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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
For Quarter Ended June 30, 2000
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 August 2, 2000, the registrant had outstanding 53,808,988 shares
of its $0.0001 par value Class A Common Stock (including 848,535 shares held in
trust for the benefit of the warrant holders) and 848,535 redeemable
exchangeable warrants to obtain Class A Common Stock.
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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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 - 17
PART II. OTHER INFORMATION
--------------------------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
-------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30,
2000 1999
---------- ----------
ASSETS (In millions)
------
CURRENT ASSETS:
Cash and equivalents $ 13.1 $ 10.4
Trade receivables (less allowances
of $9.6 million and $6.7
million, respectively) 153.7 149.8
Inventories (Note 2) 116.8 67.1
Other current assets 20.9 12.8
---------- ----------
Total current assets 304.5 240.1
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment,
at cost 1,192.5 1,119.3
Less accumulated depreciation (608.2) (560.4)
---------- ----------
Property - net 584.3 558.9
---------- ----------
DEFERRED INCOME TAXES 151.4 150.3
OTHER ASSETS 54.4 68.7
---------- ----------
TOTAL $ 1,094.6 $ 1,018.0
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 11.5 $ 10.9
Trade payables 67.1 56.2
Accrued interest payable 13.5 16.2
Accrued and other liabilities 69.3 61.1
---------- ----------
Total current liabilities 161.4 144.4
---------- ----------
LONG-TERM DEBT 974.7 924.8
OTHER LONG-TERM LIABILITIES 50.5 39.6
COMMITMENTS AND CONTINGENCIES (Note 3) - -
STOCKHOLDERS' DEFICIT:
Class A common stock - par value,
$0.0001 per share; authorized
125,000,000 shares; issued
55,221,094 shares and 54,991,409
shares, respectively, and
outstanding 53,794,516 shares
and 53,523,443 shares,
respectively - -
Capital in excess of par value 178.9 178.2
Accumulated deficit (259.3) (257.0)
Common stock in treasury - at cost;
1,426,578 shares and 1,467,966
shares, respectively (10.5) (10.9)
Accumulated other comprehensive
income (loss):
Minimum pension liability (1.1) (1.1)
---------- ----------
Total stockholders' deficit (92.0) (90.8)
---------- ----------
TOTAL $ 1,094.6 $ 1,018.0
========== ==========
See notes to condensed consolidated financial statements.
1
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 2000 AND 1999 (In millions, except per share data)
-------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
---------- ----------
NET SALES $ 299.2 $ 229.0
COST OF GOODS SOLD 245.6 193.1
---------- ----------
GROSS MARGIN 53.6 35.9
SELLING AND ADMINISTRATIVE COSTS (30.3) (25.3)
---------- ----------
OPERATING INCOME 23.3 10.6
INTEREST EXPENSE - Net (23.1) (21.6)
OTHER INCOME (EXPENSE) - Net 0.4 (2.0)
---------- ----------
INCOME (LOSS) BEFORE TAXES 0.6 (13.0)
INCOME TAX (EXPENSE) BENEFIT (0.2) 5.0
---------- ----------
NET INCOME (LOSS) $ 0.4 $ (8.0)
==========
ACCUMULATED DEFICIT:
Beginning of period (259.5)
Excess of cost over issuance price
of Treasury Stock (0.2)
----------
End of period $ (259.3)
==========
INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.01 $ (0.15)
========== ==========
Diluted (A) $ 0.01 N/A
========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
SHARE EQUIVALENTS
BASIC:
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 53.8 53.4
DILUTED:
EFFECT OF DILUTIVE SECURITIES:
Employee and director stock options 0.2 0.5
---------- ----------
Weighted average common and common
share equivalents 54.0 53.9
========== ==========
(A) Not presented where the effect of potential shares is antidilutive.
See notes to condensed consolidated financial statements.
2
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CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
JUNE 30, 2000 AND 1999 (In millions, except per share data)
-------------------------------------------------------------
NINE MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
---------- ----------
NET SALES $ 870.0 $ 628.8
COST OF GOODS SOLD 720.9 557.2
---------- ----------
GROSS MARGIN 149.1 71.6
SELLING AND ADMINISTRATIVE COSTS (85.7) (73.6)
---------- ----------
OPERATING INCOME (LOSS) 63.4 (2.0)
INTEREST EXPENSE - Net (68.2) (63.7)
OTHER INCOME (EXPENSE) - Net 1.4 (3.0)
---------- ----------
LOSS BEFORE TAXES (3.4) (68.7)
INCOME TAX BENEFIT 1.3 26.3
---------- ----------
NET LOSS $ (2.1) $ (42.4)
==========
ACCUMULATED DEFICIT:
Beginning of period (257.0)
Excess of cost over issuance price
of Treasury Stock (0.2)
----------
End of period $ (259.3)
==========
LOSS PER COMMON SHARE:
Basic $ (0.04) $ (0.79)
========== ==========
Diluted (A) N/A N/A
========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
SHARE EQUIVALENTS
BASIC:
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 53.7 53.4
DILUTED:
EFFECT OF DILUTIVE SECURITIES:
Employee and director stock
options 0.3 0.3
---------- ----------
Weighted average common and common
share equivalents 54.0 53.7
========== ==========
(A) Not presented where the effect of potential shares is antidilutive.
See notes to condensed consolidated financial statements.
3
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
NINE MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
---------- ----------
(In millions)
CASH FLOWS FROM OPERATIONS:
Net loss $ (2.1) $ (42.4)
Adjustments to reconcile net
loss to net cash provided by
(used for) operations:
Depreciation and amortization 39.6 41.0
Deferred tax benefit (1.1) (26.5)
Change in current assets and
liabilities, excluding
acquisitions and dispositions (26.5) (16.4)
Other - net 2.6 4.1
---------- ----------
Net cash provided by (used for)
operations 12.5 (40.2)
---------- ----------
CASH FLOWS FROM INVESTMENTS:
Capital expenditures (28.2) (13.2)
Capitalized interest (0.4) (0.5)
Acquisition of S&G Packaging - net 1.4 -
Other investments - net (1.0) (1.8)
---------- ----------
Net cash used for investments (28.2) (15.5)
---------- ----------
CASH FLOWS FROM FINANCING:
Senior debt - repayments (4.9) (7.6)
Revolving credit agreement
borrowings - net 57.0 66.5
Repayment of S&G Packaging
revolving credit loan (32.6) -
Other financing - net (1.1) (0.2)
---------- ----------
Net cash provided by financing 18.4 58.7
---------- ----------
Net increase in cash and equivalents 2.7 3.0
Cash and equivalents, beginning of period 10.4 5.7
---------- ----------
Cash and equivalents, end of period $ 13.1 $ 8.7
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for:
Interest $ 70.0 $ 65.2
========== ==========
Income taxes $ - $ -
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Property additions $ - $ 11.1
========== ==========
Increase in accrued and other
liabilities $ - $ 11.1
========== ==========
Acquisition of S&G Packaging:
Inventories $ 28.7 $ -
========== ==========
Property additions $ 35.2 $ -
========== ==========
Other assets $ 15.1 $ -
========== ==========
Trade payables, accrued and
other liabilities $ 47.8 $ -
========== ==========
Total debt assumed before repayment $ 32.6 $ -
========== ==========
See notes to condensed consolidated financial statements.
4
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
----------------------------------------------------------------
1. GENERAL
-------
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all normal and recurring adjustments and accruals
necessary to present fairly the financial position as of June 30, 2000 and the
results of operations for the three months and nine months ended June 30, 2000
and 1999, and cash flows for the nine months ended June 30, 2000 and 1999,
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. For the three
months and nine months ended June 30, 2000 and 1999, Comprehensive Income/Loss
is equal to net Income/Loss for the respective periods.
2. INVENTORIES JUNE 30, SEPTEMBER 30,
----------- 2000 1999
---------- ----------
(In millions)
Inventories consist of:
Finished products $ 32.8 $ 9.1
Work in process 71.0 42.7
Raw materials 9.4 9.0
Supplies 15.9 15.0
---------- ----------
129.1 75.8
LIFO valuation adjustment (12.3) (8.7)
---------- ----------
Total $ 116.8 $ 67.1
========== ==========
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 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
5
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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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 accident have been consolidated in the Twenty-Third
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.
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, notice of the class action was published and mailed to all
individuals within the geographic boundaries of the class action. A total of
3,978 persons elected to "opt out" of the class proceeding by the December 14,
1999 deadline. Of those, 3,888 have claims pending in the related Mississippi
tort litigation described below. As of June 20, 2000, the filing deadline,
16,592 proof of claim forms had been filed, and 5,753 allege claims for bodily
or personal injury.
The trial court has set a trial date of June 11, 2001 for the first 18
plaintiffs in the Louisiana class action. Those plaintiffs were selected
randomly and in proportion to the geographic dispersal of all claim forms timely
filed. The initial Louisiana trial will be conducted in two phases. The first
phase will resolve issues of fault and punitive liability for the entire class,
in addition to compensatory damages for the initial 18 trial plaintiffs. The
second phase is the trial of punitive damages claims on behalf of the entire
class by plaintiffs, if
6
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
----------------------------------------------------------------
any, who were awarded compensatory damages in phase one. 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 purport 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 accident. 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.
After a three-month trial, 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
timely appeal the verdict or the trial court's post-trial rulings, but their
motion to re-open the time for appeal was approved. Plaintiffs have not yet
filed a notice of appeal. The trial court has ordered that the results of the
first 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. No trial date has been set for
the next group of Mississippi plaintiffs.
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,
7
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
----------------------------------------------------------------
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 to artificially 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 are without 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.
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, then consisting of
six converting plants with annual sales of approximately $250 million. In
connection with this transaction, the Company paid
8
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GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
----------------------------------------------------------------
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 October 29, 1999, the operating results of S&G
Packaging have been fully consolidated with the Company's Results of Operations.
Prior to acquiring the remaining 65 percent of S&G Packaging, 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
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 would close the S&G Packaging facility in Yulee,
Florida to better align capacity with customer needs. This facility ceased
production April 7, 2000 and was closed permanently June 20, 2000. The Company
has allocated approximately $3.1 million of the acquisition cost to purchase
accounting reserves 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.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
THIRD QUARTER OF FISCAL 2000 COMPARED WITH THIRD QUARTER OF FISCAL 1999
Net sales for the third quarter of fiscal 2000 were $299.2 million compared to
net sales of $229.0 million for the third quarter of fiscal 1999. Operating
income for the current quarter was $23.3 million compared to an operating income
of $10.6 million for the year-ago quarter. Net income for the current quarter
totaled $0.4 million, or $0.01 per basic common share, compared to a net loss of
$8.0 million, or $0.15 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
October 29, 1999. The Company accounted for S&G Packaging prior to acquiring the
remaining 65 percent, 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 third quarter of fiscal 2000, sales increased approximately $31 million
due to incremental volume, as a result of the acquisition of the remaining 65
percent of S&G Packaging during the first quarter of fiscal 2000. Higher average
net selling prices for all of the Company's paper products contributed
approximately $39 million in the quarter-over-quarter comparison. In addition,
during the quarter the Company incurred $2.6 million of bad debt expense
associated with the bankruptcies of two customers.
Gross margin for the third quarter of fiscal 2000 increased to $53.6 million
from $35.9 million in the prior-year quarter primarily due to higher average net
selling prices ($32 million, net of $7 million of higher containerboard and
kraft paper costs), offset partially by higher fiber costs ($11 million), higher
energy costs ($2 million).
Corrugated shipments in the third quarter of fiscal 2000 of 3.9 billion square
feet were flat compared to the year-ago quarter, primarily as a result of stable
demand. Industrial and retail bag shipments increased to 80.0 thousand tons
during the third quarter of fiscal 2000 from 12.8 thousand tons in the
prior-year quarter, primarily due to the inclusion of shipments by S&G Packaging
in the third quarter of fiscal 2000. Total mill
10
<PAGE> 13
production decreased by 3 percent to 4,234 tons per day (TPD, calculated on the
basis of the number of days in the period) during the third quarter of fiscal
2000 compared to 4,369 TPD in the prior-year quarter, primarily due to
market-related downtime. Quarter-over-quarter, containerboard production
decreased by 5 percent to 3,481 TPD from 3,647 TPD while unbleached kraft paper
production increased by 4 percent to 753 TPD from 722 TPD, over the prior-year
period. The increase in unbleached kraft paper production is due primarily to
increased integration from S&G Packaging.
Average net selling prices for corrugated products increased by 17 percent in
the third quarter of fiscal 2000 compared with the prior-year quarter. Average
net selling prices on sales to third parties for the Company's domestic
linerboard, export linerboard and unbleached kraft paper increased by 25
percent, 26 percent and 13 percent, respectively, in the third 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 of OCC and DLK increased by 91
percent and 45 percent, respectively, while the average delivered cost of wood
chips decreased by 9 percent in quarter-over-quarter comparison.
Selling and administrative costs were $30.3 million for the current quarter
compared to $25.3 million for the year-ago period. This increase was primarily
due to the inclusion of selling and administrative costs of S&G Packaging in the
consolidated results ($3.1 million) and management reorganization costs ($1.2
million).
Net interest expense increased to $23.1 million in the third quarter of fiscal
2000 from $21.6 million in the prior-year quarter due primarily to higher
average debt levels as a result of the assumption of $32.6 million of debt in
the acquisition of S&G Packaging during the first quarter of fiscal 2000, and
higher working capital requirements.
In the third quarter of fiscal 2000, due to improved operating results, the
Company recognized income tax expense of $0.2 million compared to a $5.0 million
tax benefit in the prior-year quarter. The effective tax rate was 38 percent in
the third quarter of fiscal 2000 and 1999.
11
<PAGE> 14
FIRST NINE MONTHS OF FISCAL 2000 COMPARED WITH FIRST NINE MONTHS OF FISCAL 1999.
Net sales for the first nine months of fiscal 2000 were $870.0 million compared
to net sales of $628.8 million for the first nine months of fiscal 1999.
Operating income for the current nine-month period was $63.4 million compared to
an operating loss of $2.0 million for the year-ago period. Net loss for the
current period totaled $2.1 million, or $0.04 per basic common share, compared
to a net loss of $42.4 million, or $0.79 per basic common share, for the
year-ago period.
In the first nine months of fiscal 2000, sales increased by approximately $132
million due to incremental volume, as a result of the S&G Packaging acquisition
and increased volume in the corrugated converting facilities. Higher average net
selling prices for all of the Company's paper products contributed approximately
$109 million in the period-over-period comparison.
Gross margin for the first nine months of fiscal 2000 increased to $149.1
million from $71.6 million in the prior-year period primarily due to higher
average net selling prices ($96 million, net of $13 million of higher
containerboard & kraft paper costs) and higher volume ($13 million) offset
somewhat by higher fiber costs ($28 million).
Corrugated shipments increased by approximately 3 percent in the first nine
months of fiscal 2000 to 11.6 billion square feet compared to 11.3 billion
square feet in the year-ago period, primarily as a result of increased demand.
Industrial and retail bag shipments increased to 223.9 thousand tons during the
first nine months of fiscal 2000 from 40.0 thousand tons in the prior-year
period primarily due to the inclusion of shipments by S&G Packaging in the
current period. Total mill production increased by 1 percent to 4,287 TPD during
the first nine months of fiscal 2000 compared to 4,225 TPD in the prior-year
period. Period over period, containerboard and unbleached kraft paper production
increased by 1 percent to 3,525 TPD from 3,498 TPD and by 5 percent to 762 TPD
from 727 TPD, respectively, over the prior-year period.
Average net selling prices for corrugated products increased by 17 percent in
the first nine months of fiscal 2000 compared with the prior-year period.
Average net selling prices on sales to third parties for the Company's domestic
linerboard, export linerboard and unbleached kraft paper increased by 35
percent, 27 percent and 24 percent, respectively, in the first nine months of
fiscal 2000 compared to the same period in the prior year.
Fiber costs increased due to higher average delivered costs for recycled fiber.
The average delivered cost of OCC and DLK increased by 79 percent and 71
percent, respectively, while the
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average delivered cost of wood chips decreased by 7 percent in
period-over-period comparison.
Selling and administrative costs were $85.7 million for the current period
compared to $73.6 million for the year-ago period. This increase was primarily
due to the inclusion of selling and administrative costs of S&G Packaging ($9.5
million) in the consolidated results and management reorganization costs ($1.2
million).
Net interest expense increased to $68.2 million in the first nine months of
fiscal 2000 from $63.7 million in the prior-year period 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 S&G
Packaging during the first quarter of fiscal 2000.
In the first nine months of fiscal 2000, due to improved operating results, the
Company recognized a tax benefit of $1.3 million compared to $26.3 million in
the prior-year period. The effective tax rate was 38 percent in the first nine
months of both fiscal 2000 and fiscal 1999.
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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 additional purchases of its common stock by the
terms of its bank credit agreement and public debt securities.
Net cash provided by operations for the first nine months of fiscal 2000 was
$12.5 million, compared with net cash used by operations of $40.2 million for
the year-ago period. Approximately $64 million of the favorable change was due
to improved operating results in the period-over-period comparison, offset
somewhat by increased working capital requirements ($10 million).
Cash flows used for investing activities increased in the first nine months of
fiscal 2000 to $28.2 million from $15.5 million in the year-ago period primarily
due to a $15.0 million increase in capital expenditures in the first nine months
of fiscal 2000 compared to the year-ago period. In the first nine months of
fiscal 1999, the Company incurred an $11.1 million liability for costs
associated with a capital project that was financed through a secured debt
obligation later in the fiscal year.
Cash flows from financing activities decreased to $18.4 million in the first
nine months of fiscal 2000 from $58.7 million in the year-ago quarter. The
decrease in cash flows from financing activities was primarily due to the
improved operating results described above. Financing activities in the fiscal
2000 nine-month period included the repayment of $32.6 million of S&G
Packaging's revolving loan facility by using funds available under the Company's
revolving credit agreements.
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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 nine months
of fiscal 2000, the Company incurred approximately $1.6 million of costs for
demolition and maintenance of the East Mill. Such costs were net of proceeds
from the sale of scrap. At June 30, 2000, approximately $0.6 million of spending
remained to complete the demolition work. Management expects to complete the
remaining demolition during fiscal 2000. At June 30, 2000, the balance sheet
reserve for demolition was approximately $0.6 million and the net book value of
the East Mill was $11.5 million.
In connection with the acquisition of S&G Packaging, the Company has allocated
approximately $3.1 million of the acquisition costs to purchase accounting
reserves relating to severance and closure costs associated primarily with the
integration of S&G Packaging's Corporate headquarters facility and the closure
of the S&G Packaging facility in Yulee, Florida. In the period from the date of
the acquisition, through June 30, 2000, amounts expended related to such costs
were $2.1 million. The balance of the related reserve at June 30, 2000,
including amounts recorded through operations in the first and second quarters
of fiscal 2000 in respect of the Company's pre-existing 35% ownership of S&G
Packaging, was $2.3 million. The majority of the remaining restructuring costs
will be expended over the next nine months.
LIQUIDITY
At June 30, 2000, the Company had cash and equivalents of $13.1 million, an
increase of $2.7 million from September 30, 1999, as cash provided by operating
and financing activities exceeded cash used for investments. Total debt
increased $50.5 million to $986.2 million at June 30, 2000 from $935.7 million
at September 30, 1999 as a result of increased revolver borrowings, primarily
due to repayment of the S&G Packaging revolving loan facility. At June 30, 2000,
the Company had $149 million of borrowings outstanding, and $90.5 million of
credit available under the revolving portions of its credit agreements.
At June 30, 2000, the Company had primary working capital (Trade receivables
plus Inventories less Trade payables) of $203.4 million, an increase of $42.7
million from September 30, 1999, mainly due to primary working capital acquired
with S&G Packaging.
Consolidation among major containerboard industry producers has resulted in the
reduction of domestic containerboard capacity. This rationalization, combined
with limited new containerboard
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capacity additions, stable domestic demand, and market related downtime has
resulted in relatively balanced industry supply/demand conditions. Published
industry prices for linerboard increased approximately 12% from December 1999 to
June 2000. During the third quarter of fiscal 2000, the Company implemented a
price increase for corrugated products and retail bags and sacks. Also during
the third fiscal quarter the Company took approximately 25,000 tons of mill
downtime, the vast majority of which was market-related. Depending upon market
conditions, the Company could accumulate, in the fourth quarter of fiscal 2000,
as much or more mill downtime, as it took in the third fiscal quarter.
The Company's average delivered costs of OCC and DLK increased by 32% and 12%
respectively, in the third quarter of fiscal 2000 compared to the second quarter
of fiscal 2000, while the average delivered cost of wood chips decreased by 6%
over the same period. Over the past several weeks the average delivered cost of
recycled fiber has been trending downward. Fiber markets are difficult to
predict; thus there can be no assurance of the future direction of wood chip,
OCC and DLK prices.
On August 4, 2000 the Company amended certain financial covenants for the period
ending September 2000 and beyond under its bank credit agreement to provide
substantial additional financial flexibility. In connection with the amendment,
the Company paid a one-time fee. The amendment also increased borrowing margins
on the term loan and revolving loan.
The Company has received commitments to refinance and expand its trade
receivables backed revolving credit facility. The refinancing, which is
currently scheduled to close before the end of August 2000, will extend the
facility to 2005 and will expand the facility to $125 million from $70 million.
Upon completion, the approximate availability is estimated to be $95 million.
The additional liquidity available under the facility, will be used for general
corporate purposes, including, but not limited to, repayment of the bank
revolver, working capital needs and capital expenditures. The Company will pay
a one-time fee and will incur an increase in the borrowing margin in connection
with the refinancing.
Based on current prices for converted products 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.
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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, SFAS 137, was
issued in July 1999, which defers by one year the effective date of SFAS 133 to
fiscal years beginning after June 15, 2000. A further amendment to SFAS 133,
SFAS 138, was issued on June 15, 2000, which amends certain accounting and
reporting standards of SFAS 133, for certain derivative instruments and hedging
activities. These statements will be adopted by the Company in fiscal 2001. The
Company is in the process of determining what effect, if any, these statements
will have on its results of operations or financial position.
YEAR 2000 ISSUE
---------------
Following the end of the Company's fiscal year in September 1999, the calendar
year in December 1999 and the passing of leap year 2000, the Company experienced
no major incidents related to the Year 2000 Issue, and does not expect to incur
any material additional costs related to this issue in the future.
------------------------------
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.
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PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings.
The Company is not a party to any legal proceedings other than
litigation incidental to normal business activities, except as
described in "Note 3 of Notes to Condensed Consolidated Financial
Statements." The Company believes the outcome of such litigation
will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
On April 18, 2000, Daniel P. Casey, formerly, Executive Vice President
and Chief Financial Officer was elected to the Board of Directors and
named Vice Chairman. Mr. Casey continues as Chief Financial Officer.
Concurrently, Dale E. Stahl resigned as the Company's President and
Chief Operating Officer, and the Board of Directors elected Michael J.
Keough to the position of President and Chief Operating Officer. Mr.
Keough was previously Vice President and General Manager, Container
Operations.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Number and Description of Exhibit
---------------------------------
4.1 Amendment No. 1 to the Gaylord Container Corporation 1997
Long-Term Equity Incentive Plan, incorporated by reference
to Exhibit 4.5 of the Registrant's Form S-8 Registration
Statement under the Securities Act of 1933, filed with the
Securities and Exchange Commission on April 6, 2000.
4.2 Amendment No. 2 to the Credit Agreement dated as of August 4,
2000. By and between the Registrant and Bankers Trust Company
as agent, and various lending institutions.
27.1 Financial Data Schedule - filed herein.
b) No reports on Form 8-K were filed for the quarter ended June
30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GAYLORD CONTAINER CORPORATION
Date: August 9, 2000 /s/ Marvin A. Pomerantz
-------------------------------------
Marvin A. Pomerantz
Chairman and Chief Executive Officer
Date: August 9, 2000 /s/ Jeffrey B. Park
--------------------------------------
Jeffrey B. Park
Vice President, Finance
(Principal Accounting Officer)
19
