentures, 12.75%, due May
2005 (g).................................................. 404.3 404.3
------ ------
Total debt............................................. 716.1 634.4
Less current maturities..................................... (14.4) (11.3)
------ ------
Total.................................................. $701.7 $623.1
====== ======
</TABLE>
Scheduled aggregate annual principal payments due on long-term debt during
each of the next five years are (in millions) $14.4, $8.7, $5.8, $4.1 and $0.1,
respectively.
(a) At September 30, 1997, the Company's bank credit agreement (the Bank
Credit Agreement) was comprised of a $175 million revolving credit facility due
in June 2000 (the Revolving Credit Facility) and a $3.8 million standby letter
of credit facility maturing in April 1999 (the L/C Facility). In Fiscal 1997,
the Bank Credit Agreement was amended to permit the refinancing of the Old Notes
(see Note 3) and to modify certain financial covenants allowing the Company
greater financial flexibility. The Company is required to maintain and is in
compliance with certain financial covenants including tests for current ratio,
minimum net worth and minimum interest coverage. The level of the Company's
annual capital expenditures is also limited by the Bank Credit Agreement.
F-12
<PAGE> 91
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All obligations under the Bank Credit Agreement are secured by liens on
substantially all of the Company's assets. In connection with a trade
receivables-backed revolving credit facility, the Company sells on an ongoing
basis substantially all of its accounts receivable to a wholly owned, special
purpose subsidiary, and such accounts receivable are not subject to a lien under
the Bank Credit Agreement (see (b) below).
The Revolving Credit Facility provides the ability to borrow funds and to
repay such funds in whole or in part from time to time without incurring any
prepayment penalty. Up to $30 million of letters of credit, which reduce the
facility by a like amount, may be issued under this agreement. At September 30,
1997, no amounts were outstanding under the Revolving Credit Facility, $158.9
million of credit was available and $6.1 million of letters of credit were
outstanding. The highest outstanding principal balance under the facility during
Fiscal 1997 was $18.0 million, and the weighted average interest rate was 8.8
percent. A commitment fee of 0.375 percent per year is paid on the unused
portion of the facility.
The L/C Facility provides for standby letter of credit loans which are
incurred only in the event that the standby letters of credit are drawn due to
nonpayment of principal or interest on certain debt instruments, which are
secured by these standby letters of credit. The standby letter of credit
commitment is permanently reduced periodically to reflect principal repayments.
The Company has the right to prepay the standby letter of credit loans in whole
or in part from time to time without incurring any prepayment penalty. A fee of
2.75 percent per annum is payable on outstanding letters of credit under both
the Revolving Credit Facility and the L/C Facility.
The Company has various interest rate options for Bank Credit Agreement
borrowings based on one or a combination of the following three rates: (i) prime
rate loans at the prime rate in effect from time to time plus a borrowing margin
of 1.5 percent per annum, (ii) certificate of deposit (CD) rate loans at the
relevant CD rate plus a borrowing margin of 2.625 percent per annum, or (iii)
Eurodollar rate loans at the relevant Eurodollar rate plus a borrowing margin of
2.5 percent per annum. The Company has the option of incurring Eurodollar and CD
rate loans for 30, 60, 90, 120 or 180-day periods. Interest is payable monthly.
(b) In September 1993, the Company established a wholly owned, special
purpose subsidiary, Gaylord Receivables Corporation (GRC). Concurrently, GRC and
a group of banks established a $70 million trade receivables-backed revolving
credit facility (the Trade Receivable Facility) due in July, 2000. By mutual
agreement with the lenders, the Company has the ability annually to extend the
term by one year. In accordance with the provisions of this program, GRC
purchases (on an on-going basis) substantially all of the accounts receivable of
the Company. GRC transfers the accounts receivable to a trust in exchange for
certain trust certificates representing ownership interests in the accounts
receivable. The trust certificates received by GRC from the trust are solely the
assets of GRC. In the event of liquidation of GRC, the creditors of GRC would be
entitled to satisfy their claims from GRC's assets prior to any distribution to
the Company.
GRC has various interest rate options for Trade Receivable Facility
borrowings based on one or a combination of the following two rates: (i) prime
rate loans at the higher of (a) the prime rate in effect from time to time or
(b) the Federal Funds Rate plus 0.5 percent per annum, or (ii) LIBOR rate loans
at the relevant LIBOR rate plus a borrowing margin of 0.75 percent per annum.
Interest is payable monthly. GRC is obligated to pay a commitment fee of 0.5
percent per annum on the unused credit available under the Trade Receivable
Facility. Credit availability under the Trade Receivable Facility is based on a
borrowing base formula (as defined). As a result, the full amount of the
facility may not be available at all times. At September 30, 1997, $47.0 million
was outstanding under the Trade Receivable Facility and $5.6 million of credit
was available to GRC pursuant to the borrowing base formula. The highest
outstanding principal balance under the Trade Receivable Facility during Fiscal
1997 was $54.0 million and the weighted average interest rate was 6.5 percent.
At September 30, 1997 and 1996, the Company's consolidated balance sheet
included $85.2 million and $91.8 million, respectively, of accounts receivable
sold to GRC.
F-13
<PAGE> 92
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) In June 1997, the Company issued $225.0 million aggregate principal
amount of 9 3/4% Senior Notes Due 2007 (the New Notes). The New Notes are
general unsecured obligations of the Company and rank pari passu in right of
payment to all senior indebtedness of the Company, including indebtedness under
the Bank Credit Agreement, and rank senior in right of payment to the
Subordinated Discount Debentures (as defined below). Indebtedness under the Bank
Credit Agreement, however, is secured by liens on substantially all of the
assets of the Company. Interest on the New Notes is payable semiannually on June
15 and December 15. The New Notes will mature on June 15, 2007 and are subject
to redemption on or after June 15, 2002 at the option of the Company, in whole
or in part, at declining redemption prices commencing at 104.875 percent of the
principal amount and declining to 100 percent of the principal amount at June
15, 2005 and thereafter, plus accrued interest to the date of redemption. In
addition, prior to June 15, 2000, the Company, at its option, may redeem up to
33 percent of the aggregate principal amount of the New Notes originally issued
with the net cash proceeds of one or more equity offerings (as defined) at the
redemption prices described above, plus accrued and unpaid interest, if any, to
the date of redemption, provided that at least $100.0 million aggregate
principal amount of the New Notes remain outstanding after any such redemption.
Upon the occurrence of a change of control (as defined) each holder of the
New Notes has the right to require the Company to repurchase such holder's New
Notes at a price equal to 101 percent of the principal amount, plus accrued
interest to the date of the repurchase. In addition, the Company will be
required to make an offer to repurchase the New Notes at 100 percent of the
principal amount, plus accrued interest to the date of repurchase, in the event
of certain asset sales.
(d) In June 1997, the Company redeemed all of the outstanding 11 1/2%
Senior Notes Due 2001 pursuant to their terms (see Note 3).
(e) The pollution control and industrial revenue bonds were assumed by the
Company from Crown Zellerbach Corporation (Crown Zellerbach). The Company also
acquired a note receivable from Crown Zellerbach for an amount and with terms
identical to those of the bonds. At September 30, 1997 and 1996, such note
receivable was approximately $9.7 million and $11.6 million, respectively, and
was classified as "Other assets."
(f) Commencing in Fiscal 1995, in conjunction with the $250 million capital
expenditure program, the Company entered into various capital leases with a
cumulative aggregate value of approximately $31.3 million to finance equipment
at its converting facilities. The capital leases had initial terms ranging from
five to seven years. The capital leases contain certain covenants which are
standard for these types of obligations, but do not contain any operating or
financial covenants.
(g) In May 1993, the Company issued approximately $434.2 million aggregate
principal amount (approximately $300 million of gross proceeds) of 12 3/4%
Senior Subordinated Discount Debentures Due 2005 (the Subordinated Discount
Debentures). The Subordinated Discount Debentures are general unsecured
obligations of the Company and are subordinated in right of payment to all
senior debt of the Company. The Subordinated Discount Debentures were issued at
approximately 69 percent of their principal amount. Commencing May 15, 1996,
interest will accrue until maturity on the Subordinated Discount Debentures at
the rate of 12.75 percent per annum. Interest on the Subordinated Discount
Debentures is payable semiannually on May 15 and November 15, commencing
November 15, 1996. The Subordinated Discount Debentures will mature on May 15,
2005 and are subject to redemption on or after May 15, 1998 at the option of the
Company, in whole or in part, at declining redemption prices commencing at
106.38 percent of the principal amount and declining to 100 percent of the
principal amount at May 15, 2003 and thereafter, plus accrued interest to the
date of redemption. During Fiscal 1996, the Company repurchased on the open
market and retired approximately $29.9 million principal amount of the
Subordinated Discount Debentures (see Note 3).
F-14
<PAGE> 93
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon the occurrence of a change of control (as defined), each holder of the
Subordinated Discount Debentures has the right to require the Company to
repurchase such holder's Subordinated Discount Debentures at a price equal to
101 percent of the principal amount thereof, plus accrued interest to the date
of repurchase. In addition, the Company will be required to make an offer to
repurchase the Subordinated Discount Debentures at 100 percent of the principal
amount, or accreted value thereof, plus accrued interest to the date of
repurchase, in the event of certain asset sales.
The Company has various restrictions under (a), (c) and (g) which limit,
among other things, its ability to (i) incur additional obligations for money
borrowed, (ii) incur certain liens on the Company's assets, (iii) make capital
expenditures, (iv) incur guarantees, (v) acquire the assets or capital stock of
other businesses, (vi) dispose of any material assets constituting collateral,
(vii) make any voluntary prepayments of any indebtedness for money borrowed,
(viii) pay, declare, or distribute dividends on or repurchase its capital stock
or warrants and (ix) enter into certain transactions with affiliates.
10. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Current
Accrued salaries and wages.................................. $24.6 $27.0
Other....................................................... 36.8 39.9
----- -----
Total current............................................. 61.4 66.9
----- -----
Long-term
Accrued acquisition restructuring costs..................... 0.9 1.3
Accrued pension expense..................................... 18.9 17.3
Casualty insurance liabilities.............................. 1.3 3.4
Other....................................................... 5.2 7.1
----- -----
Total long-term........................................... 26.3 29.1
----- -----
Total..................................................... $87.7 $96.0
===== =====
</TABLE>
11. PREFERRED STOCK
The Company is authorized to issue up to 25,000,000 shares of preferred
stock. The right of the holders of Class A Common Stock (see Note 12) voting as
a class are not to be limited by the grant of voting rights to any series of
preferred stock. The Company's Certificate of Incorporation prohibits the
issuance of non-voting preferred stock.
12. COMMON STOCK
At September 30, 1997 and 1996, the Company had authorized capital stock of
125,000,000 shares of Class A Common Stock, par value $.0001 per share (Class A
Common Stock), of which 54,573,164 shares and 54,270,011 shares were issued,
respectively, and 53,026,961 shares and 52,688,233 shares were outstanding,
respectively.
At September 30, 1997 and 1996, the Company had authorized capital stock of
15,000,000 shares of Class B Common Stock, par value $.0001 per share (Class B
Common Stock and together with the Class A Common Stock, the Common Stock), of
which no shares were issued and outstanding. On July 31, 1995, all
F-15
<PAGE> 94
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Company's 5,250,082 then outstanding shares of Class B Common Stock
automatically converted into an equal number of shares of Class A Common Stock.
The Company has outstanding Warrants to obtain one share of Class A Common
Stock per Warrant. At the time the Company issued the Warrants it also issued an
equal number of shares of Class A Common Stock to the Warrant Trustee for
issuance upon exercise of the Warrants (the Trust Stock). The Warrants are
exercisable only for the shares of Trust Stock held by the Warrant Trustee and
the Company has no obligation to issue or deliver shares of stock pursuant to
the Warrants. The Warrant Trustee has agreed to hold the Trust Stock in trust
and to deliver shares of Trust Stock upon exercise of the Warrants by the
holders thereof or exchange of the Warrants on behalf of the Company. The
Warrant Trustee will vote all shares of Trust Stock in proportion to all other
votes by holders of the Common Stock, except upon the occurrence of certain
votes (as defined).
In June 1995, the Company redeemed 25 percent of its 31,845,533 outstanding
Warrants, and subsequently, a portion of the remaining Warrants were exchanged
pursuant to a "Special Exercise on July 31, 1995." As a result, a total of
13,836,754 Warrants were exchanged for Class A Common Stock in Fiscal 1995.
The remaining 18,008,701 Warrants became exercisable on July 31, 1996 and
expire on November 2, 2002. Each Warrant is exercisable into one share of Class
A Common Stock at an exercise price of $.0001 per Warrant, which amount was paid
with a portion of the consideration received from exchanging noteholders and is
non-refundable. The Company will have the option to redeem any or all of the
unexercised Warrants for one share of Class A Common Stock or for cash at any
time at $16.65 per share.
In June 1995, the Company's Board of Directors adopted a stockholder Rights
Agreement that provides for the distribution of one Preferred Share Purchase
Right on each share of Class A Common Stock. Generally, the rights become
exercisable after a person or group announces a tender offer for, or acquires,
15 percent or more of the outstanding Class A Common Stock. In that event, each
right becomes exercisable to purchase one one-hundredth of a share of junior
participating preferred stock for $50. If 15 percent of the outstanding Class A
Common Stock is acquired, each right (other than the rights held by the
acquiring person) becomes exercisable to purchase, for $50, shares of Class A
Common Stock with a market value of $100. The rights will expire on June 30,
2005 and may be redeemed by the Company for $0.0001 per right at any time prior
to the date on which 15 percent or more of the Class A Common Stock is acquired.
In the third quarter of Fiscal 1996, the Company's Board of Directors
authorized the repurchase of up to 6,000,000 shares of Class A Common Stock and
canceled a February 1989 authorization for the repurchase of up to 500,000
shares of Class A Common Stock. During Fiscal 1996, the Company repurchased
1,570,500 shares of Class A Common Stock and may repurchase additional shares
from time to time on the open market. No shares were repurchased in Fiscal 1997.
Shares repurchased under the program are held as treasury stock. At September
30, 1997, and 1996, 1,546,203 shares and 1,581,778 shares, respectively, of
Class A Common Stock were held as treasury stock.
In July 1994, the Company established a stock purchase plan (the Plan) for
all full-time employees. The Plan permits employees to invest up to 10 percent
of their after-tax compensation (as defined) for the purchase of shares of Class
A Common Stock. All brokerage fees for the purchase of such shares are paid by
the Company. During Fiscal 1997, Fiscal 1996 and Fiscal 1995 the Company issued
35,575 shares, 35,725 shares and 35,975 shares, respectively, of Class A Common
Stock held as treasury stock to satisfy employee purchases pursuant to the Plan.
The Company neither declared nor paid dividends on its Common Stock during
Fiscal 1997, Fiscal 1996 or Fiscal 1995. The Company does not currently intend
to pay cash dividends on its Common Stock, but intends instead to retain future
earnings for reinvestment in the business and for repayment of debt. At
September 30, 1997, the Company was prohibited from declaring or paying cash
dividends on its Common Stock, except under certain limited circumstances (see
Note 9).
F-16
<PAGE> 95
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. STOCK OPTION PLANS
The Company maintained three stock-based plans during Fiscal 1997 pursuant
to which stock options may be granted: (i) the 1989 Long-Term Incentive Plan
(the 1989 Plan), (ii) the 1987 Key Employee Stock Option Plan (the 1987 Plan)
and (iii) the 1997 Long-Term Incentive Plan (the 1997 Plan).
The Company has adopted the disclosure-only provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-based Compensation" (FAS No.
123). FAS No. 123 requires pro forma recognition of compensation expense for
stock options based on the fair value of the options at the date of grant. Pro
forma compensation expense for stock options granted in Fiscal 1997 and Fiscal
1996, computed in a manner consistent with the provisions of FAS No. 123, would
have reduced the Company's net earnings and earnings per share by de minimus
amounts (less than $0.01 per share).
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in Fiscal 1997 and Fiscal 1996: expected volatility
of 55 percent; risk-free interest rate of 6.0 percent; and expected lives of 5.0
years.
1989 Plan -- The 1989 Plan authorizes the Company to grant options
(including both incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the Code), and nonqualified stock
options), stock appreciation rights, stock indemnification rights, restricted
stock and performance awards to officers and key employees. The Company has
granted only nonqualified stock options and restricted stock under the 1989
Plan. At September 30, 1997, the Company was authorized to issue 2,279,833
shares of Class A Common Stock, and had outstanding nonqualified stock options
covering 1,275,308 shares of Class A Common Stock at exercise prices from $2.56
per share to $11.63 per share. During Fiscal 1997, the Company granted
nonqualified stock options under the 1989 Plan covering 325,000 shares of Class
A Common Stock (32,000 of which have been forfeited) at exercise prices ranging
from $5.88 per share to $9.63 per share. In general, the options have 10-year
terms and vest at the rate of 33 1/3 percent per year commencing approximately
one year after the date of grant so long as the optionee remains continuously in
the employ of the Company or one of its subsidiaries; provided, however, that
100 percent of such options will vest immediately upon a change in control of
the Company (as defined) or the optionee's death or disability.
At September 30, 1997, options to purchase 890,143 shares of Class A Common
Stock at exercise prices ranging from $2.56 per share to $11.63 per share were
exercisable, 383,782 options had been exercised and 51,718 shares were available
for future grants under the 1989 Plan.
At September 30, 1997, the Company had granted 627,200 restricted shares of
Class A Common Stock (58,175 of which have been forfeited) under the 1989 Plan.
Such shares are restricted in that unvested shares will be forfeited in the
event that the optionee's employment terminates other than due to death,
disability or retirement. The restricted shares will vest 100 percent in the
event of a change in control of the Company (as defined) or upon the recipient's
retirement, death or disability. During Fiscal 1997, the Company awarded 63,000
restricted shares of Class A Common Stock (none of which have been forfeited).
As to the restricted shares granted during Fiscal 1997, 5,000 shares, 25,000
shares, 13,000 shares, and 20,000 shares will become 100 percent vested in
fiscal 1998, fiscal 1999, fiscal 2000, and fiscal 2002 respectively. As to
506,025 restricted shares granted prior to Fiscal 1997, 459,425 shares were 100
percent vested at September 30, 1997 and 15,600 shares, 21,000 shares and 10,000
shares will become 100 percent vested in fiscal 1998, fiscal 1999 and fiscal
2001, respectively.
1987 Plan -- The 1989 Plan superseded the 1987 Plan under which no
additional options may be granted except for shares of Class A Common Stock
which become available after September 30, 1988 due to expiration, termination
without exercise, unexercisability or forfeiture of any option granted under the
1987 Plan. The 1987 Plan was terminated according to its terms in Fiscal 1997.
The Company has reserved 854,467 shares of Class A Common Stock in connection
with grants under the 1987 Plan. At September 30, 1997, the
F-17
<PAGE> 96
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company had outstanding nonqualified stock options under the 1987 Plan covering
395,657 shares of Class A Common Stock at exercise prices ranging from $3.63 per
share to $8.94 per share. During Fiscal 1997, the Company granted nonqualified
stock options under the 1987 Plan covering 15,000 shares of Class A Common Stock
(none of which have been forfeited) at exercise prices ranging from $6.13 per
share to $8.94 per share. The options have 10-year terms and vest at the rate of
33 1/3 percent per year commencing approximately one year after the date of
grant so long as the optionee remains continuously in the employ of the Company
or one of its subsidiaries; provided, however, that 100 percent of such options
will vest immediately upon a change in control of the Company (as defined) or
the optionee's death or disability.
At September 30, 1997, options to purchase 365,657 shares of Class A Common
Stock at exercise prices ranging from $3.63 to $8.38 per share were exercisable
and 13,332, 11,669 and 4,999 options will become exercisable in fiscal 1998,
fiscal 1999 and fiscal 2000, respectively. At September 30, 1997, options for
457,132 shares had been exercised.
1997 Plan -- The 1997 Plan provides for grants of stock options, stock
appreciation rights in tandem with options, restricted stock, performance awards
and any combination of the foregoing to certain directors, officers and key
employees of the Company and its subsidiaries.
The Company has reserved 2,000,000 shares of Class A Common Stock for
issuance pursuant to the 1997 Plan. At September 30, 1997, no stock options had
been granted under the 1997 Plan.
Director Option Plan -- An Outside Director Option Plan (the Director
Option Plan) authorized grants of stock options to each director who was not an
employee of the Company in lieu of all or some specified portion of certain cash
fees. The Director Option Plan was terminated on September 26, 1991.
The Company has reserved 115,700 shares of Class A Common Stock in
connection with grants under the Director Option Plan. In the aggregate, the
Company granted options on 121,000 shares (5,300 of which have been forfeited)
of Class A Common Stock at exercise prices of $3.50 and $12.50 per share in lieu
of $220,000 of cash fees payable with respect to fiscal 1991 and fiscal 1990.
At September 30, 1997, options to purchase 59,000 shares of Class A Common
Stock at exercise prices of $3.50 and $12.50 per share were outstanding and
exercisable and options for 56,700 shares had been exercised under the Director
Option Plan.
The following table details stock option activity (excluding restricted
stock) for Fiscal 1997, Fiscal 1996 and Fiscal 1995:
<TABLE>
<CAPTION>
STOCK OPTIONS EXERCISE PRICE
------------- --------------
<S> <C> <C>
Balance at September 30, 1994...................... 1,893,103 $1.24 - $12.50
Grants during Fiscal 1995........................ 294,000 $8.00 - $11.63
Exercises........................................ (306,648) $1.24 - $ 4.25
Cancellations.................................... (40,785) $1.24 - $ 8.63
---------
Balance at September 30, 1995...................... 1,839,670 $1.24 - $12.50
Grants during Fiscal 1996........................ 45,000 $7.31 - $ 9.00
Exercises........................................ (122,981) $1.24 - $ 8.63
Cancellations.................................... (52,936) $2.56 - $10.88
---------
Balance at September 30, 1996...................... 1,708,753 $1.24 - $12.50
Grants during Fiscal 1997........................ 340,000 $5.88 - $ 9.63
Exercises........................................ (244,953) $1.24 - $ 5.25
Cancellations.................................... (73,835) $2.56 - $11.63
---------
Balance at September 30, 1997...................... 1,729,965 $2.56 - $12.50
=========
</TABLE>
F-18
<PAGE> 97
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information regarding options outstanding as of September 30,
1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.56 - $ 3.75 1,089,599 4.04 $ 3.43 1,089,599 $ 3.43
$4.00 - $ 5.88 33,000 7.04 $ 5.12 23,000 $ 4.79
$6.13 - $ 8.38 316,000 9.04 $ 7.02 20,001 $ 7.95
$8.63 - $12.50 291,366 7.44 $10.51 182,200 $10.73
--------- ---- ------ --------- ------
$2.56 - $12.50 1,729,965 5.59 $ 5.31 1,314,800 $ 4.54
========= ==== ====== ========= ======
</TABLE>
The following table details restricted stock activity for Fiscal 1997,
Fiscal 1996 and Fiscal 1995:
<TABLE>
<CAPTION>
RESTRICTED STOCK
----------------
<S> <C>
Balance at September 30, 1994............................... 437,525
Issued during Fiscal 1995................................. 47,800
Cancellations............................................. (7,050)
-------
Balance at September 30, 1995............................... 478,275
Issued during Fiscal 1996................................. 42,100
Cancellations............................................. (9,550)
-------
Balance at September 30, 1996............................... 510,825
Issued during Fiscal 1997................................. 63,100
Cancellations............................................. (4,800)
-------
Balance at September 30, 1997............................... 569,125
=======
</TABLE>
14. LEASES
The Company has capital leases for certain equipment and leasehold
improvements included in "Property -- net." The present value of future minimum
lease payments relating to these assets are capitalized based on the lease
contract provisions. Capitalized amounts are amortized over either the term of
the lease or the normal depreciable lives of the assets. All other leases are
defined as operating leases. Lease payments related to operating leases are
charged to expense as incurred.
Future minimum lease payments at September 30, 1997 are as follows (in
millions):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR LEASES LEASES
- ----------- --------- -------
<S> <C> <C>
1998........................................................ $11.2 $5.0
1999........................................................ 8.6 4.8
2000........................................................ 7.1 3.3
2001........................................................ 5.9 1.7
2002........................................................ 5.6 --
2003 and thereafter......................................... 23.2 --
----- -----
Total future minimum lease payments....................... $61.6 14.8
=====
Less interest.......................................... 2.2
-----
Present value of future minimum lease payments............ $12.6
=====
</TABLE>
F-19
<PAGE> 98
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for Fiscal 1997, Fiscal 1996 and Fiscal 1995 was $13.8
million, $11.4 million and $11.7 million, respectively.
15. EMPLOYEE BENEFIT PLANS
Pension Plan -- The Company has a noncontributory defined benefit pension
plan covering substantially all employees who are age 21 or older and have one
or more years of service. Pension benefits provided for certain union hourly
employees are established pursuant to the collective bargaining agreements in
effect with their respective unions. For hourly employees the normal retirement
benefit is determined by multiplying years of benefit service by a dollar amount
benefit factor separately determined for each bargaining unit. For salaried
employees, the plan generally provides a normal retirement benefit equal to the
greater of the benefit accrued at June 30, 1987 or 1.0 percent of final average
earnings (as defined) multiplied by years of credited service before January 1,
1994 plus 1.25 percent of final average earnings multiplied by years of credited
service after January 1, 1994 less 1.0 percent of primary Social Security
benefits for each year of credited service. The Company has an excess benefit
plan covering certain designated employees of the Company whose earned pension
benefits would otherwise be restricted by maximum benefit limitations imposed by
Internal Revenue Service regulations.
In Fiscal 1996, the Company recorded a $5.2 million charge for pension
costs associated with the staff reduction program which will reduce future
administrative and overhead costs (see Note 2). In Fiscal 1995, the Company
recorded a $5.4 million charge for costs associated with an early retirement
option accepted by certain hourly employees of the Antioch mill which was
designed to reduce future unit labor costs.
The components of net periodic pension cost follow:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost........................................... $ 4.1 $ 4.5 $ 3.6
Interest cost.......................................... 10.5 9.8 8.5
Return on plan assets.................................. (35.9) (19.7) (17.9)
Net amortization and deferral.......................... 25.6 10.5 9.7
Staff reduction program................................ -- 5.2 --
Antioch mill early retirement.......................... -- -- 5.4
------ ------ -----
Net pension cost.................................. $ 4.3 $ 10.3 $ 9.3
====== ====== =====
</TABLE>
Assumptions used to develop the net periodic pension costs were:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 7.5% 7.5% 8.0%
Expected rate of return on plan assets...................... 9.0% 9.0% 9.0%
Expected rate of salary increases........................... 5.0% 5.0% 5.0%
</TABLE>
F-20
<PAGE> 99
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The status of the pension plan follows:
<TABLE>
<CAPTION>
SEPTEMBER
--------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested.................................................. $ 125.2 $ 121.3
Nonvested............................................... 7.1 8.9
------- -------
Accumulated benefit obligation.......................... 132.3 130.2
Effect of salary progression............................ 14.0 9.8
------- -------
Projected benefit obligation............................ 146.3 140.0
Plan assets at market value (primarily government
securities, corporate bonds and common stocks).......... (154.1) (126.7)
------- -------
Plan assets less than (in excess of) projected benefit
obligation.............................................. (7.8) 13.3
Unrecognized net gain..................................... 27.6 2.1
Prior service benefit not yet recognized in net periodic
pension cost............................................ (2.7) (2.6)
------- -------
Accrued pension liability.......................... $ 17.1 $ 12.8
======= =======
</TABLE>
The Company's funding policy is to contribute annually amounts necessary to
satisfy the statutory requirements of ERISA.
Supplemental Executive Retirement Plans -- Under the terms of their
employment agreements, Marvin A. Pomerantz (Chairman, Chief Executive Officer
and a Director of the Company) and Warren J. Hayford (Former Vice Chairman and a
Director of the Company) will receive supplemental annual retirement income
payments at age 65 equal to approximately 50 percent of their average base
salary and bonus for their four most highly compensated years of service with
the Company, less primary Social Security benefits and any amounts received
under the Company's pension plan. The agreements also provide for the reduction
of benefits for early retirement. Mr. Hayford elected early retirement on
December 31, 1992 and is receiving benefits under the supplemental retirement
plan. An additional supplemental retirement plan covering seven current or
retired officers provides annual retirement payments at age 65 equal to 60
percent of their average base salary and bonus for the four highest of the last
seven years prior to retirement, less primary Social Security and any amounts
received under the Company's pension plan. Benefits are reduced for early
retirement.
At September 30, 1997 and 1996, the actuarial present value of projected
benefit obligations for the supplemental retirement income payments described
above was approximately $11.5 million and $10.2 million, respectively. At
September 30, 1997, the actuarial present value of accumulated benefit
obligations exceeded the accrual for the vested portion of the obligations and
the Company recognized a minimum pension liability adjustment of $3.0 million
and a corresponding reduction to stockholders' equity of $1.5 million. Funding
for the supplemental retirement income payments is not subject to the statutory
requirements of ERISA and no assets have been set aside to satisfy the
liability. Required supplemental annual retirement income payments will be made
from general corporate funds.
F-21
<PAGE> 100
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net periodic pension cost for the supplemental retirement
income payments follow:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost................................................ $0.6 $0.5 $0.2
Interest cost............................................... 0.8 0.6 0.4
Net amortization and deferral............................... 0.2 0.2 0.2
---- ---- ----
Net pension cost....................................... $1.6 $1.3 $0.8
==== ==== ====
</TABLE>
Assumptions used to develop the net periodic pension costs were:
<TABLE>
<S> <C> <C> <C>
Discount rate............................................... 7.5% 7.5% 8.0%
Expected rate of salary increases........................... 5.0% 5.0% 5.0%
</TABLE>
Post-retirement Benefits Other Than Pensions -- In connection with the
acquisition of certain of its facilities, the Company assumed a liability for
providing post-retirement medical coverage to age 65 for 96 salaried employees
who elected to take early retirement prior to June 30, 1987. In addition, the
Company has obligations to provide post-retirement medical benefits to age 65
pursuant to collective bargaining agreements at four of its facilities.
The net post-retirement benefit cost for Fiscal 1997, Fiscal 1996 and
Fiscal 1995 was $0.4 million, $1.6 million and $0.3 million, respectively. The
benefit cost for Fiscal 1996 includes a charge of $1.1 million for
post-retirement medical costs for retirees related to the staff reduction
program (see Note 2). The Company funds benefit costs on a pay-as-you-go basis,
and, for Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company made benefit
payments of approximately $0.5 million, $0.7 million and $0.5 million,
respectively.
The following table sets forth the plan's funded status, reconciled with
amounts recognized in the Company's balance sheets:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of post-retirement benefits:
Retirees.................................................. $ 3.3 $ 3.2
Fully eligible active plan participants................... 0.7 1.3
Other active plan participants............................ 0.4 0.3
----- -----
Accumulated post-retirement benefit obligation......... 4.4 4.8
Plan assets at market value............................... -- --
----- -----
Accumulated post-retirement benefit obligation......... 4.4 4.8
Unrecognized net loss..................................... (1.0) (1.2)
----- -----
Accrued post-retirement benefit obligation................ $ 3.4 $ 3.6
===== =====
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation at September 30, 1997 was 7.0 percent in 1998
declining to 6.0 percent in 1999 and thereafter. The assumed health care cost
trend rate used in measuring the accumulated post-retirement benefit obligation
at September 30, 1996 was 8.0 percent in 1997 declining 1.0 percent per year to
6.0 percent in 1999 and thereafter. The discount rate used in determining the
accumulated post-retirement benefit obligation at September 30, 1997 and 1996
was 7.5 percent. If the health care cost trend rate assumptions were increased
by 1 percent, the accumulated post-retirement benefit obligation at September
30, 1997 would be increased by
F-22
<PAGE> 101
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $0.2 million or 5 percent. The effect of this change on the sum of
the service cost and interest cost components of net periodic post-retirement
benefit costs would be an increase of approximately 1 percent.
Savings Plan -- In October 1987, the Company established a defined
contribution retirement savings plan (Section 401K Plan) covering substantially
all salaried employees of the Company subject to certain service requirements
for different aspects of participation. The Section 401K Plan provides for
employees to make contributions on a pre-tax basis up to a maximum of 15 percent
of their compensation (as defined) each year, with their maximum annual
contribution determined pursuant to Internal Revenue Service regulations. Prior
to January 1, 1994, the Company contributed to each participant's plan account
an amount equal to 50 percent of the participant's contribution up to a maximum
of 2 percent of the participant's compensation. Subsequent to January 1, 1994,
the Company contributed to each participant's plan account an amount equal to 75
percent of the participant's contribution up to a maximum of 3 percent of the
participant's compensation. The Company may also make additional discretionary
contributions to the Section 401K Plan. For Fiscal 1997, Fiscal 1996 and Fiscal
1995, the Company's cost relating to the Section 401K Plan was $1.6 million,
$5.1 million and $1.6 million, respectively. The Company's cost for Fiscal 1996
includes $3.5 million for deferred profit sharing contributions.
16. COMMITMENTS AND CONTINGENCIES
The Company has various agreements which provide for the purchase at market
prices of wood chips, hog fuel (bark and other residual fiber from trees) and
stumpage.
The Company has a commitment to sell electricity from its cogeneration
facility to a utility through 2013. The Company does not intend to terminate
this contract; however, if terminated, penalties of approximately $6.8 million
could be imposed.
The Company has an agreement to sell at market prices approximately 130,000
tons per year (subject to annual adjustments, as defined) of unbleached kraft
paper to S&G Packaging. The agreement expires five years after the Company no
longer has an ownership interest in S&G Packaging.
The Company has an agreement to purchase at market prices, through 2004,
approximately 24,000 tons per year of containerboard from Newark Group
Industries, Inc.
The Company is not a party to any legal proceedings other than litigation
incidental to normal business activities, except as described below:
The Company and certain of its officers and directors have been named in a
civil suit filed in Cook County (Illinois) Circuit Court alleging that they
omitted or misrepresented facts about the Company's operations in connection
with the Company's initial public offering of stock in 1988 and in certain
periodic reports. The complaint, a purported class action, originally sought
unspecified damages under the Illinois Consumer Fraud and Deceptive Practices
Act and for common law fraud. On January 10, 1996, the court dismissed both
counts with prejudice, and the plaintiff has appealed. On September 29, 1997,
the Illinois Court of Appeals affirmed, in all respects, dismissal of the
complaint. Plaintiff's appeal of that decision to the Illinois Supreme Court is
pending. A similar lawsuit, based on the same factual allegations, but alleging
violations of Federal securities laws and filed in the United States District
Court for the Northern District of Illinois, was voluntarily dismissed by the
same plaintiff in July 1993. The Company believes that after investigation of
the facts the allegations in the complaint are without merit, and the Company is
vigorously defending the decision on appeal.
On October 18 and December 4, 1995, the Company, its directors and certain
of its officers were named in complaints which have been consolidated in the
Court of Chancery of the State of Delaware alleging breach of fiduciary duties
on two counts. The first count is a putative class action and the second is an
alleged derivative claim brought on behalf of the Company against the individual
defendants. Both counts allege that
F-23
<PAGE> 102
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's stockholder Rights Agreement (as defined), adopted on June 12,
1995, amendments to the Company's charter and by-laws, adopted on July 21, 1995,
and a redemption of Warrants in June 1995 all were designed to entrench the
individual defendants in their capacities as directors and officers at the
expense of stockholders who otherwise would have been able to take advantage of
a sale of the Company. The complaint asks the court, among other things, to
rescind the amendments and prohibit the use of the stockholder Rights Agreement
to discourage any bona fide acquirer. In the alternative, the plaintiffs seek
compensatory damages. On December 19, 1996, the Delaware Chancery Court denied
the Company's motion to dismiss the complaint in its entirety. The case is now
in the discovery stage. The Company believes that, after investigation of the
facts, the allegations are without merit and is defending itself vigorously.
On October 23, 1995, a rail tank car exploded on the premises of the
Bogalusa, Louisiana plant of Gaylord Chemical Corporation, a wholly owned,
independently operated subsidiary of the Company. The accident resulted in the
venting of certain chemicals, including by-products of nitrogen tetroxide, a raw
material used by the plant to produce dimethyl sulfoxide, a solvent used in the
manufacture of pharmaceutical and agricultural chemicals. More than 160 lawsuits
have been filed in both federal and state courts naming as defendants Gaylord
Chemical Corporation and/or the Company, certain of their respective officers
and other unrelated corporations and individuals. The lawsuits allege personal
injury, property damage, economic loss, related injuries and fear of injuries as
a result of the accident. On April 1, 1996, the federal judge dismissed all but
one of the federal actions for failing to state claims under federal law and
remanded the remaining tort cases to the district court in Washington Parish,
Louisiana, where they have been consolidated. Discovery in the remaining federal
action, a suit to recover alleged clean-up costs, was ordered coordinated with
the Louisiana state action.
On May 21, 1996, the Louisiana state court established a Plaintiff's
Liaison Committee (PLC) to coordinate and oversee the consolidated cases on
behalf of plaintiffs. On June 26, 1996 the PLC and defendants agreed to a Case
Management Order (CMO) that was subsequently entered by the Court. Pursuant to
the CMO, the plaintiffs filed a single Consolidated Master Petition against
Gaylord Chemical Corporation, the Company and twenty-one other defendants. In
the Consolidated Master Petition all claims against individual defendants
(including the officers of Gaylord Chemical Corporation and the Company) were
dropped. The Consolidated Master Petition includes substantially all of the
claims and theories asserted in the prior lawsuits, including negligence and
strict liability, as well as several claims of statutory liability. Compensatory
and punitive damages are sought. The Company and its subsidiaries are vigorously
contesting all of these claims.
On July 15, 1996 the Louisiana state court certified these consolidated
actions as a single class action. The class was tentatively defined to include
all those persons or entities who claim to have been injured as a result of the
October 23, 1995 accident. On March 27, 1997, the Louisiana Court of Appeal for
the First Circuit reversed the trial court's order granting class certification,
defining the class, approving class notice, requiring all notice forms be
notarized and appointing the plaintiffs' attorneys to the PLC. The Court of
Appeal ordered the trial court to conduct a new class certification hearing to
allow additional evidence on the adequacy of class representatives and class
counsel and instructed the trial court to create a concise geographic definition
of the class of individuals allegedly impacted. Finally, the Court of Appeal
instructed the trial judge to approve a new class notice form that permits the
use of notice of claim forms and/or proof of claim forms only after a
determination of liability, if any. The Louisiana Supreme Court declined to
review that decision. On May 23, 1997, the trial court reappointed the PLC with
several new members. On June 20, 1997, a second CMO was entered by the court.
Pursuant to this second CMO, a Second Consolidated Amended Master Petition
(SCAMP) was filed on June 20, 1997. The SCAMP includes substantially all the
claims and theories asserted in the original Consolidated Master Petition. No
officers of Gaylord Chemical Corporation or the Company are named as defendants
in the SCAMP. Pursuant to the second CMO, the status of all lawsuits pending
before the filing of the SCAMP, some of which name officers of Gaylord Chemical
Corporation or the Company as defendants, will be determined by the trial court
after class certification. Following a hearing
F-24
<PAGE> 103
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
held in July, August and September, 1997 the trial court certified a class on
November 10, 1997. The class consists of allegedly injured parties in the City
of Bogalusa, parts of Washington Parish, Louisiana, and parts of Marion,
Walthall and Pike Counties in Mississippi. Defendants have filed supervisory
writs with the Court of Appeal challenging the trial court's class certification
ruling. Those writs are currently pending.
In addition, the Company, Gaylord Chemical Corporation and numerous other
third party companies have been named as defendants in eleven actions brought by
plaintiffs in Mississippi state court, who claim injury as a result of the
October 23, 1995 accident at the Bogalusa facility. Included among these cases
are eleven actions which purport to be on behalf of over 11,000 individuals.
These cases are not filed as a class action but have been consolidated before a
single judge in Hinds County, Mississippi. All of these cases seek to allege
claims similar to those in the Louisiana state court. To date, discovery in
these consolidated cases has been coordinated with the ongoing discovery in the
Louisiana class action. The Company and Gaylord Chemical Corporation are
vigorously contesting these claims.
The Company and Gaylord Chemical Corporation maintain insurance and have
filed separate suits seeking a declaratory judgement of coverage for the October
23, 1995 accident against their general liability and directors and officers
liability insurance carriers. These cases are currently pending in Louisiana
state court with the liability cases. The carrier with the first layer of
coverage under the general liability policy has agreed to pay the Company's and
Gaylord Chemical Corporation's defense costs under a reservation of rights. The
primary carrier and the nine excess level insurers moved for summary judgment
before the trial court claiming that coverage for the accident is excluded
because of a pollution exclusion contained in these policies. On November 20,
1997, the trial court denied all of the motions.
The Company believes the outcome of such litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgment is required, however, in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and/or methodologies could have a material effect on the estimated
fair value amounts. The estimated fair value of financial instruments at
September 30, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Assets
Cash and equivalents.................... $ 6.1 $ 6.1 $ 39.2 $ 39.2
Trade receivables....................... 100.6 100.6 111.0 111.0
Long-term notes receivable.............. 9.9 10.3 11.9 12.5
Liabilities
Trade payables.......................... 65.2 65.2 60.8 60.8
Senior and subordinated notes........... 629.3 666.3 584.0 642.4
Capital lease obligations............... 12.6 12.6 16.2 16.2
Other senior debt....................... 74.2 74.7 34.2 34.7
</TABLE>
F-25
<PAGE> 104
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and equivalents, trade receivables, trade payables and capital lease
obligations -- The carrying amount of these items are a reasonable estimate of
their fair value.
Senior and subordinated notes -- Estimated fair value is based on estimates
obtained from dealers/brokers.
Long-term notes receivable and other senior debt -- Interest rates that are
currently available to the Company for similar terms and remaining maturities
are used to estimate fair value.
The fair value estimates presented herein were based on pertinent
information available to the Company at September 30, 1997 and 1996. Although
the Company is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been revalued for purposes
of these financial statements since that date, and current estimates of fair
value may differ significantly from the amounts presented herein.
The Company is not a party to any lending or borrowing arrangements that
are considered to be derivative financial instruments.
18. SUPPLEMENTAL CASH FLOW DISCLOSURES
The balance sheet effects of non-cash transactions which are not reflected
in the consolidated statements of cash flows and other supplemental cash flow
disclosures are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-----------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Cash paid for interest expense........................... $79.5 $28.6 $35.5
Cash paid for income taxes............................... 1.9 5.6 2.5
Supplemental schedule of non-cash investing and financing
activities:
Property additions..................................... 2.4 5.6 45.1
Increase in total debt................................. 0.8 5.6 45.1
Increase in accrued and other liabilities.............. 1.6 -- --
Write-off of deferred financing fees................... 2.8 1.5 --
</TABLE>
F-26
<PAGE> 105
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. EARNINGS PER SHARE
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). The following table sets forth the computation of
basic and diluted earnings per share.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item............... $(74.3) $ 11.8 $134.2
Extraordinary loss.................................... (7.7) (3.2) --
------ ------ ------
Net income (loss)..................................... $(82.0) $ 8.6 $134.2
====== ====== ======
Denominator:
Basic:
Weighted average common shares outstanding......... 52.8 54.0 53.9
Diluted:
Effect of dilutive securities:
Employee and director incentive stock options...... 0.7 0.7 1.2
------ ------ ------
Weighted average outstanding and potential common
shares................................................ 53.5 54.7 55.1
====== ====== ======
Earnings (loss) per share:
Basic:
Income (loss) before extraordinary item............ $(1.40) $ 0.22 $ 2.49
Extraordinary item................................. (0.15) (0.06) --
------ ------ ------
Net income (loss).................................. $(1.55) $ 0.16 $ 2.49
====== ====== ======
Diluted(1):
Income before extraordinary item................... -- $ 0.22 $ 2.44
Extraordinary item................................. -- (0.06) --
------ ------
Net income......................................... -- $ 0.16 $ 2.44
====== ======
</TABLE>
- ---------------
(1) Not presented where the effect of potential shares is antidilutive.
F-27
<PAGE> 106
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
--------------------------------------------------------------------------
1ST 2ND 3RD 4TH YEAR
--- --- --- --- ----
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FISCAL 1997
Net sales....................... $195.6 $192.4 $189.4 $181.9 $ 759.3
Gross margin.................... 21.4 12.3 9.4 (1.1) 42.0
Loss before extraordinary
item.......................... (9.7) (18.5) (19.9) (26.2) (74.3)
Extraordinary loss.............. -- -- (7.7) -- (7.7)
Net loss........................ (9.7) (18.5) (27.6) (26.2) (82.0)
Earnings per share(1):
Basic:
Loss before extraordinary
item..................... (0.18) (0.35) (0.38) (0.49) (1.40)
Extraordinary loss......... -- -- (0.15) -- (0.15)
Net loss................... (0.18) (0.35) (0.53) (0.49) (1.55)
Weighted average common shares
outstanding................... 52.7 52.8 52.8 53.0 52.8
Common stock price (AMEX)
High.......................... 8 7/16 7 1/4 8 5/8 10 1/8 10 1/8
Low........................... 6 1/8 6 1/16 5 1/2 7 9/16 5 1/2
Warrant price (AMEX)
High.......................... 8 1/4 7 1/4 8 3/8 9 3/4 9 3/4
Low........................... 6 1/8 6 1/8 5 5/8 8 5 5/8
FISCAL 1996
Net sales....................... $253.8 $219.3 $225.5 $223.4 $ 922.0
Gross margin.................... 74.8 45.2 43.8 42.0 205.8
Income (loss) before
extraordinary item............ 19.1 1.2 0.1 (8.6) 11.8
Extraordinary loss.............. (2.6) -- -- (0.6) (3.2)
Net income (loss)............... 16.5 1.2 0.1 (9.2) 8.6
Earnings per share(1):
Basic:
Income (loss) before
extraordinary item....... 0.35 0.02 0.00 (0.16) 0.22
Extraordinary loss......... (0.05) -- -- (0.01) (0.06)
Net income (loss).......... 0.30 0.02 0.00 (0.17) 0.16
Diluted:
Income before extraordinary
item..................... 0.35 0.02 0.00 -- 0.22
Extraordinary loss......... (0.05) -- -- -- (0.06)
Net income................. 0.30 0.02 0.00 -- 0.16
Weighted average shares
outstanding:
Basic......................... 54.1 54.1 54.2 53.6 54.0
Diluted....................... 55.0 55.1 55.1 54.3 54.7
Common stock price (AMEX)
High.......................... 10 3/8 11 5/8 11 1/2 7 15/16 11 5/8
Low........................... 7 1/16 7 1/2 7 11/16 5 3/8 5 3/8
Warrant price (AMEX)
High.......................... 9 3/8 10 7/8 10 7/8 7 11/16 10 7/8
Low........................... 6 1/2 7 1/4 7 5/8 5 3/4 5 3/4
</TABLE>
F-28
<PAGE> 107
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
<TABLE>
<CAPTION>
QUARTER
--------------------------------------------------------------------------
1ST 2ND 3RD 4TH YEAR
--- --- --- --- ----
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FISCAL 1995
Net sales....................... $241.2 $256.3 $285.2 $268.7 $1,051.4
Gross margin.................... 57.1 74.5 85.4 79.4 296.4
Net income...................... 11.8 27.5 39.8 55.1 134.2
Earnings per share(1):
Basic......................... 0.22 0.51 0.73 1.03 2.49
Diluted....................... 0.21 0.51 0.72 1.00 2.44
Weighted average shares
outstanding:
Basic......................... 53.7 53.9 54.0 54.1 53.9
Diluted....................... 54.9 55.1 55.2 55.2 55.1
Common stock price (AMEX)
High.......................... 9 3/4 13 7/8 15 1/2 13 3/8 15 1/2
Low........................... 7 1/2 7 3/4 7 3/4 9 7 1/2
Warrant price (AMEX)
High.......................... 8 1/8 10 7/8 11 7/8 11 1/2 11 7/8
Low........................... 5 7/8 6 1/2 7 1/4 8 1/4 5 7/8
</TABLE>
- ---------------
(1) Diluted earnings per share is not presented for periods where effect of
potential shares of antidilutive.
F-29
<PAGE> 108
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 5.6 $ 6.1
Trade receivables (less allowances of $6.0 million and
$5.5 million, respectively)............................ 101.2 100.6
Inventories (Note 2)...................................... 88.2 77.4
Deferred income taxes..................................... 4.7 4.7
Other current assets...................................... 13.6 15.4
-------- --------
Total current assets................................... 213.3 204.2
-------- --------
Property, plant and equipment:
Property, plant and equipment, at cost.................... 1,080.5 1,061.5
Less accumulated depreciation............................. 488.3 475.4
-------- --------
Property -- net........................................ 592.2 586.1
-------- --------
Deferred income taxes 81.1 71.2
Other assets................................................ 68.2 68.4
-------- --------
Total.................................................. $ 954.8 $ 929.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 14.6 $ 14.4
Trade payables............................................ 59.7 65.2
Accrued interest payable.................................. 8.2 26.3
Accrued and other liabilities............................. 49.8 61.4
-------- --------
Total current liabilities.............................. 132.3 167.3
-------- --------
Long-term debt.............................................. 780.0 701.7
Other long-term liabilities................................. 26.4 26.3
Commitments and contingencies (Note 3)...................... -- --
Stockholders' equity:
Class A common stock -- par value, $.0001 per share;
authorized 125,000,000 shares; issued 54,595,513 shares
and 54,573,164 shares, respectively, and outstanding
53,057,425 shares and 53,026,961 shares, respectively -- --
Capital in excess of par value............................ 175.8 175.6
Retained deficit.......................................... (146.9) (128.1)
Common stock in treasury -- at cost; 1,538,088 shares and
1,546,203 shares, respectively......................... (11.3) (11.4)
Recognition of minimum pension liability.................. (1.5) (1.5)
-------- --------
Total stockholders' equity............................. 16.1 34.6
-------- --------
Total.................................................. $ 954.8 $ 929.9
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-30
<PAGE> 109
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------------
1997 1996
---- ----
(IN MILLIONS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net sales................................................... $ 197.6 $195.6
Cost of goods sold.......................................... 186.1 174.2
------- ------
Gross margin................................................ 11.5 21.4
Selling and administrative costs............................ (20.6) (20.5)
------- ------
Operating earnings (loss)................................... (9.1) 0.9
Interest expense -- net..................................... (21.1) (19.4)
Other income (expense) -- net............................... (0.2) 0.8
------- ------
Loss before taxes........................................... (30.4) (17.7)
Income taxes................................................ (11.6) (8.0)
------- ------
Net loss.................................................... (18.8) $ (9.7)
======
Retained deficit:
Beginning of period....................................... (128.1)
-------
End of period............................................. $(146.9)
=======
Loss per common share:(A)................................... $ (0.35) $(0.18)
======= ======
Average number of common shares outstanding:(A)............. 53.0 52.7
======= ======
</TABLE>
- ---------------
(A) Diluted loss per share and corresponding average potential shares
outstanding have not been presented because of their antidilutive nature
(see Note 4).
See notes to unaudited condensed consolidated financial statements.
F-31
<PAGE> 110
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net loss................................................. $(18.8) $ (9.7)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization......................... 16.6 16.3
Deferred tax provision................................ (9.9) (6.4)
Change in current assets and liabilities, excluding
acquisitions and dispositions....................... (41.8) (36.3)
Other -- net.......................................... (0.1) (2.1)
------ ------
Net cash used for operations............................... (54.0) (38.2)
------ ------
CASH FLOWS FROM INVESTMENTS:
Capital expenditures..................................... (14.6) (8.4)
Capitalized interest..................................... (0.3) (0.2)
Other investments -- net................................. 0.2 0.4
------ ------
Net cash used for investments.............................. (14.7) (8.2)
------ ------
CASH FLOWS FROM FINANCING:
Senior debt -- repayments................................ (3.0) (2.1)
Debt issuance costs...................................... -- 0.1
Revolving credit agreement borrowings -- net............. 71.0 12.5
Other financing -- net................................... 0.2 0.2
------ ------
Net cash provided by financing............................. 68.2 10.7
------ ------
NET DECREASE IN CASH AND EQUIVALENTS....................... (0.5) (35.7)
Cash and equivalents, beginning of period.................. 6.1 39.2
------ ------
Cash and equivalents, end of period........................ $ 5.6 $ 3.5
====== ======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (refunded) for:
Interest.............................................. $ 38.7 $ 37.3
====== ======
Income taxes.......................................... $ (0.2) $ --
====== ======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Property additions....................................... $ 8.9 $ --
====== ======
Increase in total debt................................... $ 10.5 $ --
====== ======
Decrease in accrued and other liabilities................ $ 1.6 $ --
====== ======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-32
<PAGE> 111
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED 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 December
31, 1997 and the results of operations and cash flows for the three months ended
December 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, 1997. Certain amounts in the consolidated statement of cash
flows have been reclassified to conform to the current year presentation.
2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
(IN MILLIONS)
<S> <C> <C>
Inventories consist of:
Finished products.................................. $20.5 $22.5
In process......................................... 48.8 39.3
Raw materials...................................... 12.2 9.2
Supplies........................................... 14.6 15.0
----- -----
96.1 86.0
LIFO valuation adjustment.......................... (7.9) (8.6)
----- -----
Total......................................... $88.2 $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 have been named in a
civil suit filed in Cook County (Illinois) Circuit Court alleging that they
omitted or misrepresented facts about the Company's operations in connection
with the Company's initial public offering of stock in 1988 and in certain
periodic reports. The complaint, a purported class action, originally sought
unspecified damages under the Illinois Consumer Fraud and Deceptive Practices
Act and for common law fraud. On January 10, 1996, the court dismissed both
counts with prejudice, and the plaintiff appealed. On September 29, 1997, the
Illinois Court of Appeals affirmed, in all respects, dismissal of the complaint.
Plaintiff's appeal of that decision to the Illinois Supreme Court is pending. A
similar lawsuit, based on the same factual allegations, but alleging violations
of Federal securities laws and filed in the United States District Court for the
Northern District of Illinois, was voluntarily dismissed by the same plaintiff
in July 1993. The Company believes that after investigation of the facts the
allegations in the complaint are without merit, and the Company is vigorously
defending the decision on appeal.
On October 18 and December 4, 1995, the Company, its directors and certain
of its officers were named in complaints which have been consolidated in the
Court of Chancery of the state of Delaware alleging breach of fiduciary duties
on two counts. The first count is a putative class action and the second is 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
F-33
<PAGE> 112
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. 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
F-34
<PAGE> 113
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(CONCLUDED)
Marion, Walthall and Pike Counties in Mississippi. Defendants have filed
supervisory writs with the Court of Appeal challenging the trial court's class
certification ruling. Those writs are currently pending.
In addition, the Company, Gaylord Chemical Corporation and numerous other
third party companies have been named as defendants in 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 7,400 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 against co-defendants in both
of the Mississippi and Louisiana actions.
The Company and Gaylord Chemical Corporation maintain insurance and have
filed separate suits seeking a declaratory judgement of coverage for the October
23, 1995 accident against their general liability and directors and officers
liability insurance carriers. These cases are currently pending in Louisiana
state court 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 have filed supervisory writs with the Court of Appeal
contesting that ruling. Those writs are pending.
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. ADOPTION OF NEW ACCOUNTING STANDARD
Effective October 1, 1997, the Company has 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).
F-35
<PAGE> 114
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CONTAIN
HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Market Data............................................ i
Forward-Looking Statements............................. i
Available Information.................................. i
Incorporation of Certain Information by Reference...... ii
Prospectus Summary..................................... 1
Risk Factors........................................... 13
The Company............................................ 18
The Refinancing........................................ 19
Use of Proceeds........................................ 20
Capitalization......................................... 21
Selected Historical and Pro Forma Financial Data....... 22
Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 24
Business............................................... 30
Description of Other Indebtedness and Other
Obligations........................................... 38
Description of Notes................................... 40
Book-Entry; Delivery and Form.......................... 61
The Exchange Offer..................................... 63
Certain Federal Income Tax Consequences................ 72
Plan of Distribution................................... 73
Experts................................................ 73
Legal Matters.......................................... 73
Index to Financial Statements.......................... F-1
</TABLE>
======================================================
======================================================
------------------------
PROSPECTUS
------------------------
[GAYLORD LOGO]
GAYLORD
CONTAINER
CORPORATION
OFFER TO EXCHANGE ITS
9 3/8% SENIOR NOTES
DUE 2007, SERIES B,
FOR ANY AND ALL OF ITS OUTSTANDING
9 3/8% SENIOR NOTES
DUE 2007, SERIES A AND
TO EXCHANGE ITS
9 7/8% SENIOR SUBORDINATED NOTES
DUE 2008, SERIES B,
FOR ANY AND ALL OF ITS OUTSTANDING
9 7/8% SENIOR SUBORDINATED NOTES
DUE 2008, SERIES A
MARCH 31, 1998
======================================================
