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, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to to
For Quarter Ended December 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 ___
As of February 7, 2000, the registrant had outstanding 53,750,363
shares of its $0.0001 par value Class A Common Stock (including 1,050,179 shares
held in trust for the benefit of the warrant holders) and 1,050,179 redeemable
exchangeable warrants to obtain Class A Common Stock.
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PAGE
PART I. FINANCIAL INFORMATION NUMBERS
- ------- --------------------- -------
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
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 1999
- ----------------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
<S> <C> <C>
1999 1999
ASSETS (In millions)
CURRENT ASSETS:
Cash and equivalents $ 16.3 $ 10.4
Trade receivables (less allowances of $9.4 million and $6.7
million, respectively) 150.9 149.8
Inventories (Note 2) 118.9 67.1
Other current assets 17.5 12.8
--------- ---------
Total current assets 303.6 240.1
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 1,175.4 1,119.3
Less accumulated depreciation (586.1) (560.4)
--------- ---------
Property - net 589.3 558.9
--------- ---------
DEFERRED INCOME TAXES 150.3 150.3
OTHER ASSETS 54.6 68.7
--------- ---------
TOTAL $ 1,097.8 $ 1,018.0
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 11.7 $ 10.9
Trade payables 76.2 56.2
Accrued interest payable 12.4 16.2
Accrued and other liabilities 83.7 61.1
--------- ---------
Total current liabilities 184.0 144.4
--------- ---------
LONG-TERM DEBT 958.2 924.8
OTHER LONG-TERM LIABILITIES 45.2 39.6
COMMITMENTS AND CONTINGENCIES (Note 3) - -
STOCKHOLDERS' EQUITY (DEFICIT):
Class A common stock - par value, $0.0001 per share;
authorized 125,000,000 shares; issued 55,200,909 shares
and 54,991,409 shares, respectively, and outstanding
53,744,338 shares and 53,523,443 shares, respectively - -
Capital in excess of par value 178.4 178.2
Accumulated deficit (256.1) (257.0)
Common stock in treasury - at cost; 1,456,571 shares and
1,467,966 shares, respectively (10.8) (10.9)
Accumulated other comprehensive income (loss):
Minimum pension liability (1.1) (1.1)
--------- ---------
Total stockholders' equity (deficit) (89.6) (90.8)
--------- ---------
TOTAL $ 1,097.8 $ 1,018.0
========= =========
<FN>
See notes to condensed consolidated financial statements.
</FN>
1
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1999 AND 1998 (In millions, except per share data)
- --------------------------------------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------
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1999 1998
--------- ---------
NET SALES $ 279.6 $ 198.8
COST OF GOODS SOLD 230.2 178.4
--------- ---------
GROSS MARGIN 49.4 20.4
SELLING AND ADMINISTRATIVE COSTS (26.5) (23.5)
--------- ---------
OPERATING INCOME (LOSS) 22.9 (3.1)
INTEREST EXPENSE - Net (22.1) (20.6)
OTHER INCOME (EXPENSE) - Net 0.6 (0.8)
--------- ---------
INCOME (LOSS) BEFORE TAXES 1.4 (24.5)
INCOME TAX (EXPENSE) BENEFIT (0.5) 9.4
--------- ---------
NET INCOME (LOSS) 0.9 $ (15.1)
=========
ACCUMULATED DEFICIT:
Beginning of period (257.0)
---------
End of period $ (256.1)
=========
INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.02 $ (0.28)
========= =========
Diluted $ 0.02 $ N/A
========= =========
WEIGHTED AVERAGE COMMON AND COMMON
SHARE EQUIVALENTS
BASIC:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 53.7 53.3
DILUTED:
EFFECT OF DILUTIVE SECURITIES:
Employee and director stock options 0.3 0.2
--------- ---------
Weighted average common and common
share equivalents 54.0 53.5
========= =========
See notes to condensed consolidated financial statements.
2
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1999 AND 1998
- ---------------------------------------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 31,
----------------------------------
1999 1998
-------- --------
(In millions)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income (loss) $ 0.9 $ (15.1)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operations:
Depreciation and amortization 13.3 15.3
Deferred tax benefit 0.5 (9.5)
Change in current assets and liabilities, excluding
acquisitions and dispositions (1.4) (0.1)
Other - net (1.7) 1.3
-------- --------
Net cash provided by (used for) operations 11.6 (8.1)
-------- --------
CASH FLOWS FROM INVESTMENTS:
Capital expenditures (8.3) (4.3)
Capitalized interest (0.1) (0.4)
Acquisition of S&G Packaging - net 1.4 -
Other investments - net (0.5) (1.1)
-------- --------
Net cash used for investments (7.5) (5.8)
-------- --------
CASH FLOWS FROM FINANCING:
Senior debt - repayments (3.3) (1.9)
Revolving credit agreement borrowings - net 37.5 21.5
Repayment of S&G Packaging revolving credit loan (32.6) -
Other financing - net 0.2 0.1
-------- --------
Net cash provided by financing 1.8 19.7
-------- --------
Net increase in cash and equivalents 5.9 5.8
Cash and equivalents, beginning of period 10.4 5.7
-------- --------
Cash and equivalents, end of period $ 16.3 $ 11.5
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (refunded) for:
Interest $ 24.9 $ 24.3
======== ========
Income taxes $ - $ -
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Property additions $ - $ 5.6
======== ========
Increase (decrease) in accrued & other liabilities $ - $ 5.6
======== ========
Acquisition of S&G Packaging:
Inventories $ 28.7 $ -
======== ========
Property additions $ 35.1 $ -
======== ========
Other assets $ 15.1 $ -
======== ========
Trade payables, accrued and other liabilities $ 47.7 $ -
======== ========
Total debt assumed before repayment $ 32.6 $ -
======== ========
See notes to condensed consolidated financial statements.
3
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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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, 1999 and
the results of operations and cash flows for the three months ended December 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, 1999.
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2. INVENTORIES DECEMBER 31, SEPTEMBER 30,
----------- 1999 1999
---------- ----------
(In millions)
<S> <C> <C>
Inventories consist of:
Finished products $ 21.9 $ 9.1
In process 80.3 42.7
Raw materials 9.8 9.0
Supplies 16.0 15.0
---------- ----------
128.0 75.8
LIFO valuation adjustment (9.1) (8.7)
---------- ----------
Total $ 118.9 $ 67.1
========== ==========
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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 were consolidated in the Court of
Chancery of the State of Delaware alleging breach of fiduciary duties on two
counts. The first count is a putative class action and the second is an alleged
derivative claim brought on behalf of the Company against the individual
defendants. Both counts allege that (i) the Company's stockholder Rights
Agreement, adopted on June 12, 1995 and approved by the Company's stockholders
on June 28, 1995; (ii) amendments to the Company's charter and by-laws, adopted
on July 21, 1995; and (iii) a redemption of warrants in June 1995 all were
designed to entrench the individual defendants in their capacities as directors
at the expense of stockholders who otherwise would have been able to take
advantage of a sale of the Company. The complaint asks the court, among other
things, to rescind the amendments and prohibit the use of the stockholder
4
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ----------------------------------------------------------------
Rights Agreement to discourage any bona fide acquirer. In the alternative, the
plaintiffs seek compensatory damages. The court certified a class of holders of
common stock as of June 12, 1995, and their successors in interest, transferees
and assignees, immediate and remote (excluding defendants and any person, firm,
trust, corporation or other entity related to the defendants). On January 26,
2000, the Chancery Court granted defendants' motion for summary judgment on both
counts and dismissed the class action in its entirety. Plaintiffs have 30 days
to file an appeal of the decision. If an appeal is filed, the Company will
continue to defend itself vigorously.
On October 23, 1995, a rail tank car exploded on the premises of the Bogalusa,
Louisiana plant of Gaylord Chemical Corporation, a wholly owned, independently
operated subsidiary of the Company. The accident resulted in the venting of
certain chemicals, including by-products of nitrogen tetroxide, a raw material
used by the plant to produce dimethyl sulfoxide, a solvent used in the
manufacture of pharmaceutical and agricultural chemicals. More than 160 lawsuits
have been filed in both federal and state courts naming as defendants Gaylord
Chemical Corporation and/or the Company, certain of their respective officers
and other unrelated corporations and individuals. The lawsuits, which seek
unspecified damages, allege personal injury, property damage, economic loss,
related injuries and fear of injuries as a result of the accident. On April 1,
1996, the federal judge dismissed all but one of the federal actions for failing
to state claims under federal law and remanded the remaining state law claims to
the district court in Washington Parish, Louisiana, where they have been
consolidated. Discovery in the remaining federal action, a suit to recover
alleged clean-up costs, was ordered coordinated with the Louisiana state action.
Under an agreed Case Management Order (CMO), all actions in Louisiana arising
out of the October 23, 1995 explosion have been consolidated in the
Twenty-Second Judicial district in Washington Parish, Louisiana, where
plaintiffs have filed a single Consolidated Master Petition (CMP) against
Gaylord Chemical Corporation, the Company and twenty-one other defendants. The
CMP, as amended, asserts substantially all of the claims and theories made in
prior lawsuits, including negligence, strict liability and other statutory
liability. Compensatory and punitive damages are sought. No officers or
directors of Gaylord Chemical Corporation or the Company are named defendants in
the CMP, as amended. The status of all lawsuits pending before the filing of the
CMP, some of which name officers of Gaylord Chemical Corporation and the
Company, will be determined by the trial court after class certification issues
are finally resolved.
5
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ----------------------------------------------------------------
In November 1997, the Louisiana trial court certified these consolidated cases
as a class action. The trial court certified, and the Court of Appeal and State
Supreme Court upheld, a class consisting of allegedly injured parties in the
City of Bogalusa and portions of Washington Parish, Louisiana, and parts of
Marion, Walthall and Pike counties in Mississippi. The trial court did not
certify a single, mandatory class for punitive damages.
In September 1999, potential class members received notice of the action and in
the next few months will receive detailed proof of claim forms, which must be
completed by May 5, 2000. A total of 3,978 persons have "opted out" of the
Louisiana class action. Of those, 3,888 have claims pending in the related
Mississippi tort litigation described below. No trial date has been set for
these consolidated Louisiana actions. The Company and its subsidiary are
vigorously contesting all claims.
The Company, Gaylord Chemical Corporation and numerous other third-party
companies have been named as defendants in 13 actions brought by plaintiffs in
Mississippi state court, who claim injury as a result of the October 23, 1995
accident at the Bogalusa facility. These cases, which purported to be on behalf
of over 11,000 individuals, were not filed as a class action but rather have all
been consolidated before a single judge in Hinds County, Mississippi. All of
these cases allege claims and damages similar to those in Louisiana State Court.
Discovery in the consolidated cases has been coordinated with the on-going
discovery in the Louisiana class action. Following several rulings by the
Mississippi trial court, over 7,000 individuals' claims in these consolidated
actions have been either dismissed or voluntarily withdrawn. As with the
Louisiana class action, the Company and Gaylord Chemical Corporation are
vigorously contesting all claims in Mississippi arising out of the October 23,
1995 explosion. In addition, the Company and Gaylord Chemical Corporation have
filed cross-claims for indemnity and contribution against co-defendants in both
of the Mississippi and Louisiana actions. The Mississippi trial court selected
the first 20 plaintiffs whose claims were tried to a jury on all issues of
liability and damages beginning on March 29, 1999 and ending on June 23, 1999.
During trial, the court dismissed with prejudice the claims of three plaintiffs.
The jury found Gaylord Chemical Corporation and a co-defendant, Vicksburg
Chemical Company, equally at fault for the accident. The jury also found that
none of the 17 remaining plaintiffs whose claims went to the jury had suffered
any damages. Consequently, no defendant was found liable, and no plaintiff was
awarded any damages. Finally, the jury determined that the Company was not
responsible for the conduct of its subsidiary, Gaylord Chemical Corporation.
Plaintiffs' motion for a new trial or, alternatively, judgment notwithstanding
the verdict was denied on November 16, 1999. Plaintiffs did not appeal the
verdict or the trial court's post-trial rulings. The trial court has ordered
that the results of this trial will not be binding, either as to liability or
compensatory or punitive damages, on any of the other plaintiffs in the
Mississippi consolidated actions. Rather, the trial court ordered that each of
the approximately 4,000 Mississippi plaintiffs will be required to prove their
own individual claims of liability or compensatory or punitive damages.
6
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ----------------------------------------------------------------
The Company and Gaylord Chemical Corporation maintain $127 million of general
liability insurance and filed separate suits seeking a declaratory judgment of
coverage for the October 23, 1995 accident against their general liability and
directors and officers liability insurance carriers. The carrier with the first
layer of coverage under the general liability policies has agreed to pay the
Company's and Gaylord Chemical Corporation's defense costs under a reservation
of rights.
The coverage action against the liability insurers was tried to a judge in
December 1998. During trial, one of the excess carriers settled by agreeing to
pay $5 million, its full policy limits. Trial concluded against the remaining
defendants on December 10, 1998 and on February 25, 1999, the trial court issued
an opinion holding that the Company and Gaylord Chemical Corporation have
insurance coverage for the October 23, 1995 accident under eight of the nine
remaining policies. The judge held that language in one policy excluded
coverage. On March 30, 1999, the trial court denied all the insurers' motions
for a new trial. The eight insurers issuing policies where coverage was found
have filed an appeal of the judgment with the Louisiana Court of Appeal. The
Company and Gaylord Chemical Corporation have appealed that part of the judgment
excluding coverage under one policy. Including coverage afforded by the
settlement and by the trial court's decision, the Company and Gaylord Chemical
Corporation have in excess of $110 million in insurance coverage for the October
23, 1995 accident.
On May 18 and May 24, 1999, the Company was named in lawsuits consolidated
in the Federal District Court for the Eastern District of Pennsylvania alleging
civil violations of Section 1 of the Sherman Act. The complaints, both putative
class actions, allege that during the period October 1, 1993 through November
30, 1995 the Company agreed with nine other manufacturers of linerboard to raise
or maintain prices. According to the complaints, the purpose and effect of the
alleged conspiracy was artificially to increase prices of corrugated sheets and
corrugated boxes sold to customers. Treble damages and attorney fees are sought.
The Company has moved to dismiss the complaints. After investigation of the
facts, the Company believes the allegations have no merit and is vigorously
defending itself.
The Company believes the outcome of such litigation should not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
7
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
- ----------------------------------------------------------------
4. ACQUISITION OF S&G PACKAGING COMPANY L.L.C.
-------------------------------------------
On October 28, 1999, the Company acquired the remaining 65 percent share of S&G
Packaging Company L.L.C. (S&G Packaging) it did not already own from
Smurfit-Stone Container Corporation (Smurfit-Stone). S&G Packaging is the
largest U.S. producer of retail paper grocery sacks and bags, consisting of six
converting plants with annual sales of approximately $250 million. In connection
with this transaction, the Company paid to Smurfit-Stone $0.5 million for its 65
percent interest and repaid through borrowings on its revolver, $32.6 million
outstanding on S&G Packaging's revolving loan facility, which was then
terminated. In addition, Smurfit-Stone forgave $4.0 million of its trade
receivable for kraft paper sold to S&G Packaging. S&G Packaging also entered
into a paper supply agreement to purchase at market prices 60,000 tons and
48,000 tons of kraft paper in fiscal 2000 and fiscal 2001, respectively, and
36,000 tons each year in fiscal 2002 through 2004, from Smurfit-Stone.
The Company has accounted for this transaction as a purchase business
combination. Beginning on November 1, 1999, the operating results of S&G
Packaging have been fully consolidated with the Company's Results of Operations.
Prior to November 1, 1999, the Company accounted for S&G Packaging under the
equity method and recognized its proportionate share of earnings, net of
amortization of goodwill, in Other Income (Expense) - Net. The integration of
S&G Packaging's corporate functions with the Company is ongoing. This
integration will provide cost savings by eliminating duplicative functions
including S&G Packaging's corporate headquarters facility. In addition, the
Company announced on January 7, 2000 that it will close the S&G Packaging
facility in Yulee, Florida to better align capacity with customer needs. The
Company has allocated approximately $4.4 million of the acquisition cost to
purchase accounting reserves primarily relating to severance and closure costs.
The majority of these costs will be expended over the next 12 months. The
Company will continue to evaluate its purchase accounting reserves for severance
and closure costs and the appropriateness of its purchase price allocation.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
First Quarter of Fiscal 2000 Compared with First Quarter of Fiscal 1999
Net sales for the first quarter of fiscal 2000 were $279.6 million compared to
net sales of $198.8 million for the first quarter of fiscal 1999. Operating
income for the current quarter was $22.9 million compared to an operating loss
of $3.1 million for the year-ago quarter. Net income for the current quarter
totaled $0.9 million, or $0.02 per basic and diluted common share, compared to a
net loss of $15.1 million, or $0.28 per basic common share, for the year-ago
quarter.
On October 28, 1999, the Company acquired the remaining 65 percent share of S&G
Packaging Company L.L.C. (S&G Packaging) it did not already own from
Smurfit-Stone Container Corporation. The operating results of S&G Packaging have
been fully consolidated with the Company's Results of Operations beginning on
November 1, 1999. The Company accounted for S&G Packaging prior to November 1,
1999, under the equity method of accounting and recognized its proportionate
share of earnings, net of amortization of goodwill, in Other Income (Expense) -
Net.
In the first quarter of fiscal 2000, sales increased approximately $50 million
due to higher volume, primarily as a result of the S&G Packaging acquisition and
increased volume in the corrugated converting facilities. Higher average net
selling prices contributed approximately $31 million in the quarter-over-quarter
comparison.
Gross margin for the first quarter of fiscal 2000 increased to $49.4 million
from $20.4 million in the prior-year quarter primarily due to higher average net
selling prices ($31 million) and higher volume ($8 million) offset somewhat by
higher fiber costs ($9 million).
Corrugated shipments increased approximately 6 percent in the first quarter of
fiscal 2000 to 3.8 billion square feet compared to 3.6 billion square feet in
the year-ago quarter, primarily as a result of increased demand. Industrial and
retail bag shipments increased to 63 thousand tons during the first quarter of
fiscal 2000 from 13 thousand tons in the prior-year quarter primarily due to the
inclusion of shipments by S&G Packaging in the last two months of the first
quarter of fiscal 2000. Total mill production increased approximately 4 percent
to 4,432 tons per day (TPD, calculated on the basis of the number of days in the
period) during the first quarter of fiscal 2000 compared to 4,272 TPD in the
prior-year quarter. Quarter-over-quarter, containerboard and unbleached kraft
paper production increased approximately 3 percent to 3,644 TPD from 3,542 TPD
and 8 percent to 788 TPD from 730 TPD, respectively, over the prior-year.
9
<PAGE>
Average net selling prices increased for corrugated products and multiwall bags
by approximately 14 percent and 3 percent, respectively, in the first quarter of
fiscal 2000 compared with the prior-year quarter. Average net selling prices
increased for the Company's domestic linerboard, export linerboard and
unbleached kraft paper approximately 45 percent, 23 percent and 26 percent,
respectively, in the first quarter of fiscal 2000 compared to the same quarter
in the prior year.
Fiber costs increased due to higher 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 increased
approximately 68 percent and 103 percent, respectively, while the average
delivered cost for wood chips decreased approximately 4 percent in
quarter-over-quarter comparison.
Selling and administrative costs were $26.5 million for the current quarter
compared to $23.5 million for the year-ago period. This increase is due
primarily to selling and administrative costs associated with S&G Packaging.
Net interest expense increased to $22.1 million in the first quarter of fiscal
2000 from $20.6 million in the prior-year quarter due primarily to higher
average debt levels. The higher average debt levels are due in part to the
assumption of $32.6 million of debt as a result of the acquisition of the
remaining 65 percent of S&G Packaging during the current quarter.
In the first quarter of fiscal 2000, the Company recognized a tax provision of
$0.5 million compared to a tax benefit of $9.4 million in the prior-year
quarter. The effective tax rate was 38 percent in both the first quarter of
fiscal 2000 and in the first quarter of fiscal 1999.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
General
The Company has historically financed its operations from cash provided by
operations, borrowings under its credit agreements and the issuance of debt and
equity securities. The Company's principal uses of cash are to pay operating
expenses, fund capital expenditures and service debt. The Company is prohibited
from paying dividends and making purchases of additional common stock by the
terms of its bank credit agreement and public debt securities.
Net cash provided by operations for the first quarter of fiscal 2000 was $11.6
million, compared with net cash used by operations of $8.1 million for the
year-ago period. The improvement was primarily due to improved operating results
in the period-over-period comparison.
Cash flows used for investing activities increased in the first quarter of
fiscal 2000 to $7.5 million from $5.8 million in the year-ago quarter primarily
due to a $4.0 million increase in capital expenditures in the first quarter of
fiscal 2000 compared to the year-ago quarter, offset in part by the net cash
received in conjunction with the S&G Packaging acquisition. In the first quarter
of fiscal 1999, the Company incurred a $5.6 million liability for costs
associated with a capital project, that was subsequently financed in fiscal 1999
through a secured debt obligation.
Cash flows from financing activities decreased to $1.8 million in the first
quarter of fiscal 2000 from $19.7 million in the year-ago quarter. Financing
activities in the fiscal 2000 quarter included the repayment of $32.6 million of
S&G Packaging's revolving loan facility.
In fiscal 1992, the Company determined it would be unlikely that its Antioch,
California unbleached kraft paper mill (the East Mill), which was closed in
fiscal 1991, could be sold as a mill site or that the East Mill, or a portion
thereof, could be operated economically by the Company. In the first quarter of
fiscal 2000, the Company incurred approximately $0.5 million of costs for
demolition and maintenance of the East Mill. Such costs were net of proceeds
from the sale of scrap. At December 31, 1999, approximately $0.6 million of
spending remained to complete the demolition work. Management expects to
complete the remaining demolition during fiscal 2000. At December 31, 1999, the
balance sheet reserve for demolition was approximately $0.6 million and the net
book value of the East Mill was $10.5 million.
11
<PAGE>
Liquidity
At December 31, 1999, the Company had cash and equivalents of $16.3 million, an
increase of $5.9 million from September 30, 1999, as cash provided by operating
and financing activities exceeded cash used for investments. Total debt
increased $34.2 million to $969.9 million at December 31, 1999 from $935.7
million at September 30, 1999 as a result of increased revolver borrowings. The
increase in revolver borrowings was primarily due to the repayment of the S&G
Packaging revolving loan facility. At December 31, 1999, the Company had
approximately $133 million of borrowings outstanding, and approximately $107
million of credit available under the revolving portions of its credit
agreements.
At December 31, 1999, the Company had primary working capital (Trade receivables
plus Inventories less Trade payables) of $193.6 million, an increase of $32.9
million from September 30, 1999, primarily due to primary working capital
acquired in the S&G Packaging acquisition.
Consolidation among major containerboard industry producers during the past 12
to 24 months has resulted in the "mothballing" of approximately 5 percent of the
domestic containerboard capacity. This rationalization, combined with limited
new containerboard capacity additions and stable domestic demand growth, has
resulted in relatively balanced industry supply/demand conditions. Published
industry prices for linerboard and kraft paper remained unchanged at December
1999 compared to September 1999. Because of continuing strong market conditions,
the Company has announced price increases of $50 per ton for linerboard and
grocery bag paper effective February 1, 2000 and multiwall bag paper effective
March 1, 2000. In addition, the Company has announced a minimum of a 12 percent
increase in corrugated products effective March 1, 2000.
The Company's average delivered cost of DLK and wood chips were relatively
unchanged from fourth quarter fiscal 1999 levels while average delivered OCC
prices decreased approximately 8 percent in the first quarter of fiscal 2000
compared to fourth quarter fiscal 1999. However, in February 2000, published
prices for recycled fiber increased approximately 10 percent to 35 percent.
Fiber markets are difficult to predict; thus there can be no assurance of the
future direction of wood chip, OCC and DLK prices.
Based on current prices for converted products (before the announced
February/March price increases), 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 product price
improvement beyond current levels for converted products, however, the Company
will need to seek additional covenant modifications to its bank credit agreement
by the end of December 2000 to maintain continued access to its liquidity.
12
<PAGE>
PENDING ACCOUNTING STANDARDS
- ----------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments. An amendment to SFAS 133 was issued in
July 1999, which defers by one year the effective date of SFAS 133 to fiscal
years beginning after June 15, 2000. The statement will be adopted by the
Company in fiscal 2001. The Company has not yet determined what effect, if any,
the statement will have on its results of operations or financial position.
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.
Following the end of the Company's fiscal year in September 1999, and the
calendar year in December 1999, the Company experienced no major incidents
related to the Year 2000 Issue.
The Company incurred approximately $5.0 million to correct potential problems
related to the Year 2000 Issue. The Company funded its Year 2000 effort with
cash from operations and borrowings under its revolving credit agreements.
IT systems were verified for accuracy across the Year 2000 boundary as well as
other special calendar date situations. A national consulting firm specializing
in Year 2000 issues assisted the Company throughout the planning process and was
retained to assist in the Year 2000 verification testing. The testing approach
employed was intended to identify all potential problems with processing the
Year 2000. It is impractical to assure that all potential problems were
identified during these testing procedures. Therefore, the Company may
experience limited problems into Year 2000. The IT staff, with the assistance of
designated outside vendor support, is prepared to react and correct these
problems in a timely fashion, as it does with problems that occur in the normal
course of business.
A consulting firm specializing in industrial controls developed an equipment
inventory and assisted in the validation of equipment compliance for certain
non-IT systems at the Company's paper mills. At its other facilities, internal
resources, both operational and IT staff, were used to inventory and to validate
the non-IT systems. All business critical non-IT systems used in the
manufacturing and conversion processes have been remediated, verified, and are
operating properly in Year 2000.
13
<PAGE>
The Company believes that many of its customers, suppliers and financial
institutions are also impacted by the Year 2000 Issue, which could affect the
Company. The Company has assessed the compliance efforts of a significant
portion of the Company's critical partners. To date, no material deficiencies
have been identified. If the Company's current or future customers, or
suppliers, however, fail to achieve Year 2000 compliance, the Company believes
that, due to lack of concentration of major customers or critical suppliers,
results of operations, financial position or cash flow are not expected to be
materially adversely affected.
The Company experienced no unplanned downtime of production facilities as a
result of Year 2000. Contingency plans have been developed to respond to any
system incidents. Any system failure which results in a business disruption is
expected to be handled in a timely fashion, as would any normal day-to-day
failures. These potential disruptions are not expected to result in a material
adverse impact on the Company's results of operations, financial position or
cash flow.
14
<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.
15
<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 8, 2000, 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 51,191,079 428,610
Harve A. Ferrill 51,203,949 415,730
John E. Goodenow 51,205,449 414,230
David B. Hawkins 51,205,249 414,430
Warren J. Hayford 51,296,899 322,780
Charles S. Johnson 47,615,660 4,004,029
Jerry W. Kolb 51,195,349 424,330
Ralph L. MacDonald Jr. 51,205,449 414,230
Marvin A. Pomerantz 51,302,668 317,021
Thomas H. Stoner 51,204,349 415,330
An increase of 1,500,000 shares available under the Company's 1997 Long-Term
Equity Incentive Plan was approved by a vote of 31,915,966 for; 19,725,899
against; 61,153 withheld.
The appointment of Deloitte & Touche LLP to continue to serve as the Company's
independent auditors in fiscal 2000 was ratified by a vote of 51,614,741 for;
69,071 against; 19,205 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
December 31, 1999
------------------
(a) Filed with this Quarterly Report
16
<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: February 11, 2000 /s/ Marvin A. Pomerantz
-------------------------------
Marvin A. Pomerantz
Chairman and Chief Executive Officer
Date: February 11, 2000 /s/ Jeffrey B. Park
--------------------------------
Jeffrey B. Park
Vice President-Controller
(Principal Accounting Officer)
17
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