GAYLORD CONTAINER CORP /DE/
SEVERANCE COMPENSATION AGMNT - MICHAEL J. KEOUGH
<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>11
<FILENAME>c66680ex10-5.txt
<DESCRIPTION>SEVERANCE COMPENSATION AGMNT - MICHAEL J. KEOUGH
<TEXT>
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                                                                    EXHIBIT 10.5

                        SEVERANCE COMPENSATION AGREEMENT

      This Severance Compensation Agreement is entered into as of NOVEMBER 27,
2000 by and between GAYLORD CONTAINER CORPORATION, a Delaware corporation (the
"Company"), and MICHAEL J. KEOUGH (the "Executive").

                                   RECITALS:

      The Company's Board of Directors has determined that the Executive is
among that group of key managers whose services and participation in
management may be critical in any period of transition, such as at the time of
any change in control of the Company or in the face of any proposed corporate
reorganization or acquisition, friendly or hostile, affecting the Company.
Accordingly, the Company's Board of Directors has determined that it is
appropriate and in the best interests of the Company and its stockholders that
provisions be made to encourage the Executive's continued attention and
undistracted dedication to his duties in the potentially disturbing
circumstances of a possible change in control of the Company, by providing the
Executive some degree of financial security under those circumstances.

      Therefore, in order to induce the Executive to remain in the employ of
the Company and as consideration for the Executive's covenants to continue such
employment in the face of a change in control as set forth in this Agreement,
the Board of Directors has determined that it is desirable to provide for the
severance compensation described in this Agreement if the Executive's
employment with the Company terminates under the circumstances described herein
following a change in control of the Company.

                                   AGREEMENT:

      In consideration of the premises and the mutual covenants herein
contained, the Company and the Executive do hereby agree with each other as
follows:

      1.  Severance Payment. The Company agrees that if the employment of the
Executive by the Company is terminated at any time within twenty-four (24)
months after the effective date of a Change in Control that occurred while the
Executive was an employee of the Company, the Executive shall be entitled to
the severance payment ("the Severance Payment") provided under this Agreement
unless such termination of employment was by reason of the Executive's (a)
death, (b) Disability, (c) Retirement, (d) Termination for Cause, or (e)
voluntary termination of employment by the Executive under circumstances not
constituting a Constructive Termination. (The capitalized terms used in this
paragraph are defined herein below.)

      The Severance Payment shall be payable not later than the fifth (5th)
business day following the Executive's last day of employment.

      2.  Insurance Benefits. In addition to the Severance Payment, upon any
termination of the Executive's employment that entitles the Executive to a
Severance Payment hereunder, the Company agrees to arrange to provide the
Executive with life, medical, dental, disability and

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accident insurance benefits substantially similar to those which the Executive
was receiving immediately prior to the termination of Executive's employment or
in effect immediately prior to the Change in Control, whichever is higher, for
a period ending on the earliest to occur of (a) thirty-six (36) months from the
effective date of termination, or (b) the Executive's death.

      3.  Calculation of Severance Payment. The "Severance Payment" hereunder
shall be a lump sum equal to three (3) times the sum of (i) the Executive's
annual base salary and (ii) the Executive's target bonus as provided in the
Company's Management Incentive Plan, as said salary and target bonus are in
effect immediately prior to the termination of Executive's employment or in
effect immediately prior to the Change in Control, whichever is higher.

      4.  Covenants of the Executive. In consideration for the Company's
agreements in Paragraphs 1 and 2 herein, the Executive hereby agrees as follows:

          (a) The Executive shall remain in the employ of the Company during a
period commencing with any public announcement by any person of any proposed
transaction or transactions which, if effected, would result in a Change in
Control and ending when the Change in Control occurs or when, in the opinion of
the Company's Board of Directors, such person has abandoned or terminated its
efforts to effect a Change in Control. Nothing contained in this Agreement
shall affect the right of the Company to terminate the employment of the
Executive, with or without cause, prior to a Change in Control.

          (b) The Executive shall retain in confidence, and will not directly
or indirectly reveal, report, disclose, publish or transfer to any person or
firm, any confidential information of the Company, or utilize any such
confidential information for any purpose other than in furtherance of the
Executive's work as an employee of the Company. As used in this paragraph,
"confidential information" means information or material proprietary to the
Company or designated as being confidential by the Company which is not
generally known to non-Company personnel, of which or to which the Executive
obtained knowledge or access as a result of the Executive's relationship with
the Company, but information publicly known or generic information or knowledge
which the Executive would have learned in the course of similar employment or
work elsewhere in the industry shall not be deemed part of confidential
information.

      5.  Term of Agreement. This agreement shall remain in effect until the
first to occur of (a) the expiration of twenty-four (24) months after the
effective date of any Change in Control or (b) the termination of the
Executive's employment with the Company prior to the effective day of any
Change in Control for any reason.

      6.  Outplacement Services. In the event a Severance Payment becomes
payable to the Executive, the Company agrees to provide outplacement services
reasonably appropriate to maximize the likelihood of an effective transition to
a comparable new position.

      7.  Management Incentive Plan. In the event of a Change in Control, the
Company's Management Incentive Plan (MIP) shall be terminated and PRO-RATA
payments made as follows:

          (A) A projection of EBITDA for the fiscal year shall be established
by the Board of Directors by reviewing results through the date of MIP
termination and the forecast

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EBITDA for the balance of the fiscal year based on the best available pricing
data and key performance factors available at that time.

         (B) The projected EBITDA will create a pool of award monies based on
the current formula of 1.6%.

         (C) The pool shall be pro-rated based on the number of weeks of the
fiscal year completed at the date of MIP termination.

         (D) The pool shall be distributed to the Executive and all other
participating Executives on the payroll as of the termination date of the MIP,
proportional to each individual's target incentive.

     8. Excise Tax. In the event Executive becomes subject to any excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code") (or any successor provisions thereto), the Company shall pay to
Executive, no later than 30 days following any "change in ownership or control
of the Company" as defined in Code Section 280G (or any successor provision
thereto), an amount ("Gross-Up Payment") equal to (i) any excise tax to which
Executive is subject under Section 4999, including interest and penalties; and
(ii) all federal income, state income, payroll or other taxes to which Executive
may be subject with respect to the Gross-Up Payment. It is the intent of this
provision that Executive receive a Gross-Up Payment sufficient to place him in
the same position as if the excise tax imposed by Code Section 4999 did not
exist.

     9. Definitions of Certain Terms. As used in this Agreement, the following
terms shall have the following meanings:

         (a) "Change in Control" means the occurrence of one of the following
events:
              (1) if any "person" or "group" as those terms are used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), other than an Exempt Person, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities; or

              (2) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board and any new director whose
election by the Board or nomination for election by the Company's stockholders
was approved by at least two-thirds (2/3) of the directors then still in office
who either were directors at the beginning of the period or whose election was
previously so approved, cease for any reason to constitute a majority thereof;
or

              (3) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in all or a portion of the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately

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after such merger or consolidation, or the stockholders of the Company approve
a plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets,
other than a sale to an Exempt Person.

         (b) "Disability" means a total and permanent condition which, on the
basis of competent medical evidence, would wholly and permanently prevent the
Executive from engaging in any occupation or employment for wage or profit as
the result of bodily injury or disease, either occupational or non-occupational
in cause, except such employment as is so irregular as to time and nature
that it should be excepted or is for purposes of rehabilitation.

          (c) "Retirement" means the termination of the Executive's employment
after the Executive's sixty-fifth (65th) birthday under circumstances that
will entitle the Executive to full benefits under one or more of the Company's
retirement or pension plans generally applicable to officers of the Company.

          (d) "Termination for Cause" means termination of the Executive
employment by the Company solely by reason of one or more of: (1) an act by the
Executive constituting a felony, and resulting in a conviction, and resulting or
intended to result directly or indirectly in substantial gain or personal
enrichment at the expense of the Company or any of its affiliated corporations,
or (2) the Executive's willful engagement in gross misconduct that results in
demonstrably material injury to the Company or any of its affiliated
corporations, or (3) the Executive's willful, repeated and continued failure
substantially to perform the Executive's duties to the Company after a written
demand, referencing this paragraph, for substantial performance is delivered to
the Executive by the Company's chief executive officer which specifically
identifies the manner in which it is believed that the Executive has not
substantially performed his or her duties.

          (e) "Constructive Termination" means any of the following events
unless it occurs with the Executive's express prior written consent or in
connection with the termination of the Executive's employment for Disability,
Retirement, or Termination for Cause:

               (1) a significant and adverse change by the Company of any
duties, responsibilities, reporting relationships or other conditions of
employment inconsistent with, or in derogation of the Executive's position,
duties, offices, responsibilities and status with the Company immediately prior
to the Change in Control;

               (2) a reduction within twenty-four (24) months after the
effective date of a Change in Control in the Executive's base salary as in
effect on the date of the Change in Control, or the Company's failure to
increase the Executive's base salary after a Change in Control at a rate which
is substantially similar to the average increase in base salary received by
such Executive during the prior two years;

                (3) any failure by the Company to continue in effect any
material benefit plan, bonus plan or arrangement in which the Executive was
participating immediately prior to a Change in Control, or to substitute and
continue other plans providing the Executive with substantially similar
benefits, or any action by the Company that would adversely affect the
Executive's participation in or materially reduce the Executive's benefits
under any such material

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benefit plan or deprive the Executive of any material fringe benefit enjoyed by
the Executive at the time of the Change in Control;

         (4) any failure by the Company to continue in effect any incentive plan
or arrangement in which the Executive is participating at the time of a Change
in Control, or to substitute and continue other plans or arrangements providing
the Executive with substantially similar benefits, or the taking of any action
by the Company that would adversely affect the Executive's participation in any
such incentive plan or reduce the Executive's benefits under any such incentive
plan in an amount which is not substantially similar, on a percentage basis, to
the average percentage reduction of benefits under any such incentive plan
effected during the preceding twelve (12) months for all officers of the Company
participating in any such incentive plan;

         (5) the Executive's relocation to any place other than the location at
which the Executive performed the Executive's primary duties prior to the
effective date of the Change in Control; or

         (6) any material breach by the Company of any provision of this
Agreement or any other agreement between the Company and Executive.

     10. Notice of Termination. Any termination of the Executive's employment by
the Company or by the Executive within twenty-four (24) months after a Change in
Control shall be communicated to the other party by a notice of termination in
writing, which shall indicate the specific termination provisions in this
Agreement relied upon and which shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment. The effective date of termination for purposes of this Agreement
shall be the date specified in such notice of termination, or if no date is
therein specified it shall be the date such notice is given, except that any
termination for Disability shall not be effective earlier than the thirtieth
(30th) day after the notice of termination is given.

     11. Successors and Assigns.

         (a) This Agreement and the rights of the Executive hereunder will inure
to the benefit of the heirs, devisees and personal and legal representatives of
the Executive. However, the obligations of the Executive hereunder may not be
assigned or pledged or delegated.

         (b) The rights and obligations of the Company under this Agreement will
inure to the benefit of and will be binding upon the successors and assigns of
the Company, including without limitation successors voluntarily or by operation
of law to the business or the Company or to substantially all its assets as an
entirety.

     12. Governing Law. This Agreement is entered into and the rights and
obligations of the parties thereunder will be governed by and construed in
accordance with the laws of Illinois, although it is understood that the
validity of any corporate action taken by the Company in authorizing and
implementing this Agreement will be governed by the laws of Delaware, the
Company's state of incorporation.

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      13.  Other Effects of Change in Control. Nothing in this Agreement shall
supersede or reduce the Executive benefits under any other arrangement or
contract, whether agreed to heretofore or hereafter, under which interests and
rights that the Executive may have under one or more employee benefits programs
of the Company or its subsidiaries may vest or mature or be accelerated by
reason of a Change in Control, including without limitation under the Company's
stock option, restricted stock, pension, retirement, supplemental retirement
and deferred compensation.

      14.  No Mitigation Required. The Severance Payment provided for under
this Agreement is intended to compensate the Executive for remaining with the
Company in the face of a Change in Control in accordance with the covenants
rendered by the Executive herein. Therefore, the Executive is not required to
mitigate damages by seeking other employment following the term of employment
that triggers the Executive's right to Insurance Benefits hereunder. No wages
earned by the Executive from any source will reduce or mitigate the amount
severance payable to the Executive hereunder.

      15.  General Provisions.

           (a) Notices and all other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or mailed by U.S. mail, return receipt guaranteed, first-class or
express postage prepaid, as follows:

            If to the Company:

                  Gaylord Container Corporation
                  500 Lake Cook Road, Suite 400
                  Deerfield, Illinois 60015

            If to the Executive:

                  Michael J. Keough


or such other addresses as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.

            (b) No waiver by either party hereto at any time of any breach of,
or compliance with, any condition or provision of this Agreement to be
performed by the other party hereto shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.

             (c) No provisions of this Agreement may be modified or amended
unless such modification or amendment is agreed to in writing signed by the
Executive and the Company.

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         (d) The invalidity or unenforceability of any provision or portion of
this Agreement shall, as far as possible, not affect the validity or
unenforceability of the other provisions or portions of this Agreement.

         (e) This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original as against any party that has signed it,
but all of which together will constitute one and the same instrument.

         (f) Each reference is this Agreement to the Executive's being employed
by the Company, or the termination by the Company of the Executive's employment,
or references of similar import, shall also apply to employment and terminations
of employment by any subsidiary of the Company, such subsidiary being any
employer of the Executive of which more than 50% of the outstanding voting
equity securities are directly or indirectly beneficially owned by the Company.

     16. Legal Fees and Expenses. In the event the Executive commences or is
required to defend a claim or litigation in order to obtain or retain the
benefits of this Agreement, and thereafter through litigation or settlement he
is successful in whole or part, then the Company will reimburse the Executive
for reasonable attorney fees (considering the difficulty of the case and fees
charged by other attorneys from nationally-recognized firms engaged in this type
of litigation), and will also pay all other actual out-of-pocket costs or other
expenses (including reduced salary from any other employment due to time spent
in said litigation). Upon written agreement to repay the Company if he is not
entitled to reimbursement hereunder, the Company will advance to Executive all
funds to commence or defend said litigation.

     IN WITNESS WHEREOF, the Company and the Executive have executed this
agreement on the date first above written.



EXECUTIVE                                         GAYLORD CONTAINER CORPORATION

By: /s/ Michael J. Keough                         By: /s/ Marvin A. Pomerantz
    ---------------------                             ------------------------



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