<PAGE> 1
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 December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
For Quarter Ended December 31, 1998 Commission file number 1-9915
GAYLORD CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3472452
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Lake Cook Road, Suite 400
Deerfield, Illinois 60015
Telephone: (847) 405-5500
(Address, including zip code, and telephone number, including
area code, of registrant's principal offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
As of February 1, 1999, the registrant had outstanding 53,331,838 shares of
its $0.0001 par value Class A Common Stock (including 1,755,533 shares held in
trust for the benefit of the warrant holders) and 1,755,533 redeemable
exchangeable warrants to obtain Class A Common Stock.
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<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBERS
<S> <C>
Item 1. Financial Statements 1 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security
Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
ASSETS (In millions)
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 11.5 $ 5.7
Trade receivables (less allowances of $6.8
million and $6.4 million, respectively) 104.6 122.4
Inventories (Note 2) 83.9 73.2
Other current assets 10.4 9.5
--------- ----------
Total current assets 210.4 210.8
--------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 1,116.7 1,104.1
Less accumulated depreciation (544.6) (530.7)
--------- ----------
Property - net 572.1 573.4
--------- ----------
DEFERRED INCOME TAXES 131.0 121.5
OTHER ASSETS 73.2 74.1
--------- ----------
TOTAL $ 986.7 $ 979.8
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 10.3 $ 9.7
Trade payables 43.6 42.3
Accrued interest payable 12.2 16.2
Accrued and other liabilities 73.3 69.0
--------- ----------
Total current liabilities 139.4 137.2
--------- ----------
LONG-TERM DEBT 882.3 863.3
OTHER LONG-TERM LIABILITIES 27.4 26.8
COMMITMENTS AND CONTINGENCIES (Note 3) -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Class A common stock - par value,
$.0001 per share; authorized
125,000,000 shares; issued
54,822,492 shares and 54,786,492
shares, respectively, and
outstanding 53,327,705 shares and
53,273,928 shares, respectively -- --
Capital in excess of par value 177.5 177.4
Retained deficit (225.7) (210.6)
Common stock in treasury - at cost;
1,494,787 shares and 1,512,564
shares, respectively (11.1) (11.2)
Minimum pension liability (3.1) (3.1)
--------- ----------
Total stockholders' equity (deficit) (62.4) (47.5)
--------- ----------
TOTAL $ 986.7 $ 979.8
========= ==========
</TABLE>
See notes to condensed consolidated financial statements.
1
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND 1997 (In millions, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
NET SALES $ 198.8 $ 197.6
COST OF GOODS SOLD 178.4 186.1
--------- ----------
GROSS MARGIN 20.4 11.5
SELLING AND ADMINISTRATIVE COSTS (23.5) (20.6)
--------- ----------
OPERATING LOSS (3.1) (9.1)
INTEREST EXPENSE - Net (20.6) (21.1)
OTHER EXPENSE - Net (0.8) (0.2)
--------- ----------
LOSS BEFORE TAXES (24.5) (30.4)
INCOME TAX BENEFIT 9.4 11.6
--------- ----------
NET LOSS (15.1) $ (18.8)
==========
RETAINED DEFICIT:
Beginning of period (210.6)
---------
End of period $ (225.7)
=========
LOSS PER COMMON SHARE:
Basic $ (0.28) $ (0.35)
========= ==========
Diluted (A) $ -- $ --
========= ==========
WEIGHTED AVERAGE OUTSTANDING AND POTENTIAL COMMON
SHARES OUTSTANDING:
BASIC:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 53.3 53.0
DILUTED:
EFFECT OF DILUTIVE SECURITIES:
Employee and director incentive stock options 0.2 0.4
--------- ----------
Weighted Average Outstanding and Potential
Common Shares Outstanding 53.5 53.4
========= ==========
</TABLE>
See notes to condensed consolidated financial statements.
(A) Not presented where the effect of potential shares is antidilutive.
2
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
---- ----
(In millions)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Net loss $ (15.1) $ (18.8)
Adjustments to reconcile net loss to net cash used
for operations:
Depreciation and amortization 15.3 16.6
Deferred tax provision (benefit) (9.5) (9.9)
Change in current assets and liabilities,
excluding acquisitions and dispositions (0.1) (41.8)
Other - net 1.3 (0.1)
-------- ---------
Net cash used for operations (8.1) (54.0)
-------- ---------
CASH FLOWS FROM INVESTMENTS:
Capital expenditures (4.3) (14.6)
Capitalized interest (0.4) (0.3)
Other investments - net (1.1) 0.2
-------- ---------
Net cash used for investments (5.8) (14.7)
-------- ---------
CASH FLOWS FROM FINANCING:
Senior debt - repayments (1.9) (3.0)
Revolving credit agreement borrowings - net 21.5 71.0
Other financing - net 0.1 0.2
-------- ---------
Net cash provided by financing 19.7 68.2
-------- ---------
Net increase(decrease) in cash and equivalents 5.8 (0.5)
Cash and equivalents, beginning of period 5.7 6.1
-------- ---------
Cash and equivalents, end of period $ 11.5 $ 5.6
======== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (refunded) for:
Interest $ 24.3 $ 38.7
======== =========
Income taxes $ -- $ (0.2)
======== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Property additions $ 5.6 $ 8.9
======== =========
Increase in total debt $ -- $ 10.5
======== =========
Increase (decrease) in accrued & other liabilities $ 5.6 $ 1.6
======== =========
</TABLE>
See notes to condensed consolidated financial statements.
3
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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 December 31, 1998 and
the results of operations and cash flows for the three months ended December 31,
1998 and 1997, including all the accounts of Gaylord Container Corporation
(including its subsidiaries, the Company), and are in conformity with Securities
and Exchange Commission Rule 10-01 of Regulation S-X. The financial statements
should be read in conjunction with the audited consolidated financial statements
and the notes thereto on Form 10-K for the fiscal year ended September 30, 1998.
<TABLE>
<CAPTION>
2. INVENTORIES DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(In millions)
Inventories consist of:
<S> <C> <C>
Finished products $ 20.6 $ 19.0
In process 41.0 31.6
Raw materials 11.8 12.4
Supplies 14.3 13.6
---------- ----------
87.7 76.6
LIFO valuation adjustment (3.8) (3.4)
---------- ----------
Total $ 83.9 $ 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
4
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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. 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
5
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
In November 1997, the Louisiana trial court certified these consolidated cases
as a class action. The trial court certified, and the Court of Appeal 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.
Defendants have requested reconsideration in the Court of Appeal of the
geographic boundaries of the class and the trial court's failure to certify a
single, mandatory class for punitive damages. The trial court entered a stay of
all class notice and related issues until the defendants' suspensive appeal on
geographic boundaries is ultimately resolved. The Company and its subsidiary are
vigorously contesting all claims brought in these consolidated actions. No trial
date has been set for these Louisiana actions.
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 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: (1) dismissed for failure to comply with
outstanding discovery orders or (2) voluntarily withdrawn. As with the Louisiana
class action, the Company and Gaylord Chemical Corporation are vigorously
contesting all claims in Mississippi arising out of the October 23, 1995
explosion. In addition, the Company and Gaylord Chemical Corporation have filed
cross-claims for indemnity and contribution against co-defendants in both of the
Mississippi and Louisiana actions. The Mississippi trial court has selected the
first 20 plaintiffs whose claims will be tried on all issues of liability and
damages. The initial trial is set to begin March 29, 1999. On July 24, 1998, the
trial court ordered that the results of this trial for the initial 20
Mississippi plaintiffs will not be binding, either as to liability or damages,
6
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 have to prove their own individual claims of liability and
compensatory damages. The trial court further ordered that the distribution of
any punitive damages awarded after the initial trial will be made by the trial
court after the final resolution (by judgment or settlement) of the
compensatory damages of all plaintiffs.
The Company and Gaylord Chemical Corporation maintain $127 million of general
liability insurance and have filed separate suits seeking declaratory judgment
of coverage for the October 23, 1995 accident against their general liability
and directors and officers liability insurance carriers. These cases are
currently pending in Louisiana state court before the same judge who is hearing
the liability class action. The carrier with the first layer of coverage under
the general liability policy has agreed to pay the Company's and Gaylord
Chemical Corporation's defense costs under a reservation of rights. The primary
carrier and the nine excess level insurers moved for summary judgment before the
trial court claiming that coverage for the accident is excluded because of
pollution exclusions contained in these policies.
On November 20, 1997, the trial court denied all of the motions, and the
insurers filed supervisory writs with the Court of Appeal contesting that
ruling. On April 30, 1998, the Court of Appeal affirmed denial of the motions.
On June 1, 1998, the Louisiana Supreme Court refused the insurers' request for
supervisory writs challenging the denial of summary judgment. Following a change
of the trial court judge, the general liability insurers renewed their summary
judgment motions based on the pollution exclusion, all of which were denied on
November 9, 1998. 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. As of February 11, 1999, no decision
has been rendered in the Company's coverage litigation.
On January 20, 1999, the Louisiana Supreme Court ruled in a case unrelated to
the Company's declaratory judgment action that a pollution exclusion barred
insurance coverage for injuries allegedly caused by the accidental release of
chemicals. A petition for rehearing is pending in that case.
7
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
The Company believes the outcome of such litigation should not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
4. ADOPTION OF NEW ACCOUNTING STANDARDS
Effective October 1, 1998, the Company has 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 ended December 31, 1998 and December
31, 1997, which is reported on the Consolidated Statements of Operations.
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). Interim period segment reporting is not required in the initial year of
adoption and, therefore, the Company will disclose the required segment
reporting under FAS 131 in its fiscal 1999 year-end financial statements. The
Company is in the process of evaluating the potential impact, if any, on its
segment disclosure, of adopting this statement.
The Company has 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 be required to disclose the required information
in its fiscal 1999 year-end financial statements.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER OF FISCAL 1999 COMPARED WITH FIRST QUARTER OF FISCAL 1998
Net sales for the first quarter of fiscal 1999 were $198.8 million compared to
net sales of $197.6 million for the first quarter of fiscal 1998. The operating
loss for the current quarter was $3.1 million compared to $9.1 million for the
year-ago quarter. The net loss for the current quarter totaled $15.1 million, or
$0.28 per share, compared to a net loss of $18.8 million, or $0.35 per share,
for the year-ago quarter.
Sales in the first quarter of fiscal 1999 were favorably affected by higher
volume, which increased net sales, by approximately $8 million. Lower average
net selling prices decreased sales by approximately $6 million in the
quarter-over-quarter comparison.
Gross margin for the first quarter of fiscal 1999 increased to $20.4 million
from $11.5 million in the prior-year quarter primarily due to lower fiber costs
($13 million) and higher volume ($6 million) offset somewhat by lower average
selling prices ($5 million net of $1 million lower paper costs in the converting
facilities).
Quarter-over-quarter, total mill production increased to 4,272 tons per day
(TPD, calculated on the basis of the number of days in the period) from 4,076
TPD principally due to deferring the Bogalusa mill's annual maintenance outage
from the first quarter of fiscal 1999 to the second quarter of fiscal 1999.
Containerboard production in the first quarter of fiscal 1999 increased
approximately 8 percent to 3,542 TPD from 3,280 TPD in the prior-year quarter.
Unbleached kraft paper production in the current quarter decreased to 730 TPD
from 796 TPD in the prior-year quarter. Corrugated shipments increased to 3.6
billion square feet in the first quarter of fiscal 1999 compared to 3.3 billion
square feet in the year-ago quarter primarily as a result of the opening of a
new sheet feeder plant in December 1997. Multiwall bag shipments decreased to
13.2 thousand tons in the current quarter compared to shipments of 14.9 thousand
tons in the first quarter of fiscal 1998.
Average selling prices decreased for the Company's domestic linerboard, export
linerboard and unbleached kraft paper, by approximately 20 percent, 2 percent,
and 21 percent, respectively, in the first quarter of fiscal 1999 compared to
the previous-year quarter. Average selling prices increased approximately 9
percent for multiwall bags and approximately 2 percent for corrugated products
9
<PAGE> 12
in the current-year quarter compared to the prior-year quarter.
Fiber costs decreased primarily due to lower average delivered costs for
recycled fiber which consists primarily of old corrugated containers (OCC) and
double lined kraft (DLK) clippings. The average delivered cost for OCC and DLK
decreased approximately 39 percent and 54 percent, respectively, in the
quarter-over-quarter comparison. In addition, the cost of wood chips decreased
by approximately 4 percent in the first quarter of fiscal 1999 compared to the
prior-year quarter. The decrease in fiber costs is primarily due to decreased
demand for these materials.
Selling and administrative costs were $23.5 million for the current quarter
compared to $20.6 million for the year-ago period. This increase is due
primarily to higher information system costs principally related to the Year
2000 effort, higher costs associated with employee recruitment and retention,
and increased litigation costs.
Net interest expense decreased to $20.6 million in the first quarter of fiscal
1999 from $21.1 million in the prior-year quarter. Higher average debt levels
increased interest expense by approximately $3.4 million, while lower average
borrowing rates reduced interest expense by approximately $3.9 million. The
lower average borrowing rates are the result of the fiscal 1998 refinancing of
the Company's 12 3/4% Senior Subordinated Discount Debentures due 2005.
In the first quarter of fiscal 1999, the Company recognized a tax benefit of
$9.4 million compared to $11.6 million in the prior-year quarter. The tax
benefit decreased in the quarter-to-quarter comparison, primarily because of the
improved operating results in the first quarter of fiscal 1999. The effective
tax rate was 38 percent in both the first quarter of fiscal 1999 and the first
quarter of fiscal 1998.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company has historically financed its operations through cash provided by
operations, borrowings under its credit agreements and the issuance of debt and
equity securities. The Company's principal uses of cash are to pay operating
expenses, fund capital expenditures and service debt.
Net cash used for operations for the first quarter of fiscal 1999 was $8.1
million, compared with net cash used for operations of $54.0 million for the
year-ago period. The improvement was primarily due to improved operating results
and a decrease in working capital requirements.
Cash flows used for investing activities decreased in the first quarter of
fiscal 1999 to $5.8 million from $14.7 million in the year-ago quarter primarily
due to a $10.3 million decrease in capital expenditures in the first quarter of
fiscal 1999 compared to the year-ago quarter. In the first quarter of fiscal
1999, the Company incurred a liability for $5.6 million of equipment costs
associated with a capital project, which will be financed in mid-1999 through a
debt obligation secured by the project assets.
Cash flows from financing activities decreased to $19.7 million in the first
quarter of fiscal 1999 from $68.2 million in the year-ago quarter. The decrease
is primarily due to decreased net borrowings from the Company's revolving credit
facility.
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. The Company has
incurred in the first quarter of fiscal 1999 approximately $1.1 million of costs
for demolition and asbestos removal and to maintain the East Mill. Such costs
were net of any proceeds from the sale of scrap. Management expects to complete
the remainder of its demolition and asbestos removal efforts during fiscal 1999.
At December 31, 1998, balance sheet reserves for demolition and asbestos removal
were approximately $2 million and the net book value of the East Mill was $8.7
million.
11
<PAGE> 14
LIQUIDITY
At December 31, 1998, the Company had cash and equivalents of $11.5 million, an
increase of $5.8 million from September 30, 1998, as cash from financing was
largely offset by cash used for operations and investments. Total debt increased
by $19.6 million to $892.6 million at December 31, 1998 from $873.0 million at
September 30, 1998 as a result of increased revolver borrowings. The increase in
revolver borrowings was primarily due to semi-annual interest payments on the
Company's Senior Notes ($20.3 million), interest payments on the Term Loan ($2.7
million), and capital expenditures ($4.3 million). At December 31, 1998, the
Company had $60 million of borrowings outstanding, and approximately $172
million of credit available under the revolving portions of its credit
agreements.
At December 31, 1998, the Company had primary working capital (Trade receivables
plus Inventories less Trade payables) of $144.9 million, a decrease of $8.4
million from September 30, 1998 primarily due to lower accounts receivable
offset somewhat by seasonably higher inventory levels. The decrease in accounts
receivable was primarily due to lower average net selling prices for the
Company's products.
Published industry prices for linerboard have declined approximately $50 per ton
from October 1997 to December 1998, primarily due to excess supply relative to
both domestic and export demand. Recently, however, annual containerboard
capacity declined by approximately 2 million tons, as a result of permanent and
semi-permanent plant closures by certain producers, substantially improving the
industry supply/demand balance. With continued strong domestic demand for
corrugated products and reduced containerboard inventories, the Company has
informed its customers of a $50 per ton increase in the price of linerboard and
kraft paper effective February 1, 1999, and a minimum of 11.5 percent increase
in the price of corrugated products effective March 1, 1999.
During the first quarter of fiscal 1999, the Company's average delivered cost of
OCC and DLK decreased approximately 22 percent and 20 percent, respectively,
from fourth quarter fiscal 1998 levels. Average wood chip prices, however, have
increased approximately 8 percent in the first quarter of fiscal 1999 compared
to fourth quarter fiscal 1998. Fiber markets, however, are difficult to predict,
and there can be no assurance of the future direction of wood chip, OCC and DLK
prices.
During the first quarter of fiscal 1999, the Company amended its trade
receivable revolving credit facility to extend the maturity date of the facility
for one year to July 2001. In February 1999, the Company also amended certain
financial covenants under its bank credit agreement for the period ending March
1999 and beyond, to provide additional financial flexibility. In connection with
12
<PAGE> 15
the amendment, the Company paid a one-time amendment fee. The amendment also
increased borrowing margins on the term loan and revolving loan under the bank
credit agreement.
Based on current pricing (before the recently announced linerboard price
increase) and raw material costs, 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 significant product price improvement beginning in the
spring of this year, however, the Company will need to seek additional covenant
modifications to its bank credit agreement by the end of December 1999 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," which establishes accounting and reporting standards
for derivative instruments. The statement is effective for fiscal years
beginning after June 15, 1999. The statement will be adopted by the Company in
fiscal 2000. The Company anticipates that it will not have a material impact on
the results of operations, financial position or cash flows of the Company.
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 has 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 includes 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
13
<PAGE> 16
correct the Year 2000 Issue, of which approximately $2.5 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.
The Company has largely completed the awareness and assessment portion of its
Year 2000 readiness plan. Remediation and implementation activities for
business-critical items are proceeding and are scheduled to be completed by
mid-1999. Verification testing will continue through the remainder of 1999. IT
systems are being 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 has
been retained to assist in the Year 2000 verification testing. The testing
approach employed is 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 has
been retained to develop an equipment inventory and to assist 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, are
being used to inventory and to assist in the validation of the non-IT systems.
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. At this time, the Company is unable to determine the impact of
these third-party compliance efforts. 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 at a rate higher than is normally experienced. Contingency
plans are currently being developed and are expected to be completed by mid-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
14
<PAGE> 17
in a timely fashion, as would 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.
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.
15
<PAGE> 18
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.
On February 10, 1999, the Company held its annual meeting of
stockholders at which the following issues were voted upon by holders
of the Company's common stock:
The Company's ten directors were re-elected by the following vote:
For Withheld
---------------------------------
Mary Sue Coleman 50,734,916 851,839
Harve A. Ferrill 46,624,074 4,962,481
John E. Goodenow 50,753,152 833,403
David B. Hawkins 50,748,926 837,629
Warren J. Hayford 50,740,462 846,093
Charles S. Johnson 50,709,752 876,803
Jerry W. Kolb 50,752,952 833,603
Ralph L. MacDonald Jr. 50,756,957 829,598
Marvin A. Pomerantz 50,659,542 927,013
Thomas H. Stoner 50,751,136 836,419
The appointment of Deloitte & Touche LLP to continue to serve as the Company's
independent auditors in fiscal 1999 was ratified by a vote of 51,134,558 for;
139,328 against; 312,669 withheld.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Number and Description of Exhibit
a) 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
b) 27.1(a) Financial Data Schedule
c) No reports on Form 8-K were filed for the quarter ended
December 31, 1998
------------------
(a) Filed with this Quarterly Report
16
<PAGE> 19
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: February 11, 1999 /s/ Marvin A. Pomerantz
------------------------------------
Marvin A. Pomerantz
Chairman and Chief Executive Officer
Date: February 11, 1999 /s/ Jeffrey B. Park
-------------------------------
Jeffrey B. Park
Vice President-Controller
(Principal Accounting Officer)
17
<PAGE> 1
EXHIBIT 4.1
FIRST AMENDMENT
TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (this "Amendment"), dated as
of February 16, 1999, is by and among Gaylord Container Corporation, a Delaware
corporation (the "Borrower"), the undersigned financial institutions in their
capacities as lenders (collectively, the "Lenders"), and Bankers Trust Company,
as agent (the "Agent") for the Lenders.
W I T N E S S E T H :
WHEREAS, the Borrower, the Lenders and the Agent are parties to that
certain Credit Agreement dated as of June 19, 1998 (as amended, restated,
supplemented or otherwise modified and in effect from time to time, the "Credit
Agreement"), pursuant to which the Lenders have provided to the Borrower credit
facilities and other financial accommodations; and
WHEREAS, the Borrower has requested that the Agent and the Lenders
amend the Credit Agreement in certain respects as set forth herein and the
Lenders and the Agent are agreeable to the same, subject to the terms and
conditions hereof;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained herein, and other good and valuable consideration the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Defined Terms. Terms capitalized herein and not otherwise defined
herein are used with the meanings ascribed to such terms in the Credit
Agreement.
2. Amendments to Credit Agreement. The Credit Agreement is, as of the
Effective Date (as defined below), hereby amended as follows:
(a) Section 1.1 of the Credit Agreement is amended by deleting
the definitions of "Applicable Base Rate Margin" and "Applicable Eurodollar Rate
Margin" in their entirety and substituting therefor the following:
"Applicable Base Rate Margin" means at any date, (i) with respect to
Revolving Loans, the applicable percentage set forth in the following
table under the column Applicable Base Rate Margin for Revolving Loans
opposite the Most Recent Ratio of Total Debt to EBITDA as of such date
and (ii) with respect to Term Loans, 2.25%:
<PAGE> 2
<TABLE>
<CAPTION>
===========================================================================
MOST RECENT APPLICABLE BASE RATE
RATIO OF TOTAL DEBT MARGIN FOR
TO EBITDA REVOLVING LOANS
===========================================================================
<S> <C>
Less than 3.00 to 1.00 1.00%
===========================================================================
Equal to or greater than 3.00 to 1.00
but less than 3.50 to 1.00 1.25%
===========================================================================
Equal to or greater than 3.50 to 1.00
but less than 4.00 to 1.00 1.50%
===========================================================================
Equal to or greater than 4.00 to 1.00
but less than 4.50 to 1.00 1.75%
===========================================================================
Equal to or greater than 4.50 to 1.00
but less than 5.00 to 1.00 2.00%
===========================================================================
Greater than or equal to 5.00 to 1.00
2.25%
===========================================================================
</TABLE>
"Applicable Eurodollar Rate Margin" means at any date (i) with respect
to Revolving Loans, the applicable percentage set forth in the
following table under the column Applicable Eurodollar Rate Margin for
Revolving Loans opposite the Most Recent Ratio of Total Debt to EBITDA
as of such date and (ii) with respect to Term Loans, 3.25%:
<TABLE>
<CAPTION>
============================================================================
MOST RECENT APPLICABLE EURODOLLAR RATE
RATIO OF TOTAL DEBT MARGIN FOR REVOLVING LOANS
TO EBITDA
============================================================================
<S> <C>
Less than 3.00 to 1.00 2.00%
============================================================================
Equal to or greater than 3.00 to 1.00
but less than 3.50 to 1.00 2.25%
============================================================================
Equal to or greater than 3.50 to 1.00
but less than 4.00 to 1.00 2.50%
============================================================================
Equal to or greater than 4.00 to 1.00
but less than 4.50 to 1.00 2.75%
============================================================================
Equal to or greater than 4.50 to 1.00
but less than 5.00 to 1.00 3.00%
============================================================================
Greater than or equal to 5.00 to 1.00
3.25%
============================================================================
</TABLE>
-2-
<PAGE> 3
(b) Section 1.1 of the Credit Agreement is further amended by
deleting the ratio "4.00 to 1.0" appearing in the definition of "Most Recent
Ratio of Total Debt to EBITDA " and substituting the ratio "5.00 to 1.00"
therefor.
(c) Section 9.2 of the Credit Agreement is amended by deleting
such Section in its entirety and substituting therefor the following:
"9.2 Minimum Consolidated EBITDA . Permit the Consolidated EBITDA of
Borrower and its Subsidiaries (a) to be less than (i) $14,000,000 for
the one fiscal quarter ending September 30, 1998, (ii) $26,000,000 for
the two fiscal quarter period ending December 31, 1998 and (iii)
$28,000,000 for the three fiscal quarter period ending March 31, 1999,
and (b) for the applicable Test Period ending on a date set forth below
to be less than the amount set for the opposite such date:
Date Minimum Consolidated EBITDA
June 30, 1999 $37,000,000
September 30, 1999 $47,000,000
December 31, 1999 $58,000,000
March 31, 2000 $88,000,000
June 30, 2000 $110,000,000
September 30, 2000 $135,000,000
December 31, 2000 and
each fiscal quarter thereafter $150,000,000
provided, however, that if Borrower and its Subsidiaries fail to
maintain Consolidated EBITDA of at least $47,000,000 for the Test
Period ending September 30, 1999, Borrower shall be allowed to satisfy
the minimum Consolidated EBITDA requirement under this Section 9.2 for
such Test Period by maintaining Consolidated EBITDA of Borrower and its
Subsidiaries of not less than $10,000,000 for the one fiscal quarter
ending September 30, 1999."
(d) Section 9.3 of the Credit Agreement is hereby amended by
deleting such Section in its entirety and substituting therefor the following:
"9.3 Interest Coverage Ratio. Permit the Interest Coverage Ratio (a) to
be less than (i) 0.60 to 1.00 for the one fiscal quarter ending
September 30, 1998, (ii) 0.65 to 1.00 for the two fiscal quarter period
ending December 31, 1998 and (iii) .45 to 1.00 for the three fiscal
quarter period ending March 31, 1999, and (b) for the applicable Test
Period ending on a date set forth below to be less than the ratio set
forth opposite such date:
-3-
<PAGE> 4
<TABLE>
<CAPTION>
Date Ratio
<S> <C>
June 30, 1999 0.45 to 1.00
September 30, 1999 0.55 to 1.00
December 31, 1999 0.65 to 1.00
March 31, 2000 1.00 to 1.00
June 30, 2000 1.25 to 1.00
September 30, 2000 1.50 to 1.00
December 31, 2000 2.00 to 1.00
March 31, 2001 and
each fiscal quarter thereafter 2.50 to 1.00
</TABLE>
provided, however, that if Borrower and its Subsidiaries fail
to maintain an Interest Coverage Ratio of at least 0.55 to
1.00 for the Test Period ending September 30, 1999, Borrower
shall be allowed to satisfy the minimum Interest Coverage
Ratio requirement under this Section 9.3 for such Test Period
by maintaining an Interest Coverage Ratio of not less than
0.55 to 1.00 for the one fiscal quarter ending September 30,
1999."
3. Amendment Fee. In consideration of the execution of this Amendment
by the Agent and the Lenders, the Borrower hereby agrees to pay each Lender
which executes this Amendment on or prior to February 4, 1999 a fee (the
"Amendment Fee") in an amount equal to such Lender's Commitment multiplied by
0.25%.
4. Borrower's Representations and Warranties. In order to induce the
Agent and the Lenders to enter into this Amendment, the Borrower hereby
represents and warrants to the Agent and the Lenders as follows:
(i) The Borrower has the right, power and capacity
and has been duly authorized and empowered by all requisite
corporate and shareholder action to enter into, execute,
deliver and perform this Amendment and all agreements,
documents and instruments executed and delivered pursuant to
this Amendment.
(ii) This Amendment constitutes the Borrower's legal,
valid and binding obligation, enforceable against it, except
as enforcement thereof may be subject to the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally and
general principles of equity (regardless of whether such
enforcement is sought in a proceeding in equity or at law or
otherwise).
(iii) After giving effect to the amendments
contemplated by this Amendment, the representations and
warranties contained in the Credit Agreement and the other
Loan Documents are true and correct in all material
-4-
<PAGE> 5
respects at and as of the Effective Date as though made on and
as of the Effective Date (except to the extent specifically
made with regard to a particular date, in which case such
representation and warranty is true and correct in all
material respects as of such earlier date).
(iv) The Borrower's execution, delivery and
performance of this Amendment do not and will not violate its
Certificate of Incorporation or By-laws, any law, rule,
regulation, order, writ, judgment, decree or award applicable
to it or any contractual provision to which it is a party or
to which it or any of its property is subject.
(v) No authorization or approval or other action by,
and no notice to or filing or registration with, any
governmental authority or regulatory body (other than those
which have been obtained and are in force and effect) is
required in connection with its execution, delivery and
performance of this Amendment and all agreements, documents
and instruments executed and delivered pursuant to this
Amendment.
(vi) After giving effect to the amendments
contemplated by this Amendment, no Event of Default or
Unmatured Event of Default exists under the Credit Agreement
or would exist after giving effect to the transactions
contemplated by this Amendment.
5. Conditions to Effectiveness of Amendment. This Amendment shall
become effective on the date (the "Effective Date") each of the following
conditions precedent is satisfied:
(a) Execution and Delivery. The Borrower, the Agent, and the
Required Lenders shall have executed and delivered this Amendment.
(b) No Defaults. No Unmatured Event of Default or Event of
Default under the Credit Agreement (as amended hereby) shall have occurred and
be continuing.
(c) Representations and Warranties. After giving effect to the
amendments contemplated by this Amendment, the representations and warranties of
the Borrower contained in this Amendment, the Credit Agreement and the other
Loan Documents shall be true and correct in all material respects as of the
Effective Date, with the same effect as though made on such date, except to the
extent that any such representation or warranty relates to an earlier date, in
which case such representation or warranty shall be true and correct in all
material respects as of such earlier date.
(d) Payment of Amendment Fee. The Borrower shall have paid in
full to the Agent, for ratable distribution to those Lenders that have signed
this Amendment on or prior to February 4, 1999, an amount equal to the
Amendment Fee on or prior to February 5, 1999; provided, however, that the
Amendment Fee shall be payable only in the event that this Amendment has been
executed by the Agent and the Required Lenders.
-5-
<PAGE> 6
(e) Officer's Certificate. The Borrower shall have duly
executed and delivered to the Agent a certificate of a Responsible Officer of
the Borrower dated as of the Effective Date in the form of Exhibit A attached
hereto.
6. Miscellaneous. The parties hereto hereby further agree as follows:
(a) Costs, Expenses and Taxes. The Borrower hereby agrees to
pay all reasonable fees, costs and expenses of the Agent incurred in connection
with the negotiation, preparation and execution of this Amendment and the
transactions contemplated hereby, including, without limitation, the reasonable
fees and expenses of Winston & Strawn, counsel to the Agent.
(b) Counterparts. This Amendment may be executed in one or
more counterparts, each of which, when executed and delivered, shall be deemed
to be an original and all of which counterparts, taken together, shall
constitute but one and the same document with the same force and effect as if
the signatures of all of the parties were on a single counterpart, and it shall
not be necessary in making proof of this Amendment to produce more than one (1)
such counterpart.
(c) Headings. Headings used in this Amendment are for
convenience of reference only and shall not affect the construction of this
Amendment.
(d) Integration. This Amendment and the Credit Agreement (as
amended hereby) constitute the entire agreement among the parties hereto with
respect to the subject matter hereof.
(e) Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS AND DECISIONS OF
THE STATE OF NEW YORK (WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES).
(f) Binding Effect. This Amendment shall be binding upon and
inure to the benefit of and be enforceable by the Borrower, the Agent and the
Lenders and their respective successors and assigns. Except as expressly set
forth to the contrary herein, this Amendment shall not be construed so as to
confer any right or benefit upon any Person other than the Borrower, the Agent
and the Lenders and their respective successors and permitted assigns.
(g) Amendment; Waiver. The parties hereto agree and
acknowledge that nothing contained in this Amendment in any manner or respect
limits or terminates any of the provisions of the Credit Agreement or any of the
other Loan Documents other than as expressly set forth herein and further agree
and acknowledge that the Credit Agreement (as amended hereby) and each of the
other Loan Documents remain and continue in full force and effect and are hereby
ratified and confirmed. Except to the extent expressly set forth herein, the
execution, delivery and effectiveness of this Amendment shall not operate as a
waiver of any rights, power or remedy of the Lenders or the Agent under the
Credit Agreement or any other Loan Document,
-6-
<PAGE> 7
nor constitute a waiver of any provision of the Credit Agreement or any other
Loan Document. No delay on the part of any Lender or the Agent in exercising any
of their respective rights, remedies, powers and privileges under the Credit
Agreement or any of the Loan Documents or partial or single exercise thereof,
shall constitute a waiver thereof. None of the terms and conditions of this
Amendment may be changed, waived, modified or varied in any manner, whatsoever,
except in accordance with Section 12.1 of the Credit Agreement.
[signature pages follow]
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first written above.
GAYLORD CONTAINER CORPORATION
By:
------------------------------------
Name: /s/ Thomas M. Steffen
------------------------------------
Title: Assistant Treasurer
------------------------------------
BANKERS TRUST COMPANY, in its individual
capacity and as Agent
By:
------------------------------------
Name: /s/ Robert R. Telesca
------------------------------------
Title: Assistant Vice President
------------------------------------
THE BANK OF NEW YORK
By:
------------------------------------
Name: /s/ Richard A. Raffetto
------------------------------------
Title: Vice President
------------------------------------
NATIONSBANK, N.A.
By:
------------------------------------
Name: /s/ Michael L. Short
------------------------------------
Title: Senior Vice President
------------------------------------
CHRISTIANIA BANK
By:
------------------------------------
Name: /s/ Carl Petter Svenosen
------------------------------------
Title: Senior Vice President
------------------------------------
By:
------------------------------------
Name: /s/ Peter M. Dodge
------------------------------------
Title: Senior Vice President
------------------------------------
Gaylord Container Corporation
First Amendment to Credit Agreement
<PAGE> 9
TORONTO DOMINION [TEXAS], INC.
By:
------------------------------------
Name: /s/ Shelia M. Conley
------------------------------------
Title: Vice President
------------------------------------
SANWA BUSINESS CREDIT CORPORATION
By:
------------------------------------
Name: /s/ Peter L. Skavia
------------------------------------
Title: Vice President
------------------------------------
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By:
------------------------------------
Name: /s/ Perry Vavoules
------------------------------------
Title: Senior Vice President
------------------------------------
BANKBOSTON, N.A.
By:
------------------------------------
Name: /s/ Rennee A. Ross
------------------------------------
Title:
------------------------------------
PILGRIM PRIME RATE TRUST
By: Pilgrim Investment, Inc., as its
Investment Advisor
By:
------------------------------------
Name: /s/ Michel Prince, CFA
------------------------------------
Title: Vice President
------------------------------------
Gaylord Container Corporation
First Amendment to Credit Agreement
<PAGE> 10
ML CLO XV PILGRIM AMERICA
(CAYMAN) LTD.
By: Pilgrim Investment, Inc., as its
Investment Advisor
By:
-------------------------------------
Name: /s/ Michel Prince, CFA
-------------------------------------
Title: Vice President
-------------------------------------
STEIN ROE & FARNHAM INCORPORATED,
as agent for Keyport Life Insurance Company
By:
-------------------------------------
Name: /s/ Brian W. Good
-------------------------------------
Title: Vice President & Portfolio Manager
-------------------------------------
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
By:
-------------------------------------
Name: /s/ Payson F. Swaffield
-------------------------------------
Title: Vice President
-------------------------------------
BEAR STEARNS INVESTMENT PRODUCTS, INC.
By:
-------------------------------------
Name: /s/ Harry Rosenberg
-------------------------------------
Title: Authorized Signatory
-------------------------------------
KZH PAMCO LLC
By:
-------------------------------------
Name: /s/ Virginia Conway
-------------------------------------
Title: Authorized Agent
-------------------------------------
Gaylord Container Corporation
First Amendment to Credit Agreement
<PAGE> 11
CERES FINANCE LTD.
By:
------------------------------------
Name: /s/ John H. Cullinane
------------------------------------
Title: Director
------------------------------------
STRATA FUNDING LTD.
By:
------------------------------------
Name: /s/ John H. Cullinane
------------------------------------
Title: Director
------------------------------------
Gaylord Container Corporation
First Amendment to Credit Agreement
<PAGE> 12
BLACK DIAMOND CLO 1998-1 LTD.
By: Black Diamond Capital Management, L.L.C.,
as Collateral Manager
By:
------------------------------------
Name: /s/ James J. Zenni Jr.
------------------------------------
Title: President/Principal
------------------------------------
Gaylord Container Corporation
First Amendment to Credit Agreement
<PAGE> 13
EXHIBIT A
OFFICER'S CERTIFICATE
The undersigned, Thomas M. Steffen, hereby certifies that he
is the duly elected Assistant Treasurer of Gaylord Container Corporation, a
Delaware corporation (the "Borrower"), and pursuant to that certain First
Amendment to Credit Agreement dated as of February 16, 1999 (the Amendment") by
and among the Borrower, Bankers Trust Company, as Agent, and the financial
institutions party thereto as lenders (capitalized terms used herein shall,
unless otherwise defined herein, have the meaning provided in the Amendment),
hereby further certifies as follows:
1. No Unmatured Event of Default or Event of Default under the
Credit Agreement (as amended by the Amendment) has occurred and is continuing as
of the date hereof.
2. After giving effect to the amendments contemplated by the
Amendment, the representations and warranties of the Borrower contained in the
Amendment, the Credit Agreement and the other Loan Documents are true and
correct in all material respects as of the date hereof, with the same effect as
though made on such date, except to the extent that any such representation or
warranty relates to an earlier date, in which case such representation or
warranty is true and correct in all material respects as of such earlier date.
IN WITNESS WHEREOF, the undersigned has caused this
Certificate to be duly executed and delivered as of February 16, 1999.
GAYLORD CONTAINER CORPORATION
By:
---------------------------
Thomas M. Steffen
Assistant Treasurer
Gaylord Container Corporation
First Amendment to Credit Agreement
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 11,500
<SECURITIES> 0
<RECEIVABLES> 104,600
<ALLOWANCES> 6,800
<INVENTORY> 83,900
<CURRENT-ASSETS> 210,400
<PP&E> 1,116,700
<DEPRECIATION> 544,600
<TOTAL-ASSETS> 986,700
<CURRENT-LIABILITIES> 139,400
<BONDS> 882,300
0
0
<COMMON> 177,500
<OTHER-SE> (239,900)
<TOTAL-LIABILITY-AND-EQUITY> 986,700
<SALES> 198,800
<TOTAL-REVENUES> 198,800
<CGS> 178,400
<TOTAL-COSTS> 201,900
<OTHER-EXPENSES> 800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,600
<INCOME-PRETAX> (24,500)
<INCOME-TAX> (9,400)
<INCOME-CONTINUING> (15,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,100)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> 0
</TABLE>
