<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 23, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 1-11113
RIVERWOOD HOLDING, INC.
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2205241
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1200
1105 North Market Street
P.O. Box 8985
Wilmington, Delaware 19899
- - -------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
c/o Riverwood International Corporation
(770) 644-3000
- - -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- - -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 ____ No __X__. The registrant became subject to such filing requirements
as of March 19, 1996, the date of effectiveness of the Registration Statement
on Form S-1 (Registration No. 33-80475).
At May 1, 1996, there were 7,000,000 shares and 500,000 shares of the
registrant's Class A and Class B common stock, respectively, outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION*
A. RIVERWOOD HOLDING, INC.
ITEM 1. FINANCIAL STATEMENTS
RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 23, December 31,
ASSETS 1996 1995
- - -------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Cash $1,000 $1,000
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
- - -------------------------------------------------------------------------------
Class A Common Stock, par value $0.01 per
share; 9,000,000 shares authorized; no
shares issued and outstanding $ - $ -
Class B Common Stock (Non-Voting), par
value $0.01 per share; 3,000,000 shares
authorized; no shares issued and outstanding - -
Additional paid-in capital 1,000 1,000
- - -------------------------------------------------------------------------------
Total Stockholders' Equity $1,000 $1,000
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Balance Sheets.
* As used in this Form 10-Q, unless the context otherwise requires, "RIC"
refers to the corporation formerly named Riverwood International Corporation,
the "Company" refers either to RIC and its subsidiaries, for periods prior to
the Merger (as defined herein), or to the registrant, Riverwood Holding,
Inc., a Delaware corporation formerly named New River Holding, Inc.
("Holding"), and its subsidiaries, for periods after the Merger, "RIC
Holding" refers to RIC Holding, Inc., a Delaware corporation, successor by
merger to RIC, and "Riverwood" refers to Riverwood International Corporation,
a Delaware corporation formerly named Riverwood International USA, Inc.
I-1
<PAGE>
RIVERWOOD HOLDING, INC.
NOTES TO CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
NOTE 1 - ORGANIZATION
Holding, its wholly-owned subsidiary RIC Holding and the corporation formerly
named CDRO Acquisition Corporation ("Acquisition Corp.") were incorporated in
1995 to acquire the stock of RIC.
Holding and its subsidiaries conducted no significant business other than in
connection with the Merger and related transactions through March 23, 1996.
Accordingly, no statements of operations or cash flows have been presented.
The condensed consolidated financial statements of RIC as of March 27, 1996,
and December 31, 1995, and for the three months ended March 27, 1996 (through
the date of the Merger) and April 1, 1995, are presented herein as
supplemental information.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Holding, RIC
Holding and Acquisition Corp., after the elimination of all intercompany
accounts and transactions.
NOTE 3 - SUBSEQUENT EVENTS
On March 27, 1996, Holding, through it wholly-owned subsidiaries, acquired
all of the outstanding shares of common stock of RIC. On such date,
Acquisition Corp. was merged (the "Merger") into RIC. RIC, as the surviving
corporation in the Merger, became a wholly-owned subsidiary of RIC Holding.
On March 28, 1996, RIC transferred substantially all of its properties and
assets to Riverwood, other than the capital stock of Riverwood, and RIC was
merged (the "Subsequent Merger") into RIC Holding. Thereupon, Riverwood was
renamed "Riverwood International Corporation." Upon consummation of the
Subsequent Merger, RIC Holding, as the surviving corporation in the
Subsequent Merger, became the parent company of Riverwood.
On March 27, 1966, Holding completed an offering (the "Equity Offering") of
7,500,000 shares of common stock of Holding ("Holding Common Stock") to
certain institutional investors (the "Equity Investors"). Holding has
commenced an offering of Holding Common Stock to certain members of
management and key employees (the "Management Investors") of the Company for
proceeds of up to approximately $20 million. In connection with the Merger,
the Company entered into a credit agreement (the "Senior Secured Credit
Agreement") with certain lenders providing for new senior secured credit
facilities which provide for aggregate commitments not to exceed $1,550
million (the "Senior Secured Credit Facilities"), including a $1,150 million
term loan facility (the "Term Loan Facility") and a $400 million revolving
credit facility (the "Revolving Facility"). In addition, Riverwood
International Machinery, Inc. ("RIMI"), a wholly-owned subsidiary of
Riverwood, entered into a credit agreement (the "Machinery Credit Agreement,"
and together with the Senior Secured Credit, the "Credit Agreements")
providing for a $140 million secured revolving credit facility (the
"Machinery Facility," and together with the Senior Secured Credit Facilities,
the "Facilities") with certain lenders for the purpose of financing or
refinancing packaging machinery. In connection with the Merger, the Company
also completed an offering (the "Notes Offering") of $250,000,000 aggregate
principal amount of 10 1/4% Senior Notes due 2006 (the "Senior Notes") and
$400,000,000 aggregate principal amount of 10 7/8% Senior Subordinated Notes
due 2008 (the "Senior Subordinated Notes" and, together with the Senior
Notes, the "Notes"). Furthermore, substantially all outstanding indebtedness
(with certain limited exceptions) and packaging machinery leasing obligations
of the Company were repaid of terminated in connection with the Merger.
The condensed consolidated financial statements and Management's Discussion
of and Analysis of Financial Condition and Results of Operations of RIC as of
March 27, 1996 and for the three-month period then ended are presented herein
as supplemental information.
I-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors
of Riverwood Holding, Inc.:
We have reviewed the condensed consolidated balance sheet of Riverwood
Holding, Inc. (formerly New River Holding, Inc. the "Company") and its
subsidiaries as of March 23, 1996. This condensed consolidated balance is the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
data and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated balance sheet to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1995, and our reported dated March 18, 1996, we expressed an unqualified
opinion on that consolidated balance sheet. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet as of
December 31, 1996, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 2, 1996
I-3
<PAGE>
ITEM 2. RIVERWOOD HOLDING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Holding, its wholly-owned subsidiaries RIC Holding and Acquisition Corp. were
organized to acquire RIC. Holding, RIC Holding and Acquisition Corp. were
incorporated in 1995 under the laws of the State of Delaware. On March 27,
1996, Holding, through its wholly-owned subsidiaries, acquired all of the
outstanding shares of common stock of RIC. On such date, Acquisition Corp.
was merged into RIC. RIC, as the surviving corporation in the Merger, became
a wholly-owned subsidiary of RIC Holding. On March 28, 1996, RIC transferred
substantially all of its properties and assets to Riverwood, other than the
capital stock of Riverwood, and RIC was merged was merged into RIC Holding.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Holding and its subsidiaries conducted no significant business other than in
connection with the Merger and related transactions through March 23, 1996.
Accordingly, no discussion and analysis of the results of operations and
financial condition of Holding and its subsidiaries has been presented.
For a discussion and analysis of the results of operations and financial
condition of the Company for periods prior to the completion of the Merger,
and a discussion relating to the impact that the Merger and the related
financings and transactions may have on the Company, see "Predecessor
Financial Information - Riverwood International Corporation Management's
Discussion and Analysis of Financial Condition and Results of Operations"
presented herein as supplemental information.
I-4
<PAGE>
B. PREDECESSOR FINANCIAL INFORMATION
The condensed consolidated financial statements of RIC as of March 27, 1996,
and December 31, 1995, and for the three months ended March 27, 1996 (up to
the Merger) and April 1, 1995, are presented as supplemental information and
reflect all normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of financial position,
results of operations and cash flows for the periods presented. The condensed
consolidated balance sheet as of December 31, 1995, was derived from audited
financial statements, and as presented, does not include all disclosures
required by generally accepted accounting principles. the condensed financial
statements of RIC have been prepared without giving effect to the Merger or
related transactions.
I-5
<PAGE>
RIVERWOOD INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
<TABLE>
<CAPTION>
March 27, December 31,
ASSETS 1996 1995
- - ---------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Current Assets
Cash and equivalents $26,035 $35,870
Marketable securities, at cost (approximates market) 936 1,375
Receivables, net of allowances 171,420 187,621
Inventories 207,220 193,703
Prepaid expenses 15,087 23,229
Deferred tax assets 12,366 18,754
- - ---------------------------------------------------------------------------------
Total Current Assets 433,064 460,552
Property, Plant and Equipment, net of accumulated
depreciation of $485,307 in 1996 and $475,897
in 1995 1,247,908 1,227,203
Timber and Timberlands, less cost of timber harvested 239,068 238,887
Investments in Net Assets of Equity Affiliates 124,572 119,592
Other Assets 161,594 155,094
- - ---------------------------------------------------------------------------------
Total Assets $2,206,206 $2,201,328
- - ---------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------
LIABILITIES
- - ---------------------------------------------------------------------------------
Current Liabilities
Accounts and notes payable $189,594 $174,985
Compensation and employee benefits 46,633 56,495
Income Taxes 2,185 4,688
Other accrued liabilities 69,120 58,384
- - ---------------------------------------------------------------------------------
Total Current Liabilities 307,532 294,552
Long-Term Debt, less current portion 1,051,225 1,041,221
Long-Term Debt to Affiliate 12,573 12,573
Deferred Income Taxes 223,461 232,195
Other Noncurrent Liabilities 53,928 58,477
- - ---------------------------------------------------------------------------------
Total Liabilities 1,648,719 1,639,018
- - ---------------------------------------------------------------------------------
Contingencies and Commitments (Note 5)
STOCKHOLDERS' EQUITY
- - ---------------------------------------------------------------------------------
Preferred Stock - -
Common Stock 657 657
Capital in Excess of Par Value 527,660 526,814
Retained Earnings 40,629 45,309
Cumulative Currency Translation Adjustment (11,459) (10,470)
- - ---------------------------------------------------------------------------------
Total Stockholders' Equity 557,487 562,310
- - ---------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,206,206 $2,201,328
- - ---------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-6
<PAGE>
RIVERWOOD INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 27, April 1,
1996 1995
<S> <C> <C>
- - -----------------------------------------------------------------------------
Net Sales $293,649 $313,176
Cost of Sales 232,701 243,783
Selling, General and Administrative 30,936 30,149
Research, Development and Engineering 2,031 3,862
Other Costs 11,114 2,703
Other Expenses, net 1,217 1,777
- - -----------------------------------------------------------------------------
Income from Operations 15,650 30,902
Interest Income 329 878
Interest Expense 26,392 26,295
- - -----------------------------------------------------------------------------
(Loss) Income before Income Taxes and Equity
in Net Earnings of Affiliates (10,413) 5,485
Income Tax (Benefit) Expense (3,436) 2,365
- - -----------------------------------------------------------------------------
(Loss) Income before Equity in Net Earnings of Affiliates (6,977) 3,120
Equity in Net Earnings of Affiliates 4,927 7,740
- - -----------------------------------------------------------------------------
Net (Loss) Income $ (2,050) $ 10,860
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
Primary and Fully Diluted Earnings
Per Common Share:
Net (Loss) Income $ (0.03) $ 0.16
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
Weighted Average Common
Equivalent Shares Outstanding 65,714 65,847
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-7
<PAGE>
RIVERWOOD INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 27, April 1,
Cash Flows from Operating Activities: 1996 1995
<S> <C> <C>
- - -----------------------------------------------------------------------------
Net (Loss) Income $ (2,050) $10,860
Noncash Items Included in Net (Loss) Income:
Depreciation, amortization and cost of
timber harvested 24,438 21,958
Deferred income taxes (3,574) (3,928)
Pension, postemployment and postretirement
expense, net of benefits paid 1,861 1,706
Equity in net earnings of affiliates (4,927) (7,740)
Other (1,731) 452
(Increase) Decrease in Current Assets:
Receivables 14,737 (211)
Inventories (14,659) (10,069)
Prepaid expenses 8,298 1,964
Increase (Decrease) in Current Liabilities:
Accounts and notes payable 18,182 6,362
Compensation and employee benefits (10,248) (7,524)
Income taxes (3,343) (10,246)
Other accrued liabilities 12,360 16,333
Decrease in Other Noncurrent Liabilities (2,569) (1,704)
- - -----------------------------------------------------------------------------
Net Cash Provided by Operating Activities 36,775 18,213
- - -----------------------------------------------------------------------------
Cash Flows from Investing Activities:
- - -----------------------------------------------------------------------------
Purchases of Property, Plant and Equipment (44,074) (39,798)
Proceeds from Sales of Marketable Securities
Held to Maturity 439 2,630
Proceeds from Sales of Assets 623 57
Decrease (Increase) in Other Assets (8,004) 530
- - -----------------------------------------------------------------------------
Net Cash Used in Investing Activities (51,016) (36,581)
- - -----------------------------------------------------------------------------
Cash Flows from Financing Activities:
- - -----------------------------------------------------------------------------
Issuance of Debt 12,669 -
Net decrease in Notes Payables (3,000) (58,000)
Proceeds from Issuance of Common Stock 838 1,756
Payments on Debt (2,833) (2,394)
Dividends (2,630) (2,625)
- - -----------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 5,044 (61,263)
Effect of Exchange Rate Changes on Cash (638) 453
- - -----------------------------------------------------------------------------
Net Decrease in Cash and Equivalents (9,835) (79,178)
Cash and Equivalents at Beginning of Period 35,870 117,712
- - -----------------------------------------------------------------------------
Cash and Equivalents at End of Period $ 26,035 $38,534
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-8
<PAGE>
RIVERWOOD INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - ACCOUNTING POLICIES
The Company has reclassified the presentation of certain prior year information
to conform with the current presentation. Please refer to the Company's Form
10-K dated December 31, 1995 filed with the Securities and Exchange Commission
on April 16, 1996, for additional information relating to its accounting
policies, operations and financial position.
NOTE 2 - STRATEGIC ALTERNATIVES AND SUBSEQUENT EVENT
In April 1995, RIC announced that it was reviewing strategic alternatives which
may be available to it and in the best interest of its shareholders. On October
26, 1995, RIC announced that it had entered into a merger agreement with an
investor group to sell RIC to the investor group for $20.25 per share in cash.
On March 27, 1996, Holding, through its wholly-owned subsidiaries, acquired all
of the outstanding shares of common stock of RIC. On such date, Acquisition
Corp. was merged into RIC. RIC, as the surviving corporation of the Merger,
became a wholly-owned subsidiary of RIC Holding. On March 28, 1996, RIC
transferred substantially all of its properties and assets to Riverwood, other
than the capital stock of Riverwood, and RIC was merged into RIC Holding.
Thereupon, Riverwood was renamed "Riverwood International Corporation." Upon
consummation of the Subsequent Merger, RIC Holding, as the surviving corporation
in the Subsequent Merger, became the parent company of Riverwood and succeeded
to and was substituted for RIC under RIC's 10 3/4% Senior Notes Due 2000,
11 1/4% Senior Subordinated Notes Due 2002 and 10 3/8% Senior Subordinated Notes
Due 2004 that were not tendered, as well as RIC's 6 3/4% Convertible
Subordinated Notes Due 2003.
On March 27, 1996, Holding completed the Equity Offering of Holding Common Stock
to the Equity Investors. Holding has commenced an offering of Holding Common
Stock to the Management Investors for proceeds of up to approximately $20
million. In connection with the Merger, the Company entered into the Secured
Credit Agreement with certain lenders providing for the Senior Secured Credit
Facilities which provide for aggregate commitments not to exceed $1,550 million,
including a $1,150 million Term Loan Facility and a $400 million Revolving
Facility. In addition, RIMI entered into the Machinery Credit Agreement
providing for the $140 million secured Machinery Facility with certain lenders
for the purpose of financing or refinancing packaging machinery. In connection
with the Merger, the Company also completed the Notes Offering of $250,000,000
aggregate principal amount of Senior Notes and $400,000,000 aggregate principal
amount of Senior Subordinated Notes. Furthermore, substantially all outstanding
indebtedness (with certain limited exceptions) and packaging machinery leasing
obligations of the Company were repaid or terminated in connection with the
Merger.
I-9
<PAGE>
NOTE 3 - INVENTORIES
The major classes of inventories were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
March 27, Dec. 31,
1996 1995
- - -----------------------------------------------------------------------------
<S> <C> <C>
Finished Goods $ 76,246 $ 67,336
Work-In-Process 19,260 19,941
Raw Materials 68,042 61,298
Supplies 43,672 45,128
- - -----------------------------------------------------------------------------
$207,220 $193,703
- - -----------------------------------------------------------------------------
</TABLE>
NOTE 4 - INVESTMENT IN NET ASSETS OF IGARAS
On December 29, 1994, the Company sold approximately 50 percent of its
investment in its Brazilian operations, Igaras Papeis e Embalagens S.A.
("Igaras"), an integrated containerboard producer, after first spinning off a
wholly-owned subsidiary to operate the Company's packaging machinery operations
in Brazil. Subsequent to December 29, 1994, the Company no longer consolidates
Igaras, but instead reports its investment in Igaras using the equity method of
accounting.
The following represents the summarized income statement information for Igaras
for the first quarter of 1996 and 1995, respectively.
<TABLE>
<CAPTION>
(In thousands of dollars)
1996 1995
- - -----------------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 59,573 $ 68,573
Cost of Sales 39,127 33,365
- - -----------------------------------------------------------------------------
Gross Profit $ 20,446 $ 35,208
- - -----------------------------------------------------------------------------
Income from Continuing Operations $ 14,275 $ 30,173
- - -----------------------------------------------------------------------------
Net Income $ 10,249 $ 17,280
- - -----------------------------------------------------------------------------
</TABLE>
NOTE 5 - CONTINGENCIES AND COMMITMENTS
The Company is committed to compliance with all applicable laws and regulations.
Environmental law is, however, dynamic rather than static. As a result, costs,
which are unforeseeable at this time, may be incurred when new laws are enacted,
and when environmental agencies promulgate or revise rules and regulations. In
late 1993, the U.S. Environmental Protection Agency (the "EPA") proposed
regulations (generally referred to as the "cluster rules" ) that would mandate
more stringent controls on air and water discharges from the United States pulp
and paper mills. The Company expects, based on information presently available
form the EPA, that the cluster rules may be finally promulgated in 1996. The
Company estimates the capital spending that may be required to comply with the
cluster rules could reach $40 million to be spent over a three-year period
beginning in 1997.
The Louisiana Department of Environmental Quality ("DEQ") has notified the
Company by letter, dated December 19, 1995, that the Company may be liable for
the remediation of the release or threat of release of hazardous substances at a
wood treatment site in Shreveport, Louisiana, that the Company or its
predecessor previously operated and a former oil refinery site in Caddo Parish,
Louisiana, that the Company currently owns. The Company never operated the
refinery. In response to these DEQ letters, the Company has provided additional
information to the DEQ concerning these sites and has commenced its own
evaluation of any claims and remediation liabilities for which it may be
responsible.
The Company is engaged in environmental remediation projects on properties
currently owned or operated by the Company and certain properties divested by
the Company for which responsibility was retained for pre-existing conditions.
The Company's costs in some instances cannot be estimated until the remediation
process is substantially underway. To address
I-10
<PAGE>
these contingent environmental costs, the Company has accrued reserves where
such costs are probable and can be reasonably estimated. The Company
believes that, based on current information and regulatory requirements, the
accruals established by the Company for environmental expenditures are
adequate. Based on current knowledge, to the extent that additional costs
may be incurred that exceed the accrued reserves, such amounts are not
expected to have a material impact on the results of operations, cash flows
or financial condition of the Company, although no assurance can be given
that material costs will not be incurred in connection with clean-up
activities at these properties, including the Shreveport and Caddo Parish
sites referred to above.
The Company is a party to a number of lawsuits arising out of the conduct of
its business. While there can be no assurance as to their ultimate outcome,
the Company does not believe that these lawsuits will have a material impact
on the results of operations, cash flows or financial condition of the Company.
NOTE 6 - OTHER COSTS
Other Costs include expenses associated with stock-based compensation plans,
expenses related to the Company's review of strategic alternatives and provision
for environmental reserves. During the first quarter of 1996 and 1995, the
Company recognized charges of $2.3 million and $2.7 million, respectively,
related to the stock-based compensation plans. For business segment reporting
purposes, these expenses are allocated to either the respective business
segments or Corporate and Eliminations based upon the responsibility of the
individuals holding or exercising the stock incentive benefits. The Company
incurred approximately $8.0 million of expenses during the first quarter of 1996
related to its review of strategic alternatives (see Note 2) and included such
expenses in Corporate and Eliminations for business segment reporting purposes.
Additionally, in 1996, the Company accrued approximately $0.8 million of
environmental expenses and included such expenses in Corporate and Eliminations
for business segment reporting purposes.
NOTE 7 - EARNING PER COMMON SHARE
Earnings per common share amounts are based on the weighted average number of
common equivalent shares outstanding during the period. The fully diluted
earnings per common share calculation further assumes the conversion of the
6 3/4% Convertible Subordinated Notes due 2003. For 1996 and 1995, the
computation of fully diluted earnings per common share was antidilutive.
NOTE 8 - ACCOUNTING CHANGE
In March 1995, the Financial Accounting Standards board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121 ").
SFAS No. 121 established accounting standards for the impairment of long-lived
assets, certain identifiable intangible assets, and goodwill related to those
assets to be held and used and of long-lived assets and certain identifiable
intangible assets to be disposed of. SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995. The adoption by the Company of SFAS No 121
did not have a significant effect on its financial results.
I-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors
of Riverwood International Corporation:
We have reviewed the condensed consolidated balance sheet of Riverwood
International Corporation ("RIC") and subsidiaries as of March 27, 1996, and the
related condensed consolidated statements of income and cash flows for the
three-month period then ended. These financial statements are the
responsibility of RIC's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial data and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
The condensed consolidated statements of income and cash flows for the three
month period ended April 1, 1995 were reviewed by other accountants whose report
dated April 19, 1995, stated that they were not aware of any material
modifications that should be made to those statements in order for them to be in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 2, 1996
I-12
<PAGE>
RIVERWOOD INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and financial
condition of the Company covers periods before completion of the Merger.
Accordingly, the discussion and analysis of such periods does not reflect the
significant impact that the Merger and the related financings and transactions
has had and will have on the Company. See the discussion below under "-
Financial Condition, Liquidity and Capital Resources" for further discussion
relating to the impact that the Merger and the related financings and
transactions may have on the Company.
STRATEGIC ALTERNATIVES
In April 1995, RIC announced that it was reviewing strategic alternatives that
may be available to it and in the best interest of its stockholders. On October
26, 1995, RIC announced that it had entered into a merger agreement with an
investor group to sell RIC to the investor group for $20.25 per share in cash.
The merger transaction was approved by the stockholders of RIC on March 27,
1996.
On March 27, 1996, Holding, through its wholly-owned subsidiaries, acquired all
of the outstanding shares of common stock of RIC. On such date, Acquisition
Corp. was merged into RIC. RIC, as the surviving corporation of the Merger,
became a wholly-owned subsidiary of RIC Holding. On March 28, 1996, RIC
transferred substantially all of its properties and assets to Riverwood, other
than the capital stock of Riverwood, and RIC was merged into RIC Holding.
Thereupon, Riverwood was renamed "Riverwood International Corporation." Upon
consummation of the Subsequent Merger, RIC Holding, as the surviving corporation
in the Subsequent Merger, became the parent company of Riverwood and succeeded
to and was substituted for RIC under RIC's 10 3/4% Senior Notes Due 2000,
11 1/4% Senior Subordinated Notes Due 2002 and 10 3/8% Senior Subordinated Notes
Due 2004 that were not tendered, as well as RIC's 6 3/4% Convertible
Subordinated Notes Due 2003.
On March 27, 1996, Holding completed the Equity Offering of Holding Common Stock
to the Equity Investors. Holding has commenced an offering of Holding Common
Stock to the Management Investors for proceeds of up to approximately $20
million. In connection with the Merger, the Company entered into the Secured
Credit Agreement with certain lenders providing for the Senior Secured Credit
Facilities which provide for aggregate commitments not to exceed $1,550 million,
including a $1,150 million Term Loan Facility and a $400 million Revolving
Facility. In addition, RIMI entered into the Machinery Credit Agreement
providing for the $140 million secured Machinery Facility with certain lenders
for the purpose of financing or refinancing packaging machinery. In connection
with the Merger, the Company also completed the Notes Offering of $250,000,000
aggregate principal amount of Senior Notes and $400,000,000 aggregate principal
amount of Senior Subordinated Notes. Furthermore, substantially all outstanding
indebtedness (with certain limited exceptions) and packaging machinery leasing
obligations of the Company were repaid or terminated in connection with the
Merger.
GENERAL
The Company reports its results in three business segments: Coated Board System,
Containerboard and U.S. Timberlands/Wood Products. The Coated Board System
business segment includes the production and sale of coated board for packaging
cartons from the paper mills in West Monroe, Louisiana (the "West Monroe Mill"),
Macon, Georgia (the "Macon Mill") and Norrkping, Sweden (the "Swedish Mill");
converting operations at facilities in the United States, Australia and Europe;
and the design, manufacture and installation of packaging machinery related to
the production and sale of beverage cartons. The Containerboard business segment
includes the production and sale of linerboard, corrugating medium and kraft
paper from paperboard mills in the United States. The U.S. Timberlands/Wood
Products business segment includes timberlands and operations engaged in the
supply of pulpwood to the West Monroe Mill from the Company's U.S. timberlands,
as well as the manufacture and sale of lumber and plywood.
I-13
<PAGE>
The table below sets forth certain income and expense items and the percentage
that such items increased or decreased in 1996 when compared to the
corresponding period in 1995.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS, EXCEPT PERCENTAGES)
THREE MONTHS ENDED
- - ---------------------------------------------------------------------------------------------------------------------
% Increase
(Decrease)
March 27, From Prior April 1,
1996 Period 1995
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales (Segment Data):
Coated Board System $234,608 7.5 $218,290
Containerboard 25,496 (56.6) 58,693
U.S. Timberlands/Wood Products 37,336 (9.0) 41,036
Intersegment Eliminations (3,791) 21.7 (4,843)
- - ---------------------------------------------------------------------------------------------------------------------
Net Sales 293,649 (6.2) 313,176
Cost of Sales 232,701 (4.5) 243,783
- - ---------------------------------------------------------------------------------------------------------------------
Gross Profit 60,948 (12.2) 69,393
Selling, General and Administrative 30,936 2.6 30,149
Research, Development and Engineering 2,031 (47.4) 3,862
Other Costs 11,114 - 2,703
Other Expenses, net 1,217 (31.5) 1,777
- - ---------------------------------------------------------------------------------------------------------------------
Income from Operations $15,650 (49.4) $30,902
- - ---------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------
Income from Operations (Segment Data):
Coated Board System $24,638 60.1 $15,386
Containerboard (5,955) - 8,460
U.S. Timberlands/Wood Products 13,868 (13.6) 16,057
Corporate and Eliminations (16,901) (87.8) (9,001)
- - ---------------------------------------------------------------------------------------------------------------------
Income from Operations $15,650 (49.4) $30,902
- - ---------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
During the first quarter of 1996 and 1995, the Company incurred Other Costs of
approximately $11.1 million and $2.7 million, respectively. Other Costs include
expenses associated with stock-based compensation plans, expenses related to the
Company's review of strategic alternatives and provision for environmental
reserves. Stock-based compensation expense has been allocated to each of the
business segments based upon the responsibility of the individuals holding or
exercising the stock incentive benefits. During the first quarter of 1996, $1.2
million, $0.1 million, $0.2 million and $0.8 million were recorded in the Coated
Board System, Containerboard and U.S. Timberlands/Wood Products business
segments and Corporate and Eliminations, respectively, as compared to $1.2
million, $0.4 million, $0.2 million and $0.9 million, respectively, during the
first quarter of 1995. Expenses related to the Company's review of strategic
alternatives and environmental reserves of $8.0 million and $0.8 million,
respectively, in the first quarter of 1996 were included in Corporate and
Eliminations for business segment reporting purposes. There were no expenses
related to strategic alternatives and environmental reserves included in Other
Costs during the first quarter of 1995.
I-14
<PAGE>
Excluding Other Costs, Income from Operations would have been as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS, EXCEPT PERCENTAGES)
THREE MONTHS ENDED
- - ---------------------------------------------------------------------------------------------------------------------
% Increase
(Decrease)
March 27, From Prior April 1,
1996 Period 1995
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from Operations (Segment Data):
Coated Board System $25,881 56.1 $16,579
Containerboard (5,835) - 8,862
U.S. Timberlands/Wood Products 14,086 (13.2) 16,225
Corporate and Eliminations (7,368) 8.6 (8,061)
- - ---------------------------------------------------------------------------------------------------------------------
Income from Operations $26,764 (20.4) $33,605
- - ---------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Pro forma estimated earnings before interest, income taxes, depreciation,
amortization, cost of timber harvested and certain non-cash items ("EBITDA"),
calculated in accordance with definitions in the Credit Agreements and
indentures for the Notes and excluding Other Costs, at March 27, 1996 and April
1, 1995, were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS OF DOLLARS, EXCEPT PERCENTAGES)
THREE MONTHS ENDED
- - ---------------------------------------------------------------------------------------------------------------------
% Increase
(Decrease)
March 27, From Prior April 1,
1996 Period 1995
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro Forma Estimated EBITDA (Segment Data):
Coated Board System $ 47 46.9 $ 32
Containerboard (1) - 14
U.S. Timberlands/Wood Products 17 (5.6) 18
Corporate and Eliminations (7) - (7)
- - ---------------------------------------------------------------------------------------------------------------------
Pro Forma Estimated EBITDA $ 56 (1.8) $57
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
FIRST QUARTER 1996 COMPARED WITH FIRST QUARTER 1995
NET SALES
Net Sales in the Coated Board System business segment increased by $16.3 million
in the first quarter of 1996, or 7.5 percent, to $234.6 million from $218.3
million in the first quarter of 1995, due principally to increased selling
prices in worldwide coated board open markets and U.S. beverage markets as well
as increased sales volumes in worldwide beverage markets and international open
markets. These increases were offset somewhat by decreased volume in domestic
open markets for coated board and selling price declines in international
folding carton markets. Net Sales in the Containerboard business segment
decreased $33.2 million, or 56.6 percent, to $25.5 million in the first
quarter of 1996 from $58.7 million in the first quarter of 1995, due
principally to selling price declines and volume declines as a result of the
significant decline in demand in containerboard markets worldwide. See
"-Gross Profit" and "-Financial Condition, Liquidity and Capital Resources -
Cash Flows" for a further discussion of the Company's Containerboard business
segment. Net Sales in the U.S. Timberlands/Wood Products business segment
decreased by $3.7 million, or 9.0 percent, to $37.3 million in the first
quarter of 1996 from $41.0 million in the first quarter of 1995, due
principally to selling price declines in both lumber and plywood markets.
As a result of the above factors, the Company's Net Sales in the first
quarter of 1996 decreased by $19.5 million, or 6.2 percent, compared with the
first quarter of 1995.
I-15
<PAGE>
GROSS PROFIT
Gross Profit in the Coated Board System business segment increased by $9.0
million, or 21.3 percent, to $51.2 million in the first quarter of 1996 as
compared to $42.2 million in the first quarter of 1995, while its gross
profit margin increased to 21.8 percent in the first quarter of 1996 from
19.3 percent in the first quarter of 1995. These increases were principally
due to selling price increases in worldwide open markets and U.S. beverage
markets combined with operating efficiencies realized at the Macon Mill.
These increases were offset somewhat by a decline in selling prices in
international folding carton markets. In the Containerboard business
segment, Gross Profit decreased $15.0 million in the first quarter of 1996 as
compared to the first quarter of 1995 to a loss of $4.4 million. This
decrease was due primarily to selling price and sales volume declines and
unabsorbed fixed costs at the West Monroe Mill as a result of 49 days of
corrugated medium paper machine outages effected in order to begin to correct
imbalances in containerboard inventories. The unabsorbed fixed costs
resulting from this machine outage reduced Gross Profit by approximately $2.7
million during the first quarter of 1996. This is a result of the
significant decline in demand in worldwide containerboard markets that began
in the latter part of 1995 and has continued throughout the first quarter of
1996. Gross Profit in the U.S. Timberlands/Wood Products business segment
decreased by $2.5 million, or 14.8 percent, to $14.4 million in the first
quarter of 1996 as compared to $16.9 million in the first quarter of 1995,
and the gross profit margin decreased to 38.7 percent in the first quarter of
1996 from 41.3 percent in the first quarter of 1995. These declines are a
result of lower selling prices in the lumber and plywood markets, offset
somewhat by decreased log costs in the first quarter of 1996 as compared to
the first quarter of 1995. As a result of the above factors, the Company's
Gross Profit for the first quarter of 1996 decreased $8.4 million, or 12.2
percent, to $60.9 million from $69.4 million in the first quarter of 1995.
The gross profit margin decreased to 20.8 percent for the first quarter of
1996 from 22.2 percent in the first quarter of 1995.
PAPERBOARD PRODUCTION
Total tons of paperboard produced at the Company's U.S. mills for the first
quarter of 1996 and 1995, were as follows:
Three Months Ended
(IN THOUSANDS OF TONS)
March 27, April 1,
1996 1995
----------------------
Coated Board 233.2 215.2
Containerboard 90.3 133.7
----------------------
323.5 348.9
----------------------
----------------------
The volume of coated board shipped to the Company's integrated converting
facilities increased 20.9 percent in the first quarter of 1996, as compared
to the first quarter of 1995, related to the increased sales volumes in
worldwide beverage markets during the first quarter of 1996 and to the
anticipated increase in volume of worldwide beverage markets during the
summer months of 1996.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses increased $0.8 million, or 2.6
percent, to $30.9 million in the first quarter of 1996 as compared to $30.1
million in the first quarter of 1995, primarily due to increases in selling,
marketing and administrative expenses to penetrate worldwide coated board
markets.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses decreased by $1.8 million to
$2.0 million, primarily due to a higher level of packaging machinery
engineering costs being deferred in the first quarter of 1996 as compared
with the first quarter of 1995 resulting from the timing and nature of
packaging machinery under development.
I-16
<PAGE>
OTHER COSTS
Other Costs increased $8.4 million to $11.1 million in the first quarter of
1996 from $2.7 million in the first quarter of 1995, primarily as a result of
the increase in expenses related to the strategic alternative review. The
Company recorded an expense of approximately $8.0 million in the first
quarter of 1996 related to the review of strategic alternatives, which was
included in the Corporate and Eliminations for business segment reporting
purposes. Stock-based compensation expense has been allocated to each of the
business segments based upon the responsibility of the individuals holding or
exercising the stock incentive benefits. During the first quarter of 1996,
$1.2 million, $0.1 million, $0.2 million and $0.8 million of stock-based
compensation expense was recorded in the Coated Board System, Containerboard,
U.S. Timberlands/Wood Products business segments and Corporate and
Eliminations, respectively, as compared to $1.2 million, $0.4 million, $0.2
million and $0.9 million, respectively, during the first quarter of 1995.
Environmental expenses of $0.8 million and nil in the first quarter of 1996
and 1995, respectively, were included in Corporate and Eliminations for
business segment reporting purposes.
OTHER EXPENSES, NET
Other Expenses, net, decreased $0.6 million, or 31.5 percent, in the first
quarter of 1996 as compared to the same period of 1995, resulting primarily
from lower costs associated with the Company's hedging program.
INCOME FROM OPERATIONS
Income from Operations in the Coated Board System business segment increased
$9.3 million, or 60.1 percent, to $24.6 million in the first quarter of 1996
from $15.4 million in the first quarter of 1995, while the operating margin
increased to 10.5 percent from 7.0 percent for the same periods. Excluding
Other Costs recorded in each of the first quarters of 1996 and 1995, Income
from Operations in the Coated Board System business segment increased $9.3
million, or 56.1 percent, to $25.9 million from $16.6 million, while the
operating margin as a percent of Net Sales increased to 11.0 percent from 7.6
percent, primarily as a result of the factors described above. Income from
Operations in the Containerboard business segment decreased $14.4 million to
a loss of $6.0 million in the first quarter of 1996 from the first quarter of
1995. Excluding Other Costs recorded in the first quarter of 1996 and 1995,
Income from Operations in the Containerboard business segment decreased $14.7
million to a loss of $5.8 million, primarily as a result of the factors
described above. Income from Operations in the U.S. Timberlands/Wood Products
business segment decreased $2.2 million, or 13.6 percent, to $13.9 million in
the first quarter of 1996 from $16.1 million in the first quarter of 1995;
the operating margin decreased to 37.1 percent from 39.1 percent for the same
periods. Excluding Other Costs recorded in the first quarter of 1996 and
1995, Income from Operations in the U.S. Timberlands/Wood Products business
segment decreased $2.1 million, or 13.2 percent, to $14.1 million from $16.2
million, while the operating margin as a percent of Net Sales decreased to
37.7 percent from 39.5 percent, primarily as a result of the factors
described above. As a result of the above factors, the Company's Income from
Operations in the first quarter of 1996 decreased by $15.3 million, or 49.4
percent, to $15.7 million from the first quarter of 1995, while the operating
margin as a percent of Net Sales decreased to 5.3 percent from 9.9 percent.
Excluding Other Costs recorded in the first quarter of 1996 and 1995, Income
from Operations decreased by $6.8 million, or 20.4 percent, while the
operating margin as a percent of Net Sales decreased to 9.1 percent from 10.7
percent.
U.S. DOLLAR CURRENCY EXCHANGE RATES
Fluctuations in U.S. dollar currency exchange rates did not have a
significant impact on Net Sales, Gross Profit, operating expenses or Income
from Operations of the Company or any of its business segments during the
first quarter of 1996 as compared to the same period of 1995.
INTEREST INCOME
Interest Income of 1996 decreased $0.5 million to $0.3 million in the first
quarter of 1996 from the first quarter of 1995, primarily as a result of
lower average balances of cash and equivalents and marketable securities in
the first quarter of 1996 as compared to the first quarter of 1995.
I-17
<PAGE>
INTEREST EXPENSE
Compared with the first quarter of 1995, Interest Expense for the first
quarter of 1996 remained relatively constant at approximately $26.4 million.
Capitalized interest decreased to $0.3 million in the first quarter of 1996
from $0.5 million in the first quarter of 1995. As a result of the
substantial indebtedness incurred in connection with the Merger, the
Company's interest expense will have a greater proportionate impact on net
income in comparison to pre-Merger periods.
INCOME TAX (BENEFIT) EXPENSE
In the first quarter of 1996, the Company recognized an income tax benefit of
$3.4 million on Loss before Income Taxes and Equity in Net Earnings of
Affiliates of $10.4 million. The Company's effective income tax rate for the
first quarter of 1995 was 43 percent.
EQUITY IN NET EARNINGS OF AFFILIATEs
Equity in Net Earnings of Affiliates, which was $4.9 million and $7.7 million
in the first quarter of 1996 and 1995, respectively, was comprised primarily
of the Company's equity in net earnings of Igaras under the equity method of
accounting. The decline was due principally to the significant decline in
containerboard markets worldwide.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company broadly defines liquidity as its ability to generate sufficient
cash flow from operating activities to meet its obligations and commitments.
In addition, liquidity includes the ability to obtain appropriate debt and
equity financing and to convert into cash those assets that are no longer
required to meet existing strategic and financial objectives. Therefore,
liquidity cannot be considered separately from capital resources that consist
of current or potentially available funds for use in achieving long-range
business objectives and meeting debt service and dividend commitments.
CASH FLOWS
Cash and equivalents decreased by approximately $10 million in the first
quarter of 1996, primarily as a result of $51 million of net cash used in
investing activities related principally to purchases of property, plant and
equipment (see "-Liquidity and Capital Resources - Capital Expenditures")
which was offset in part by $37 million and $5 million of net cash provided
by operating and financing activities, respectively.
Depreciation, amortization and cost of timber harvested during the first
quarter of 1996 totaled approximately $24.4 million and is expected to be
approximately $105 million for fiscal year 1996.
The Company operates in a dynamic market environment, and its cash flows from
its operations and EBITDA are affected by a number of significant business,
economic and competitive factors. Although a number of components of the
Company's business plan are developing as expected, these business, economic
and competitive factors have negatively impacted several aspects of the
Company's business, including coated board open market sales volumes and
selling prices in international folding carton operations, as well as the
Company's Containerboard business segment.
The Company's cash flows from its operations and EBITDA are influenced by
selling prices of its products and raw materials costs, and are subject to
moderate seasonality with demand usually increasing in the spring and summer.
The Company's Coated Board System business segment experiences seasonality
principally due to the seasonality of its largest market, the worldwide
I-18
<PAGE>
multiple packaging beverage segment. Historically, the Company's Coated
Board System business segment reports its strongest sales in the second and
third quarter of the fiscal year. The Company's beverage carton products
historically have experienced stable pricing while folding cartons and open
market coated board have experienced some moderate cyclical pricing. The
Company's coated board open markets are impacted by general market conditions
and competition from competing substrates, namely recycled clay coated news
and solid bleached sulfate. The Company's international folding carton and
coated board open markets have been negatively impacted by a slower recovery
of general economic conditions than expected. The international folding
carton markets have also been negatively impacted by lower than expected
carton selling prices. The Company's containerboard and wood products prices
have experienced cyclicality and significant fluctuations. The Company's
Containerboard business segment is impacted by the cyclical worldwide
commodity paperboard markets. Average transaction selling prices for the
Company's linerboard in the first quarter of 1996 were below the average
transaction selling prices at the end of 1995. In the event that the market
for the Company's containerboard products were to experience continued
weakness and industry inventory levels were to increase as a result, the
Company may consider effecting containerboard machine outages at its mills
(in excess of outages taken to date) as the Company has done in the past in
response to industry weakness and excess capacity. See "-Results of
Operations First Quarter 1996 Compared with First Quarter 1995 - Gross
Profit." The cost of recycled fiber used in the Company's paper board
production has decreased in the first quarter of 1996 from the end of fiscal
year 1995. The U.S. Timberlands/Wood Products segment has experienced lower
prices for plywood and lumber in the first quarter of 1996 from the end of
fiscal year 1995.
The Company continues to evaluate a number of programs that could result in
improvements that could partially offset some of the weaknesses described
above. However, no assurance can be given that any of these programs will be
implemented, and, if implemented, that any of them will result in improved
cash flows from operations and EBITDA.
LIQUIDITY AND CAPITAL RESOURCES
GENERALLY
The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the Merger and from the
funding of its capital expenditures. As of April 30, 1996, the Company had
outstanding approximately $2,011 million of indebtedness, consisting
primarily of $650 million aggregate principal amount of the Notes, $1,150
million in term loan borrowings under the Term Loan Facility and additional
amounts under the Revolving Facility, the Machinery Facility and other debt
issues and facilities.
HISTORICAL FINANCING ARRANGEMENTS
With certain limited exceptions, the Company's existing debt was
substantially refinanced or replaced in connection with the Merger. RIMI was
party to sale and leaseback arrangements with respect to packaging machinery,
under which RIMI sold and leased back certain of its packaging machinery, and
then subleased them to customers. The Company has terminated such sale and
leaseback arrangements and refinanced them with the new $140 million
Machinery Facility.
DEBT SERVICE
Principal and interest payments under the Facilities and interest payments on
the Notes represent significant liquidity requirements for the Company. With
respect to the $1,150 million borrowed under the Term Loan Facility, the
Company will be required to make scheduled principal payments of
approximately $24 million in 1997, $71 million in 1998, $106 million in 1999,
$129 million in 2000, $186 million in 2001, $243 million in 2002, $225
million in 2003 and $166 million in 2004. The Revolving Facility will mature
in March 2003 and the $140 million Machinery Facility will mature in March
2001, with all amounts then outstanding becoming due. The loans under the
Facilities bear interest at floating rates based upon the interest rate
option elected by the Company. The Senior Notes due 2006 and the Senior
Subordinated Notes due 2008 bear interest at rates of 10 1/4% and 10 7/8%,
respectively. As a result of the substantial indebtedness incurred in
connection with the Merger, the Company's interest expense will be higher and
will have a greater proportionate impact on net income in comparison to
pre-Merger periods.
CAPITAL EXPENDITURES
Capital spending for the first quarter of 1996 was approximately $44.1
million and related primarily to increasing paper production efficiencies,
increasing converting capacity and producing packaging machinery. The
Company projects that its capital spending for fiscal year 1996 will be
approximately $170 million, of which $40 million is expected to relate to
packaging machinery. The remaining capital spending for fiscal 1996 is
expected to relate principally to pulp mill modifications, the upgrading of
the second paper machine at the Macon Mill from linerboard production to
coated board production, press and converting capacity additions, as well as
maintenance and productivity expenditures. The Company expects that $60
million to $80 million will relate to maintenance, environmental and ongoing
productivity improvement programs.
I-19
<PAGE>
FUTURE FINANCING SOURCES AND CASH FLOWS
The amount under the Revolving Facility that remained undrawn as of April 30,
1996, was approximately $310 million, is to pay the remaining fees of the
Merger of approximately $115 million and to meet future working capital and
other business needs of the Company. In connection with the Merger, the
Company terminated its then existing sale and leaseback arrangements with
respect to packaging machinery and replaced them with the $140 million
Machinery Facility. The Company's Australian bank lender agreed to keep its
$37 million Australian revolving facility in place following the closing of
the Subsequent Merger, and certain other debt and credit facilities existing
prior to the Merger have been maintained as well. The Company anticipates
pursuing additional working capital financing for its foreign operations as
its needs may require, and possibly implementing a receivables securitization
program.
The Company believes that cash generated from operations, together with
amounts available under the Revolving Facility, the Machinery Facility and
any other available financing sources, will be adequate to permit the Company
to meet its debt service obligations, capital expenditure program
requirements, ongoing operating costs and working capital needs, although no
assurance can be given in this regard. The Company's future operating
performance and ability to service or refinance the Notes and to repay,
extend or refinance the Facilities will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond the Company's control.
While Igaras has strong liquidity, the Company shares control of Igaras with
its joint venture partner and future dividend payments from Igaras, if any,
would be subject to restrictions in the joint venture agreement and would
reflect only the Company's remaining interest of approximately 50%. Under
the Igaras joint venture agreement, Igaras is required to pay dividends equal
to at least 25% of its net profits. Due to currency fluctuations, inflation
and changes in political and economic conditions, earnings from Brazilian
operations have been subject to significant volatility. There can be no
assurance that such volatility will not recur in the future.
COVENANT RESTRICTIONS
The Credit Agreements impose restrictions on the Company's ability to make
capital expenditures and both the Credit Agreements and the indentures
governing the Notes limit the Company's ability to incur additional
indebtedness. Such restrictions, together with the highly leveraged nature
of the Company, could limit the Company's ability to respond to market
conditions, to meet its capital spending program, to provide for
unanticipated capital investments or to take advantage of business
opportunities. The covenants contained in the Credit Agreements also, among
other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur guarantee obligations, repay the Notes, pay
dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage
in mergers or consolidations, make capital expenditures or engage in certain
transactions with affiliates, and otherwise restrict corporate activities.
The covenants contained in the indentures governing the Notes also impose
restrictions on the operation of the Company's businesses.
ENVIRONMENTAL MATTERS
The Company is committed to compliance with all applicable environmental laws
and regulations. Environmental law is, however, dynamic rather than static.
As a result, costs, which are unforeseeable at this time, may be incurred
when new laws are enacted, and when environmental agencies promulgate or
revise rules and regulations. In late 1993, the EPA proposed regulations
(generally referred to as the "cluster rules") that would mandate more
stringent controls on air and water discharges from United States pulp and
paper mills. The Company expects, based on information presently available
from the EPA, that the cluster rules may be finally promulgated in 1996. The
Company estimates the capital spending that may be required to comply with
the cluster rules could reach $40 million to be spent over a three-year
period beginning in 1997.
I-20
<PAGE>
The DEQ notified the Company by letters, dated December 19, 1995, that the
Company may be liable for the remediation of the release or threat of release
of hazardous substances at a wood treatment site in Shreveport, Louisiana,
that the Company or its predecessor previously operated and a former oil
refinery site in Caddo Parish, Louisiana, that the Company currently owns.
The Company never operated the oil refinery. In response to these DEQ
letters, the Company has provided additional information to the DEQ
concerning these sites and has commenced its own evaluation of any claims and
remediation liabilities for which it may be responsible.
The Company is engaged in environmental remediation projects for certain
properties currently owned or operated by the Company and certain properties
divested by the Company for which responsibility was retained for
pre-existing conditions. The Company's costs in some instances cannot be
estimated until the remediation process is substantially underway. To
address these contingent environmental costs, the Company has accrued
reserves when such costs are probable and can be reasonably estimated. The
Company believes that, based on current information and regulatory
requirements, the accruals established by the Company for environmental
expenditures are adequate. Based on current knowledge, to the extent that
additional costs may be incurred that exceed the accrued reserves, such
amounts are not expected to have a material impact on the results of
operations, cash flows, or financial condition of the Company, although no
assurance can be given that material costs will not be incurred in connection
with clean-up activities at these properties, including the Shreveport and
Caddo Parish sites referred to above.
RELATING TO THE MERGER
U.S. TAXES
Pursuant to an election under section 338(h)(10) of the Internal Revenue
Code, the Merger will be treated for income tax purposes as a taxable sale of
the assets of RIC and a taxable sale of the assets of RIC's subsidiaries to
which such election applies. As a result, following the Merger the tax basis
of the assets of the Company will be equal to the fair market value thereof,
and the excess of the Merger consideration, the Company's liabilities and
capitalizable acquisition costs over the fair market value of those assets
will be deductible over 15 years for federal income tax purposes. Such
amortization deductions and increased depreciation and other deductions
resulting from the fair market value tax basis of those assets, together with
deductions for interest on indebtedness and certain other expenses incurred
in connection with the Merger, are expected to reduce the Company's future
taxable income.
The Company has historically been included in the consolidated federal and
certain combined state income tax returns of Manville Corporation
("Manville"). The Company will now be included in the consolidated federal
and certain combined state income tax returns of Holding.
Pursuant to a previously existing tax sharing agreement between the Company
and Manville (the "Tax Sharing Agreement"), the Company was required to make
tax sharing payments to Manville (or Manville to make tax sharing payments to
the Company in certain cases) with respect to the Company's share of
consolidated federal and combined state and local income tax liabilities,
generally computed as if the Company were the parent of a separate
consolidated group of companies. The Tax Matters Agreement, dated as of
October 25, 1995, among Manville, RIC, RIC Holding and Acquisition Corp. (the
"Tax Matters Agreement"), required that the Tax Sharing Agreement be
terminated effective upon the closing of the Merger. The Tax Matters
Agreement further required the Company to make tax sharing payments after the
closing of the Merger (or Manville to make tax sharing payments to the
Company in certain cases), calculated in a manner generally consistent with
past practices under the Tax Sharing Agreement, with respect to the Company's
share of consolidated federal and combined state and local income tax
liabilities for all pre-closing periods, excluding taxes associated with the
election under Section 338(h)(10) of the Internal Revenue Code, to the extent
such amounts have not previously been paid pursuant to the Tax Sharing
Agreement.
ACCOUNTING
The Merger will be accounted for as a purchase. Under purchase accounting,
the total purchase cost and fair value of liabilities assumed will be
allocated to the tangible and intangible assets of the Company based upon
their respective fair values as of the Closing. The excess of purchase cost
over the fair value of assets acquired and liabilities assumed, if any, will
be recorded as goodwill. Cost of sales and operating expenses may be
substantially higher and income from operations may be substantially lower as
a result of the effects of purchase accounting, as compared with the
Company's historical results.
I-21
<PAGE>
ACCOUNTING CHANGE
In March 1995, the Financial Accounting Standards board issued SFAS No. 121.
SFAS No. 121 established accounting standards for the impairment of
long-lived assets, certain identifiable intangible assets, and goodwill
related to those assets to be held and used and of long-lived assets and
certain identifiable intangible assets to be disposed of. SFAS No. 121 is
effective for fiscal years beginning after December 15, 1995. The adoption
by the Company of SFAS No 121 did not have a significant effect on its
financial results.
I-22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Form of Investor Stock Subscription Agreement between Riverwood Holding,
Inc. (formerly named New River Holding, Inc.) and each of the investors
named on the schedule thereto (filed as Exhibit 10.6 to Registration
Statement on Form S-1 (Registration No. 33-80475) of the registrant under
the Securities Act of 1933, as amended, incorporated herein by reference).
(b) Reports on Form 8-K.
Form 8-K dated March 27, 1996, and filed with the Securities and Exchange
Commission on April 11, 1996, regarding the Merger.
II-1
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVERWOOD HOLDING, INC.
---------------------------------------
(Registrant)
Date: May 6, 1996 By: /s/ J. S. Beabout
-----------------------------------
J. S. Beabout
Vice President, General Counsel
and Secretary
Date: May 6, 1996 By: /s/ A. Kurt Renick
-----------------------------------
A. Kurt Renick
Senior Vice President and
Chief Financial Officer
II-2
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