FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 March 31, 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 ___
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _X_ No ___
As of May 6, 1999, the registrant had outstanding 53,427,224 shares of
its $0.0001 par value Class A Common Stock (including 1,482,497 shares held in
trust for the benefit of the warrant holders) and 1,482,497 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
MARCH 31, 1999 AND SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------------------------
MARCH 31, SEPTEMBER 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS (In millions)
CURRENT ASSETS:
Cash and equivalents $ 9.8 $ 5.7
Trade receivables (less allowances of $6.0 million
and $6.4 million, respectively) 115.8 122.4
Inventories (Note 2) 85.9 73.2
Other current assets 13.3 9.5
--------- ---------
Total current assets 224.8 210.8
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 1,126.6 1,104.1
Less accumulated depreciation (556.2) (530.7)
--------- ---------
Property - net 570.4 573.4
--------- ---------
DEFERRED INCOME TAXES 143.1 121.5
OTHER ASSETS 73.1 74.1
--------- ---------
TOTAL $ 1,011.4 $ 979.8
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 9.7 $ 9.7
Trade payables 52.0 42.3
Accrued interest payable 16.2 16.2
Accrued and other liabilities 89.3 69.0
--------- ---------
Total current liabilities 167.2 137.2
--------- ---------
LONG-TERM DEBT 900.5 863.3
OTHER LONG-TERM LIABILITIES 25.2 26.8
COMMITMENTS AND CONTINGENCIES (Note 3) - -
STOCKHOLDERS' DEFICIT:
Class A common stock - par value, $.0001 per share;
authorized 125,000,000 shares; issued 54,818,792 shares
and 54,786,492 shares, respectively, and outstanding
53,334,878 shares and 53,273,928 shares, respectively - -
Capital in excess of par value 177.6 177.4
Retained deficit (245.0) (210.6)
Common stock in treasury - at cost; 1,483,914
shares and 1,512,564 shares, respectively (11.0) (11.2)
Minimum pension liability (3.1) (3.1)
--------- ---------
Total stockholders' deficit (81.5) (47.5)
--------- ---------
TOTAL $ 1,011.4 $ 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
MARCH 31, 1999 AND 1998 (In millions, except per share data)
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
---------------------------------
1999 1998
--------- ---------
<S> <C> <C>
NET SALES $ 201.0 $ 219.1
COST OF GOODS SOLD 185.7 197.5
--------- ---------
GROSS MARGIN 15.3 21.6
SELLING AND ADMINISTRATIVE COSTS (24.8) (22.7)
--------- ---------
OPERATING LOSS ( 9.5) (1.1)
INTEREST EXPENSE - Net (21.5) (20.6)
OTHER EXPENSE - Net ( 0.2) (2.4)
--------- ---------
LOSS BEFORE TAXES AND EXTRAORDINARY ITEM (31.2) (24.1)
INCOME TAX BENEFIT 11.9 9.3
--------- ---------
NET LOSS BEFORE EXTRAORDINARY ITEM (19.3) (14.8)
EXTRAORDINARY LOSS (Note 4) - (23.9)
--------- ---------
NET LOSS (19.3) $ (38.7)
========= =========
RETAINED DEFICIT:
Beginning of period (225.7)
---------
End of period $ (245.0)
=========
LOSS PER COMMON SHARE:
Basic:
Loss before extraordinary item $ (0.36) $ (0.28)
Extraordinary loss - (0.45)
--------- ---------
Net Loss $ (0.36) $ (0.73)
========= =========
Diluted: (A)
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 OUSTANDING:
BASIC:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 53.3 53.1
DILUTED:
EFFECT OF DILUTIVE SECURITIES:
Employee and director incentive
stock options 0.5 0.4
--------- ---------
Weighted Average Outstanding and
Potential Common Shares
Outstanding 53.8 53.5
========= =========
<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 SIX MONTHS ENDED
MARCH 31, 1999 AND 1998 (In millions, except per share data)
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31,
----------------------------------
1999 1998
--------- ---------
<S> <C> <C>
NET SALES $ 399.8 $ 416.7
COST OF GOODS SOLD 364.1 383.6
--------- ---------
GROSS MARGIN 35.7 33.1
SELLING AND ADMINISTRATIVE COSTS (48.3) (43.3)
--------- ---------
OPERATING LOSS (12.6) (10.2)
INTEREST EXPENSE - Net (42.1) (41.7)
OTHER EXPENSE - Net (1.0) (2.6)
--------- ---------
LOSS BEFORE TAXES AND EXTRAORDINARY ITEM (55.7) (54.5)
INCOME TAX BENEFIT 21.3 20.9
--------- ---------
NET LOSS BEFORE EXTRAORDINARY ITEM (34.4) (33.6)
EXTRAORDINARY LOSS (Note 4) - (23.9)
--------- ---------
NET LOSS (34.4) $ (57.5)
========= ==========
RETAINED DEFICIT:
Beginning of period (210.6)
---------
End of period $ (245.0)
=========
LOSS PER COMMON SHARE:
Basic:
Loss before extraordinary item $ (0.64) $ (0.63)
Extraordinary loss - (0.45)
--------- ----------
Net Loss $ (0.64) $ (1.08)
========= ==========
Diluted: (A)
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 OUSTANDING:
BASIC:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 53.3 53.1
DILUTED:
EFFECT OF DILUTIVE SECURITIES:
Employee and director incentive
stock options 0.4 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 SIX MONTHS ENDED
MARCH 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31,
----------------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS: (In Millions)
Net loss $ (34.4) $ (57.5)
Adjustments to reconcile net loss to net cash
used for operations:
Extraordinary loss - 23.9
Depreciation and amortization 28.0 33.0
Deferred tax benefit (21.5) (10.5)
Change in current assets and liabilities,
excluding acquisitions and dispositions 7.0 (59.8)
Other - net (0.4) 1.7
--------- ---------
Net cash used for operations (21.3) (69.2)
--------- ---------
CASH FLOWS FROM INVESTMENTS:
Capital expenditures (9.0) . (23.9)
Capitalized interest (0.5) . (0.7)
Other investments - net (1.5) 0.8
--------- ---------
Net cash used for investments (11.0) (23.8)
--------- ---------
CASH FLOWS FROM FINANCING:
Senior debt - repayments (3.9) (6.2)
Early retirement of debt - (436.9)
Issuance of Senior Notes - 200.0
Issuance of Senior Subordinated Notes - 250.0
Debt issuance costs - (9.5)
Revolving credit agreement borrowings - net 41.0 94.5
Other financing - net (0.7) 0.9
--------- ---------
Net cash provided by financing 36.4 92.8
--------- ---------
Net increase(decrease) in cash and equivalents 4.1 (0.2)
Cash and equivalents, beginning of period 5.7 6.1
--------- ---------
Cash and equivalents, end of period $ 9.8 $ 5.9
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (refunded) for:
Interest $ 40.7 $ 42.3
========= =========
Income taxes $ - $ (5.1)
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Write-off of deferred financing fees $ - $ 6.1
========= =========
Property additions $ 11.1 $ 8.9
========= =========
Increase in total debt $ - $ 10.5
========= =========
Increase 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 March 31, 1999 and the
results of operations for the three months and six months ended March 31, 1999
and 1998, and cash flows for the six months ended March 31, 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>
MARCH 31, SEPTEMBER 30,
1999 1998
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(In millions)
Inventories consist of:
<S> <C> <C>
Finished products $ 17.4 $ 19.0
In process 46.4 31.6
Raw materials 11.5 12.4
Supplies 14.7 13.6
---------- ----------
90.0 76.6
LIFO valuation adjustment (4.1) (3.4)
---------- ----------
Total $ 85.9 $ 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
at the expense of stockholders who otherwise would have been able to take
5
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ----------------------------------------------------------------
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
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 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 the Louisiana Supreme Court to review the Court of
Appeal's decision affirming 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 to the Louisiana Supreme Court 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 of the 20 plaintiffs' claims began on March 29, 1999
and continues as of this date. During trial, the Mississippi trial court denied
the Company's motion for summary judgment dismissing the action against the
Company. The trial court in an updated order has ordered that the results of
this trial for the initial 20 Mississippi plaintiffs 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 have 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 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 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
have appealed that part of the judgment excluding coverage. Including coverage
afforded by the settlement and by the trial court's decision, the Company and
Gaylord Chemical have in excess of $110 million in insurance coverage for the
accident.
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 ITEM
------------------
During the second quarter of fiscal 1998, the Company issued $200 million
principal amount of 9 3/8% Senior Notes due 2007 and $250 million principal
amount of 9 7/8% Senior Subordinated Notes due 2008 (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.
5. 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 and six months ended March 31, 1999
and 1998, 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". 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 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 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
- ---------------------
Second Quarter of Fiscal 1999 Compared with Second Quarter of
Fiscal 1998
Net sales for the second quarter of fiscal 1999 were $201.0 million compared to
net sales of $219.1 million for the second quarter of fiscal 1998. The operating
loss for the current quarter was $9.5 million compared to $1.1 million for the
year-ago quarter. The net loss for the current quarter totaled $19.3 million, or
$0.36 per share, compared to a net loss of $38.7 million, or $0.73 per share,
for the year-ago quarter, which included a $23.9 million ($0.45 per share)
extraordinary loss on the early retirement of debt.
Sales in the second quarter of fiscal 1999 were unfavorably affected by lower
average net selling prices, which decreased net sales by approximately $18
million.
Gross margin for the second quarter of fiscal 1999 decreased to $15.3 million
from $21.6 million in the prior-year quarter primarily due to lower average net
selling prices ($14 million net of $4 million lower paper costs in the
converting facilities) and lower volume ($2 million), offset somewhat by lower
fiber costs ($11 million).
Quarter-over-quarter, total mill production decreased to 4,033 tons per day
(TPD, calculated on the basis of the number of days in the period) from 4,315
TPD principally due to the Bogalusa mill annual maintenance outage occurring
during the second quarter of fiscal 1999 versus the first quarter of fiscal
1998. Containerboard production in the second quarter of fiscal 1999 decreased
approximately 9 percent to 3,305 TPD from 3,647 TPD in the prior-year quarter.
Unbleached kraft paper production in the current quarter increased to 728 TPD
from 668 TPD in the prior-year quarter. Corrugated shipments increased to 3.8
billion square feet in the second quarter of fiscal 1999 compared to 3.5 billion
square feet in the year-ago quarter primarily as a result of the opening of a
new sheet feeder plant in December 1997 and increased demand. Multiwall bag
shipments decreased to 14.0 thousand tons in the current quarter compared to
shipments of 16.1 thousand tons in the second quarter of fiscal 1998.
Average selling prices decreased for the Company's domestic linerboard, export
linerboard and unbleached kraft paper, by approximately 22 percent, 15 percent,
and 28 percent, respectively, in the second quarter of fiscal 1999 compared to
the previous-year quarter. Average selling prices increased approximately 6
percent for multiwall bags (mix related) and decreased approximately 7 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
recycled fiber (consisting primarily of old corrugated containers (OCC) and
doubled lined kraft (DLK) clippings) and wood chips. The average delivered cost
for OCC and DLK decreased approximately 32 percent and 31 percent, respectively,
in the quarter-over-quarter comparison, primarily due to decreased demand for
these materials. In addition, the cost of wood chips decreased by approximately
17 percent in the second quarter of fiscal 1999 compared to the prior-year
quarter mainly due to improved weather conditions in the southern United States.
Selling and administrative costs were $24.8 million for the current quarter
compared to $22.7 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 $21.5 million in the second quarter of fiscal
1999 from $20.6 million in the prior-year quarter. Higher average debt levels
increased interest expense by approximately $1.8 million, while lower average
borrowing rates reduced interest expense by approximately $0.9 million. The
lower average borrowing rates are the result of the refinancing of the Company's
12 3/4% Senior Subordinated Discount Debentures, due 2005 (the Old Notes), in
the second quarter of fiscal 1998.
In the second quarter of fiscal 1999, the Company recognized an income tax
benefit of $11.9 million compared to $9.3 million in the prior-year quarter. The
effective tax rate was approximately 38 percent in each of the second quarters
of fiscal 1999 and fiscal 1998.
During the second quarter of fiscal 1998, the Company issued $200 million
principal amount of 9 3/8% Senior Notes due 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 Old Notes ($404.3 million
outstanding principal amount). 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.
11
<PAGE>
First Six Months of Fiscal 1999 Compared with First Six Months of Fiscal 1998
Net sales for the first six months of fiscal 1999 were $399.8 million compared
to net sales of $416.7 million for the first six months of fiscal 1998. The
operating loss for the current period was $12.6 million compared to $10.2
million for the year-ago period. The net loss for the current period totaled
$34.4 million, or $0.64 per share, compared to a net loss of $57.5 million, or
$1.08 per share, for the year-ago period, which included a $23.9 million ($0.45
per share) extraordinary loss on the early retirement of debt.
Sales in the first six months of fiscal 1999 were unfavorably affected by lower
average net selling prices, which decreased net sales by approximately $24
million. Higher corrugated shipments increased net sales by approximately $8
million in the period-over-period comparison.
Gross margin for the first six months of fiscal 1999 increased to $35.7 million
from $33.1 million in the prior-year period primarily due to lower fiber costs
($24 million) and higher volume ($4 million), offset by lower average net
selling prices ($20 million net of $4 million lower paper costs in the
converting facilities), reduced chemical subsidiary earnings as a result of a
significant decline in Asian demand ($3 million) and increased insurance costs.
Period-over-period, total mill production decreased to 4,153 tons per day (TPD,
calculated on the basis of the number of days in the period) from 4,196 TPD.
Containerboard production in the first six months of fiscal 1999 decreased
approximately 1 percent to 3,423 TPD from 3,463 TPD in the prior-year period.
The current period unbleached kraft paper production of 730 TPD remained
relatively flat with prior-year production levels. Corrugated shipments
increased approximately 9 percent to 7.4 billion square feet in the first six
months of fiscal 1999 compared to 6.8 billion square feet in the year-ago period
primarily as a result of the opening of a new sheet feeder plant in December
1997 and increased demand. Multiwall bag shipments decreased to 27 thousand tons
in the current period compared to shipments of 31 thousand tons in the first six
months of fiscal 1998.
Average selling prices decreased for the Company's domestic linerboard, export
linerboard and unbleached kraft paper, by approximately 21 percent, 9 percent,
and 25 percent, respectively, in the first six months of fiscal 1999 compared to
the prior-year period. Average selling prices increased approximately 8 percent
for multiwall bags (mixed related) and decreased approximately 3 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 36 percent and 43 percent, respectively, in the
period-over-period comparison, primarily due to decreased demand for these
materials. In addition, the cost of wood chips decreased by approximately 15
percent in the first six months of fiscal 1999 compared to the prior-year
period, mainly due to improved weather conditions in the southern United States.
Selling and administrative costs were $48.3 million for the current period
compared to $43.3 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 $42.1 million in the first six months of
fiscal 1999 from $41.7 million in the prior-year period. Higher average debt
levels increased interest expense by approximately $5.2 million, while lower
average borrowing rates reduced interest expense by approximately $4.8 million.
The lower average borrowing rates are the result of the refinancing of the
Company's Old Notes in the second quarter of fiscal 1998.
In the first six months of fiscal 1999, the Company recognized an income tax
benefit of $21.3 million compared to $20.9 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 the New Notes and
used the proceeds to retire all of its outstanding 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.
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 $21.3 million for the first six months of
fiscal 1999, compared with net cash used for operations of $69.2 million for the
year-ago period. The improvement was primarily due to a decrease in working
capital requirements versus the prior-year period.
In the first six months of fiscal 1999 cash flows used for investing activities
decreased to $11.0 million from $23.8 million in the year-ago period, primarily
due to $14.9 million decrease in capital expenditures in the current year period
compared to the year-ago period. Furthermore, in the first six months of fiscal
1999, the Company incurred an $11.1 million liability for costs associated with
a capital project that will be vendor financed in the third fiscal quarter of
1999 through a debt obligation secured by the project assets. During the first
six months of fiscal 1998, the Company acquired $10.5 million of equipment
financed by a capital lease.
Cash flows from financing activities decreased to $36.4 million in the first six
months of fiscal 1999 from $92.8 million in the year-ago period. 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. During the first
six months of fiscal 1999, the Company has incurred approximately $2.1 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 majority of the remaining demolition and asbestos removal efforts
during fiscal 1999. At March 31, 1999, balance sheet reserves for demolition and
asbestos removal were approximately $1.2 million and the net book value of the
East Mill was $9.6 million.
14
<PAGE>
Liquidity
At March 31, 1999, the Company had cash and equivalents of $9.8 million, an
increase of $4.1 million from September 30, 1998, as cash from financing was
largely offset by cash used for operations and investments. Total debt increased
by $37.2 million to $910.2 million at March 31, 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 and term loan ($38 million). At March 31, 1998, the Company had
approximately $80 million of borrowings outstanding, and approximately $154
million of credit available under the revolving portions of its credit
agreements.
At March 31, 1999, the Company had primary working capital (Trade receivables
plus Inventories less Trade payables) of $149.7 million, a decrease of $3.6
million from September 30, 1998 primarily due to seasonaly higher inventory
offset somewhat by lower accounts receivable and higher accounts payable. The
decrease in accounts receivable was primarily due to lower average net selling
prices for the Company's products in fiscal 1999 versus fiscal 1998.
Published industry prices for linerboard have increased approximately $45 per
ton from the month of December 1998 to the month of March 1999, and are
relatively unchanged from published prices at March 1998. The increase in
published linerboard prices follow a decline in annual containerboard capacity
of approximately 2 million tons announced by certain producers. At the end of
March 1999, the Company had successfully implemented a $50 per ton increase in
prices for its linerboard and is implementing an increase of approximately 10
percent in the prices of its corrugated products.
During the first six months of fiscal 1999, the Company's average delivered cost
of OCC and DLK decreased approximately 36 percent and 43 percent, respectively,
from the prior-period levels. At the end of March 1999, however, OCC prices had
risen by approximately 41 percent from the low point during this period. In
addition, the cost of wood chips decreased approximately 15 percent in the first
six months of fiscal 1999 compared to the prior-year period. 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 post price increase pricing and current 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 additional product
price improvement however, the Company will need to seek additional covenant
modifications to its bank credit agreement by the end of June 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," 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 has not determined what affect, 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 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
correct the Year 2000 Issue, of which approximately $3.6 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 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 on business critical systems will be completed by
mid-1999 while testing will continue on non-business critical systems 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 of production facilities at a rate higher than is normally
experienced. Contingency plans are currently being developed 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
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.
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) 27.1(a) Financial Data Schedule
b) No reports on Form 8-K were filed for the quarter ended
March 31, 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: May 11, 1999 /s/ Marvin A. Pomerantz
------------------------------------
Marvin A. Pomerantz
Chairman and Chief Executive Officer
Date: May 11, 1999 /s/ Jeffrey B. Park
------------------------------------
Jeffrey B. Park
Vice President-Controller
(Principal Accounting Officer)
20
<PAGE>
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