-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QRav5CY16FPBNxNTrkmiMZzOHGcXrKzFv1kjh5fvHown2ZYz/jg3eMTLfX52zW7f jv2tMYLPee87RQbm0mn4/A== 0000922423-97-000279.txt : 19970407 0000922423-97-000279.hdr.sgml : 19970407 ACCESSION NUMBER: 0000922423-97-000279 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970404 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUR M CORP CENTRAL INDEX KEY: 0001018219 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD CONTAINERS & BOXES [2650] IRS NUMBER: 520822639 STATE OF INCORPORATION: MD FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-08043 FILM NUMBER: 97575328 BUSINESS ADDRESS: STREET 1: 115 STEVENS AVE CITY: VALHALLA STATE: NY ZIP: 10595 BUSINESS PHONE: 9147472600 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOX USA GROUP INC CENTRAL INDEX KEY: 0001018678 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 132994891 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-08043-01 FILM NUMBER: 97575329 BUSINESS ADDRESS: STREET 1: 115 STEVEN AVE CITY: VALHALIA STATE: NY ZIP: 10595 BUSINESS PHONE: 9147493200 MAIL ADDRESS: STREET 1: 115 STEVEN AVE CITY: VALHALIA STATE: NY ZIP: 10595 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUR M PAPER CORP CENTRAL INDEX KEY: 0001018679 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133739406 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-08043-02 FILM NUMBER: 97575330 BUSINESS ADDRESS: STREET 1: 115 STEVEN AVE CITY: VALHALIA STATE: NY ZIP: 10595 BUSINESS PHONE: 9147493200 MAIL ADDRESS: STREET 1: 115 STEVEN AVE CITY: VALHALIA STATE: NY ZIP: 10595 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAGE PACKAGING CORP CENTRAL INDEX KEY: 0001018681 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 930936895 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-08043-03 FILM NUMBER: 97575331 BUSINESS ADDRESS: STREET 1: 115 STEVEN AVE CITY: VALHALIA STATE: NY ZIP: 10595 BUSINESS PHONE: 9147493200 MAIL ADDRESS: STREET 1: 115 STEVEN AVE CITY: VALHALIA STATE: NY ZIP: 10595 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOX USA INC CENTRAL INDEX KEY: 0001018682 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133813536 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-08043-04 FILM NUMBER: 97575332 BUSINESS ADDRESS: STREET 1: 115 STEVEN AVE CITY: VALHALIA STATE: NY ZIP: 10595 BUSINESS PHONE: 9147493200 MAIL ADDRESS: STREET 1: 115 STEVEN AVE CITY: VALHALIA STATE: NY ZIP: 10595 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUR M MANUFACTURING GROUP OF GEORGIA INC CENTRAL INDEX KEY: 0001018683 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 231986917 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-08043-05 FILM NUMBER: 97575333 BUSINESS ADDRESS: STREET 1: 115 STEVEN AVE CITY: VALHALIA STATE: NY ZIP: 10595 BUSINESS PHONE: 9147493200 MAIL ADDRESS: STREET 1: 115 STEVEN AVE CITY: VALHALIA STATE: NY ZIP: 10595 10-K/A 1 AMENDMENT 2 TO FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-K/A2 FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTIONS 13 AND 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 WASHINGTON, D.C. 20549 ------------------------------------ AMENDMENT NO. 2 TO FORM 10-K/A FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTIONS 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [x] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from August 1, 1996 to December 31, 1996 Commission File Number: 333-8043 Four M Corporation (Exact name of Registrant as Specified in Its Charter) Maryland 52-0822639 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 115 Stevens Avenue 10595 Valhalla, New York 10595 (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: (914) 749-3200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None ----------- 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 31, 1997, there were no shares of voting stock of the registrant held by non-affiliates. As of March 31, 1997, registrant had 6,815,867 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part 1, Item 8: The Financial Statements for the period from May 30, 1996 to December 1, 1996, together with the Independent Auditors' Report for Florida Coast and the Financial Statements for the period from January 1, 1996 to May 30, 1996 and the two years ended December 31, 1995 and 1994 together with the Independent Auditors' Report for St. Joe Forest Products Company - Linerboard Mill Operations included in the Annual Report on Form 10-K for Florida Coast Paper Company, L.L.C., ("Florida Coast") (File No. 333-8023) ("Florida Coast 10-K") as filed with the Securities and Exchange Commission ("SEC") on March 31, 1997. FOUR M CORPORATION TRANSITION REPORT ON FORM 10-K/A2 TABLE OF CONTENTS PART I
Item 1. Business......................................................................................1 Item 2. Properties....................................................................................9 Item 3. Legal Proceedings............................................................................10 Item 4. Submission of Matters to a Vote of Security Holders..........................................10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................11 Item 6. Selected Financial Data......................................................................11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........13 Item 8. Financial Statements and Supplementary Data..................................................19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........19 PART III Item 10. Directors and Executive Officers of the Registrant...........................................20 Item 11. Executive Compensation.......................................................................22 Item 12. Security Ownership of Certain Beneficial Owners and Management...............................23 Item 13. Certain Relationships and Related Party Transactions.........................................23 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................24
Signatures PART I Item 1. BUSINESS General Four M Corporation (the "Company" or "Four M"), which operates under the trade name Box USA, believes that it is one of the largest independent full-service converters of corrugated packaging materials in North America. The Company, through its subsidiaries, operates 28 strategically located converting facilities, which sold 4.6 billion square feet of finished corrugated containers, partitions and sheets during the fiscal year ended July 31, 1996 ("Fiscal 1996") and during the five month period from August 1, 1996 to December 31, 1996 (the "1996 Transition Period"). The Company has developed and maintains long-standing customer relationships with leading consumer products and packaging companies including Avon, Clorox, Anchor Glass, Owens Illinois and Procter & Gamble. The Company also owns a paper mill at Ft. Madison, Iowa (the "Ft. Madison Mill") which produced 77,726 tons of corrugating medium during Fiscal 1996 and 31,699 tons of corrugating medium during the 1996 Transition Period, most of which was sold to third parties during such periods. See "Recent Developments." On May 30, 1996, the Company acquired (i) substantially all of the assets of St. Joe Container Company ("St. Joe Container"), which primarily consisted of 16 converting facilities and related working capital and (ii) through Florida Coast Paper Company, L.L.C. ("Florida Coast"), a joint venture (the "Mill Joint Venture") with Stone Container Corporation ("Stone Container"), a 50% interest in a 500,000 tons per year linerboard mill (the "St. Joe Mill") from St. Joe Forest Products Company ("St. Joe Forest"), an affiliate of St. Joe Container (collectively, the "Acquisition"). The Acquisition more than doubled the size of the Company to 28 converting facilities. The facilities of the Company and St. Joe Container utilize similar manufacturing equipment and production processes and operate with minimal geographic redundancy and no material customer overlap. Accordingly, the Company believes that the Acquisition creates opportunities to pursue continued growth in its business, utilize its purchasing power to achieve reductions in raw material costs, improve productivity and reduce operating expenses. In the 1996 Transition Period, the Company had net sales of $196.8 million, net loss of $2.2 million and EBITDA of $11.8 million. The Company was founded in 1966 as a manufacturer of corrugated partitions. From a single partition plant, the Company expanded initially through internal growth and later through 11 separate acquisitions involving 17 manufacturing facilities prior to the date of the Acquisition. The Company has historically targeted distressed properties and undermanaged assets to which the Company could significantly improve profitability. These strategic acquisitions have allowed the Company to (i) supply its partition plants with lower-cost corrugated sheets for conversion into interior packaging components, (ii) capture a portion of its partition customers' corrugated container business and (iii) diversify its customer base to include a broader variety of users of corrugated packaging materials. The Company's ability to target and successfully integrate acquisitions is reflected in an increase in average revenue per plant from $9.0 million in 1991 to $18.2 million in Fiscal 1996 while average annual production per plant has grown from 201.7 million square feet to 342.6 million square feet over the same period. During the 1996 Transition Period, the average revenue per plant was $16.3 million, and average production per plant was 397.6 million square feet. The Company has entered into a letter of intent to (i) acquire a 50% interest in a sheet plant and (ii) enter into a requirements and services agreement for total investment of $2.25 million The Company's strategy is to enhance its position as one of the largest independent full-service converters of corrugated packaging materials in North America. Fundamental elements of the Company's strategy include: o providing a full line of high-quality products o capitalizing on the Company's significant raw materials purchasing power o implementing cost-reduction manufacturing techniques and operating efficiency programs o responding quickly to customer needs and offering high levels of customer service o expanding the Company's penetration of national accounts and increasing the Company's share of existing customers' business 1 One of the Company's competitive advantages is its long-term relationships with many customers, some of which have been maintained for over 25 years. A second feature which distinguishes the Company from its competitors is the significant relationships it has established with its containerboard suppliers. The Company believes that it is the largest customer of its four primary raw material suppliers. As one of the largest purchasers of linerboard and corrugating medium in the industry, the Company believes that it has been able to purchase raw materials from its outside suppliers at prices below those reported in Pulp & Paper Week, an industry trade publication. Four M has no assets or independent business operations other than its ownership interest in its subsidiaries. Recent Developments The markets for corrugated packaging materials produced by the Company are generally subject to changes in industry capacity and cyclical changes in the economy, both of which can significantly impact the Company's profitability. The ability of the Company to sustain profitability during cyclical fluctuations in corrugating packaging material markets is dependent upon the Company's ability to maintain value-added margins (net sales less the cost of raw materials). For corrugating packaging material manufacturers, raw materials typically represent approximately 70% of the total of cost of goods sold. The ability of the Company to maintain value-added margins is a function of the speed with which the Company can pass along raw material cost increases to its customers or conversely, absorb reductions in raw materials prices. Historically, the Company has been able to sustain consistent value-added margins on a unit basis. Although prices for corrugated packaging products have declined due to an industry-wide excess of capacity, the Company has experienced growth in volume for such products. Thus, the Company believes that it is well positioned to benefit from any increase in prices for its products. The Ft. Madison Mill is experiencing a decline in prices for its products as a result of increased capacity in the industry and decreased demand for such products. This decline in demand and prices has had a negative impact on the financial results of the Company during the 1996 Transition Period. The Company has decided to shut down the Ft. Madison Mill on March 31, 1997 for an indefinite period of time. Operations at the Ft. Madison Mill will resume when market conditions warrant a resumption of production. In addition, Florida Coast is also experiencing a decline in prices for its products as a result of increased capacity in the industry and decreased demand for such products. As a result, Florida Coast has decided to shut down the St. Joe Mill on April 1, 1997 for an indefinite period of time until market conditions warrant a resumption of production. Pursuant to the Output Purchase Agreement, the Company is required to reimburse the St. Joe Mill for one-half of its fixed costs during the shut-down, including its debt service costs of approximately $1,763,000 per month. The Acquisition The Acquisition enabled the Company to increase its geographic coverage from nine to 17 states. As a result, the Company is able to serve new markets in the Midwest, Mid-Atlantic and the faster growing Southeast. While corrugated packaging plants typically serve customers within a 150-mile radius, the Company is generally able to extend its service area to a radius of approximately 250 miles. The Company believes that improved operating efficiencies have enabled it to overcome any incremental freight costs associated with its larger trading areas. The Company believes that the Acquisition, by expanding the Company's geographic coverage, will particularly benefit its national account sales program by enabling it to serve national accounts from St. Joe Container facilities in markets not previously covered by the Company. National accounts comprised approximately 20% of net sales for the Company in Fiscal 1996 and 18.0% in the 1996 Transition Period. In addition, the Company strives to operate its corrugator plants for three shifts per day, five days per week rather than the two shifts per day, five days per week operation of the St. Joe Container facilities in order to increase aggregate production at these facilities. The Company intends to utilize available capacity to increase production of corrugated sheets to supply sheet plants owned by third parties in the vicinity of the St. Joe Container facilities. The Company has focused on maximum utilization of available production capacity, minimization of waste and the development and implementation of financial controls and management systems. In addition, the Company believes it can eliminate certain duplicative functions and achieve efficiencies in manufacturing, administration and sales and marketing. Furthermore, the Company believes that it can reduce manufacturing costs by reducing waste at the St. Joe Container facilities. 2 Operations The Company operates three types of converting facilities: (i) corrugator plants which convert linerboard and corrugating medium into corrugated sheets and then convert the sheets into corrugated containers, (ii) sheet or specialty container plants which receive corrugated sheets from the Company's corrugator plants or external suppliers and then manufacture corrugated containers and displays and (iii) partition plants which receive corrugated sheets from the Company's corrugator plants or external suppliers and make corrugated interior packaging components. The Company also owns the Ft. Madison Mill, a paper mill which produces corrugating medium primarily for sale to third parties, and a 50% interest in the St. Joe Mill, which produces linerboard for sale to the Company and Stone Container. Both mills have been shut down for an indefinite period of time. See "Recent Developments." Corrugators Prior to the Acquisition, the Company operated five corrugator plants located in the Midwest, the Southeast and California. As a result of the Acquisition, the Company currently operates an additional 14 full-service corrugators located in the Southeast, Midwest, Mid-Atlantic and Texas. The Company supplies corrugated containers to national, regional and local accounts, which include companies in the food, household products, cosmetics, personal care, beverage, pharmaceutical, electrical and other machinery, and high-tech industries. The Company's corrugator plants are value-added container manufacturers, as well as suppliers of corrugated sheets to the Company's and third-parties' sheet and partition plants. During Fiscal 1996 and the 1996 Transition Period, the Company's corrugator plants produced approximately 5.2 billion and 4.9 billion square feet of corrugated sheets, respectively. The Company supplied approximately 85.7% of its own corrugated sheet requirements in Fiscal 1996 and purchased the remaining 14.3% in the marketplace from third parties, while in the 1996 Transition Period, the Company supplied approximately 86.0% of its own corrugated sheet requirements and the remaining 14.0% was purchased from other suppliers. The Company's corrugators convert mottled white linerboard, unbleached kraft linerboard and corrugating medium into corrugated sheets and containers. Mottled white containers are generally sold at a premium over kraft containers; however, the premium tends to cover the higher cost of mottled white linerboard without increasing operating margins at the container facilities. Approximately 89.9% of the corrugated materials produced in these facilities in Fiscal 1996 required unbleached kraft linerboard and the remaining 10.1% required mottled white linerboard. During the 1996 Transition Period, the Company's corrugators used unbleached kraft linerboard for approximately 92.9% of the corrugated materials produced by such plants and white mottled linerboard for the remaining 7.1%. Sheet Plants The Company's sheet plants convert corrugated sheets into specialty containers and point-of-sale displays. The Company operates one sheet plant in Ohio, one in Alabama, two in California and one in Florida. During Fiscal 1996, the Company's sheet plants produced approximately 543.2 million square feet of corrugated containers, accounting for approximately 16.4% of the Company's net sales. These plants produced approximately 295.4 million square feet of corrugated containers and accounted for approximately 9.9% of the Company's net sales in the 1996 Transition Period. The Alabama facility, which was acquired by the Company in the Acquisition, shipped approximately 68.1 million square feet of corrugated containers in Fiscal 1996 and 31.4 million square feet in the 1996 Transition Period. The Company's sheet plants typically operate on a two shifts per day, five days per week schedule. The Company operates the sheet plants for smaller production runs and specialized containers. The customers for these plants are primarily local and regional accounts. By serving different market segments, sheet plants allow the Company to operate in trading areas which overlap those of the corrugator plants without competing with the larger, integrated facilities. Partition Plants The Company believes that it is the largest producer of corrugated interior packaging components in the United States. The Company operates four free-standing partition plants in the Midwest and Southeast and supplies interior packaging components to major food, household products, and glass and plastic container producers. The Company also has partition manufacturing capability at two of its sheet plants. The Company maintains a leading position in the partition segment of the corrugated market by supplying national account, high-volume users such as Clorox, Anchor Glass and Owens Illinois. Output at the partition plants totaled approximately 402.4 million square feet in Fiscal 1996 and approximately 128.8 million square feet in the 1996 Transition Period. 3 Ft. Madison Mill The Company's paper mill in Ft. Madison, Iowa was acquired out of bankruptcy in January 1994. In 1993, the Ft. Madison Mill had a capacity of approximately 70,000 tons per year or 200 tons per day of corrugating medium. Actual production for 1993 was approximately 165 tons per day. Following the acquisition of the Ft. Madison Mill, the Company improved production by providing management leadership, supplying necessary working capital and initiating significant repairs. By the first quarter of 1995, the Ft. Madison Mill began to achieve record daily production levels, thereby lowering unit operating costs and increasing sales. In Fiscal 1996, the Ft. Madison Mill produced approximately 77,726 tons, and in the 1996 Transition Period, it produced approximately 31,699 tons, or 222 tons per day. The Ft. Madison Mill is currently capable of producing up to 80,000 tons per year of corrugating medium. The Ft. Madison Mill sells its output primarily to smaller, independent corrugated container manufacturers in the Midwest. In Fiscal 1996, the Ft. Madison Mill generated net sales of $21.9 million through sales of 59,035 tons of corrugating medium to third parties. In addition, the Ft. Madison Mill supplied 18,350 tons of corrugating medium for processing at the Company's corrugator plants. The Ft. Madison Mill sold approximately 23,285 tons of corrugating medium to third parties and provided approximately 8,414 tons of corrugating medium to the Company's corrugator plants in the 1996 Transition Period. The Ft. Madison Mill has the capability to process both wood fiber and recycled fiber. Recycled fiber utilized at the Ft. Madison Mill consists of double-lined kraft clippings. This flexibility in raw materials processing has enabled the Company to reduce the impact of fluctuations in raw material prices. Recycled fibers represented approximately 39% of the raw materials used by the Ft. Madison Mill in Fiscal 1996 and in the 1996 Transition Period. The Company benefited from lower recycled fiber costs during the 1996 Transition Period. The price of recycled fiber paid by the Ft. Madison Mill has declined from an average of approximately $205 per ton in August 1995 to an average of approximately $99 per ton as of December 31, 1996. During the 1996 Transition period, the Ft. Madison Mill experienced a decline in prices for corrugating medium as a result of increased capacity in the industry and decreased demand for such products. The Company will shut down the Ft. Madison Mill as of March 31, 1997 for an indefinite period of time. Operations at the Ft. Madison Mill will resume when market conditions warrant a resumption of production. The Company will satisfy its current obligations to third parties for corrugating medium from other sources. The Company estimates that its fixed costs for the Ft. Madison Mill during the shut-down will be approximately $115,000 per month. St. Joe Mill On May 30, 1996, Florida Coast, a joint venture of the Company and Stone Container (the "Joint Venture Partners"), acquired the St. Joe Mill for its strategic location and to fulfill a portion of the linerboard requirements of the corrugated container facilities of the Joint Venture Partners. The St. Joe Mill has two paper machines which are capable of producing an aggregate of approximately 500,000 tons of linerboard annually in a variety of grades and basis weights. Since 1990, approximately $148.0 million has been spent for the maintenance and modernization of the St. Joe Mill's plant, equipment and machinery and for environmental compliance. The St. Joe Mill's production presently is approximately 28% mottled white linerboard, a premium priced product, and 72% unbleached kraft linerboard. Under the Output Purchase Agreement, each of the Joint Venture Partners has agreed to purchase one-half of the St. Joe Mill's entire annual linerboard production, representing approximately one-third of the Company's total requirements, at a price that is $25 per ton below the price published in Pulp & Paper Week, under the section entitled "Price Watch: Paper and Paperboard," subject to a minimum purchase price, which price is intended to generate sufficient funds to cover cash operating costs, cash interest expense and maintenance capital expenditures. Management determined that it was probable that the Company would be required to pay additional amounts above market price for linerboard pursuant to the Output Purchase Agreement and established a reserve (the "Reserve") in the amount of $11.0 million for such purchases. The Reserve was subsequently increased to $20.2 million and was $17.9 million at December 31, 1996. The Company was required to pay Florida Coast an additional $4.0 million for its 50% share of the linerboard produced by the St. Joe Mill during 1996 Transition Period. The Company recorded a loss on joint venture contract of $1.7 million and utilized $2.3 of the Reserve during the 1996 Transition Period. Florida Coast has experienced a decline in prices for linerboard as a result of increased capacity in the industry and decreased demand for such products. Florida Coast has decided to shut down the St. Joe Mill as of April 1, 1997 for an indefinite period of time. Pursuant to the Output Purchase Agreement, the Company is required to reimburse the St. Joe Mill for one-half of its fixed costs during the shut-down, including its debt service costs of approximately $1,763,000 per month. The Company believes, in light of 4 current market conditions, that it can purchase linerboard from third parties during this shut-down and meet its financial obligations to the St. Joe Mill. Fibre Marketing Group In Fiscal 1996, the Company acquired a 50% interest in Fibre Marketing Group, LLC ("Fibre Marketing"), which procures and markets waste paper. Fibre Marketing acts as a broker for the sale and transportation of waste material from companies which generate waste, such as printers, paper converters and recycling processors, to paper mills. Fibre Marketing currently provides brokerage services to all of the Company's converting facilities. Fibre Marketing also owns and operates Fibre Processing Corporation, a waste paper processing company located in Edgemere, Maryland, which services sources of recyclable waste paper which are too small to utilize brokerage services. MannKraft Corporation In the 1996 Transition Period the Company acquired an additional 49% of the outstanding shares of common stock of MannKraft Corporation (the "MannKraft Acquisition") from Stone Container, increasing its ownership interest to 50%. MannKraft is a manufacturer of corrugated paper products, such as cartons and displays, which it sells primarily in New Jersey, southern New York, southeastern Connecticut and eastern Pennsylvania. Box USA of Florida, L.P. In the 1996 Transition Period, Four M Manufacturing Group of Georgia, Inc. acquired a 51% interest in Box USA of Florida, L.P. ("Florida, L.P."). Florida, L.P. operates a sheet plant in Jacksonville, Florida. Sales, Marketing and Customers Sales and Marketing The Company's products are primarily sold on a direct basis and, to a lesser degree, through the use of brokers. Currently, the Company generates approximately 90% of its business through direct sales and approximately 10% through brokers. The Company seeks to be a leader in customer service for the markets it serves by capitalizing on its marketing experience, technical expertise and manufacturing flexibility. The Company's corrugated packaging materials are typically manufactured to customer order. The Company believes that the strong integration between manufacturing, marketing and sales provides it with a competitive advantage by allowing it to respond favorably and quickly to changing customer demands. The Company prides itself on its sales oriented culture and its long-standing relationships with customers. The Company's senior executive officers personally handle a number of the larger accounts. Each of the Company's sales representatives receives training in product specifications and manufacturing techniques in order to satisfy customer requirements and maintain existing national and local account relationships. The Company emphasizes achieving sales efficiency by preserving existing relationships, having a thorough knowledge of customer requirements and being flexible and responsive to changing customer needs. The Company has focused on capturing market share by targeting a diverse customer base and offering a full product line within a given geographical area. The Company believes that the Acquisition has provided access to markets previously outside the Company's geographic service areas, as well as allowed it to expand relationships with existing customers which have packaging requirements within geographic areas serviced by the St. Joe Container facilities. The Company's sales and marketing system is supported by a centralized computer network. All sales are invoiced and entered into the computer network at the plant level. Sales information and data are accessible on a real-time basis from computer terminals at each plant and at the Company's executive offices. The Company's sales and marketing organization provides the Company with accurate and timely information on projected product demand, competitive activity in the marketplace and potential markets for new products and services. Customers In Fiscal 1996 and the 1996 Transition Period, the Company's largest customer accounted for approximately 7.1% and 2.5% of net sales, respectively. The top 10 customers accounted for approximately 21.8% and 12.7% of net sales during such periods. The Company typically has one-year, and in some cases multi-year, contracts with its national accounts. These contracts have 5 provisions which provide for price adjustments based on changes in the Company's raw material prices. Sales to national accounts accounted for approximately 20.0% of net sales in Fiscal 1996 and 18.0% of net sales in the 1996 Transition Period. Competition The markets in which the Company sells its products are highly competitive. Competitors of the Company's corrugators include large, integrated manufacturers with operations throughout the United States as well as small, independent converters with a regional or local focus. The Company competes by offering its customers high-quality products produced to the customers' specifications, rapid order turnaround, competitive pricing and high levels of customer service. The Company's sheet plants generally compete with independent regional and local sheet plants. Competitive factors include product quality, price, delivery time and customer service. The Company believes that its ready access to raw materials from its corrugator plants provides it with a competitive advantage over its non-integrated competitors. The market for corrugated partitions is mature. The primary competitors in the partition business are producers of solid fiber partitions. Solid fiber partitions have a price advantage over corrugated partitions due to lower raw material costs but are not as effective as corrugated partitions for protection of fragile products during shipment and storage. The Company competes with the solid fiber manufacturers by tailoring timing, manufacturing specifications and delivery requirements to individual customer needs. As consolidation among users of corrugated partitions has increased, the Company has continued to focus on aligning its manufacturing capabilities with individual customer needs to maintain its market share in the partition segment. In addition, the Company has utilized its relationships with its partition customers to increase sales of corrugated containers. Distribution Corrugated packaging materials generally are delivered by truck due to the large number of customers and demand for timely service. The dispersion of customers and the high bulk and low density and value of corrugated packaging materials make shipping costs a relatively high percentage of total costs. As a result, corrugated packaging material plants tend to be located close to customers to minimize freight costs. Generally, corrugated packaging material plants service an area within a 150-mile radius of the plant locations. Each of the Company's plants typically services a market within a 250-mile radius of the plant. The Company believes that improved operating efficiencies have enabled it to overcome any incremental freight costs associated with its larger trading areas. Raw Materials The Company's primary raw materials are linerboard and corrugating medium. Historically, over two-thirds of the Company's raw materials have been provided by Stone Container, Inland Container Corporation and Tenneco Packaging Inc. pursuant to long-term supply contracts. The Company has recently negotiated renewals of these contracts; two of them expire in March and July 2000, and the third contract expires in December 2002. The Company has also entered into an additional long-term supply contract with Georgia-Pacific Corporation which expires in January 2001. The contracts specify certain monthly and annual discounts to negotiated market prices, which are based on volumes purchased. The Company believes that alternate sources of raw materials are available. In Fiscal 1996, St. Joe Container bought a substantial amount of its linerboard from the St. Joe Mill. Under the Output Purchase Agreement, each of the Joint Venture Partners has agreed to purchase one-half of the St. Joe Mill's entire annual linerboard production, representing approximately one-third of the Company's total requirements, at a price that is $25 per ton below the price published in Pulp & Paper Week, under the section entitled "Price Watch: Paper and Paperboard," subject to a minimum purchase price, which price is intended to generate sufficient funds to cover cash operating costs, cash interest expense and maintenance capital expenditures. Pursuant to this minimum price provision, the Company was required to pay Florida Coast an additional $4.0 million for its share of the linerboard produced by the St. Joe Mill during the six-month period ended December 31, 1996. Florida Coast has experienced a decline in prices for linerboard as a result of increased capacity in the industry and decreased demand for such products. Florida Coast has decided to shut down the St. Joe Mill as of April 1, 1997 for an indefinite period of time. In light of current market conditions, the Company believes that it can purchase linerboard from third parties during the period the St. Joe Mill is shut down. The Ft. Madison Mill purchases its virgin fiber and its recycled fiber from several suppliers, including some suppliers of recycled fiber who are also customers of the Ft. Madison Mill. The Ft. Madison Mill does not typically enter into long-term supply contracts. 6 Environmental Matters The Company's operations are subject to environmental regulation by federal, state and local authorities in the United States. The Company believes that it is in substantial compliance with current federal, state and local environmental regulation. Unreimbursed liabilities arising from environmental claims, if significant, could have a material adverse effect on the Company's results of operations and financial condition. Furthermore, actions by federal, state and local governments concerning environmental matters could result in laws or regulations that could increase the cost of compliance with environmental laws and regulations. In November 1993, the EPA announced proposed regulations, known as the "cluster rules," that would require more stringent controls on air and water discharges from pulp and paper mills under the Clean Water Act and the Clean Air Act. Pulp and paper manufacturers have submitted extensive comments to the EPA on the proposed cluster rules in support of the position that requirements under the proposed regulations are unnecessarily complex, burdensome and environmentally unjustified. It cannot be predicted at this time whether the EPA will modify the requirements in the final regulations. Based on information presently available from the EPA, it is expected that the EPA will promulgate the final cluster rules in 1997. In addition, the Company anticipates that the earliest time for industry compliance with certain aspects of the regulations should not be prior to the last quarter of 1997, and that compliance with the remaining elements will be required by the end of 1999. The Company estimates that these regulations, if adopted as currently proposed, would require capital expenditures of approximately $1.5 million to $2.0 million by the Company with respect to the Ft. Madison Mill. The ultimate financial impact of the proposed regulations on the Company will depend on the nature of the final regulations, the timing of required implementation and the cost and availability of new technology. St. Joe Container, St. Joe Paper and St. Joe Forest (collectively, the "Paper Indemnitors") agreed to indemnify the Company for certain "On-Site Environmental Liabilities" (as defined in the Asset Purchase Agreement dated as of November 1, 1995 (the "Acquisition Agreement")) arising from conditions existing on the date of the closing of the Acquisition (the "Closing Date") and relating either to the St. Joe Mill or the St. Joe Container facilities. Pursuant to these provisions, (1) 100.0% of the first $2.5 million of such liability will be paid by the Company or the Mill Joint Venture, (2) 100.0% of the next $2.5 million by the Paper Indemnitors, (3) 100.0% of the next $2.5 million of such liability will be paid by the Company or the Mill Joint Venture, (4) 100.0% of the next $2.5 million of such liability will be paid by the Paper Indemnitors, (5) 100.0% of the next $2.5 million of such liability will be paid by the Company or the Mill Joint Venture and (6) 100.0% of the next $5.0 million of such liability will be paid by the Paper Indemnitors; provided that the conditions that give rise to such On-Site Environmental Liabilities are discovered and the Paper Indemnitors are notified not later than three years after the Closing Date and, subject to certain exceptions, remediation expenses are incurred within five years after the Closing Date. The Paper Indemnitors will have no responsibility to indemnify the Company or the Mill Joint Venture for expenses relating to On-Site Environmental Liabilities in excess of the foregoing or for any On-Site Environmental Liabilities discovered after the third anniversary of the Closing Date. The Company is solely responsible for On-Site Environmental Liabilities that arise from the acts or omissions of the Company after the Closing Date. In the event that On-Site Environmental Liabilities arise from acts or omissions which occurred both before and after the Closing Date, such liabilities will be allocated between the Paper Indemnitors, on the one hand, and the Company or the Mill Joint Venture, on the other hand, based on the relative contribution of the acts and omissions occurring in each time period to such On-Site Environmental Liabilities. St. Joe Paper and its affiliates, including St. Joe Container, have retained responsibility for "Off-Site Environmental Liabilities" (as defined in the Acquisition Agreement) that arise from conditions existing on the Closing Date. In the event Off-Site Environmental Liabilities arise from acts or omissions that occurred both before and after the Closing, such Liabilities will be allocated between the Paper Indemnitors, on the one hand, and the Company and the Mill Joint Venture, on the other hand, based on the relative contribution of the acts and omissions occurring in each time period to such Off-Site Environmental Liabilities. Should a condition exist that requires remediation costs to be incurred both within and without the boundaries of the real property, the costs for work within the boundaries will be deemed On-Site Environmental Liabilities, and the work outside such boundaries will be deemed Off-Site Environmental Liabilities. Subject to certain exceptions, On-Site Environmental Liabilities do not include liabilities that arise due to a change in any law or regulation becoming effective after November 1, 1995. Pursuant to the Indemnification Reimbursement Agreement between the Mill Joint Venture and the Company, the benefit of indemnification from the Paper Indemnitors with respect to such environmental liabilities will be allocated 80.0% to the Mill Joint Venture and 20.0% to the Company, with the Mill Joint Venture or the Company being obligated, under certain circumstances, to reimburse the other in the event either recovers more than its allocated share and the other recovers less. The obligations of the Paper Indemnitors with respect to On-Site Environmental Liabilities will terminate in the event that either the Company or the Mill Joint Venture undergoes a "change of control" (as defined in the Acquisition Agreement). Change of Control is defined to mean (i) a transaction in which any Person or Group (as defined in Rule 13d-5 of the Exchange Act) other than the "Principals" (as defined in the Acquisition Agreement) or the "Lenders" (as defined in the Acquisition Agreement) acquires 7 more than 50.0% of the total voting power of all classes of voting stock of the Company or the Mill Joint Venture, as the case may be, (ii) a transaction in which any Person or Group (as defined in Rule 13d-5 of the Exchange Act) other than the Principals or the Lenders has a sufficient number of nominees elected to constitute a majority of the Board of Directors of the Company or of the Board of Managers of the Mill Joint Venture, as the case may be, (iii) the sale of all or substantially all of the capital stock of the Company or the Mill Joint Venture, as the case may be, as an entirety or substantially as an entirety to any Person or Group (as defined in Rule 13d-5 of the Exchange Act) other than the Principals or the Lenders and (iv) the sale or transfer of all or substantially all of the assets of the Company or the Mill Joint Venture, as the case may be, as an entirety or substantially as an entirety to any Person other than the Principals or the Lenders. For purposes of the definition of Change of Control, "Principals" is defined as (1) Dennis Mehiel in the case of the Company, (2) the Company and Stone Container, in the case of the Mill Joint Venture, and (3) any subsidiary of Dennis Mehiel, the Company or Stone Container; and "Lenders" is defined as one or more institutional lenders which provide debt financing to the Company or the Mill Joint Venture as of the Closing. Pursuant to the Acquisition Agreement, St. Joe Container has completed, at its sole cost, remedial actions required for a former land application area at the container facility located in Laurens, South Carolina and remedial actions associated with two underground storage tanks at the container facility located in Chicago, Illinois. St. Joe Container has also agreed to reimburse the Company for up to $1.4 million of expenses incurred by the Company after the Closing Date to undertake certain identified environmental projects at several of the acquired container facilities. To date, the Company has spent approximately $100,000 in connection with these projects and expects that it will be reimbursed for these amounts from St. Joe Container. The indemnification provisions in the Acquisition Agreement are generally intended to be the exclusive remedies of the parties with respect to such agreements. Personnel As of December 31, 1996, the Company had 2,439 employees, of whom 1,769 were hourly employees and 670 were salaried employees. Of such employees, 559 were engaged in management and administrative functions, 111 were engaged in sales and marketing and 1,769 were engaged in manufacturing. One thousand three hundred and sixty-seven hourly employees at 20 Company facilities are members of unions under 21 separate contracts. One of these contracts is currently being renegotiated, one expires in 1997, ten expire in 1998, seven expire in 1999, one expires in 2000 and one expires in 2001. Management believes that its employee relations are good. 8 Item 2. PROPERTIES The Company owns or leases manufacturing properties having an aggregate floor space of approximately 4.7 million square feet. The table below provides summary information regarding the principal properties owned or leased by the Company. Approximate Leased Location Square Footage Type or Owned - -------- -------------- ---- -------- Birmingham, AL (1) 167,000 Corrugator Owned Compton, CA 135,000 Corrugator Leased Port St. Joe, FL (1)(2)(6) 142,000 Corrugator Leased Lake Wales, FL (1) 275,000 Corrugator Owned Stockbridge, GA (3) 160,000 Corrugator Leased Chicago, IL (1) 185,000 Corrugator Owned Hartford City, IN (1) 277,150 Corrugator Owned Louisville, KY (1) 240,000 Corrugator Owned Baltimore, MD (1) 220,000 Corrugator Owned Newark, NJ 180,000 Corrugator Owned Charlotte, NC (1) 170,000 Corrugator Owned Newark, OH 107,000 Corrugator Owned Eighty Four, PA 133,000 Corrugator Owned Pittsburgh, PA (1) 225,000 Corrugator Owned Laurens, SC (1) 180,000 Corrugator Owned Memphis, TN (1) 216,000 Corrugator Owned Dallas, TX (1) 187,000 Corrugator Owned Houston, TX (1) 157,000 Corrugator Owned Chesapeake, VA (1) 148,000 Corrugator Owned Dothan, AL (1) 31,000 Sheet Owned Montebello, CA (6) 90,000 Sheet (4) Leased San Leandro, CA 110,000 Sheet (4) Leased Jacksonville, FL 72,700 Sheet Leased Byesville, OH 60,000 Sheet Owned Jacksonville, FL (3) 69,000 Partition Leased Litchfield, IL 42,000 Partition Leased Portland, IN (3) 40,500 Partition Leased Bethesda, OH (3) 44,100 Partition Leased Ft. Madison, IA(6) 138,570 Mill Owned Valhalla, NY 16,000 Executive Offices Leased New York City, NY 3,500 Executive Offices Leased College Park, GA (1)(7) 167,000 Corrugator Owned Vernon, CA (5) 200,000 Sheet Owned North Brunswick, NJ (6) 107,220 Sheet Owned - ----------- (1) Properties acquired in the Acquisition. (2) Property net leased from the Mill Joint Venture for a nominal rental payment. (3) Properties owned, directly or indirectly, by Dennis Mehiel. See "Certain Relationships and Related Party Transactions." (4) Sheet plants which have the capability to produce partitions. (5) Acquired on June 4, 1996 by Box USA Group, Inc., a wholly-owned subsidiary of the Company for approximately $4.5 million. The Company has spent approximately $1.2 million for capital expenditures on this plant. Full operations are expected to commence during Fiscal 1997. (6) Inactive facilities. (7) Machinery and equipment sold in January 1997. The plant was net leased to the purchaser. 9 Item 3. LEGAL PROCEEDINGS From time to time, the Company is subject to legal proceedings and other claims arising in the ordinary course of its business. The Company maintains insurance coverage against claims in an amount which it believes to be adequate. The Company believes that it is not presently a party to any litigation, the outcome of which could reasonably be expected to have a material adverse effect on its financial condition or results of operations. On July 19, 1996, a civil action was filed in the Superior Court of Fulton County, Georgia (the "Suit") by Sid Dunken, individually and on behalf of D&M Partnership, a purported Georgia partnership, against Four M, Box USA Group, Inc., Four M Manufacturing Group of Georgia, Inc. and Dennis Mehiel. The complaint alleges that Dunken is entitled to an equity interest in Four M or in the alternative, $150,000,000 in compensatory damages, as well as punitive damages and attorneys' fees. On September 23, 1996, the Company filed an answer in response to the Complaint. The Company believes that the Suit is without merit. The Company intends to defend against the Suit vigorously and believes that it has adequate defenses. However, the Suit is in a very preliminary stage, and there can be no assurance that the outcome of the Suit will not be adverse to Four M. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the five month period covered by this report, no matter was submitted to a vote of security holders of the Company. 10 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for the Company's Common Stock. Dennis Mehiel, the Chairman of the Board of Directors and the Chief Executive Officer of the Company, is the sole shareholder of the Company's outstanding Common Stock. Item 6. SELECTED FINANCIAL DATA The following historical data have been derived from consolidated financial statements of the Company. The data as of and for the five months ended December 31, 1996 and the fiscal years ended July 31, 1996, 1995 and 1994 are derived from the consolidated financial statements of the Company audited by BDO Seidman, LLP, independent certified public accountants, whose report thereon is included elsewhere in this report. The data as of and for the fiscal years ended July 31, 1993 and 1992 are derived from the Company's consolidated financial statements audited by KPMG Peat Marwick LLP, independent certified public accountants, whose report is not included herein. The data as of and for the five months ended December 31, 1995 are unaudited, but in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) which the Company considers necessary for a fair presentation of the operating results for that period. The following data should be read in conjunction with the Company's consolidated financial statements, and related notes, "Management's Discussions and Analysis of Financial Condition and Results of Operations" and the other financial information included elsewhere herein. 11
Five Months Ended December 31, Fiscal Year Ended July 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1996 1995 1994 1993 1992 ---- ---- ----- ---- ----- ----- ----- (In thousands) Statement of Operation Data: Net sales .............................. $ 196,787 $ 95,614 $ 257,817 $ 271,994 $ 228,563 $ 214,936 $ 203,179 Cost of goods sold ..................... 171,304 81,119 222,105 232,154 205,025 192,208 178,189 --------- -------- --------- --------- --------- --------- --------- Gross profit ........................... 25,483 14,495 35,712 39,840 23,538 22,728 24,990 Selling, general and administrative expenses ............................... 17,707 6,320 19,217 19,703 22,018 21,813 23,663 --------- -------- --------- --------- --------- --------- --------- Income from operations ................. 7,776 8,175 16,495 20,137 1,520 915 1,327 Loss on joint venture contract ......... 1,668 -- -- -- -- -- -- Other income ........................... 425 2 -- 1,927 126 3,651 5,917 Interest expense ....................... 10,106 1,589 7,565 5,607 5,448 4,948 5,903 --------- -------- --------- --------- --------- --------- --------- Income (loss) before provision (benefit) for income taxes, minorit interest, cumulative effect of change in method of accounting and extraordinary gain on early retirement of debt ...... (3,573) 6,588 8,930 16,457 (3,802) (382) 1,341 Minority interest ...................... (87) -- -- (146) (180) -- 94 Cumulative effect in change in method of accounting for taxes on income . -- -- -- -- 381 -- -- Provision (benefit) for income taxes ... (1,486) 2,966 3,817 5,483 (325) 453 832 Extraordinary gain on early retirement of debt............................ -- -- -- 2,219 -- -- 321 --------- -------- --------- --------- --------- --------- --------- Net income (loss) ...................... $ (2,174) $ 3,622 $ 5,113 $ 13,047 $ (3,276) $ (835) $ 924 ========= ======== ========= ========= ========= ========= ========= Other Financial Data: Ratio of earnings to fixed charges(1) .. 0.7x 3.9x 2.0x 3.3x .5x 1.0x 1.1x EBITDA(2) .............................. $ 11,820 $ 9,469 $ 21,677 $ 25,382 $ 6,796 $ 6,209 $ 6,664 Net cash provided by (used for) operating activities(3) ........... (3,930) 1,127 27,060 (2,217) 4,794 8,860 3,615 Net cash provided by (used for) investing activities .............. (4,707) (221) (166,642) (1,975) (9,126) (4,135) 3,733 Net cash provided by (used for) financing activities .............. 10,257 (1,032) 139,167 3,518 5,182 (3,841) (8,336) Depreciation and amortization .......... 5,287 1,432 5,182 5,245 5,276 5,294 5,337 Capital expenditures ................... (6,721) (1,405) 8,612 3,690 3,916 3,935 2,862 Adjusted net sales(4) .................. 196,787 89,252 246,140 212,562 155,869 153,857 139,116 Adjusted EBITDA(4) ..................... 11,820 10,919 24,831 24,210 3,926 2,196 3,110 Five Months Ended December 31, Fiscal Year Ended July 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1996 1995 1994 1993 1992 ---- ---- ----- ---- ----- ----- ----- (In thousands) Balance Sheet Data: Working capital ........................ $ 45,849 $ 16,108 $ 37,590 $ 14,504 $ 8,903 $ 10,413 $ 11,573 Property, plant and equipment, net ..... 173,333 33,736 157,973 27,044 36,536 36,052 37,636 Total assets ........................... 303,645 76,322 263,809 73,137 93,933 79,716 85,744 Total long-term debt ................... 210,691 36,113 187,092 30,998 44,105 40,993 44,285 Stockholder's equity ................... 12,188 12,131 14,362 8,649 1,278 4,554 5,389 The accompanying footnotes, which are an integral part of this financial data, appear on the following page.
12 (1) For purpose of calculating the ratio of earnings to fixed charges, earnings consist of earnings (loss) before provision (benefit) for income taxes, minority interest and extraordinary gain on early retirement of debt plus fixed charges, and fixed charges consist of interest expense plus that portion of rental payments on operating leases deemed representative on the interest factor. (2) EBITDA represents income from operations before interest expense, provision (benefit) for income taxes and depreciation and amortization. EBITDA provides information regarding a company's ability to service and/or incur debt. EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operations or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. EBITDA is not intended to disclose excess funds available for reinvestments because other commitments and obligations exist, including, but not limited to, principal repayment obligations and lease commitments, that are not considered in the calculation of EBITDA. See Notes 12, 13 and 16 through 19 to the Company's financial statements. (3) Material differences between EBITDA and net cash provided by or used in operating activities may occur because of the inherent differences in each such calculation including (a) the change in operating assets and liabilities between the beginning and end of each period, as well as certain non-cash items which are considered when presenting net cash provided by or used in operating activities but are not used when calculating EBITDA and (b) interest expense, provision for income taxes and other income or expense which are included when presenting net cash provided by or used in operating activities but are not included in the calculation of EBITDA. EBITDA is a measure used as part of the covenants of the Credit Facility. (4) Adjusted to exclude the results of The Fonda Group, Inc. ("Fonda"), which was a subsidiary until March 1995, and the Flint, Michigan facility (the "Flint Facility") which was owned by Box USA Group, Inc. ("Box USA Group"), a wholly-owned subsidiary of the Company. On August 16, 1996, Box USA Group discontinued its operations at the Flint Facility and disposed of substantially all of the machinery and equipment, finished goods and work-in-progress inventory and certain related assets utilized at such facility. 13 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion and analysis should be read in conjunction with the financial statements of the Company and the notes thereto included elsewhere in this report. The Company manufacturers corrugated paper, rolled paper and other paper products such as cartons and displays. The markets for corrugated packing materials produced by the Company are generally subject to changes in industry capacity and cyclical changes in the economy, both of which can significantly impact the Company's profitability. The ability of the Company to sustain profitability during cyclical fluctuations in corrugating packaging material markets is dependent upon the Company's ability to maintain value-added margins (net sales less the cost of raw materials). For corrugated packaging material manufacturers, raw materials typically represent approximately 70.0% of the total cost of goods sold. The ability of the Company to maintain value-added margins is a function of the speed with which the Company can pass on raw material cost increases to its customers or conversely, absorb reductions in raw materials prices. Historically, the Company has been able to sustain consistent value-added margins on a unit basis. In addition, the Company also believes it has been able to mitigate raw material price increases at its converting facilities by entering into several long-term supply contracts. In addition to maintaining value-added margins, the Company has also focused on controlling costs through maximum utilization of available production capacity, the development and implementation of financial controls and management systems and minimization of waste. Direct costs of production at the Company's converting facilities have declined on a per unit basis from 1992 through the present. By controlling costs and maintaining value-added margins, together with adding to its manufacturing base through acquisitions completed in a cost effective manner, the Company has been able to increase its net sales from $36.3 million in Fiscal 1985 to 257.8 million in Fiscal 1996, to increase net income from $0.7 million to $5.1 million over the same period and to increase EBITDA from $2.6 million to $21.7 million over the same period. In the 1996 Transition Period, the Company had net sales of $196.8 million, net loss of $2.2 million and EBITDA of $11.8 million. On May 30, 1996, the Mill Joint Venture acquired the St. Joe Mill for its strategic location and to fulfill a portion of the linerboard requirements of the corrugated container facilities of the Mill Joint Venture Partners, each of which has committed to purchase one-half of the St. Joe Mill's output. The St. Joe Mill has two paper machines which are capable of producing approximately 500,000 tons of linerboard annually in a variety of grades and basis weights. Since 1990, approximately $148.0 million has been spent for the maintenance and modernization of the St. Joe Mill's plant, equipment and machinery and for environmental compliance. The St. Joe Mill's operations will be managed principally by personnel designated by Stone Container. The Company was required to pay Florida Coast an additional $4.0 million for its 50% share of the linerboard produced by the St. Joe Mill during the five-month period ended December 31, 1996. The Company recorded a loss on joint venture contract of $1.7 million and utilized $2.3 of the Reserve during the 1996 Transition Period. Prior to the consummation of the Acquisition, both of the St. Joe Mill's paper machines were shut down for maintenance and to reduce inventory, from April 17, 1996 through May 6, 1996, and in December 1995 and January 1996, one paper machine was shut down for the same reasons. Since the consummation of the Acquisition, both of the St. Joe Mill's paper machines were shut down in July 1996 for annual maintenance. Florida Coast has experienced a decline in prices for linerboard as a result of increased capacity in the industry and decreased demand for its products. Florida Coast has decided to shut down the St. Joe Mill as of April 1, 1997 for an indefinite period of time until market conditions warrant a resumption of production. During the 1996 Transition Period, the Ft. Madison Mill experienced a decline in prices for corrugating medium as a result of increased capacity in the industry and decreased demand for such products. As a result of this decline in prices and demand, the Company shut down the Ft. Madison Mill as of March 31, 1997 for an indefinite period of time. Operations at the Ft. Madison Mill will resume when market conditions warrant resumption of production. The Company will satisfy its current obligations to third parties for corrugating medium from other sources. In December 1996, the Company changed its fiscal year end from July 31 to December 31. This report includes the five month period from August 1, 1996 to December 31, 1996 as a transitional period. 14 Summary Sales Table
Five Months Ended December 31, Fiscal Year Ended July 31, ------------------------------------- ------------------------------------------------------- 1996 1995 1996 1995 1994 ----------------- ----------------- ---------------- --------------- ---------------- (in millions) Percent Percent Percent Percent Percent of Net of Net of Net of Net of Net Amount Sales Amount Sales Amount Sales Amount Sales Amount Sales ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Net sales ....................... $ 196.8 100.0% $ 95.6 100.0% $ 257.8 100.0% $ 272.0 100.0% $ 228.6 100.0% Cost of goods sold .............. 171.3 87.0 81.1 84.8 222.1 86.2 232.2 85.4 205.0 89.7 Gross profit .................... 25.5 13.0 14.5 15.2 35.7 13.8 39.8 14.6 23.6 10.3 Selling, general and administrative expenses .... 17.7 9.0 6.3 6.6 19.2 7.4 19.7 7.2 22.0 9.6 Income from operations .......... 7.8 4.0 8.2 8.6 16.5 6.4 20.1 7.4 1.6 0.7 Loss on joint venture contract ................... 1.7 0.9 -- -- -- -- -- -- -- -- Other income .................... 0.4 0.9 -- -- -- -- 2.0 0.7 0.1 0.1 Interest expense ................ 10.1 5.1 1.6 1.7 7.6 2.9 5.6 2.1 5.5 2.4 ------ ----- ----- ----- ------ ----- ------ ----- ------ ----- Income (loss) before provision (benefit) for income taxes, minority interest and extraordinary gain on early retirement of debt ........ (3.6) (1.8) 6.6 6.9 8.9 3.5 16.5 6.1 (3.8) (1.6) Provision (benefit) for income taxes ............... (1.5) (0.1) 3.0 3.1 3.8 1.5 5.5 2.0 (0.3) (0.1) ------ ----- ----- ----- ------ ----- ------ ----- ------ ----- Net income (loss) before minority interest and extraordinary gain on early retirement of debt ... $ (2.1) (1.1)% $ 3.6 3.8% $ 5.1 2.0% $ 11.0 4.1% $ (3.5) (1.5)% ====== ===== ===== ===== ====== ===== ====== ===== ====== =====
1996 Transition Period Compared to the Five Month Period Ended December 31, 1995 The Company's net sales increased $101.2 million, or 105.9%, to $196.8 million in the 1996 Transition Period compared to $95.6 million in the five month period from August 1, 1995 to December 31, 1995 (the "1995 Period"). Net sales for the Company's converting operations increased $110.3 million, or 137.4%, to $190.7 million in the 1996 Transition Period compared to $80.3 million in the 1995 Period primarily as a result of the Acquisition and the MannKraft Acquisition which was partially offset by lower average selling prices during the 1996 Transition Period. Net sales at the Ft. Madison Mill decreased $9.2 million, or 60.0%, to $6.1 million in the 1996 Transition Period compared to $15.3 million in the 1995 Period due to a 54.1% decrease in price per ton to $262 in the 1996 Transition Period from $461 in the 1995 Period. The Company's cost of goods sold as a percentage of net sales increased to 87.0% for the 1996 Transition Period from 84.8% in the 1995 Period primarily as a result of the decrease in sales price per ton incurred at the Ft. Madison Mill which was partially offset by a decrease in cost of goods sold as a percentage of net sales at the converting facilities. Cost of goods sold at the Company's converting operations decreased as a percentage of net sales to 86.4% in the 1996 Transition Period from 89.1% in the 1995 Period, whereas cost of goods sold at the Ft. Madison Mill increased as a percentage of net sales to 105.7% in the 1996 Transition Period from 62.1% in the 1995 Period primarily as a result of the 54.1% decrease in selling prices per ton. Gross profit increased $11.0 million, or 75.9 %, to $25.5 million in the 1996 Transition Period from $14.5 million in the 1995 Period primarily a result of the Acquisition and the MannKraft Acquisition. As a percentage of net sales, gross profit decreased to 13.0% in the 1996 Transition Period compared to 15.2% in the 1995 Period primarily as a result of the net loss incurred at the Ft. Madison Mill. Gross profit as a percentage of net sales for the Company's converting operations increased to 13.5% in the 1996 Transition Period compared to 10.8% in the 1995 Period. Selling, general and administrative expenses increased $11.4 million, or 181.0%, to $17.7 million in the 1996 Transition Period from $6.3 million in the 1995 Period, primarily as a result of the Acquisition and the MannKraft Acquisition. Selling, general and administrative expenses as a percent of net sales increased to 9.0% in the 1996 Transition Period from 6.6% in the 1995 Period. This increase is primarily a result of a decrease in paper prices. 15 Loss on joint venture contract was $1.7 million in the 1996 Transition Period. Operating income decreased $0.4 million, or 4.9%, to $7.8 million in the 1996 Transition Period from $8.2 million in the 1995 Period, primarily as a result of a decrease in selling price per ton. Interest expense was $10.1 million in the 1996 Transition Period compared to $1.6 million in the 1995 Period. This increase is primarily a result of the issuance of the Company's 12% Senior Secured Notes due 2006 in connection with the Acquisition. An income tax benefit of $1.5 million was recorded in the 1996 Transition Period as compared to a provision of $3.0 million in the 1995 Period. This change is related to the decrease in income before taxes. The effective tax rate in the 1996 Transition Period was 41.6% compared to 45.5% in the 1995 Period. This decrease was primarily due to a gain on the sale of one of the Company's subsidiaries in the 1995 Period. Fiscal 1996 Compared to Fiscal 1995 The Company's net sales decreased $14.2 million, or 5.2%, to $257.8 million in Fiscal 1996 compared to $272.0 million in the twelve month period ended July 31, 1995 ("Fiscal 1995"). Net sales for the Company's converting operations increased $39.9 million, or 20.4%, to $235.9 million in Fiscal 1996 compared to $196.0 million in Fiscal 1995 primarily as a result of the Acquisition, which increased sales by $44.8 million, or 22.8%. This increase was partially offset by the effect of the sale in August 1995 by the Companmy of its equity interest in Timberline Packaging, Inc. ("Timberline"), a converting facility which accounted for $1.2 million, or 0.5%, of net sales for Fiscal 1996 compared to $13.6 million, or 5.0%, for Fiscal 1995. Net sales at the Ft. Madison Mill decreased $11.7 million, or 34.8%, to $21.9 million in Fiscal 1996 compared to $33.6 million in Fiscal 1995 due to a 16.1% decrease in price per ton to $371.47 in Fiscal 1996 from $442.67 in Fiscal 1995. The Company's net sales decreased by $42.4 million, or 15.6%, in Fiscal 1996 due to the spinoff of Fonda in March 1995. The Company's cost of goods sold as a percentage of net sales increased to 86.2% for Fiscal 1996 from 85.4% in Fiscal 1995. Cost of goods sold at the Company's converting operations increased as a percentage of net sales to 88.0% in Fiscal 1996 from 87.6% in Fiscal 1995 primarily as a result of a shift in product mix in Fiscal 1996. Cost of goods sold at the Ft. Madison Mill increased as a percentage of net sales to 74.3% in Fiscal 1996 from 73.2% in Fiscal 1995 primarily as a result of a decrease in selling prices per ton. Gross profit decreased $4.1 million, or 10.3%, to $35.7 million in Fiscal 1996 from $39.8 million in Fiscal 1995. As a percentage of net sales, gross profit decreased to 13.8% in Fiscal 1996 compared to 14.6% in Fiscal 1995. Gross profit as a percentage of net sales for the Company's converting operations decreased to 12.0% in Fiscal 1996 compared to 12.4% in Fiscal 1995. Gross profit as a percentage of net sales for the Ft. Madison Mill increased to 25.7% in Fiscal 1996 compared to 26.8% in Fiscal 1995. Selling, general and administrative expenses decreased $0.5 million, or 2.5%, to $19.2 million in Fiscal 1996 from $19.7 million in Fiscal 1995. The decrease is primarily a result of the elimination of Fonda's expenses after March 1995, partially offset by the addition of St. Joe expenses for June and July 1996. Selling, general and administrative expenses as a percent of net sales remained flat in Fiscal 1996 and Fiscal 1995. Operating income decreased $3.6, or 31.9%, to $16.5 million in Fiscal 1996 from $20.1 million in Fiscal 1995, primarily as a result of the spin-off of Fonda, the sale of the Company's interest in Timberline and a decrease in selling price per ton. Income taxes decreased $1.7 million to $3.8 million in Fiscal 1996 compared to $5.5 million in Fiscal 1995. This decrease in the provision for income taxes is related to the decrease in income before taxes. Fiscal 1995 Compared to Fiscal 1994 The Company's net sales increased $43.4 million, or 19.0%, to $272.0 million in Fiscal 1995 compared to $228.6 million in Fiscal 1994. Net sales for the Company's converting operations increased $40.6 million, or 26.1%, to $196.0 million in Fiscal 1995 compared to $155.4 million in Fiscal 1994 primarily as a result of an increase in average price per thousand square feet sold to $51.66 in Fiscal 1995 from $40.90 in Fiscal 1994 with volume remaining virtually flat at 3,794 million square feet sold compared to 3,799 million square feet sold. Net sales at the Ft. Madison Mill increased $22.3 million, or 197.3%, to $33.6 million in Fiscal 1995 compared to $11.3 million in Fiscal 1994 primarily as a result of net sales in Fiscal 1994 reflecting only five full months of 16 operations of the Ft. Madison Mill, which was acquired by the Company in January 1994, and by a 48.6% rise in the average price per ton sold of corrugating medium to $442.67 in Fiscal 1995 from $297.98 in Fiscal 1994. Volume at the Ft. Madison Mill increased to 75,872 tons sold in Fiscal 1995 from 38,029 tons sold in Fiscal 1994. The increase in net sales from the Company's converting and mill operations was partially offset by a decrease of $19.4 million, or 31.4%, in Fonda's net sales to $42.4 million in Fiscal 1995 from $61.8 million in Fiscal 1994, resulting from the elimination of four months of operations following the spin-off of Fonda in March 1995. The Company's cost of goods sold as a percentage of net sales improved to 85.4% in Fiscal 1995 compared to 89.7% in Fiscal 1994. Cost of goods sold as a percentage of net sales at the Company's converting facilities improved to 87.1% in Fiscal 1995 compared to 91.2% in Fiscal 1994. This improvement was primarily a result of a decrease in labor costs to 10.3% of net sales in Fiscal 1995 from 13.8% of net sales in Fiscal 1994 and reductions in other major components of manufacturing costs as a percentage of net sales. Cost of goods sold as a percentage of net sales at the Ft. Madison Mill improved to 73.2% in Fiscal 1995 from 99.1% of net sales for the initial five months of ownership ended July 31, 1994. The improved performance at the Ft. Madison Mill was primarily a result of improved value-added margins which resulted from the 48.6% increase in average price per ton sold of corrugating medium partially offset by a 24.7% increase in raw material costs per ton sold. Manufacturing costs per ton (excluding raw materials used at the Ft. Madison Mill) decreased to $169 per ton in Fiscal 1995, or 1.7%, from $172 per ton sold in Fiscal 1994. Gross profit increased $16.3 million, or 69.4%, to $39.8 million in Fiscal 1995 from $23.5 million in Fiscal 1994, primarily as a result of the reduction in the cost of goods sold as a percentage of net sales to 85.4% from 89.7% during this period. Gross profit as a percentage of net sales for the Company's converting operations increased to 12.4% in Fiscal 1995 compared to 8.8% in Fiscal 1994. Gross profit as a percentage of net sales for the Ft. Madison Mill improved to 26.8% in Fiscal 1995 compared to 0.9% in Fiscal 1994. Selling, general and administrative expenses decreased $2.3 million, or 10.5%, to $19.7 million in Fiscal 1995 from $22.0 million in Fiscal 1994 due, in part, to the elimination of Fonda's expenses subsequent to March 1995. Selling, general and administrative expenses as a percentage of net sales were 7.2% in Fiscal 1995 compared to 9.6% in Fiscal 1994. This decrease was primarily a result of a reduction in certain selling, legal, insurance and other costs at the Company's converting facilities. Operating income increased $18.6 million to $20.1 million in Fiscal 1995 from $1.5 million in Fiscal 1994. This increase was attributable to a 26.1% increase in net sales in the Company's converting operations and a 13.2% improvement in value-added margin for the Company's converting operations, as well as a reduction in overall selling, general and administrative expenses primarily as a result of the exclusion of Fonda after March 1995. Other income increased $1.8 million to $1.9 million in Fiscal 1995 compared to $0.1 million in Fiscal 1994. This increase was due to a gain on the sale of the assets of the Company's fiber partitions division. Income taxes increased $5.8 million to $5.5 million in Fiscal 1995 compared to a tax benefit in Fiscal 1994 of $0.3 million. This increase was directly related to the change in income before taxes. Liquidity and Capital Resources Historically, the Company has relied on cash flows from operations and bank borrowing to finance its working capital requirements and capital expenditures. Net cash used for operating activities was $3.9 million in the 1996 Transition Period compared to net cash provided by operating activities of $1.1 million in the 1995 Period. This decrease in cash flow was primarily a result of the Company's reduction in earnings during the 1996 Transition Period. Net cash provided by operating activities for Fiscal 1996 was $27.1 million compared to net cash used for operating activities of $2.2 million for Fiscal 1995. Cash provided by operating activities in Fiscal 1996 was driven by net income of $5.1 million for the period and a $14.1 million reduction in the level of accounts receivable and inventory which was offset by a $7.1 million reduction in accounts payable and accrued liabilities. Net cash used for operating activities was $2.2 million for Fiscal 1995 compared to net cash provided by operating activities of $4.8 million in Fiscal 1994. The period-to-period change was due primarily to the net changes related to the exclusion of Fonda after March 1995. Net cash used for investing activities was $4.7 million in the 1996 Transition Period compared to $0.2 million in the 1995 Period. This increase was due principally to capital expenditures and the Company's investment in MannKraft, which was partially 17 offset by the receipt of the final purchase price adjustment by St. Joe in connection with the Acquisition and the sale of certain assets located at the Flint, Michigan facility. Net cash used for investing activities was $166.6 million for Fiscal 1996 compared to $2.0 million for Fiscal 1995. This increase was principally the result of the financing raised for the Acquisition and an increase in capital expenditures. The Company's net cash used for investing activities decreased to $2.0 million in Fiscal 1995 compared to $9.1 million for Fiscal 1994. The decrease was principally the result of the acquisition by the Company in January 1994 of three converting facilities and the Ft. Madison Mill for $5.3 million (the "CPC Acquisition"). Net cash provided by financing activities was $10.3 million in the 1996 Transition Period compared to net cash used for financing activities of $1.0 million in the 1995 Period. This increase was due primarily to borrowings by the Company pursuant to the Credit Facility which were used to fund capital expenditures and working capital needs. This increase was partially offset by the prepayment of certain long-term debt. Net cash provided by financing activities was $139.2 million in Fiscal 1996 compared to net cash provided by financing activities of $3.5 million in Fiscal 1995. The increase was primarily a result of the net proceeds received from the sale of the Company's 12% Series A Senior Secured Notes due 2006 (the "Notes") and borrowings under the Company's Credit Facility. In Fiscal 1996 net cash provided by financing activities was used to repay $16.1 million under a credit facility, $10.0 million of term loans, $2.1 million of subordinated debt and the balance for other debt. Capital expenditures for the 1996 Transition Period were $6.7 million compared to $1.4 million in the 1995 Period. Capital expenditures for Fiscal 1996 were $8.6 million compared to $3.7 million for Fiscal 1995. These increases were primarily a result of equipment purchases for and rehabilitation of certain property at a facility in Vernon, California. The Company has implemented a target capital expenditure program with annual capital expenditures totaling approximately $17.0 million for 1997. The Company intends to finance capital expenditures primarily through operating cash flow. On May 30, 1996, the Company established a Credit Facility which will mature in 2001. The Credit Facility provides total borrowing of up to $80.0 million on a revolving basis, subject to borrowing base limitations, to finance the Company's working capital needs. Unused borrowing base availability must be at least $5.0 million. On December 31, 1996, the Company had unused borrowing capacity of approximately $30.6 million under the Credit Facility. Pursuant to the Credit Facility, the Company is subject to certain affirmative and negative covenants customarily found in agreements of this type, including, without limitation, covenants that restrict, subject to specified exceptions (i) mergers, consolidations, asset sales or changes in capital structure, (ii) creation or acquisition of subsidiaries, (iii) purchase or redemption of the Company's capital stock or declaration or payment of dividends or distributions on such capital stock, (iv) incurrence of additional indebtedness, (v) investment activities, (vi) capital expenditures, (vii) granting or incurrence of liens to secure other indebtedness, (viii) prepayment or modification of the terms of subordinated indebtedness and (ix) transactions with affiliates. In addition, the Credit Facility requires that the Company maintain certain specified financial covenants, including, without limitation, a minimum tangible net worth, a minimum interest coverage ratio, a maximum funded debt to EBITDA ratio and a minimum fixed charge coverage ratio. At December 31, 1996, the Company was in compliance with these covenants, as amended. On February 28, 1997, the Credit Facility was amended and Florida, L.P. was made an additional borrower thereunder. The sole general partner of Florida, L.P. is Four M Manufacturing Group of Georgia, Inc., one of the guarantors of the Notes. In addition, the Company will provide, if needed, the Mill Joint Venture with up to $10.0 million of subordinated indebtedness on a revolving credit basis (the "Subordinated Credit Facility"). At December 2, 1996, the Mill Joint Venture drew down on the Subordinated Credit Facility in the amount of $2.0 million ($1.0 million of which was funded by the Company) to supplement its cash flow in order to meet its 1996 debt service requirements. The Mill Joint Venture currently has availability of $10.0 million from each Joint Venture Partner under the Subordinated Credit Facility. On May 30, 1996 (i) the Company acquired substantially all of the assets of St. Joe Container and (ii) the Company and Stone Container through the Mill Joint Venture acquired the St. Joe Mill. The purchase price for the St. Joe Container facilities was $87.8 million for the fixed assets, plus approximately $69.7 million for working capital, for a total purchase price of $157.5 million, subject to adjustment for changes in working capital. The purchase price for the St. Joe Mill was $185.0 million for the fixed assets, plus approximately $17.4 million for working capital, for a total purchase price of $202.4 million, subject to adjustment for changes in working capital. In July 1996, the Company and Florida Coast received monies as purchase price adjustments. Approximately $13.8 million was paid to the Company. In December 1996, St. Joe paid approximately $5.2 million as final payment for the purchase price adjustment. The Company acquired a 50% equity interest in the Mill Joint Venture for $5.0 million. The Acquisition was funded by the sale of the Notes and borrowings under the Credit Facility. 18 Pursuant to the Output Purchase Agreement, the Company was required to pay Florida Coast an additional $4.0 million for its share of the linerboard produced by the St. Joe Mill during the six-month period ended December 31, 1996. The Company recorded a loss on joint venture contract of $1.7 million and utilized $2.3 of the Reserve during the 1996 Transition Period. Although there can be no assurance, the Company believes that cash generated by operations together with amounts available under the Credit Facility, will be sufficient to meet its capital expenditure needs, debt service requirements and working capital needs for the next twelve months. Impact of Inflation A period of rising prices will affect the Company's cost of production and, in particular, the Company's raw material costs. Since the Company's business is a margin business, the impact of increased costs on the Company will depend upon the Company's ability to pass on such costs to its customers. The Company is typically able to pass on a significant portion of its increased raw material costs in a timely fashion. From time to time, however, there is a lag in passing on price adjustments which creates a temporary margin contraction in a rising price environment. Historically, the Company has been able to recover fully from the impact of rising prices over a short period of time. Environmental Matters The Company's operations are subject to environmental regulation by federal, state and local authorities in the United States. The Company believes that it is in substantial compliance with current federal, state and local environmental regulation. Unreimbursed liabilities arising from environmental claims, if significant, could have a material adverse effect on the Company's results of operations and financial condition. Furthermore, actions by federal, state and local governments concerning environmental matters could result in laws or regulations that could increase the cost of compliance with environmental laws and regulations. In November 1993, the EPA announced proposed regulations, known as the "cluster rules," that would require more stringent controls on air and water discharges from pulp and paper mills under the Clean Water Act and the Clean Air Act. Pulp and paper manufacturers have submitted extensive comments to the EPA on the proposed cluster rules in support of the position that requirements under the proposed regulations are unnecessarily complex, burdensome and environmentally unjustified. It cannot be predicted at this time whether the EPA will modify the requirements in the final regulations. Based on information presently available from the EPA, it is expected that the EPA will promulgate the final cluster rules in 1997. In addition, the Company anticipates that the earliest time for industry compliance with certain aspects of the regulations should not be prior to the last quarter of 1997, and that compliance with the remaining elements will be required by the end of 1999. The Company estimates that these regulations, if adopted as currently proposed, would require capital expenditures of approximately $1.5 million to $2.0 million by the Company with respect to the Ft. Madison Mill. The ultimate financial impact of the proposed regulations on the Company will depend on the nature of the final regulations, the timing of required implementation and the cost and availability of new technology. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and notes thereto are presented under item 14 of this report. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 19 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the directors and executive officers of the Company. Name Age Position Dennis Mehiel 55 Chairman, Chief Executive Officer and Director Chris Mehiel 57 Executive Vice President, Chief Operating Officer and Director Timothy D. McMillin 54 Senior Vice President, Chief Financial Officer and Director Gerald K. Adams 43 Chief Executive Officer of Box USA Group, Inc. Harvey L. Friedman 55 Corporate Secretary and General Counsel Howard Brainin 67 Regional Vice President Lawrence A. Bishop 52 Director Samuel B. Guren 50 Director Thomas Uleau 52 Director James Armenakis 53 Director John Nevin 62 Director Dennis Mehiel, a co-founder of the Company, has been the Chairman and Chief Executive Officer of the Company, except during a leave of absence from April 1994 through July 1995, since 1977. He was also the Chief Executive Officer of the Company's subsidiary, Box USA Group, Inc., until June 1996. He is also the Chairman of the Executive Committee of the Company's Board of Directors. Mr. Mehiel is also the Chairman of Fonda and the MannKraft Corporation, a corrugated container manufacturer ("MannKraft"). Chris Mehiel, the brother of Dennis Mehiel, is a co-founder of the Company and has been Executive Vice President, Chief Operating Officer and a Director of the Company since September 1995. Mr. Mehiel was President of Fibre Marketing Group, Inc., a waste paper recovery business which he co-founded, from 1994 to January 1996. He is the President of the managing member of Fibre Marketing Group, LLC, the successor to Fibre Marketing Group, Inc. From 1993 to 1994, Mr. Mehiel served as President and Chief Operating Officer of MannKraft Corporation, a corrugated container manufacturer affiliated with the Company. From 1982 to 1992, Mr. Mehiel served as the President and Chief Operating Officer of Specialty Industries, Inc., a waste paper processing and container manufacturing company. Timothy D. McMillin has been a Director of the Company since 1983 and Senior Vice President and Chief Financial Officer since September 1995. From November 1994 to September 1995, he was Chairman of Executive Advisors, Inc., a consulting firm specializing in financial restructuring. From 1991 to 1994, Mr. McMillin was an independent strategic and financial consultant. Mr. McMillin spent over 25 years in the financial services industry and served in various capacities, including Executive Vice President, at Maryland National Bank, from 1965 to 1990. Mr. McMillin is a Director of EIL Instruments, Inc., a manufacturer and distributor of testing, measurement and energy control systems. Mr. McMillin is a member of the Audit Committee of the Company's Board of Directors. Gerald K. Adams became Chief Executive Officer of the Company's subsidiary, Box USA Group, Inc., in June 1996. From March 1992 to March 1996, he was Chief Executive Officer of Amcor Fibre Packaging Group, a corrugated packaging company and a division of Amcor, Ltd. From March 1988 until March 1992, Mr. Adams was the General Manager of Australian Paper, a folding cartonboard producer and a division of Amcor, Ltd. Harvey L. Friedman has been General Counsel since 1991 and Corporate Secretary since May 1996. He was a Director of the Company from 1985 to May 1996. He was formerly a partner in Kramer, Levin, Naftalis & Frankel, a New York City law firm. Howard Brainin became Regional Vice President of Box USA Group, Inc. in May 1996. From March 1992 until May 1996, Mr. Brainin was a Vice President and a Director of St. Joe Paper and the President of St. Joe Container. From December 1981 to March 1992, Mr. Brainin was a Regional Vice President of St. Joe Container. 20 Lawrence A. Bishop has been a Director of the Company since November 1985. He has held various positions since 1980 at Gray, Seifert and Co., Inc., a registered investment advisor that provides money management services to individuals and institutions, and currently holds the title of Executive Vice President. From 1972 to 1979, he was a Vice President of Bessemer Trust Company, N.A. Mr. Bishop is a Director of Synergistics, Inc. and Unapix Entertainment, Inc. Mr. Bishop is Chairman of the Compensation/Stock Appreciation Rights Committee and a member of the Executive Committee and Audit Committee of the Company's Board of Directors. Mr. Bishop is also a Director of Fonda. Samuel B. Guren has been a Director of the Company since 1987. He is a Managing Director of Baird Capital Partners, a private equity fund. He is also co-founder and Managing Partner since 1982 of William Blair Venture Management Company, the general partner of three private equity funds. Mr. Guren was a Vice President at Continental Illinois Corporation from 1974 to 1981. Mr. Guren is Chairman of the Audit Committee of the Company's Board of Directors. Mr. Guren is also a Director of Fonda and Maus Bros. Jewelers Inc. Thomas Uleau has been the President of Fonda since January 1997, the Chief Operating Officer of Fonda since March 1995, a Director of Fonda since 1988 and a Director of the Company since May 1989. Mr. Uleau was Executive Vice President and Chief Financial Officer of the Company from 1989 through March 1994. He served as President of Cardinal Container Corporation (which was acquired by the Company in 1985) from 1983 to 1986. Mr. Uleau started his career as an accountant at Deloitte, Haskins and Sells from 1969 to 1972, after which he spent several years in various capacities at IU International, a transportation and paper products conglomerate. Mr. Uleau is a Director and Chief Operating Officer of Creative Expressions Group, Inc., a company owned 97% by Dennis Mehiel and 3% by Mr. Uleau. James Armenakis has been a Director of the Company since May 1996. He has been a partner in Armenakis & Armenakis, a New York City law firm, since 1990. John Nevin has been a Director of the Company since May 1996. He has been an Executive Vice President at Fieldcrest Cannon, Inc. since October 1995. From September 1990 to October 1995 he was a Senior Vice President at James River Corporation. From 1957 to 1990, Mr. Nevin served in various capacities at International Paper Company, including Vice President and Group Executive of the Pulp and Coated Papers Businesses. 21 Item 11. EXECUTIVE COMPENSATION The following table sets forth the compensation earned, whether paid or deferred, to the Company's Chief Executive Officer and its other four most highly compensated executive officers during the 1996 Transition Period (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company for the 1996 Transition Period and Fiscal 1994, 1995, and 1996:
Summary Compensation Table Annual Long-Term Compensation(1) Compensation ---------------------------------------- ------------ Securities Other Annual Underlying All Other Name and Principal Position Year Salary Bonus Compensation Option/SARs Compensation --------------------------- ---- ------ ----- ------------ ----------- ------------ Dennis Mehiel................. 1996 Transition Period $229,167 $ 39,200 - - - Chairman of the Board of 1996 369,166 173,131 31,574(2) - 101,412(3) Directors and Chief 1995 333,044 375,000 38,904(2) - 137,448(3) Executive Officer 1994 373,641 - 16,462(2) - 87,287(3) Chris Mehiel.................. 1996 Transition Period $115,000 - - - - Executive Vice President and 1996 167,333(4) 60,000 - - - Chief Operating Officer 1995 24,000 - - - - 1994 144,000 - - - - Gerald K. Adams............... 1996 Transition Period $114,583 - 2,083(6) - - Chief Executive Officer of 1996 31,445(5) - 500(6) - - Box USA Group, Inc. 1995 - - - - - 1994 - - - - - Timothy D. McMillin........... 1996 Transition Period $ 83,333 - 434(7) Senior Vice President 1996 154,542(4) 40,000 1,250(7) - - and Chief Financial Officer 1995 - - - - - 1994 - - - - - Howard Brainin................ 1996 Transition Period $83,333 $20,833 - - - Regional Vice President of 1996 33,333(8) 38,000 - - - Box USA Group, Inc. 1995 - - - - - 1994 - - - - -
- ----------------------------- (1) Unless otherwise indicated, the Named Executive Officers did not receive any annual compensation, stock options, restricted stock awards, SARs, long-term incentive plan payments or any perquisites or other personal benefits that exceeded the lesser of $50,000 or 10% of the salary and bonus for such officer during the 1996 Transition Period or Fiscal 1996, 1995 and 1994. (2) Includes imputed interest from non-interest bearing loans provided to Dennis Mehiel by the Company in Fiscal 1996, 1995 and 1994. (3) Consists of split-dollar term life insurance premiums for Mr. Mehiel paid by the Company. (4) Consists of salary for employment commencing in September 1995. (5) Consists of salary for employment commencing on June 24, 1996. (6) Represents imputed interest from non-interest bearing loan provided to Mr. Adams by the Company. (7) Represents imputed interest from non-interest bearing loan provided to Mr. McMillin by the Company. (8) Consists of salary for employment commencing on May 31, 1996. 22 Compensation of Directors Any Director who is not an employee of the Company receives annual compensation of (i) $12,000 (provided such director attends five meetings per year), (ii) a fee of $1,000 for attendance at each meeting of the Board of Directors or any committee thereof and (iii) 1,000 SARs. Directors who are employees of the Company do not receive any compensation or fees for service on the Board of Directors. Stock Appreciation Rights Timothy D. McMillan and Chris Mehiel received grants of stock appreciation rights ("SARs") in the amount of 17,000 and 20,000, respectively, during the 1996 Transition Period. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of December 31, 1996 with respect to the beneficial ownership of shares of Common Stock: Percentage of Amount of Beneficial Beneficial Ownership Ownership of Shares of Shares Name of Common Stock of Common Stock - ---- --------------- --------------- Dennis Mehiel...... 6,815,867 100% Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Dennis Mehiel, Chairman and Chief Executive Officer of the Company, is an owner, directly or indirectly, of entities from which the Company rents certain property, plant and equipment. Rental expense incurred and paid to these entities in the 1996 Transition Period, Fiscal 1996, Fiscal 1995 and Fiscal 1994 amounted to approximately $0.4 million, $1.0 million, $0.9 million, and $1.1 million, respectively. The Company believes that such rents were not in excess of market levels. The partition plant located in Jacksonville, Florida is currently leased by Fonda from Mr. Mehiel, and a portion of the facility is subleased to the Company. In addition, the Company is selling products to this partition plant on terms no more favorable than those given to unaffiliated third parties. Dennis Mehiel has been a part owner since 1993 of MannKraft, to which the Company sold approximately $1,351,000 million and $3,300,000 million of material in Fiscal 1996 and Fiscal 1994, respectively. The Company believes that the prices at which such sales were made are not below market levels. There were no material sales to MannKraft in Fiscal 1995. In March 1995, the Company spun off its Fonda subsidiary to Dennis Mehiel. The Company sold approximately $1.1 million and $.06 million of material to Fonda in Fiscal 1995 and Fiscal 1994, respectively. The Company believes that the prices at which such sales were made are not below market levels. Chris Mehiel, Chief Operating Officer of the Company has been a part owner since 1994 of Fibre Marketing, to which the Company sold approximately $3.1 million, $2.0 million and $3.4 million of material in the 1996 Transition period, Fiscal 1996 and Fiscal 1995, respectively. The Company believes that the prices at which such sales were made are not below market levels. There were no material sales to Fibre Marketing in Fiscal 1994. The Company has outstanding notes and loan receivables from Gerald Adams and Timothy McMillin in the amount of $100,000 and $25,000, respectively, at the end of Fiscal 1996 which are non-interest bearing and are due on June 30, 1999 and on demand, respectively. The Company had outstanding notes and loans receivables from Dennis Mehiel in the amount of $0.8 million and $1.5 million at the end of Fiscal 1996 and Fiscal 1995, respectively, all of which have been paid and were non-interest bearing. Of these amounts, approximately $0.8 million and $0.7 million, at the end of Fiscal 1996 and Fiscal 1995, respectively, relate to the cumulative premiums on life insurance policies paid by the Company on behalf of Mr. Mehiel. 23 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules: Index to Financial Statements Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1996, July 31, 1996 and 1995 Consolidated Statements of Operations for the five months ended December 31, 1996, the years ended July 31, 1996, 1995 and 1994 Consolidated Statements of Stockholder's Equity for the five months ended December 31, 1996, the years ended July 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the five months ended December 31, 1996, the years ended July 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements The Financial Statements for the period from May 30, 1996 to December 31, 1996, together with the Independent Auditors' Report for Florida Coast and the Financial Statements for the period from January 1, 1996 to May 30, 1996, together with the Independent Auditors' Report for St. Joe Forest Products Company - Linerboard Mill Operations included in the Florida Coast 10-K as filed with the SEC on March 31, 1997. (b) Exhibits: Exhibits 2.1 through 10.6 and Exhibit 21.1, are incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Registration Statement on Form S-4 filed on July 12, 1996, and all amendments thereto (File No. 333-8043). Exhibit Number Description of Exhibit - ------ ---------------------- 2.1 Asset Purchase Agreement, dated as of November 1, 1995, among Four M Corporation (the "Company"), St. Joe Forest Products Company, St. Joe Container Company, St. Joe Paper Company and Florida Coast Paper Company, L.L.C. ("Florida Coast"). 3.1 Certificate of Incorporation of the Company. 3.2 Certificate of Incorporation of Box USA Group, Inc. 3.3 Certificate of Incorporation of Four M Paper Corporation. 3.4 Certificate of Incorporation of Page Packaging Corporation. 3.5 Certificate of Incorporation of Box USA, Inc. 3.6 Certificate of Incorporation of Four M Manufacturing Group of Georgia, Inc. 3.7 By-laws of the Company. 3.8 By-laws of Box USA Group, Inc. 3.9 By-laws of Four M Paper Corporation. 3.10 By-laws of Page Packaging Corporation. 3.11 By-laws of Box USA, Inc. 3.12 By-laws of Four M Manufacturing Group of Georgia, Inc. 4.1 Indenture, dated as of May 30, 1996, between the Company and Norwest Bank Minnesota, National Association (the "Trustee"). 4.2 Form of 12% Series A and Series B Senior Secured Notes, dated as of May 30, 1996 (incorporated by reference to Exhibit 4.1). 4.3 Registration Rights Agreement, dated as of May 30, 1996, among 24 the Company, the Guarantors and Bear, Stearns & Co. Inc. (the "Initial Purchaser"). 4.4 Security Agreement, dated as of May 30, 1996, between the Company and the Trustee. 4.5 Subsidiary Security Agreement, dated as of May 30, 1996, among the Guarantors and the Trustee. 4.6 Contribution Agreement, dated as of May 30, 1996, among the Company, the Guarantors and the Trustee. 4.7 Drop Down Notes, dated as of May 30, 1996, executed by each of the Guarantors. 4.8 Drop Down Note Security Agreement, dated as of May 30, 1996, among the Guarantors and the Company. 4.9 Guaranty, dated as of May 30, 1996, among the Guarantors and the Trustee. 4.10 Form of Company Pledge Agreement, dated as of May 30, 1996, between the Company and the Trustee. 4.11 Form of Subsidiary Pledge Agreement, dated as of May 30, 1996, among the Guarantors and the Trustee. 4.12 Warrant Agreement, dated as of May 30, 1996, between the Company and the Initial Purchaser. 10.1 Output Purchase Agreement, dated as of May 30, 1996, among the Company, Florida Coast and Stone Container Corporation ("Stone"). 10.2 Financing and Security Agreement, dated as of May 30, 1996, among the Company, the Guarantors, NationsBank, N.A. ("NationsBank"), the financial institutions named therein (together with NationsBank, the "Lenders"), and NationsBank, as agent (NationsBank, in such capacity, the "Agent"). 10.3 Subordinated Credit Agreement, dated as of May 30, 1996, among the Company, Florida Coast and Stone. 10.4 Environmental Indemnity Agreement, dated as of May 30, 1996, between the Company and Florida Coast. 10.5 Stock Appreciation Unit Plan of the Company, dated as of August 1, 1992, and Amendment No. 1 thereto, dated as of August 1, 1995. 10.6 Subordination, Nondisturbance and Attornment Agreement, dated as of May 30, 1996, between Norwest Bank Minnesota, National Association, and Box USA Group, Inc. 10.7 First Amendment to Financing and Security Agreement and Additional Borrower Joinder Supplement, dated as of February 28, 1997, among the Company, the Guarantors, the Lenders, the Agent and Box USA of Florida, L.P. 12.1 Statement re computation of ratios. 21.1 Subsidiaries of the registrant. 27.1 Financial Data Schedule. 99.1 The Financial Statements for the period from May 30, 1996 to December 1, 1996, together with the Independent Accountants' Report for Florida Coast and the Financial Statements for the period from January 1, 1996 to May 30, 1996 and the two years ended December 31, 1995 and 1994 together with the Independent Auditors' Report for St. Joe Forest Products Company - Linerboard Mill Operations included in the Florida Coast 10-K as filed with SEC on March 31, 1997. 25 (b) Reports on Form 8-K A report on Form 8-K was filed by the Company on December 19, 1996 regarding the change of the Company's fiscal year end from July 31 to December 31. A report on Form 8-K was filed by the Company on March 14, 1997 regarding the shut down of the Company's Ft. Madison Mill. 26 Four M Corporation and Subsidiaries d/b/a Box USA Financial Statements For the five months ended December 31, 1996 and the years ended July 31, 1996, 1995 and 1994 1 Four M Corporation and Subsidiaries d/b/a Box USA Contents Report of Independent Certified Public Accountants 3 Consolidated financial statements: Balance sheets 4 Statements of operations 5 Statements of stockholder's equity 6 Statements of cash flows 7 Notes to consolidated financial statements 8-29 2 Report of Independent Certified Public Accountants Board of Directors and Stockholder Four M Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of Four M Corporation and subsidiaries (the "Company") as of December 31, 1996, July 31, 1996 and 1995 and the related consolidated statements of operations, stockholder's equity and cash flows for the five month period ended December 31, 1996 and each of the three years in the period ended July 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 1996, July 31, 1996 and 1995 and the results of their operations and their cash flows for the five month period ended December 31, 1996 and each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles. Valhalla, NY March 18, 1997 3
Four M Corporation and Subsidiaries d/b/a Box USA Consolidated Balance Sheets (In Thousands, except per share data) December 31, July 31, July 31, 1996 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Assets Current: Cash and cash equivalents $ 2,431 $ 811 $ 1,226 Accounts receivable, less allowance for doubtful accounts of $1,621, $1,909 and $1,778, respectively (Note 12) 52,775 43,193 22,867 Inventories (Notes 10 and 12) 32,896 32,732 15,110 Deferred income taxes (Note 14) 12,661 10,241 2,001 Notes, advances and other receivables 3,863 1,433 1,452 Income taxes recoverable 4,207 -- -- ----- -------- ------- Total current assets 108,833 88,410 42,656 Property, plant and equipment, net (Notes 11 and 12) 173,333 157,973 27,044 Goodwill and other intangibles, net of accumulated amortization of $880, $763 and $546, respectively (Note 6) 4,678 933 1,007 Other assets (Notes 2 and 17) 16,801 16,493 2,430 ------ ------ ----- $303,645 $263,809 $73,137 ======== ======== ======= ------- Liabilities and Stockholder's Equity Current: Accounts payable and accrued liabilities (Note 3) $ 60,537 $48,380 $24,703 Current maturities of long-term debt and subordinated debt (Note 12 and 13) 2,447 2,440 3,449 ----- ----- ----- Total current liabilities 62,984 50,820 28,152 Long-term debt (Note 12) 208,777 187,092 29,918 Subordinated debt (Note 13) 1,914 -- 1,080 Deferred income taxes (Note 14) 14,486 10,390 3,663 Minority interest (Note 15) 1,584 -- 326 Other liabilities 1,712 1,145 1,349 ----- ----- ----- Total liabilities 291,457 249,447 64,488 ------- ------- ------ Commitments and contingencies (Note 8,9, 16 and 18) Stockholder's equity Common stock, $.125 par value, 10,000,000 shares authorized; 7,229,770 shares issued and 6,815,867 outstanding 904 904 904 Additional paid-in capital 717 717 117 Retained earnings 11,529 13,703 8,590 ------ ------ ----- 13,150 15,324 9,611 Less: treasury stock, at cost (413,903) shares 962 962 962 --- --- --- Total stockholder's equity 12,188 14,362 8,649 ------ ------ ----- $303,645 $263,809 $73,137 ======== ======== =======
See accompanying notes to consolidated financial statements. 4
Four M Corporation and Subsidiaries d/b/a Box USA Consolidated Statements of Operations (In Thousands) Five Months Ended Years ended July 31, December 31, ------------------------------------------------------------- 1996 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $196,787 $257,817 $271,994 $228,563 Cost of goods sold 171,304 222,105 232,154 205,025 - ----------------------------------------------------------------------------------------------------------------------------------- Gross profit 25,483 35,712 39,840 23,538 Selling, general and administrative expenses 17,707 19,217 19,703 22,018 - ----------------------------------------------------------------------------------------------------------------------------------- Income from operations 7,776 16,495 20,137 1,520 Other income (expense): Interest expense (10,106) (7,565) (5,607) (5,448) Loss on joint venture contract (Notes 6 and 9) (1,668) - - - Gain on sale of assets and other (Note 6) 425 - 1,927 126 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before taxes, minority interest, cumulative effect of change in method of accounting and extraordinary gain on early retirement of debt (3,573) 8,930 16,457 (3,802) Provision (benefit) for income taxes (Note 14) (1,486) 3,817 5,483 (325) - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before minority interest, cumulative effect of change in method of accounting and extraordinary gain on early retirement of debt (2,087) 5,113 10,974 (3,477) Minority interest (Note 15) (87) - (146) (180) Cumulative effect of change in method of accounting for taxes on income (Note 14) - - - 381 Extraordinary gain on early retirement of debt (Notes 12 and 13) - - 2,219 - - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (2,174) $ 5,113 $ 13,047 $ (3,276) - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 5
Four M Corporation and Subsidiaries d/b/a Box USA Consolidated Statements of Stockholder's Equity (In Thousands) Common Common Additional Stock Stock Paid-in Retained Treasury Shares Amount Capital Earnings Stock Total - ------------------------------------------------------------------------------------------------------------------------------ Balance, August 1, 1993 7,230 $904 $117 $ 4,495 $962 $ 4,554 Net loss - - - (3,276) - (3,276) - ------------------------------------------------------------------------------------------------------------------------------ Balance, July 31, 1994 7,230 904 117 1,219 962 1,278 Net income - - - 13,047 - 13,047 Distribution (Note 6) - - - (5,676) - (5,676) - ------------------------------------------------------------------------------------------------------------------------------ Balance, July 31, 1995 7,230 904 117 8,590 962 8,649 Net income - - - 5,113 - 5,113 Warrant issuance (Note 6) - - 600 - - 600 - ------------------------------------------------------------------------------------------------------------------------------ Balance, July 31, 1996 7,230 904 717 13,703 962 14,362 Net loss - - - (2,174) - (2,174) - ------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 7,230 $904 $717 $11,529 $962 $12,188 - ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 6
Four M Corporation and Subsidiaries d/b/a Box USA Consolidated Statements of Cash Flows (Note 4) (In Thousands) Five Months Ended Years ended July 31, December 31, ---------------------------------------------- 1996 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ (2,174) $ 5,113 $13,047 $(3,276) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 5,287 5,182 5,245 5,276 Allowance for doubtful accounts 583 (290) 467 678 Non-cash interest expense - - 499 1,123 Gain on sale/closure of subsidiary - (166) (1,618) - Gain on exchange of stock for debt - - (2,393) (381) Deferred income taxes 1,578 (1,506) (312) (600) Loss (gain) on sale of fixed assets (480) 246 32 (830) Change in assets and liabilities, net of effect of acquisitions and disposals: Accounts, advances, notes and other receivables (3,151) 2,218 (4,273) (5,061) Income taxes recoverable (4,027) - - - Inventories 1,025 12,296 (10,594) (1,194) Other assets, net of other liabilities (3,338) (512) 275 (387) Accounts payable and accrued liabilities 767 4,479 (2,592) 9,446 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities (3,930) 27,060 (2,217) 4,794 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (6,721) (8,612) (3,690) (3,916) Proceeds from sale of subsidiaries - 898 1,618 1,401 Proceeds from sale or exchange of fixed assets 2,300 679 397 174 Payment for acquisition, net of cash acquired - - - (6,601) Investment in Mannkraft, net of cash acquired (5,500) - - - Purchase of net assets of St. Joe Container - (159,168) - - Recovery of purchase price from St. Joe Container 5,214 - - - Payment related to subsidiary spin-off, net of common stock sold - - (300) - Loans made to employees, net of payment - (439) - (184) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (4,707) (166,642) (1,975) (9,126) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from bond issuance - 170,000 - - Financing costs - (8,798) - - Borrowings under revolving credit agreements 94,200 14,419 - 3,428 Repayments under revolving credit agreements (79,223) (22,953) - - Secured term, mortgage, equipment and other borrowings 8,534 380 8,914 7,172 Repayment of long-term debt (13,254) (13,881) (5,396) (5,418) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 10,257 139,167 3,518 5,182 Increase (decrease) in cash and cash equivalents 1,620 (415) (674) 850 Cash and cash equivalents, beginning of period 811 1,226 1,900 1,050 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 2,431 $ 811 $ 1,226 $ 1,900 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 7 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements 1. Summary of Business Significant Accounting Policies Four M Corporation and subsidiaries ("Four M" or the "Company") are manufacturers of corrugated packaging and semi-chemical corrugating medium and prior to the distribution of The Fonda Group, Inc. ("Fonda") (See Note 6), paper cups and plates. The Company uses the trade name Box USA to conduct the bulk of its business activities. Four M has no assets or independent business operations other than its ownership interest in its subsidiaries. Principles of Consolidation The consolidated financial statements include the accounts of Four M Corporation and all of its subsidiaries. All of the common stock of Four M is owned by its Chairman of the Board and Chief Executive Officer, Dennis Mehiel (the "Stockholder"). Intercompany accounts and transactions have been eliminated. The Company has certain investments of 50% which are accounted for under the equity method. Inventories Inventories are valued at the lower of cost (first-in, first-out) or market. Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is based on estimated useful lives of the assets and is provided using the straight-line method. For income tax purposes, statutory accelerated methods of depreciation are used. Goodwill and Other Intangibles Goodwill and other intangibles principally relate to the excess of the purchase price of certain acquisitions over the fair value of the net assets acquired and are being amortized over their estimated useful lives, which range from 10 to 20 years, using the straight-line method. Revenue Recognition Revenue is recognized when products are shipped. 8 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements Income Taxes Deferred taxes are provided on the differences between the basis of assets and liabilities for financial reporting and income tax purposes using the statutory rates enacted for future periods. The Company files a consolidated federal tax return with all of its subsidiaries except MannKraft (see Note 6) and Box USA of Florida, L.P., a 51% owned joint venture. State income tax returns are filed separately. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Reclassifications Certain prior year balances have been reclassified to conform with the December 31, 1996 presentation. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Long-lived Assets As prescribed in Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of," long-lived assets are required to be adjusted to net realizable value if, in the opinion of management, there is a permanent diminution in value. The adoption of this pronouncement in 1996 did not have a significant impact on the Company's financial statements. The Company assesses recoverability based upon estimated undiscounted future cash flows from the related assets. 9 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements Fair Value of Financial Instruments The carrying value of financial instruments including cash, accounts receivable, advances and other receivables and accounts payable approximate fair value because of the relatively short maturities of these instruments. The carrying value of long-term debt, including the current portion and subordinated debt, approximate fair value based upon market rates for similar instruments. 2. Other Assets Other assets at December 31, 1996 and July 31, 1996 include an investment in Groveton Paper Board, Inc. ("Groveton") an unconsolidated affiliate of approximately $5,250,000 (see Note 6) and deferred financing costs of approximately $8,285,000 and $8,798,000, respectively. Deferred financing costs are being amortized over 10 years using the straight-line method. 3. Accounts Payable and Accrued liabilities were approximately Accrued Liabilities $30,150,000, $25,915,000 and $4,603,000 at December 31, 1996, July 31, 1996 and 1995, respectively. At December 31, 1996 and July 31, 1996 accrued liabilities included approximately $19,363,000 and $12,492,000, respectively, in reserves for unfavorable contracts related to the Acquisition (see Note 6) and approximately $870,000 and $5,000,000 at December 31, 1996 and July 31, 1996, respectively, in acquisition related provisions (see Note 6). In addition, accrued liabilities consisted of various items including employee benefits, utilities, interest and plant repairs at December 31, 1996, July 31, 1996 and 1995. 4. Supplemental Cash The Company made interest payments of Disclosures $11,683,000, $4,204,000, $4,882,000 and $4,015,000 and income tax payments of $1,127,000, $3,668,000, $6,052,000 and $1,080,000 during the five month period ended December 31, 1996 and the twelve month period ended July 31, 1996, 1995 and 1994, respectively. In addition, the Company purchased equipment under capital leases for $7,862,000 during the twelve month period ended July 31, 1996. The Company had non-cash distributions of $5,676,000 and $1,262,000 during the twelve month period ended July 31, 1995 and 1994, respectively. 10 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements 5. Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with financial institutions having high credit ratings. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across many different geographical regions. At December 31, 1996, the Company had no significant concentrations of credit risk. No single customer accounted for 10% or more of net sales during any of the reported periods. 6. Acquisitions and MannKraft Corporation Dispositions On August 5, 1996, the Company acquired 490 shares of common stock of MannKraft Corporation ("MannKraft") from Stone Container for $5.5 million. The purchase represented 49% of MannKraft's outstanding shares, increasing the Company's ownership interest to 50%. Since the remaining interest in MannKraft is owned indirectly by the Stockholder, the financial statements of MannKraft are included in the Company's consolidation. The acquisition has been accounted for using the purchase method of accounting. The purchase price was allocated to the assets purchased and liabilities assumed based upon fair value at the date of the acquisition. The Company recorded goodwill of approximately $4 million, which is being amortized over 15 years. The results of MannKraft's operations have been included in the Company's financial statements since the date of acquisition. Purchase of Fibre Marketing Pursuant to a Limited Liability Company Agreement, dated as of May 24, 1996, the Company acquired a 50% interest in Fibre Marketing Company, L.L.C. ("Fibre Marketing"). The Company made an aggregate capital contribution of $280,000 to Fibre Marketing in August 1996. 11 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements St. Joe Container Company On May 30, 1996, the Company acquired substantially all of the assets and certain liabilities of St. Joe Container Company for approximately $160 million (the "Acquisition"). In accordance with the Asset Purchase Agreement (the "Agreement"), the Company entered into an investment in a joint venture (the "Mill Joint Venture") between the Company and Stone Container Corporation ("Stone Container") to acquire a paper mill (the "Mill") owned by St. Joe Forest Products Company having an annual production capacity of approximately 500,000 tons (see Note 9). On May 30, 1996 the Company issued senior secured notes for $170 million and warrants valued at $600,000 and entered into a revolving credit facility of $80 million to, in part, finance such transactions. In December 1996, the Company received $5.2 million as a purchase price adjustment in accordance with the Agreement. The Acquisition has been accounted for using the purchase method of accounting, and accordingly the purchase price, as adjusted as discussed above, has been allocated to the assets purchased and the liabilities assumed based upon fair value at the date of the Acquisition. The purchase price has been allocated as follows: ------------------------------------------------------------- Accounts receivable, net $ 23,558 Inventories, net 30,257 Property, plant and equipment, net 120,747 Long-term investment 5,250 Deferred financing costs 8,798 Accounts payable and accrued liabilities (2,552) Acquisition related provisions (a) (5,000) Reserve for unfavorable contracts (b) (17,706) ------------------------------------------------------------- Total costs allocated (c) $163,352 ------------------------------------------------------------- 12 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements (a) The Acquisition related provisions consist of professional costs incurred with respect to the Acquisition, costs associated with a plant closure, severance and relocation costs. During the five months ended December 31, 1996 approximately $2.6 million of costs have been applied to this reserve and approximately $1.53 million has been reclassified to reserve for unfavorable contracts (see (b)). (b) The Company has provided for two unfavorable contracts related to the Acquisition and has established a separate reserve for each such unfavorable contract. The first unfavorable contract is the Output Purchase Agreement with the Mill Joint Venture, which requires the Company and Stone Container to each purchase one-half of the Mill's annual output of linerboard. Initially, management determined it was probable that the Company would be required to pay additional amounts above market price for linerboard as a result of the Output Purchase Agreement and accordingly, provided a reserve for approximately $11.0 million in accordance with Accounting Principles Board Opinion No. 16 "Business Combinations." During the five month period ended December 31, 1996, the Company reevaluated such reserve and increased this reserve by $9.2 million. The Company increased the reserve by reducing other reserves established in purchase accounting and by the purchase price adjustment described above. The Company has charged approximately $2.3 million against this reserve during the five month period ended December 31, 1996 and its balance at December 31, 1996 was approximately $17.9 million. The second unfavorable contract is the Shareholder's Agreement relating to the Company's 12.6% shareholder's interest in Groveton which requires the Company to purchase 12.6% of Groveton's annual production of medium paper at a defined price. Management has determined it is probable that the Company will be required to pay an aggregate $1.5 millon above market price in 1997 and 1998 and as a result has provided a reserve for approximatlely $1.5 million. Since the acquisition, no amounts have been charged against this reserve. (c) The Company did not allocate any portion of the purchase price to its investment in the Mill Joint Venture since management believes the investment value is nominal (see Note 9). Timberline Packing Inc. In August 1995, the Company sold its 67% interest in Timberline Packaging, Inc. The sale resulted in a gain of approximately $166,000. 13 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements The Fonda Group, Inc. In March 1995, Fonda acquired certain net assets and the business of the Scott Foodservice Division for approximately $30 million in cash plus the assumption of certain liabilities. In March 1995, the stock of Fonda was distributed to the Stockholder, except for 3.5% which was distributed to a lender as described in Note 13. The distribution to the Stockholder amounted to 96.5% of the net assets of Fonda as of March 31,1995. Accordingly, the results of operations of Fonda are not included in the financial statements after March 31, 1995. The accounts of Fonda as of and for the eight months ended March 31, 1995 and for the twelve months ended July 31, 1994 are summarized as follows (in thousands): March 31, July 31, 1995 1994 ------------------------------------------ Net sales $42,413 $61,839 Operating income 1,352 1,788 Net (loss) income (57) 251 Total assets 33,332 24,668 Stockholder's equity 5,882 5,977 ------------------------------------------ Fiber Partition Products Effective March 20, 1995, the Company disposed of certain assets relating to its fiber partition products which resulted in a gain before income taxes of approximately $1,618,000. Consolidated Packaging Corporation, Debtor-In-Possession On January 5, 1994, the Company acquired certain assets of Consolidated Packaging Corporation, Debtor-in-Possession (the "CPC Acquisition"). The purchase price was approximately $5,285,000. Assets acquired included accounts receivable, inventories, equipment and certain real estate and leasehold interests including a paper mill in Ft. Madison, Iowa. The assets were transferred to certain subsidiaries. The financial statements reflect the operations of such subsidiaries from the date of acquisition. 14 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements Effective July 31, 1994, the Company disposed of certain of the assets purchased in the CPC Acquisition, resulting in a gain before income taxes of approximately $622,000. In November 1994, the Company sold certain additional assets purchased in the CPC Acquisition, consisting of substantially all of the inventory, property and equipment and certain tangible assets resulting in a loss of approximately $73,000 which was recorded in 1994. On August 16, 1996, Box USA Group, Inc. ("Box USA"), a wholly-owned subsidiary of the Company, discontinued operations at its Flint, Michigan facility (which was purchased as a part of the CPC Acquisition), and disposed of substantially all of the machinery and equipment for approximately $2.3 million and finished goods and work-in-progress inventory and certain related assets utilized at such facility for approximately $0.3 million which resulted in a gain of $480,000. Box USA retained all accounts receivable, accounts payable and raw materials inventory. The machinery and equipment were transferred pursuant to a like-kind exchange within the meaning of Section 1031 of the Internal Revenue Code of 1986, as amended. 7. Results of Operations Unaudited results of operations of the for the Five Months Company for the five months ended Ended December 31, December 31, 1995 are as follows: 1995 (Unaudited) (Unaudited) December 31, 1995 ------------------------------------------------ Net sales $95,614 Gross profit 14,495 Income before income taxes 6,588 Provision for income taxes 2,966 Net income 3,622 ------------------------------------------------ 15 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements 8. Condensed In connection with the Acquisition, the Consolidating Company issued and sold $170 million Financial Statements aggregate principal amount of 12% Series A Secured Notes due 2006 (the "Old Notes"). In September 1996, the Company registered $170 million aggregate principal amount of 12% Series B Senior Secured Notes due 2006 (the "New Notes"). The Company consummated an exchange offer pursuant to which the New Notes were exchanged for the Old Notes in November 1996. The Notes are guaranteed on a senior secured basis by Box USA Group, Inc., Four M Paper Corporation, Page Packaging Corporation, Box USA, Inc. and Four M Manufacturing Group of Georgia, Inc., each a direct or indirect wholly owned subsidiary of the Company (collectively, the "Guarantors"). The Notes are not guaranteed by Box USA Paper Corporation, Box USA of Florida, L.P., Florida Coast or MannKraft (collectively, the "Non-Guarantors"). The Guarantors have fully and unconditionally guaranteed the Notes on a joint and several basis. Separate financial statements and other disclosures concerning the Guarantors are not presented because management has determined that they are not material to holders of the Notes. The following are unaudited condensed consolidating financial statements regarding the Company (on a stand-alone basis and on a consolidated basis) and Guarantors and Non-Guarantors as of and for the five months ended December 31, 1996 (in thousands): 16 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements
Condensed Consolidating Balance Sheet Four M Non Elimination Corporation Guarantors Guarantors Entries Consolidated - ------------------------------------------------------------------------------------------ Current assets $ - $98,772 $10,061 $ - $108,833 Investment in affiliates 12,188 5,730 - (12,388) 5,530 Total assets 12,188 278,405 25,440 (12,388) 303,645 Current liabilities - 57,010 5,974 - 62,984 Total liabilities - 269,287 22,170 - 291,457 Stockholder's equity 12,188 9,118 3,270 (12,388) 12,188 - ------------------------------------------------------------------------------------------ Condensed Consolidating Statement of Operations Four M Non Elimination Corporation Guarantors Guarantors Entries Consolidated - ----------------------------------------------------------------------------------------- Net sales $ - $176,172 $20,615 $ - $196,787 Gross profit - 22,812 2,671 - 25,483 Income from operations - 6,765 1,011 - 7,776 Income (loss) before income taxes - (3,864) 291 - (3,573) Net loss of subsidiaries (2,174) - - 2,174 - Net income (loss) (2,174) (2,344) 170 (2,174) (2,174) - ----------------------------------------------------------------------------------------- Condensed Consolidating Statement of Cash Flows Four M Non Elimination Corporation Guarantors Guarantors Entries Consolidated - ----------------------------------------------------------------------------------------- Net cash used in operating activities $ - $(3,151) $ (779) $ - $(3,930) Net cash used in - investing activities (3,948) (759) - (4,707) Net cash used in - financing activities 8,619 1,638 - 10,257 (Decrease) increase in cash and cash equivalents - 1,520 100 - 1,620 Cash and cash - equivalents, beginning of period 544 267 - 811 - ----------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ - $ 2,064 $ 367 $ - $ 2,431 - -----------------------------------------------------------------------------------------
17 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements 9. Investment in Mill On May 30, 1996, the Company and Stone Joint Venture Container each invested $5 million for a 50% interest in Florida Coast Holding Co., L.L.C. ("Florida Coast Holding"), the holder of all of the member interests in the Mill Joint Venture (see Note 6). Additionally, Stone Container made a $30 million loan to Florida Coast Holding. In addition, the Company and Stone Container have each agreed to provide the Mill Joint Venture with up to $10 million of subordinated indebtedness if needed for general corporate purposes. The Company's investment in the Mill Joint Venture is accounted for using the equity method of accounting. During the five month period ended December 31, 1996, the Company did not record its 50% share of the Mill Joint Venture's operating results aggregating $(3.5) million since its investment had no carrying value. As a result of the Company's 4.0 million obligation under the Output Purchase Agreement, during the five month period ended December 31, 1996, the Company recorded approximately $1.7 million as loss on joint venture contract and approximatley $2.3 million against its reserve for unfavorable contracts (see Note 6). Summarized balance sheet and income statement information of the Mill Joint Venture, as of December 31, 1996, and for the seven months ended December 31, 1996 were as follows: Summarized balance sheet information (in thousands): December 31, 1996 ------------------------------------------------------- Current assets 31,697 Land, buildings and equipment, net 184,946 Other assets 8,822 Current liabilities 20,542 Long term liabilities 178,867 Equity (1) 26,056 ------------------------------------------------------- Summarized statement of operations (in thousands): Seven Months Ended December 31, 1996 ------------------------------------------------------- Net sales $103,365 Net operating income (loss) (908) Interest expense (13,546) Net loss (13,944) ------------------------------------------------------- (1) Equity of the Mill Joint Venture is held entirely by Stone Container. 18 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements 10. Inventories Inventories consist of the following (in thousands): July 31, December 31, ---------------------- 1996 1996 1995 ------------------------------------------------------ Raw materials $25,056 $25,410 $10,710 Work-in-process 1,615 1,563 632 Finished goods 6,225 5,759 3,768 ------------------------------------------------------ $32,896 $32,732 $15,110 ------------------------------------------------------ 11. Property, Plant Property, plant and equipment consist of and Equipment the following (in thousands):
July 31, Life in December 31, --------------------------- Years 1996 1996 1995 - ---------------------------------------------------------------------------------------- Land and buildings 20 $ 56,384 $ 50,015 $ 9,107 Machinery and equipment 3-20 142,145 125,574 31,819 Leasehold improvements 5-10 1,402 1,461 1,362 Furniture and fixtures 5 3,071 2,798 2,987 Autos and trucks 5 460 365 306 - ---------------------------------------------------------------------------------------- 203,462 180,213 45,581 Less: accumulated depreciation 30,129 22,240 18,537 - ---------------------------------------------------------------------------------------- $173,333 $157,973 $27,044 - ----------------------------------------------------------------------------------------
19 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements Depreciation expense was approximately $5,135,000 for the five months ended December 31, 1996. Depreciation expense was approximately $5,118,000, $4,887,000 and $5,014,000 for the years ended July 31, 1996, 1995 and 1994, respectively. Property, plant and equipment includes equipment under capital leases as follows (in thousands): July 31, December 31, -------------------------- 1996 1996 1995 - --------------------------------------------------------------------------- Equipment $8,332 $8,332 $1,170 Less: accumulated depreciation 710 634 311 - --------------------------------------------------------------------------- $7,622 $7,698 $ 859 - --------------------------------------------------------------------------- 20 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements 12. Long-Term Debt Long-term debt consist of the following (in thousands): July 31, December 31, ------------------ 1996 1996 1995 - ------------------------------------------------------------------------- 12% Senior Secured Notes (a) $170,000 $170,000 $ - Revolving credit agreements (b) 22,235 7,258 16,110 Mortgages (weighted average interest rate as of December 31, 1996 7.9%) 2,374 2,456 2,620 Term loan agreements (c) 8,500 - 9,913 Pre-petition creditors (discounted at 9%)(d) - - 275 Other 832 2,267 2,857 - ------------------------------------------------------------------------- 203,941 181,981 31,775 Capital lease obligations (Note 16) 7,283 7,551 592 - ------------------------------------------------------------------------- 211,224 189,532 32,367 Less: current portion 2,447 2,440 2,449 - ------------------------------------------------------------------------- Long-term debt $208,777 $187,092 $29,918 - ------------------------------------------------------------------------- (a) On May 30, 1996, the Company issued $170 million aggregate principal amount of 12% Series A Senior Secured Notes (the "Notes") due 2006 to, in part, finance the Acquisition. The Notes are secured by the Company's real and personal property other than accounts receivable, inventory and certain related assets and interest is payable semi-annually in arrears on June 1 and December 1 of each year beginning December 1, 1996. 21 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements (b) On May 30, 1996, the Company entered into a new credit facility (the "Credit Facility") in the amount of $80 million. The Credit Facility is secured by accounts receivable, inventories and certain related assets. Advances are limited to 85% of eligible receivables and the lesser of 60% of eligible inventories or $40 million. The Credit Facility matures on May 30, 2001. The interest rate at December 31, 1996 was prime (8.25% at December 31, 1996) plus .75%. At December 31, 1996, the Company had outstanding $16,566,000 and available approximately $30.6 million of additional credit under the Credit Facility. The Company has the ability to convert interest on some or all of its advances to a LIBOR based rate. At December 31, 1996, the Company had converted $8.0 million of its debt under this option at a rate of 8.25%. This LIBOR based arrangement matured on March 2, 1997 and was replaced with a 90 day contract for $10 million. Pursuant to the Credit Facility, the Company is subject to certain affirmative and negative covenants customarily found in agreements of this type. In addition, the Credit Facility requires that the Company maintain certain specified financial covenants, including, without limitation, a minimum tangible net worth, a minimum interest coverage ratio, a maximum funded debt to EBITDA ratio and a minimum fixed charge coverage ratio. The Company was in compliance with these covenants, as amended, at December 31, 1996, Mannkraft Corporation (see Note 6) has a revolving credit agreement for $10 million, secured by inventories, receivables and equipment. Borrowings are limited to 85% of eligible inventory. Mannkraft had approximately $5,669,000 outstanding and $249,000 of additional credit available under this agreement at December 31, 1996. Interest under this agreement is prime (8.25% at December 31, 1996) plus 1%. MannKraft has the ability to convert interest on some or all of its advances to a LIBOR based rate equal to LIBOR plus 3.5%. (c) Mannkraft Corporation had outstanding at December 31, 1996 an $8.5 million term loan due September 30, 2001 which is secured by Mannkraft's equipment, real estate and eligible receivables. This loan bears interest at the prime rate (8.25% at December 31, 1996) plus 1.5%. Mannkraft has the ability to convert some or all of this term loan to a LIBOR based rate equal to LIBOR plus 3.5%. At December 31, 1996, MannKraft had $8.0 million of its debt under this option at a rate of 9.0%. 22 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements (d) In January 1995, Four M assumed certain outstanding pre-petition creditor liabilities from Fonda aggregating $870,000 in exchange for partial settlement of amounts owed to Fonda by Four M. In July 1995, this assumed liability of $870,000 was settled for $455,000 resulting in an extraordinary gain of $241,000 net of income taxes. Long-term debt, excluding capital lease obligations, is payable as follows (in thousands): -------------------------------------- 1997 $ 1,352 1998 1,804 1999 1,472 2000 1,942 2001 3,657 Thereafter 193,714 -------------------------------------- $203,941 -------------------------------------- 13. Subordinated Debt Subordinated debt consists of the following (in thousands): July 31, December 31, -------------------- 1996 1996 1995 - --------------------------------------------------------------------------- Subordinated notes (a) $2,279 $ - $ - Debt with warrants (b) - - 2,080 Less: Deferred interest (365) - - Current portion - - (1,000) - --------------------------------------------------------------------------- Long-term subordinated debt $1,914 $ - $ 1,080 - --------------------------------------------------------------------------- 23 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements (a) Prior to the Company's purchase of MannKraft, the Bankruptcy Court confirmed MannKraft's Plan of Reorganization and MannKraft emerged from Chapter 11 of the United States Bankruptcy Code. Pursuant to Mannkraft's Plan of Reorganization, Mannkraft's previous shareholders received $2,750,000 in cash and notes payable in consideration of full and complete satisfaction of their interests. The first note is in the principal amount of $700,000 and interest is payable on the outstanding principal balance at 7.5% per annum paid quarterly, with the exception of the first six payments which are payable in the year 2001. The second and third notes are in the principal amounts of $1,179,000 and $321,000, respectively, and are non-interest bearing. The notes have been discounted using a rate of 8% resulting in aggregate initial deferred interest of $838,638. Deferred interest is accreted over the repayment period using the balance outstanding method. All three notes are payable beginning after fiscal year ending July 31, 1999 provided that MannKraft's secured claims and trade and other claims are paid in full. The notes are secured by a pledge agreement executed by Four M Manufacturing Group of New Jersey, Inc. (b) In January 1990, the Company borrowed $4,000,000 (the "Subordinated Debt") from a lender (the "Holder") and issued a warrant (the "Warrant") to the Holder to purchase 513,000 shares of its common stock. Interest on the Warrant was accreted such that at March 31, 1995, the Warrant had a value of $2,184,000. In March 1995, the Subordinated Debt was restructured as follows: (i) the Company distributed 35 shares (3.5%) of the issued and outstanding stock of Fonda to the Holder (see Note 6), in exchange for a portion of the outstanding principal balance of the Subordinated Debt; and (ii) in consideration of the Holder's surrendering the Warrant, and in satisfaction of the remaining portion of the Subordinated Debt and interest accrued thereon, payments aggregating $4,000,000 were made, with a final payment of $1,080,000 which was made on July 30, 1996, together with interest accrued thereon. As a result, the Company recognized an extraordinary gain of $1,978,000 in 1995 which represented the excess of the recorded value of the Warrant settled less $206,000, representing 3.5% of the net assets of Fonda at March 31, 1995. 24 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements 14. Income Taxes Components of provision (benefit) for income taxes are as follows (in thousands): 5 Months Ended 12 Months Ended July 31, December 31, --------------------------- 1996 1996 1995 1994 - -------------------------------------------------------------------------------- Current: Federal $(2,362) $ 4,441 $ 4,675 $ -- State (702) 889 1,120 275 ------- (3,064) 5,330 5,795 275 ------- Deferred: Federal 1,206 (1,261) (250) (481) State 372 (252) (62) (119) ------- 1,578 (1,513) (312) (600) ------- Provision (benefit) for income taxes before extraordinary item (1,486) 3,817 5,483 (325) Taxes on extraordinary item -- -- 174 -- ------- $(1,486) $ 3,817 $ 5,657 $ (325) ------- Deferred income taxes reflect the tax effect of temporary differences between carrying amounts of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets (liabilities) result from temporary differences as follows (in thousands):
July 31, December 31,----------------------- 1996 1996 1995 - --------------------------------------------------------------------------------------- Current: Allowance for doubtful accounts receivable $ 670 $ 581 $ 751 Capitalized inventory costs 1,632 1,213 762 Accrued salaries and benefits 964 730 299 Provisions for losses 9,133 7,350 -- Other 262 367 189 -------- Current deferred tax assets 12,661 10,241 2,001 -------- Long term: Property, plant and equipment (19,340) (10,390) (3,663) MannKraft net operating loss carryforward 4,854 -- -- -------- Net long-term deferred tax liabilities (14,486) (10,390) (3,663) -------- Net deferred tax liabilities $ (1,825) $ (149) $ (1,662) --------
25 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements The effective tax rate was different than the federal statutory rate due to the following:
Five Months Ended 12 Months Ended July 31, December 31, ---------------------------------- 1996 1996 1995 1994 - ----------------------------------------------------------------------------------------- Tax (benefit) at the statutory Federal rate (35.0)% 35.0% 34.0% (34.0)% State income taxes (net of Federal benefit) (6.0) 6.4 4.0 7.0 Non-deductible interest - - 3.0 5.3 Reversal of valuation allowance - - (3.7) 11.7 Other (0.6) 1.3 (4.0) 1.5 - ----------------------------------------------------------------------------------------- (41.6)% 42.7% 33.3% (8.5)% - -----------------------------------------------------------------------------------------
During 1994, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" ("FASB 109"). The cumulative effect of this change in method of accounting for taxes on income has been reported as of the beginning of the 1994 fiscal year in the consolidated statements of operations. 15. Minority Interest Minority interest represents the minority stockholder's investment plus its proportionate share of the income or loss of the respective subsidiary. 26 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements 16. Leases The Company leases several facilities and certain equipment used in connection with its manufacturing operations. Future minimum payments for capital leases and noncancellable operating leases with initial or remaining terms of one year or more are (in thousands): Capital Operating Year ending December 31, Leases Leases - ------------------------------------------------------------------------------ 1997 $1,957 5,033 1998 1,883 4,314 1999 1,671 3,350 2000 1,662 2,573 2001 1,634 1,921 Thereafter 876 7,761 - ------------------------------------------------------------------------------ Total minimum lease payments 9,683 24,952 ------------- Less: amount representing interest (2,400) - ------------------------------------------------------------ Present value of capital lease obligations 7,283 - ------------------------------------------------------------ Rent expense under operating leases was approximately $3,555,000 for the five months ended December 31, 1996. Rent expense under operating leases was approximately $5,041,000, $4,613,000 and $4,984,000 for the years ended July 31, 1996, 1995 and 1994, respectively. 17. Related Party Transactions The Stockholder is an owner of entities from which the Company rents certain property, plant and equipment. Rent expense for the five months ended December 31, 1996 was approximately $434,000. Rental expense for the three years ended 1996, 1995 and 1994 was approximately $964,000, $929,000 and $1,120,000, respectively. The Company believes that such rents are not in excess of market levels. The partition plant located in Jacksonville, Florida is currently leased by Fonda from the Stockholder, and a portion of the facility is subleased to the Company. The Stockholder has been a part owner since 1993 of MannKraft, to which the Company sold approximately $1,351,000 and $3,300,000 of material in the twelve months ended July 31, 1996 and 1995, respectively. There were no material sales to this entity during the twelve month period ended July 31, 1995. The Company believes that the prices at which such sales were made are not below market levels. For the five month period ended December 31, 1996, all sales to MannKraft have been eliminated in consolidation. 27 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements The Company had outstanding receivables from officers and employees in the amount of $286,000, $1,124,000 and $1,474,000 at December 31, 1996, July 31, 1996 and at July 31, 1995, respectively, all of which are non-interest bearing. These receivables are classified as other assets. An officer of the Company has been part owner since 1994 of Fibre Marketing, to which the Company sold approximately $3,130,074 of material in the five months ended December 31, 1996 and $2,024,000 and $3,400,000 of material in the twelve months ended July 31, 1996 and 1995, respectively. The Company believes that the prices at which such sales were made are not below market levels. 18. Commitment and Purchase Commitments Contingencies The Company has commitments to purchase paperboard inventory from four major vendors. The total commitment is for the purchase of up to 170,000 tons of inventory annually through December 2001. The price per ton will be based on market rates. As discussed in Note 6, the Company has commitments to purchase one half the production of the Mill. The price per ton is based on the Output Purchase Agreement discussed in Note 6. Additionally the Company is required to purchase 12.6% of the output of the Groveton medium mill at prices defined in an agreement among the owners of the mill. The mill's production capacity is approximately 140,000 tons annually. Litigation On July 19, 1996, a civil action was filed in the Superior Court of Fulton County, Georgia (the "Suit") by a former employee, individually and on behalf of D&M Partnership, a purported Georgia partnership, against Four M, Box USA Group, Inc., Four M Manufacturing Group of Georgia, Inc. and the Stockholder. The plaintiff alleges that he is entitled to an equity interest in Four M or in the alternative, $150,000,000 in compensatory damages, as well as punitive damages and attorneys' fees. The Company believes that the Suit is without merit. On September 23, 1996, the Company filed an answer in response to the complaint. The Company intends to defend against the Suit vigorously and believes that it has adequate defenses. The Suit is in the preliminary stages and management believes that the outcome of this Suit will not have a material impact on the Company's financial statements. 28 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements The Company is involved in various other legal actions and claims arising in the ordinary course of its business. Management believes that current litigation and claims will be resolved without any material effect on the Company's financial statements Savings and Investment Plans The Company has two defined contribution savings and investment plans covering most of its non-union employees with at least one year of service. One plan does not provide for matching of employee contributions. Under the other plan, employee contributions up to 6% of their salary are matched at 20%. Expenses incurred under both plans amounted to approximately $130,000 for the five months ended December 31, 1996 and $195,000, $107,000 and $81,000 for the years ended July 31, 1996, 1995 and 1994, respectively. The Company amended one of its plans, effective January 1, 1997, to increase the Company's employee match to 50% Pension Plans The Company has defined contribution plans for its union employees. Contributions are made by the Company at a defined rate per hour worked. Expense incurred under these plans amounted to approximately $306,000 for the five months ended December 31, 1996 and $93,000, $67,000 and $431,000 for the years ended July 31, 1996, 1995 and 1994, respectively. Stock Appreciation Unit Plan On September 8, 1993, the Company's Board of Directors approved a Stock Appreciation Unit Plan (the "Plan"). Pursuant to the Plan units may be granted to key employees at the discretion of the Chief Executive Officer and the non-employee directors of the Company. Units awarded under the Plan are subject to the vesting and redemption terms of the Plan. Employees may elect to redeem vested units awarded under the Plan. Units to be redeemed will be paid in cash over a period of time at an amount based on earnings and increases in book value. 29 Four M Corporation and Subsidiaries d/b/a Box USA Notes to Consolidated Financial Statements 19. Subsequent Events The Company has experienced a decline in prices for corrugating medium as a result of increased capacity in the industry and decreased demand for such products. As a result of this decline in price and demand, the Company will shut down its Ft. Madison Mill as of March 31, 1997 for an indefinite period of time. Operations at the Ft. Madison Mill will resume when market conditions warrant a resumption of production. In addition, the Company and Stone Container, as partners in the Mill Joint Venture, (see Note 9) have decided to shut down the St. Joe Mill on April 1, 1997 for an indefinite period of time. The Company continues to be subject to the terms of the Output Purchase Agreement (see Note 6) . The Company sold certain of its machinery and equipment in its corrugating facility located in College Park, Georgia in January 1997 for approximately $2.5 million. 30 INDEPENDENT AUDITORS' REPORT RELATING TO SCHEDULE Board of Directors and Stockholder Four M Corporation and Subsidiaries The audits referred to in our report to Four M Corporation and Subsidiaries dated March 18, 1997 which is contained in Item 8 of this Form 10-K included the audit of the Schedule listed under Item 21(b) for the five month period ended December 31, 1996 and each of the three years in the period ended July 31, 1996. This Financial Statement Schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this Financial Statement Schedule based on our audits. In our opinion, such Schedule presents fairly, in all material respects, the information set forth therein for the five month period ended December 31, 1996 and each of the three years in the period ended July 31, 1996. /s/ BDO Seidmen, LLP -------------------- BDO Seidman, LLP Valhalla, New York March 18, 1997 SCHEDULE II FOUR M CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------------------------------- -------- ------------------------------------ --------------------- ------------- ADDITIONS --------- BALANCE AT CHARGED TO CHARGED TO BEGINNING OF COST AND OTHER ACCOUNTS - BALANCE AT END DESCRIPTION PERIOD EXPENSES DESCRIBE DEDUCTIONS - DESCRIBE OF PERIOD - --------------------------------- ------------------------------- ------------------ ----------------------- -------------- Year ended July 31, 1993 Allowance for doubtful accounts....................... $1,970,000 $809,000 -- $ 612,000(1) $2,167,000 - -- Year ended July 31, 1994 Allowance for doubtful accounts....................... $2,167,000 $599,000 -- $1,224,000(1) $1,542,000 Year ended July 31, 1995 Allowance for doubtful accounts....................... $1,542,000 $575,000 -- $ 339,000(1) $1,778,000 Year ended July 31, 1996 Allowance for doubtful accounts....................... $1,778,000 $736,000 -- $ 605,000(1) $1,909,000 Period ended December 31, 1996... $1,909,000 $582,000 $151,000(2) $1,021,000(1) $1,621,000
- -------- (1) Amounts written off. (2) Acquired through Mannkraft purchase. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. FOUR M CORPORATION By: /s/Dennis Mehiel ---------------- Dennis Mehiel Chairman of the Board and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title(s) Date /s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997 - ----------------- (Principal Executive Officer) Dennis Mehiel /s/ Chris Mehiel Executive Vice President, Chief April 2, 1997 - ---------------- Operating Officer and Director Chris Mehiel /s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997 - ----------------------- Financial Officer and Director Timothy D. McMillin (Principal Accounting Officer) /s/ James Armenakis Director April 2, 1997 - ------------------- James Armenakis /s/ Lawrence Bishop Director April 2, 1997 - ------------------- Lawrence A. Bishop Samuel B. Guren Director April 2, 1997 /s/ John Nevin Director April 2, 1997 - -------------- John Nevin /s/ Thomas Uleau Director April 2, 1997 - ---------------- Thomas Uleau SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. FOUR M PAPER CORPORATION By: /s/Dennis Mehiel ---------------- Dennis Mehiel Chairman of the Board and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title(s) Date /s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997 - ----------------- (Principal Executive Officer) Dennis Mehiel /s/ Chris Mehiel Executive Vice President, Chief April 2, 1997 - ---------------- Operating Officer and Director Chris Mehiel /s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997 - ----------------------- Financial Officer and Director Timothy D. McMillin (Principal Accounting Officer) /s/ James Armenakis Director April 2, 1997 - ------------------- James Armenakis /s/ Lawrence Bishop Director April 2, 1997 - ------------------- Lawrence A. Bishop Samuel B. Guren Director April 2, 1997 /s/ John Nevin Director April 2, 1997 - -------------- John Nevin /s/ Thomas Uleau Director April 2, 1997 - ---------------- Thomas Uleau SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. BOX USA GROUP, INC. By: /s/Dennis Mehiel ---------------- Dennis Mehiel Chairman of the Board and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title(s) Date /s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997 - ----------------- (Principal Executive Officer) Dennis Mehiel /s/ Chris Mehiel Executive Vice President, Chief April 2, 1997 - ---------------- Operating Officer and Director Chris Mehiel /s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997 - ----------------------- Financial Officer and Director Timothy D. McMillin (Principal Accounting Officer) /s/ James Armenakis Director April 2, 1997 - ------------------- James Armenakis /s/ Lawrence Bishop Director April 2, 1997 - ------------------- Lawrence A. Bishop Director Samuel B. Guren Director April 2, 1997 Director /s/ John Nevin Director April 2, 1997 - -------------- John Nevin /s/ Thomas Uleau Director April 2, 1997 - ---------------- Thomas Uleau SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. PAGE PACKAGING CORPORATION By: /s/Dennis Mehiel ---------------- Dennis Mehiel Chairman of the Board and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title(s) Date /s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997 - ----------------- (Principal Executive Officer) Dennis Mehiel /s/ Chris Mehiel Executive Vice President, Chief April 2, 1997 - ---------------- Operating Officer and Director Chris Mehiel /s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997 - ----------------------- Financial Officer and Director Timothy D. McMillin (Principal Accounting Officer) /s/ James Armenakis Director April 2, 1997 - ------------------- James Armenakis /s/ Lawrence Bishop Director April 2, 1997 - ------------------- Lawrence A. Bishop Samuel B. Guren Director April 2, 1997 /s/ John Nevin Director April 2, 1997 - -------------- John Nevin /s/ Thomas Uleau Director April 2, 1997 - ---------------- Thomas Uleau SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. BOX USA, INC. By: /s/Dennis Mehiel ---------------- Dennis Mehiel Chairman of the Board and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title(s) Date /s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997 - ----------------- (Principal Executive Officer) Dennis Mehiel /s/ Chris Mehiel Executive Vice President, Chief April 2, 1997 - ---------------- Operating Officer and Director Chris Mehiel /s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997 - ----------------------- Financial Officer and Director Timothy D. McMillin (Principal Accounting Officer) /s/ James Armenakis Director April 2, 1997 - ------------------- James Armenakis /s/ Lawrence Bishop Director April 2, 1997 - ------------------- Lawrence A. Bishop Samuel B. Guren Director April 2, 1997 /s/ John Nevin Director April 2, 1997 - -------------- John Nevin /s/ Thomas Uleau Director April 2, 1997 - ---------------- Thomas Uleau SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. FOUR M MANUFACTURING GROUP OF GEORGIA, INC. By: /s/Dennis Mehiel ---------------- Dennis Mehiel Chairman of the Board and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title(s) Date /s/ Dennis Mehiel Chairman of the Board and Director April 2, 1997 - ----------------- (Principal Executive Officer) Dennis Mehiel /s/ Chris Mehiel Executive Vice President, Chief April 2, 1997 - ---------------- Operating Officer and Director Chris Mehiel /s/ Timothy D. McMillin Senior Vice President, Chief April 2, 1997 - ----------------------- Financial Officer and Director Timothy D. McMillin (Principal Accounting Officer) /s/ James Armenakis Director April 2, 1997 - ------------------- James Armenakis /s/ Lawrence Bishop Director April 2, 1997 - ------------------- Lawrence A. Bishop Director Samuel B. Guren Director April 2, 1997 Director /s/ John Nevin Director April 2, 1997 - -------------- John Nevin /s/ Thomas Uleau Director April 2, 1997 - ---------------- Thomas Uleau EXHIBIT INDEX Exhibit Number Description of Exhibit Page - ------ ---------------------- ---- 2.1 Asset Purchase Agreement, dated as of November 1, 1995, among Four M Corporation (the "Company"), St. Joe Forest Products Company, St. Joe Container Company, St. Joe Paper Company and Florida Coast Paper Company, L.L.C. ("Florida Coast"). 3.1 Certificate of Incorporation of the Company. 3.2 Certificate of Incorporation of Box USA Group, Inc. 3.3 Certificate of Incorporation of Four M Paper Corporation. 3.4 Certificate of Incorporation of Page Packaging Corporation. 3.5 Certificate of Incorporation of Box USA, Inc. 3.6 Certificate of Incorporation of Four M Manufacturing Group of Georgia, Inc. 3.7 By-laws of the Company. 3.8 By-laws of Box USA Group, Inc. 3.9 By-laws of Four M Paper Corporation. 3.10 By-laws of Page Packaging Corporation. 3.11 By-laws of Box USA, Inc. 3.12 By-laws of Four M Manufacturing Group of Georgia, Inc. 4.1 Indenture, dated as of May 30, 1996, between the Company and Norwest Bank Minnesota, National Association (the "Trustee"). 4.2 Form of 12% Series A and Series B Senior Secured Notes, dated as of May 30, 1996 (incorporated by reference to Exhibit 4.1). 4.3 Registration Rights Agreement, dated as of May 30, 1996, among the Company, the Guarantors and Bear, Stearns & Co. Inc. (the "Initial Purchaser"). 4.4 Security Agreement, dated as of May 30, 1996, between the Company and the Trustee. 4.5 Subsidiary Security Agreement, dated as of May 30, 1996, among the Guarantors and the Trustee. 4.6 Contribution Agreement, dated as of May 30, 1996, among the Company, the Guarantors and the Trustee. 4.7 Drop Down Notes, dated as of May 30, 1996, executed by each of the Guarantors. 4.8 Drop Down Note Security Agreement, dated as of May 30, 1996, among the Guarantors and the Company. 4.9 Guaranty, dated as of May 30, 1996, among the Guarantors and the Trustee. 4.10 Form of Company Pledge Agreement, dated as of May 30, 1996, between the Company and the Trustee. 4.11 Form of Subsidiary Pledge Agreement, dated as of May 30, 1996, among the Guarantors and the Trustee. 4.12 Warrant Agreement, dated as of May 30, 1996, between the Company and the Initial Purchaser. 10.1 Output Purchase Agreement, dated as of May 30, 1996, among the Company, Florida Coast and Stone Container Corporation ("Stone"). 10.2 Financing and Security Agreement, dated as of May 30, 1996, among the Company, the Guarantors, NationsBank, N.A. ("NationsBank"), the financial institutions named therein (together with NationsBank, the "Lenders"), and NationsBank, as agent (NationsBank, in such capacity, the "Agent"). 10.3 Subordinated Credit Agreement, dated as of May 30, 1996, among the Company, Florida Coast and Stone. 10.4 Environmental Indemnity Agreement, dated as of May 30, 1996, between the Company and Florida Coast. 10.5 Stock Appreciation Unit Plan of the Company, dated as of August 1, 1992, and Amendment No. 1 thereto, dated as of August 1, 1995. 10.6 Subordination, Nondisturbance and Attornment Agreement, dated as of May 30, 1996, between Norwest Bank Minnesota, National Association, and Box USA Group, Inc. 10.7 First Amendment to Financing and Security Agreement and Additional Borrower Joinder Supplement, dated as of February 28, 1997, among the Company, the Guarantors, the Lenders, the Agent and Box USA of Florida, L.P. 12.1 Statement re computation of ratios. 21.1 Subsidiaries of the registrant. 27.1 Financial Data Schedule. 99.1 The Financial Statements for the period from May 30, 1996 to December 1, 1996, together with the Independent Accountants' Report for Florida Coast and the Financial Statements for the period from January 1, 1996 to May 30, 1996 and the two years ended December 31, 1995 and 1994 together with the Independent Auditors' Report for St. Joe Forest Products Company - Linerboard Mill Operations included in the Florida Coast 10-K as filed with SEC on March 31, 1997. EX-10.7 2 FIRST AMENDMENT Exhibit 10.7 FIRST AMENDMENT TO FINANCING AND SECURITY AGREEMENT AND ADDITIONAL BORROWER JOINDER SUPPLEMENT THIS FIRST AMENDMENT TO FINANCING AND SECURITY AGREEMENT AND ADDITIONAL BORROWER JOINDER SUPPLEMENT (this "Agreement") is made this 28th day of February, 1997, by and among BOX USA OF FLORIDA, L.P., a limited partnership organized under the laws of the State of Georgia (the "Florida Partnership"); Four M Corporation, a corporation organized under the laws of the State of Maryland ("FMC"), Box USA Group, Inc., a corporation organized under the laws of the State of New York ("Box"), Four M Paper Corporation, a corporation organized under the laws of the State of Delaware ("Paper"), Four M Manufacturing Group of Georgia, Inc., a corporation organized under the laws of the State of Pennsylvania ("Georgia") and Page Packaging Corporation, a corporation organized under the laws of the State of Delaware ("Page"), jointly and severally (FMC, Box, Paper, Georgia, and Page, are sometimes herein collectively referred to as the "Original Borrowers;" FMC, Box, Paper, Georgia, Page, and the Florida Partnership are sometimes herein collectively referred to as the "Borrowers" and individually, as a "Borrower"); NATIONSBANK, N.A., a national banking association ("NationsBank"), and the other financial institutions listed on the signature pages hereof (NationsBank and the other financial institutions are herein collectively referred to as the "Lenders" and individually, as a "Lender"); and NATIONSBANK, N.A., a national banking association (the "Agent"). RECITALS -------- A. The Agent, the Lenders and the Original Borrowers are parties to the Financing and Security Agreement dated as of May 30, 1996 (as amended, modified, restated, substituted, extended and renewed at any time and from time to time, the "Financing Agreement"). Capitalized terms not otherwise defined in this Agreement shall have the meanings given to them in the Financing Agreement. B. Box Georgia is the sole general partner of the Florida Partnership which is in the same business as Box. C. The Borrowers have requested that the Lenders provide working capital financing to the Florida Partnership by adding the Florida Partnership as an Additional Borrower under the Financing Agreement. The Borrowers have advised the Lenders that the Borrowers believe that such financing will benefit them by the enhancement to Box Georgia's position as general partner of the Florida Partnership. D. The Lenders are willing to provide the working capital financing on the condition that the Florida Partnership, to the limited extent provided in this Agreement, becomes an Additional Borrower and grant a Lien on the Florida Partnership Collateral (as that term is defined in this Agreement) and that the Borrowers agree to the other terms and conditions of this Agreement. AGREEMENTS ---------- NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledged, the Borrowers, the Agent and the Lenders agree that the Financing Agreement is hereby amended as follows: 1. The Borrowers, the Agent and the Lenders agree that the Recitals above are a part of this Agreement. Unless otherwise expressly defined in this Agreement, terms defined in the Financing Agreement shall have the same meaning under this Agreement. 2. (a) Subject to the terms, conditions and limitations set forth in this Agreement, the Florida Partnership hereby acknowledges, confirms and agrees that on and as of the date of this Agreement the Florida Partnership has become, and is, an "Additional Borrower" and a "Borrower" under the Financing Agreement and the other Financing Documents. Except as otherwise provided in this Agreement, the Florida Partnership shall be bound and liable, jointly and severally, with the Original Borrowers by all of the terms, provisions and conditions of the Financing Documents. (b) Notwithstanding the provisions of subsection (a) above and the terms and conditions of the Financing Agreement or any of the other Financing Documents: (i) The Florida Partnership shall be obligated to the Agent and the Lenders only to the extent of the Florida Partnership Obligations (as that term is defined below) outstanding from time to time. (ii) The Florida Partnership Collateral shall secure only the Florida Partnership Obligations. (iii) The proceeds of the Florida Partnership Advances shall be used solely for the working capital uses of the Florida Partnership in the ordinary course of the Florida Partnership's business. (iv) The Florida Partnership Advances outstanding at any time shall not exceed the sum of $600,000 plus the lesser of (A) $1,500,000, or (B) the Florida Partnership Borrowing Base (as that term is defined below). (v) Advances to Borrowers other than the Florida Partnership shall not exceed the portion of the Borrowing Base based solely on the Eligible Receivables and the Eligible Inventory of those other Borrowers minus the amount by which the Florida Partnership Advances exceed the Florida Partnership Borrowing Base. (vi) To the extent a limitation contained in item (v) or (vi) is exceeded, a Borrowing Base Deficiency shall be deemed to exist. (vii) As part of the monthly statements required by Section 6.1.1(c) of the Financing Agreement, the Borrower shall furnish a detailed statement of the extent to which advances under the Revolving Credit Facility during the month were Florida Partnership Advances. (viii) All Prepayments made by the Florida Partnership under the Revolving Credit Facility shall be applied solely to the Florida Partnership Obligations. (ix) All proceeds from collections of the Florida Partnership Collateral under the Financing Agreement shall be applied solely to the Florida Partnership Obligations. (x) The Florida Partnership shall have no liability under Section 2.4.5 of the Financing Agreement. Each other Borrower (other than Box USA of Florida, L.P., if and when it becomes a Borrower) shall be obligated under Section 2.4.5 with respect to all Obligations including, without limitation, the Obligations of the Florida Partnership. (c) Without otherwise in any way implying any limitation on any of the provisions of this Agreement, the Financing Agreement, or any of the other Financing Documents, to secure the Florida Partnership Obligations, the Florida Partnership hereby assigns, pledges and grants to the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations, and agrees that the Agent and the Lenders shall have a perfected and continuing security interest in, and Lien on, (i) all of the Florida Partnership's Accounts, Inventory, Chattel Paper, Documents, and Instruments, (ii) all credit insurance policies and insurance covering the Inventory and all cash and non-cash proceeds thereof, and (iii) all books and records in whatever media (paper, electronic or otherwise) recorded or stored, with respect to any or all of the foregoing, all of the foregoing whether now owned or existing or hereafter acquired or arising. The Florida Partnership further agrees that the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations, shall have in respect thereof all of the rights and remedies of a secured party under the Uniform Commercial Code as well as those provided in this Agreement, under each of the other Financing Documents and under applicable Laws. 3. Section 1.1 of the Financing Agreement is hereby amended by adding the following new definitions: "Florida Partnership" means Box USA of Florida, L.P., a limited partnership organized under the laws of the State of Georgia. "Florida Partnership Advance" means an advance under the Revolving Credit Facility for the use by or for the benefit of the Florida Partnership, and shall include an advance in the amount of $694,304 made on or after the date of this Agreement to repay Box for advances it made to the Florida Partnership prior to the date of this Agreement; and "Florida Partnership Advances" means the collective reference to all such advances. "Florida Partnership Borrowing Base" means that portion of the Borrowing Base based solely on the Eligible Receivables and the Eligible Inventory of the Florida Partnership. "Florida Partnership Collateral" means the Collateral of the Florida Partnership. "Florida Partnership Collateral Account" has the meaning described in Section 2.1.8A. "Florida Partnership Lockbox" has the meaning set forth in Section 2.1.8A. "Florida Partnership Obligations" means those Obligations arising pursuant to, in connection with and/or on account of the Florida Partnership Advances, whether pursuant to this Agreement, each Note, each Security Document, and any of the other Financing Documents, including, without limitation, with respect to and to the extent related to the Florida Partnership Advances, the principal of, and interest on, each Note, late charges, the Fees, Enforcement Costs, and prepayment fees; and also means any and all renewals, extensions, substitutions, amendments, restatements and rearrangements of any such Obligations. "Florida Partnership Revolving Loan Account" has the meaning described in Section 2.1.9A. 4. The Financing Agreement is amended by adding the following as new Section 2.1.8A: 2.1.8A The Florida Partnership Collateral Account. Notwithstanding and, with respect to the Florida Partnership only, in lieu of the provisions of Section 2.1.8, the Florida Partnership will deposit, or cause to be deposited, all Items of Payment with respect to the Florida Partnership Collateral to a bank account designated by the Agent and from which the Agent alone has power of access and withdrawal (the "Florida Partnership Collateral Account"). Each deposit shall be made not later than the next Business Day after the date of receipt of the Items of Payment with respect to the Florida Partnership Collateral. The Items of Payment shall be deposited in precisely the form received, except for the endorsements of the Florida Partnership where necessary to permit the collection of any such Items of Payment, which endorsement the Florida Partnership hereby agrees to make. In the event the Florida Partnership fails to do so, the Florida Partnership hereby authorizes the Agent to make the endorsement in the name of the Florida Partnership. Prior to such a deposit, the Florida Partnership will not commingle any Items of Payment with any of the Florida Partnership' other funds or property, but will hold them separate and apart in trust and for the account of the Agent for the ratable benefit of the Lenders. In addition, the Florida Partnership shall direct the mailing of all Items of Payment from its Account Debtors to a post-office box designated by the Agent, or to such other additional or replacement post-office boxes pursuant to the request of the Agent from time to time (collectively, the "Florida Partnership Lockbox"). The Agent shall have unrestricted and exclusive access to the Lockbox. The Florida Partnership hereby authorizes the Agent to inspect all Items of Payment, endorse all Items of Payment in the name of the Florida Partnership, and deposit such Items of Payment in the Florida Partnership Collateral Account. The Agent reserves the right, exercised in its sole and absolute discretion from time to time, to provide to the Florida Partnership Collateral Account credit prior to final collection of an Item of Payment and to disallow credit for any Item of Payment which is unsatisfactory to the Agent. In the event Items of Payment are returned to the Agent for any reason whatsoever, the Agent may, in the exercise of its discretion from time to time, forward such Items of Payment a second time. Any returned Items of Payment shall be charged back to the Florida Partnership Collateral Account, the Florida Partnership Revolving Loan Account, or other account, as appropriate. The Agent will apply the whole or any part of the funds credited to the Florida Partnership Collateral Account against the outstanding principal balance of the Florida Partnership Advances (or during the continuance of a Default or an Event of Default, against any of the Florida Partnership Obligations) or, in the event there are no Florida Partnership Obligations outstanding, credit such funds to the depository account of the Florida Partnership with the Agent. The order and method (including, without limitation, the extent to which credit may be given for uncollected funds) of such application shall be in the sole discretion of the Agent, exercised from time to time. On the first day of each month, the Borrowers shall pay the Agent as part of the Agent's Obligations an amount equal to the additional interest which would have accrued on the Revolving Loans during the preceding month if collections in the Florida Partnership Collateral Account during the month had been received one (1) Business Day subsequent to their actual receipt. The Enforcement Costs include, without limitation, all customary fees, charges and expenses charged or incurred by the Agent with respect to the administration of the Florida Collateral Account. 5. The Financing Agreement is amended by adding the following as new Section 2.1.9A: SECTION 2.1.9A Florida Partnership Revolving Loan Account. In addition to the Revolving Loan Account, the Agent will establish and maintain a loan account on its books (the "Florida Partnership Revolving Loan Account") to which the Agent will (a) debit (i) the principal amount of each Florida Partnership Advance made by the Lenders hereunder as of the date made, (ii) the amount of any interest accrued on the Florida Partnership Advances as and when due, and (iii) any other amounts due and payable by the Borrowers to the Agent and/or the Lenders from time to time under the provisions of this Agreement in connection with the Florida Partnership Advances, and (b) credit all payments made by the Borrowers to the Agent on account of the Florida Partnership Advances as of the date made including, without limitation, funds credited to the Florida Partnership Revolving Loan Account from the Florida Partnership Collateral Account. The Agent may debit the Florida Partnership Revolving Loan Account for the amount of any Item of Payment credited to the Florida Partnership Collateral Account or the Florida Partnership Loan Account which is returned to the Agent unpaid. All credit entries to the Florida Partnership Revolving Loan Account are conditional and shall be readjusted as of the date made if final and indefeasible payment is not received by the Agent in cash or solvent credits. The Borrowers hereby promise to pay to the order of the Agent for the ratable benefit of the Lenders, on demand, an amount equal to the excess, if any, of all debit entries over all credit entries recorded in the Florida Partnership Revolving Loan Account under the provisions of this Agreement. Any and all periodic or other statements or reconciliations, and the information contained in those statements or reconciliations, of the Florida Partnership Revolving Loan Account shall be final, binding and conclusive upon the Borrowers in all respects, absent manifest error, unless the Agent receives specific written objection thereto from the Borrowers within thirty (30) Business Days after such statement or reconciliation shall have been sent by the Agent. 6. Section 2.1.12(b) of the Financing Agreement is amended to read as follows: (b) The aggregate outstanding principal amount of the Revolving Loan minus the lesser of (i) the Florida Partnership Advances or (ii) the Florida Partnership Borrowing Base, shall at no time exceed an amount equal to the aggregate of (x) the Borrowing Base minus (y) the Florida Partnership Borrowing Base, minus (z) Five Million Dollars ($5,000,000). 7. References in the Financing Agreement and in any of the other Financing Documents (a) to the status of any one or more of the Borrowers as a corporation shall in the case of the Florida Partnership be deemed to refer to the Florida Partnership as a limited partnership, (b) to the corporate power, authority, action, structure or organizational documents of any one or more of the Borrowers shall in the case of the Florida Partnership be deemed to refer to the limited partnership power, authority, action, structure or organizational documents of the Florida Partnership. 8. The agreements of the Agent and the Lenders under this Agreement are subject to the following terms and conditions, time being of the essence: (a) The Agent shall have received a certificate of the general partner of the Florida Partnership, dated as of the date of this Agreement: (i) stating that the Florida Partnership's limited partnership agreement and certificate of limited partnership furnished to the Agent on the Closing Date has not been the subject of any amendments, modifications, restatements, substitutions, extensions or renewals thereto; (ii) authorizing the execution and delivery of this Agreement, the joinder in the other Financing Documents, and the performance of the Florida Partnership's obligations under the Financing Documents; (iii) setting forth the identity and signatures of the general partner then authorized to sign the Financing Documents to which the Florida Partnership is a party; (iv) authorizing Box to request and direct the Florida Partnership Advances on behalf of the Florida Partnership and otherwise to act on behalf of the Florida Partnership as set forth in Section 2.2.1(c) of the Financing Agreement; and (v) identifying the Florida Partnership's partners. (b) The Agent shall have received the favorable opinion of counsel for the Borrowers addressed to the Agent and the Lenders in form satisfactory to the Agent and its counsel. (c) The Agent shall have received with respect to the Florida Partnership an insurance certificate in accordance with the provisions of Section 6.1.8 (Insurance) and Section 6.1.20 (Insurance With Respect to Inventory) of this Agreement. (d) The Collateral Disclosure List shall be supplemented by information pertaining to the Florida Partnership and the Florida Partnership shall become a party thereto. 9. The Florida Partnership hereby represents and warrants that all of the representations and warranties contained in the Financing Documents are true and correct on and as of the date hereof as if made on and as of such date, both before and after giving effect to this Agreement, and that no Event of Default or Default has occurred and is continuing or exists or would occur or exist after giving effect to this Agreement. Each of the Borrowers hereby issues, ratifies and confirms the representations, warranties and covenants contained in the Financing Agreement, as amended hereby. Each of the Borrowers agrees that this Agreement is not intended to and shall not cause a novation with respect to any or all of the Obligations. This Agreement is one of the Financing Documents. 10. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Maryland, without regard to principles of choice of law. 11. The Borrowers shall pay at the time this Agreement is executed and delivered all fees, commissions, costs, charges, taxes and other expenses incurred by the Agent and its counsel in connection with this Agreement, including, but not limited to, reasonable fees and expenses of the Agent's counsel and all recording fees, taxes and charges. 12. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original and all taken together shall constitute but one and the same instrument. The Borrowers agree that the Agent and the Lenders may rely on a telecopy of any signature of any Borrower. The Agent and the Lenders agree that the Borrower may rely on a telecopy of this Agreement executed by the Agent and the Lenders, respectively. IN WITNESS WHEREOF, each of the parties hereto have executed and delivered this Agreement under their respective seals as of the day and year first written above. [SIGNATURES ARE ON THE FOLLOWING PAGES] SIGNATURE PAGE TO FIRST AMENDMENT TO FINANCING AND SECURITY AGREEMENT AND ADDITIONAL BORROWER JOINDER SUPPLEMENT WITNESS OR ATTEST: FOUR M CORPORATION /s/Harvey L. Friedman By: Timothy D. McMillin (Seal) - --------------------- ------------------- Senior Vice President WITNESS OR ATTEST: BOX USA GROUP, INC. /s/Harvey L. Friedman - ---------------------- By: Timothy D. McMillin (Seal) ------------------- Senior Vice President WITNESS OR ATTEST: FOUR M PAPER CORPORATION /s/Harvey L. Friedman - ---------------------- By: Timothy D. McMillin (Seal) ------------------- Senior Vice President WITNESS OR ATTEST: FOUR M MANUFACTURING GROUP OF GEORGIA, INC. /s/Harvey L. Friedman - ---------------------- By: Timothy D. McMillin (Seal) ------------------- Senior Vice President WITNESS OR ATTEST: PAGE PACKAGING CORPORATION /s/Harvey L. Friedman - ---------------------- By: Timothy D. McMillin (Seal) ------------------- Senior Vice President SIGNATURE PAGE TO FIRST AMENDMENT TO FINANCING AND SECURITY AGREEMENT AND ADDITIONAL BORROWER JOINDER SUPPLEMENT -------------------------------------- WITNESS OR ATTEST: BOX USA OF FLORIDA, L.P. BY: FOUR M MANUFACTURING GEORGIA, INC. /s/Harvey L. Friedman - ---------------------- By: Timothy D. McMillin (Seal) ------------------- Senior Vice President WITNESS: NATIONSBANK, N.A. in its capacity as Agent By:/s/ Vickie Tillman (Seal) - ------------------------- ------------------------ Name: Vickie Tillman Title: Vice President WITNESS: NATIONSBANK, N.A. in its capacity as a Lender By:/s/ Vickie Tillman (Seal) - ------------------------- ------------------------ Name: Vickie Tillman Title: Vice President WITNESS: IBJ SCHRODER BANK & TRUST COMPANY By:/s/ Robert R. Wallace (Seal) - ------------------------- ------------------------ Name: Robert R. Wallace Title: Vice President SIGNATURE PAGE TO FIRST AMENDMENT TO FINANCING AND SECURITY AGREEMENT AND ADDITIONAL BORROWER JOINDER SUPPLEMENT WITNESS: SANWA BUSINESS CREDIT CORPORATION By:/s/ Lawrence J. Placek (Seal) - ------------------------- ------------------------ Name: Lawrence J. Placek Title: Vice President WITNESS: THE BANK OF NEW YORK COMMERCIAL CORPORATION By:/s/ Ryan Peck (Seal) - ------------------------- ------------------------ Name: Ruan Peck Title: Vice President WITNESS: FLEET CAPITAL CORPORATION By: /s/ Howard Handman (Seal) - ------------------------- ------------------------ Name: Howard Handman Title: EX-12.1 3 RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12.1 FOUR M CORPORATION RATIO OF EARNINGS TO FIXED CHARGES
Five Months Ended December 31, Fiscal Year Ended July 31, ---------------------------------------------------------------------------------------------- 1996 1995 1996 1995 1994 1993 1992 ---------------------------------------------------------------------------------------------- Interest expense................ $ 10,106 $ 1,589 $ 7,565 $ 5,607 $ 5,448 $ 4,948 $ 5,903 Rent expense.................... 3,555 2,051 5,041 4,613 4,984 4,997 5,442 One third rent expense.......... 1,185 684 1,680 1,538 1,661 1,666 1,814 ------- --------- -------- --------- -------- -------- -------- Fixed charges................... $ 11,291 $ 2,273 $ 9,245 $ 7,145 $ 7,109 $ 6,614 $ 7,717 IBT............................. $ (3,573) 6,588 $ 8,930 $ 16,457 $ (3,802) $ 1,435 $ 1,435 Fixed charges from above........ 11,291 2,273 9,245 7,145 7,109 6,614 7,717 -------- -------- -------- -------- -------- -------- -------- Earnings, as defined............ $ 7,718 $ 8,861 $ 18,175 $ 23,602 $ 3,307 $ 6,232 $ 9,152 Ratio of earnings to fixed charges......................... .7x 3.9x 2.0x 3.3x 0.5x 1.0x .7x --------- --------- --------- --------- --------- --------- ----------
EX-27.1 4 FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 5-MOS DEC-31-1996 AUG-01-1996 DEC-31-1996 2,431 0 52,775 1,621 32,896 108,833 173,333 30,129 303,645 62,984 0 0 0 13,150 962 12,188 196,787 0 171,304 0 0 0 (10,106) (3,573) (1,486) (2,087) 0 0 0 (2,174) 0 0
EX-99.1 5 FINANCIAL PAGES ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS Independent Auditors' Report Statement of Financial Position as of December 31, 1995 Statementof Operations for the period from January 1, 1996 to May 30, 1996 and for the years ended December 31, 1995 and 1994 Statementof Cash Flows for the period from January 1, 1996 to May 30, 1996 and for the years ended December 31, 1995 and 1994 Statementof Changes in Equity for the period from January 1, 1996 to May 30, 1996 and for the years ended December 31, 1995 and 1994 Notes to Financial Statements FLORIDA COAST PAPER COMPANY, L.L.C. Independent Auditors' Report Balance Sheet as of December 31, 1996 Statementof Operations and Changes in Accumulated Deficit for the period from May 30, 1996 to December 31, 1996 Statement of Cash Flows for the period from May 30, 1996 to December 31, 1996 Notes to Financial Statements FLORIDA COAST PAPER FINANCE CORP. Finance Corp. is a subsidiary of the Company that was incorporated in Delaware for the purpose of serving as co- issuer of and to facilitate the offering of Florida Coast's 12 3/4% Series A First Mortgage Notes due 2003 (the "Old Notes") and Florida Coast's exchange of its Old Notes for its registered 12 3/4% Series B First Mortgage Notes due 2003. Finance Corp. does not have any substantial operations or assets and does not have any revenues; thus, the separate financial statements of Finance Corp. have not been included in the financial statements included herein. INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS St. Joe Forest Products Company: We have audited the accompanying statement of financial position of St. Joe Forest Products Company--Linerboard Mill Operations as of December 31, 1995, and the related statements of operations, cash flows and changes in equity for the period from January 1, 1996 to May 30, 1996 and for each of the years in the two-year period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of St. Joe Forest Products Company--Linerboard Mill Operations as of December 31, 1995, and the results of its operations and its cash flows for the period from January 1, 1996 to May 30, 1996 and for each of the years in the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP ------------------------- KPMG Peat Marwick LLP Jacksonville, Florida March 20, 1997 ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS STATEMENT OF FINANCIAL POSITION As of December 31, 1995 (dollars in thousands) ASSETS Current assets: Accounts receivable ....................................... $ 9,249 Inventories, net .......................................... 14,632 Other assets .............................................. 1,143 -------- Total current assets ...................................... 25,024 Property, plant and equipment, net ........................ 169,424 -------- Total assets .............................................. $194,448 ======== LIABILITIES AND EQUITY Current liabilities: Accounts payable........................................... $ 7,746 Accrued liabilities ....................................... 1,354 Accrued reserves .......................................... 2,056 -------- Total current liabilities ................................. 11,156 Accrued reserves .......................................... 2,379 Deferred income taxes ..................................... 33,533 -------- Total liabilities ......................................... 47,088 -------- Equity in net assets ...................................... 147,360 -------- Total liabilities and equities ............................ $194,448 ======== See accompanying notes to financial statements. - 2 - ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS STATEMENT OF OPERATIONS For the period from January 1, 1996 to May 30, 1996 and the years ended December 31, 1995 and 1994 (dollars in thousands)
Period ended Year ended December 31, ------------ ----------------------- May 30, 1996 1995 1994 ------------ ---- ---- Net Sales ...................................................... $ 67,670 $ 239,165 $ 192,886 Cost of sales .................................................. 68,979 180,788 183,800 Selling, general and administrative expense .................... 1,409 4,672 3,077 -------- --------- --------- Operating profit (loss) ........................................ (2,718) 53,705 6,009 Other income: Interest income ................................................ -- 962 383 Other, net ..................................................... 152 95 227 -------- --------- --------- 152 1,057 610 -------- --------- --------- Income (loss) before income taxes .............................. (2,566) 54,762 6,619 Provision for income taxes: Current ........................................................ (753) 20,995 (494) Deferred ....................................................... (198) (701) 2,947 -------- --------- --------- Total provision for income taxes ............................... (951) 20,294 2,453 -------- --------- --------- Net income (loss) .............................................. $ (1,615) $ 34,468 $ 4,166 ======== ========= =========
See accompanying notes to financial statements. - 3 - ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS STATEMENT OF CASH FLOWS For the period from January 1, 1996 to May 30, 1996 and the years ended December 31, 1995 and 1994 (Dollars in thousands)
Period ended Year ended December 31, ------------ ----------------------- May 30, 1996 1995 1994 ------------ ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................................ $ (1,615) $ 34,468 $ 4,166 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation ............................................ 10,335 24,054 23,678 Increase (decrease) in deferred income taxes ....................................... (198) (701) 2,947 Changes in operating assets and liabilities: Accounts receivable ......................................... 3,324 3,043 (3,920) Inventories, net ............................................ 630 (2,524) 2,370 Other assets ................................................ (304) (78) (4) Accounts payable ............................................ 402 (810) 426 Accrued liabilities ......................................... 820 558 333 Accrued expenses and reserves ............................... -- 1,212 (153) -------- -------- -------- Cash provided by operating activities ............................ 13,394 59,222 29,843 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ....................... (4,160) (22,457) (8,321) Purchases of held to maturity investments ........................ -- (8,850) (3,951) Proceeds from maturity of investments ............................ -- 8,850 3,951 -------- -------- -------- Cash used in investing activities ................................ (4,160) (22,457) (8,321) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in intercompany accounts .................................. (9,234) (50,326) (8,434) -------- -------- -------- Cash used in financing activities ................................ (9,234) (50,326) (8,434) -------- -------- -------- Net (decrease) increase in cash and cash equivalents ................................................. -- (13,561) 13,088 Cash and cash equivalents at beginning of period ......................................... -- 13,561 473 -------- -------- -------- Cash and cash equivalents at end of period ....................... $ -- $ -- $ 13,561 ======== ======== ========
See accompanying notes to financial statements. - 4 - ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS STATEMENT OF CHANGES IN EQUITY For the period from January 1, 1996 to May 30, 1996 and the years ended December 31, 1995 and 1994 (Dollars in thousands)
Period ended Year ended December 31, ------------ ----------------------- May 30, 1996 1995 1994 ------------ ---- ---- Common stock ........................................................ $ 10 $ 10 $ 10 ========= ========= ========= Additional paid in capital .......................................... $ 75,014 $ 75,014 $ 75,014 ========= ========= ========= Retained earnings: Balance at beginning of year ................................... $ 158,684 $ 124,216 $ 120,050 Net income (loss) .............................................. (1,615) 34,468 4,166 --------- --------- --------- Balance at end of year ......................................... $ 157,069 $ 158,684 $ 124,216 ========= ========= ========= Intercompany accounts: Balance at beginning of year ................................... $ (86,348) $ (36,022) $ (27,588) Intercompany (sales) purchases: St. Joe Container Company .................................. (36,834) (126,410) (97,691) St. Joseph Land and Development Company ............................................... 16,932 55,225 54,321 Apalachicola Northern Railroad ............................. 1,241 4,310 4,489 Costs allocated from St. Joe Paper Company: Overhead allocation ........................................ 400 960 960 Current income taxes ....................................... (753) 20,995 (494) Net cash (transferred) received ................................ 9,780 (5,406) 29,981 --------- --------- --------- Balance at end of year ......................................... $ (95,582) $ (86,348) $ (36,022) ========= ========= =========
See accompanying notes to financial statements. - 5 - ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS NOTES TO FINANCIAL STATEMENTS For the period from January 1, 1996 to May 30, 1996 and the years ended December 31, 1995 and 1994 (Dollars in thousands) (1) Nature of Operations St. Joe Forest Products Company (SJFP) is engaged in the manufacture of mottled white and unbleached kraft linerboard. SJFP operates one production facility which is located in Port St. Joe, Florida. Sales are primarily to manufacturers of corrugated containers, both domestic and foreign. (2) Basis of Presentation The accompanying financial statements include all of the relevant assets, liabilities, revenues and expenses attributable to the linerboard mill operation of SJFP. Certain of SJFP's assets and liabilities were sold on May 30, 1996, pursuant to the asset purchase agreement between St. Joe Paper Company (SJPC), SJFP, St. Joe Container Company (SJCC), Florida Coast Paper Company, L.L.C. and Four M. Corporation dated November 1, 1995. The financial statements do not reflect SJFP's wholly owned subsidiaries. (3) Summary of Significant Accounting Policies (a) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b) Revenue Recognition Revenue from the sale of linerboard is recognized generally on delivery of the product to the common carrier. (c) Cash and Cash Equivalents For purposes of the statement of cash flows, cash and cash equivalents include cash on hand, bank demand accounts, money market accounts, remarketed certificates of participation and repurchase agreements having original maturities of three months or less. (d) Inventories Inventories are stated at the lower of cost or market. Costs for manufactured paper products and associated raw materials are determined under the last-in, first-out (LIFO) method. Costs for substantially all other inventories are determined under the first-in, first-out (FIFO) or the average cost method. A reserve for obsolescence is established for materials and supplies having no activity in the previous seven years. (e) Property, Plant and Equipment Depreciation is computed using both straight-line and accelerated methods over the useful lives of various assets. - 6 - (f) Self-insurance Self-insurance reserves are established for automobile liability, workers' compensation, group health insurance provided to employees and property losses based on claims filed and claims incurred but not reported, with a maximum per occurrence of $25 for automobile liability, $600 for workers' compensation, $50 for property loss, other than windstorm, and $250 for damage due to windstorm. SJFP is insured for insurance costs in excess of these limits. (g) Income Taxes SJFP's results of operations are included in the consolidated U.S. federal and Florida income tax returns of SJPC. The tax provisions and deferred tax liabilities presented have been determined as if SJFP was a stand-alone business filing separate returns, except to the extent that an operating loss can be utilized by SJPC, the benefit is allocated to SJFP. Current tax liabilities are paid to or refunded by SJPC. SJFP follows the asset and liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes." Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (4) Inventories Inventories as of December 31 consist of: 1995 ---- Manufactured paper products and associated raw materials....... $ 3,886 Materials and supplies......................................... 10,746 ------- $ 14,632 The replacement cost of manufactured paper products and associated raw material inventories was in excess of LIFO stated cost by approximately $2,750 as of December 31, 1995. The reserve for obsolescence was approximately $2,100 at December 31, 1995. (5) Property, Plant and Equipment Property, plant and equipment, at cost, as of December 31 consist of: Estimated 1995 Useful Life ---- ----------- Land............................................ $ 200 -- Land improvements............................... 4,123 20 Buildings....................................... 11,474 45 Machinery and equipment......................... 366,225 12-30 Office equipment................................ 732 10 Autos and trucks................................ 861 3-6 Construction 1,796 -- ---------- 385,411 Accumulated depreciation........................ 215,987 --------- $ 169,424 ========= - 7 - (6) Income Taxes Total income tax expense (benefit) for the period from January 1, 1996 to May 30, 1996 and the year ended December 31, 1995 and 1994 was attributable to income (loss) from continuing operations and was ($951), $20,294, and $2,453, respectively. Income tax expense (benefit) attributable to income (loss) from continuing operations differed from the amount computed by applying the statutory federal income tax rate to pre-tax income (loss) as a result of the following:
Period ended Year ended December 31, ------------ ----------------------- May 30, 1996 1995 1994 ------------ ---- ---- Tax at the statutory federal rate .................................. $ (898) $19,167 $2,317 State income taxes (net of federal benefit) ........................ (53) 1,127 136 -------- ------- ------ $ (951) $20,294 $2,453 ======== ======= ======
The tax effects of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at December 31, 1995, are presented below: 1995 ---- Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation............................................ $ 35,197 Deferred tax assets: Current: Accrued reserves........................................... 762 Noncurrent: Accrued reserves........................................... 1,644 Total deferred tax assets.................................. 2,406 Net deferred tax liability........................................ $ 32,791 ======= Based on the timing of reversal of future taxable amounts and SJFP's history of reporting taxable income, SJFP believes that the deferred tax assets will be realized and a valuation allowance is not considered necessary. The current deferred tax asset of $762 is recorded in other assets as of December 31, 1995 (7) Pension and Retirement Plans Substantially all of SJFP's employees, along with other SJPC and subsidiaries eligible employees, participate in SJPC pension plans. During the past four years, the assets of the SJPC pension plan have exceeded benefit obligations under such plans, resulting in pension income under SFAS No. 87 "Employers' Accounting for Pensions." SJPC has an Employee Stock Ownership Plan (ESOP) for the purpose of purchasing stock of SJPC for the benefit of qualified employees. Contributions to the ESOP are limited to .5% of compensation of employees covered under the ESOP. No assets of the SJPC pension plan or the ESOP will be transferred as a result of the asset purchase agreement. No allocation of benefit or expense from the pension plans or ESOP has been made to SJFP during the period from January 1, 1996 to May 30, 1996 and the years ended December 31, 1995 and 1994 due to immateriality. SJPC also has other defined contribution plans which, in conjunction with the ESOP cover substantially all its salaried employees. Contributions are at the employees' discretion and are matched by SJPC up to certain limits. SJFP's expense for these defined contribution plans was $79, $131 and $133 in 1996, 1995 and 1994 respectively. - 8 - Pursuant to the asset purchase agreement, the assets of the defined contribution plans attributable to transferred SJFP employees may be paid out immediately to the employee, left in the plans or rolled over into a qualified plan of the buyer, if such plan exists. (8) Related Party Transactions Intercompany due to and due from balances between SJFP and SJPC and its affiliates have been included in equity. The net intercompany due to SJFP was $86,348 at December 31, 1995. The intercompany transactions described below may or may not be indicative of what such transactions would have been had SJFP operated either as an unaffiliated entity or in affiliation with another entity. An allocation of costs of overhead of SJPC is included in selling, general and administrative expenses. SJPC provides services for SJFP in treasury, taxes, benefits administration and legal support and other financial systems and support. SJPC's budgeted overhead was allocated based on a formula which equally weighted each subsidiary's proportional share of payroll, sales and fixed assets. This formula is similar to that which is used by many states to determine the economic activity of an entity and is considered by management to be a reasonable measure of the use of corporate resources by each subsidiary. SJFP was billed approximately $400 for the period from January 1, 1996 to May 30, 1996 and approximately $960 annually for such services in 1995 and 1994. Sales to SJCC, a wholly owned subsidiary of SJFP, amounted to approximately $36,834, $126,410 and $97,691 representing approximately 78,000, 238,000 and 248,000 tons for the period from January 1, 1996 to May 30, 1996 and for the years ended December 31, 1995 and 1994, respectively. Pricing for these transactions was based on the Pulp & Paper Week Price Watch: Paper and Paperboard. In addition, SJFP purchases both linerboard and corrugating medium for SJCC from outside suppliers. The price paid by SJFP for this rollstock was negotiated with each supplier. SJCC was charged for this rollstock at the prices published in Pulp & Paper Week. Purchases of pulpwood and wood chips from St. Joseph Land and Development Company, a wholly owned subsidiary of SJFP, amounted to approximately $16,932, $55,225 and $54,321 representing approximately 570,000, 2,033,000 and 2,028,000 tons for the period from January 1, 1996 to May 30, 1996 and for the years ended December 31, 1995 and 1994, respectively. SJFP ships the majority of its product via Apalachicola Northern Railroad, a subsidiary of SJPC. Amounts billed for freight amounted to approximately $1,241, $4,310 and $4,489 for the period from January 1, 1996 to May 30, 1996 and for the years ended December 31, 1995 and 1994, respectively. (9) Contingencies SJFP is involved in litigation on a number of matters and is subject to certain claims which arise in the normal course of business, none of which, in the opinion of management, is expected to have a material adverse effect on SJFP's financial position, liquidity, or results of operations. SJFP has retained certain self-insurance risks with respect to losses for third party liability, property damage and group health insurance provided to employees. SJFP is subject to costs arising out of environmental laws and regulations, which include obligations to remove or limit the effects on the environment of the disposal or releases of certain wastes or substances at various sites. It is SJFP's policy to accrue and charge against earnings environmental cleanup costs when it is probable that a liability has been incurred and an amount is reasonably estimable. As assessments and cleanups proceed, these accruals are reviewed and adjusted, if necessary, as additional information becomes available. SJFP is currently a party to, or involved in, legal proceedings involving environmental matters such as alleged discharges into water or soil. It is not possible to quantify future environmental costs because many issues relate to actions by third parties or changes in environmental regulation. Environmental liabilities are paid over an - 9 - extended period and the timing of such payments cannot be predicted with any confidence. Based on information presently available, management believes that the ultimate disposition of currently known matters will not have a material effect on the financial position, liquidity, or results of operations of SJFP. Aggregate environmental related accruals were approximately $1,000 as of December 31, 1995. - 10 - REPORT OF INDEPENDENT ACCOUNTANTS TO THE MANAGEMENT OVERSIGHT COMMITTEE AND MEMBERS OF FLORIDA COAST PAPER COMPANY, L.L.C. In our opinion, the accompanying balance sheet and the related statements of operations and changes in accumulated deficit and of cash flows present fairly, in all material respects, the financial position of Florida Coast Paper Company, L.L.C. (the "Company") at December 31, 1996 and the results of its operations and its cash flows for the period from May 30, 1996 to December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 9 to the financial statements, all of the Company's linerboard production is purchased by the Company's owners at prices intended to generate sufficient funds to cover the Company's cash operating costs, cash interest expenses and maintenance capital expenditures. As discussed in Note 3 to the financial statements, the Company's owners have agreed to continue to make supporting payments to the Company, despite the planned cessation of production on April 1, 1997. PRICE WATERHOUSE LLP Chicago, Illinois March 27, 1996 - 11 - FLORIDA COAST PAPER COMPANY, L.L.C. BALANCE SHEET As of December 31, 1996 (dollars in thousands) ASSETS Current assets: Cash and cash equivalents......................................... $ 8,621 Accounts receivable from Joint Venture Partners................... 8,643 Other receivables................................................. 567 Inventories....................................................... 13,185 Other............................................................. 681 --------- Total current assets.......................................... 31,697 -------- Property, plant and equipment, net of accumulated depreciation.... 184,946 Deferred debt issuance costs...................................... 7,825 Other noncurrent assets........................................... 997 --------- Total assets.................................................. $225,465 ------- Current liabilities: Accounts payable.................................................. $ 10,222 Accrued liabilities............................................... 8,567 Accrued interest.................................................. 1,753 --------- Total current liabilities..................................... 20,542 -------- Long-term debt: Senior long-term debt............................................. 165,000 Subordinated debt................................................. 10,791 Other noncurrent liabilities...................................... 3,076 Commitments and contingencies (Note 10)........................... --------- Total liabilities............................................. 199,409 --------- Members' equity Contributed capital............................................... 40,000 Accumulated deficit............................................... (13,944) --------- Total members' equity......................................... 26,056 ---------- Total liabilities and members' equity................................$ 225,465 ========= The accompanying notes are an integral part of these statements. - 12 - FLORIDA COAST PAPER COMPANY, L.L.C. STATEMENT OF OPERATIONS AND CHANGES IN ACCUMULATED DEFICIT For the period from May 30, 1996 to December 31, 1996 (dollars in thousands) Net sales to Joint Venture Partners.................... $ 103,365 Cost of sales.......................................... 102,728 General, selling & administrative expense.............. 1,545 ----------- Operating loss...................................... (908) ----------- Interest income........................................ 510 Interest expense....................................... (13,546) ---------- Other expense, net.................................. (13,036) ---------- Loss before income taxes............................... (13,944) Provision for state income taxes....................... -- ------------- Net loss............................................... (13,944) Accumulated deficit, beginning of period............... -- ------------- Accumulated deficit, end of period..................... $ (13,944) ========== The accompanying notes are an integral part of these financial statements. - 13 - FLORIDA COAST PAPER COMPANY, L.L.C. STATEMENT OF CASH FLOWS For the period from May 30, 1996 to December 31, 1996 (dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ...................................................................... $ (13,944) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation ............................................................... 7,785 Other non-cash items ....................................................... 1,952 Changes in current assets and liabilities: Accounts receivable ........................................................ (3,403) Inventories ................................................................ 1,153 Other current assets ....................................................... (1,368) Accounts payable ........................................................... 788 Accrued liabilities ........................................................ 7,501 Accrued interest ........................................................... 1,753 --------- Net cash provided by operating activities ..................................... 2,217 --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings .................................................................... 175,500 Debt repayments ............................................................... (500) Capital contribution from Joint Venture Partners .............................. 40,000 Payment of debt issuance costs ................................................ (8,250) --------- Net cash provided by financing activities ..................................... $ 206,750 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .......................................................... (3,932) Payments made for business acquired ........................................... (196,414) --------- Net cash used in investing activities ......................................... (200,346) --------- NET CASH FLOWS: Net increase in cash and cash equivalents ..................................... 8,621 Cash and cash equivalents, beginning of period ................................ -- --------- Cash and cash equivalents, end of period ...................................... $ 8,621 ---------
See Note 4 regarding supplemental cash flow information. The accompanying notes are an integral part of these financial statements. - 14 - FLORIDA COAST PAPER COMPANY, L.L.C. NOTES TO FINANCIAL STATEMENTS December 31, 1996 NOTE 1 -- NATURE OF OPERATIONS Florida Coast Paper Company, L.L.C. (the "Company") was formed for the purpose of purchasing a paperboard mill from St. Joe Forest Products Company ("St. Joe") located in Port St. Joe, Florida (the "Mill"). The Company is a joint venture between Stone Container Corporation ("Stone") and Four M Corporation (together, the "Joint Venture Partners"). The purchase, which occurred on May 30, 1996, was accounted for under the purchase method. Accordingly, the purchase price was allocated to the net assets acquired based on estimated fair values as supported by various company analyses some of which are still pending. The Mill is engaged in the manufacture of mottled white and unbleached kraft linerboard. See also Part I Item 1. Business--The Company. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year: The Company utilizes a December 31 fiscal year end. The accompanying financial statements are presented as of December 31, 1996 and for the period from May 30, 1996 to December 31, 1996 (the "1996 period"). Estimates: The financial statements are prepared in conformity with generally accepted accounting principles that require the use of management estimates. Changes in such estimates may affect amounts reported in future periods. Cash and cash equivalents: The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents and, therefore, includes such investments as cash and cash equivalents in the financial statements. Inventories: Inventories are stated at the lower of cost or market. Costs for substantially all inventories are determined using the average cost method. Property, plant and equipment: Property, plant and equipment is stated at cost. Expenditures for maintenance and repairs are charged to income as incurred. Additions, improvements and major replacements are capitalized. The cost and accumulated depreciation related to assets sold or retired are removed from the accounts and any gain or loss is credited or charged to income. Depreciation is provided on the straight-line method over the estimated useful lives of depreciable assets based on the following annual rates: Type of asset: Rates - ------------- -------------- Machinery and equipment...................................... 7% to 33% Buildings.................................................... 4% Land improvements............................................ 7% - 15 - In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", the Company's long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Deferred debt issuance costs: Deferred debt issuance costs are amortized over the expected life of the related debt using the interest method. Revenue recognition policy: Revenues are recognized during the period in which such product is shipped. Income taxes: As a limited liability company, the Company's results of operations are included in the U.S. federal income tax returns of the Joint Venture Partners. The Company has provided a valuation allowance for all state net operating loss carryforwards generated. Insurance reserves: The Company retains portions of anticipated losses related to workers' compensation and group medical. Liabilities in excess of specified amounts are the responsibility of the Company's insurance carriers. Reserves have been provided for the Company's loss retentions, based on experience and management's best estimate. Changes in actual experience could cause these estimates to change in the near term. Concentration of credit risk A significant portion of the Company's accounts receivable are due from the Joint Venture Partners. See Note 9 "Related party transactions." NOTE 3 -- SUBSEQUENT EVENT On March 5, 1997 the Company announced that on April 1, 1997 it will cease production at the Mill until market conditions warrant a resumption of linerboard production. Stone and Four M, the Joint Venture Partners, have committed to fund the Company's cash operating costs, cash interest expense and maintenance capital expenditures during the shutdown. The Company also has a $20 million Subordinated Credit Facility provided by its Joint Venture Partners. NOTE 4 -- ADDITIONAL CASH FLOW STATEMENT INFORMATION (in thousands) - ---------------------------------------------------------- Cash paid during the 1996 period for: interest............ $10,577 income taxes........ $ -- ======== - 16 - NOTE 5 -- INVENTORIES Inventories as of December 31, 1996 are summarized as follows: (in thousands) 1996 - --------------------------------------------- ------------ Raw materials................................ $ 3,616 Supplies..................................... 8,337 Finished goods and work in process........... 1,232 ------------ Total inventories......................... $ 13,185 ------------ NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of December 31, 1996 is summarized as follows: (in thousands) 1996 - --------------------------------------------- ------------ Land and land improvements................................ $ 2,815 Buildings................................................. 7,564 Machinery and equipment................................... 181,177 Construction in progress.................................. 1,175 ----------- Total property, plant and equipment.................... 192,731 Accumulated depreciation.................................. (7,785) ---------- Total property, plant and equipment, net............... $ 184,946 ----------- NOTE 7-- LONG-TERM DEBT Long-term debt at December 31, 1996 is summarized as follows: (in thousands) 1996 - --------------------------------------------- ------------ Senior debt: 12.75% First Mortgage Notes due June 1, 2003.......... $ 165,000 Subordinated debt: 13.25% Subordinated Seller Note due June 1, 2004...... 10,791 Subordinated Credit Facility.......................... -- ---------- Total subordinated debt.................................. 10,791 ---------- Total long-term debt..................................... $ 175,791 ---------- The First Mortgage Notes (the "Notes") bear interest at a rate of 12.75% per annum, payable semiannually on June 1 and December 1 of each year, commencing December 1, 1996. The Company is not required to make any mandatory redemption or sinking fund payments with respect to the Notes prior to maturity. Interest on the Subordinated Seller Note (the "Seller Note") is compounded quarterly and has been added to the principal of the Seller Note rather than being paid in cash. In connection with the acquisition of the Mill assets, the Joint Venture Partners have agreed to provide the Company with a $20 million subordinated line of credit for general corporate purposes (the "Subordinated Credit Facility"). The Subordinated Credit Facility will expire 90 days after the maturity of the Notes, and each loan made under the Subordinated Credit Facility bears interest at a rate equal to LIBOR, plus 3.625% per annum. At December 31, 1996, there were no borrowings outstanding under the Subordinated Credit Facility. - 17 - There are no amounts of long-term debt maturing during the next five years. The indenture pursuant to which the Notes have been issued contains certain covenants that, among other things, limit the ability of the Company to incur additional indebtedness, make distributions, create certain liens, enter into certain transactions with affiliates, sell assets or enter into certain mergers and consolidations. The Notes are secured by a first mortgage on all real property and improvements comprising the Company and a first priority security interest in substantially all of the equipment of the Company and certain other assets (but excluding, among other things, inventories and accounts receivable). The Seller Note contains certain covenants none of which are more restrictive than those contained in the indenture. The fair value of the Company's debt, based on the quoted market price at December 31, 1996, was $190,641. NOTE 8 -- PENSIONS The Company has noncontributory pension plans for the benefit of all salaried and hourly employees. The funding policy for the plans is to annually contribute the statutory required minimum. The salaried pension plan provides benefits based on a formula that takes into account each participant's final average earnings. The hourly pension plan provides benefits under a flat benefit formula. The salaried and hourly pension plans provide reduced benefits for early retirement. Net pension expense for the combined pension plans for the 1996 period includes the following components: (in thousands) 1996 - ------------------------------------------------------- ------------ Service cost-- benefits earned during the period....... $ 442 Interest cost on projected benefit obligations......... 75 ------------- Net pension expense.................................... $ 517 ------------- The following table sets forth the funded status of the Company's pension plans and the amounts recorded in the Balance Sheet:
December 31, (in thousands) 1996 - -------------------------------------------------------------------------- ---- Actuarial present value of benefit obligations: Vested benefits ........................................................ $(1,835) Non-vested benefits .................................................... (391) ------- Accumulated benefit obligation ............................................ (2,226) Effect of increase in compensation levels ................................. (70) ------- Projected benefit obligation for service rendered through December 31, 1996 (2,296) Plan assets at fair value ................................................. 50 ------- Excess of projected benefit obligation over plan assets ................... (2,246) Unrecognized net actuarial loss ........................................... 170 ------- Net accrual ............................................................... $(2,076) =======
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligations at December 31, 1996 was 7.5 percent. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations was 5.0 percent. The expected long-term rate of return on assets was 8.5 percent. - 18 - NOTE 9 -- RELATED PARTY TRANSACTIONS Pursuant to an Output Purchase Agreement, each of the Joint Venture Partners has agreed to purchase from the Company one half of the Mill's entire linerboard production at a price that is $25 per ton below the price of such product published in Pulp & Paper Week, an industry trade publication, subject to a minimum purchase price, which minimum purchase price is intended to generate sufficient funds to cover cash operating costs, cash interest expense and maintenance capital expenditures. During the 1996 period, the Joint Venture Partners were charged an additional $8.34 million as a result of the minimum purchase price provisions of the Output Purchase Agreement. This amount is included in Net Sales to Joint Venture Partners in the Statement of Operations. Furthermore, in addition to an initial investment of $40 million in the Company, the Joint Venture Partners have severally agreed to provide the Company with a $20 million Subordinated Credit Facility. See Note 7 "Long-term debt." At December 31, 1996, the Company had receivables from the Joint Venture Partners of approximately $8.6 million. The Company has entered into a procurement agreement with Stone pursuant to which Stone will procure wood fiber, at market values, on behalf of the Company. NOTE 10 -- COMMUNICATIONS AND CONTINGENCIES The Company entered into a Wood Fiber Supply Agreement (the "Fiber Agreement") with St. Joseph Land and Development Company ("St. Joe Land") pursuant to which St. Joe Land will supply a specified quantity of pulpwood and wood chips to the Company. The Company and St. Joe Land are currently determining the impact of the cessation of production on the Fiber Agreement. See Note 3. The Company may be required to make payments pursuant to the Fiber Agreement during the shutdown period. In accordance with the provisions of the WARN Act, in the event that the shutdown of the Company's operations exceeds six months, the Company may be required to provide severance payments to its employees of up to 60 days of pay. Pursuant to the Acquisition Agreement, St. Joe Forest Products Company, St. Joe Paper Company and St. Joe Container Company have agreed to indemnify the Company for certain environmental matters based on activities prior to May 30, 1996. However, there can be no assurance that this indemnification will be sufficient to reimburse the Company for all environmental liabilities. The Company is subject to costs arising out of environmental laws and regulations that include obligations to remove or limit the effects on the environment of the disposal or release of certain wastes or substances at various sites. It is the Company's policy to accrue and charge against earnings environmental cleanup costs when it is probable that a liability has been incurred and an amount is reasonably estimable. As assessments and cleanups proceed, these accruals are reviewed and adjusted, if necessary, as additional information becomes available. St. Joe previously made significant capital expenditures to comply with water, air and solid and hazardous waste regulations. The Company expects to make significant expenditures in the future. The Company's environmental capital expenditures were immaterial in 1996 and are expected to approximate $600 thousand in 1997. In December 1993, the U.S. Environmental Protection Agency (the "EPA") issued a proposed rule affecting the pulp and paper industry. These proposed regulations, informally known as the "cluster rules," would make more stringent requirements for discharge of wastewaters under the Clean Water Act and would impose new requirements on air emissions under the Clean Air Act. Pulp and paper manufacturers have submitted extensive comments to the EPA on the proposed regulations in support of the position that requirements under proposed regulations are unnecessarily complex, burdensome and environmentally unjustified. Estimates, based on currently proposed regulations, indicate that the Company could be required to make capital expenditures of approximately $87 million (unaudited) in order to meet the requirements of the regulations, although it is likely this estimate will decrease upon finalization of the rules. While it cannot be predicted with certainty, it appears as though the final cluster rules that - 19 - are currently expected to be issued in 1997, will be modified to reduce certain requirements. Assuming that the anticipated reduced requirements are promulgated as the Company expects, the Company currently believes it would be required to make capital expenditures of approximately $27 million (unaudited) during the period of 1998 through 2006 in order to meet the requirements of the anticipated regulations. If the Company determines to discontinue the production of mottled white linerboard, the Company estimates the capital spending that may be required to comply with the anticipated regulations could be $5 million (unaudited) (but could reach as high as $45 million (unaudited) under the currently proposed regulations). The ultimate financial impact of the regulations on the Company cannot be accurately estimated at this time but will depend on the nature of the final regulations, the timing of required implementation and the cost and availability of new technology. The Company may determine that, under the final regulations, the costs associated with the production of mottled white linerboard may be prohibitive and could discontinue its production. Because of the current higher margins associated with mottled white linerboard, in the event the Company discontinues the production of mottled white linerboard, its revenues and profit margins could decrease. The Company may be subject to legal proceedings involving environmental matters such as alleged discharges into water or soil. Based on information presently available, management believes that the ultimate disposition of such matters would not have a material effect on the financial position, results of operations or liquidity of the Company. Additionally, the Company is involved in certain litigation primarily arising in the normal course of business. In the opinion of management, the Company's liability under any pending litigation would not materially affect its financial condition, results of operations or liquidity. NOTE 11 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes quarterly financial data for 1996: (dollars in thousands) ---------------------- 1996 Second (1) Third Fourth - ---- ----------- ------ -------- Net sales ....... $14,279 $43,496 $45,590 Cost of sales ... 14,478 43,393 44,857 Net income (loss) (2,138) (5,365) (6,441) (1) Includes one month of Florida Coast's results. - 20 - -----END PRIVACY-ENHANCED MESSAGE-----