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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 June 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11113
RIVERWOOD HOLDING, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-2205241
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1013 Centre Road
Suite 350
Wilmington, Delaware 19805
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(Address of principal executive offices)
(Zip Code)
c/o Riverwood International Corporation
(770) 644-3000
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(Registrant's telephone number, including area code)
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(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No . The registrant became subject to such filing
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requirement as of March 19, 1996, the date of effectiveness of the Registration
Statement on Form S-1 (Registration No. 33-80475).
At August 9, 1996 there were 7,111,900 shares and 500,000 shares of the
registrant's Class A and Class B common stock, respectively, outstanding.
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PART I. FINANCIAL INFORMATION*
* As used in this Form 10-Q, unless the context otherwise requires, "RIC"
refers to the corporation formerly named Riverwood International
Corporation, the "Predecessor" or the "Predecessor Company" refers to RIC
and its subsidiaries in respect of periods prior to the Merger (as defined
herein), the "Company" refers to the registrant, Riverwood Holding, Inc., a
Delaware corporation formerly named New River Holding, Inc. ("Holding") and
its subsidiaries, "RIC Holding" refers to RIC Holding, Inc., a Delaware
corporation, successor by merger to RIC and a wholly-owned subsidiary of
Holding, and "Riverwood" refers to Riverwood International Corporation, a
Delaware corporation formerly named Riverwood International USA, Inc. and a
wholly-owned subsidiary of RIC Holding.
I-1
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ON MARCH 27, 1996, HOLDING, THROUGH ITS WHOLLY-OWNED SUBSIDIARY RIC HOLDING,
ACQUIRED ALL OF THE OUTSTANDING SHARES OF COMMON STOCK OF RIC. THE PURCHASE
METHOD OF ACCOUNTING WAS USED TO RECORD ASSETS ACQUIRED AND LIABILITIES
ASSUMED BY HOLDING. THE ALLOCATION OF THE PURCHASE PRICE AND ACQUISITION COSTS
TO THE ASSETS ACQUIRED AND LIABILITIES ASSUMED IS PRELIMINARY AND IS SUBJECT
TO CHANGE PENDING FINALIZATION OF APPRAISALS AND OTHER STUDIES OF FAIR VALUE
AND FINALIZATION OF MANAGEMENT'S PLANS WHICH MAY RESULT IN THE RECORDING OF
ADDITIONAL LIABILITIES AS PART OF THE ALLOCATION OF THE PURCHASE PRICE. AS A
RESULT OF PURCHASE ACCOUNTING AND DISCONTINUED OPERATIONS (SEE NOTE 11), THE
ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND THE COMPANY ARE NOT
COMPARABLE IN ALL MATERIAL RESPECTS SINCE THE FINANCIAL STATEMENTS REPORT
FINANCIAL POSITION, RESULTS OF OPERATIONS AND CASH FLOWS OF THESE TWO SEPARATE
ENTITIES. THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995
WAS DERIVED FROM COMPLETE FINANCIAL STATEMENTS AUDITED BY OTHER ACCOUNTANTS.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
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June 29, December 31,
ASSETS 1996 1995
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<S> <C> <C>
Current Assets
Cash and equivalents $ 14,905 $ 35,870
Marketable securities, at cost (approximates market) 959 1,375
Receivables, net of allowances 188,246 187,621
Inventories 246,817 193,703
Prepaid expenses 11,377 23,229
Deferred tax assets 3,948 18,754
Net assets of discontinued operations 545,399 --
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Total Current Assets 1,011,651 460,552
Property, Plant and Equipment, net of accumulated
depreciation of $33,311 in 1996 and $475,897 in 1995 1,641,429 1,227,203
Timber and Timberlands, less cost of timber harvested -- 238,887
Investments in Net Assets of Equity Affiliates 130,256 119,592
Other Assets 378,329 155,094
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Total Assets $3,161,665 $2,201,328
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LIABILITIES
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Current Liabilities
Accounts and notes payable $ 136,419 $ 174,985
Compensation and employee benefits 51,870 56,495
Income taxes 41,850 4,688
Other accrued liabilities 84,914 58,384
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Total Current Liabilities 315,053 294,552
Long-Term Debt, less current portion 2,028,373 1,041,221
Long-Term Debt to Affiliate -- 12,573
Deferred Income Taxes 24,269 232,195
Other Noncurrent Liabilities 81,201 58,477
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Total Liabilities 2,448,896 1,639,018
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Contingencies and Commitments (Note 8)
STOCKHOLDERS' EQUITY
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Preferred Stock -- --
Common Stock 76 657
Capital in Excess of Par Value 761,068 526,814
(Accumulated Deficit) Retained Earnings (51,260) 45,309
Cumulative Currency Translation Adjustment 2,885 (10,470)
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Total Stockholders' Equity 712,769 562,310
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Total Liabilities and Stockholders' Equity $3,161,665 $2,201,328
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-2
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ON MARCH 27, 1996, HOLDING, THROUGH ITS WHOLLY-OWNED SUBSIDIARY RIC HOLDING,
ACQUIRED ALL OF THE OUTSTANDING SHARES OF COMMON STOCK OF RIC. THE PURCHASE
METHOD OF ACCOUNTING WAS USED TO RECORD ASSETS ACQUIRED AND LIABILITIES ASSUMED
BY HOLDING. THE ALLOCATION OF THE PURCHASE PRICE AND ACQUISITION COSTS TO THE
ASSETS ACQUIRED AND LIABILITIES ASSUMED IS PRELIMINARY AND IS SUBJECT TO CHANGE
PENDING FINALIZATION OF APPRAISALS AND OTHER STUDIES OF FAIR VALUE AND
FINALIZATION OF MANAGEMENT'S PLANS WHICH MAY RESULT IN THE RECORDING OF
ADDITIONAL LIABILITIES AS PART OF THE ALLOCATION OF THE PURCHASE PRICE. AS A
RESULT OF PURCHASE ACCOUNTING AND DISCONTINUED OPERATIONS (SEE NOTE 11), THE
ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND THE COMPANY ARE NOT
COMPARABLE IN ALL MATERIAL RESPECTS SINCE THE FINANCIAL STATEMENTS REPORT
FINANCIAL POSITION, RESULTS OF OPERATIONS AND CASH FLOWS OF THESE TWO SEPARATE
ENTITIES.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
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Three months Three months Three months Six months
ended ended ended ended
June 29, 1996 March 27,1996 July 1,1995 July 1,1995
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<S> <C> <C> <C> <C>
Net Sales $ 293,884 $ 293,649 $ 366,265 $ 679,441
Cost of Sales 278,798 232,701 280,688 524,471
Selling, General and Administrative 31,631 30,936 32,724 62,873
Research, Development and Engineering 1,754 2,031 2,348 6,210
Other Costs -- 11,114 13,432 16,135
Other Expenses, net 1,992 1,217 423 2,200
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(Loss) Income from Operations (20,291) 15,650 36,650 67,552
Interest Income 226 329 509 1,387
Interest Expense 49,842 26,392 26,013 52,308
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(Loss) Income from Continuing Operations before Income
Taxes and Equity in Net Earnings of Affiliates (69,907) (10,413) 11,146 16,631
Income Tax (Benefit) Expense (2,272) (3,436) 4,952 7,317
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(Loss) Income from Continuing Operations before Equity in
Net Earnings of Affiliates (67,635) (6,977) 6,194 9,314
Equity in Net Earnings of Affiliates 4,622 4,927 10,913 18,653
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(Loss) Income from Continuing Operations (63,013) (2,050) 17,107 27,967
Income from Discontinued Operations, net
of tax of $0 11,753 -- -- --
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Net (Loss) Income $ (51,260) $ (2,050) $ 17,107 $ 27,967
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-3
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ON MARCH 27, 1996, HOLDING, THROUGH ITS WHOLLY-OWNED SUBSIDIARY RIC HOLDING,
ACQUIRED ALL OF THE OUTSTANDING SHARES OF COMMON STOCK OF RIC. THE PURCHASE
METHOD OF ACCOUNTING WAS USED TO RECORD ASSETS ACQUIRED AND LIABILITIES ASSUMED
BY HOLDING. THE ALLOCATION OF THE PURCHASE PRICE AND ACQUISITION COSTS TO THE
ASSETS ACQUIRED AND LIABILITIES ASSUMED IS PRELIMINARY AND IS SUBJECT TO CHANGE
PENDING FINALIZATION OF APPRAISALS AND OTHER STUDIES OF FAIR VALUE AND
FINALIZATION OF MANAGEMENT'S PLANS WHICH MAY RESULT IN THE RECORDING OF
ADDITIONAL LIABILITIES AS PART OF THE ALLOCATION OF THE PURCHASE PRICE. AS A
RESULT OF PURCHASE ACCOUNTING AND DISCONTINUED OPERATIONS (SEE NOTE 11), THE
ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND THE COMPANY ARE NOT
COMPARABLE IN ALL MATERIAL RESPECTS SINCE THE FINANCIAL STATEMENTS REPORT
FINANCIAL POSITION, RESULTS OF OPERATIONS AND CASH FLOWS OF THESE TWO SEPARATE
ENTITIES.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
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Three months Three months Three months Six months
ended ended ended ended
June 29, 1996 March 27,1996 July 1, 1995 July 1,1995
----------------------------------------------------------------
Cash Flows from Operating Activities:
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<S> <C> <C> <C> <C>
Net (Loss) Income $(51,260) $ (2,050) $ 17,107 $ 27,967
Noncash Items Included in Net (Loss) Income:
Depreciation, amortization and cost of
timber harvested 39,935 24,438 23,056 45,014
Write-up of inventories 58,156 -- -- --
Deferred income taxes (2,467) (3,574) (1,535) (5,463)
Pension, postemployment and postretirement
expense, net of benefits paid 415 1,861 1,666 3,372
Equity in net earnings of affiliates (3,214) (4,927) (9,184) (16,924)
Other 3,843 (1,731) 450 902
(Increase) Decrease in Current Assets, net of effects
from the Merger:
Receivables (17,203) 14,737 (30,897) (31,108)
Inventories (37,503) (14,659) 3,919 (6,150)
Prepaid expenses (6,164) 8,298 (3,159) (1,195)
(Decrease) Increase in Current Liabilities, net of effects
from the Merger:
Accounts payable (9,754) 18,182 15,140 21,502
Compensation and employee benefits (4,128) (10,248) 15,301 7,777
Income taxes 54 (3,343) 1,378 (8,868)
Other accrued liabilities (930) 12,360 (16,695) (362)
Decrease in Other Noncurrent Liabilities (2,119) (2,569) (817) (2,521)
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Net Cash (Used in) Provided by Operating Activities (32,339) 36,775 15,730 33,943
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Cash Flows from Investing Activities:
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Acquisition of RIC, net of cash acquired (1,365,202) -- -- --
Purchases of Property, Plant and Equipment (34,299) (44,074) (42,600) (82,398)
Acquisition of equipment previously leased under
operating leases (46,742) -- -- --
Proceeds from Sales of Marketable Securities
Held to Maturity -- 439 -- 2,630
Proceeds from Sales of Assets 214 623 14,551 14,608
Increase in Other Assets (3,462) (8,004) (546) (16)
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Net Cash Used in Investing Activities (1,449,491) (51,016) (28,595) (65,176)
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Cash Flows from Financing Activities:
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Issuance of Debt 1,838,400 12,669 -- --
Increase in Debt Issuance Costs (92,820) -- -- --
Net increase (decrease) in Notes Payable 114,303 (3,000) 10,000 (48,000)
Proceeds from Issuance of Common Stock 761,143 838 400 2,156
Payments on Debt (5,724) (2,833) (564) (2,958)
Predecessor Debt Paid at Merger (1,118,461) -- -- --
Dividends -- (2,630) (2,626) (5,251)
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Net Cash Provided by (Used in) Financing Activities 1,496,841 5,044 7,210 (54,053)
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Effect of Exchange Rate Changes on Cash (107) (638) (378) 75
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Net Increase (Decrease) in Cash and Equivalents 14,904 (9,835) (6,033) (85,211)
Cash and Equivalents at Beginning of Period 1 35,870 38,534 117,712
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Cash and Equivalents at End of Period $ 14,905 $26,035 $ 32,501 $ 32,501
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-4
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RIVERWOOD HOLDING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Holding, its wholly-owned subsidiaries RIC Holding and the corporation
formerly named CDRO Acquisition Corporation ("Acquisition Corp.") were
incorporated in 1995 to acquire the stock of RIC.
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 (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.
Holding and its subsidiaries conducted no significant business other than in
connection with the Merger and related transactions through March 27, 1996. The
condensed consolidated financial statements included herein have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Although management believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that the Predecessor interim condensed financial statements be read in
conjunction with the Predecessor's most recent audited financial statements and
notes thereto. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented have been made. Operating results for
the interim periods are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 1996.
In connection with the Merger, the purchase method of accounting was used to
establish and record a new cost basis for the assets acquired and liabilities
assumed. The allocation of the purchase price and acquisition costs to the
assets acquired and liabilities assumed is preliminary at June 29, 1996, and is
subject to change pending finalization of appraisals and other studies of fair
value and finalization of management's plans which may result in the recording
of additional liabilities as part of the allocation of the purchase price. The
difference between the purchase price and the preliminary fair market values of
the assets acquired and liabilities assumed was recorded as goodwill.
The preliminary allocation of the $1,365.2 million net cash paid for acquisition
is summarized as follows (in millions of dollars):
Current assets.......................... $ 457.5
Property, plant and equipment........... 2,133.8
Intangible assets....................... 281.2
Other noncurrent assets................. 117.6
Liabilities.............................. (1,624.9)
----------
Total.................................... $ 1,365.2
----------
----------
The condensed consolidated financial statements presented herein for the periods
prior to March 28, 1996, represent the Predecessor's results of operations and
cash flows prior to the Merger and, consequently, are stated on the
Predecessor's historical cost basis. The consolidated financial statements as
of June 29, 1996, and for the three months then ended, reflect the adjustments
which were made to record the Merger. Accordingly, the financial statements of
the Predecessor for periods prior to March 28, 1996 are not comparable in all
material respects with the financial statements subsequent to the Merger date.
The most significant differences relate to amounts recorded for inventory,
property and equipment, intangibles and debt which will result in increased cost
of sales, amortization, depreciation and interest expense in the three months
ended June 29, 1996 and in future periods.
I-5
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NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies of the Company.
For a summary of RIC's significant accounting policies, please refer to RIC's
annual report filed with the Securities and Exchange Commission under Form 10-K
dated December 31, 1995.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include all of the accounts
of Riverwood Holding, Inc and its subsidiaries. All significant transactions
and balances between the consolidated operations have been eliminated.
The Company's consolidated international subsidiaries are principally reported
on the basis of fiscal years ending November 30 and interim quarterly periods
ending on a date approximately one month prior to the U.S. quarterly periods.
The U.S. quarterly periods are generally on a 13-week basis ending on a
Saturday; however, the length of the first and fourth quarters vary depending
upon the calendar.
The Company accounts for investments in which it has a 20 percent to 50 percent
ownership interest and for corporate joint ventures using the equity method.
(B) CASH AND EQUIVALENTS
Cash and equivalents include time deposits, certificates of deposit and other
marketable securities with original maturities of three months or less.
(C) MARKETABLE SECURITIES
Marketable securities are those with maturities in excess of three months and
are valued at amortized cost, which approximates market. All marketable
securities at June 29, 1996 were classified as held-to-maturity, and have
various maturity dates which do not exceed one year.
(D) INVENTORIES
Inventories are stated at the lower of cost or market. The cost of inventories
are determined principally on the first-in, first-out ("FIFO") basis. In
addition, average and actual cost bases are used to determine the cost of
certain U.S. inventories.
(E) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Betterments, renewals and
extraordinary repairs that extend the life of the asset are capitalized; other
repairs and maintenance charges are expensed as incurred. The cost and related
accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition is recognized in income.
Interest is capitalized on major projects. The capitalized interest is
recorded as part of the asset to which it relates and is amortized over the
asset's estimated useful life.
(F) DEPRECIATION, AMORTIZATION AND COST OF TIMBER HARVESTED
Depreciation and amortization on assets acquired are computed using the
straight-line method over their remaining useful lives ranging from two to 38
years. For certain major capital additions, the Company computes depreciation
on the units-of-production method until the assets' designed level of production
is achieved and sustained.
Cost of timber harvested is based on unit cost rates calculated using the total
estimated yield of timber to be harvested and the unamortized timber costs.
Goodwill is amortized on a straight-line basis over 40 years. The related
amortization expense is included in Other Expense, net, in the Condensed
Consolidated Statement of Operations. The cost of patents, licenses and
trademarks is amortized on a straight-line basis over 15 to 20 years. The
Company assesses goodwill which is not allocable to long-live assets for
impairment whenever facts and circumstances indicate that the carrying amount
may not be fully recoverable. To analyze recoverability, the Company projects
future cash flows, undiscounted and before interest, over the remaining life of
the
I-6
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goodwill. If these projected cash flows are less than the carrying amount of
the goodwill, an impairment loss would be recognized, resulting in a write down
of goodwill with a corresponding charge to earnings. The impairment loss is
measured based upon the difference between the carrying amount of the goodwill
and the undiscounted future cash flows before interest.
(G) INTERNATIONAL CURRENCY TRANSLATION
The functional currency for most of the international subsidiaries is the local
currency for the country in which the subsidiaries own their primary assets.
The translation of the applicable currencies into U.S. dollars is performed for
balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted average
exchange rate during the period. Any related translation adjustments are
recorded directly to stockholders' equity. Gains and losses on foreign currency
transactions are included in Other Expenses, net, in the consolidated statements
of income for the period in which the exchange rate changes.
The Company enters into forward exchange and option contracts to hedge certain
foreign currency denominated exposures. Realized gains and losses on these
contracts are included in Other Expenses, net, in the consolidated statements of
income. Unrealized gains and losses on forward exchange and certain option
contracts are also included in Other Expenses, net. The discount or premium on
a forward exchange contract is included in the measurement of the basis of the
related foreign currency transaction when recorded. The premium on an option
contract is accounted for separately and amortized to Other Expenses, net, over
the term of the contract.
(H) INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires, among other things, the use of the liability method of
computing deferred income taxes. Under the liability method, the effect of
changes in corporate tax rates on deferred income taxes is recognized currently
as an adjustment to income tax expense. The liability method also requires that
deferred tax assets or liabilities be recorded based on the difference between
the tax bases of assets and liabilities and their carrying amounts for financial
reporting purposes.
Income taxes are provided at rates applicable in the countries in which the
income is earned. Investment tax credits granted by various countries are
accounted for as reductions of income tax expense in the year in which the
related expenditures become eligible for investment benefit under applicable tax
regulations.
(I) REVENUE RECOGNITION
The Company recognizes revenue when goods are shipped to customers. Revenues
from packaging machinery leases are recognized on a straight-line basis over the
term of the lease.
(J) INSURANCE RESERVES
It is the Company's policy to self-insure or fund a portion of certain expected
losses related to group health benefits. Provisions for losses expected under
these benefit programs are recorded based on the Company's estimates of the
aggregate undiscounted liabilities for known claims and estimated claims
incurred but not reported.
(K) ENVIRONMENTAL REMEDIATION RESERVES
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals
for such losses are adjusted as further information develops or circumstances
change. Costs of future expenditures for environmental remediation obligations
are not discounted to their present value.
(L) USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from those estimates.
I-7
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NOTE 3 -- INVENTORIES
The major classes of inventories were as follows:
(In thousands of dollars)
Company Predecessor
----------- ------------
June 29, December 31,
1996 1995
- -----------------------------------------------------------------------
Finished goods $ 91,958 $ 67,336
Work-in-process 17,228 19,941
Raw materials 85,666 61,298
Supplies 51,965 45,128
- -----------------------------------------------------------------------
$246,817 $193,703
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
At December 31, 1995, the cost of the Predecessor's inventory balances were
determined based on the last-in first-out (LIFO) method, resulting in a reserve
of approximately $29.4 million to reduce such balances. At the Merger date, the
Company adjusted its inventory balances to fair value resulting in the
elimination of the LIFO reserve and a write up of approximately $40.1 million
above the Predecessor's FIFO cost. This write up will be allocated to cost of
sales as the inventory on hand at March 27, 1996 is sold; approximately $27.1
million was charged to cost of sales during the three months ended June 29,
1996.
NOTE 4 -- INVESTMENTS IN NET ASSETS OF EQUITY AFFILIATES
The Company has investments in affiliates that are accounted for using the
equity method of accounting. The only significant investment is the Company's
50 percent investment in Igaras Papeis e Embalagens S.A. ("Igaras").
The following represents the summarized income statement information for Igaras:
(In thousands of dollars)
Company Predecessor
---------- ---------------------------------
Three Three Three Six
months months months months
ended ended ended ended
June 29, March 27, July 1, July 1,
1996 1996 1995 1995
- --------------------------------------------------------------------------------
Net Sales $56,748 $59,573 $74,935 $143,508
Cost of Sales 37,938 39,127 34,159 67,524
- --------------------------------------------------------------------------------
Gross Profit $18,810 $20,446 $40,776 $ 75,984
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income from Operations $13,050 $14,275 $31,548 $ 61,721
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- --------------------------------------------------------------------------------
Net Income $ 8,757 $10,249 $20,025 $ 37,305
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- --------------------------------------------------------------------------------
NOTE 5 -- INTANGIBLE ASSETS
Other Assets included intangible assets as follows:
(In thousands of dollars)
Company Predecessor
------- ------------
June 29, December 31,
1996 1995
- --------------------------------------------------------------------------------
Goodwill $234,248 $74,225
Patents, licenses,
and trademarks 46,929 9,827
Other -- 5,765
- --------------------------------------------------------------------------------
281,177 89,817
Less, accumulated amortization 1,954 19,462
- --------------------------------------------------------------------------------
Total $279,223 $70,355
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I-8
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NOTE 6 -- LONG-TERM DEBT
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 with 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 Agreement, 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 million aggregate principal amount of 10 1/4% Senior
Notes due 2006 (the "Senior Notes") and $400 million 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 RIC and its subsidiaries were repaid or
terminated in connection with the Merger.
With respect to the $1,150 million borrowed under the Term Loan Facility at June
29, 1996, the Company is scheduled to make 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.
The Company uses interest rate swap and cap agreements to convert or cap a
portion of its variable rate Term Loan Facility to a fixed rate in order to
reduce the impact of interest rate changes on future income. The differential
to be paid or received under these agreements is recognized as an adjustment to
interest expense related to the debt. At June 29, 1996, the Company had
interest rate swap agreements (with a notional amount of $250 million under
which the Company will pay fixed rates of 6.06 percent to 6.43 percent) and 7
percent cap agreements (with a notional amount of $400 million) that expire
through November 30, 1998.
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.
NOTE 7 -- COMMON STOCK
On March 27, 1996, Holding completed an offering of 7,500,000 shares of common
stock of Holding ("Holding Common Stock") to certain institutional investors for
$750 million. Holding has commenced an offering of Holding Common Stock to
certain members of management and key employees (the "Management Investors") of
the Company. As of June 29, 1996, the Company had issued 111,900 shares of
Holding Common Stock to Management Investors for $11.2 million.
On June 4, 1996, the Management Investors received a total of 296,550
non-qualified options to purchase additional shares of Holding Common Stock for
$100 per share (the "Stock Options"). Of these Stock Options, 223,800 options
vest over a five-year period and 72,750 options vest upon achievement of certain
financial goals or on December 4, 2005, whichever occurs first. As of June 29,
1996, no Stock Options had vested. The Company accounts for these Stock Options
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees."
I-9
<PAGE>
NOTE 8 -- 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
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.
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 received a letter from the DEQ dated May 20, 1996,
requesting a plan for soil and groundwater sampling of the wood treatment site.
The Company met with the DEQ on July 18, 1996 and agreed to submit a soil
sampling plan to the DEQ by September 18, 1996.
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 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 9 -- OTHER COSTS
Other Costs incurred by the Predecessor Company include expenses associated with
stock-based compensation plans, expenses related to RIC's review of strategic
alternatives and provision for environmental reserves.
NOTE 10 -- INCOME TAXES
During the three months ended June 29, 1996, the Company recognized an income
tax benefit of $2.3 million, or 3.3 percent, on a Loss from Continuing
Operations before Income Taxes and Equity in Net Earnings of Affiliates of $69.9
million. This benefit differed from the statutory federal income tax rate
because of valuation allowances established on net operating loss carryforwards
in the U.S. and certain international locations where the realization of such
benefits is less likely than not.
In the first quarter of 1996, the Predecessor Company recognized an income tax
benefit of $3.4 million on a Loss from Continuing Operations before Income
Taxes and Equity in Net Earnings of Affiliates of $10.4 million. The
Predecessor Company's effective income tax rate for both the three and six
months ended July 1, 1995 was 44 percent.
I-10
<PAGE>
NOTE 11 -- DISCONTINUED OPERATIONS
On August 7, 1996, the Company entered into an agreement to sell substantially
all of the assets of the U.S. Timberlands/Wood Products business segment for
$540 million plus payment for the value of transferred inventory. The sale,
subject to certain conditions, is expected to close in the fourth quarter of
1996. Under the terms of the agreement for such sale, the Company and the buyer
will upon the closing enter into a long-term supply agreement for the purchase
by the Company of a majority of the Company's requirements for pine pulpwood and
residual chips at its paper mill in West Monroe, Louisiana (the "West Monroe
Mill"), as well as a portion of the Company's needs for hardwood pulpwood. The
sale is subject to the consent of the lenders under the Facilities. The Company
does not anticipate any significant gain or loss on the sale.
The operating results for the U.S. Timberlands/Wood Products business
segment have been classified as discontinued operations for the three months
ended June 29, 1996 in the Condensed Consolidated Statement of Operations.
The assets and liabilities of discontinued operations have been classified in
the Condensed Consolidated Balance Sheets as "Net assets of discontinued
operations", and as of June 29, 1996, reflect the preliminary fair value of
assets and liabilities of the U.S. Timberlands/Wood Products business
segment. Discontinued operations have not been segregated in the Condensed
Consolidated Statement of Cash Flows nor have they been reclassified as
discontinued operations in the Predecessor Company's Condensed Consolidated
Statement of Operations and Condensed Consolidated Balance Sheets.
Net sales and income from operations of the discontinued U.S. Timberlands/Wood
Products business segment for the quarter ended June 29, 1996 were $34.7 million
and $11.8 million, respectively.
The preliminary balance sheet data for the discontinued operations excludes
certain assets and liabilities maintained at the corporate level. The following
is a summary of the preliminary balance sheet data for the discontinued
operations as of June 29, 1996:
(In thousands of dollars)
- -------------------------------------------------------------
Current assets $ 21,534
Noncurrent assets 527,000
- -------------------------------------------------------------
Total assets 548,534
- -------------------------------------------------------------
Current liabilities 3,135
- -------------------------------------------------------------
Net assets of discontinued operations $545,399
- -------------------------------------------------------------
- -------------------------------------------------------------
NOTE 12 -- PRO FORMA DATA
The following unaudited pro forma financial data has been prepared assuming that
the Merger and related financings were consummated on January 1, 1995 and
excluding the results of operations of the U.S. Timberlands/Wood Products
business segment from all periods presented. In addition, the pro forma
financial data excludes an adjustment to write-up inventory to fair value. This
pro forma financial data is presented for informational purposes and is not
necessarily indicative of the operating results that would have occurred had the
Merger been consummated on January 1, 1995, nor is it necessarily indicative of
future operations.
<TABLE>
<CAPTION>
(In thousands of dollars)
Three months Six months Three months Six months
ended ended ended ended
March 27,1996 June 29, 1996 July 1, 1995 July 1,1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $251,128 $545,012 $317,631 $584,919
Net Loss $(43,576) $(81,389) $(15,296) $(51,002)
</TABLE>
NOTE 13 -- RELATED PARTY TRANSACTIONS
The Company receives certain management services provided by Clayton,
Dubilier & Rice, Inc. ("CD&R"), an affiliate of an equity investor in the
Company. Charges for such services totaled approximately $0.2 million for
the quarterly period ended June 29, 1996, and were included in operating
expenses in the Condensed Consolidated Statements of Operations.
Additionally, the Company paid fees totaling approximately $15.4 million to
CD&R and an affiliate of another equity investor in connection with the
Merger and related financings.
I-11
<PAGE>
NOTE 14 -- SUPPLEMENTAL CASH FLOW INFORMATION
Details of the Merger (see Note 1): (In thousands of dollars)
- -----------------------------------------------------------------------
Fair value of assets acquired $3,016,186
Liabilities assumed 1,624,949
- -----------------------------------------------------------------------
Cash paid 1,391,237
Less, cash acquired 26,035
- -----------------------------------------------------------------------
Net cash paid for acquisition $1,365,202
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
I-12
<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. and its subsidiaries as of June 29, 1996, and the related condensed
consolidated statements of operations and cash flows for the three month period
then ended. These financial statements are 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 of 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 operations of Riverwood International
Corporation for the three and six months ended July 1, 1995 were reviewed by
other accountants whose report dated July 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
August 7, 1996
I-13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors
of Riverwood International Corporation:
We have reviewed the condensed consolidated statements of operations and cash
flows of Riverwood International Corporation ("RIC") and subsidiaries for the
three month period ended March 27, 1996. 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 of 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.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 2, 1996
I-14
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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.
The Merger was accounted for as a purchase in accordance with APB Opinion No.
16, "Accounting for Business Combinations" ("APB 16"). The allocation of the
purchase price and acquisition costs to the assets acquired and liabilities
assumed is preliminary at June 29, 1996, and is subject to change pending
finalization of appraisals and other studies of fair value and finalization of
management's plans which may result in the recording of additional liabilities
as part of the allocation of purchase price. Purchase accounting results in
increased cost of sales, amortization and depreciation. Additionally, the new
capital structure will result in higher interest expense reported in future
periods. The condensed consolidated financial statements for periods prior to
March 28, 1996 have been prepared on the historical cost basis using accounting
principles that had been adopted by RIC. The Company's condensed consolidated
balance sheet at June 29, 1996 is not comparable with the December 31, 1995
historical balance sheet of the Predecessor. As a result of purchase accounting
and the effect of discontinued operations, operating results subsequent to the
Merger are not comparable to the operating results prior to the Merger.
On August 7, 1996, the Company entered into an agreement to sell substantially
all of the assets of the U.S. Timberlands/Wood Products business segment for
$540 million plus payment for the value of transferred inventory. The sale,
subject to certain conditions, is expected to close in the fourth quarter of
1996. Under the terms of the agreement for such sale, the Company and the buyer
will upon the closing enter into a long-term supply agreement for the purchase
by the Company of a majority of the West Monroe Mill's requirements for pine
pulpwood and residual chips, as well as a portion of the Company's needs for
hardwood pulpwood. The sale is subject to the consent of the lenders under the
Facilities. There can be no assurance that the sale will be completed. The
Company does not anticipate any significant gain or loss on the sale. The
operating results for the U.S. Timberlands/Wood Products business segment have
been classified as discontinued operations for the quarterly period ended June
29, 1996 in the Condensed Consolidated Statement of Operations. The assets and
liabilities of discontinued operations have been classified in the Condensed
Consolidated Balance Sheets as "Net assets of discontinued operations."
Discontinued operations have not been segregated in the Condensed Consolidated
Statement of Cash Flows nor have they been reclassified as discontinued
operations in the Predecessor Company's Condensed Consolidated Statement of
Operations and Condensed Consolidated Balance Sheets. See "- Financial
Condition, Liquidity and Capital Resources."
Under the terms and definitions of the Senior Secured Credit Agreement and the
indentures (the "Indentures") for the Notes, certain expenses and costs are
excluded from the Company's (Loss) Income from Operations in determining EBITDA
(as defined below), including amortization, depreciation or expenses associated
with the write-up of inventory, fixed assets and intangible assets in accordance
with APB 16 and APB Opinion No. 17, "Intangible Assets", collectively referred
to as the "Purchased Asset Costs." During the quarter ended June 29, 1996, the
Company's (Loss) Income from Operations and Income from Discontinued Operations
included $38.0 million and $3.6 million, respectively, of Purchased Asset Costs,
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Coated Total Dis-
Board Contain Continuing continued
Description System -erboard Corporate Operations Operations
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost of sales $28,243 $(1,127) $ -- $27,116 $2,728
Depreciation expense 9,483 1,267 (64) 10,686 844
Amortization of intangible assets 195 (50) 23 168 --
- -------------------------------------------------------------------------------------------------------------------------
Net impact on income from operations $37,921 $ 90 $ (41) $37,970 $3,572
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
I-15
<PAGE>
GENERAL
The Company reports its results in two business segments: Coated Board System
and Containerboard. Effective for the quarter ended June 29, 1996, the Company
reports the U.S. Timberlands/Wood Products business segment as discontinued
operations. 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; Macon, Georgia and Norrkoping, Sweden; converting operations at
facilities in the United States, Australia and Europe; and the design,
manufacture and installation of packaging machinery related to the assembly 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 discontinued 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.
The table below sets forth Net Sales, (Loss) Income from Operations and earnings
before interest, income taxes, depreciation, amortization, cost of timber
harvested and certain non-cash items ("EBITDA"), calculated in accordance with
definitions in the Senior Secured Credit Agreement and the Indentures and
excluding Other Costs of the Predecessor Company ("Pro Forma EBITDA") (in
thousands of dollars). The Company believes that EBITDA provides useful
information regarding the Company's debt service ability, but should not be
considered in isolation or as a substitute for the Condensed Consolidated
Statement of Operations or cash flow data.
<TABLE>
<CAPTION>
Company Predecessor
-------------- -------------------------------------------
Three Three Three Six
Months Months Months Months
Ended Ended Ended Ended
June 29, March 27, July 1, July 1,
1996 1996 1995 1995
-------------- -------------------------------------------
<S> <C> <C> <C> <C>
Net Sales (Segment Data):
Coated Board System $266,231 $234,608 $272,338 $490,628
Containerboard 27,653 25,496 56,514 115,207
U.S. Timberlands/Wood Products -- 37,336 42,866 83,902
Intersegment Eliminations -- (3,791) (5,453) (10,296)
----------- --------- --------- ----------
Net Sales $293,884 $293,649 $366,265 $679,441
----------- --------- --------- ----------
----------- --------- --------- ----------
(Loss) Income from Operations (Segment Data):
Coated Board System $ (7,144) $ 24,638 $ 24,868 $ 40,254
Containerboard (6,751) (5,955) 10,149 18,609
U.S. Timberlands/Wood Products -- 13,868 13,742 29,799
Corporate and Eliminations (6,396) (16,901) (12,109) (21,110)
----------- --------- --------- ----------
(Loss) Income from Operations $(20,291) $ 15,650 $ 36,650 $ 67,552
----------- --------- --------- ----------
----------- --------- --------- ----------
Pro Forma EBITDA (Segment Data):
Coated Board System $ 52,446 $ 47,174 $ 46,552 $ 78,757
Containerboard (2,264) (1,242) 17,477 31,361
U.S. Timberlands/Wood Products 18,059 16,766 16,656 34,879
Corporate and Eliminations (4,277) (6,565) (4,624) (11,869)
----------- --------- --------- ----------
Pro Forma EBITDA $ 63,964 $ 56,133 $ 76,061 $133,128
----------- --------- --------- ----------
----------- --------- --------- ----------
</TABLE>
Included in Pro Forma EBITDA for the three months ended June 29, 1996 was an
adjustment for certain non-cash items of $1.3 million.
Prior to March 28, 1996, the Predecessor Company incurred expenses associated
with stock-based compensation plans, expenses related to RIC's review of
strategic alternatives and provision for environmental reserves. These
expenses were classified as Other Costs on the Condensed Consolidated
Statement of Operations. Stock-based compensation expense was allocated to
each of the business segments based upon the responsibility of the
individuals holding or exercising the stock incentive benefits. During the
three months ended March 27, 1996, $1.2 million, $0.1 million, $0.2 million
and $0.8 million of stock-based compensation expense were allocated to the
Coated Board System, Containerboard and U.S. Timberlands/Wood Products
business segments and Corporate and Eliminations, respectively, as compared
to $5.4 million, $1.8 million, $0.8 million and $4.2 million, respectively
for the second quarter of 1995, and $6.6 million, $2.2 million, $0.9 million
and $5.2 million, respectively, for the first six months of 1995. Expenses
related to RIC's review of strategic alternatives and environmental reserves
were included in Corporate and Eliminations for business segment reporting
purposes.
I-16
<PAGE>
The following is a discussion of the Company's results of operations. The
discussion is based upon (a) the three month period ended June 29, 1996,
exclusive of the net effect of Purchased Asset Costs made in this period, in
comparison to the three month period ended July 1, 1995, exclusive of Other
Costs and the U.S. Timberlands/Wood Products business segment results of
operations and (b) the three month period ended June 29, 1996, exclusive of the
net effect of Purchased Asset Costs made in this period, plus the three month
period ended March 27, 1996, exclusive of Other Costs and the U.S.
Timberlands/Wood Products business segment results of operations (the "six
months ended June 29, 1996"), in comparison to the six months ended July 1,
1995, exclusive of Other Costs and the U.S. Timberlands/Wood Products business
segment results of operations, as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------------- ----------------------------------------
% Increase % Increase
(Decrease) (Decrease)
June 29, From Prior July 1, June 29, From Prior July 1,
1996 Period 1995 1996 Period 1995
----------- ------------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales (Segment Data):
Coated Board System $266,231 (2.2) $272,338 $500,837 2.1 $490,662
Containerboard 27,653 (51.1) 56,514 53,149 (53.9) 115,207
--------- --------- -------- --------
Net Sales 293,884 (10.6) 328,852 553,986 (8.6) 605,869
Cost of Sales 240,995 (6.5) 257,644 454,582 (5.7) 482,205
--------- --------- -------- --------
Gross Profit 52,889 (25.7) 71,208 99,404 (19.6) 123,664
Selling, General and Administrative 31,631 (1.2) 32,027 62,228 1.2 61,478
Research, Development and Engineering 1,754 (24.5) 2,325 3,764 (38.9) 6,163
Other Expense, net 1,825 41.5 1,289 3,055 (0.3) 3,063
--------- --------- -------- --------
Income from Operations $ 17,679 (50.3) $ 35,567 $ 30,357 (42.7) $ 52,960
--------- --------- -------- --------
--------- --------- -------- --------
Income from Operations (Segment Data):
Coated Board System $ 30,777 1.8 $ 30,248 $ 56,658 21.0 $ 46,827
Containerboard (6,661) -- 11,962 (12,496) -- 20,824
Corporate and Eliminations (6,437) 3.1 (6,643) (13,805) 6.0 (14,691)
--------- --------- -------- --------
Income from Operations $ 17,679 (50.3) $ 35,567 $ 30,357 (42.7) $ 52,960
--------- --------- -------- --------
--------- --------- -------- --------
</TABLE>
RESULTS OF OPERATIONS
SECOND QUARTER 1996 COMPARED WITH SECOND QUARTER 1995
NET SALES
As a result of the factors described below, the Company's Net Sales in the
second quarter of 1996 declined by $35.0 million, or 10.6 percent, compared
with the second quarter of 1995. Net Sales in the Containerboard business
segment decreased $28.9 million, or 51.1 percent, to $27.7 million in the
second quarter of 1996 from $56.5 million in the second quarter of 1995, due
principally to selling price and sales volume declines as a result of the
significant decline in demand in containerboard markets worldwide that began
in the latter part of 1995 and has continued throughout the second quarter of
1996. See "-First Six Months of 1996 Compared with First Six Months of 1995
"-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 Coated Board System business segment decreased by
$6.1 million in the second quarter of 1996, or 2.2 percent, to $266.2 million
from $272.3 million in the second quarter of 1995, due primarily to decreased
sales volume. The decrease in sales volume in the Coated Board System
business segment was the result of an overall decline in demand in folding
carton and worldwide coated board open markets and loss of volume to
competitors due to substitution by customers of competing substrates for the
Company's coated board in these markets due primarily to pricing pressures,
production issues at the West Monroe Mill and other competitive factors.
These decreases were offset somewhat by continued sales growth in the
Company's domestic and worldwide integrated beverage markets.
GROSS PROFIT
As a result of the factors discussed below, the Company's Gross Profit for
the second quarter of 1996 decreased $18.3 million, or 25.7 percent, to $52.9
million from $71.2 million in the second quarter of 1995. The Company's
gross profit margin decreased to 18.0 percent for the second quarter of 1996
from 21.7 percent in the second quarter of 1995. In the Containerboard
business segment, Gross Profit decreased $18.5 million in the second quarter
of 1996 as compared to the second quarter of 1995 to a
I-17
<PAGE>
loss of $4.8 million. This decrease was due principally to selling price and
sales volume declines resulting from the significant decline in demand in
containerboard markets worldwide that began in the latter part of 1995 and
has continued throughout the second quarter of 1996. Gross Profit in the
Coated Board System business segment increased by $0.1 million, or 0.2
percent, to $58.3 million in the second quarter of 1996 as compared to $58.2
million in the second quarter of 1995, while its gross profit margin
increased to 21.9 percent in the second quarter of 1996 from 21.4 percent in
the second quarter of 1995. The gross profit margin was positively affected
primarily by selling price increases in certain market channels combined with
lower production costs primarily as a result of lower fiber costs, offset by
a shift in sales mix to lower margin products.
PAPERBOARD PRODUCTION
Total tons of paperboard produced at the Company's U.S. mills for the second
quarter of 1996 and 1995, were as follows:
--------------------------------------------------------------
Three Months Ended
(In Thousands of Tons)
June 29, July 1,
1996 1995
--------------------------------------------------------------
Coated Board 246.2 237.9
Containerboard 104.7 124.0
--------------------------------------------------------------
350.9 361.9
--------------------------------------------------------------
--------------------------------------------------------------
The Company's U.S. mill production of containerboard decreased approximately
19,300 tons in the second quarter of 1996 as compared to the same period of
1995 due to scheduled paper machine maintenance outages in the second quarter
of 1996 that did not occur in 1995, lower paper machine productivity and a
shift in production mix to coated board.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses decreased $0.4 million, or 1.2
percent, to $31.6 million in the second quarter of 1996 as compared to $32.0
million in the second quarter of 1995, primarily due to a decrease in incentive
compensation expenses.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses decreased by $0.6 million to $1.8
million.
OTHER EXPENSES, NET
Other Expenses, net, increased by approximately $0.5 million to $1.8 million.
INCOME FROM OPERATIONS
As a result of the above factors, the Company's Income from Operations in the
second quarter of 1996 decreased by $17.9 million, or 50.3 percent, to $17.7
million from the second quarter of 1995, while the operating margin as a percent
of Net Sales decreased to 6.0 percent from 10.8 percent. Income from Operations
in the Containerboard business segment decreased $18.6 million to a loss of $6.7
million in the second quarter of 1996 from Income from Operations of $12.0
million in the second quarter of 1995, primarily as a result of the factors
described above. Income from Operations in the Coated Board System business
segment increased $0.6 million, or 1.8 percent, to $30.8 million in the second
quarter of 1996 from $30.2 million in the second quarter of 1995, while the
operating margin increased to 11.6 percent from 11.1 percent for the same
periods, primarily as a result of the factors described above.
I-18
<PAGE>
RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1996 COMPARED WITH FIRST SIX MONTHS OF 1995
NET SALES
As a result of the factors described below, the Company's Net Sales in the
first six months of 1996 decreased by $51.9 million, or 8.6 percent, compared
with the first six months of 1995. Net Sales in the Containerboard business
segment decreased $62.1 million, or 53.9 percent, to $53.1 million in the first
six months of 1996 from $115.2 million in the first six months of 1995, due
principally to selling price and sales volume declines as a result of the
significant decline in demand in containerboard markets worldwide that began in
the latter part of 1995 and has continued throughout the second quarter of 1996.
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 Coated Board System business segment increased by
$10.1 million in the first six months of 1996, or 2.1 percent, to $500.8 million
from $490.7 million in the first six months of 1995, due primarily to increased
sales growth in the Company's domestic and international integrated beverage
markets. This increase was offset somewhat by decreased sales volume as a
result of an overall decline in demand in folding carton and worldwide coated
board open markets and loss of volume to competitors due to substitution by
customers of competing substrates for the Company's coated board in these
markets due primarily to pricing pressures, production issues at the West Monroe
Mill and other competitive factors.
GROSS PROFIT
As a result of the factors described below, the Company's Gross Profit for
the first six months of 1996 decreased $24.3 million, or 19.6 percent, to
$99.4 million from $123.7 million in the first six months of 1995. The
Company's gross profit margin decreased to 17.9 percent for the first six
months of 1996 from 20.4 percent in the first six months of 1995. In the
Containerboard business segment, Gross Profit decreased $33.5 million in the
first six months of 1996 as compared to the first six months of 1995 to a
loss of $9.3 million. This decrease was due primarily to selling price and
sales volume declines resulting from the significant decline in demand in
containerboard markets worldwide that began in the latter part of 1995 and
has continued throughout the first six months of 1996, and unabsorbed fixed
costs at the West Monroe Mill as a result of 49 days of corrugated medium
paper outages effected in order to correct imbalances in containerboard
inventories in the first quarter of 1996. 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 six months
of 1996. Gross Profit in the Coated Board System business segment increased
by $9.1 million, or 9.1 percent, to $109.5 million in the first six months of
1996 as compared to $100.4 million in the first six months of 1995, while its
gross profit margin increased to 21.9 percent in the first six months of 1996
from 20.5 percent in the first six months of 1995. The increase in gross
margin was principally due to selling price increases in certain market
channels, combined with lower production cost, primarily as a result of lower
fiber costs. These gross margin increases were offset somewhat by a shift in
sales mix to lower margin products.
PAPERBOARD PRODUCTION
Total tons of paperboard produced at the Company's U.S. mills for the first six
months of 1996 and 1995, were as follows:
----------------------------------------------------
Six Months Ended
(IN THOUSANDS OF TONS)
June 29, July 1,
1996 1995
----------------------------------------------------
Coated Board 479.4 453.1
Containerboard 195.0 257.8
----------------------------------------------------
674.4 710.9
----------------------------------------------------
----------------------------------------------------
The Company's U.S. mill production of containerboard decreased approximately
62,800 tons in the first six months of 1996 as compared to the same period of
1995 due to scheduled paper machine maintenance outages combined with the
medium paper machine outages in 1996 that did not occur in 1995, lower paper
machine productivity and a shift in production mix to coated board.
I-19
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses increased approximately $0.7
million, or 1.2 percent, to $62.2 million for the six months ended June 29, 1996
as a result of increases in selling, marketing and administrative expenses to
penetrate worldwide coated board markets which were somewhat offset by decreases
in incentive compensation expenses.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses decreased by $2.4 million to $3.8
million, or 38.9 percent.
OTHER EXPENSES, NET
Other Expenses, net, remained constant at approximately $3.1 million in the
first six months of 1996 and 1995.
INCOME FROM OPERATIONS
As a result of the above factors, the Company's Income from Operations in the
first six months of 1996 decreased by $22.6 million, or 42.7 percent, to $30.4
million from the first six months of 1995, while the operating margin as a
percent of Net Sales decreased to 5.5 percent from 8.7 percent. Income from
Operations in the Containerboard business segment decreased $33.3 million to a
loss of $12.5 million in the first six months of 1996 from income from
operations of $20.8 million in the first six months of 1995, primarily as a
result of the factors described above. Income from Operations in the Coated
Board System business segment increased $9.9 million, or 21.0 percent, to $56.7
million in the first six months of 1996 from $46.8 million in the first six
months of 1995, while the operating margin increased to 11.3 percent from 9.5
percent for the same periods, primarily as a result of the factors described
above.
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 second quarter and the
first six months of 1996 as compared to the same periods of 1995.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES AND DISCONTINUED OPERATIONS
INTEREST INCOME
Interest Income decreased $0.3 million and $0.8 million to $0.2 million and $0.6
million in the second quarter and the first six months of 1996, respectively,
from the second quarter and the first six months of 1995, respectively,
primarily as a result of lower average balances of cash and equivalents and
marketable securities for the same periods in 1996 as compared to 1995.
INTEREST EXPENSE
Interest Expense increased $23.8 million and $23.9 million to $49.8 million and
$76.2 million in the second quarter and the first six months of 1996,
respectively, from the second quarter and the first six months of 1995,
respectively, primarily as a result of the incremental indebtedness incurred in
connection with the Merger.
INCOME TAX (BENEFIT) EXPENSE
During the three months ended June 29, 1996, the Company recognized an income
tax benefit of $2.3 million, or 3.3 percent, on a Loss from Operations before
Income Taxes and Equity in Net Earnings of Affiliates of $69.9 million. This
benefit differed from the statutory federal income tax rate because of valuation
allowances established on net operating loss carryforward tax assets in the U.S.
and certain international locations where the realization of such benefits is
less likely than not.
In the first quarter of 1996, the Predecessor Company recognized an income tax
benefit of $3.4 million on a Loss from Operations before Income Taxes and Equity
in Net Earnings of Affiliates of $10.4 million. The Predecessor Company's
I-20
<PAGE>
effective income tax rate for both the three and six months ended July 1, 1995
was 44 percent.
EQUITY IN NET EARNINGS OF AFFILIATEs
Equity in Net Earnings of Affiliates is comprised primarily of the Company's
equity in net earnings of Igaras, an integrated containerboard producer located
in Brazil, which produces linerboard and corrugating medium, which is accounted
for under the equity method of accounting. Equity in Net Earnings of
Affiliates, decreased $6.3 million and $9.1 million to $4.6 million and $9.5
million in the second quarter and the first six months of 1996, respectively,
from the second quarter and the first six months of 1995, respectively,
primarily as a result of the significant decline in containerboard markets
worldwide.
DISCONTINUED OPERATIONS
On August 7, 1996, the Company entered into an agreement to sell substantially
all of the assets of the U.S. Timberlands/Wood Products business segment for
$540 million plus payment for the value of transferred inventory. The sale,
subject to certain conditions, is expected to close in the fourth quarter of
1996. Under the terms of the agreement for such sale, the Company and the buyer
will upon the closing enter into a long-term supply agreement for the purchase
by the Company of a majority of the West Monroe Mill's requirements for pine
pulpwood and residual chips, as well as a portion of the Company's needs for
hardwood pulpwood. The sale is subject to the consent of the lenders under the
Facilities. There can be no assurance that the sale will be completed. The
Company does not anticipate any significant gain or loss on the sale.
The results of the U.S. Timberlands/Wood Products business segment are reported
as discontinued operations effective for the three months ended June 29, 1996,
and accordingly, the results of its operations are not included in the Company's
Income from Continuing Operations in the Condensed Consolidated Statement of
Operations for the three month period ended June 29, 1996. Net Sales in the
U.S. Timberlands/Wood Products business segment decreased by $2.7 million, or
7.1 percent, and $5.3 million, or 7.2 percent, respectively, in the second
quarter and first six months of 1996 when compared with the same periods of
1995, due principally to selling price declines in both lumber and plywood
markets, as well as a sales volume decline in lumber markets. Excluding the
effects of Purchased Asset Costs for the three months ended June 29, 1996, and
excluding Other Costs for periods prior to the Merger, Income from Operations in
the U.S. Timberlands/Wood Products business segment increased $1.1 million, or
7.3 percent, in the second quarter of 1996, and decreased $1.3 million, or 4.3
percent, in the first six months of 1996 when compared to the same periods of
1995, primarily as a result of selling price declines in both lumber and plywood
markets and sales volume decline in lumber markets, offset by lower log costs in
the second quarter of 1996.
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 increased by approximately $15 million in the second
quarter of 1996, primarily as a result of $1,497 million of net cash provided by
financing activities, offset in part by $1,450 million and $32 million of net
cash used in investing and operating activities, respectively. Cash used in
investing activities related principally to the acquisition of RIC and to
purchases of property, plant and equipment (see "-Liquidity and Capital
Resources -- Capital Expenditures").
Depreciation, amortization and cost of timber harvested during the second
quarter of 1996 totaled approximately $40 million.
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
I-21
<PAGE>
aspects of the Company's business, including sales volumes and selling prices in
coated board open markets, beverage and folding carton operations, as well as
the Company's Containerboard business segment. The Company's performance for
the first six months of 1996 has fallen short of its business plan for 1996
which had anticipated substantial improvements over 1995 results.
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
multiple packaging beverage segment. Historically, the Company's Coated
Board System business segment reports its strongest sales in the second and
third quarters of the fiscal year driven by the seasonality of the Company's
integrated beverage business. 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 competitor's coated board and other substrates, namely
recycled clay coated news and solid bleached sulfate and internationally,
white lined chip. The Company's folding carton and coated board open markets
have been negatively impacted in part by a slower recovery of general
economic conditions in European markets than expected. 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 six
months 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 experiences 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 Six Months of 1996 Compared with
First Six Months of 1995 -Gross Profit." The cost of recycled fiber used in
the Company's paper board production has decreased in the first six months 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 six
months 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 June 29, 1996, the Company had
outstanding approximately $2,039 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
(see Note 6 to the condensed consolidated financial statements).
HISTORICAL FINANCING ARRANGEMENTS
With certain limited exceptions, the debt of RIC and its subsidiaries at the
date of Merger 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 at June
29, 1996, the Company is scheduled to make 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
I-22
<PAGE>
in 2004. These scheduled principal payments will be reduced in the event
that the sale of substantially all of the assets of the U.S. Timberlands/Wood
Products business segment is completed and, as the Company intends, a
substantial portion of the proceeds therefrom are used to pay down the Term
Loan Facility. 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 has increased and has had a greater proportionate
impact on net income in comparison to pre-Merger periods.
The Company intends to use a substantial portion of the proceeds from the sale
to repay the indebtedness under the Senior Secured Credit Facilities, with a
correlating reduction in interest expense. There can be no assurance that the
sale will be completed. The sale is subject to the consent of the lenders under
the Facilities.
CAPITAL EXPENDITURES
In connection with the Merger, the Company acquired assets with a fair value
of approximately $3,016 million (including cash of $26 million) and assumed
liabilities of approximately $1,625 million.
Capital spending for the second quarter of 1996 was approximately $34 million
and related primarily to increasing paper production efficiencies, increasing
converting capacity and producing packaging machinery. Additionally, the
Company purchased $47 million of packaging machinery and a converting press
that were previously financed under operating lease arrangements. 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, packaging
machinery, as well as maintenance and productivity expenditures.
FINANCING SOURCES AND CASH FLOWS
The amount under the Revolving Facility that remained undrawn as of June 29,
1996, was approximately $277 million, and is expected to be used to pay taxes
and other remaining costs of the Merger of approximately $70 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, of which approximately $38 million was utilized at
June 29, 1996. 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, ability to service or
refinance the Notes and to repay, extend or refinance the Facilities and ability
to comply with the covenants and restrictions contained in the Credit Agreements
and the Indentures will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond the Company's
control (see "Covenant Restrictions").
While Igaras has adequate 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 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
Under the Credit Agreements, the Company is required to comply with specified
financial ratios and minimum tests, including minimum interest coverage ratios,
maximum leverage ratios and minimum net worth tests. The Company anticipates
that certain covenants under the Credit Agreements will be modified accordingly
in the event that the sale of
I-23
<PAGE>
substantially all of the assets of the U.S. Timberlands/Wood Products business
segment is completed. There can be no assurance that such sale will be
completed.
The initial application of the interest coverage and leverage ratio covenants
under the Credit Agreements is as of December 1996. The Company expects that
it will be in compliance with the financial covenants under the Credit
Agreements so long as the sale of substantially all of the assets of the U.S.
Timberlands/Wood Products business segment is completed in the fourth quarter
of 1996, whether or not the financial covenants are modified and assuming
business conditions do not materially worsen. There can be no assurance that
such sale will be completed. In the event that such sale is not so completed
and the business, economic and competitive factors that have negatively
impacted the Company's results of operations for the first six months of 1996
continue or worsen, there can be no assurance that the Company will be able
to comply with these financial covenants as they are currently in effect.
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.
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 received a letter from the DEQ dated May
20, 1996, requesting a plan for soil and groundwater sampling of the wood
treatment site. The Company met with the DEQ on July 18, 1996, and agreed to
submit a soil sampling plan to the DEQ by September 18, 1996.
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.
I-24
<PAGE>
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 substantially 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.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report (other than the financial
statements and other statements of historical fact), including, without
limitation, statements as to management's expectations and belief presented in
this "Management's Discussion and Analysis of Financial Condition and Results of
Operations", are forward-looking statements. Forward-looking statements are
made based upon management's expectations and belief concerning future
developments and their potential effect upon the Company. There can be no
assurance that future developments will be in accordance with management's
expectations or that the effect of future developments on the Company will be
those anticipated by management. There are certain important factors that could
cause actual results to differ materially from estimates reflected in such
forward-looking statements, including changes in the level of sales volume of
coated board for beverage cartons and folding cartons, as well as for
containerboard, in the U.S. and abroad, changes in selling prices of the
products of the Company or its competitors, the Company's ability to realize
cost savings from productivity improvements and changes in the market for raw
materials which could impact the Company's production costs. For a discussion
of additional significant factors that impact the Company's operations, see
"--Financial Condition, Liquidity and Capital Resources -- Cash Flows".
While the Company periodically reassesses material trends and uncertainties
affecting the Company's results of operations and financial condition in
connection with its preparation of management's discussion and analysis of
results of operations and financial condition contained in its quarterly and
annual reports, the Company does not intend to review or revise any particular
forward-looking statement referenced herein in light of future events.
I-25
<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.
As of April 3, 1996, the stockholders of Holding approved the sale of Holding
Common Stock and the grant of options to purchase Holding Common Stock to,
and the terms of employment agreements of, approximately 105 executives and
other key management employees.
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Not applicable.
(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: August 12, 1996 By: /s/ Bill H. Chastain
------------------------------------
Bill H. Chastain
Secretary
Date: August 12, 1996 By: /s/ James O. Egan
------------------------------------
James O. Egan
Senior Vice President and
Chief Financial Officer
II-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RIVERWOOD
HOLDING, INC.'S CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF
OPERATIONS FOR THE PERIOD ENDED JUNE 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-29-1996
<CASH> 14,905
<SECURITIES> 959
<RECEIVABLES> 166,060
<ALLOWANCES> 1,802
<INVENTORY> 246,817
<CURRENT-ASSETS> 1,011,651
<PP&E> 1,674,740
<DEPRECIATION> 33,311
<TOTAL-ASSETS> 3,161,665
<CURRENT-LIABILITIES> 330,353
<BONDS> 2,028,373
0
0
<COMMON> 76
<OTHER-SE> 712,693
<TOTAL-LIABILITY-AND-EQUITY> 3,161,665
<SALES> 293,884
<TOTAL-REVENUES> 293,884
<CGS> 278,798
<TOTAL-COSTS> 278,798
<OTHER-EXPENSES> 0
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