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FORM
10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
COMMISSION FILE NUMBER 1-9915
GAYLORD CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3472452
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Lake Cook Road, Suite 400, Deerfield, Illinois 60015
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (847) 405-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
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CLASS A COMMON STOCK, $.0001 PAR VALUE PER SHARE AMERICAN STOCK EXCHANGE
(53,738,404 shares outstanding as of November 29, 1999)
REDEEMABLE EXCHANGEABLE WARRANTS AMERICAN STOCK EXCHANGE
(1,054,379 warrants outstanding as of November 29, 1999)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The aggregate market value of voting stock held by non-affiliates of the
registrant, computed on the basis of the closing price of such stock as reported
on the composite tape on November 29, 1999, was approximately $285 million.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held February 8, 2000 is incorporated into Part 3 of this Annual
Report on Form 10-K.
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PART 1
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Item 1. BUSINESS
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DEVELOPMENT Gaylord Container Corporation (including its subsidiaries, the
Company) acquired the business, 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. At September 30,
1999, the Company's facilities consisted of three containerboard and unbleached
kraft paper mills, fourteen 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 chemical facility.
On October 28, 1999 the Company acquired the remaining 65 percent share of
S&G Packaging Company, L.L.C. (S&G Packaging) from its joint venture partner,
Smurfit-Stone Container Corporation. S&G Packaging is the largest U.S. producer
of retail paper grocery sacks and bags, consisting of six converting plants with
annual sales of approximately $250 million. Its customer base includes
supermarkets, quick-service restaurants, paper distributors and non-food mass
merchandisers throughout North America and the Caribbean. This acquisition will
increase the Company's overall integration from 81 percent to 89 percent, thus
enabling the Company to make significant progress towards its strategic goal of
becoming a fully integrated brown paper producer.
Since its inception in 1986, the Company has made significant capital
expenditures primarily to expand capacity, install advanced papermaking
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. As a result, mill productive capacity has increased by more than 65
percent compared to 1987 levels. The Company believes that all of its mills are
low-cost producers in their respective products and that its Bogalusa mill is
one of the premier mills in the industry. Over the last six years, the Company
has focused its capital plan on upgrading and expanding its corrugated
container, sheet feeder and multiwall bag plants. The goal of this capital plan
is to increase capacity and to achieve quality enhancements and cost
efficiencies. For fiscal 2000, capital spending is expected to be in the range
of $40 to $45 million, while capital spending beyond fiscal 2000 will be
targeted to approximate the Company's annual depreciation expense. Capital
spending will, however, 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.
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Corrugated containers and sheets are primarily 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 products
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.
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 to produce corrugated sheets, which are subsequently printed, cut,
folded and glued to produce corrugated containers, in corrugated container or
sheet plants.
To reduce the cost of shipping containerboard from mills to widely
dispersed corrugated plants, vertically integrated containerboard manufacturers
routinely exchange containerboard with other manufacturers from mills in one
location for containerboard having a similar value from mills located elsewhere
in the United States. Containerboard 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.
Multiwall bags are used by producers in such industries as pet food,
chemical, agricultural, food, metal, plastics and rubber. Grocery bags and sacks
are used by supermarkets, quick-service restaurants and non-food mass
merchandisers. Multiwall bags and grocery bags and sacks are manufactured
through a process of printing, cutting, folding and gluing kraft paper to meet
customer specifications. Unbleached kraft paper is the principal raw material
used in the manufacture of multiwall bags and grocery bags and sacks.
Cellulose fiber produced from wood chips and recycled fiber is the primary
raw material used in the manufacture of containerboard and kraft paper. Fiber
costs are generally the largest cost component in the manufacture of
containerboard and unbleached kraft paper.
In calendar 1998, industry trade associations estimated U.S. corrugated
product sales and multiwall bag sales to be $20.3 billion and $1.2 billion,
respectively. Unbleached kraft containerboard and unbleached kraft paper
capacity utilization rates in the U.S. have been estimated to average 95 percent
and 84 percent, respectively, in calendar 1998 and 92 percent and 85 percent,
respectively, for the first nine months of calendar 1999.
Annual U.S. containerboard and unbleached kraft paper capacity are
estimated by industry trade associations to be at 38.1 million tons and 2.2
million tons, respectively, in calendar 1999. Consolidation among major
containerboard industry producers during the past 12 to 18 months has resulted
in the "mothballing" of approximately 5 percent of the domestic containerboard
capacity. This rationalization combined with limited new containerboard capacity
additions and stable domestic demand growth has resulted in relatively balanced
industry supply/demand conditions.
Demand for corrugated containers and sheets, containerboard and unbleached
kraft paper is affected by the level 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, solid fibre products,
containerboard and unbleached kraft paper collectively represented approximately
98 percent of the Company's net sales. Sales of the Company's products are not
seasonal to any significant degree.
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The Company sells its products to thousands of customers, with the ten
largest, excluding sales to affiliates, accounting for approximately 15 percent
of net sales in both fiscal 1999 and fiscal 1998 and 16 percent in fiscal 1997.
Excluding sales to affiliates, the Company's largest customer accounted for
approximately 2 percent of the Company's net sales in fiscal 1999, and 3 percent
in both fiscal 1998 and fiscal 1997. Corrugated products 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 product sales.
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. The Company's converted
products sales force at September 30, 1999 consisted of approximately 105
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 $59.9 million,
$64.5 million and $66.4 million in fiscal 1999, fiscal 1998 and fiscal 1997,
respectively.
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 corrugated sheet plants. Corrugated
shipments were 15.2 billion square feet in fiscal 1999, an increase of
approximately 6 percent from the prior year. Corrugated shipments in fiscal 1998
increased approximately 5 percent from fiscal 1997.
Containerboard. The Company's containerboard mills in the aggregate have
the ability to manufacture containerboard in a broad spectrum of grades and
weights. The Company consumed the equivalent of approximately 84 percent in
fiscal 1999 and 82 percent in both fiscal 1998 and fiscal 1997 of the Company's
containerboard production and purchase commitments. Containerboard production
increased approximately 2 percent in fiscal 1999 to 1,293,600 tons from
1,264,500 tons in the prior year. Production of containerboard was essentially
unchanged in fiscal 1998 compared to production of 1,263,200 tons in fiscal
1997. In addition to its own production, the Company has agreed to purchase, at
market prices through 2004, approximately 24,000 tons per year of corrugating
medium from Newark Group Industries, Inc.; 50,000 tons per year of corrugating
medium, at market prices through 2000, from Smurfit-Stone Container Corporation
(Smurfit-Stone), and 18,000 tons per year of corrugating medium at market prices
through 2000 from Weyerhaeuser Company (Weyerhaeuser).
Multiwall Bags. The Company produces a variety of small to large multiwall
bags and sells them to manufacturers and processors for packaging their
products. The Company's multiwall bag shipments decreased approximately 10
percent in fiscal 1999 to 53,500 tons from 59,200 tons in fiscal 1998. The
Company's multiwall bag shipments increased 4 percent in fiscal 1998 compared to
fiscal 1997.
Unbleached Kraft Paper. The Company is a supplier of unbleached kraft paper
to its grocery bag joint venture, its multiwall bag converting facilities and to
independent grocery bag and sack and multiwall bag converters. The Company's bag
plants consumed, or the Company sold pursuant to its paper supply agreement with
S&G Packaging, approximately 69 percent in fiscal 1999 and approximately 71
percent in both fiscal 1998 and fiscal 1997 of its unbleached kraft paper
production. During fiscal 1999, the Company produced 263,800 tons of unbleached
kraft paper. This compares with 260,300
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tons and 278,600 tons in fiscal 1998 and fiscal 1997, respectively. At September
30, 1999, the Company had an agreement to supply S&G Packaging with
approximately 112,000 tons of unbleached kraft paper per year. In connection
with the Company's October 28, 1999 acquisition, S&G Packaging agreed to
purchase at market prices 60,000 tons, 48,000 tons and 36,000 tons of kraft
paper in fiscal 2000, fiscal 2001 and fiscal 2002 through fiscal 2004,
respectively, from Smurfit-Stone. With this acquisition, the Company will be
approximately 113 percent integrated in unbleached kraft paper.
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. Gaylord Chemical Corporation also markets dimethyl sulfone (DMSO2),
a high-temperature solvent. 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.
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.
RAW MATERIALS Fiber costs represented approximately 40 percent of the Company's
containerboard and unbleached kraft paper costs in fiscal 1999. The Company has
contracts that covered approximately 50 percent of its pulpwood and wood chip
requirements and approximately 67 percent of its recycled fiber requirements in
fiscal 1999.
The Bogalusa, Louisiana mill uses approximately 70 to 75 percent pulpwood
and wood chips in the manufacture of containerboard and unbleached kraft paper,
of which in the last three fiscal years approximately 35 to 45 percent was
supplied by Weyerhaeuser, or its predecessor in interest Hanson Natural
Resources Company. The remainder was purchased on the open market. The Company
has certain agreements through 2016, pursuant to which Weyerhaeuser is committed
to supply the Company with significant quantities of wood chips, roundwood and
stumpage at prices based on independent market transactions. Recycled fiber,
which consists primarily of old corrugated containers (OCC) and double-lined
kraft clippings (DLK), accounts for the remainder of the mill's fiber
requirements. The Bogalusa mill has contracts that covered 100 percent of its
OCC requirements. All DLK requirements were purchased on the open market.
The Antioch, California mill uses 100 percent recycled fiber, primarily
OCC. Over the last three fiscal years, approximately 80 to 85 percent of the OCC
used as a source of recycled fiber was supplied under contracts with several
suppliers at market prices, while the remainder of its fiber needs were
purchased on the open market. 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 Pine Bluff, Arkansas mill uses approximately 70 to 75 percent wood
chips, of which over each of the last three fiscal years approximately 32
percent was purchased from Weyerhaeuser, pursuant to a supply contract. The
remainder was purchased under annual contracts with a number of different chip
suppliers. The contract with Weyerhaeuser provides for a supply of wood chips at
market prices through June 30, 2001, at which time the Company anticipates it
will be renegotiated. Recycled fiber, primarily DLK, accounts
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for the remainder of the mill's fiber requirements. The Pine Bluff mill
purchased 100 percent of its DLK requirements on the open market.
The fiber market is difficult to predict and there can be no assurance of
the future direction of OCC, DLK and wood chip prices. Future increases in fiber
prices would adversely affect the Company's results of operations.
ENERGY The Company's mills require significant amounts of steam and electricity
in their operation. Energy costs accounted for approximately 10 percent of the
Company's containerboard and unbleached kraft paper production costs in each of
fiscal 1999, fiscal 1998 and fiscal 1997. The Company has a supply agreement
through 2003 at the Bogalusa mill, pursuant to which Weyerhaeuser will provide
at contractual prices hog fuel (consisting of bark and other residual fiber from
trees), which is used to generate steam. 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 1999, the Bogalusa mill produced all of its steam and generated
approximately 69 percent of its electricity requirements. The Pine Bluff mill
produces all of its own steam, but purchases all of its electricity from a local
public utility. During the same period, the Antioch mill produced all of its
steam and electricity.
The Company operates a cogeneration facility at its Antioch, California
mill, which produces steam and electricity for the mill. The Company has a
contract to sell a specified amount of electricity representing the cogeneration
facility's anticipated excess capacity at the contract date to Pacific Gas &
Electric Company through 2013, subject to certain adjustments. Electricity sales
pursuant to this agreement were $8.2 million, $8.4 million and $7.5 million in
fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
Certain aspects of the energy operations of the Bogalusa mill and the
Antioch mill are regulated by the Federal Energy Regulatory Commission. Future
increases in energy prices would adversely affect the Company's results of
operations.
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 can
take at least two years to design and construct. Many of the Company's larger
competitors own timberlands. Although the Company does not own timberlands, it
has fiber supply agreements. See "Raw Materials."
In contrast to paper mills, which manufacture containerboard and unbleached
kraft paper, converting facilities, which consume the containerboard and
unbleached kraft paper to produce corrugated products, multiwall bags and
grocery bags and sacks, have comparatively low barriers to entry. Competition in
corrugated products and, to a lesser extent, multiwall bags and grocery bags and
sacks 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.
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. In fiscal 1999, fiscal 1998
and fiscal 1997, the Company made capital expenditures for environmental
purposes of approximately $4 million, $2 million and $1 million, respectively.
The Company believes that it is in compliance in all material respects with
applicable federal, state and local environmental regulations. Future
expenditures, primarily of a capital nature, for environmental compliance are
estimated to be approximately $50 million over
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the next 8 years, including approximately $30 million to comply with the Cluster
Rule as described below. Although future environmental regulations cannot be
predicted with any certainty because of continuing changes in laws, the Company
believes that compliance with such environmental regulations will not have a
material adverse effect upon its financial position.
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. Regulations for phase I of the Cluster Rule, including
the Maxiumum Achievable Control Technology (MACT) I and MACT II Standards,
pertaining to air quality are applicable to kraft, soda, sulfite or
semi-chemical pulping processes; mechanical pulping processes and processes
using secondary or non-wood fibers, including unbleached paper mills of the type
the Company operates. The Company is currently working towards compliance with
the Cluster Rule MACT I and MACT II Standards pertaining to air quality. The
Company expects to be fully compliant with these initial standards by the April,
2001 regulatory deadline at a capital cost of approximately $10 million.
New effluent (water) quality standards for unbleached paper mills were not
included in the phase I Cluster Rules as promulgated. These standards are
expected to be promulgated between 2000 and 2002. Also not included in the phase
I regulations was the proposed MACT II Standard for the control of hazardous air
pollutant emissions from pulp and paper mill combustion sources. The timeline
for final promulgation of the MACT II Standard for the control of hazardous air
pollutant emissions is uncertain at this time pending resolution of substantive
issues raised during the public comment period and as subsequently addressed by
industry stakeholder groups. Preliminary estimates indicate that the Company
could be required to make total capital expenditures of approximately $20
million (included in the overall number above) over 8 years following issuance
of these final rules, with approximately 75 percent to be spent in the first
five years. The ultimate financial impact to the Company of these regulations
cannot be predicted with certainty and will depend upon several factors,
including the actual requirements imposed under the final rules (i.e., water
effluent standards for unbleached paper mills and MACT II Standards for
hazardous air pollutant emissions from pulp and paper mill combustion sources),
new developments in process-control technology and the impact of inflation.
EMPLOYEES At September 30, 1999, the Company employed approximately 4,000
people. Approximately 68 percent of the Company's employees are hourly wage
employees, who are members of various labor unions. The Company's labor
agreements covering its employees at its Bogalusa, Antioch and Pine Bluff mills
expire in fiscal 2000, fiscal 2001 and fiscal 2002, respectively. In fiscal
1999, labor contracts covering approximately 16 percent of the Company's union
employees expired, and were renegotiated. In addition, labor contracts covering
approximately 26 percent of the Company's union employees are scheduled to
expire before the end of fiscal 2000. 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.
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Item 2. PROPERTIES
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MANUFACTURING PROPERTIES The Company's plants are maintained in generally good
condition and management believes they are suitable for their specific purposes.
Set forth below is certain information concerning these facilities at September
30, 1999:
<TABLE>
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OWNED/
PLANT PRODUCTS LEASED
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Mills:
Antioch, California Containerboard Owned
Bogalusa, Louisiana Containerboard and unbleached kraft paper Owned
Pine Bluff, Arkansas Unbleached kraft paper and containerboard Owned
Corrugated Plants:
Antioch, California Corrugated containers Owned
Atlanta, Georgia Corrugated containers Owned
Bogalusa, Louisiana Corrugated containers and solid fibre Owned
Carol Stream, Illinois Corrugated containers Owned
City of Industry, California Corrugated sheets Owned
Dallas, Texas Corrugated containers Leased
Gilroy, California Corrugated containers Leased
Greenville, South Carolina Corrugated containers Owned
Marion, Ohio Corrugated containers Owned
Newark, Delaware Corrugated containers Owned
Phoenix, Arizona Corrugated containers Owned
Raleigh, North Carolina Corrugated containers Owned
St. Louis, Missouri Corrugated containers Owned
San Antonio, Texas Corrugated containers Leased
San Antonio, Texas Corrugated sheets Owned
Sunnyvale, California Corrugated sheets Owned
Tampa, Florida Corrugated containers Leased
Tipton, Indiana 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.
The Antioch mill has one paper machine with the capacity to produce
recycled linerboard and corrugating medium using 100 percent recycled fiber.
The Pine Bluff mill has one paper machine with the capacity to produce
unbleached kraft paper and linerboard. The mill uses softwood pulp and recycled
fiber. See "Business - Products."
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OTHER PROPERTIES The Company leases its executive and general and administrative
offices in Deerfield, Illinois. It also leases numerous warehouse facilities and
sales offices throughout the U.S.
Item 3. LEGAL PROCEEDINGS
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The Company is not a party to any legal proceedings other than litigation
incidental to normal business activities, except as described in "Note 15 of
Notes to Consolidated Financial Statements." The Company believes the outcome of
such litigation will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders in the fourth quarter of
fiscal 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT Marvin A. Pomerantz has served as Chairman,
Chief Executive Officer and a director of the Company since its organization in
1986. Since 1980, Mr. Pomerantz has served as Chairman or President and a
director of Mid-America Group, Ltd., a real estate investment company. Mr.
Pomerantz formerly served as President of the Board of Regents for the state
universities in Iowa and formerly served on the Board of Directors of Stone
Container Corporation, a manufacturer of paper packaging products. He has served
on the Board of Directors of Wellmark Blue Cross and Blue Shield of Iowa since
1998, Norwest Bank Iowa, N.A. since 1975 and Berkley, Inc., a sporting goods
manufacturer, since 1976. He currently serves on the Board of Directors of the
American Forest and Paper Association.
Dale E. Stahl has served as President and Chief Operating Officer of the
Company since August 1988. From March 1988 through August 1988, Mr. Stahl served
as Vice President of the Company. From 1978 to 1988, he was employed by Union
Camp Corporation, an integrated paper packaging manufacturer, starting in sales
and ultimately being promoted to Vice President-General Manager of the container
division. He is currently a director and member of the Compensation Committee of
AMCOL International Corporation, a diversified specialty mineral, chemical and
environmental company.
Daniel P. Casey has served as Executive Vice President and Chief
Financial Officer of the Company since February 1990. From July 1988 through
February 1990, Mr. Casey served as Senior Vice President-Financial and Legal
Affairs of the Company and from January 1988 through June 1988 in the same
position for each of the Company and Mid-America Packaging, Inc. (Mid-America),
which merged with the Company in June 1988. From March 1987 through January
1988, Mr. Casey served as Vice President-Financial and Legal Affairs for each of
the Company and Mid-America.
Lawrence G. Rogna has served as Senior Vice President of the Company
since February 1990. From December 1988 through February 1990, Mr. Rogna served
as Vice President-Human Resources of the Company. From 1981 to 1988 he was
employed by Rohr Industries, Inc., a manufacturer of components for aircraft and
space vehicles, where he served as Vice President, Human Resources from 1983 to
1988.
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PART 2
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Item 5. MARKET FOR REGISTRANT'S COMMON STOCK, WARRANTS AND RELATED
STOCKHOLDER MATTERS
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The Company had 610 and 13 holders of record of its Class A Common Stock, par
value $.0001 per share (Class A Common Stock) and redeemable exchangeable
Warrants (Warrants), respectively, at November 29, 1999.
The Company's Class A Common Stock and Warrants are listed and traded on
the American Stock Exchange under the symbols GCR and GCRWS, respectively. On
July 31, 1996, all outstanding Warrants became exercisable and could be
exchanged for one share of Class A Common Stock. As of September 30, 1999, the
Company had outstanding 53,523,443 shares of Class A Common Stock (including
1,054,379 shares held in trust for the benefit of the Warrant holders) and
1,054,379 Warrants. See "Note 11 of Notes to Consolidated Financial Statements."
Information with respect to quarterly high and low stock prices for the
Company's Class A Common Stock and Warrants for each quarterly period for fiscal
1999 and fiscal 1998 is contained in "Note 20 of Notes to Consolidated Financial
Statements."
The Company's Board of Directors authorized in fiscal 1996 the repurchase
of up to 6 million shares of the Company's Class A Common Stock. The shares may
be repurchased from time to time on the open market and will be used for general
corporate purposes, including issuances in connection with the Company's
employee stock option plans and employee stock purchase plan. No shares were
repurchased in fiscal 1999, fiscal 1998 or fiscal 1997.
The Company neither declared nor paid any dividends on its common stock
during fiscal 1999, fiscal 1998 or fiscal 1997. The Company does not currently
intend to pay cash dividends on its Class A Common Stock, but intends instead to
retain future earnings for reinvestment in the business and for repayment of
debt. The Company's ability to declare or pay dividends or distributions on its
capital stock or to repurchase or redeem shares of its capital stock is limited
under the terms of its debt agreements. See "Note 8 of Notes to Consolidated
Financial Statements."
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Item 6. SELECTED FINANCIAL DATA
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The following table sets forth selected historical consolidated financial data
for the Company. The data set forth below should be read in conjunction with the
Company's consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA: Year Ended September 30, (1)
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In millions, except per share data 1999 1998 1997 1996 1995
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Net sales $ 870.6 $ 842.6 $ 759.3 $ 922.0 $1,051.4
Cost of goods sold 757.5 758.0 717.3 716.2 755.0
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Gross margin 113.1 84.6 42.0 205.8 296.4
Selling and administrative costs (98.4) (91.3) (81.1) (99.1) (95.5)
Non-recurring operating charges(2) - - - (8.1) (5.4)
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Operating earnings (loss) 14.7 (6.7) (39.1) 98.6 195.5
Interest expense - net (85.4) (82.1) (80.7) (78.3) (86.1)
Other income (expense) - net (4.5) (4.2) (1.6) (0.2) 0.6
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Income (loss) before income taxes (75.2) (93.0) (121.4) 20.1 110.0
Income tax benefit (provision) (3) 28.8 35.6 47.1 (8.3) 24.2
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Income (loss) before
extraordinary items (46.4) (57.4) (74.3) 11.8 134.2
Extraordinary loss (4) - (25.1) (7.7) (3.2) -
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (46.4) $ (82.5) $ (82.0) $ 8.6 $ 134.2
- ------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic:
Income (loss) before
extraordinary items $ (0.87) $ (1.08) $ (1.40) $ 0.22 $ 2.47
Extraordinary loss (4) - (0.47) (0.15) (0.06) -
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.87) $ (1.55) $ (1.55) $ 0.16 $ 2.47
- ------------------------------------------------------------------------------------------------------------
Diluted:
Income (loss) before
extraordinary items $ (0.87) $ (1.08) $ (1.40) $ 0.22 $ 2.44
Extraordinary loss (4) - (0.47) (0.15) (0.06) -
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.87) $ (1.55) $ (1.55) $ 0.16 $ 2.44
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding 53.4 53.2 52.8 54.0 54.4
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Weighted average common and common
share equivalents 53.8 53.9 53.5 54.7 55.1
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
BALANCE SHEET DATA: September 30,
----------------------------------------------------------------
In millions 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current assets $ 240.1 $ 210.8 $ 204.2 $ 236.1 $ 306.3
Property - net 558.9 573.4 586.1 612.3 640.0
Other assets 219.0 195.6 139.6 84.6 41.7
- ------------------------------------------------------------------------------------------------------------
Total assets $1,018.0 $ 979.8 $ 929.9 $ 933.0 $ 988.0
- ------------------------------------------------------------------------------------------------------------
Current liabilities $ 144.4 $ 127.3 $ 167.3 $ 166.3 $ 149.9
Long-term debt (less current
maturities) 924.8 863.3 701.7 623.1 671.5
Other long-term liabilities 39.6 36.7 26.3 29.1 53.4
- ------------------------------------------------------------------------------------------------------------
Total liabilities 1,108.8 1,027.3 895.3 818.5 874.8
Stockholders' equity (deficit) (90.8) (47.5) 34.6 114.5 113.2
- ------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity (deficit) $1,018.0 $ 979.8 $ 929.9 $ 933.0 $ 988.0
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company operates on a 52/53-week fiscal year. All fiscal years from
1995 through 1999 are on a 52-week year except fiscal 1996, which was a 53-week
year.
(2) In fiscal 1996, the Company recorded an $8.1 million charge against
operating earnings for costs associated with a staff reduction program which
eliminated approximately 8 percent of the Company's salaried positions. In
fiscal 1995, the Company recorded a $5.4 million charge against operating
10
<PAGE> 12
earnings for costs associated with an optional early retirement program at the
California mill.
(3) In fiscal 1995, the Company recorded a $24.2 million income tax benefit
primarily due to the recognition of tax benefits of which substantial doubt as
to their realization had previously existed.
(4) In fiscal 1998, the Company issued $200 million principal amount of 9 3/8%
Senior Notes due in 2007 and $250 million principal amount of 9 7/8% Senior
Subordinated Notes due in 2008 and used the proceeds to redeem and retire all of
the then outstanding senior subordinated debentures ($404.3 million principal
amount) due in 2005. The early retirement of debt resulted in an extraordinary
loss of $23.9 million, net of an income tax benefit of $14.8 million. In
addition, in fiscal 1998, the Company refinanced its bank credit facility
establishing a term loan and a new revolving credit facility. The Company used
the proceeds to retire a revolving loan, repay a portion of the Trade Receivable
Facility and for general corporate purposes. In conjunction with this
refinancing, an extraordinary loss of $1.2 million was recognized, net of an
income tax benefit of $0.7 million. See "Note 2 of Notes to Consolidated
Financial Statements."
In fiscal 1997, the Company issued $225 million principal amount of
9 3/4% Senior Notes due in 2007 and used the proceeds to redeem and retire all
of the then outstanding senior notes ($179.7 million principal amount) due in
2001 and to repay borrowings under the revolving portion of its credit
facilities. The early retirement of debt resulted in an extraordinary loss of
$7.7 million, net of an income tax benefit of $5.0 million. See "Note 2 of Notes
to Consolidated Financial Statements."
In fiscal 1996, the Company recorded an extraordinary loss of $3.2
million, net of an income tax benefit of $2.3 million, on the early retirement
of approximately $75.2 million principal amount of the Company's publicly traded
debt.
- --------------------------------------------------------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL Demand for brown paper packaging has historically corresponded primarily
to changes in the rate of growth of the manufacturing sector in the U.S.
economy. Growth in the U.S. economy generally stimulates demand for packaging
products.
Historically, the industry's cyclical nature has been driven by the
inelasticity of supply due to the capital-intensive nature of the industry.
Because productive capacity cannot be added quickly, containerboard and
unbleached kraft paper inventory levels tend to fall during periods of rising
demand, exerting upward pressure on prices. In periods when capacity exceeds
demand, efforts to control inventory levels have been viewed as limited, because
containerboard and unbleached kraft paper mills operate most economically near
capacity operating levels. Consolidation among major containerboard industry
producers during the past 12 to 18 months has resulted in the "mothballing" of
approximately 5 percent of the domestic containerboard capacity. This
rationalization combined with limited new containerboard capacity additions and
stable domestic demand growth has resulted in relatively balanced industry
supply/demand conditions.
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
11
<PAGE> 13
34 percent, respectively. Published industry 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 a decrease in published prices for
linerboard and grocery sack paper of approximately 35 percent and 27 percent,
respectively, between September 1995 and September 1996, and an additional 1
percent and 10 percent, respectively, through September 1997. By September 1998,
published linerboard prices had recovered slightly, increasing by approximately
6 percent over September 1997 levels, while grocery sack paper prices remained
flat over the same period. The industry experienced a 16 percent increase in
linerboard and a 3 percent increase in grocery sack paper published industry
prices in September 1999 compared to September 1998. November 1999 published
industry prices for linerboard remained unchanged from September 1999 levels.
RESULTS OF OPERATIONS Year ended September 30, 1999 (fiscal 1999) Compared with
Year ended September 30, 1998 (fiscal 1998). Net sales for fiscal 1999 were
$870.6 million, an increase of 3 percent compared with net sales of $842.6
million in fiscal 1998. Operating income for fiscal 1999 was $14.7 million
compared with an operating loss of $6.7 million in fiscal 1998. Fiscal 1999
resulted in a net loss of $46.4 million, or $0.87 per share, compared to a net
loss of $82.5 million, or $1.55 per share in fiscal 1998, which included a $25.1
million extraordinary loss ($0.47 per share) on the early retirement of debt.
Sales in fiscal 1999 were unfavorably affected by lower average net selling
prices, which decreased net sales by approximately $7 million. Higher corrugated
shipments increased net sales by approximately $36 million in the year-to-year
comparison.
Gross margin increased to $113.1 million in fiscal 1999 from $84.6 million
in the prior year primarily due to lower fiber costs ($19 million) and higher
volume ($11 million). These improvements were offset in part by reduced earnings
from the Company's chemical subsidiary, as a result of a significant decline in
demand for the subsidiary's products in Asian markets in the first half of
fiscal 1999 ($3 million).
Corrugated shipments increased approximately 6 percent in fiscal 1999 to
15.2 billion square feet compared to 14.3 billion square feet in fiscal 1998,
primarily as a result of opening a new sheet feeder plant in the first quarter
of fiscal 1998 and increased demand. Multiwall bag shipments decreased
approximately 9 percent to 53.5 thousand tons in fiscal 1999 compared to 59.0
thousand tons in the prior year. Total mill production increased by 2 percent to
4,279 tons per day (TPD, calculated on the basis of the number of days in the
period) in fiscal 1999 compared to 4,189 TPD in fiscal 1998. Containerboard
production increased approximately 2 percent to 3,554 TPD in fiscal 1999
compared to 3,474 TPD in the prior-year. Unbleached kraft paper production
increased approximately 1 percent to 725 TPD in fiscal 1999 from 715 TPD in
fiscal 1998.
Average selling prices were essentially unchanged for corrugated products
and increased approximately 5 percent for multiwall bags (due mainly to a mix
change) in fiscal 1999 compared to the prior year. Average selling prices
decreased for the Company's domestic linerboard, export linerboard and
unbleached kraft paper, by approximately 4 percent, 5 percent and 7 percent,
respectively, in fiscal 1999 compared to fiscal 1998.
Fiber costs decreased primarily due to lower average delivered costs for
recycled fiber and wood chips. The average delivered cost for OCC (old
corrugated containers) and DLK (double-lined kraft clippings) decreased
approximately 12 percent and 9 percent, respectively, in fiscal 1999 compared to
fiscal 1998, primarily due to decreased demand. In addition, the average
delivered cost for wood chips decreased by approximately 11 percent in fiscal
12
<PAGE> 14
1999 compared to the prior year. Unusually wet weather in the southern U.S.
resulted in higher wood chip costs in fiscal 1998.
Selling and administrative costs were $98.4 million in fiscal 1999 compared
to $91.3 million in fiscal 1998. This increase was due primarily to higher
information system costs related primarily to the Year 2000 effort, and
increased long-term incentive and litigation costs.
Net interest expense increased to $85.4 million in fiscal 1999 from $82.1
million in fiscal 1998. Higher average debt levels increased interest expense by
approximately $7 million, while lower average borrowing rates reduced interest
expense by approximately $4 million. The lower average borrowing rates resulted
primarily from the refinancing of the Company's senior subordinated debentures
in the second quarter of fiscal 1998.
The Company recognized a tax benefit of $28.8 million in fiscal 1999
compared to $35.6 million in fiscal 1998. The tax benefit decreased in the
year-over-year comparison primarily due to improved operating results in fiscal
1999 over fiscal 1998. The effective tax rate was approximately 38 percent in
both fiscal 1999 and fiscal 1998.
During the second quarter of fiscal 1998, the Company issued $200 million
principal amount of 9 3/8% Senior Notes due in 2007 and $250 million principal
amount of 9 7/8% Senior Subordinated Notes due in 2008 and used the proceeds to
redeem and retire all of the then outstanding senior subordinated debentures
($404.3 million principal amount) due in 2005. In conjunction with the
retirement, approximately $6.1 million of deferred financing fees were written
off. The early retirement of debt resulted in an extraordinary loss of $23.9
million, net of an income tax benefit of $14.8 million.
In the third quarter of fiscal 1998, the Company refinanced its bank credit
facility establishing a term loan and a new revolving credit facility. In
conjunction with this refinancing, approximately $1.9 million of deferred
financing fees were written off. This transaction resulted in an extraordinary
loss of $1.2 million, net of an income tax benefit of $0.7 million.
Year ended September 30, 1998 (fiscal 1998) Compared with Year ended
September 30, 1997 (fiscal 1997) Net sales for fiscal 1998 were $842.6 million,
an increase of 11 percent compared with net sales of $759.3 million in fiscal
1997. The operating loss for fiscal 1998 was $6.7 million compared with $39.1
million in fiscal 1997. Fiscal 1998 resulted in a net loss of $82.5 million, or
$1.55 per share, after a $25.1 million extraordinary loss ($0.47 per share) on
the early retirement of debt. In fiscal 1997, the net loss was $82.0 million, or
$1.55 per share, after a $7.7 million extraordinary loss ($0.15 per share) on
the early retirement of debt.
Sales and earnings in fiscal 1998 were favorably affected by higher average
selling prices for the Company's products which increased net sales by
approximately $58 million compared with the prior year. Average selling prices
for the Company's domestic linerboard, export linerboard and corrugated products
increased approximately 15 percent, 14 percent and 8 percent, respectively, in
fiscal 1998 over fiscal 1997. Average selling prices increased approximately 7
percent for unbleached kraft paper and 6 percent for multiwall bags compared to
the prior year. Higher volumes of corrugated products shipped in fiscal 1998
increased sales by approximately $23 million compared to fiscal 1997.
Corrugated shipments increased approximately 5 percent in fiscal 1998 to
14.3 billion square feet compared to 13.6 billion square feet in fiscal 1997,
primarily due to the start-up of a new sheet feeder facility in the first
quarter of fiscal 1998. Multiwall bag shipments increased approximately 4
percent to 59 thousand tons in fiscal 1998 compared to 57 thousand tons in the
prior year. Total mill production decreased to 4,189 tons per day (TPD,
calculated on the basis of the number of days in the period) in fiscal 1998
compared to 4,235 TPD in fiscal 1997. Containerboard production was
13
<PAGE> 15
essentially unchanged with 3,474 TPD in fiscal 1998 compared with 3,470 TPD in
the prior year. Unbleached kraft paper production decreased to 715 TPD in fiscal
1998 from 765 TPD in fiscal 1997, due primarily to market-related downtime.
Gross margin increased to $84.6 million from $42.0 million in the prior
year. Gross margin was favorably impacted by higher volume ($6 million) and
higher average selling prices ($50 million) for the Company's products. The
favorable impact was reduced by higher fiber costs ($9 million) and incremental
fixed costs associated with the start-up of the new sheet feeder facility ($5
million). Increased fiber costs were primarily due to higher prices for wood
chips with an average delivered cost increase of approximately 12 percent in
fiscal 1998 compared to the prior year. The increase in wood chip cost was due
to unseasonably wet weather in the southern U.S. and increased demand relative
to supply. Meanwhile, old corrugated container (OCC) costs decreased by
approximately 8 percent in fiscal 1998 compared to fiscal 1997, which partially
offset the effect of the increased wood chip costs.
Selling and administrative costs were $91.3 million for fiscal 1998
compared to $81.1 million in the prior year. This increase was due primarily to
higher information system costs principally related to the Year 2000 effort,
higher costs associated with employee recruitment and retention, incremental
costs for the new sheet feeder facility and general inflation.
Net interest expense increased to $82.1 million in fiscal 1998 from $80.7
million in fiscal 1997. Higher average debt levels increased interest expense by
approximately $8 million, while lower average borrowing rates reduced interest
expense by approximately $7 million. The lower average borrowing rates were the
result of the fiscal 1998 refinancing of the senior subordinated debentures due
2005, and the refinancing of the senior notes due 2001 in mid-fiscal 1997.
The Company recognized a tax benefit of $35.6 million in fiscal 1998
compared to $47.1 million in fiscal 1997. The tax benefit decreased in the
year-over-year comparison primarily due to improved operating results in fiscal
1998 over fiscal 1997. The effective tax rates in fiscal 1998 and fiscal 1997
were approximately 38 and 39 percent, respectively.
The Company recognized an extraordinary loss of $25.1 million in fiscal
1998 relating to the refinancing of a portion of its long-term debt. The Company
issued $200 million principal amount of 9 3/8% Senior Notes due in 2007 and $250
million principal amount of 9 7/8% Senior Subordinated Notes due in 2008 and
used the proceeds to redeem and retire all of the then outstanding senior
subordinated debentures ($404.3 million principal balance) due in 2005. In
conjunction with the retirement, approximately $6.1 million of deferred
financing fees were written off, a redemption premium of approximately $25.8
million was paid and approximately $6.8 million of interest was paid. The early
retirement of debt resulted in an extraordinary loss of $23.9 million, net of an
income tax benefit of $14.8 million. In addition, in fiscal 1998, the Company
refinanced its bank credit facility establishing a term loan and a new revolving
credit facility. The Company used the proceeds to retire a revolving loan, repay
a portion of the Trade Receivable Facility and for general corporate purposes.
In conjunction with this refinancing, approximately $1.9 million of deferred
financing fees were written off. This transaction resulted in an extraordinary
loss of $1.2 million, net of an income tax benefit of $0.7 million.
In fiscal 1997, the Company issued $225 million principal amount of 9 3/4%
Senior Notes due in 2007 and used the proceeds to redeem and retire all of the
then outstanding senior notes ($179.7 million principal amount) due in 2001 and
to repay borrowings under the revolving portion of its credit facilities. In
conjunction with the redemption, approximately $2.8 million of deferred
financing fees were written off. The early retirement of debt
14
<PAGE> 16
resulted in an extraordinary loss of $7.7 million, net of an income tax benefit
of $5.0 million.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
GENERAL The Company has historically financed its operations through cash
provided by operations, borrowings under its credit agreements and the issuance
of debt and equity securities. The Company's principal uses of cash are to pay
operating expenses, fund capital expenditures and service debt. The Company is
prohibited from paying dividends and making purchases of additional common stock
by the terms of its bank credit agreement and public debt securities.
Net cash used for operations for fiscal 1999 was $21.7 million compared to
$57.5 million for the prior year. The improvement was due to a decrease in
working capital requirements.
Capital expenditures of $19.7 million in fiscal 1999 decreased by $20.0
million from fiscal 1998. In addition to capital spending, the Company acquired
$14.7 million, $10.2 million and $2.4 million of equipment through vendor
financing or capital leases in fiscal 1999, fiscal 1998, and fiscal 1997,
respectively. Since its inception in 1986, the Company has made significant
capital expenditures primarily to expand capacity, install advanced papermaking
technology, improve product quality, realize operating efficiencies and maintain
its existing facilities. For fiscal 2000, capital spending is expected to be in
the range of $40 to $45 million, while capital spending beyond fiscal 2000 will
be targeted to approximate the Company's annual depreciation expense. Capital
spending will, however, 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 unbleached kraft paper mill (the East Mill), which was
closed in fiscal 1991, could be sold as a mill site or that the East Mill, or a
portion thereof, could be operated economically by the Company. In fiscal 1999,
the Company incurred approximately $3.8 million of costs for demolition and
asbestos removal and to maintain the East Mill. Such costs were net of proceeds
from the sale of scrap. At the end of fiscal 1999, approximately $1.1 million of
spending remained to complete the demolition work. Management expects to
complete the remaining demolition during fiscal 2000. At September 30, 1999, the
balance sheet reserve for demolition was approximately $1.1 million and the net
book value of the East Mill was $10.0 million.
LIQUIDITY At September 30, 1999, the Company had cash and equivalents of $10.4
million, an increase of $4.7 million from September 30, 1998 as cash from
financing exceeded cash used for operations and investments. Total debt
increased by $62.7 million from $873.0 million at September 30, 1998 to $935.7
million at September 30, 1999. The increase in revolver borrowings was primarily
due to interest payments on the Company's public debt. During fiscal 1999, the
Company amended the financial covenants of the Credit Facility to obtain
additional financial flexibility. At September 30, 1999, the Company had
approximately $95.0 million of revolver borrowings outstanding and approximately
$144.5 million available under the revolving portion of its credit agreements.
At September 30, 1999, the Company had primary working capital of $160.7
million, an increase of $7.4 million from September 30, 1998, primarily due to
increased trade receivables offset somewhat by increased trade payables. The
increase in trade receivables was primarily due to higher sales in fiscal 1999
compared to fiscal 1998.
Consolidation among major containerboard industry producers during the
past 12 to 18 months has resulted in the "mothballing" of approximately 5
15
<PAGE> 17
percent of the domestic containerboard capacity. This rationalization combined
with limited new containerboard capacity additions and stable domestic demand
growth has resulted in relatively balanced industry supply/demand conditions.
During the early spring and mid summer of calendar 1999, published prices of
linerboard increased by $50 per ton and $40 per ton, respectively. Subsequently,
the Company implemented corresponding price increases for its corrugated
products.
Average delivered costs for wood chips decreased by approximately 11
percent in fiscal 1999 compared to the prior year. Unusually wet weather in the
southern U.S. resulted in higher wood chip costs in fiscal 1998. Average
delivered prices for OCC and DLK decreased approximately 12 percent and 9
percent, respectively, in fiscal 1999 compared to fiscal 1998 primarily due to
decreased demand. Fiber markets are difficult to predict, and there can be no
assurance of the future direction of OCC, DLK and wood chip prices.
On October 28, 1999, the Company acquired the remaining 65 percent share
of S&G Packaging from its joint venture partner Smurfit-Stone Container
Corporation (Smurfit-Stone). S&G Packaging is the largest U.S. producer of
retail paper grocery sacks and bags, consisting of six converting plants with
annual sales of approximately $250 million. In connection with this transaction,
the Company paid Smurfit-Stone $0.5 million for its 65 percent interest. In
addition, Smurfit-Stone forgave $4.0 million of its trade receivable for kraft
paper sold to S&G Packaging. The Company also repaid, through borrowings on its
revolver, approximately $31 million oustanding on S&G Packaging's revolving loan
facility, which was then terminated. In connection with the acquisition, S&G
Packaging entered into a paper supply agreement to purchase at market prices
60,000 tons, 48,000 tons and 36,000 tons of kraft paper in fiscal 2000, fiscal
2001 and fiscal 2002 through fiscal 2004, respectively, from Smurfit-Stone. S&G
Packaging's corporate staff will be integrated into the Company's headquarters
staff, providing cost savings associated with the elimination of duplicative
functions. The Company also intends to move promptly to reduce costs by better
aligning S&G Packaging's converting capacity with its customer needs. The
Company currently estimates that it will spend approximately $5.0 million
implementing these actions over the next 12 to 24 months.
As of October 31, 1999, the Company had approximately $119 million of
revolver borrowings outstanding and approximately $121 million available under
the revolving portions of its credit agreements.
Based on current announced prices for converted products, current raw
material costs and assuming maintenance levels of capital spending and including
the projected impact of the acquisition of S&G Packaging, the Company believes
that cash provided by operations and borrowings available under its credit
agreements will provide adequate liquidity to meet debt service obligations and
other liquidity requirements over the next 12 to 24 months. Unless there is
additional product price improvement, however, the Company will need to seek
additional covenant modifications to its bank credit agreement by the end of
December 2000 to maintain continued access to its liquidity.
PENDING ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments. An
amendment to SFAS 133 was issued in July 1999, which defers by one year the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The
statement will be adopted by the Company in fiscal 2001. The Company has not yet
determined what effect, if any, the statement will have on its results of
operations or financial position.
16
<PAGE> 18
YEAR 2000 READINESS DISCLOSURE The "Year 2000 Issue" refers generally to the
potential problems that software and processing systems could encounter in
determining the correct century for the year. Software and processing systems
with date-sensitive functions that are not Year 2000 compliant may not be able
to distinguish whether "00" means 1900 or 2000, which may result in system
failures or the creation of erroneous results.
The Company crossed the fiscal year-end boundary at the end of September
1999 and its business systems are now operating in fiscal 2000. The Company has
experienced no major incidents related to the Year 2000.
The Company developed a comprehensive, phased Year 2000 readiness plan to
address its internal systems that are comprised of both information technology
(IT) and non-IT systems. The Company's IT and non-IT systems are comprised of
computers and application software for financial and business management,
electronic data interchange, process control and equipment monitoring,
telecommunications, and environmental controls. The plan included development of
corporate awareness, assessment, implementation (including remediation, upgrade,
replacement, and deployment of certain products), validation testing, and
contingency planning. The Company believes that, by modifying or upgrading
existing systems, and/or converting to new systems, the Year 2000 Issue can be
resolved without material operational difficulties. The Company has incurred
approximately $4.9 million through fiscal 1999 to correct the Year 2000 Issue
and expects to incur an additional $0.1 million through the second quarter of
fiscal 2000. The Company has funded its Year 2000 effort with cash from
operations and borrowings under its revolving credit agreements.
The Company has largely completed the awareness, assessment, remediation,
implementation and testing activities for business-critical items. Testing will
continue on non-business critical systems through the remainder of calendar
1999. IT systems were verified for accuracy across the Year 2000 boundary as
well as other special calendar date situations. A national consulting firm
specializing in Year 2000 issues assisted the Company throughout the planning
process and was retained to assist in the Year 2000 verification testing. The
testing approach employed was intended to identify all potential problems with
processing the Year 2000. It is impractical to assure that all potential
problems will be identified during these testing procedures. Therefore, the
Company may experience a greater-than-normal need for support activities
immediately following the change to the Year 2000. The IT staff, with the
assistance of designated outside vendor support, is prepared to react and
correct these problems in a timely fashion, as it does with problems that occur
in the normal course of business.
A consulting firm specializing in industrial controls developed an
equipment inventory and assisted in the validation of equipment compliance for
certain non-IT systems at the Company's paper mills. At its other facilities,
internal resources, both operational and IT staff, were used to inventory and to
validate the non-IT systems. All business critical non-IT systems used in the
manufacturing and conversion processes have been remediated and verified.
The Company believes that many of its customers, suppliers and financial
institutions are also impacted by the Year 2000 Issue, which could affect the
Company. The Company has assessed the compliance efforts of a significant
portion of the Company's critical partners. To date, no material deficiencies
have been identified. Assessment activities will continue through the remainder
of the year. If the Company's current or future customers, or suppliers,
however, fail to achieve Year 2000 compliance, the Company believes that, due to
lack of concentration of major customers or critical suppliers, results of
operations, financial position or cash flow are not expected to be materially
adversely affected.
17
<PAGE> 19
The Company has projected that the "most likely worst-case Year 2000
scenario" would be the result of unidentified Year 2000 issues, which could
result in unplanned downtime of production facilities at a rate higher than is
normally experienced. Contingency plans have been developed to respond to the
likelihood of these higher-than-normal system incidents. Any system failure
which results in a business disruption is expected to be handled in a timely
fashion, as would any normal day-to-day failures. These potential disruptions
are not expected to result in a material adverse impact on the Company's results
of operations, financial position or cash flow.
THE PRECEDING "YEAR 2000 READINESS DISCLOSURE" DISCUSSION CONTAINS VARIOUS
FORWARD-LOOKING STATEMENTS WHICH REPRESENT THE COMPANY'S BELIEFS OR EXPECTATIONS
REGARDING FUTURE EVENTS. WHEN USED IN THE "YEAR 2000 READINESS DISCLOSURE"
DISCUSSION, THE WORDS "BELIEVES," "PROJECTED," "EXPECTS," "ANTICIPATES" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THE COMPANY'S
EXPECTATIONS AS TO WHEN IT WILL COMPLETE THE REMEDIATION AND TESTING PHASES OF
ITS YEAR 2000 PROGRAM AS WELL AS ITS YEAR 2000 CONTINGENCY PLANS; ITS ESTIMATED
COST OF ACHIEVING YEAR 2000 READINESS; AND THE COMPANY'S BELIEF THAT ITS
INTERNAL SYSTEMS AND ASSETS WILL BE YEAR 2000 COMPLIANT IN A TIMELY MANNER. ALL
FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES THAT
COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE PROJECTED RESULTS.
FACTORS THAT MAY CAUSE THESE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE
AVAILABILITY OF QUALIFIED PERSONNEL AND OTHER INFORMATION TECHNOLOGY RESOURCES;
THE ABILITY TO IDENTIFY AND REMEDIATE ALL DATE-SENSITIVE LINES OF COMPUTER CODE
OR TO REPLACE EMBEDDED COMPUTER CHIPS IN AFFECTED SYSTEMS OR EQUIPMENT; AND THE
ACTIONS AND ABILITY OF THIRD-PARTY SUPPLIERS AND CUSTOMERS TO SUCCESSFULLY
ELIMINATE THEIR YEAR 2000 PROBLEMS.
-------------------------------------
FORWARD-LOOKING STATEMENTS IN THIS FILING, INCLUDING THOSE IN THE FOOTNOTES TO
THE FINANCIAL STATEMENTS, ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WHEN USED IN THIS FILING, THE
WORDS "BELIEVES," "PROJECTED," "EXPECTS," "ANTICIPATES," "ESTIMATES" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. 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, YEAR 2000 READINESS PROBLEMS,
POTENTIAL EQUIPMENT MALFUNCTIONS AND PENDING LITIGATION.
18
<PAGE> 20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report 20
.............................................................................
Consolidated Balance Sheets at September 30, 1999 and 1998 21
.............................................................................
Consolidated Statements of Operations for the Years
Ended September 30, 1999, 1998 and 1997 22
.............................................................................
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1999, 1998 and 1997 23
.............................................................................
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1999, 1998 and 1997 24
.............................................................................
Notes to Consolidated Financial Statements 25
.............................................................................
19
<PAGE> 21
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, 1999
and 1998 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, 1999. Our audits also included the financial statement schedule of
the Company for each of the three years in the period ended September 30, 1999,
listed in Item 14a. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at September 30,
1999 and 1998 and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1999 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information shown therein.
Deloitte & Touche LLP
Chicago, Illinois
October 28, 1999
20
<PAGE> 22
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
In millions 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 10.4 $ 5.7
Trade receivables
(less allowances of $6.7 and $6.4, respectively) 149.8 122.4
(Note 8)
Inventories (Note 4) 67.1 73.2
Prepaid expenses 5.1 2.9
Other 7.7 6.6
- --------------------------------------------------------------------------------------------------------
Total current assets 240.1 210.8
- --------------------------------------------------------------------------------------------------------
Property - net (Notes 5 and 13) 558.9 573.4
Other assets:
Deferred charges (Note 6) 20.0 22.1
Deferred income taxes (Note 7) 150.3 121.5
Other (Notes 3 and 8) 48.7 52.0
- --------------------------------------------------------------------------------------------------------
Total $ 1,018.0 $ 979.8
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 8) $ 10.9 $ 9.7
Trade payables 56.2 42.3
Accrued interest payable 16.2 16.2
Accrued and other liabilities (Note 9) 61.1 59.1
- --------------------------------------------------------------------------------------------------------
Total current liabilities 144.4 127.3
- --------------------------------------------------------------------------------------------------------
Long-term debt (Note 8) 924.8 863.3
Other long-term liabilities (Note 9) 39.6 36.7
Commitments and contingencies (Note 15) - -
Stockholders' equity (deficit) (Notes 10, 11 and 12)
Class A common stock - -
Capital in excess of par value 178.2 177.4
Accumulated deficit (257.0) (210.6)
Common stock in treasury - at cost (10.9) (11.2)
Accumulated other comprehensive income (loss):
Minimum pension liability (Note 14) (1.1) (3.1)
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (90.8) (47.5)
- --------------------------------------------------------------------------------------------------------
Total $ 1,018.0 $ 979.8
- --------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 23
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
In millions, except per share data 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 870.6 $ 842.6 $ 759.3
Cost of goods sold 757.5 758.0 717.3
- ------------------------------------------------------------------------------------------------------------------
Gross margin 113.1 84.6 42.0
Selling and administrative costs (98.4) (91.3) (81.1)
- ------------------------------------------------------------------------------------------------------------------
Operating earnings (loss) 14.7 (6.7) (39.1)
Interest expense - net (Note 8) (85.4) (82.1) (80.7)
Other expense - net (4.5) (4.2) (1.6)
- ------------------------------------------------------------------------------------------------------------------
Loss before taxes and extraordinary items (75.2) (93.0) (121.4)
Income tax benefit (Note 7) 28.8 35.6 47.1
- ------------------------------------------------------------------------------------------------------------------
Net loss before extraordinary items (46.4) (57.4) (74.3)
Extraordinary loss (Note 2) - (25.1) (7.7)
- ------------------------------------------------------------------------------------------------------------------
Net Loss $ (46.4) $ (82.5) $ (82.0)
- ------------------------------------------------------------------------------------------------------------------
Net loss per common share (Note 18):
Basic and diluted:
Net loss before extraordinary items $ (0.87) $ (1.08) $ (1.40)
Extraordinary loss (Note 2) - (0.47) (0.15)
- ------------------------------------------------------------------------------------------------------------------
Net Loss $ (0.87) $ (1.55) $ (1.55)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 24
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common stock Accumulated
--------------------- other Total
Class A Capital in Accumulated Treasury stock comprehensive stockholders'
--------------------- excess of earnings ------------------- income equity
Dollars in millions Shares Dollars par value (deficit) Shares Dollars (loss) (deficit)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
SEPTEMBER 30, 1996 54,270,011 $ - $ 173.5 $ (46.1) 1,581,778 $ (11.7) $ (1.2) $114.5
Comprehensive income (loss)
Net loss - - - (82.0) - - - (82.0)
Other comprehensive income
(loss):
Adjustment of minimum
pension liability - - - - - - (0.3) (0.3)
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
(loss) - - - (82.0) - - (0.3) (82.3)
Options exercised 244,953 - 1.8 - - - - 1.8
Restricted stock - net 58,200 - 0.3 - - - - 0.3
Other - - - - (35,575) 0.3 - 0.3
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1997 54,573,164 - 175.6 (128.1) 1,546,203 (11.4) (1.5) 34.6
Comprehensive income (loss)
Net loss - - - (82.5) - - - (82.5)
Other comprehensive income
(loss):
Adjustment of minimum
pension liability - - - - - - (1.6) (1.6)
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
(loss) - - - (82.5) - - (1.6) (84.1)
Options exercised 199,478 - 1.5 - - - - 1.5
Restricted stock - net 13,850 - 0.3 - - - - 0.3
Other - - - - (33,639) 0.2 - 0.2
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1998 54,786,492 - 177.4 (210.6) 1,512,564 (11.2) (3.1) (47.5)
Comprehensive income (loss)
Net loss - - - (46.4) - - - (46.4)
Other comprehensive income
(loss):
Adjustment of minimum
pension liability - - - - - - 2.0 2.0
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
(loss) - - - (46.4) - - 2.0 (44.4)
Options exercised 168,151 - 0.6 - - - - 0.6
Restricted stock - net 4,650 - 0.2 - - - - 0.2
Other 32,116 - - - (44,598) 0.3 - 0.3
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1999 54,991,409 $ - $ 178.2 $(257.0) 1,467,966 $ (10.9) $ (1.1) $(90.8)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 25
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
In millions 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net loss $ (46.4) $ (82.5) $ (82.0)
Adjustments to reconcile net loss to net
cash used for operations:
Extraordinary loss (Note 2) - 25.1 7.7
Depreciation and amortization 53.0 65.6 65.1
Deferred tax benefit (28.8) (30.1) (48.9)
Acquisition restructuring expenditures (0.4) (0.6) (0.4)
Change in current assets and liabilities,
excluding acquisitions and dispositions:
Receivables (27.4) (21.8) 12.0
Inventories 6.1 4.1 (6.7)
Prepaid expenses and other current assets (3.0) 4.7 (4.9)
Accounts payable and other accrued liabilities 17.8 (24.7) (7.5)
Other - net 7.4 2.7 (0.9)
- ------------------------------------------------------------------------------------------------------------------
Net cash used for operations (21.7) (57.5) (66.5)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTMENTS:
Capital expenditures (19.7) (39.7) (31.1)
Capitalized interest (0.6) (1.6) (0.8)
Proceeds from asset sales 1.5 3.2 1.9
Other investments - net (3.7) (4.6) (3.7)
- ------------------------------------------------------------------------------------------------------------------
Net cash used for investments (22.5) (42.7) (33.7)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING:
Early extinguishment of debt (Notes 2 and 8) - (436.9) (189.7)
Issuance of debt (Notes 2 and 8) - 575.0 225.0
Senior debt repayments (9.5) (15.7) (10.4)
Debt issuance costs - (15.3) (5.6)
Revolving credit agreement borrowings - net 56.5 (8.5) 47.0
Other financing - net 1.9 1.2 0.8
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing 48.9 99.8 67.1
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 4.7 (0.4) (33.1)
Cash and equivalents, beginning of year 5.7 6.1 39.2
- ------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 10.4 $ 5.7 $ 6.1
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
1. GENERAL/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Gaylord Container Corporation (including its
subsidiaries, the Company) is engaged in the integrated production, conversion
and sale of brown 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, solid fibre products, containerboard and
unbleached kraft paper collectively represent approximately 98 percent of the
Company's net 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, grocery bags and sacks or sells to independent converters.
At September 30, 1999, the Company's facilities, which are located
throughout the United States, consist of three containerboard and paper mills,
fourteen 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
chemical facility.
Use of Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported and disclosed 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, 1999 and 1998 and for the years ended September 30, 1999 (fiscal
1999), September 30, 1998 (fiscal 1998) and September 30, 1997 (fiscal 1997)
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 1999, fiscal 1998 and fiscal 1997 were 52-week fiscal years. Certain
amounts on the consolidated financial statements and footnotes 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 Consolidated Statements of Operations. In the Consolidated Balance
Sheets, however, trade receivables due from and trade payables due to Exchange
Partners are not eliminated because a contractual right of offset does not
exist.
Valuation of Long-Lived Assets - The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. Management believes
circumstances, including current and future product price trends, support the
recoverability of such long-lived assets.
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.
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
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 and includes interest capitalized during
construction periods. Maintenance and repairs are charged to expense as
incurred.
Depreciation is computed using the straight-line method over estimated
useful lives ranging from 10 to 45 years for buildings and improvements and 3 to
20 years for machinery and equipment.
Deferred Financing Costs - Costs incurred in connection with the issuance
of long-term debt or other financing arrangements are capitalized. Amortization
of deferred financing costs is computed using the effective interest rate method
over the term of the related debt and is classified 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 expense - net" in the Company's
Consolidated Statements 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 Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (see Note 7).
Earnings Per Common Share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", (see Note 18).
2. EXTRAORDINARY ITEMS During the second quarter of fiscal 1998, the Company
issued $200 million principal amount of 9 3/8% Senior Notes due in 2007 and $250
million principal amount of 9 7/8% Senior Subordinated Notes due in 2008 and
used the proceeds to redeem and retire all of the then outstanding senior
subordinated debentures ($404.3 million principal amount) due in 2005. In
conjunction with the retirement, approximately $6.1 million of deferred
financing fees were written off. The early retirement of debt resulted in an
extraordinary loss of $23.9 million, net of an income tax benefit of $14.8
million.
In the third quarter of fiscal 1998, the Company refinanced its bank
credit facility establishing a term loan and a new revolving credit facility. In
conjunction with this refinancing, approximately $1.9 million of deferred
financing fees were written off. This transaction resulted in an extraordinary
loss of $1.2 million, net of an income tax benefit of $0.7 million.
In fiscal 1997, the Company issued $225 million principal amount of 9 3/4%
Senior Notes due in 2007 and used the proceeds to redeem and retire all of the
then outstanding senior notes ($179.7 million principal amount) due in 2001 and
to repay borrowings under the revolving portion of its credit facility. In
conjunction with the redemption, approximately $2.8 million of
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
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.
3. INVESTMENT IN AFFILIATES In July 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 Smurfit-Stone
Container Corporation (Smurfit-Stone), in exchange for a 35 percent equity
interest in the new company. Product sales to S&G Packaging during fiscal 1999,
fiscal 1998 and fiscal 1997 were approximately $42.2 million, $46.3 million and
$38.4 million, respectively. On October 28, 1999, the Company acquired the
remaining 65 percent share of S&G Packaging from Smurfit-Stone. S&G Packaging is
the largest U.S. producer of retail paper grocery sacks and bags, consisting of
six converting plants with annual sales of approximately $250 million. In
connection with this transaction, the Company paid to Smurfit-Stone $0.5 million
for its 65 percent interest and repaid through borrowings on its revolver,
approximately $31 million outstanding on S&G Packaging's revolving loan
facility, which was then terminated. In addition, Smurfit-Stone forgave $4.0
million of its trade receivable for kraft paper sold to S&G Packaging. S&G
Packaging also entered into a paper supply agreement to purchase at market
prices 60,000 tons, 48,000 tons and 36,000 tons of kraft paper in fiscal 2000,
fiscal 2001 and fiscal 2002 through fiscal 2004, respectively, from
Smurfit-Stone. S&G Packaging's corporate staff will be integrated into the
Company's headquarters staff, providing cost savings associated with the
elimination of duplicative functions. The Company also intends to move promptly
to reduce costs by better aligning S&G Packaging's converting capacity with its
customer needs. The Company currently estimates that the cost of these actions
will be approximately $5.0 million with the majority expended over the next 12
to 24 months.
The Company owns a 50 percent interest in Gaylord Central National,
Inc. (GCN), a joint venture 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 1999, fiscal 1998 and fiscal 1997 were approximately
$20.9 million, $22.1 million and $30.8 million, respectively.
The Company has a 50 percent ownership interest in a joint venture
that, through wholly owned subsidiaries, produce corrugated sheets and
corrugated containers in Mexico. Product sales to these companies during fiscal
1999, fiscal 1998 and fiscal 1997 were approximately $2.9 million, $4.1 million
and $4.9 million, respectively.
4. INVENTORIES
Inventories consist of:
September 30,
---------------------------------------
IN MILLIONS 1999 1998
- -------------------------------------------------------------------------------
Finished products $ 9.1 $ 19.0
In process 42.7 31.6
Raw materials 9.0 12.4
Supplies 15.0 13.6
- -------------------------------------------------------------------------------
75.8 76.6
LIFO valuation adjustment (8.7) (3.4)
- -------------------------------------------------------------------------------
Total $ 67.1 $ 73.2
- -------------------------------------------------------------------------------
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
As a result of a LIFO inventory liquidation in fiscal 1999, the
Company's "Cost of Goods Sold" in fiscal 1999 was $0.3 million less than it
would have been had a liquidation not occurred.
5. PROPERTY - NET
Property consists of:
September 30,
----------------------------
IN MILLIONS 1999 1998
- -------------------------------------------------------------------------------
Land $ 18.2 $ 17.6
Buildings and improvements 158.0 147.8
Machinery and equipment 930.7 900.1
Construction-in-process 12.4 38.6
- -------------------------------------------------------------------------------
1,119.3 1,104.1
Accumulated depreciation (560.4) (530.7)
- -------------------------------------------------------------------------------
Total $ 558.9 $ 573.4
- -------------------------------------------------------------------------------
Depreciation expense was $49.2 million, $60.4 million and $59.9 million
for fiscal 1999, fiscal 1998 and fiscal 1997, respectively. In fiscal 1999
depreciation expense was significantly lower than fiscal 1998, as a significant
portion of property purchased as a part of the 1986 acquisition of the Company
from Crown Zellerbach became fully depreciated in the first quarter of fiscal
1999.
6. DEFERRED CHARGES
Deferred charges consist of:
September 30,
----------------------------
IN MILLIONS 1999 1998
- -------------------------------------------------------------------------------
Deferred financing costs $ 23.7 $ 23.4
Intangibles 4.7 4.7
- -------------------------------------------------------------------------------
28.4 28.1
Accumulated amortization (8.4) (6.0)
- -------------------------------------------------------------------------------
Total $ 20.0 $ 22.1
- -------------------------------------------------------------------------------
Amortization of deferred charges during fiscal 1999, fiscal 1998 and
fiscal 1997 was approximately $2.8 million, $3.3 million and $3.6 million,
respectively. Included in these amounts is amortization of deferred financing
costs incurred during fiscal 1999, fiscal 1998 and fiscal 1997, and recognized
in interest expense - net, of approximately $2.5 million, $2.8 million and $3.1
million, respectively. During 1998, the Company wrote off approximately $6.1
million of deferred financing fees relating to the early retirement of its
senior subordinated debentures and $1.9 million relating to the refinancing of
the revolving credit facility and deferred approximately $15.3 million of
financing fees related to such refinancings. In fiscal 1997, the Company wrote
off approximately $2.8 million of deferred financing fees related to the
refinancing of its senior notes, and deferred approximately $5.5 million of
financing fees related to the issuance of the 9 3/4% Notes (see Note 2).
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
7. INCOME TAXES
The net deferred income tax assets both current and non-current, result from the
tax effects of the following temporary differences:
September 30,
-----------------------------------------
IN MILLIONS 1999 1998
- --------------------------------------------------------------------------------
CURRENT
Deferred tax assets:
Inventory valuation $ 0.6 $ -
- --------------------------------------------------------------------------------
Current deferred tax asset $ 0.6 $ -
- --------------------------------------------------------------------------------
NON-CURRENT
Deferred tax assets:
Net operating loss $ 275.6 $ 245.1
Asset write-down 38.8 41.3
Debt restructuring expenses 1.0 1.3
Other long-term liabilities 2.9 2.6
Deferred compensation 14.5 9.9
Other 3.7 8.1
- --------------------------------------------------------------------------------
Sub-total 336.5 308.3
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 171.3 172.0
Capitalized interest 13.4 13.2
Other 1.5 1.6
- --------------------------------------------------------------------------------
Sub-total 186.2 186.8
- --------------------------------------------------------------------------------
Net non-current deferred tax asset $ 150.3 $ 121.5
- --------------------------------------------------------------------------------
The current income tax provision for fiscal 1999, fiscal 1998 and fiscal
1997, principally for state income taxes and Alternative Minimum Tax (AMT), was
$0, $0 and $1.9 million, respectively. A 1997 loss carryback against AMT
resulted in a $5.2 million refund during fiscal 1998.
The deferred income tax benefit for fiscal 1999, fiscal 1998 and fiscal
1997, was $28.8 million, $51.1 million and $54.0 million, respectively. 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 1999, fiscal 1998 and fiscal 1997
and their related deferred income tax benefit follow:
Year Ended September 30,
-----------------------------------------
IN MILLIONS 1999 1998 1997
- --------------------------------------------------------------------------------
Depreciation expense $ 0.7 $ 7.1 $ (0.5)
Original issue discount - (58.6) (0.6)
Asset write-down (2.5) (0.6) 0.9
Debt restructuring expenses (0.3) (0.4) (0.7)
Inventory differences 0.6 (4.7) (0.4)
Net operating loss 30.5 107.9 53.5
Other - net (0.2) 0.4 1.8
- --------------------------------------------------------------------------------
Total deferred income tax benefit $ 28.8 $ 51.1 $ 54.0
- --------------------------------------------------------------------------------
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 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 the
September 30, 1999 deferred tax assets.
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
At September 30, 1999, the Company had cumulative regular net operating
loss carryforwards of approximately $681 million, which may be carried forward
and expire at various dates through the year 2019. At September 30, 1999, AMT
net operating losses of approximately $450 million are available to be carried
forward through the year 2019.
A reconciliation of income tax benefit to the amount computed by applying
the statutory federal income tax rates to the loss before income taxes follows
(dollars in millions):
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------
1999 1998 1997
------------------------ --------------------- ---------------------
PERCENTAGE OF Percentage of Percentage of
LOSS BEFORE loss before loss before
INCOME income income
AMOUNT TAXES Amount taxes Amount taxes
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax $26.3 35% $32.5 35% $42.5 35%
State income taxes - net of
Federal benefit 2.5 3 3.1 3 4.6 4
- ----------------------------------------------------------------------------------------------------------------------
Total income tax benefit $28.8 38% $35.6 38% $47.1 39%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
-----------------------
IN MILLIONS 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade Receivable Facility (a) $ 70.0 $ 38.5
Revolving Credit Facility, due June 2003 (b) 25.0 -
Term Loan, due June 2004 (b) 124.4 125.0
Senior Notes, 9 3/8%, due June 2007 (c) 200.0 200.0
Senior Notes, 9 3/4%, due June 2007 (c) 225.0 225.0
Pollution control and industrial revenue bonds,
interest at 5.7% to 8.3%, due at various dates to 2008 (d) 11.2 11.2
Capital lease obligations, interest at 7.6% to 11.8%, due at
various dates to 2011 (e) 13.1 17.6
Other senior debt, interest at 6.5% to 9.0%, due at various
dates to 2011 (f) 17.0 5.7
- ----------------------------------------------------------------------------------------------------------
Total senior debt 685.7 623.0
Senior Subordinated Notes, 9 7/8%, due February 2008 (g) 250.0 250.0
- ----------------------------------------------------------------------------------------------------------
Total debt 935.7 873.0
Less current maturities (10.9) (9.7)
- ----------------------------------------------------------------------------------------------------------
Total $ 924.8 $ 863.3
- ----------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
Scheduled aggregate annual principal payments due on long-term debt
during each of the next five years are (in millions) $10.9, $9.2, $5.7, $6.3 and
$120.0, respectively. These amounts exclude the debt that is outstanding under
the GRC trade receivable-backed revolving credit facility and the bank credit
agreement revolving credit facility reflecting the Company's intention to extend
or replace the facilities described below.
(a) 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 2001. With
mutual agreement from the lenders, the Company has the ability to annually
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 and 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
property 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.
Various interest rate options are available 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 0.50 percent per annum, or (ii) LIBOR rate loans
at the relevant LIBOR rate plus a borrowing margin of 0.50 percent per annum for
interest periods of one, two or three months. 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 defined). As a result, the
full amount of the facility may not be available at all times. At September 30,
1999, $70.0 million was outstanding under the Trade Receivable Facility. The
highest outstanding principal balance under the Trade Receivable Facility during
fiscal 1999 was $70.0 million and the weighted average interest rate was 5.75
percent in fiscal 1999 and 6.6 percent in fiscal 1998. At September 30, 1999 and
1998, the Company's consolidated balance sheet included $133.2 million and
$108.9 million, respectively, of accounts receivable sold to GRC.
(b) At September 30, 1999, the Company's bank credit agreement was
comprised of the Term Loan Facility and the Revolving Credit Facility
(collectively the Credit Facility). The Company entered into the Credit Facility
in June 1998, and used the proceeds of the Term Loan: (i) to retire the
outstanding balance on a revolving loan; (ii) to repay a portion of the Trade
Receivable Facility; (iii) to pay fees and expenses; and (iv) for general
corporate purposes.
Substantially all of the Company's assets except for the accounts
receivable sold to GRC described in (a) above are encumbered by liens under the
Credit Facility. This facility contains normal and customary terms and
conditions including restrictions on: liens, additional indebtedness,
investments, pre-payment of debt, declaration and payment of dividends,
repurchases of stock, guarantees, equity offerings, change of control, capital
expenditures, and asset sales. The Credit Facility also contains covenants
requiring the Company to achieve certain financial criteria each quarter.
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
The Term Loan Facility requires semi-annual amortization payments of $0.6
million which began in June 1999, increasing to $59.7 million for December 2003
and June 2004, the maturity date. The Company may be required to pre-pay the
Term Loan Facility with the proceeds of certain asset dispositions, equity
offerings or certain property insurance and condemnation recoveries. In
addition, the Company may be required to pre-pay a portion of the Term Loan
Facility with 50 percent of excess cash flow (as defined). Various interest rate
options are available on Term Loan Facility borrowings consisting of one or a
combination of the following two rates: (i) the greater of (a) the prime rate
plus a borrowing margin of 2.25 percent per annum or (b) the federal funds rate
plus 2.75 percent per annum or (ii) the Eurodollar rate plus a borrowing margin
of 3.25 percent per annum for periods of one, two, three or six months. Nine and
twelve month options may also be made available by the lenders. The weighted
average interest rate on the Term Loan Facility during fiscal 1999 was 8.4
percent.
The Revolving Credit Facility provides the Company the ability to borrow
funds and repay such funds in whole or in part from time to time without
incurring a prepayment penalty. The same interest rate options are available
under the Revolving Credit Facility as the Term Loan Facility discussed above.
The Revolving Credit Facility contains subfacilities for the issuance of up to
$30 million of letters of credit and a $25 million swingline facility, both of
which reduce the available balance under the facility by a like amount. A
commitment fee of 0.50 percent per annum is paid on the unused portion of the
Revolving Credit Facility. At September 30, 1999, $25 million was outstanding
under the Revolving Credit Facility, $5.5 million of undrawn standby letters of
credit were outstanding and $144.5 million of credit was available. The
Company's highest outstanding principal balance under a revolving bank facility
during fiscal 1999 was $43.0 million. The weighted average interest rate was 8.3
percent in fiscal 1999 and 8.7 percent in fiscal 1998.
(c) In fiscal 1998, the Company issued $200 million principal amount of
9 3/8% Senior Notes due June 15, 2007 (the 9 3/8% Notes and together with the
9 3/4% Notes (defined below), the Senior Notes). 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 indebtedness under the Credit
Facility. The Senior Notes rank senior in right of payment to the Senior
Subordinated Notes (defined below). Interest on the Senior Notes is payable
semi-annually on June 15 and December 15. The 9 3/8% Notes 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 104.688 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 fiscal 1997, the Company issued $225 million principal amount of 9 3/4%
Senior Notes due on June 15, 2007 (the 9 3/4% Notes). The 9 3/4% Notes 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.
The Senior Notes contain terms and conditions, which include that prior to
June 15, 2000, the Company, at its option, may redeem up to 33 percent of the
original aggregate principal amount of each issue of the Senior Notes with the
net cash proceeds of equity offerings (as defined) at the redemption price of
109.75 percent and 109.375 percent of the principal amount thereof
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
of the 9 3/4% Notes and the 9 3/8% Notes, respectively, plus accrued and unpaid
interest, if any, to the date of redemption; provided that at least $100 million
principal amount of each of the 9 3/4% Notes and 9 3/8% Notes remain outstanding
after any such redemption. In addition, upon the occurrence of a change of
control (as defined) each holder of the Senior Notes has the right to require
the Company to repurchase such holder's notes at a price equal to 101 percent of
the principal amount, plus accrued interest to the date of the repurchase.
Finally, the Company would be required to make an offer to repurchase the Senior
Notes at 100 percent of the principal amount, plus accrued interest to the date
of repurchase, in the event of certain asset sales.
(d) The pollution control and industrial revenue bonds were assumed by the
Company from Crown Zellerbach Corporation (Crown Zellerbach). The Company
simultaneously acquired a note receivable from Crown Zellerbach for an amount
and with terms identical to those of the bonds. At both September 30, 1999 and
1998, such remaining unpaid note receivable was approximately $9.4 million,
respectively, and was classified as "Other assets."
(e) The capital leases have initial terms ranging from five to fourteen
years. The capital leases contain covenants, which are standard for these types
of obligations, but do not contain any operating or financial covenants.
(f) The other senior debt instruments were incurred to acquire certain
assets and are secured by those assets. They have terms ranging from four to ten
years. The other senior debt instruments contain covenants, which are standard
for these types of obligations, but do not contain any operating or financial
covenants.
(g) In fiscal 1998, the Company issued $250 million principal amount of
9 7/8% Senior Subordinated Notes due February 15, 2008 (the Senior Subordinated
Notes). The Senior Subordinated Notes are general unsecured obligations of the
Company and are subordinated in right of payment to all Senior Debt (as defined)
of the Company, including indebtedness under the Credit Facility and the Senior
Notes. The Senior Subordinated Notes would rank pari passu in right of payment
to any future senior subordinated indebtness of the Company. The Senior
Subordinated Notes rank senior in right of payment to all subordinated
indebtedness. Interest on the Senior Subordinated Notes is payable semi-annually
on February 15 and August 15. The Senior Subordinated Notes are subject to
redemption on or after February 15, 2003 at the option of the Company, in whole
or in part, at declining redemption prices commencing at 105.063 percent of the
principal amount and declining to 100 percent of the principal amount at
February 15, 2006 and thereafter, plus accrued interest to the date of
redemption.
The Senior Subordinated Notes contain terms and conditions, which include:
prior to February 15, 2001, the Company, at its option, may redeem up to 33
percent of the original aggregate principal amount of the Senior Subordinated
Notes with the net cash proceeds of equity offerings (as defined) at the
redemption price equal to 109.875 percent of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of the redemption; provided
that at least $125 million aggregate principal amount of the Senior Subordinated
Notes remain outstanding after any such redemption. In addition, upon the
occurrence of a change of control (as defined), each holder of the Senior
Subordinated Notes has the right to require the Company to repurchase such
holder's Senior Subordinated Notes at a price equal to 101
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
percent of the principal amount thereof, plus accrued interest to the date of
repurchase. Finally, the Company would be required to make an offer to
repurchase the Senior Subordinated Notes at 100 percent of the principal amount,
plus accrued interest to the date of repurchase, in the event of certain asset
sales.
The Company has various restrictions under (b), (c), and (g), which
limit, among other things, its ability to (i) incur additional indebtedness,
(ii) incur certain liens on the Company's assets, (iii) incur guarantees, (iv)
acquire the assets or capital stock of other businesses, (v) dispose of any
material assets, (vi) make any voluntary prepayments of any indebtedness for
money borrowed, (vii) pay, declare, or distribute dividends on or repurchase its
capital stock or warrants and (viii) enter into certain transactions with
affiliates.
9. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following:
September 30,
--------------------------
IN MILLIONS 1999 1998
- --------------------------------------------------------------------------------
CURRENT
Accrued salaries, wages and benefits $ 25.0 $ 22.8
Sales, property and other taxes 4.8 2.8
Other 31.3 33.5
- --------------------------------------------------------------------------------
Total current 61.1 59.1
- --------------------------------------------------------------------------------
LONG-TERM
Accrued pension and post-retirement expense 36.7 34.1
Other 2.9 2.6
- --------------------------------------------------------------------------------
Total long-term 39.6 36.7
- --------------------------------------------------------------------------------
Total $ 100.7 $ 95.8
- --------------------------------------------------------------------------------
10. 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 11) 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.
11. COMMON STOCK
At September 30, 1999 and 1998, the Company had authorized capital stock of
125,000,000 shares of Class A Common Stock, par value $0.0001 per share (Class A
Common Stock), of which 54,991,409 shares and 54,786,492 shares were issued,
respectively, and 53,523,443 shares and 53,273,928 shares were outstanding,
respectively.
At September 30, 1999 and 1998, the Company had authorized capital stock
of 15,000,000 shares of Class B Common Stock, par value $0.0001 per share (Class
B Common Stock), of which no shares were issued and outstanding.
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
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
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).
At September 30, 1999 and 1998, the Company had Warrants outstanding of
1,054,379 shares and 1,783,330 shares, respectively. All of the Company's
outstanding 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 $0.0001 per Warrant, which amount was paid at the time of
issuance and is non-refundable. The Company has the option to redeem at any
time, all of the unexercised Warrants in exchange for Class A Common Stock for
an amount based on $16.65 per share divided by the then-current market price of
the Class A Common Stock.
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 for each share of Class A Common Stock. In general, 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 the
event a right becomes exercisable, the holder of the right may purchase for $50,
one one-hundredth of a share of junior participating preferred stock. If 15
percent of the outstanding Class A Common Stock is acquired, the rights (other
than the rights held by the acquiring person) can be exercised at a price of $50
to purchase 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 at any
time for $0.0001 per right.
In fiscal 1996, the Company's Board of Directors authorized the
repurchase of up to 6 million 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. No shares were repurchased on the open market in fiscal 1999,
fiscal 1998 or fiscal 1997. At September 30, 1999 and 1998, 1,467,966 shares and
1,512,564 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 1999, fiscal 1998 and fiscal 1997 the Company
issued 44,598 shares, 33,639 shares and 35,575 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 1999, fiscal 1998 or fiscal 1997. At September 30, 1999, the
Company was prohibited from declaring or paying cash dividends on its Common
Stock. 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.
12. STOCK OPTION PLANS
The Company maintains one stock-based plan, the 1997 Long-Term Equity Incentive
Plan (the 1997 Plan), pursuant to which stock options may be granted.
1997 Plan - The 1997 Plan authorizes the Company to grant stock options
(including both incentive stock options within the meaning of section 422 of the
Internal Revenue Code of 1986, as amended (the Code), and non-qualified stock
options), stock appreciation rights in tandem with options, restricted stock,
performance awards and any combination of the foregoing to certain
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
directors, officers and key employees of the Company and its subsidiaries. The
Company has granted only non-qualified stock options and restricted stock under
the 1997 Plan.
The Company has reserved 2,000,000 shares of Class A Common Stock for
issuance pursuant to the 1997 Plan. At September 30, 1999, the Company had
outstanding non-qualified stock options under the 1997 Plan covering 1,771,400
shares at exercise prices ranging from $3.69 to $9.06 per share. During fiscal
1999, the Company granted non-qualified stock options under the 1997 Plan
covering 238,900 shares of Class A Common Stock (9,000 of which were forfeited)
at exercise prices ranging from $2.50 to $8.50 per share. The options have 10
year terms and generally vest at the rate of 33 1/3 percent per year commencing
one year after the date of grant providing that the optionee remains
continuously in the employ of the Company or one of its subsidiaries. The
options vest 100 percent immediately upon a change in control of the Company (as
defined) or the optionee's death or disability.
At September 30, 1999, options to purchase 875,832 shares of Class A
Common Stock at exercise prices ranging from $7.00 to $9.06 per share were
exercisable, 1,000 shares had been exercised and 213,800 shares were available
for future grants.
During fiscal 1999, the Company granted 12,800 restricted shares of Class
A Common Stock under the 1997 Plan (1,000 of which were forfeited). 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. The restricted stock granted in 1999 will become 100 percent
vested as follows: 1,800 shares in fiscal 2001, 4,000 shares in fiscal 2002 and
6,000 shares in fiscal 2003. Prior to fiscal 1999, 2,000 restricted shares were
granted and will become 100 percent vested in fiscal 2000. The pretax
compensation expense recognized in the Consolidated Statement of Operations was
de minimus in both fiscal 1999 and fiscal 1998 and $0 in fiscal 1997.
1989 Plan - The 1989 Plan was terminated according to its terms in fiscal
1999 and therefore, no additional options may be granted under this plan. The
Company had outstanding non-qualified stock options at September 30, 1999,
covering 1,076,507 shares of Class A Common Stock at exercise prices ranging
from $2.56 to $11.63 per share. During fiscal 1999, the Company granted
non-qualified stock options under the 1989 Plan covering 111,000 shares of Class
A Common Stock (10,000 of which have been forfeited) at exercise prices ranging
from $3.69 to $9.63 per share.
At September 30, 1999, options to purchase 913,522 shares of Class A
Common Stock at exercise prices ranging from $2.56 per share to $11.63 per share
were exercisable and 137,401 options had been exercised.
In general, the outstanding options have 10-year terms and vest at the
rate of 33 1/3 percent per year commencing one year after the date of grant
providing that the optionee remains continuously in the employ of the Company or
one of its subsidiaries. The options vest 100 percent immediately upon a change
in control of the Company (as defined) or the optionee's death or disability.
36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
At September 30, 1999, the Company had granted 698,600 restricted shares
of Class A Common Stock (124,875 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 1999, the Company awarded 29,600
restricted shares of Class A Common Stock (200 of which have been forfeited) of
which 100 percent will become vested in fiscal 2001. As to the 544,325
restricted shares granted prior to fiscal 1999, 492,525 were 100 percent vested
at September 30, 1999 and 19,800 shares and 32,000 shares will become 100
percent vested in fiscal 2000 and fiscal 2001, respectively. The pretax
compensation expense relating to restricted stock, which was recognized in the
Consolidated Statements of Operations, was $0.2 million, $0.4 million and $0.4
million in fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
1987 Plan - The 1987 Plan was terminated according to its terms in fiscal
1997 and no additional options may be granted. At September 30, 1999, the
Company had outstanding non-qualified stock options under the 1987 Plan covering
227,000 shares of Class A Common Stock at exercise prices ranging from $3.63 to
$8.94 per share. In general the options have 10-year terms and vest at the rate
of 33 1/3 percent per year commencing one year after the date of grant,
providing that the optionee remains continuously in the employ of the Company or
one of its subsidiaries. The options vest 100 percent immediately upon a change
in control of the Company (as defined) or the optionee's death or disability. At
September 30, 1999, options to purchase 221,335 shares of Class A Common Stock
at exercise prices ranging from $3.63 to $8.94 per share were exercisable and
617,789 options had been exercised.
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 75,600 shares of Class A Common Stock in
connection with grants under the Director Option Plan. At September 30, 1999,
there were 18,900 options outstanding under the Director Option Plan at an
exercise price of $3.50 per share, all of which are exercisable and 56,700 of
which have been exercised. These options have a 10-year term and vest one year
after the date of grant.
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
The following table details stock option activity (excluding restricted stock)
for fiscal 1999, fiscal 1998 and fiscal 1997:
<TABLE>
<CAPTION>
Stock Options Exercise Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at September 30, 1996 1,708,753 $1.24 - $12.50
Grants 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
Grants 1,640,500 $3.00 - $ 9.06
Exercises (199,478) $2.56 - $ 6.81
Cancellations (115,896) $2.56 - $10.88
- -----------------------------------------------------------------------------
Balance at September 30, 1998 3,055,091 $2.56 - $12.50
Grants 349,900 $2.50 - $ 9.63
Exercises (168,151) $2.56 - $ 7.00
Cancellations (143,033) $2.50 - $12.50
- -----------------------------------------------------------------------------
Balance at September 30, 1999 3,093,807 $2.56 - $11.63
- -------------------------------------------------------------------------------------------------------
</TABLE>
Additional information regarding options outstanding as of September 30, 1999 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-$3.88 915,472 4.11 $3.46 702,240 $3.39
$4.00-$5.38 34,333 5.48 $4.58 25,667 $4.76
$6.13-$8.25 947,335 7.93 $7.01 414,342 $7.01
$8.50-$11.63 1,196,667 7.92 $9.15 887,340 $9.26
- ----------------------------------------------------------------------------------------------------------------
$2.56-$11.63 3,093,807 6.77 $6.76 2,029,589 $6.71
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The following table details restricted stock activity for fiscal 1999, fiscal
1998 and fiscal 1997:
<TABLE>
<CAPTION>
Restricted Stock
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at September 30, 1996 510,825
Issued 63,000
Cancellations (4,800)
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 569,025
Issued 43,800
Cancellations (29,950)
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 582,875
Issued 42,400
Cancellations (37,750)
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 587,525
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation"
(SFAS No. 123). SFAS No. 123 requires pro forma recognition of compensation
expense for stock options awarded based on the fair value of the options at the
date of grant.
38
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for grants in fiscal 1999: expected volatility of 55
percent; risk-free interest rate of 5.5 percent; and expected lives of 5.0
years. The weighted-average assumptions used for grants in fiscal 1998 and
fiscal 1997 were: expected volatility of 55 percent in both years; risk-free
interest rate of 5.0 percent in fiscal 1998 and 6.0 percent in fiscal 1997; and
expected lives of 5.0 years. The weighted-average fair value per share of
options granted was $2.92, $4.19 and $3.82 per share in fiscal 1999, fiscal 1998
and fiscal 1997, respectively. The weighted-average fair value per share of
awards of restricted stock issued in fiscal 1999, fiscal 1998, and fiscal 1997
was $4.38, $6.51 and $7.50 per share, respectively.
The pro forma impact on net loss and basic and diluted loss per share of
computing compensation cost for the Company's stock options based on the fair
value on the date of grant follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------
IN MILLIONS, EXCEPT PER SHARE DATA 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss:
As reported $ (46.4) $ (82.5) $ (82.0)
Pro forma (48.3) (84.2) (82.3)
Basic and diluted loss per share:
As reported $ (0.87) $ (1.55) $ (1.55)
Pro forma (0.91) (1.58) (1.55)
- ------------------------------------------------------------------------------------------------
</TABLE>
The pro forma effects on net loss and basic and diluted loss per share
may not be representative of the effects on reported net income or loss in
future years.
13. 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, 1999 are as
follows (in millions):
Operating Capital
Fiscal Year Leases Leases
- --------------------------------------------------------------------------------
2000 $ 11.1 $ 4.6
2001 8.6 2.9
2002 7.1 1.1
2003 5.7 1.1
2004 3.3 1.1
2005 and thereafter 20.4 8.1
- --------------------------------------------------------------------------------
Total future minimum lease payments $ 56.2 $ 18.9
- --------------------------------------------------------------------------------
Less interest 5.8
- --------------------------------------------------------------------------------
Present value of future minimum lease payments $ 13.1
- --------------------------------------------------------------------------------
Rent expense for fiscal 1999, fiscal 1998 and fiscal 1997 was $14.2
million, $14.3 million and $13.8 million, respectively.
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
14. EMPLOYEE BENEFIT PLANS
Pension Plan - The Company has a qualified noncontributory defined benefit
pension plan covering substantially all employees who are age 21 or older with
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 December 31, 1993, less 1.0 percent of primary Social
Security benefits for each year of credited service. The Company has a
non-qualified 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.
The components of net periodic pension cost for the defined benefit plan follow:
Year Ended September 30,
-----------------------------------------
IN MILLIONS 1999 1998 1997
- --------------------------------------------------------------------------------
Service cost $ 4.8 $ 4.4 $ 4.1
Interest cost 11.0 11.0 10.5
Expected return on plan assets (12.3) (11.3) (10.3)
Net amortization and deferral 0.1 - -
- --------------------------------------------------------------------------------
Net periodic pension cost $ 3.6 $ 4.1 $ 4.3
- --------------------------------------------------------------------------------
40
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
Assumptions used to develop the net periodic pension cost were:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.00% 6.75% 7.50%
Expected rate of return on plan assets 9.00% 9.00% 9.00%
Expected rate of salary increases 5.00% 5.00% 5.00%
</TABLE>
The reconciliation of the projected benefit obligation and the plan assets from
the beginning of the fiscal year to the end of the fiscal year follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------
IN MILLIONS 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation at beginning of year $ 163.2 $ 146.3
Service cost 4.8 4.4
Interest cost 11.0 11.0
Plan amendments 0.6 1.8
Actuarial (gain) loss (2.9) 10.2
Benefits paid (10.3) (10.5)
- ---------------------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year $ 166.4 $ 163.2
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 173.4 $ 154.1
Actual return 2.8 29.8
Benefits paid (10.3) (10.5)
- ---------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 165.9 $ 173.4
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The funded status of the plan and the amount reported in the Consolidated
Balance Sheets as part of other long-term liabilities for the defined benefit
plan follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------------
IN MILLIONS 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Funded status $ 0.5 $ (10.2)
Unrecognized net gain 29.4 36.0
Unrecognized prior service cost (5.0) (4.5)
- ---------------------------------------------------------------------------------------------------------------
Accrued pension liability $ 24.9 $ 21.3
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's funding policy is to contribute annually amounts necessary
to satisfy the statutory requirements of ERISA. Assets for the defined benefit
plan are held in a retirement trust fund with investments primarily in common
stock, corporate bonds and government securities.
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 currently receiving benefits under the supplemental
retirement plan. An additional supplemental retirement plan covering seven
current or retired officers provides annual retirement
41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
payments at age 65 equal to 60 percent of their average base salary and bonus
for the four highest of the last ten years prior to retirement, less primary
Social Security benefits and any amounts received under the Company's pension
plan. Benefits are reduced for early retirement.
The components of net periodic pension cost for the supplemental executive
retirement plans follow:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
IN MILLIONS 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 0.1 $ 0.1 $ 0.6
Interest cost 0.9 0.9 0.8
Net amortization and deferral 0.2 0.2 0.2
- --------------------------------------------------------------------------------------------
Net periodic pension cost $ 1.2 $ 1.2 $ 1.6
- --------------------------------------------------------------------------------------------
</TABLE>
Assumptions used to develop the net periodic pension cost were:
<TABLE>
<S> <C> <C> <C>
Discount rate 7.00% 6.75% 7.50%
Expected rate of salary increases 5.00% 5.00% 5.00%
</TABLE>
The reconciliation of the projected benefit obligation and the plan assets from
the beginning of the fiscal year to the end of the fiscal year follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------
IN MILLIONS 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation at beginning of year $ 12.4 $ 11.5
Service cost 0.1 0.1
Interest cost 0.9 0.9
Actuarial (gain) loss (1.3) 0.2
Benefits paid (0.4) (0.3)
- ------------------------------------------------------------------------------------------
Projected benefit obligation at end of year $ 11.7 $ 12.4
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ - $ -
Company contributions 0.4 0.3
Benefits paid (0.4) (0.3)
- ------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ - $ -
- ------------------------------------------------------------------------------------------
</TABLE>
The funded status of the plan and the amount reported in the Consolidated
Balance Sheets for the supplemental executive retirement plans follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------------
IN MILLIONS 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Funded status $ 11.7 $ 12.4
Unrecognized net(loss) (1.8) (3.1)
Unrecognized prior service cost (1.3) (1.4)
- ------------------------------------------------------------------------------------------
Accrued pension liability $ 8.6 $ 7.9
- ------------------------------------------------------------------------------------------
</TABLE>
The Company recorded, as part of Other comprehensive income, a minimum
pension liability adjustment to stockholders' equity for $2.0 million, $(1.6)
million and $(0.3) million in fiscal 1999, fiscal 1998 and fiscal 1997,
respectively. Funding for the supplemental executive retirement plan is not
subject to the statutory requirements of ERISA and no assets have been set aside
to satisfy the liability. All retirement payments for supplemental plans will be
made from general corporate assets.
42
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
Post-retirement Benefits Plan - The Company has an obligation to provide
post-retirement medical benefits to age 65 pursuant to collective bargaining
agreements at four of its facilities.
The net periodic post-retirement benefit cost was $0.3 million in fiscal
1999, and $0.4 million in both fiscal 1998 and fiscal 1997.
The reconciliation of the projected benefit obligation and the plan assets from
the beginning of the fiscal year to the end of the fiscal year follows:
<TABLE>
<CAPTION>
September 30,
------------------------------
IN MILLIONS 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation at beginning of year $ 3.9 $ 4.4
Interest cost 0.2 0.3
Actuarial (gain) loss (0.5) -
Benefits paid (0.7) (0.8)
- ---------------------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year $ 2.9 $ 3.9
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ - $ -
Company contributions 0.7 0.8
Benefits paid (0.7) (0.8)
- ---------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ - $ -
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The funded status of the plans and the amounts reported on the Consolidated
Balance Sheets for the post-retirement benefit plans follows:
<TABLE>
<CAPTION>
September 30,
------------------------------
IN MILLIONS 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Funded status $ 2.9 $ 3.9
Unrecognized net loss (0.4) (0.8)
- ---------------------------------------------------------------------------------------------------------------
Accrued post-retirement benefit obligations $ 2.5 $ 3.1
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed health care cost trend rate used in measuring the
accumulated post-retirement benefit obligations at September 30, 1999 was 6.0
percent. The assumed health care cost trend rate used in measuring the
accumulated post-retirement benefit obligations at September 30, 1998 was 7.0
percent decreasing 1.0 percent per year to an ultimate rate of 6.0 percent. The
discount rate used to calculate the accumulated post-retirement benefit
obligations at September 30, 1999 and 1998 was 7.00 percent and 6.75 percent,
respectively. At September 30, 1999, a change of 1.0 percent per year would
impact the accumulated post-retirement benefit obligation by $0.1 million and
the aggregate of the service and interest cost components of net periodic
post-retirement benefit cost by a de minimus amount.
Savings Plan - The Company sponsors a defined contribution retirement
savings plan (401k Plan) covering substantially all salaried employees of the
Company subject to certain service requirements. The 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. The
Company contributes to each participant's plan account an amount equal to 100
percent of the participant's contribution up to a maximum of 5 percent of the
participant's compensation. The Company's cost relating to the 401k Plan was
$2.6 million in fiscal 1999 and $1.6 million in both fiscal 1998 and fiscal
1997. The Company's cost increased in fiscal 1999 primarily due to a plan
amendment which increased the Company matching contributions to the plan.
43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
15. COMMITMENTS AND CONTINGENCIES The Company has various agreements,
which provide for the purchase of wood chips, hog fuel (bark and other residual
fiber from trees) and stumpage at market prices.
The Company has a contract to sell a specified amount of electricity
representing its cogeneration facility's anticipated excess capacity at the
contract date to Pacific Gas & Electric Company through 2013, subject to certain
adjustments. The Company does not intend to terminate this contract, however, if
terminated, penalties of approximately $6.8 million could be imposed against the
Company.
At September 30, 1999 the Company had an agreement to supply S&G
Packaging at market prices approximately 112,000 tons per year of unbleached
kraft paper. On October 28, 1999, the Company acquired the remaining 65 percent
share of S&G Packaging from Smurfit-Stone. In connection with the acquisition,
S&G Packaging entered into a paper supply agreement on October 28, 1999 to
purchase at market prices 60,000 tons, 48,000 tons and 36,000 tons of kraft
paper in fiscal 2000, fiscal 2001 and fiscal 2002 through fiscal 2004,
respectively, from Smurfit-Stone.
The Company has an agreement to purchase at market prices, through 2004,
approximately 24,000 tons per year of corrugating medium from Newark Group
Industries, Inc.
The Company has an agreement to purchase at market prices, through 2000,
approximately 18,000 tons per year of corrugating medium from Weyerhaeuser.
The Company has an agreement to purchase at market prices, through 2000,
approximately 50,000 tons per year of corrugating medium from Smurfit-Stone.
The Company is not a party to any legal proceedings other than
litigation incidental to normal business activities, except as described below:
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 (i) the Company's stockholder
Rights Agreement, adopted on June 12, 1995 and approved by the Company's
stockholders on June 28, 1995; (ii) amendments to the Company's charter and
by-laws, adopted on July 21, 1995; and (iii) a redemption of warrants in June
1995 all were designed to entrench the individual defendants in their capacities
as directors 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. Discovery is complete and the court has
conditionally certified a class of holders of common stock as of June 12, 1995,
and their successors in interest, transferees and assignees, immediate and
remote (excluding defendants and any person, firm, trust, corporation or other
entity related to the defendants). The Company has moved for summary judgment in
its favor on all counts of the complaint. The Company believes that, after
investigation of the facts, the allegations are without merit and is defending
itself vigorously. Trial is scheduled to begin on February 14, 2000.
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
44
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
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 state law claims 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.
Under an agreed Case Management Order (CMO), all actions in Louisiana
arising out of the October 23, 1995 explosion have been consolidated in the
Twenty-Second Judicial district in Washington Parish, Louisiana, where
plaintiffs have filed a single Consolidated Master Petition (CMP) against
Gaylord Chemical Corporation, the Company and twenty-one other defendants. The
CMP, as amended, asserts substantially all of the claims and theories made in
prior lawsuits, including negligence, strict liability and other statutory
liability. Compensatory and punitive damages are sought. No officers or
directors of Gaylord Chemical Corporation or the Company are named defendants in
the CMP, as amended. The status of all lawsuits pending before the filing of the
CMP, some of which name officers of Gaylord Chemical Corporation or the Company,
will be determined by the trial court after class certification issues are
finally resolved.
In November 1997, the Louisiana trial court certified these consolidated
cases as a class action. The trial court certified, and the Court of Appeal and
State Supreme Court upheld, a class consisting of allegedly injured parties in
the City of Bogalusa and portions of Washington Parish, Louisiana, and parts of
Marion, Walthall and Pike counties in Mississippi. The trial court did not
certify a single, mandatory class for punitive damages.
Potential class members have received notice of the action and in the next
few months will receive detailed proof of claim forms. No trial date has been
set for these consolidated Louisiana actions. The Company and its subsidiary are
vigorously contesting all claims.
In addition, the Company, Gaylord Chemical Corporation and numerous other
third-party companies have been named as defendants in 13 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 and damages similar to those in
Louisiana State Court. Discovery in the consolidated cases has been coordinated
with the on-going discovery in the Louisiana class action. Following several
rulings by the Mississippi trial court, over 7,000 individuals' claims in these
consolidated actions have been either dismissed or 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 Mississippi trial court
selected the first 20 plaintiffs whose claims were tried to a jury on all issues
of liability and damages beginning on March 29, 1999 and ending on June 23,
1999. During trial, the court dismissed with prejudice the claims of three
plaintiffs. The jury found Gaylord Chemical Corporation and a co-defendant,
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
Vicksburg Chemical Company, equally at fault for the accident. The jury also
found that none of the seventeen remaining plaintiffs whose claims went to the
jury had suffered any damages. Consequently, no defendant was found liable, and
no plaintiff was awarded any damages. Finally, the jury determined that the
Company was not responsible for the conduct of its subsidiary, Gaylord Chemical
Corporation. Plaintiffs have moved for a new trial or, alternatively, judgment
notwithstanding the verdict. The trial court has ordered that the results of
this trial will not be binding, either as to liability or compensatory or
punitive damages, on any of the other plaintiffs in the Mississippi consolidated
actions. Rather, the trial court ordered that each of the approximately 4,000
Mississippi plaintiffs will be required to prove their own individual claims of
liability or compensatory or punitive damages.
The Company and Gaylord Chemical Corporation maintain $127 million of
general liability insurance and filed separate suits seeking a declaratory
judgment of coverage for the October 23, 1995 accident against their general
liability and directors and officers liability insurance carriers. The carrier
with the first layer of coverage under the general liability policies has agreed
to pay the Company's and Gaylord Chemical Corporation's defense costs under a
reservation of rights.
The coverage action against the liability insurers was tried to a judge in
December 1998. During trial, one of the excess carriers settled by agreeing to
pay $5 million, its full policy limits. Trial concluded against the remaining
defendants on December 10, 1998 and on February 25, 1999, the trial court issued
an opinion holding that the Company and Gaylord Chemical Corporation have
insurance coverage for the October 23, 1995 accident under eight of the nine
remaining policies. The judge held that language in one policy excluded
coverage. On March 30, 1999, the trial court denied all the insurers' motions
for a new trial. The eight insurers issuing policies where coverage was found
have filed an appeal of the judgment with the Louisiana Court of Appeal. The
Company and Gaylord Chemical Corporation have appealed that part of the judgment
excluding coverage under one policy. Including coverage afforded by the
settlement and by the trial court's decision, the Company and Gaylord Chemical
Corporation have in excess of $110 million in insurance coverage for the October
23, 1995 accident.
On May 18 and May 24, 1999, the Company was named in lawsuits consolidated
in the Federal District Court for the Eastern District of Pennsylvania alleging
civil violations of Section 1 of the Sherman Act. The complaints, both putative
class actions, allege that during the period October 1, 1993 through November
30, 1995 the Company agreed with nine other manufacturers of linerboard to raise
or maintain prices. According to the complaints, the purpose and effect of the
alleged conspiracy was artificially to increase prices of corrugated sheets and
corrugated boxes sold to customers. Treble damages and attorney fees are sought.
The Company has moved to dismiss the complaints. After investigation of the
facts, the Company believes the allegations have no merit and is vigorously
defending itself.
The Company believes the outcome of such litigation will not have a
material adverse effect on its financial position, results of operations or cash
flows.
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
16. 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, is
as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------
ESTIMATED Estimated
CARRYING FAIR Carrying fair
IN MILLIONS AMOUNT VALUE amount value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and equivalents $ 10.4 $ 10.4 $ 5.7 $ 5.7
Trade receivables 149.8 149.8 122.4 122.4
Long-term notes receivable 11.4 11.9 11.9 12.3
Liabilities
Trade payables 56.2 56.2 42.3 42.3
Senior and subordinated notes 675.0 619.1 675.0 500.0
Capital lease obligations 13.1 13.1 17.6 17.6
Other senior debt 247.6 248.1 180.4 180.9
</TABLE>
Cash and equivalents, trade receivables, trade payables and capital lease
obligations - The carrying amount of these items are a reasonable estimate of
their fair value.
Senior and subordinated notes - Estimated fair value is based on
estimates obtained from dealers/brokers.
Long-term notes receivable and other senior debt - Interest rates that
are currently available to the Company for similar terms and remaining
maturities are used to estimate fair value.
The fair value estimates presented herein were based on pertinent
information available to the Company at September 30, 1999 and 1998. 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.
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
17. SUPPLEMENTAL CASH FLOW DISCLOSURES
The balance sheet effects of non-cash transactions which are not reflected in
the consolidated statements of cash flows and other supplemental cash flow
disclosures are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
IN MILLIONS 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest expense $ 82.1 $ 91.2 $ 79.5
Cash paid (refund) for income taxes - (5.2) 1.9
Supplemental schedule of non-cash
Investing and financing activities:
Property additions 14.7 10.2 2.4
Increase in total debt 14.7 10.5 0.8
Increase (decrease) in accrued
and other liabilities - (0.3) 1.6
Write-off of deferred financing fees - 8.0 2.8
</TABLE>
18. EARNINGS PER SHARE
Effective October 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 requires
the presentation of both basic earnings per share and diluted earnings per
share. The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
IN MILLIONS, EXCEPT PER SHARE DATA 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net loss before extraordinary items $ (46.4) $ (57.4) $ (74.3)
Extraordinary loss - (25.1) (7.7)
- ----------------------------------------------------------------------------------------------------
Net loss $ (46.4) $ (82.5) $ (82.0)
- ----------------------------------------------------------------------------------------------------
Denominator:
Basic:
Weighted average common shares outstanding 53.4 53.2 52.8
Diluted:
Effect of dilutive securities:
Employee and director stock options 0.4 0.7 0.7
- ----------------------------------------------------------------------------------------------------
Weighted average common and common share equivalents 53.8 53.9 53.5
- ----------------------------------------------------------------------------------------------------
Net loss per common share:
Basic and diluted (A):
Net loss before extraordinary items $ (0.87) $ (1.08) $ (1.40)
Extraordinary loss - (0.47) (0.15)
- ----------------------------------------------------------------------------------------------------
Net loss $ (0.87) $ (1.55) $ (1.55)
- ----------------------------------------------------------------------------------------------------
</TABLE>
(A) Basic and diluted loss per common share are equal due to the antidilutive
effect of the common share equivalents.
19. BUSINESS SEGMENT
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", on
October 1, 1998, and concluded that the Company is an integrated manufacturer of
brown paper packaging products primarily engaged in one line of business. The
Company produces and sells primarily brown paper packaging products, which
include corrugated containers, corrugated sheets, containerboard, unbleached
kraft paper and multiwall bags. Total revenues for the brown paper packaging
segment (the Segment) were $853.5 million, $823.7 million and $739.7 million in
fiscal 1999, fiscal 1998 and fiscal 1997, respectively. The Segment's net loss
was $48.2 million, $85.6
48
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corporation and Subsidiaries
million and $84.9 million in fiscal 1999, fiscal 1998 and fiscal 1997,
respectively. The Segment's total assets were $981.1 million and $942.9 million
at September 30, 1999 and September 30, 1998, respectively. The Segment
represents substantially all of the Company's consolidated results of operations
and financial position.
The Company sells its products to thousands of customers with its largest
customer, excluding sales to affiliates, accounting for approximately 2 percent
of net sales in fiscal 1999 and 3 percent of net sales in both fiscal 1998 and
fiscal 1997. The Company exports linerboard and unbleached kraft paper, certain
converted products and specialty chemicals. Such sales totaled $59.5 million,
$64.5 million and $66.4 million in fiscal 1999, fiscal 1998 and fiscal 1997,
respectively.
20. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
--------------------------------------------------------------
IN MILLIONS, EXCEPT PER SHARE DATA 1st 2nd 3rd 4th Year
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <S> <C> <C>
FISCAL 1999
Net sales $ 198.8 $201.0 $229.0 $ 241.8 $ 870.6
Gross margin 20.4 15.3 35.9 41.5 113.1
Net loss (15.1) (19.3) (8.0) (4.0) (46.4)
Net loss per common share:
Basic and diluted:
Net loss (0.28) (0.36) (0.15) (0.08) (0.87)
Weighted average common shares
outstanding 53.3 53.3 53.4 53.5 53.4
Common stock price (AMEX) - High 6 1/4 7 15/16 8 3/4 8 11/16 8 3/4
- Low 2 1/4 5 3/4 6 1/16 6 9/16 2 1/4
Warrant price (AMEX) - High 4 1/2 7 11/16 8 7 3/4 8
- Low 3 1/8 6 1/16 7 5/8 7 5/8 3 1/8
FISCAL 1998
Net sales $ 197.6 $219.1 $212.1 $ 213.8 $ 842.6
Gross margin 11.5 21.6 23.3 28.2 84.6
Net Loss before extraordinary items (18.8) (14.8) (12.7) (11.1) (57.4)
Extraordinary loss (Note 2) - (23.9) (1.2) - (25.1)
Net loss (18.8) (38.7) (13.9) (11.1) (82.5)
Net loss per common share:
Basic and diluted:
Loss before extraordinary items (0.35) (0.28) (0.24) (0.21) (1.08)
Extraordinary loss - (0.45) (0.02) - (0.47)
Net loss (0.35) (0.73) (0.26) (0.21) (1.55)
Weighted average common shares
outstanding 53.0 53.1 53.2 53.3 53.2
Common stock price (AMEX) - High 8 15/16 8 10 3/4 8 1/4 10 3/4
- Low 5 3/8 5 3/8 7 1/8 2 2
Warrant price (AMEX) - High 8 1/4 7 3/4 10 1/2 7 5/8 10 1/2
- Low 5 1/2 6 6 7/8 2 1/2 2 1/2
</TABLE>
49
<PAGE> 51
Number and Description of Exhibit
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
- --------------------------------------------------------------------------------
Not applicable.
PART 3
- --------------------------------------------------------------------------------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
See the section captioned Executive Officers of the Registrant under Part 1 of
this Report for information concerning the Company's executive officers.
There is incorporated by reference herein from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held February
8, 2000 the sections therein captioned Director Nominees for Election at the
2000 Annual Meeting.
Item 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
There is incorporated by reference herein from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held February
8, 2000 the sections therein captioned Executive Compensation and Employment
Agreements.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
There is incorporated by reference herein from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held February
8, 2000 the section therein captioned Information With Respect to Certain
Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
There is incorporated by reference herein from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held February
8, 2000 the section therein captioned Certain Transactions.
PART 4
- --------------------------------------------------------------------------------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
a. Financial Statement Schedule. The following Financial Statement Schedule
is filed with this Annual Report on Form 10-K on the pages indicated:
Description Page
------------------------------------------------------------------------
II. Valuation and Qualifying Accounts and Reserves 58
All other schedules have been omitted because the information is either not
required or is included in the Consolidated Financial Statements or Notes to
Consolidated Financial Statements listed under Item 8.
50
- ------------------------
(a) Incorporated by reference.
(b) Filed with this Form 10-K Report.
<PAGE> 52
Number and Description of Exhibit
b. No reports have been filed on Form 8-K during the current reporting
period.
c. Exhibits. Each Exhibit is listed according to the number assigned to
it in the Exhibit Table of Item 601 of Regulation S-K.
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8 No. 33-25675
(filed November 28, 1988), No. 33-32221 (filed November 27, 1989), No. 33-33977
(filed March 21, 1990), No. 33-33871 (filed March 21, 1990), No. 33-54367 (filed
June 29, 1994) and No. 333-39809 (filed November 7, 1997):
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expense incurred or paid by a director, officer or controlling person
of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by final
adjudication of such issue.
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Number and Description of Exhibit
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant, as of July 21, 1995, incorporated by reference to
Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q (No.
1-9915) for the quarter ended June 30, 1995 filed under the
Securities Exchange Act of 1934, as amended (the June 30, 1995
Form 10-Q)
3.2(a) Amended and Restated Bylaws of the Registrant, as amended,
incorporated by reference to Exhibit 3.1 of the Registrant's
Current Report on Form 8-K filed on July 5, 1995 under the
Securities Act of 1934, as amended (the July 5, 1995 Form 8-K)
4.1(a) Amendment No. 1 to the Credit Agreement dated as of February 16,
1999 by and between the Registrant and Bankers Trust Company as
agent, and various lending institutions, incorporated by reference
to Exhibit 4.1 of the December 31, 1998 Form 10-Q
51
- ------------------------
(a) Incorporated by reference.
(b) Filed with this Form 10-K Report.
<PAGE> 53
Number and Description of Exhibit
4.2(a) Securities Purchase Agreement, dated as of February 13, 1998,
among the Company and BT Alex. Brown Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation, Bear Stearns & Co. Inc.,
Salomon Brothers Inc, and NationsBanc Montgomery Securities LLC,
as Initial Purchasers, incorporated by reference to Exhibit 4.27
of the Company's Registration Statement on Form S-4 (No.
333-48495) filed under the Securities Act of 1933 as amended (the
1998 Debt Registration Statement)
4.3(a) Indenture dated February 23, 1998, among the Company and State
Street Bank and Trust Company, as Trustee (including the forms of
Series A and Series B 9 3/8% Senior Notes), incorporated by
reference to Exhibit 4.28 of the 1998 Debt Registration Statement
4.4(a) Registration Rights Agreement dated as of February 23, 1998 among
the Company, and BT Alex. Brown Incorporated, Donaldson, Lufkin &
Jenrette Securities Corporation, Bear Stearns & Co. Inc., Salomon
Brothers Inc, and NationsBanc Montgomery Securities LLC with
respect to the 9 3/8% Senior Notes due 2007, incorporated by
reference to Exhibit 4.29 of the 1998 Debt Registration Statement
4.5(a) Indenture, dated as of February 23, 1998, among the Company and
Chase Bank of Texas National Association with respect to the
9 7/8% Senior Subordinated Notes due 2008 (including the forms of
Series A and Series B 9 7/8% Senior Subordinated Notes due 2008),
incorporated by reference to Exhibit 4.30 of the 1998 Debt
Registration Statement
4.6(a) Registration Rights Agreement, dated as of February 23, 1998,
among the Company and BT Alex. Brown Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation, Bear Stearns & Co. Inc.,
Salomon Brothers Inc, and NationsBanc Montgomery Securities LLC,
with respect to the 9 7/8% Senior Subordinated Notes due 2008,
incorporated by reference to Exhibit 4.31 of the 1998 Debt
Registration Statement
4.7(a) Credit Agreement dated as of June 19, 1998 by and between the
Registrant and Bankers Trust Company as agent, and various lending
institutions, incorporated by reference to Exhibit 4.1 of the
Registrant's Quarterly Report on Form 10-Q (No. 1-9915) for the
quarter ended June 30, 1998 filed under the Securities Exchange
Act of 1934, as amended
4.8(a) Indenture dated as of June 12, 1997, among the Company and State
Street Bank and Trust Company, as successor to Fleet National
Bank, as Trustee, (including the forms of Series A and Series B
9 3/4% Senior Notes), incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-4 (No. 333-30423)
filed under the Securities Act of 1933, as amended (the 1997 Debt
Registration Statement)
4.9(a) Registration Rights Agreement dated as of June 5, 1997 among the
Company, BT Securities Corporation, Bear Stearns & Co. Inc. and
Salomon Brothers Inc, incorporated by reference to Exhibit 4.7 of
the 1997 Debt Registration Statement
52
- ------------------------
(a) Incorporated by reference.
(b) Filed with this Form 10-K Report.
<PAGE> 54
Number and Description of Exhibit
4.10(a) Extension of Credit Agreement dated as of September 2, 1997
between Gaylord Receivables Corporation, the financial
institutions signatory thereto and Harris Trust and Savings Bank
as Facility Agent, incorporated by reference to Exhibit 4.25 of
the Company's Annual Report on Form 10-K (No. 1-9915) for the year
ended September 30, 1997, filed under the Securities Exchange Act
of 1934, as amended
4.11(a) Amendment No. 1 to Receivables Purchase Agreement dated as of
November 7, 1996 between the Company and Gaylord Receivables
Corporation, incorporated by reference to Exhibit 3.16 of the
Company's Annual Report on Form 10-K (No. 1-9915) for the year
ended September 30, 1996, filed under the Securities Exchange Act
of 1934, as amended (the 1996 Form 10-K)
4.12(a) Extension of Credit Agreement dated as of September 27, 1996
between Gaylord Receivables Corporation, the financial
institutions signatory thereto and Harris Trust and Savings Bank
as Facility Agent, incorporated by reference to Exhibit 4.19 of
the 1996 Form 10-K
4.13(a) Rights Agreement, dated June 12, 1995, between the Registrant and
Harris Trust and Savings Bank as Rights Agent, including the form
of Certificate of Designation, Preferences and Rights of Junior
Participating Preferred Stock, Series A, attached thereto, as
Exhibit A, the form of Rights Certificate attached thereto as
Exhibit B and the Summary of Rights attached thereto as Exhibit C,
incorporated by reference to Exhibit 4.1 of the July 5, 1995 Form
8-K
4.14(a) Subscription and Stockholder Agreement dated as of September 24,
1993 between the Registrant and Gaylord Receivables Corporation,
incorporated by reference to Exhibit 4.13 of the Registrant's
Annual Report on Form 10-K (No. 1-9915) for the year ended
September 30, 1993, filed under the Securities Exchange Act of
1934, as amended (the 1993 Form 10-K)
4.15(a) Receivables Purchase Agreement dated as of September 24, 1993
between the Registrant and Gaylord Receivables Corporation,
incorporated by reference to Exhibit 4.14 of the 1993 Form 10-K
4.16(a) Gaylord Receivables Master Pooling and Servicing Agreement dated
as of September 24, 1993 between the Registrant and Gaylord
Receivables Corporation, incorporated by reference to Exhibit 4.15
of the 1993 Form 10-K
4.17(a) Revolving Credit Agreement dated as of September 24, 1993 between
Gaylord Receivables Corporation, the financial institutions
signatory thereto and Harris Trust and Savings Bank as Facility
Agent, incorporated by reference to Exhibit 4.16 of the 1993 Form
10-K
4.18(a) Security Agreement dated as of September 24, 1993 between Gaylord
Receivables Corporation and Harris Trust and Savings Bank,
incorporated by reference to Exhibit 4.17 of the 1993 Form 10-K
53
- ------------------------
(a) Incorporated by reference.
(b) Filed with this Form 10-K Report.
<PAGE> 55
Number and Description of Exhibit
4.19(a) Series 1993-1 A-RI Supplemental Issuance Agreement dated as of
September 24, 1993 by and between the Registrant, Gaylord
Receivables Corporation and Manufacturers and Traders Trust
Company, as Trustee, incorporated by reference to Exhibit 4.1 of
the Registrant's Quarterly Report on Form 10-Q (No. 1-9915) for
the quarter ended December 31, 1993, filed under the Securities
Exchange Act of 1934, as amended
4.20(a) Specimen Certificate for the Class A Common Stock, par value
$0.0001 per share, of the Registrant, incorporated by reference to
Exhibit 4.5 of the Registrant's Current Report on Form 8-K filed
on October 30, 1992 under the Securities Exchange Act of 1934, as
amended (October 30, 1992 Form 8-K)
4.21(a) Warrant Agreement between the Registrant and Harris Trust and
Savings Bank, as Warrant Agent, relating to the Registrant's
Redeemable Exchangeable Warrants, incorporated by reference to
Exhibit 4.3 of the October 30, 1992 Form 8-K
4.22(a) Specimen Certificate for the Redeemable Exchangeable Warrants of
the Registrant, incorporated by reference to Exhibit 4.6 of the
October 30, 1992 Form 8-K
4.23(a) Trust Agreement between the Registrant and Harris Trust and
Savings Bank, as Warrant Agent, relating to the Class A Common
Stock obtainable upon exercise of the Redeemable Exchangeable
Warrants, incorporated by reference to Exhibit 4.4 of the October
30, 1992 Form 8-K
10.1(b) Securities Purchase Agreement dated as of October 28, 1999 by and
between the Registrant and Stone Container Corporation
10.2(b) Amended and Restated Supply Agreement as of October 28, 1999 by
and among Stone Container Corporation, S&G Packaging Company,
L.L.C. and the Registrant
10.3(b) Patent, Trademark and Trade Secret Assignment as of October 28,
1999 by and between Stone Container Corporation and S&G Packaging
Company, L.L.C.
10.4(a) Letters dated March 1, 1991 and March 19, 1991 between the
Registrant and Cavenham Forest Industries, Inc., amending the
Bogalusa Roundwood Supply and Cutting Rights Agreement dated as of
March 28, 1986, incorporated by reference to Exhibit 10(e) of the
Registrant's Proxy Statement - Prospectus on Form S-4 (No.
33-41799) as amended, filed under the Securities Act of 1933, as
amended (the 1991 Proxy Statement - Prospectus)
10.5(a) Letters dated March 1, 1991 and March 19, 1991 between the
Registrant and Caveham Forest Industries, Inc. amending the
Bogalusa Wood Chip Supply Agreement dated as of March 28, 1986,
incorporated by reference to Exhibit 10(i) of the 1991 Proxy
Statement - Prospectus
10.6(a) Stockholder Agreement by and among the Registrant and the Persons
listed on the signature pages thereto dated as of June 1, 1988,
incorporated by reference to Exhibit 10.22 of the Registrant's
54
- ------------------------
(a) Incorporated by reference.
(b) Filed with this Form 10-K Report.
<PAGE> 56
Number and Description of Exhibit
Registration Statement on Form S-1 (No. 33-21227), as amended,
filed under the Securities Act of 1933, as amended (the 1988 Debt
Registration Statement)
10.7(a) Agreement among the Registrant and the Persons listed on the
signature pages thereto dated as of June 1, 1988, incorporated by
reference to Exhibit 10.23 of the 1988 Debt Registration Statement
10.8(a) Bogalusa Hog Fuel Supply Agreement by and between the Registrant
and Cavenham Forest Industries, Inc. dated as of March 28, 1986,
incorporated by reference to Exhibit 10.8 of the Registrant's
Registration Statement on Form S-1 (No. 33-13455), as amended,
filed under the Securities Act of 1933, as amended (the 1986 Debt
Registration Statement)
10.9(a) Bogalusa Hog Fuel Supply Agreement (St. Francisville) by and
between the Registrant and Crown Zellerbach Corporation dated as
of March 31, 1986, incorporated by reference to Exhibit 10.9 of
the 1986 Debt Registration Statement
10.10(a) Bogalusa Sawmill Agreement by and between the Registrant and
Cavenham Forest Industries, Inc. dated as of March 28, 1986,
incorporated by reference to Exhibit 10.11 of the 1986 Debt
Registration Statement
10.11(a) Bogalusa Timberland Agreement by and between the Registrant and
Cavenham Forest Industries, Inc. dated as of March 28, 1986,
incorporated by reference to Exhibit 10.12 of the 1986 Debt
Registration Statement
10.12(a) Transfer and Assumption Agreement by and between the Registrant
and Gaylord Container Limited dated as of November 17, 1986,
incorporated by reference to Exhibit 10.16 of the 1986 Debt
Registration Statement
10.13(a) Undertaking by and between the Registrant and Crown Zellerbach
Corporation dated as of May 2, 1986, incorporated by reference to
Exhibit 10.17 of the 1986 Debt Registration Statement
10.14(a) Bogalusa Roundwood Supply and Cutting Rights Agreement by and
between the Registrant and Cavenham Forest Industries, Inc. dated
as of March 28, 1986, incorporated by reference to Exhibit 10.10
of the 1986 Debt Registration Statement
10.15(a) Bogalusa Wood Chip Supply Agreement by and between the Registrant
and Cavenham Forest Industries, Inc., dated as of March 28, 1986,
incorporated by reference to Exhibit 10.13 of the 1986 Debt
Registration Statement
10.16(a) Indemnification Agreement by and between the Registrant, Crown
Zellerbach Corporation and Cavenham Forest Industries, Inc. dated
as of November 17, 1986 regarding Power Purchase Agreement by and
between Pacific Gas & Electric Company and Crown Zellerbach
Corporation dated as of December 29, 1982, incorporated by
reference to Exhibit 10.15 of the 1986 Debt Registration Statement
55
- ------------------------
(a) Incorporated by reference.
(b) Filed with this Form 10-K Report.
<PAGE> 57
Number and Description of Exhibit
10.17(a) Transaction Agreement by and between James River Corporation of
Virginia and Crown Zellerbach Corporation dated as of December 14,
1985, incorporated by reference to Exhibit 10.18 of the 1986 Debt
Registration Statement
10.18(a) Power Purchase Agreement by and between Pacific Gas & Electric
Company and Crown Zellerbach Corporation dated as of December 29,
1982, incorporated by reference to Exhibit 10.14 of the 1986 Debt
Registration Statement
10.19(a) Gaylord Container Corporation Supplemental Executive Retirement
Plan as amended dated November 4, 1998, incorporated by reference
to Exhibit 10.18 of the 1998 Form 10-K
10.20(a) Employment Letter Agreement by and between the Registrant and
Daniel P. Casey, dated November 18, 1998, incorporated by
reference to Exhibit 10.19 of the 1998 Form 10-K
10.21(a) Employment Letter Agreement by and between the Registrant and Dale
E. Stahl, dated November 18, 1998, incorporated by reference to
Exhibit 10.20 of the 1998 Form 10-K
10.22(a) Employment Letter Agreement by and between the Registrant and
Lawrence G. Rogna, dated November 18, 1998, incorporated by
reference to Exhibit 10.21 of the 1998 Form 10-K
10.23(a) Gaylord Container Corporation 1997 Long-Term Incentive Equity
Plan, incorporated by reference to Exhibit 28.1 of the Registrant
Registration Statement on Form S-8 (No. 333-39809) filed under the
Securities Act of 1933, as amended
10.24(a) Description of Gaylord Container Corporation Management Incentive
Plan, incorporated by reference to Exhibit 10.31 of Amendment No.
3 to the Company's Registration Statement on Form S-4 (No.
333-30423) filed under the Securities Act of 1933, as amended
(Amendment No. 3 to the 1997 Debt Registration Statement)
10.25(a) Gaylord Container Corporation Supplemental Retirement Plan,
incorporated by reference to Exhibit 10.33 of Amendment No. 3 to
the 1997 Debt Registration Statement
10.26(a) Employment Agreement by and between the Company and Marvin A.
Pomerantz dated June 1, 1997, incorporated by reference to Exhibit
10.18 of the 1997 Debt Registration Statement
10.27(a) Gaylord Container Corporation Shareholder Value Plan, incorporated
by reference to Exhibit A of the Company's Proxy Statement for its
1994 Annual meeting held December 10, 1993
10.28(a) Stock Retention Agreement dated June 25, 1992 between the
Registrant and Mid-America Group, Ltd., incorporated by reference
to Exhibit 10(nn) of the 1991 Proxy Statement - Prospectus
10.29(a) Amendment No. 1 to Employment Agreement between the Registrant and
Warren J. Hayford dated February 8, 1989, incorporated by
reference to Exhibit 10.26 of the 1989 Debt Registration Statement
56
- ------------------------
(a) Incorporated by reference.
(b) Filed with this Form 10-K Report.
<PAGE> 58
Number and Description of Exhibit
10.30(a) Gaylord Container Corporation 1989 Long-Term Incentive Plan,
incorporated by reference to Exhibit 28.1 of the Registrant's
Registration Statement on Form S-8 (No. 33-33977) filed under the
Securities Act of 1933, as amended
10.31(a) Employment Agreement by and between the Registrant and Warren J.
Hayford dated as of May 18, 1988, incorporated by reference to
Exhibit 10.2 of the 1988 Debt Registration Statement
10.32(a) Gaylord Container Corporation 1987 Key Employee Stock Option Plan,
incorporated by reference to Exhibit 28 of the Registrant's
Registration Statement on Form S-8 (No. 33-25675) filed under the
Securities Act of 1933, as amended
10.33(a) Gaylord Container Corporation Outside Director Stock Option Plan,
incorporated by reference to Exhibit 28 of the Registrant's
Registration Statement on Form S-8 (No. 33-33871) filed under the
Securities Act of 1933, as amended
10.34(a) Gaylord Container Corporation Supplemental Executive Retirement
Plan, incorporated by reference to Exhibit 10.36 of the Company's
Annual Report on Form 10-K (No. 1-9915) for the year ended
September 30, 1995, filed under the Securities Exchange Act of
1934, as amended
21.1(a) Subsidiaries of the Registrant, incorporated by reference to
Exhibit 21.1 of the Amendment No. 1 to the Company's Registration
Statement on Form S-4 (No. 333-30423) filed under the Securities
Act of 1933, as amended
23.1(b) Consent of Deloitte & Touche LLP
24.1(b) Power of Attorney
27.1(b) Financial Data Schedule
57
- ------------------------
(a) Incorporated by reference.
(b) Filed with this Form 10-K Report.
<PAGE> 59
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged to Balance
beginning costs and other at end of
In millions of year expenses accounts Deductions year
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended September 30, 1997:
Allowance for accounts receivable $ 6.9 $ 21.9 $ - $ (23.3) $ 5.5
- -----------------------------------------------------------------------------------------------------------------------------
Reserves - asset write-down $ 24.1 $ - $ (9.0) $ (3.6) $ 11.5
- -----------------------------------------------------------------------------------------------------------------------------
Reserves - allowance for abandonments $ 1.2 $ - $ (0.1) $ (0.5) $ 0.6
- -----------------------------------------------------------------------------------------------------------------------------
Reserves - purchase adjustments-accrued
restructuring costs $ 0.6 $ - $ 1.4 $ (0.8) $ 1.2
- -----------------------------------------------------------------------------------------------------------------------------
Reserves long-term - purchase
adjustments - accrued restructuring
costs $ 1.9 $ 0.5 $ (1.5) $ - $ 0.9
- -----------------------------------------------------------------------------------------------------------------------------
For the Year Ended September 30, 1998:
Allowance for accounts receivable $ 5.5 $ 8.9 $ - $ (8.0) $ 6.4
- -----------------------------------------------------------------------------------------------------------------------------
Reserves - asset write-down $ 11.5 $ - $ - $ (4.7) $ 6.8
- -----------------------------------------------------------------------------------------------------------------------------
Reserves - allowance for abandonments $ 0.6 $ - $ 0.3 $ (0.2) $ 0.7
- -----------------------------------------------------------------------------------------------------------------------------
Reserves - purchase adjustments-accrued
restructuring costs $ 1.2 $ - $ - $ (0.5) $ 0.7
- -----------------------------------------------------------------------------------------------------------------------------
Reserves long-term - purchase
adjustments - accrued restructuring
costs $ 0.9 $ - $ - $ - $ 0.9
- -----------------------------------------------------------------------------------------------------------------------------
For the Year Ended September 30, 1999:
Allowance for accounts receivable $ 6.4 $ 9.0 $ - $ (8.7) $ 6.7
- -----------------------------------------------------------------------------------------------------------------------------
Reserves - asset write-down $ 6.8 $ - $ (0.8) $ (3.8) $ 2.2
- -----------------------------------------------------------------------------------------------------------------------------
Reserves - allowance for abandonments $ 0.7 $ - $ - $ (0.1) $ 0.6
- -----------------------------------------------------------------------------------------------------------------------------
Reserves - purchase adjustments-accrued
restructuring costs $ 0.7 $ - $ - $ (0.5) $ 0.2
- -----------------------------------------------------------------------------------------------------------------------------
Reserves long-term - purchase
adjustments - accrued restructuring
costs $ 0.9 $ 0.1 $ - $ - $ 1.0
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE> 60
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 16th day of
December, 1999.
Gaylord Container Corporation
/s/ Marvin A. Pomerantz
-----------------------------
Marvin A. Pomerantz
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on the 16th day of December, 1999, by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Marvin A. Pomerantz Chairman, Chief Executive Officer and Director
- ---------------------------- (Principal Executive Officer)
Marvin A. Pomerantz
/s/ Daniel P. Casey Executive Vice President
- ---------------------------- (Principal Financial Officer)
Daniel P. Casey
/s/ Jeffrey B. Park Vice President-Corporate Controller
- ---------------------------- (Principal Accounting Officer)
Jeffrey B. Park
/s/ Mary Sue Coleman Director
- ----------------------------
Mary Sue Coleman*
/s/ Harve A. Ferrill Director
- ----------------------------
Harve A. Ferrill*
/s/ John E. Goodenow Director
- ----------------------------
John E. Goodenow*
/s/ David B. Hawkins Director
- ----------------------------
David B. Hawkins*
/s/ Warren J. Hayford Director
- ----------------------------
Warren J. Hayford*
/s/ Charles S. Johnson Director
- ----------------------------
Charles S. Johnson*
/s/ Jerry W. Kolb Director
- ----------------------------
Jerry W. Kolb*
/s/ Ralph L. MacDonald Jr. Director
- ----------------------------
Ralph L. MacDonald Jr.*
/s/ Thomas H. Stoner Director
- ----------------------------
Thomas H. Stoner*
*By Daniel P. Casey, Attorney-in-fact
59
<PAGE> 1
EXHIBIT 10.1(b)
================================================================================
SECURITIES PURCHASE AGREEMENT
BY AND BETWEEN
GAYLORD CONTAINER CORPORATION
AND
STONE CONTAINER CORPORATION
DATED AS OF OCTOBER 28, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
PAGE
ARTICLE I
DEFINITIONS........................................................1
1.1 Definitions..................................................1
1.2 Other Definitions............................................5
ARTICLE II
PURCHASE AND SALE OF SECURITIES....................................6
2.1 Securities Purchase..........................................6
2.2 Closing Transactions.........................................6
ARTICLE III
CONDITIONS TO CLOSING..............................................7
3.1 Conditions to Buyer's Obligations............................7
3.2 Conditions to Seller's Obligations...........................9
ARTICLE IV
REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY.............10
4.1 Title to Properties.........................................10
4.2 Contracts and Commitments...................................11
4.3 Proprietary Rights..........................................12
4.4 Environmental Matters.......................................13
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER..........................13
5.1 Organization and Corporate Power............................13
5.2 Authorization...............................................13
5.3 No Violation................................................14
5.4 Governmental Authorities and Consents.......................14
5.5 Securities..................................................14
5.6 Title to Assets of Company..................................14
5.7 Litigation..................................................14
5.8 Brokerage...................................................15
i
<PAGE> 3
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF BUYER.............................15
6.1 Organization and Corporate Power..............................15
6.2 Authorization.................................................15
6.3 No Violation..................................................15
6.4 Governmental Authorities and Consents.........................15
6.5 Litigation....................................................16
6.6 Brokerage.....................................................16
ARTICLE VII
INDEMNIFICATION AND RELATED MATTERS.................................16
7.1 Survival......................................................16
7.2 Indemnification...............................................17
7.3 Pre-Joint Venture Liabilities.................................20
ARTICLE VIII
ADDITIONAL AGREEMENTS...............................................21
8.1 Tax Matters...................................................21
8.2 Press Releases and Announcements..............................21
8.3 Further Transfers.............................................21
8.4 Specific Performance..........................................21
8.5 Expenses......................................................22
8.6 Non-Competition, Non-Solicitation and Confidentiality.........22
8.7 Termination of Agreements.....................................23
8.8 Transition Assistance.........................................24
8.9 Sufficient Capitalization.....................................24
9.1 Amendment and Waiver..........................................24
9.2 Notices.......................................................24
9.3 Binding Agreement; Assignment.................................25
9.4 Severability..................................................25
9.5 Construction..................................................26
9.6 Captions......................................................26
9.7 Entire Agreement..............................................26
9.8 Counterparts..................................................26
9.9 Governing Law.................................................26
9.10 Parties in Interest...........................................26
9.11 Arbitration...................................................27
9.12 Delivery by Facsimile.........................................28
ii
<PAGE> 4
SECURITIES PURCHASE AGREEMENT
THIS AGREEMENT is made as of October 28, 1999, by and between
Gaylord Container Corporation, a Delaware corporation ("Buyer") and Stone
Container Corporation, a Delaware corporation ("Seller"). Seller and Buyer are
collectively referred to herein as the "Parties" and individually as a "Party."
WHEREAS, Seller owns beneficially and of record 65% of the
membership interests of S & G Packaging Company, L.L.C., a Delaware limited
liability company (the "Company") and Buyer owns beneficially and of record 35%
of the membership interests of the Company.
WHEREAS, Seller desires to sell, and Buyer desires to purchase,
all of Seller's membership interests in the Company (collectively, the
"Securities"), subject to the terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. For purposes of this Agreement, the following
terms shall have the meanings set forth below:
"Affiliate" of any particular Person means any other Person
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities or otherwise.
"Buyer Pre-Joint Venture Liabilities" means any and all Losses of
the Company (including, without limitation, any and all liabilities of the
Company pursuant to CERCLA or any other Environmental and Safety Requirements)
which (i) relate to or arise out of occurrences prior to July 12, 1996 and (ii)
arise from, relate to or are attributable to the conduct of Buyer, its
predecessors or any of their affiliates.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended from time to time.
"Credit Agreement" means the Credit Agreement, dated as of July
12, 1996, among the Company, Bankers Trust Company and certain lenders parties
thereto, as amended from time to time.
"Code" means the Internal Revenue Code of 1986, as amended from
time to time.
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"Contract" shall mean any contract, license, sublicense,
franchise, permit, mortgage, purchase orders, indenture, loan agreement, lease,
sublease, agreement, obligation, instrument or other arrangement or any
commitment to enter into any of the foregoing (in each case, whether written or
oral) to which the Company is a party or by which any of its assets are bound.
"Disputed Amount" means the aggregate amount of consumption
credit to which the Company is entitled to under the Original Supply Agreement.
In the event that Buyer and Seller cannot agree on the Disputed Amount at or
prior to Closing, for purposes of this Agreement, the Disputed Amount shall be
deemed to be $50 per ton of such paper.
"Environmental and Safety Requirements" shall mean all federal,
state, local and foreign statutes, regulations, ordinances and other provisions
having the force or effect of law, all judicial and administrative orders and
determinations, all contractual obligations and all common law, in each case
concerning public health and safety, worker health and safety and pollution or
protection of the environment, including, without limitation, all those relating
to the presence, use, production, generation, handling, transport, treatment,
storage, disposal, distribution, labeling, testing, processing, discharge,
Release, threatened Release, control or cleanup of any hazardous or otherwise
regulated materials, substances or wastes, chemical substances or mixtures,
pesticides, pollutants, contaminants, toxic chemicals, petroleum products or
byproducts, asbestos, polychlorinated biphenyls, noise or radiation, as the
foregoing are enacted and in effect prior to, on, or after the Closing Date.
"Indebtedness" means (i) any indebtedness for borrowed money or
issued in substitution for or exchange of indebtedness for borrowed money, (ii)
any indebtedness evidenced by any note, bond, debenture or other debt security,
(iii) any indebtedness for the deferred purchase price of property or services
with respect to which a Person is liable, contingently or otherwise, as obligor
or otherwise (other than trade payables and other current liabilities incurred
in the Ordinary Course of Business which are not more than six months past due),
(iv) any commitment by which a Person assures a creditor against loss
(including, without limitation, contingent reimbursement obligations with
respect to letters of credit), (v) any indebtedness guaranteed in any manner by
a Person (including, without limitation, guarantees in the form of an agreement
to repurchase or reimburse), (vi) any obligations under capitalized leases with
respect to which a Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or with respect to which obligations a Person assures a
creditor against loss, (vii) any indebtedness secured by a Lien on a Person's
assets, and (viii) any amounts owed to any Person under any noncompetition or
consulting arrangements.
"JV Agreement" means the Joint Venture Agreement between Buyer
and Seller, dated as of July 12, 1996.
"Knowledge" as used in the phrases "to the Knowledge of Seller",
"to Seller's Knowledge" or phrases of similar import means the information
provided to Seller from each of Thomas Richardson, Thomas Cadden, Edward
Byczynski, Leslie Lederer and Alan Kolleff in their
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respective Certificates Regarding Representations and Warranties, the form of
such certificates being attached hereto as Appendix A.
"Liens" means any mortgage, pledge, security interest,
encumbrance, claim, Tax, lien or charge of any kind (including, without
limitation, any conditional sale or other title retention agreement or lease in
the nature thereof), any sale of receivables with recourse against the Company,
Sellers or any of their Affiliates, any filing or agreement to file a financing
statement as debtor under the Uniform Commercial Code or any similar statute.
"material" means any matter that, in the aggregate with all other
related matters, has resulted in or might result in costs, liabilities,
expenses, damages or prospects of or to, or claims by or against the Company
involving $50,000 or more.
"Material Adverse Effect" means an event, transaction, condition
or change which has had or could reasonably be expected to have a material
adverse effect on the business, assets, liabilities, operations, condition
(financial or otherwise), operating results, backlog, earnings, customer and
supplier relations, employee and sales representative relations, applicable
regulations, or business prospects of the Company.
"Ordinary Course of Business" means the conduct of business and
operations by the Company only in the ordinary course of business consistent
with past custom and practice of the Company (including, without limitation,
with respect to quantity and frequency, maintenance of working capital balances,
collection of accounts receivable, payment of employee compensation, payment of
accounts payable and cash management practices generally).
"Original Supply Agreement" means the Paper Supply Agreement,
dated as of July 12, 1996, among Stone, Buyer and the Company, as amended.
"Person" means an individual, a partnership, a limited liability
company a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Proprietary Rights" means all of the following items along with
all income, royalties, damages and payments due or payable prior to or at the
Closing or thereafter (including, without limitation, damages and payments for
past, present or future infringements or misappropriations thereof, the right to
sue and recover for past infringements or misappropriations thereof and any and
all corresponding rights that, now or hereafter, may be secured throughout the
world): (i) patents, patent applications, patent disclosures and inventions
(whether or not patentable and whether or not reduced to practice) and any
reissue, continuation, continuation-in-part, division, revision, extension or
reexamination thereof; (ii) trademarks, service marks, trade dress, logos, trade
names and corporate names (and all translations, adaptions, derivations and
combinations of the foregoing), Internet addresses, websites, domain names,
together with all goodwill associated therewith; registered and unregistered
copyrights, copyrightable works and mask works; (iii) all registrations,
applications and renewals for any of the foregoing; (iv) trade secrets and
confidential
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information (including, without limitation, ideas, formulae, compositions,
know-how, manufacturing and production processes and techniques, research and
development information, drawings, specifications, designs, plans, proposals,
technical data, financial, business and marketing plans, and customer and
supplier lists and related information); (v) computer software and software
systems (including, without limitation, data, databases and related
documentation); (vi) other proprietary rights; (vii) licenses or other
agreements to or from third parties regarding the foregoing; and (viii) all
copies and tangible embodiments of the foregoing (in whatever form or medium).
"Release" shall have the meaning set forth in CERCLA.
"Seller Pre-Joint Venture Liabilities" means any and all Losses
of the Company (including, without limitation, any and all liabilities of the
Company pursuant to CERCLA or any other Environmental and Safety Requirements)
which (i) relate to or arise out of occurrences prior to July 12, 1996 and (ii)
arise from, relate to or are attributable to the conduct of the Seller, its
predecessors or any of their affiliates.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a partnership, limited liability
company, association or other business entity, a majority of the partnership or
other similar ownership interest thereof is at the time owned or controlled,
directly or indirectly, by any Person or one or more Subsidiaries of that Person
or a combination thereof. For purposes hereof, a Person or Persons shall be
deemed to have a majority ownership interest in a partnership, limited liability
company, association or other business entity if such Person or Persons shall be
allocated a majority of partnership, association or other business entity gains
or losses or shall be or control the managing director or general partner of
such partnership, association or other business entity.
"Tax" or "Taxes" means any federal, state, local or foreign
income, gross receipts, franchise, alternative or add-on minimum, estimated,
sales, use, transfer, registration, value added, excise, natural resources,
severance, stamp, occupation, premium, windfall profit, environmental, customs,
duties, real property, personal property, capital stock, social security,
unemployment, disability, payroll, license, employee or other withholding, or
other tax, of any kind whatsoever, including any interest, penalties or
additions to tax or additional amounts in respect of the foregoing.
"Tax Returns" means returns, declarations, reports, claims for
refund, information returns or other documents (including any related or
supporting schedules, statements or information) filed or required to be filed
in connection with the determination, assessment or collection of Taxes of any
party or the administration of any laws, regulations or administrative
requirements relating to any Taxes.
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"Transaction Documents" means this Agreement, Supply Agreement,
Patent, Trademark and Trade Secret Assignment, Master Lease Agreement and any
other agreement contemplated hereby to which the Company and/or Buyer are
parties.
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1.2 OTHER DEFINITIONS Each of the following defined terms has the
meaning given such term in the Section set forth opposite such defined term:
DEFINED TERM SECTION REFERENCE
------------ -----------------
AAA Section 9.11
Ancillary Documents Section 8.7
Applicable Limitation Date Section 7.1(a)
Arbitrable Dispute Section 9.11
Arbitration Expenses Section 9.11(c)
Arbitrators Section 9.11(b)
Basket Section 7.2(c)
Buyer Preamble
Buyer Parties Section 7.2(a)
Cap Section7.2(c)
Certificates Regarding Representations
and Warranties Section 1.1
Closing Section 2.2(a)
Closing Date Section 2.2(a)
Closing Transactions Section 2.2(b)
Company Preamble
Company Warranties Section 7.1(a)
Confidential Information Section 8.7(c)
Costs and Fees Section 9.11(c)
Gaylord Preamble
HSR Act Section 3.1(e)
Indemnified Party Section 7.2(d)
Indemnifying Party Section 7.2(d)
Leased Properties Section 4.1(b)
Loss Section 7.2(a)
Losses Section 7.2(a)
Master Lease Agreement Section 3.1(h)
Non-Compete Period Section 8.7(a)
Non-Solicitation Period Section 8.6(b)
No Hire Period Section 8.6(c)
Parties Preamble
Party Preamble
Patent, Trademark and Trade Secret Assignment Section 3.1(h)
Purchase Price Section 2.2(b)
Securities Preamble
Seller Preamble
Seller Parties Section 7.2(b)
Supply Agreement Section 3.1(g)
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ARTICLE II
PURCHASE AND SALE OF SECURITIES
2.1 SECURITIES PURCHASE Subject to the terms and conditions set
forth in this Agreement, on the Closing Date, (a) Buyer shall purchase from
Seller, and Seller shall sell and transfer to Buyer, all of the Securities owned
by Seller (which shall represent 65% of the membership interests in the Company
as of the Closing Date), free and clear of any Liens, restrictions on transfer
(other than any restrictions under the Securities Act of 1933, as amended, and
applicable state securities laws), options, warrants, rights, calls,
commitments, proxies or other contract rights and (b) in consideration of the
sale of the Securities and the covenants and agreements of the Sellers contained
in Section 8.6, Buyer shall deliver to Seller the consideration specified in
Section 2.2.
2.2 CLOSING TRANSACTIONS
(a) Closing. Subject to satisfaction or waiver of the
conditions contained in this Agreement, the closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Kirkland & Ellis, 200 E. Randolph Drive, Chicago, Illinois, commencing at
10:00 a.m. on October 28, 1999, or at such other place or on such other date as
may be mutually agreeable to Buyer and Sellers. The date and time of the Closing
are herein referred to as the "Closing Date."
(b) Closing Transactions. Subject to the conditions set forth
in this Agreement, the Parties shall consummate the following "Closing
Transactions" on the Closing Date:
(i) Seller shall deliver to Buyer the Securities
accompanied by duly executed instruments of transfer with all
requisite state and federal transfer stamps affixed thereto;
(ii) Buyer shall deliver to Seller, by wire transfer of
immediately available funds to an account or accounts designated
by Seller prior to Closing, an aggregate amount equal to Five
Hundred Thousand Dollars ($500,000.00) (the "Purchase Price");
(iii) Buyer shall pay in full all of the Company's
Indebtedness as of the Closing Date under the Credit Agreement;
(iv) Seller and Buyer shall deliver the certificates and
other documents and instruments required to be delivered at or
prior to the Closing pursuant to this Agreement; and
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(v) Seller shall deliver to Buyer all corporate books and
records of the Company in Seller's possession.
ARTICLE III
CONDITIONS TO CLOSING
3.1 CONDITIONS TO BUYER'S OBLIGATIONS The obligation of Buyer to
consummate the transactions contemplated by this Agreement is subject to the
fulfillment of the following conditions as of the Closing Date to Buyer's
satisfaction in its sole discretion:
(a) The representations and warranties set forth in Article IV
and Article V hereof shall be true and correct in all material respects at and
as of the Closing Date;
(b) Seller shall have performed and complied in all material
respects with all of the covenants and agreements required to be performed by it
under this Agreement on or prior to the Closing, including, without limitation,
the simultaneous transfer of all of the Securities;
(c) Seller shall have delivered to Buyer and the Company a duly
executed instrument of release, pursuant to which Seller shall unconditionally
release the Company from its obligation to pay $4 million of its accounts
payable owed to Seller for paper purchased under the Original Supply Agreement,
it being understood that all other accounts payable of the Company to Seller in
excess of $4 million pursuant to the Original Supply Agreement shall remain in
full force and effect (less the Disputed Amount), but shall be payable in equal
monthly installments without interest over a 12 month period commencing on the
first business day of the first month following Closing. At or prior to the
Closing, Buyer and Seller shall use their reasonable best efforts to mutually
agree in good faith on the Disputed Amount, if any, to be credited to the
Company for paper purchased by the Company under the Original Supply Agreement.
In the event that Buyer and Seller cannot agree at or prior to the Closing on
the Disputed Amount, such amount shall be determined post-closing in accordance
with the procedures set forth in Section 9.11 hereof;
(d) All consents by third parties that are required for the
transfer of the Securities to Buyer, that are required for the consummation of
the transactions contemplated hereby or that are required in order to prevent a
breach of or a default under or a termination or modification of or any right of
acceleration of any obligations under any material Contract to which the Company
or Buyer is a party or by which any of its assets are bound, shall have been
obtained, all on terms satisfactory to Buyer, and a list of all such consents is
attached hereto as Schedule 3.1(d);
(e) All applicable waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), shall have been obtained or terminated prior to the date hereof;
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(f) No action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator wherein
an unfavorable judgment, decree, injunction, order or ruling would prevent the
performance of this Agreement or any of the transactions contemplated hereby,
declare unlawful the transactions contemplated by this Agreement, cause such
transactions to be rescinded or materially and adversely affect the right of
Buyer to own, operate or control the Company, and no judgment, decree,
injunction, order or ruling shall have been entered which has any of the
foregoing effects;
(g) Each of Seller and the Company shall have duly authorized,
executed and delivered to Buyer the Amended and Restated Paper Supply Agreement
(the "Supply Agreement") substantially in the form attached hereto as Exhibit I;
(h) Each of Seller and the Company shall have duly authorized,
executed and delivered to Buyer a copy of the Patent, Trademark and Trade Secret
Assignment (the "Patent, Trademark and Trade Secret Assignment") substantially
in the form attached hereto as Exhibit II;
(i) Each of Seller and the Company shall have duly authorized,
executed and delivered to Buyer the Master Lease Agreement (the "Master Lease
Agreement") substantially in the form attached hereto as Exhibit III;
(j) On or prior to the Closing Date, Seller shall have
delivered to Buyer all of the following:
(i) a certificate from Seller, in form and substance
satisfactory to Buyer, dated the Closing Date, stating that the
preconditions specified in Section 2.2(b) and Sections 3.1(a),
(b), (d) and (e) have been satisfied;
(ii) copies of all third party and governmental consents,
approvals, filings, releases, terminations, payoff letters, etc.
required in connection with the consummation of the transactions
contemplated herein, the list of which is set forth on Schedule
3.1(d);
(iii) copies of all documents and records relating to the
business of the Company that are in any Seller's possession;
(iv) such other documents or instruments as Buyer may
reasonably request to effect the transactions contemplated
hereby; and
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(k) All proceedings to be taken by Seller in connection with
the consummation of the Closing Transactions and the other transactions
contemplated hereby and all certificates, instruments and other documents
required to be delivered by Seller to effect the transactions contemplated
hereby reasonably requested by Buyer shall be reasonably satisfactory in form
and substance to Buyer.
Any condition specified in this Section 3.1 may be waived
by Buyer; provided that no such waiver shall be effective unless it is set forth
in a writing executed by Buyer or unless Buyer agrees in writing to consummate
the transactions contemplated by this Agreement without fulfillment of such
condition.
3.2 CONDITIONS TO SELLER'S OBLIGATIONS The obligation of Seller
to consummate the transactions contemplated by this Agreement is subject to the
fulfillment of the following conditions as of the Closing Date to Seller's
satisfaction in its sole discretion:
(a) The representations and warranties set forth in Article VI
shall be true and correct in all material respects at and as of the Closing
Date;
(b) Buyer shall have performed and complied in all material
respects with all of the covenants and agreements required to be performed by it
under this Agreement on or prior to the Closing;
(c) All applicable waiting periods under the HSR Act shall have
expired or been terminated;
(d) Buyer shall have duly authorized, executed and delivered to
Seller the Supply Agreement;
(e) On or prior to the Closing Date, Buyer shall have delivered
to the Seller a certificate from Buyer, in form and substance satisfactory to
Seller, dated the Closing Date, stating that the preconditions specified in
Section 2.2(b) and Sections 3.2(a), (b) and (c) have been satisfied;
(f) Buyer shall deliver to Seller the Purchase Price as set
forth in Section 2.2(b);
(g) No action, suit or proceeding shall be pending before any
court or quasi-judicial or administrative agency of any federal, state, local,
or foreign jurisdiction or before any arbitrator wherein an unfavorable
judgment, decree, injunction, order or ruling would prevent the performance of
this Agreement or any of the transactions contemplated hereby, declare unlawful
the transactions contemplated by this Agreement or cause such transactions to be
rescinded, and no judgment, decree, injunction, order or ruling shall have been
entered which has any of the foregoing effects; and
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(h) All proceedings to be taken by Buyer in connection with the
consummation of the Closing Transactions and the other transactions contemplated
hereby and all certificates, instruments and other documents required to be
delivered by Buyer to effect the transactions contemplated hereby reasonably
requested by Seller shall be reasonably satisfactory in form and substance to
Seller.
Any condition specified in this Section 3.2 may be waived by the
Seller; provided that no such waiver shall be effective against Seller unless it
is set forth in a writing executed by Seller or unless Seller agrees in writing
to consummate the transactions contemplated by this Agreement without the
fulfillment of such condition.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY
As a material inducement to Buyer to enter into this Agreement,
Seller to its Knowledge, hereby represents and warrants that:
4.1 TITLE TO PROPERTIES.
(a) The Company owns fee simple title to the interest in such
parcel of real property specified in Schedule 4.1(a), free and clear of all
Liens, except as specified in Schedule 4.1(a);
(b) The real property leases and subleases described on
Schedule 4.1(b) are valid, binding, enforceable and in full force and effect and
have not been modified (except to the extent disclosed in the documents
delivered to Buyer), and the Company holds a valid and existing leasehold
interest under such leases or subleases for the term set forth in Schedule
4.1(b). The leases and subleases described in Schedule 4.1(b) (the "Leased
Properties") constitute all of the leases and subleases under which the Company
holds leasehold or subleasehold interests in real property. As of the Closing,
(A) Sellers shall have obtained the consent of each landlord to the transactions
contemplated hereunder and under the other Transaction Documents or (B) the
lease or sublease does not prohibit the transactions contemplated hereunder and
under the other Transaction Documents.
(c) Except as set forth on Schedule 4.1(c), the Company owns
good and marketable title to, or a valid leasehold interest in, free and clear
of all Liens, all of the personal property and assets which are shown on the
applicable latest balance sheet or acquired thereafter or located on the Leased
Properties or used by the Company.
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4.2 CONTRACTS AND COMMITMENTS.
(a) Except as specifically contemplated by this Agreement and
except as set forth in Schedule 4.2, the Company is not a party to or bound by,
whether written or oral, any:
(i) collective bargaining agreement or Contract with any
labor union or any bonus, pension, profit sharing, retirement or
any other form of deferred compensation plan or any stock
purchase, stock option, hospitalization insurance or similar plan
or practice, whether formal or informal;
(ii) Contract for the employment of any officer, individual
employee or other person on a full-time or consulting basis or
any severance agreements involving annual compensation in excess
of $100,000;
(iii) agreement or indenture relating to the borrowing of
money or to mortgaging, pledging or otherwise placing a Lien on
any of its assets;
(iv) agreements with respect to the lending or investing of
funds;
(v) license or royalty agreements;
(vi) guaranty of any obligation, other than endorsements
made for collection;
(vii) lease or agreement under which it is lessee of, or
holds or operates, any personal property owned by any other party
calling for payments in excess of $10,000 annually or under which
it is lessor of or permits any third party to hold or operate any
property, real or personal, owned or controlled by it;
(viii) Contract or group of related Contracts with the same
party for the purchase or sale of supplies, products or other
personal property or for the furnishing or receipt of services
which either calls for performance over a period of more than one
year (except if such Contracts do not involve a sum in excess of
$10,000 annually) or involves a sum in excess of $10,000;
(ix) Contract or group of related Contracts with the same
party continuing over a period of more than six months from the
date or dates thereof, not terminable by it on 30 days or less
notice without penalties or involving more than $10,000;
(x) Contract which prohibits it from freely engaging in
business anywhere in the world;
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(xi) Contract relating to the distribution, marketing or
sales of its products;
(xii) agreements, Contracts or understandings pursuant to
which the Company subcontracts work to third parties; or
(xiii) other agreement material to it, whether or not
entered into in the Ordinary Course of Business.
(b) Except as disclosed in Schedule 4.2, no Contract or
commitment required to be disclosed on Schedule 4.2 has been breached or
canceled by the other party, and there is no basis to reasonably expect an
anticipated breach by any other party to any Contract set forth on Schedule 4.2.
4.3 PROPRIETARY RIGHTS.
(a) Schedule 4.3 sets forth a complete and correct list of: (i)
all patented or registered Proprietary Rights and all pending patent
applications or other applications for registration of Proprietary Rights owned,
filed or used by the Company; (ii) all trade names, and unregistered trademarks
used by the Company; (iii) all material unregistered copyrights and material
computer software owned or used by the Company; and (iv) all licenses or similar
agreements or arrangements to which the Company is a party, either as licensee
or licensor, or as a third party beneficiary, for Proprietary Rights, in each
case identifying the subject Proprietary Rights.
(b) Except as set forth in Schedule 4.3, (i) the Company owns
and possesses all right, title and interest in and to, or has a valid and
enforceable right to use all Proprietary Rights necessary for the operation of
the Company's business as currently conducted, and as currently proposed to be
conducted, free and clear of all Liens, licences or any other restrictions
(including but not limited to any injunction, judgment, order, decree, ruling or
agreement), (ii) no claim by any third party contesting the validity,
enforceability, use or ownership of any of the Proprietary Rights set forth on
Schedule 4.3 has been made, is currently outstanding or is threatened, and there
are no grounds for same, (iii) the Company's business as currently conducted and
as currently proposed to be conducted does not infringe, misappropriate or
otherwise conflict with any Proprietary Rights of any third party, Seller is not
aware of any facts that indicate a likelihood of any of the foregoing and Seller
has not received any notices regarding any of the foregoing, (iv) no third party
has infringed, misappropriated or otherwise conflicted with any of the
Proprietary Rights owned or used by the Company and Seller is not aware of any
facts that indicate a likelihood of any of the foregoing, and (v) immediately
subsequent to the Closing, the Proprietary Rights owned or used by the Company
will be owned by or available for use by the Company on terms and conditions
identical to those under which the Company owned or used such Proprietary Rights
prior to the Closing.
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4.4 ENVIRONMENTAL MATTERS.
(a) The Company has been and is currently in material
compliance with all Environmental and Safety Requirements, and the Company has
not received any oral or written notice or demand regarding any liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise) or any
corrective, investigatory or remedial obligations arising under Environmental
and Safety Requirements which relate to the Company or any of its properties or
facilities.
(b) Without limiting the generality of the foregoing, the
Company has obtained and has been and is currently in compliance with, all
permits, licenses and other authorizations required pursuant to any
Environmental and Safety Requirements for the occupancy of its properties or
facilities or the operation of its business as currently conducted. A list of
all such permits, licenses and other authorizations which are material to the
Company is set forth on Schedule 4.4.
(c) The Company has not treated, stored, disposed of, arranged
for or permitted the disposal of, transported, handled or Released any substance
(including, without limitation, any hazardous substance) or owned, occupied or
operated any facility or property (and no such facility or property is
contaminated with any such substance), so as to give rise to material
liabilities of the Company pursuant to CERCLA or in material violation of any
other Environmental and Safety Requirements.
(d) Seller has furnished to Buyer all environmental audits,
reports and other material environmental documents relating to the Company which
are in its possession or under its reasonable control and which have not already
been disclosed or provided to the Company.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER
As a material inducement to Buyer to enter into this Agreement,
Seller represents and warrants to Buyer that:
5.1 ORGANIZATION AND CORPORATE POWER. Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, with full corporate power and authority to enter into this
Agreement and the other agreements contemplated hereby to which Seller is a
party and perform its obligations hereunder and thereunder.
5.2 AUTHORIZATION. The execution, delivery and performance of
this Agreement and the other agreements contemplated hereby to which Seller is a
party have been duly and validly authorized by all requisite corporate action on
the part of Seller and no other corporate proceedings on its part are necessary
to authorize the execution, delivery or performance of this Agreement. This
Agreement constitutes, and each of the other agreements contemplated hereby to
which Seller is a
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party shall when executed constitute, a valid and binding obligation of Seller,
enforceable in accordance with their terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws from time to time affecting the enforcement of creditors'
rights generally.
5.3 NO VIOLATION. Seller is not subject to or obligated under its
certificate of incorporation, its by-laws, any applicable law, or rule or
regulation of any governmental authority, or any agreement or instrument, or any
license, franchise or permit, or subject to any order, writ, injunction or
decree, which would be breached or violated by its execution, delivery or
performance of this Agreement and the other agreements contemplated hereby to
which Seller is a party.
5.4 GOVERNMENTAL AUTHORITIES AND CONSENTS. Seller is not required
to submit any notice, report or other filing with any governmental authority in
connection with the execution or delivery by it of this Agreement and the other
agreements contemplated hereby to which Seller is a party or the consummation of
the transactions contemplated hereby or thereby. No consent, approval or
authorization of any governmental or regulatory authority or any other party or
person is required to be obtained by Seller in connection with its execution,
delivery and performance of this Agreement and the other agreements contemplated
hereby to which Seller is a party or the transactions contemplated hereby or
thereby, except such filings and notices which may be required under the HSR
Act.
5.5 SECURITIES. Seller is a member of the Company. Seller holds
of record and owns beneficially all of the Securities, and at the Closing such
Seller will transfer to the Seller good and marketable title to such Securities,
in each case free and clear of any Liens, restrictions on transfer (other than
any restrictions under the Securities Act of 1933, as amended, and applicable
state securities laws), options, warrants, rights, calls, commitments, proxies
or other contract rights. Seller is not a party to any option, warrant, right,
Contract, call, put or other agreement or commitment providing for the
disposition or acquisition of any membership interests, equity securities or
securities containing equity features of the Company (other than this
Agreement). Seller is not a party to any voting trust, proxy or other agreement
or understanding with respect to the voting of any membership interests of the
Company.
5.6 TITLE TO ASSETS OF COMPANY. Except for the real property of
Seller subject to the Master Lease, none of Seller or any of its Affiliates
(other than the Company) owns or holds title to any of the assets used by the
Company to conduct its business. At Closing, Seller shall deliver to Buyer
ownership and possession of all assets owned by the Company which are stored in
Seller's warehouse located in Bernice, Louisiana. Seller shall continue to
provide such warehousing under the same terms and conditions as currently in
effect.
5.7 LITIGATION. There are no actions, suits, proceedings or
orders pending or, to Sellers' knowledge, threatened against or affecting
Sellers at law or in equity, or before or by any federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which would adversely affect Sellers'
performance under this
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Agreement and the other agreements contemplated hereby to which Sellers are a
party or the consummation of the transactions contemplated hereby or thereby.
5.8 BROKERAGE. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of Seller.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF BUYER
As a material inducement to Sellers to enter into this Agreement,
Buyer hereby represents and warrants to Sellers that:
6.1 ORGANIZATION AND CORPORATE POWER. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, with full corporate power and authority to enter into this Agreement
and the other agreements contemplated hereby to which Buyer is a party and
perform its obligations hereunder and thereunder.
6.2 AUTHORIZATION OF TRANSACTION. The execution, delivery and
performance of this Agreement and the other agreements contemplated hereby to
which Buyer is a party have been duly and validly authorized by all requisite
corporate action on the part of Buyer, and no other corporate proceedings on its
part are necessary to authorize the execution, delivery or performance of this
Agreement. This Agreement constitutes, and each of the other agreements
contemplated hereby to which Buyer is a party shall when executed constitute, a
valid and binding obligation of Buyer, enforceable in accordance with their
terms, except as such enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws from time to time
affecting the enforcement of creditors' rights generally.
6.3 NO VIOLATION. Buyer is not subject to or obligated under its
certificate of incorporation, its by-laws, any applicable law, or rule or
regulation of any governmental authority, or any agreement or instrument, or any
license, franchise or permit, or subject to any order, writ, injunction or
decree, which would be breached or violated by its execution, delivery or
performance of this Agreement and the other agreements contemplated hereby to
which Buyer is a party.
6.4 GOVERNMENTAL AUTHORITIES AND CONSENTS. Buyer is not required
to submit any notice, report or other filing with any governmental authority in
connection with the execution or delivery by it of this Agreement and the other
agreements contemplated hereby to which Buyer is a party or the consummation of
the transactions contemplated hereby or thereby. No consent, approval or
authorization of any governmental or regulatory authority or any other party or
person is required to be obtained by Buyer in connection with its execution,
delivery and performance of this Agreement and the other agreements contemplated
hereby to which Buyer is a party or the
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transactions contemplated hereby or thereby, except such filings and notices as
may be required under the HSR Act.
6.5 LITIGATION. There are no actions, suits, proceedings or
orders pending or, to Buyer's knowledge, threatened against or affecting Buyer
at law or in equity, or before or by any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which would adversely affect Buyer's performance under this
Agreement and the other agreements contemplated hereby.
6.6 BROKERAGE. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of Buyer.
ARTICLE VII
INDEMNIFICATION AND RELATED MATTERS
7.1 SURVIVAL.
(A) SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. Any claim for indemnification under Article VII with respect to the
representations and warranties set forth in Sections 4.1 (other than Section
4.1(a)), 4.2 and 4.3 of Article IV (Representations and Warranties Concerning
the Company) (collectively, the "Company Warranties") must be brought prior to
the eighteen month anniversary of the Closing Date in accordance with Section
7.2(d) hereof. Any claim for indemnification under Article VII with respect to
representations and warranties set forth in Section 4.4 (the "Environmental
Warranties") must be brought prior to the twenty-four month anniversary of the
Closing Date in accordance with Section 7.2(d) hereof. Any claim for
indemnification under Article VII with respect to all representations and
warranties (other than the Company Warranties and the Environmental Warranties,
but including claims under Section 4.1(a) hereof), covenants and agreements set
forth in this Agreement, other Transaction Documents or in any writing or
certificate delivered in connection with this Agreement may be brought at any
time, and all such representations, warranties, covenants and agreements (other
than the Company Warranties and the Environmental Warranties) shall survive the
Closing Date without any time limitation.
(B) SPECIAL RULE FOR FRAUD. Notwithstanding anything in this
Section 7.1 to the contrary, in the event of any breach of a representation or
warranty by a Party that constitutes actual fraud, the representation or
warranty shall survive consummation of the transactions contemplated in this
Agreement and continue in full force and effect without any time limitation.
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(C) RISK ALLOCATION. The representations, warranties, covenants
and agreements made herein, together with the indemnification provisions herein,
are intended among other things to allocate the economic cost and the risks
inherent in the transactions contemplated hereby between the Parties and,
accordingly, a Party shall be entitled to the indemnification or other remedies
provided in this Agreement by reason of any breach of any such representation,
warranty, covenant or agreement by another Party notwithstanding whether any
employee, representative or agent of the Party seeking to enforce a remedy knew
or had reason to know of such breach.
7.2 INDEMNIFICATION.
(a) Sellers' Indemnification. Seller shall indemnify Buyer and
the Company and each of their respective officers, directors, employees, agents,
representatives, Affiliates, successors and permitted assigns (collectively, the
"Buyer Parties") and hold each of them harmless from and against and pay on
behalf of or reimburse such Buyer Parties in respect of any loss (including
diminution in value), liability, demand, claim, action, cause of action, cost,
damage, deficiency, Tax, penalty, fine or expense, whether or not arising out of
third party claims (including, without limitation, interest, penalties,
reasonable attorneys' fees and expenses, court costs and all amounts paid in
investigation, defense or settlement of any of the foregoing) (collectively,
"Losses" and individually, a "Loss") which any such Buyer Party may suffer,
sustain or become subject to, as a result of, in connection with, relating or
incidental to or by virtue of:
(i) breach by Seller of any representation, warranty or
covenant made by Seller contained in this Agreement, the other
Transaction Documents, any Exhibit or Schedule hereto or any
certificate delivered by the Seller to Buyer with respect hereto
or thereto in connection with the Closing; or
(ii) any claim for payment of fees and/or expenses as a
broker or finder in connection with the origin, negotiation or
execution of this Agreement or the other Transaction Documents or
the consummation of the transactions contemplated hereby based
upon any alleged agreement, arrangement or understanding between
the claimant and Seller or any of its agents or representatives.
(b) Buyer Indemnification. Buyer shall indemnify Seller and
each of its officers, directors, employees, agents, representatives, Affiliates,
successors and permitted assigns (collectively, the "Seller Parties") and hold
each of them harmless from and against and pay on behalf of or reimburse such
Seller Parties in respect of any Loss which such Seller Parties may suffer,
sustain or become subject to, as the result of, in connection with, relating to
or incidental to or by virtue of:
(i) the breach by Buyer of any representation, warranty or
covenant made by Buyer contained in this Agreement, any other
Transaction Document or any certificate delivered by Buyer to
Seller with respect thereto in connection with the Closing; or
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(ii) any claim for payment of fees and/or expenses as a
broker or finder in connection with the origin, negotiation or
execution of this Agreement or the other Transaction Documents or
the consummation of the transactions contemplated hereby based
upon any alleged agreement, arrangement or understanding between
the claimant and the Buyer or any of its agents or
representatives.
(c) Limitations on Indemnity.
(i) The Buyer Parties shall be entitled to indemnification
under this Article VII in respect of breaches of the Company
Warranties only to the extent that the aggregate amount of all
such Losses exceeds $50,000 (the "Basket"), in which case Seller
shall be liable only for such Losses, exceeding the initial
$50,000, and in no event shall the Buyer Parties be entitled to
indemnification in respect of such Losses in excess of $15
million (the "Cap"); provided that the foregoing limitations
(i.e., the Basket and the Cap) shall not apply with respect to
any Loss arising from or related to a breach of any
representation, warranty, covenant or agreement of Seller (other
than the Company Warranties and the Environmental Warranties);
(ii) Notwithstanding anything to the contrary contained
herein, for purposes of determining whether there has been a
breach and the amount of any Losses that are the subject matter
of a claim for indemnification hereunder, the Basket amounts
shall be the materiality standard for all purposes hereunder and,
therefore, each representation and warranty contained in this
Agreement shall be read without regard and without giving effect
to any materiality or Material Adverse Effect standard or
qualification contained in such representation or warranty (as if
such standard or qualification were deleted from such
representation and warranty).
(d) Procedure. If a Party seeks indemnification under this
Article VII, such party (the "Indemnified Party") shall give written
notice to the other party(ies) (the "Indemnifying Party") after
receiving written notice of any action, lawsuit, proceeding,
investigation or other claim against it (if by a third party) or
discovering the liability, obligation or facts giving rise to such
claim for indemnification, describing the claim, the amount thereof
(if known and quantifiable), and the basis thereof; provided that the
failure to so notify the Indemnifying Party shall not relieve the
Indemnifying Party of its or his obligations hereunder except to the
extent such failure shall have harmed the Indemnifying Party. In that
regard, if any action, lawsuit, proceeding, investigation or other
claim shall be brought or asserted by any third party which, if
adversely determined, would entitle the Indemnified Party to indemnity
pursuant to Article VII, the Indemnified Party shall promptly notify
the Indemnifying Party of the same in writing, specifying in detail
the basis of such claim and the facts pertaining thereto and the
Indemnifying Party shall defend such action, lawsuit, proceeding,
investigation or other claim giving rise to the Indemnified Party's
claim for indemnification at its own expense, and shall be entitled to
appoint lead counsel of such
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defense with a nationally recognized reputable counsel acceptable to
the Indemnified Party; provided that, as a condition precedent to the
Indemnifying Party's right to assume control of such defense, it must
first:
(i) enter into an agreement with the Indemnified Party (in
form and substance reasonably satisfactory to the Indemnified
Party) pursuant to which the Indemnifying Party agrees to be
fully responsible (with no reservation of rights) for all Losses
relating to such claims and that it will provide full
indemnification (whether or not otherwise required hereunder) to
the Indemnified Party for all Losses relating to such claim, and
(ii) unconditionally guarantee the payment and performance
of any liability or obligation which may arise with respect to
such claim or the facts giving rise to such claim for
indemnification (without regard to the Basket), and
(iii) furnish the Indemnified Party with reasonable
evidence that the Indemnifying Party is and will be able to
satisfy any such liability;
and provided further that the Indemnifying Party shall not have the right to
assume control of such defense and shall pay the fees and expenses of counsel
retained by the Indemnified Party, if the claim which the Indemnifying Party
seeks to assume control (i) seeks non-monetary relief, (ii) involves criminal or
quasi-criminal allegations, (iii) involves a claim to which the Indemnified
Party reasonably believes an adverse determination would be detrimental to or
injure the Indemnified Party's reputation or future business prospects, or (iv)
involves a claim which, upon petition by the Indemnified Party, the appropriate
court rules that the Indemnifying Party failed or is failing to vigorously
prosecute or defend.
If the Indemnifying Party is permitted to assume and control the
defense and elects to do so, the Indemnified Party shall have the right to
employ counsel separate from counsel employed by the Indemnifying Party in any
such action and to participate in the defense thereof, but the fees and expenses
of such counsel employed by the Indemnified Party shall be at the expense of the
Indemnified Party unless (i) the employment thereof has been specifically
authorized by the Indemnifying Party in writing, or (ii) the Indemnifying Party
has been advised by counsel that a reasonable likelihood exists of a conflict of
interest between the Indemnifying Party and the Indemnified Party.
If the Indemnifying Party shall control the defense of any such
claim, the Indemnifying Party shall obtain the prior written consent of the
Indemnified Party (which shall not be unreasonably withheld) before entering
into any settlement of a claim or ceasing to defend such claim, if pursuant to
or as a result of such settlement or cessation, injunction or other equitable
relief will be imposed against the Indemnified Party or if such settlement does
not expressly
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unconditionally release the Indemnified Party from all liabilities and
obligations with respect to such claim and all other claims arising out of the
same or similar facts and circumstances, with prejudice.
(e) Payments. The amount of indemnification to which an
Indemnified Party shall be entitled under this Section 7.2 shall be determined:
(i) by the written agreement between the Indemnified Party and the Indemnifying
Party; (ii) by a final judgment or decree of any court of competent
jurisdiction; or (iii) by any other means to which the Indemnified Party and the
Indemnifying Party shall agree. The judgment or decree of a court shall be
deemed final when the time for appeal, if any, shall have expired and no appeal
shall have been taken or when all appeals taken shall have been finally
determined. The Indemnified Party shall have the burden of proof in establishing
the amount of Losses suffered by it. The Indemnifying Party shall pay the
Indemnified Party in immediately available funds promptly after the amount of
indemnification is determined pursuant to this Section 7.2(e).
(f) Purchase Price Adjustments. Amounts paid to or on behalf of
Sellers or Buyer as indemnification shall be treated as adjustments to the
Purchase Price.
(g) Waiver, Release and Discharge. Except as set forth in
Section 3.1(c) herein, effective upon the Closing, Seller hereby irrevocably
waives, releases and discharges the Company from any and all liabilities and
obligations to Seller of any kind or nature whatsoever, whether in his capacity
as Seller hereunder, as a holder of membership interests, member, manager,
officer or director of the Company or otherwise (including, without limitation,
in respect of rights of contribution or indemnification), in each case whether
absolute or contingent, liquidated or unliquidated, known or unknown, and
whether arising hereunder or under any other agreement or understanding or
otherwise at law or equity, and each Seller shall not seek to recover any
amounts in connection therewith or thereunder from the Company.
7.3 PRE-JOINT VENTURE LIABILITIES.
(a) Notwithstanding anything to the contrary set forth in this
Agreement, Seller shall retain and assume all Seller Pre-Joint Venture
Liabilities and indemnify the Buyer Parties and hold the Buyer Parties harmless
from and against and pay on behalf or reimburse the Buyer Parties in respect of
any Seller Pre-Joint Venture Liabilities such Buyer Party may suffer, sustain or
become subject to.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, Buyer shall retain and assume all Buyer Pre-Joint Venture Liabilities
and indemnify the Seller Parties and hold the Seller Parties harmless from and
against and pay on behalf or reimburse the Seller Parties in respect of any
Buyer Pre-Joint Venture Liabilities such Seller Party may suffer, sustain or
become subject to.
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ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1 TAX MATTERS.
(a) Transfer Taxes. All transfer, documentary, sales, use,
stamp, registration and other such Taxes and fees (including any penalties and
interest thereon) incurred in connection with this Agreement shall be paid by
Seller when due, and Seller shall, at its own expense, file all necessary Tax
Returns and other documentation with respect to all such transfer, documentary,
sales, use, stamp, registration and other Taxes and fees, and if required by
applicable law, Buyer shall, and shall cause its Affiliates to, join in the
execution of any such Tax Returns and other documentation.
(b) Cooperation on Tax Matters. Buyer and Seller shall
cooperate fully, as and to the extent reasonably requested by the other party,
in connection with the filing of Tax Returns of the Company and any audit,
litigation or other proceeding with respect to Taxes of the Company. Such
cooperation shall include the retention and (upon the other party's request) the
provision of records and information which are reasonably relevant to any such
audit, litigation or other proceeding and making employees available on a
mutually convenient basis to provide additional information and explanation of
any material provided hereunder. Seller, at the option of Buyer, shall cooperate
in the preparation and filing of an election under Section 754 of the Code, and
under any similar state or local tax law, with respect to the sale of membership
interests in the Company.
8.2 PRESS RELEASES AND ANNOUNCEMENTS. At, prior to and after the
Closing Date, no press releases related to this Agreement and the transactions
contemplated herein, or other announcements to the employees, customers or
suppliers of the Company shall be issued without the mutual approval of all
Parties, except for any public disclosure which is required by law or regulation
(in which case the disclosure shall be prepared jointly by Seller and Buyer).
8.3 FURTHER TRANSFERS. Seller shall execute and deliver such
further instruments of conveyance and transfer and take such additional action
as Buyer may reasonably request to effect, consummate, confirm or evidence the
transfer to Buyer of the Securities and any other transactions contemplated
hereby. In addition, to the extent any Proprietary Rights that are supposed to
be owned by the Company are owned by, or in the name of, Seller, at the request
of the Company, Seller shall take any and all actions necessary to transfer such
Proprietary Rights to the Company.
8.4 SPECIFIC PERFORMANCE. Seller acknowledges that the Company's
business is unique and recognizes and affirms that in the event of a breach of
this Agreement by such Seller, money damages may be inadequate and Buyer may
have no adequate remedy at law. Accordingly, Seller agrees that Buyer shall have
the right, in addition to any other rights and remedies existing in its favor,
to enforce its rights and Seller's obligations hereunder not only by an action
or actions for damages but also by an action or actions for specific
performance, injunctive and/or other equitable relief.
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8.5 EXPENSES. Except as otherwise provided herein, Seller and
Buyer shall pay all of their own fees, costs and expenses (including, without
limitation, fees, costs and expenses of legal counsel, investment bankers,
brokers or other representatives and consultants and appraisal fees, costs and
expenses) incurred in connection with the negotiation of this Agreement, the
performance of its obligations hereunder, and the consummation of the
transactions contemplated hereby. Seller shall pay one-half of the filing fee
associated with any filings under the HSR Act.
8.6 NON-COMPETITION, NON-SOLICITATION AND CONFIDENTIALITY.
(a) Non-Competition. In consideration of the mutual covenants
provided for herein to Seller at the Closing, during the period beginning on the
Closing Date and ending on the tenth anniversary of the Closing Date (the
"Non-Compete Period"), Seller shall not, and shall not allow any of its
respective Affiliates to engage (whether as an owner, operator, manager,
employee, officer, director, consultant, advisor, representative or otherwise),
directly or indirectly in any business that the Company conducts as of the
Closing Date or any business that otherwise competes with the Company as of the
Closing Date in any geographic area in which the Company conducts its business
as of the Closing Date; provided that ownership of less than 5% of the
outstanding stock of any publicly-traded corporation shall not be deemed to be
engaging solely by reason thereof in any of the Company's business. Seller
acknowledges that the business that the Company currently conducts consists of
the manufacture, distribution and sale of paper bags. Seller expressly
acknowledges and agrees that each and every restriction imposed by this Section
8.6 is reasonable with respect to subject matter, time period and geographical
area.
(b) Non-Solicitation. Notwithstanding anything in Section
8.3(b) of the JV Agreement to the contrary, Seller agrees that, during the
period beginning on the Closing Date and ending on the fifth anniversary of the
Closing Date (the "Non-Solicitation Period"), Seller shall not, and shall not
permit any of its Affiliates to, directly or indirectly,
(i) contact, approach or solicit for the purpose of
offering employment to or hiring (whether as an employee,
consultant, agent, independent contractor or otherwise) any
person employed by the Company at any time prior to the Closing
Date or during the Non-Solicitation Period, without the prior
written consent of Buyer; or
(ii) solicit or attempt to induce any customer or other
business relation of the Company into any business relationship,
except to the extent Seller has been engaged in business
(unrelated to the business of the Company) with such customer
prior to the Closing Date
(c) No Hiring. Notwithstanding anything in Section 8.3(b) of
the JV Agreement to the contrary, Seller agrees that during the period beginning
on the Closing Date and ending on the third anniversary of the Closing Date (the
"No Hire Period"), Seller shall not, and shall not permit any of its Affiliates
to, directly or indirectly, hire or employ any person employed by the Company
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at any time prior to the Closing Date or during the No Hire Period, without
prior written consent of Buyer; it being understood that Seller and its
Affiliates may actually hire persons employed by the Company after the No Hire
Period, provided that Seller and its Affiliates comply with the provisions set
forth in Section 8.6 (b) hereof.
(d) Confidentiality. Notwithstanding anything in Article VI of
the JV Agreement to the contrary, Seller shall treat and hold as confidential
any information concerning the business and affairs of the Company that is not
already generally available to the public (the "Confidential Information"),
refrain from using any of the Confidential Information except in connection with
this Agreement, and deliver promptly to Buyer, at the request and option of
Buyer, all tangible embodiments (and all copies) of the Confidential Information
which are in its possession or under its control. In the event that Seller is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand, or
similar process) to disclose any Confidential Information, Seller shall notify
Buyer promptly of the request or requirement so that Buyer may seek an
appropriate protective order or waive compliance with the provisions of this
Section 8.6(d). If, in the absence of a protective order or the receipt of a
waiver hereunder, Seller is, on the advice of counsel, compelled to disclose any
Confidential Information to any tribunal or else stand liable for contempt,
Seller may disclose the Confidential Information to the tribunal; provided that
Seller shall use its best efforts to obtain, at the request of Buyer, an order
or other assurance that confidential treatment shall be accorded to such portion
of the Confidential Information required to be disclosed as Buyer shall
designate.
(e) Remedy for Breach. Seller acknowledges and agrees that in
the event of a breach by Seller of any of the provisions of this Section 8.6,
monetary damages shall not constitute a sufficient remedy. Consequently, in the
event of any such breach, the Company, Buyer and/or their respective successors
or assigns may, in addition to other rights and remedies existing in their
favor, apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunctive or other relief in order to enforce or
prevent any violations of the provisions hereof, in each case without the
requirement of posting a bond or proving actual damages.
(f) Enforcement. If the final judgment of a court of competent
jurisdiction declares that any term or provision of this Section 8.6 is invalid
or unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed.
8.7 TERMINATION OF AGREEMENTS.. The Parties confirm that all of
the Ancillary Agreements (as such term is defined in the JV Agreement) shall be
terminated as of the date hereof, and that upon such termination the parties
thereto shall have no further obligation or liability with respect to the such
agreements, except with respect to the obligations related to the Disputed
Amount
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and those obligations set forth therein which by their express terms survive the
termination of such agreements.
8.8 TRANSITION ASSISTANCE. For a period of 180 days after the
Closing Date (which period may be extended at Buyer's sole discretion for up to
an additional 90 days upon 14 days prior written notice to Seller), Seller shall
provide Buyer (as Buyer may reasonably request) with access to, and use and
support of, all of Seller's computer programs and hardware (including, without
limitation, the MSA computer system, utilities, modules, libraries, databases,
compilations, applications and other electronically shared data used to track or
store the Company's accounts receivable, accounts payable, customer lists,
inventory and other Company records) which are currently used by the Company to
support the conduct of the Company's business. Such access and support shall be
provided to Buyer at Seller's actual cost. Buyer shall use its reasonable
efforts to cause the Company not to require such access and support to conduct
its business.
8.9 SUFFICIENT CAPITALIZATION. Seller shall (i) be able to pay
its debts as they become due and (ii) have adequate capital and/or own property
that has a fair saleable value greater than the amount required to pay its
Indebtedness (including a reasonable estimate of the amount of all contingent
liabilities hereunder, under the Transaction Documents or in connection with the
transactions contemplated hereby or thereby).
ARTICLE IX
MISCELLANEOUS
9.1 AMENDMENT AND WAIVER. This Agreement may be amended and any
provision of this Agreement may be waived, provided that any such amendment or
waiver shall be binding upon a Party only if such amendment or waiver is set
forth in a writing executed by such Party. No course of dealing between or among
any persons having any interest in this Agreement shall be deemed effective to
modify, amend or discharge any part of this Agreement or any rights or
obligations of any Party under or by reason of this Agreement.
9.2 NOTICES. All notices, demands and other communications given
or delivered under this Agreement shall be in writing and shall be deemed to
have been given when personally delivered, mailed by first class mail, return
receipt requested, or delivered by express courier service or telecopied (with
hard copy to follow). Notices, demands and communications to Seller shall,
unless another address is specified in writing, be sent to the respective
address or telecopy number indicated below:
Notices to Seller: with a copy to:
- ------------------ ---------------
Stone Container Corporation Sidley & Austin
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150 North Michigan Avenue One First National Plaza
Chicago, IL 60601 Chicago, IL 60603
Telephone: (312) 580-4624 Telephone: (312) 853-7000
Facsimile: (312) 580-4919 Facsimile: (312) 853-7036
Attention: Leslie T. Lederer, Esq. Attention: Frederick C. Lowinger, Esq.
Notices to Buyer: with a copy to:
- ----------------- ---------------
Gaylord Container Corporation Kirkland & Ellis
500 Lake Cook Road 200 East Randolph Drive
Deerfield, IL 60015 Chicago, IL 60601
Telephone: (847) 405-5500 Telephone: (312) 861-2000
Facsimile: (847) 405-5586 Facsimile: (312) 861-2200
Attention: David F. Tanaka, Esq. Attention: William S. Kirsch, P.C.
Margaret A. Gibson, Esq.
9.3 BINDING AGREEMENT; ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the Parties
and their respective successors and permitted assigns; provided that neither
this Agreement nor any of the rights, interests or obligations hereunder may be
assigned by Seller or Buyer without the prior written consent of Buyer or Seller
respectively. Notwithstanding the foregoing, without the prior written consent
of Seller, Buyer may at any time, in its sole discretion, assign, in whole or in
part, (a) its rights and obligations pursuant to this Agreement to one or more
of its Affiliates; (b) its rights under this Agreement for collateral security
purposes to any lender providing financing to Buyer, the Company or any of their
Affiliates and any such lender may exercise all of the rights and remedies of
the Buyer hereunder; and (c) its rights under this Agreement, in whole or in
part, to any subsequent purchaser of the Company or any of its divisions or any
material portion of its assets (whether such sale is structured as a sale of
stock, sale of assets, merger, recapitalization or otherwise).
9.4 SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provisions or the remaining provisions of this Agreement.
9.5 CONSTRUCTION. The language used in this Agreement shall be
deemed to be the language chosen by the Parties to express their mutual intent,
and no rule of strict construction shall be applied against any person. Nothing
in the schedules hereto shall be deemed adequate to disclose an exception to a
representation or warranty made herein unless the schedule identifies the
exception
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<PAGE> 30
with reasonable particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate to
disclose an exception to a representation or warranty made herein (unless the
representation or warranty has to do with the existence of the document or other
item itself). The Parties intend that each representation, warranty, and
covenant contained herein shall have independent significance. If any Party has
breached any representation, warranty, or covenant contained herein in any
respect, the fact that there exists another representation, warranty, or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) which the Party has not breached shall not detract from or
mitigate the fact that the Party is in breach of the first representation,
warranty, or covenant.
9.6 CAPTIONS. The captions used in this Agreement are for
convenience of reference only and do not constitute a part of this Agreement and
shall not be deemed to limit, characterize or in any way affect any provision of
this Agreement, and all provisions of this Agreement shall be enforced and
construed as if no caption had been used in this Agreement.
9.7 ENTIRE AGREEMENT. The schedules identified in this Agreement
are incorporated herein by reference. This Agreement and the documents referred
to herein contain the entire agreement between the Parties and supersede any
prior understandings, agreements or representations by or between the Parties,
written or oral, which may have related to the subject matter hereof in any way.
9.8 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original but all of which taken
together shall constitute one and the same instrument.
9.9 GOVERNING LAW.. All questions concerning the construction,
validity and interpretation of this Agreement shall be governed by and construed
in accordance with the domestic laws of the State of Illinois, without giving
effect to any choice of law or conflict of law provision (whether of the State
of Illinois or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Illinois.
9.10 PARTIES IN INTEREST. Nothing in this Agreement, express or
implied, is intended to confer on any person other than the Parties and their
respective successors and assigns any rights or remedies under or by virtue of
this Agreement.
27
<PAGE> 31
9.11 ARBITRATION.
Except for disputes, controversies, or claims arising under
Sections 2.2 or 8.6 hereto and for other claims seeking injunctive relief, and
except as expressly provided elsewhere in this Agreement or the other
Transaction Documents, any dispute, controversy, or claim arising under or
relating to the Transaction Documents or any breach of threatened breach thereof
("Arbitrable Dispute") shall be resolved by final and binding arbitration
administered by the American Arbitration Association ("AAA") under its
Commercial Arbitration Rules, subject to the following:
(a) Any Party may demand that any Arbitrable Dispute be
submitted to binding arbitration. The demand for arbitration shall be in
writing, shall be served on the other Party in the manner prescribed herein for
the giving of notices, and shall set forth a short statement of the factual
basis for the claim, specifying the matter or matters to be arbitrated.
(b) The arbitration shall be conducted by a panel of three
arbitrators, one selected by Buyer, one selected by Seller and the third to be
selected jointly by the arbitrators selected by Buyer and Seller (collectively,
the "Arbitrators") who shall conduct such evidentiary or other hearings as they
deem necessary or appropriate and thereafter shall make their determination as
soon as practicable. Any arbitration pursuant hereto shall be conducted by the
Arbitrators under the guidance of the Federal Rules of Civil Procedure and the
Federal Rules of Evidence, but the Arbitrators shall not be required to comply
strictly with such Rules in conducting any such arbitration. All such
arbitration proceedings shall take place in Chicago, Illinois.
(c) Except as provided herein:
(i) each Party shall bear its own "Costs and Fees," which are
defined as all reasonable pre-award expenses of the arbitration,
including travel expenses, out-of-pocket expenses (including, but not
limited to, copying and telephone) witness fees, and reasonable
attorney's fees and expenses;
(ii) the fees and expenses of the Arbitrators and all other
costs and expenses incurred in connection with the arbitration
("Arbitration Expenses") shall be borne equally by the Parties; and
(iii) notwithstanding the foregoing, the Arbitrators shall be
empowered to require any one or more of the Parties to bear all or any
portion of such Costs and Fees and/or the fees and expenses of the
Arbitrators in the event that the Arbitrators determine such Party has
acted unreasonably or in bad faith.
(d) The Arbitrators shall have the authority to award any
remedy or relief that a Court of the State of Illinois could order or grant,
including, without limitation, specific performance of any obligation created
under this Agreement and the other Transaction Documents, the awarding
28
<PAGE> 32
of punitive damages, the issuance of an injunction, or the imposition of
sanctions for abuse or frustration of the arbitration process. The Arbitrators
shall render their decision and award upon the concurrence of at least two (2)
of their number. Such decision and award shall be in writing and counterpart
copies thereof shall be delivered to each Party. The decision and award of the
Arbitrators shall be binding on all Parties. In rendering such decision and
award, the Arbitrators shall not add to, subtract from or otherwise modify the
provisions of this Agreement or the other Transaction Documents. Any Party to
the arbitration may seek to have judgment upon the award rendered by the
Arbitrators entered in any court having jurisdiction thereof.
(e) Each Party agrees that it will not file any suit, motion,
petition or otherwise commence any legal action or proceeding for any matter
which is required to be submitted to arbitration as contemplated herein except
in connection with the enforcement of an award rendered by the Arbitrators. Upon
the entry of an order dismissing or staying any action or proceeding filed
contrary to the preceding sentence, the Party which filed such action or
proceeding shall promptly pay to the other Party the reasonable attorney's fees,
costs and expenses incurred by such other Party prior to the entry of such
order.
9.12 DELIVERY BY FACSIMILE. This Agreement and any Transaction
Document, and any amendments hereto or thereto, to the extent signed and
delivered by means of a facsimile machine, shall be treated in all manner and
respects as an original Contract and shall be considered to have the same
binding legal effects as if it were the original signed version thereof
delivered in person. At the request of any party hereto or to any such Contract,
each other party hereto or thereto shall re-execute original forms thereof and
deliver them to all other parties. No party hereto or to any such Contract shall
raise the use of a facsimile machine to deliver a signature or the fact that any
signature or Contract was transmitted or communicated through the use of
facsimile machine as a defense to the formation of a Contract and each such
party forever waives any such defense.
* * * * *
29
<PAGE> 33
IN WITNESS WHEREOF, the Parties have executed this Agreement as
of the date first written above.
GAYLORD CONTAINER CORPORATION
By: /s/ Jeffrey B. Park
--------------------------------------------
Its: Vice President and Corporate Controller
--------------------------------------------
STONE CONTAINER CORPORATION
By: /s/ Leslie Ledrer
--------------------------------------------
Its: V.P., Secretary and General Council
--------------------------------------------
30
<PAGE> 1
EXHIBIT 10.2(b)
AMENDED AND RESTATED PAPER SUPPLY AGREEMENT
THIS AMENDED AND RESTATED PAPER SUPPLY AGREEMENT (this "Agreement") is
made and entered into as of October 28, 1999, by and among STONE CONTAINER
CORPORATION, a Delaware corporation ("Seller"), S&G Packaging Company, L.L.C., a
Delaware limited liability company ("Buyer") and GAYLORD CONTAINER CORPORATION,
a Delaware corporation ("Gaylord").
WHEREAS, Seller, Gaylord and Buyer have entered into a Paper Supply
Agreement, dated as of July 12, 1996, as amended (the "Original Agreement").
WHEREAS, on October 28, 1999, Seller and Gaylord have entered into a
Securities Purchase Agreement (the "Purchase Agreement"), pursuant to which,
among other things, Seller has agreed to sell all its membership interests in
Buyer to Gaylord.
WHEREAS, in furtherance of the transaction contemplated by the Purchase
Agreement, the parties hereto wish to amend and restate the Original Agreement
as set forth herein.
NOW, THEREFORE, Seller agrees to sell and deliver unbleached kraft
paper of the kind and quality hereinafter described ("Paper") to Buyer, and
Buyer agrees to purchase Paper from Seller, all upon the terms and subject to
the conditions set forth below:
1. Term
1.1 The initial term of this Agreement ("Initial Term") shall commence
on the date hereof (the "Closing Date") and terminate on the date which is five
years after the Closing Date (the "Initial Termination Date").
1.2 Notwithstanding anything to the contrary set forth in Section 1.1
above, Buyer shall have the right to cause this Agreement to remain in full
force and effect for an additional three year period (the "Option Period"), at
its sole discretion, by giving prior written notice to Seller at least 90 days
prior to the Initial Termination Date, in which case, this Agreement shall
terminate on the date which is eight years after the Closing Date. (For purposes
of this Agreement, "Term" shall mean the term of this agreement including the
Initial Term and the Option Period, if applicable.)
<PAGE> 2
2. Quantity
2.1 Subject to the other terms and conditions hereof, in each year
during the Term, Seller agrees to sell and deliver to Buyer, and Buyer agrees to
purchase and accept from Seller, the following quantities of Paper, which Paper
shall have a basis weight of up to but not exceeding 40 lbs.:
(i) during the year commencing on the Closing Date and ending 12
months thereafter: 5,000 tons per month;
(ii) during the year commencing on the first anniversary of the
Closing Date and ending 12 months thereafter: 4,000 tons per month;
(iii) during all subsequent years of the Term, commencing on the
second anniversary of the Closing Date: 3,000 tons per month.
2.2 In addition, for up to three months after the Closing Date,
Seller shall sell and deliver at the request of Buyer up to 3,000 tons per month
of Paper in basis weights greater than 40 lbs. at the prices specified in
Section 3.1 below.
2.3 Buyer agrees to make a good faith effort to order Paper from
Seller in balanced monthly quantities as set forth in Section 2.1 above. Any
shortfall from or excess of tons of Paper ordered in any month shall be taken
into account in the sale and delivery of Paper in the following month.
2.4 Seller shall not be obligated to sell and deliver and Buyer shall
not be obligated to buy and accept Paper hereunder to the extent either party is
unable to do so as a result of strikes or other labor slow downs or other
labor-related difficulties, labor shortage, civil commotions, fire, explosions,
flood, earthquakes, hurricanes or other acts of God, war, breakdowns or failure
of plant machinery or equipment, delays in or lack of transportation,
governmental priorities or allocation, delays of suppliers, scarcity or
unavailability of raw materials, or any other cause beyond the reasonable
control of Seller or Buyer, as the case may be.
2
<PAGE> 3
3. Price.
3.1 On the Closing Date, the delivered price per ton for Paper sold
hereunder during the first calendar month of this Agreement shall be as follows:
Basis Weight Price Upcharge
------------ ----- --------
50 lb. and up $ 390.00 for the $ 0
first 90 days following
the Closing Date, and
$ 365.00 thereafter
40 lb. $ 440.00 $ 75
35 lb. $ 465.00 $100
33 lb. $ 490.00 $125
28-30 lb. $ 505.00 $140
As to deliveries made in each calendar month after such first calendar month,
prices shall remain the same as for the preceding calendar month subject to
adjustment upward or downward in accordance with Section 3.2 below. Prices shall
be increased to account for price differentials for the various other grades of
Paper to be purchased and sold hereunder, which increase shall be made in
accordance with the upcharges set forth above.
3.2 In the event that the price of 70 pound unbleached kraft paper as
quoted in Pulp & Paper Week Price Watch increases or decreases from the price
quoted in the immediately preceding issue of Pulp and Paper Week Price Watch,
the price for deliveries made in the calendar month immediately following such
increase or decrease shall be adjusted dollar for dollar by an amount per ton
equal to such increase or decrease, as the case may be. If the range of prices
is quoted in the Pulp & Paper Week Price Watch, the lowest price in the range
shall be used for purposes of such adjustments. Notwithstanding the above, if
Pulp & Paper Price Watch ceases to be published, the parties will negotiate in
good faith to jointly determine a new formula to establish the delivered price
of Paper. If the parties are unable to agree on a new formula, disagreements
will be resolved in accordance with Section 21 hereunder.
4. Taxes. Prices include freight but do not include sales, excise,
use or other taxes not in effect or hereafter levied by reason of this
transaction. All taxes (other than taxes based on Seller's income) are for the
account of Buyer. Buyer shall provide Seller with Buyer's current sales tax
certificate of exemption.
5. Terms of Payment
5.1 Seller shall forward an invoice, dated the date of shipment, to
Buyer at the time of shipment. For all grades of Paper, payment terms shall be:
1%, 30 days, net 60 days.
3
<PAGE> 4
5.2 Payments shall be remitted to the address specified on each
invoice.
6. Orders and Shipments.
6.1 Buyer agrees to provide Seller with written shipping
instructions, which instructions shall be provided in sufficient time (and in
any event at least 10 business days prior to the date of delivery) to permit
Seller to make delivery within the periods specified in such instructions.
Shipments will be made from Seller's mill by the least cost common carrier to
the destinations designated by Buyer in writing. Buyer shall receive a per ton
freight allowance of: (i) $30 on all orders of Paper produced by the Hodge, LA
mill for delivery to the Hodge, LA bag plant (such allowance, the "Hodge
Allowance"); and (ii) $25 on all orders of Paper produced by the Seminole, FL
mill for delivery to the Yulee, FL bag plant. All written instructions provided
by Buyer to Seller shall specify the grades desired, within the grade
limitations set forth herein. Paper shall meet the specifications attached
hereto as Exhibit A.
6.2 Notwithstanding anything to the contrary set forth herein, Buyer
shall receive the Hodge Allowance retroactively on all orders of Paper delivered
to Buyer by Seller on or after May 1, 1999. Any amount of the Hodge Allowance to
which Buyer is entitled to (but has not received) as of the date hereof shall be
credited to Buyer by Seller and shall be deducted from any obligation of Buyer
to make payments to Seller hereunder.
7. Most Favored Nations Status.
7.1 Seller agrees that Buyer shall be entitled to "most favored
nations" status as Seller's preferred customer, so that for each and every Price
Period (as defined below), Buyer will be the lowest price buyer of kraft grocery
bag or sack paper or any other product, irrespective of what it is called, which
is used or intended to be used in the manufacture of retail bags, including,
without limitation, grocery bags or sacks (such paper or other product,
"Applicable Paper"), from Seller. By virtue of this consideration and at all
times during the Term, Seller agrees that in the event Seller shall, directly or
indirectly (such as through a subsidiary or an affiliate), charge during a
particular Price Period a lower Effective Price (as defined below) for
Applicable Paper to any other entity or person than is charged to Buyer during
such particular Price Period, Seller shall promptly notify Buyer and provide
Buyer with the opportunity to receive such lower Effective Price offered to such
third person or entity on all pending or future purchases during such particular
Price Period. For purposes of this Agreement, (i) "Effective Price" shall mean
the price charged by Seller per ton of Applicable Paper of the same or similar
quality and grade and (ii) "Price Period" shall mean, with respect to any
particular Effective Price, a period commencing when Seller, directly or
indirectly (such as through a subsidiary or an affiliate), charges such
Effective Price to any person or entity (other than the Buyer) and ending when
the price of Applicable Paper for which such Effective Price was charged is
adjusted upwards in any subsequent issue of Pulp and Paper Week Price Watch.
7.2 Notwithstanding anything to the contrary contained herein, the
provisions of Section 7.1 hereof shall not apply to any sales or offers to sell
Applicable Paper to Interstate Acquisition
4
<PAGE> 5
Corp. ("Interstate") pursuant to the Paper Sales Agreement dated January 27,
1999 between Seller and Interstate (the "Interstate Agreement") or to Rosenbloom
Paper Supply Co. ("RPSC") pursuant to the Paper Supply Agreement dated January
16, 1964, as amended, between Seller and RPSC (the "RPSC Agreement") but only
for the duration and under the terms of such agreements as are currently in
effect.
8. First Refusal Rights.
8.1 Prior to directly or indirectly (such as through a subsidiary or
an affiliate) selling or offering to sell Applicable Paper to any person or
entity (other than Buyer or Gaylord), Seller shall deliver written notice (the
"Sale Notice") to Gaylord by facsimile addressed to Frank Sobieralski, Director
of Planning and Exchange Sales and Chuck Beech, Manager, Customer Service and
Business Logistics at (847) 405-5642 (or any other person at any other facsimile
number designated by Gaylord to Seller upon 3 days written notice). The
facsimile transmission of the Sale Notice shall be confirmed by telephone
message by Seller to Frank Sobieralski at (847) 405-5623, or in his absence to
Chuck Beech at (847) 405-5581 (or to such other person at such other number
designated by Gaylord to Seller upon 3 days written notice). The Sale Notice
shall set forth in reasonable detail the terms and conditions of the proposed
sale. Gaylord may elect to purchase all (but not less than all) of the
Applicable Paper to be purchased upon the terms and conditions set forth in the
Sale Notice(or, if less, at the prices determined in accordance with Section 7
herein) by delivering a written notice of such election to Seller by the end of
the first business day following the business day on which Seller receives
confirmation of proper transmission of such Sale Notice has been received by
Buyer (which transmission shall be deemed proper if the requirements set forth
in the second sentence of this Section 8.1 are complied with by Seller). In the
event Gaylord does not elect to purchase all of the Applicable Paper as set
forth in the Sale Notice pursuant to the terms thereof or of this Section 8.1,
Seller may sell such Applicable Paper to such person or entity as set forth in
the applicable Sale Notice; provided that, if such sale is not consummated
within 10 business days after the applicable Sale Notice has been delivered to
Gaylord, Seller shall not sell such Applicable Paper to any person or entity
(other than Buyer or Gaylord), except pursuant to the procedures set forth in
the first four sentences of this Section 8.1.
8.2 Notwithstanding anything to the contrary contained herein, the
provisions of Section 8.1 above shall not apply to any sales or offers to sell
Applicable Paper to Interstate pursuant to the Interstate Agreement or to RPSC
pursuant to the RPSC Agreement but only for the duration and under the terms of
such agreements as are currently in effect.
9. Records and Right to Audit. During the Term, and for a period of
two years following the termination of this Agreement, Seller shall maintain
clear, complete and accurate records of all documentation, invoices, orders and
proposals relating to (i) any action intended (or reasonably calculated) to
result in the sale of Applicable Paper by Seller to any person or entity (other
than Buyer or Gaylord) and (ii) the determination of price pursuant to Section 3
hereunder. Seller shall make available to Gaylord's outside accountants and
auditors its books and records (including, without limitation, all documentation
required to be maintained by Seller
5
<PAGE> 6
under the preceding sentence) necessary to evidence compliance with the terms
and conditions of Sections 7 and 8 hereof and the prices to be determined
pursuant to Section 3 hereof, provided that Buyer and Gaylord covenant and agree
neither to request nor accept any information from such outside accountants or
auditors other than confirmation that the terms and conditions of Sections 3, 7
and 8 hereof are either being complied with or not being complied with, and
further provided that such information shall not be disclosed to any person or
used for any purpose except as may be necessary to carry out the intent and
effectuate the purposes hereof.
10. Warranty and Warranty Disclaimer. Seller warrants that all Paper
sold pursuant hereto will conform to the specifications set forth on Exhibit A.
The parties acknowledge that the specifications do not exceed normal industry
standards. Any deviation in the paper descriptions, specifications or other
provisions hereof must be consented to in writing by both Buyer and Seller.
Should standards for bag paper materially change for the entire industry, and
should Buyer request Seller to change its specifications accordingly, then
Seller shall have the right to make the necessary capital expenditures to
accomplish such changes within a reasonable time. Seller also warrants it will
convey good and marketable title to the Paper, free and clear of any liens,
claims or other encumbrances. The aforesaid warranties run only to Buyer and are
non-assignable. Except as expressly set forth above, there is NO WARRANTY,
REPRESENTATION OR CONDITION OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING NO
WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR PARTICULAR PURPOSE relating to
such Paper and none shall be implied by law. As to the warranty expressly made
with respect to the specifications referred to above, any claim by Buyer on
account of breach of such warranty shall be deemed waived conclusively unless
written notice thereof is given within 30 days of Buyer's receipt of Paper (or
such other period as may be customary in the industry from time to time) and
before use or alteration thereof and shall not apply to any Paper which shall
have been damaged in any material way after title and risk of loss pass to
Buyer. The foregoing limitations of warranty shall not apply to warranty of
title. Seller shall have the right to either replace or repair any defective
Paper, to refund the purchase price or credit Buyer therewith, or, with Buyer's
concurrence, to grant a reasonable allowance on account of such defects, it
being understood that if Seller no longer manufactures and sells Paper to Buyer
under this Agreement, Seller shall refund the proper amount to Buyer; and
SELLER'S LIABILITY AND BUYER'S EXCLUSIVE REMEDY FOR DEFECTIVE PAPER SHALL BE
LIMITED TO REPLACEMENT, REPAIR, CREDIT OR ALLOWANCE AS SELLER MAY ELECT AND AS
PROVIDED ABOVE AND SELLER SHALL NOT BE LIABLE FOR ANY OTHER LOSS OR DAMAGES,
DIRECT, CONSEQUENTIAL, SPECIAL OR OTHERWISE, occasioned by defects or
deficiencies in the Paper or for my other cause whatsoever. Seller shall be
given reasonable opportunity to investigate all claims and no Paper shall be
returned to Seller until receipt by Buyer of shipping instructions from Seller.
6
<PAGE> 7
11. Delays. In the event of delay or failure of performance not
excused in accordance with the provisions of this Agreement, SELLER'S LIABILITY
SHALL NOT EXCEED AND BUYER'S EXCLUSIVE REMEDY SHALL BE LIMITED TO THE EXCESS
COSTS, if any, reasonably incurred by Buyer in procuring the undelivered portion
of the Paper ordered from other sources. IN NO EVENT SHALL SELLER BE LIABLE FOR
ANY CONSEQUENTIAL, SPECIAL OR CONTINGENT DAMAGES. No Paper will be held after
the time designated for shipment, except by mutual consent, and except that
Seller may delay shipments pending settlement of any overdue indebtedness from
Buyer to Seller. Notwithstanding anything to the contrary contained in this
Agreement, delivery dates are approximate and delivery within a reasonable time
of the dates specified shall be deemed full performance of Seller's obligations
under this Agreement.
12. Title and Risk of Loss. Title to, possession and risk of loss or
damage of Paper sold hereunder shall pass to Buyer on delivery to the common
carrier for such Paper at Seller's mill.
13. Assignment. Any party hereto may assign this Agreement (a) in
whole or in part to another corporation(s), partnership(s), or other business
entity(ies) into or with which such party shall be merged, or to which all or
substantially all of the assets of such party shall be conveyed or transferred,
or to any subsidiary of such party, or (b) as a collateral assignment to its
creditors. Except as provided above, no party hereto may assign this Agreement,
or any part hereof, without the prior written consent of the other party (which
consent shall not be unreasonably withheld or delayed). Upon any assignment as
herein permitted, all the terms and provisions of this Agreement binding upon or
inuring to the benefit of the assigning party shall be binding upon and inure to
the benefit of the assignee. No assignment, consolidation, merger, sale or
transfer by any other means shall relieve the assigning party of its obligations
hereunder.
14. Notices. All notices and other communications given to or made
upon any party hereto in connection with this Agreement shall, except as
otherwise expressly provided herein or therein, be in writing und mailed
(registered or certified), telecopied or delivered by hand or by reputable
overnight courier service to the respective parties, as follows:
Gaylord: Gaylord Container Corporation
500 Lake Cook Road, Suite 400
Deerfield, Illinois 60015
Attention: David F. Tanaka
Telecopy: (847) 405-5586
Seller: Stone Container Corporation
150 North Michigan Avenue
Chicago, Illinois 60601-7568
Attention: Leslie T. Lederer
Telecopy: (312) 580-4919
7
<PAGE> 8
Buyer: S&G Packaging Company, L.L.C.
500 Lake Cook Road, Suite 400
Deerfield, Illinois 60015
Attention: General Counsel
Telecopy: (847) 405-5628
or in accordance with any subsequent written direction from the recipient party
to the sending party. All such notices and other communications shall, except as
otherwise expressly herein provided, be effective upon delivery if delivered by
hand; one day after deposit with a reputable overnight courier service, delivery
charges prepaid; five business days after deposit in the mail when mailed by
registered or certified mail, postage prepaid; or in the case of telecopy, when
received.
15. No Implied Waiver; Writing Required. No delay or failure of any
party in exercising any right, power or remedy under this Agreement shall affect
or operate as a waiver thereof, nor shall any single or partial exercise thereof
or any abandonment or discontinuance of steps to enforce such a right, power or
remedy preclude any further exercise thereof or of any other right, power or
remedy. Any waiver, permit, consent or approval of any kind or character on the
part of any party hereto of any breach or default or any such waiver of any
provision or condition of this Agreement, must be in writing and shall be
effective only to the extent in such writing specifically set forth.
16. Complete Agreement. This Agreement, the Purchase Agreement and
the other Transaction Agreements (as such term is defined in the Purchase
Agreement) and the Exhibits and Schedules hereto and thereto contain the entire
agreement between the parties hereto with respect to the subject matter hereof.
This Agreement, the Purchase Agreement and the other Transaction Agreements and
the Exhibits and Schedules hereto and thereto supersede any previous
understandings or agreements (including without limitation the Original
Agreement), whether written or oral, with respect to the subject matter hereof.
This Agreement cannot be amended, modified or supplemented except by an
instrument in writing executed by the parties hereto.
17. Governing Law. This Agreement shall in all respects be governed
by, and construed and enforced in accordance with, the laws of the State of
Illinois, without giving effect to any choice of law or conflict of law rules or
provisions (whether of the State of Illinois or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the State
of Illinois.
18. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law in any jurisdiction, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating any other provision of this Agreement.
19. Headings. Section and subsection headings in this Agreement are
included for convenience of reference only and shall not constitute a part of
this Agreement for any other purpose.
8
<PAGE> 9
20. Counterparts. This Agreement may be executed in any number of
counterparts and by either party hereto on separate counterparts, each of which,
when so executed and delivered, shall be an original, but all such counterparts
shall together constitute one and the same instrument.
21. Arbitration. Any dispute, controversy or claim, whether based on
contract, tort, statute, fraud, misrepresentation or any other legal theory
between the parties hereto, will be resolved according to the procedures set
forth in Section 9.11 (Arbitration) of the Purchase Agreement (as in effect on
the date hereof), disregarding the first clause of Section 9.11 which refers to
Sections 2.2 and 8.6 of the Purchase Agreement.
* * * * * *
9
<PAGE> 10
IN WITNESS WHEREOF, each of the undersigned parties has caused its
authorized representative to execute this Agreement as of the date first above
written.
GAYLORD CONTAINER CORPORATION
By: /s/ Jeffrey B. Park
---------------------------------------------
Its: Vice President and Corporate Controller
---------------------------------------------
STONE CONTAINER CORPORATION
By: /s/ Leslie Ledrer
---------------------------------------------
Its: V.P., Secretary and General Council
---------------------------------------------
S&G PACKAGING COMPANY, L.L.C.
By: /s/ Thomas Cadden
---------------------------------------------
Its: President
---------------------------------------------
<PAGE> 11
EXHIBIT A
S&G PACKAGING, LLC
RETAIL NATURAL KRAFT SPECIFICATIONS
<TABLE>
<CAPTION>
BASIS WEIGHT (#/3MSF) MD TEAR MULLEN % MOISTURE HST
(CONDITIONED @ 7.5% MOIS) (GRAMS) (PSI) MAX (SECONDS) % FORMIC
GRADE MIN MAX MIN MIN MIN MAX STREAK MIN ACID INK
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
28 26.6 29.4 36 15 3.0 7.5 8.5 15 1
- ----------------------------------------------------------------------------------------------------------------------------------
30 28.5 31.5 38 16 3.0 7.5 8.5 15 1
- ----------------------------------------------------------------------------------------------------------------------------------
33 31.4 34.7 45 17 3.0 7.5 8.5 15 1
- ----------------------------------------------------------------------------------------------------------------------------------
35 33.3 36.8 50 19 3.0 7.5 8.5 15 1
- ----------------------------------------------------------------------------------------------------------------------------------
40 38.0 42.0 63 23 3.5 8.0 9.0 35 1
- ----------------------------------------------------------------------------------------------------------------------------------
45 42.8 47.3 72 26 3.5 8.0 9.5 35 1
- ----------------------------------------------------------------------------------------------------------------------------------
50 47.5 52.5 86 30 4.0 8.5 9.5 50 2
- ----------------------------------------------------------------------------------------------------------------------------------
57 54.2 59.9 97 34 4.5 8.5 9.5 50 2
- ----------------------------------------------------------------------------------------------------------------------------------
60 57.0 63.0 112 37 4.5 8.5 9.5 50 2
- ----------------------------------------------------------------------------------------------------------------------------------
63 59.9 66.2 117 39 4.5 8.5 9.5 50 2
- ----------------------------------------------------------------------------------------------------------------------------------
65 61.8 68.3 121 40 4.5 8.5 9.5 50 2
- ----------------------------------------------------------------------------------------------------------------------------------
67 63.7 70.4 126 42 4.5 8.5 9.5 50 2
- ----------------------------------------------------------------------------------------------------------------------------------
70 66.5 73.5 131 44 4.5 8.5 9.5 50 2
- ----------------------------------------------------------------------------------------------------------------------------------
73 69.4 76.7 136 47 4.5 8.5 9.5 50 2
- ----------------------------------------------------------------------------------------------------------------------------------
75 71.3 78.8 141 49 4.5 8.5 9.5 50 2
- ----------------------------------------------------------------------------------------------------------------------------------
80 76.0 84.0 150 53 4.5 8.5 9.5 50 2
</TABLE>
CALIPER: ROLL AVERAGE MUST BE WITHIN +/- 0.001 INCH OF MILL TARGET.
ROLL VARIATION MUST BE NO GREATER THAN +/- 0.001 INCH
HST: REFLECTANCE ENDPOINT = 80%
<PAGE> 1
EXHIBIT 10.3(b)
PATENT, TRADEMARK AND TRADE SECRET ASSIGNMENT
This Patent, Trademark and Trade Secret Assignment (the
"Assignment") is made and entered into this 28th day of October, 1999 (the
"Effective Date") by and between, Stone Container Corporation, a Delaware
corporation (the "Assignor"), and S&G Packaging Company, L.L.C., a Delaware
limited liability company (the "Assignee").
WHEREAS, on the date hereof, Assignor has entered into a
Securities Purchase Agreement (the "Purchase Agreement") with Gaylord Container
Corporation ("Gaylord") pursuant to which, among other things, Gaylord has
agreed to purchase all of Assignor's ownership interests in Assignee; and
WHEREAS, in furtherance of the transaction contemplated by the
Purchase Agreement, Assignee wishes to acquire and Assignor wishes to assign to
Assignee, all of Assignor's right, title and interest in and to: (a) the
Proprietary Rights (as that term is defined in the Purchase Agreement) licensed
to Assignee pursuant to the License Agreement dated July 12, 1996, by and
between Assignor and Assignee (the "License Agreement"); (b) any and all of the
improvements, and/or additions to the Proprietary Rights as described in Section
7.5 of the License Agreement (the "Improvements"); and (c) any and all of the
(i) United States patents and patent applications identified and set forth on
Exhibit A, all other patents, patent applications and inventions (whether
patentable or not) that the Assignee has used, that the Assignee is currently
using or that cover products or services that the Assignee has offered in the
past or is currently offering or that are currently in development, with respect
to Assignee's retail bag business, including its grocery bag and sack,
merchandise bag and fast food bag businesses (collectively
<PAGE> 2
the "Business"), and all improvements and/or additions to any of the foregoing,
and all foreign counterparts thereof (collectively the "Patents"), (ii) the
trademarks, the United States trademark registrations and applications for
registration, and the unregistered trademarks, all as identified and set forth
on Exhibit A, and all variations thereof, and all other trademarks that the
Assignee has used, that the Assignee is currently using or that cover products
or services that the Assignee has offered in the past or is currently offering
or that are currently in development, with respect to the Business, and all
corresponding foreign rights (collectively the "Marks"), and the goodwill of the
business associated therewith, and (iii) the trade secrets, confidential
business information and know-how that the Assignee has used, that the Assignee
is currently using or that cover products or services that the Assignee has
offered in the past or is currently offering or that are currently in
development, with respect to the Business (collectively the "Trade Secrets").
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Assignor and Assignee, each
intending to be legally bound, hereby agree as follows:
1. Assignor does hereby sell, assign, transfer and set over to
Assignee all of its right, title and interest in and to (a) the Proprietary
Rights licensed to Assignee pursuant to Paragraph 3.1 of the License Agreement,
(b) the Improvements, and (c) the Patents (including any patents that may issue
thereon, and any continuations, divisions, continuations-in-part, reissues,
reexaminations, extensions and including the subject matter of all claims which
may be obtained therefrom), the Marks (together with the goodwill of the
business in connection with which the Marks are used, and all registrations and
applications therefor, including any renewals and extensions of the
registrations that are or may be secured under the laws of the United States
-2-
<PAGE> 3
and all foreign countries, now or hereafter in effect) and the Trade Secrets,
all for Assignee's own use and enjoyment, and for the use and enjoyment of
Assignee's successors, assigns or other legal representatives, as fully and
entirely as the same would have been held and enjoyed by Assignor if this
Assignment had not been made; together with all income, royalties, damages or
payments due or payable as of the date hereof or thereafter, including, without
limitation, all claims for damages by reason of past, present or future
infringement or other unauthorized use of the rights assigned hereunder, with
the right to sue for, and collect the same for Assignee's own use and enjoyment
and for the use and enjoyment of its successors, assigns or other legal
representatives.
2. Assignor authorizes the Commissioner of Patents and Trademarks
of the United States or, in the case of the several states in the United States
or countries outside the United States, the analogous individual or agency
responsible for patents, trademarks, service marks, trade/assumed names, to
record, as applicable, Assignee as owner of the rights assigned hereunder,
including any variations thereof, for the sole use and enjoyment of Assignee,
its successors, assigns or other legal representatives.
3. Assignor hereby represents and warrants that its right, title
and interest in and to the rights assigned hereunder are free and clear of any
liens and encumbrances, that it has full right to assign all its interests
therein, and that it has not executed and will not execute any agreement or
other instrument in conflict herewith.
4. Assignor shall provide to Assignee, its successors, assigns or
other legal representatives, cooperation and assistance at Assignee's request
and expense (including the execution and delivery of any and all affidavits,
declarations, oaths, samples, exhibits, specimens
-3-
<PAGE> 4
and other documentation as may be reasonably required): (a) in the preparation
and prosecution of any application for registration or any application for
renewal of a registration covering, as applicable, any of the rights assigned
hereunder; (b) in the prosecution or defense of any interference, opposition,
reexamination, reissue, infringement or other proceedings that may arise in
connection with any of the rights assigned hereunder, as applicable, including,
but not limited to, testifying as to any facts relating to such rights; (c) in
obtaining any additional patent or trademark protection, as applicable, for the
rights assigned hereunder that Assignee reasonably may deem appropriate that may
be secured under the laws now or hereafter in effect in the United States or any
other country; and (d) in the implementation or perfection of this Assignment.
5. Assignor grants to Kirkland & Ellis the authority and power to
insert on this instrument any further information that may be necessary or
desirable for purposes of recordation in the United States Patent & Trademark
Office or the patent or trademark office of any foreign country.
* * * * *
-4-
<PAGE> 5
IN TESTIMONY WHEREOF, the parties hereto have caused this
Assignment to be signed and executed by the undersigned officers thereunto duly
authorized this 28th day of October, 1999.
S&G PACKAGING COMPANY, L.L.C. STONE CONTAINER CORPORATION
Name: /s/ Thomas Cadden Name: /s/ Leslie Ledrer
------------------------- ------------------------------------
Title: President Title: V.P., Secretary and General Counsel
------------------------ -----------------------------------
(Notarized)
-5-
<PAGE> 6
EXHIBIT A
PATENTS:
<TABLE>
<CAPTION>
COUNTRY U.S. PATENT NO. ISSUE DATE TITLE
- ------- -------------- ---------- -----
<S> <C> <C> <C>
United States 5,857,672 Jan. 12, 1999 Apparatus for Rotating
Substantially Flat Articles
United States 5,860,646 Jan. 19, 1999 Apparatus for Rotating
Substantially Flat Articles
(continuation of 5,857,672)
United States 5,816,993 Oct. 6, 1998 Apparatus and Method for
Attaching Carrying Handles to
Bags
United States 5,795,280 Aug. 18, 1998 Apparatus for the
Registration of Printed
Matter During the Manufacture
of Bags
</TABLE>
TRADEMARKS:
<TABLE>
<CAPTION>
MARK REG. NO. REG. DATE
- ---- -------- ---------
<S> <C> <C>
BREAKAWAY 1,258,530 November 22, 1983
GOOD NEWS BAG 1,655,544 September 3, 1991; cancelled
ss.8 March 9, 1998
THE HANDLER None None
</TABLE>
-6-
<PAGE> 1
EXHIBIT 23.1(B)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-25675, 33-32221, 33-33977, 33-33871, 33-54367 and 333-39809 on Form S-8 of
our report dated October 28,1999, appearing in this Annual Report on Form 10-K
of Gaylord Container Corporation for the year ended September 30, 1999.
Deloitte & Touche LLP
Chicago, Illinois
December 16, 1999
<PAGE> 1
POWER OF ATTORNEY EXHIBIT 24.1(B)
- --------------------------------------------------------------------------------
Each of the undersigned, being a director or officer, or both, of GAYLORD
CONTAINER CORPORATION, a Delaware corporation (the "Corporation"), does hereby
constitute and appoint each of Marvin A. Pomerantz and Daniel P. Casey as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him/her and in his/her name, place and stead, in any and all
capacities, to sign the Corporation's Form 10-K for the Corporation's 1999
fiscal year and to file same, together with all exhibits thereto and other
attachments and documents in connection therewith, with the Securities and
Exchange Commission, the American Stock Exchange and any other regulatory
authority, and to sign, file or deliver such further documents and to take such
further actions in connection therewith as each of the undersigned might or
could do in person and as each such attorney and agent deems necessary or
desirable; and each of the undersigned does hereby fully ratify and confirm all
that said attorneys and agents, or any of them, or the substitute of any of
them, shall do or cause to be done by virtue hereof.
SIGNATURE TITLE
/s/Marvin A. Pomerantz Chairman, Chief Executive Officer and Director
- -------------------------- (Principal Executive Officer)
Marvin A. Pomerantz
/s/Daniel P. Casey Executive Vice President
- -------------------------- (Principal Financial Officer)
Daniel P. Casey
/s/Jeffrey B. Park Vice President-Corporate Controller
- -------------------------- (Principal Accounting Officer)
Jeffrey B. Park
/s/Mary Sue Coleman Director
- --------------------------
Mary Sue Coleman
/s/Harve A. Ferrill Director
- --------------------------
Harve A. Ferrill
/s/John E. Goodenow Director
- --------------------------
John E. Goodenow
/s/David B. Hawkins Director
- --------------------------
David B. Hawkins
/s/Warren J. Hayford Director
- --------------------------
Warren J. Hayford
/s/Charles S. Johnson Director
- --------------------------
Charles S. Johnson
/s/Jerry W. Kolb Director
- --------------------------
Jerry W. Kolb
/s/Ralph L. MacDonald Jr. Director
- --------------------------
Ralph L. MacDonald Jr.
/s/Thomas H. Stoner Director
- --------------------------
Thomas H. Stoner
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,400
<SECURITIES> 0
<RECEIVABLES> 149,800
<ALLOWANCES> 6,700
<INVENTORY> 67,100
<CURRENT-ASSETS> 240,100
<PP&E> 1,119,300
<DEPRECIATION> 560,400
<TOTAL-ASSETS> 1,018,000
<CURRENT-LIABILITIES> 144,400
<BONDS> 924,800
0
0
<COMMON> 178,200
<OTHER-SE> (269,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,018,000
<SALES> 870,600
<TOTAL-REVENUES> 870,600
<CGS> 757,500
<TOTAL-COSTS> 855,900
<OTHER-EXPENSES> 4,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,400
<INCOME-PRETAX> (75,200)
<INCOME-TAX> (28,800)
<INCOME-CONTINUING> (46,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46,400)
<EPS-BASIC> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
