FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
For Quarter Ended June 30, 1999 Commission file number 1-9915
GAYLORD CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3472452
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Lake Cook Road, Suite 400
Deerfield, Illinois 60015
Telephone: (847) 405-5500
(Address, including zip code, and telephone number, including
area code, of registrant's principal offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
As of July 30, 1999, the registrant had outstanding 53,460,938 shares
of its $0.0001 par value Class A Common Stock (including 1,471,997 shares held
in trust for the benefit of the warrant holders) and 1,471,997 redeemable
exchangeable warrants to obtain Class A Common Stock.
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PAGE
PART I. FINANCIAL INFORMATION NUMBERS
- ------- --------------------- -------
Item 1. Financial Statements 1 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 18
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security
Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
- ----------
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<TABLE>
<CAPTION>
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30,
1999 1998
--------- ----------
<S> <C> <C>
ASSETS (In millions)
CURRENT ASSETS:
Cash and equivalents $ 8.7 $ 5.7
Trade receivables (less allowances of $6.2 million
and $6.4 million, respectively) 129.2 122.4
Inventories (Note 2) 82.8 73.2
Other current assets 12.8 9.5
--------- ---------
Total current assets 233.5 210.8
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 1,125.6 1,104.1
Less accumulated depreciation (562.8) (530.7)
--------- ---------
Property - net 562.8 573.4
--------- ---------
DEFERRED INCOME TAXES 148.1 121.5
OTHER ASSETS 70.6 74.1
--------- ---------
TOTAL $ 1,015.0 $ 979.8
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7.2 $ 9.7
Trade payables 52.2 42.3
Accrued interest payable 12.8 16.2
Accrued and other liabilities 79.0 69.0
--------- ---------
Total current liabilities 151.2 137.2
--------- ---------
LONG-TERM DEBT 924.7 863.3
OTHER LONG-TERM LIABILITIES 28.0 26.8
COMMITMENTS AND CONTINGENCIES (Note 3) - -
STOCKHOLDERS' DEFICIT:
Class A common stock - par value, $.0001 per share;
authorized 125,000,000 shares; issued 54,932,392
shares and 54,786,492 shares, respectively, and
outstanding 53,457,025 shares and 53,273,928
shares, respectively - -
Capital in excess of par value 178.1 177.4
Retained deficit (253.0) (210.6)
Common stock in treasury - at cost; 1,475,367
shares and 1,512,564 shares, respectively (10.9) (11.2)
Accumulated Other Comprehensive Income:
Minimum pension liability (3.1) (3.1)
--------- ---------
Total stockholders' deficit (88.9) (47.5)
--------- ---------
TOTAL $ 1,015.0 $ 979.8
========= =========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
1
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<TABLE>
<CAPTION>
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 1999 AND 1998 (In millions, except per share data)
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
---------------------------------
<S> <C> <C>
1999 1998
--------- ---------
NET SALES $ 229.0 $ 212.1
COST OF GOODS SOLD 193.1 188.8
--------- ---------
GROSS MARGIN 35.9 23.3
SELLING AND ADMINISTRATIVE COSTS (25.3) (23.6)
--------- ---------
OPERATING EARNINGS (LOSS) 10.6 (0.3)
INTEREST EXPENSE - Net (21.6) (19.9)
OTHER EXPENSE - Net (2.0) (0.4)
--------- ---------
LOSS BEFORE TAXES AND EXTRAORDINARY ITEM (13.0) (20.6)
INCOME TAX BENEFIT 5.0 7.9
--------- ---------
NET LOSS BEFORE EXTRAORDINARY ITEM (8.0) (12.7)
EXTRAORDINARY LOSS (Note 4) - (1.2)
--------- ---------
NET LOSS (8.0) $ (13.9)
========= =========
RETAINED DEFICIT:
Beginning of period (245.0)
---------
End of period $ (253.0)
=========
LOSS PER COMMON SHARE:
Basic:
Net loss before extraordinary item $ (0.15) $ (0.24)
Extraordinary loss - (0.02)
--------- ---------
Net Loss $ (0.15) $ (0.26)
========= =========
Diluted: (A)
Net loss before extraordinary item $ N/A $ N/A
Extraordinary loss N/A N/A
--------- ---------
Net Loss $ N/A $ N/A
========= =========
WEIGHTED AVERAGE OUTSTANDING AND
POTENTIAL COMMON SHARES OUTSTANDING:
BASIC:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 53.4 53.2
DILUTED:
EFFECT OF DILUTIVE SECURITIES:
Employee and director incentive
stock options 0.5 0.5
--------- --------
Weighted Average Outstanding and
Potential Common Shares Outstanding 53.9 53.7
========= ========
<FN>
See notes to condensed consolidated financial statements.
(A) Not presented where the effect of potential shares is antidilutive.
</FN>
</TABLE>
2
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<TABLE>
<CAPTION>
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
JUNE 30, 1999 AND 1998 (In millions, except per share data)
- --------------------------------------------------------------------------------------------------
NINE MONTHS ENDED JUNE 30,
----------------------------------
1999 1998
--------- ---------
<S> <C> <C>
NET SALES $ 628.8 $ 628.8
COST OF GOODS SOLD 557.2 572.4
--------- ---------
GROSS MARGIN 71.6 56.4
SELLING AND ADMINISTRATIVE COSTS (73.6) (66.9)
--------- ---------
OPERATING LOSS (2.0) (10.5)
INTEREST EXPENSE - Net (63.7) (61.6)
OTHER EXPENSE - Net (3.0) (3.0)
--------- ---------
LOSS BEFORE TAXES AND EXTRAORDINARY ITEMS (68.7) (75.1)
INCOME TAX BENEFIT 26.3 28.8
--------- ---------
NET LOSS BEFORE EXTRAORDINARY ITEMS (42.4) (46.3)
EXTRAORDINARY LOSS (Note 4) - (25.1)
--------- ---------
NET LOSS (42.4) $ (71.4)
========= =========
RETAINED DEFICIT:
Beginning of period (210.6)
---------
End of period $ (253.0)
=========
LOSS PER COMMON SHARE:
Basic:
Net loss before extraordinary items $ (0.79) $ (0.87)
Extraordinary loss - (0.47)
--------- ---------
Net Loss $ (0.79) $ (1.34)
========= =========
Diluted: (A)
Net loss before extraordinary items $ N/A $ N/A
Extraordinary loss N/A N/A
--------- ---------
Net Loss $ N/A $ N/A
========= =========
WEIGHTED AVERAGE OUTSTANDING
AND POTENTIAL COMMON SHARES OUTSTANDING:
BASIC:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 53.4 53.1
DILUTED:
EFFECT OF DILUTIVE SECURITIES:
Employee and director incentive
stock options 0.3 0.5
--------- ---------
Weighted Average Outstanding and
Potential Common Shares Outstanding 53.7 53.6
========= =========
<FN>
See notes to condensed consolidated financial statements.
(A) Not presented where the effect of potential shares is antidilutive.
</FN>
</TABLE>
3
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<TABLE>
<CAPTION>
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
JUNE 30, 1999 AND 1998
- -------------------------------------------------------------------------------------------------
NINE MONTHS ENDED JUNE 30,
-----------------------------------
1999 1998
--------- ----------
<S> <C> <C>
(In millions)
CASH FLOWS FROM OPERATIONS:
Net loss $ (42.4) $ (71.4)
Adjustments to reconcile net loss to net cash used for
operations:
Extraordinary loss (Note 4) - 25.1
Depreciation and amortization 41.0 49.2
Deferred tax benefit (26.5) (12.0)
Change in current assets and liabilities,
excluding acquisitions and dispositions (16.4) (61.4)
Other - net 4.1 2.7
--------- ---------
Net cash used for operations (40.2) (67.8)
--------- ---------
CASH FLOWS FROM INVESTMENTS:
Capital expenditures (13.2) (31.3)
Capitalized interest (0.5) (1.1)
Other investments - net (1.8) (0.6)
--------- ---------
Net cash used for investments (15.5) (33.0)
--------- ---------
CASH FLOWS FROM FINANCING:
Senior debt - repayments (7.6) (9.5)
Early retirement of debt - (436.9)
Issuance of Senior Notes - 200.0
Issuance of Senior Subordinated Notes - 250.0
Issuance of Term Loan - 125.0
Debt issuance costs - (15.2)
Revolving credit agreement borrowings/(repayments) -
net 66.5 (11.0)
Other financing - net (0.2) 1.1
--------- ---------
Net cash provided by financing 58.7 103.5
--------- ---------
Net increase in cash and equivalents 3.0 2.7
Cash and equivalents, beginning of period 5.7 6.1
--------- ---------
Cash and equivalents, end of period $ 8.7 $ 8.8
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (refunded) for:
Interest $ 65.2 $ 62.9
========= =========
Income taxes $ - $ (5.1)
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Write-off of deferred financing fees $ - $ 8.0
========= =========
Property additions $ 11.1 $ 8.9
========= =========
Increase in total debt $ - $ 10.5
========= =========
Increase (decrease) in accrued & other liabilities $ 11.1 $ (1.6)
========= ==========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
1. GENERAL
-------
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all normal and recurring adjustments and accruals
necessary to present fairly the financial position as of June 30, 1999 and the
results of operations for the three months and nine months ended June 30, 1999
and 1998, and cash flows for the nine months ended June 30, 1999 and 1998,
including all the accounts of Gaylord Container Corporation (including its
subsidiaries, the Company), and are in conformity with Securities and Exchange
Commission Rule 10-01 of Regulation S-X. The financial statements should be read
in conjunction with the audited consolidated financial statements and the notes
thereto on Form 10-K for the fiscal year ended September 30, 1998.
2. INVENTORIES
-----------
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
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(In millions)
Inventories consist of:
<S> <C> <C>
Finished products $ 17.7 $ 19.0
In process 46.1 31.6
Raw materials 11.5 12.4
Supplies 14.9 13.6
---------- ---------
90.2 76.6
LIFO valuation adjustment (7.4) (3.4)
---------- ---------
Total $ 82.8 $ 73.2
========== =========
</TABLE>
3. CONTINGENCIES
-------------
The Company is not a party to any legal proceedings other than litigation
incidental to normal business activities, except as described below:
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 shareholders
on June 28, 1995; (ii) amendments to the Company's charter and by-laws, adopted
on July 21, 1995; and (iii) a redemption of warrants in June 1995 all were
designed to entrench the individual defendants in their capacities as directors
5
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ----------------------------------------------------------------
at the expense of stockholders who otherwise would have been able to take
advantage of a sale of the Company. The complaint asks the court, among other
things, to rescind the amendments and prohibit the use of the stockholder Rights
Agreement to discourage any bona fide acquirer. In the alternative, the
plaintiffs seek compensatory damages. On December 19, 1996, the Delaware
Chancery Court denied the Company's motion to dismiss the complaint in its
entirety. The case is now in the discovery stage. A class has been certified.
The Company believes that, after investigation of the facts, the allegations
are without merit and is defending itself vigorously. No trial date has been
set.
On October 23, 1995, a rail tank car exploded on the premises of the Bogalusa,
Louisiana plant of Gaylord Chemical Corporation, a wholly owned, independently
operated subsidiary of the Company. The accident resulted in the venting of
certain chemicals, including by-products of nitrogen tetroxide, a raw material
used by the plant to produce dimethyl sulfoxide, a solvent used in the
manufacture of pharmaceutical and agricultural chemicals. More than 160 lawsuits
have been filed in both federal and state courts naming as defendants Gaylord
Chemical Corporation and/or the Company, certain of their respective officers
and other unrelated corporations and individuals. The lawsuits, which seek
unspecified damages, allege personal injury, property damage, economic loss,
related injuries and fear of injuries as a result of the accident. On April 1,
1996, the federal judge dismissed all but one of the federal actions for failing
to state claims under federal law and remanded the remaining 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 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 or the Company, will be determined by
the trial court after class certification issues are finally resolved.
6
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ----------------------------------------------------------------
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 detailed claim
forms. No trial date has been set for these consolidated Louisiana actions in
which 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,
Vicksburg Chemical Company, equally liable for the accident. The jury also found
that none of the seventeen plaintiffs whose claims went to the jury had suffered
any damages, and awarded no damages to any of them. 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.
7
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ----------------------------------------------------------------
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.
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 should not have a material
adverse effect on its financial position, results of operations or cash flows.
8
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
- ----------------------------------------------------------------
4. EXTRAORDINARY ITEMS
-------------------
During the second quarter of fiscal 1998, the Company issued $200 million
principal amount of 9 3/8% Senior Notes due 2007 and $250 million principal
amount of 9 7/8% Senior Subordinated Notes due 2008 (collectively the New Notes)
and used the proceeds to retire all of its outstanding 12 3/4% Senior
Subordinated Discount Debentures ($404.3 million outstanding principal amount)
due 2005 (the Old Notes). 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.
During the third quarter of fiscal 1998, the Company refinanced and expanded its
existing Revolving Credit Facility (the Old Facility), establishing a six-year
$125 million B Tranche term loan due in 2004 and a five-year $175 million
revolving credit facility due in 2003. The proceeds from the term loan were
used: (i) to repay the outstanding balance on the Old Facility ($95.5 million),
which was terminated; (ii) to repay a portion of the Company's Trade Receivable
Facility ($19.5 million); (iii) to pay fees and expenses; and (iv) 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.
5. ADOPTION OF NEW ACCOUNTING STANDARDS
------------------------------------
Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which requires the
reporting and display of comprehensive income and its components in the
financial statements. The Company's comprehensive income is equal to the
consolidated net loss for the three months and nine months ended June 30, 1999
and 1998, which is reported on the Consolidated Statements of Operations.
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information". Interim
period segment reporting is not required in the initial year of adoption and,
therefore, the Company will disclose the required segment reporting under this
Statement in its fiscal 1999 year-end financial statements.
The Company adopted Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Post Retirement Benefits",
which revises employers' disclosures about pension and other postretirement
benefit plans. The Company will disclose the required information in its fiscal
1999 year-end financial statements.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Third Quarter of Fiscal 1999 Compared with Third Quarter of
Fiscal 1998
Net sales for the third quarter of fiscal 1999 were $229.0 million compared to
net sales of $212.1 million for the third quarter of fiscal 1998. Operating
earnings for the current quarter were $10.6 million compared to an operating
loss of $0.3 million for the year-ago quarter. The net loss for the current
quarter totaled $8.0 million, or $0.15 per share, compared to a net loss of
$13.9 million, or $0.26 per share, for the year-ago quarter, which included a
$1.2 million ($0.02 per share) extraordinary loss on the refinancing of the
Company's credit facility.
Sales in the third quarter of fiscal 1999 were favorably affected by higher
volume, which increased net sales by approximately $15 million. Higher average
net selling prices increased net sales by approximately $2 million in the
quarter-over-quarter comparison.
Gross margin for the third quarter of fiscal 1999 increased to $35.9 million
from $23.3 million in the prior-year quarter primarily due to higher average net
selling prices ($6 million including $4 million of lower paper costs in the
converting facilities), lower fiber costs ($2 million) and higher volume ($3
million).
Quarter-over-quarter, total mill production increased to 4,369 tons per day
(TPD, calculated on the basis of the number of days in the period) from 4,285
TPD principally due to improved productivity, as a result of the absence of
electric power curtailments by the local utility at the Bogalusa Mill in the
current-year quarter versus the prior-year quarter. Containerboard production in
the third quarter of fiscal 1999 increased approximately 3 percent to 3,647 TPD
from 3,538 TPD in the prior-year quarter. Unbleached kraft paper production in
the current quarter decreased to 722 TPD from 747 TPD in the prior-year quarter.
Corrugated shipments increased to 3.9 billion square feet in the third quarter
of fiscal 1999 compared to 3.7 billion square feet in the year-ago quarter
primarily as a result of increased demand and the opening of a new sheet feeder
plant during the first quarter of fiscal 1998. Multiwall bag shipments decreased
to 12.8 thousand tons in the current quarter compared to shipments of 13.9
thousand tons in the third quarter of fiscal 1998.
Average selling prices in the third quarter of fiscal 1999 for the Company's
domestic and export linerboard and unbleached kraft paper were relatively
unchanged from the previous-year quarter. Average selling prices increased
approximately 4 percent for multiwall bags and 1 percent for corrugated products
in the current-year quarter compared to the prior-year quarter.
10
<PAGE>
Fiber costs decreased primarily due to lower average delivered costs for old
corrugated containers (OCC) and wood chips. The average delivered cost for OCC
decreased approximately 11 percent, in the quarter-over-quarter comparison,
primarily due to decreased demand. The average delivered cost of wood chips
decreased by approximately 9 percent in the third quarter of fiscal 1999
compared to the prior-year quarter mainly due to improved weather conditions in
the southern United States. At the end of June 1999, however, OCC and double
lined kraft (DLK) (together recycled fiber) prices had risen by approximately 55
percent and 87 percent, respectively, since December 1998.
Selling and administrative costs were $25.3 million for the current quarter
compared to $23.6 million for the year-ago period. This increase is due
primarily to higher information system costs related to the Year 2000 effort and
long-term incentive costs.
Net interest expense increased to $21.6 million in the third quarter of fiscal
1999 from $19.9 million in the prior-year quarter. Higher average debt levels
increased interest expense by approximately $1.1 million, and higher average
borrowing rates increased interest expense by approximately $0.6 million.
In the third quarter of fiscal 1999, the Company recognized an income tax
benefit of $5.0 million compared to $7.9 million in the prior-year quarter. The
effective tax rate was approximately 38 percent in each of the third quarters of
fiscal 1999 and fiscal 1998.
During the third quarter of fiscal 1998, the Company refinanced and expanded its
existing Revolving Credit Facility (the Old Facility), establishing a six-year
$125 million B Tranche term loan due in 2004 and a five-year $175 million
revolving credit facility due in 2003. The proceeds from the term loan were
used: (i) to repay the outstanding balance on the Old Facility ($95.5 million),
which was terminated; (ii) to repay a portion of the Company's Trade Receivable
Facility ($19.5 million); (iii) to pay fees and expenses; and (iv) 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.
11
<PAGE>
First Nine Months of Fiscal 1999 Compared with First Nine Months of Fiscal 1998
Net sales were $628.8 million in both the first nine months of fiscal 1999 and
fiscal 1998. The operating loss for the current period was $2.0 million compared
to $10.5 million for the year-ago period. The net loss for the current period
totaled $42.4 million, or $0.79 per share, compared to a net loss of $71.4
million, or $1.34 per share, for the year-ago period, which included $25.1
million ($0.47 per share) of extraordinary loss on the early retirement of debt
and the refinancing of the Company's credit facility.
Sales in the first nine months of fiscal 1999 were unfavorably affected by lower
average net selling prices, which decreased net sales by approximately $22
million. Higher corrugated shipments increased net sales by approximately $23
million in the period-over-period comparison.
Gross margin for the first nine months of fiscal 1999 increased to $71.6 million
from $56.4 million in the prior-year period primarily due to lower fiber costs
($26 million) and higher volume ($6 million), offset by lower average net
selling prices ($14 million net of $8 million of lower paper costs in the
converting facilities), and 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 ($3 million).
Current year-to-date mill production was essentially unchanged at 4,225 tons per
day (TPD, calculated on the basis of the number of days in the period) compared
to the prior-year period. Containerboard production was unchanged at 3,498 TPD
in the first nine months of fiscal 1999 compared to the prior-year period.
Unbleached kraft paper production decreased approximately 1 percent in the
current-year period, to 727 TPD, from 738 TPD in the prior-year period.
Corrugated shipments increased approximately 8 percent to 11.3 billion square
feet in the first nine months of fiscal 1999 compared to 10.5 billion square
feet in the year-ago period primarily as a result of the opening of a new sheet
feeder plant in first quarter of fiscal 1998 and increased demand. Multiwall bag
shipments decreased to 40 thousand tons in the current period compared to
shipments of 44.9 thousand tons in the first nine months of fiscal 1998.
Average selling prices decreased for the Company's domestic linerboard, export
linerboard and unbleached kraft paper, by approximately 14 percent, 9 percent,
and 11 percent, respectively, in the first nine months of fiscal 1999 compared
to the prior-year period. Average selling prices increased approximately 6
percent for multiwall bags and decreased approximately 2 percent for corrugated
products in the current-year period compared to the prior-year period.
12
<PAGE>
Fiber costs decreased primarily due to lower average delivered costs for
recycled fiber and wood chips. The average delivered cost for OCC and DLK
decreased approximately 28 percent, in the period-over-period comparison,
primarily due to decreased demand. In addition, the average delivered cost of
wood chips decreased by approximately 13 percent in the first nine months of
fiscal 1999 compared to the prior-year period, mainly due to improved weather
conditions in the southern United States. At the end of June 1999, however, OCC
and DLK prices had risen by approximately 55 percent and 87 percent,
respectively, since December 1998.
Selling and administrative costs were $73.6 million for the current period
compared to $66.9 million for the year-ago period. This increase is due
primarily to higher information system costs related to the Year 2000 effort and
increased long-term incentive and litigation costs.
Net interest expense increased to $63.7 million in the first nine months of
fiscal 1999 from $61.6 million in the prior-year period. Higher average debt
levels increased interest expense by approximately $6.3 million, while lower
average borrowing rates reduced interest expense by approximately $4.2 million.
The lower average borrowing rates are primarily the result of the refinancing of
the Company's Old Notes in the second quarter of fiscal 1998.
In the first nine months of fiscal 1999, the Company recognized an income tax
benefit of $26.3 million compared to $28.8 million in the prior-year period. The
effective tax rate was approximately 38 percent in both the current-year and
prior-year periods.
During the second quarter of fiscal 1998, the Company issued $200 million
principal amount of 9 3/8% Senior Notes due 2007 and $250 million principal
amount of 9 7/8% Senior Subordinated Notes due 2008 (collectively the New Notes)
and used the proceeds to retire all of its outstanding 12 3/4% Senior
Subordinated Discount Debentures ($404.3 million outstanding principal amount)
due 2005 (the Old Notes). 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 the Old Facility and
established a term loan and a new revolving credit facility. In conjunction with
the 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.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
General
The Company has historically financed its operations through cash provided by
operations, borrowings under its credit agreements and the issuance of debt and
equity securities. The Company's principal uses of cash are to pay operating
expenses, fund capital expenditures and service debt.
Net cash used for operations was $40.2 million for the first nine months of
fiscal 1999, compared with net cash used for operations of $67.8 million for the
year-ago period. The improvement was primarily due to a decrease in working
capital requirements.
In the first nine months of fiscal 1999 cash flows used for investing activities
decreased to $15.5 million from $33.0 million in the year-ago period, primarily
due to a $18.1 million decrease in capital expenditures. Also, in the first nine
months of fiscal 1999, the Company incurred an $11.1 million liability
associated with a capital project that will be vendor-financed through a debt
obligation secured by the project assets. During the first nine months of fiscal
1998, the Company acquired $10.5 million of equipment financed by a capital
lease.
Cash flows from financing activities decreased to $58.7 million in the first
nine months of fiscal 1999 from $103.5 million in the year-ago period. The
decrease is primarily due to a reduction in the cash needed to fund operating
and investing activities.
At the end of 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. During the first
nine months of fiscal 1999, the Company incurred approximately $2.9 million of
costs for demolition and asbestos removal and to maintain the East Mill. Such
costs are net of any proceeds from the sale of scrap. Management expects to
complete the majority of the remaining demolition and asbestos removal efforts
in the fourth quarter of fiscal 1999. At June 30, 1999, balance sheet reserves
for demolition and asbestos removal were approximately $0.5 million and the net
book value of the East Mill was $10.5 million.
14
<PAGE>
Liquidity
At June 30, 1999, the Company had cash and equivalents of $8.7 million, an
increase of $3.0 million from September 30, 1998, as cash from financing was
largely offset by cash used for operations and investments. Total debt increased
by $58.9 million to $931.9 million at June 30, 1999 from $873.0 million at
September 30, 1998 as a result of increased revolver borrowings. The increase in
revolver borrowings was primarily due to interest payments on the Company's
public debt. At June 30, 1999, the Company had approximately $105 million of
borrowings outstanding, and approximately $135 million of credit available under
the revolving portions of its credit agreements.
At June 30, 1999, the Company had primary working capital (Trade receivables
plus Inventories less Trade payables) of $159.8 million, an increase of $6.5
million from September 30, 1998 primarily due to seasonally higher inventory
levels and higher trade receivables offset somewhat by higher trade payables.
The increase in trade receivables was primarily due to higher sales for the
current-year period versus the prior-year.
Published industry prices for linerboard increased approximately $45 per ton
from December 1998 to March 1999 and remained relatively unchanged through June
1999. Unbleached kraft paper published prices increased approximately $20 per
ton from December 1998 to March 1999 and an additional $10 per ton from March
1999 to June 1999. Following the increase in published prices, the Company
successfully implemented an approximately 9 percent increase in the prices of
its corrugated products in the third quarter of fiscal 1999. During July 1999
the Company successfully completed an additional $40 per ton increase in
linerboard prices and is in the process of raising prices for unbleached kraft
paper by a similar amount. Industry suppliers of corrugating medium, a raw
material component in corrugated products, have raised prices by a total of $70
per ton in June and July of 1999. Following the July 1999 linerboard price
increase, the Company raised the price of its corrugated products by
approximately 10 percent commencing August 2, 1999.
During the first nine months of fiscal 1999, the Company's average delivered
cost of OCC and DLK decreased approximately 28 percent from the prior-period
levels. By the end of June 1999, however, OCC and DLK prices had risen by
approximately 55 percent and 87 percent, respectively, from their low point at
December 1998. In addition, the cost of wood chips decreased approximately 13
percent in the first nine months of fiscal 1999 compared to the prior-year
period. Since the end of June 1999, the prices for recovered fiber have
increased by approximately $45 per ton. Fiber markets, however, are difficult to
predict, and there can be no assurance of the future direction of OCC, DLK and
wood chip prices.
Based on current announced price increases for linerboard, unbleached kraft
paper and converted products, current raw material costs (including the
corrugating medium increase) and assuming maintenance levels of capital
spending, 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.
15
<PAGE>
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 on
July 7, 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.
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 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. Based on current estimates,
the Company expects to spend approximately $6 million through fiscal 1999 to
correct the Year 2000 Issue, of which approximately $4.6 million has been
incurred to date. The Company plans to fund its Year 2000 effort with cash from
operations and borrowings under its revolving credit agreements.
16
<PAGE>
The Company has largely completed the awareness, assessment, remediation,
implementation and verification testing activities for business-critical items.
Testing will continue on non-business critical systems through the remainder of
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 in the millennium. 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 is therefore conducting an assessment of the compliance
efforts of the Company's critical customers, suppliers and financial
institutions. A significant portion of the Company's critical partners have
participated in the assessment. 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 should not be materially adversely affected.
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 are in the final stages of development and are
expected to be completed by the fall of 1999 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 should not result in a
material adverse impact on the Company's results of operations, financial
position or cash flow.
17
<PAGE>
The preceding "Year 2000 Readiness Disclosure" contains various forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. 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
identify and eliminate any of their own 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 issues,
potential equipment malfunctions and pending litigation. For additional
information, see the Company's Form 10-K filing for the most recent fiscal year.
18
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings.
The Company is not a party to any legal proceedings other than
litigation incidental to normal business activities, except as
described in "Note 3 of Notes to Condensed Consolidated Financial
Statements." The Company believes the outcome of such litigation will
not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Number and Description of Exhibit
---------------------------------
a) 27.1(a) Financial Data Schedule
b) No reports on Form 8-K were filed for the quarter ended
June 30, 1999
------------------
(a) Filed with this Quarterly Report
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GAYLORD CONTAINER CORPORATION
Date: August 13, 1999 /s/ Marvin A. Pomerantz
------------------------------------
Marvin A. Pomerantz
Chairman and Chief Executive Officer
Date: August 13, 1999 /s/ Jeffrey B. Park
------------------------------------
Jeffrey B. Park
Vice President-Controller
(Principal Accounting Officer)
20
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