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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal period ended December 31, 1996
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number : 1-11113
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RIVERWOOD HOLDING, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-2205241
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Suite 350
1013 Centre Road
Wilmington, Delaware 19805
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
c/o Riverwood International Corporation (770) 644-3000
<PAGE>
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No
As of March 24, 1997 there were 7,111,900 shares and 500,000 shares of the
registrant's Class A Common Stock, par value $0.01 per share (the "Class A
Common Stock"), and Class B Common Stock, par value $0.01 per share (the "Class
B Common Stock," and together with the Class A Common Stock, "Holding Common
Stock"), respectively, outstanding.
<PAGE>
TABLE OF CONTENTS TO FORM 10-K
Page
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PART I .................................................................1
ITEM 1. BUSINESS................................................1
ITEM 2. PROPERTIES..............................................9
ITEM 3. LEGAL PROCEEDINGS.......................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....10
PART II .................................................................11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................11
ITEM 6. SELECTED FIVE-YEAR FINANCIAL DATA.......................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................14
ITEM 8. FINANCIAL STATEMENTS ...................................33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................99
PART III .................................................................100
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......100
ITEM 11. EXECUTIVE COMPENSATION..................................103
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..........................................111
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........112
PART IV .................................................................114
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.........................................114
<PAGE>
As used in this Form 10-K, 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.
<PAGE>
PART I
ITEM 1. BUSINESS
Acquisition of RIC
Holding, its wholly owned subsidiary RIC Holding and the corporation formerly
named CDRO Acquisition Corporation ("Acquisition Corp.") were organized to
acquire RIC. Holding, RIC Holding and Acquisition Corp. were incorporated in
1995 under the laws of the State of Delaware. On March 27, 1996, Holding,
through its wholly owned subsidiaries, acquired all of the outstanding shares of
common stock of RIC. On such date, Acquisition Corp. was merged (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."
Overview
The Company is a leading provider of paperboard packaging solutions to
multinational beverage and consumer products companies, such as Anheuser-Busch
Companies, Inc., Miller Brewing Company, numerous Coca-Cola bottling companies,
PepsiCo, Inc., M&M Mars (a division of Mars, Inc.), Sara Lee Corporation,
Mattel, Inc. and Unilever N.V. The Company is one of only two major
manufacturers of coated unbleached kraft paperboard ("CUK Board"). CUK Board,
which serves as the principal raw material for the Company's packaging products,
is a specialized high-quality grade of paperboard with superior strength
characteristics and printability for high-resolution graphics that make it
particularly well suited for a variety of packaging applications. In order to
capitalize on the significant growth in CUK Board demand, the Company has
invested over $1 billion since the beginning of 1992 in expanding its Coated
Board System business segment. The Company's Coated Board System business
segment accounted for approximately 88% of the Company's net sales for the nine
months ended December 31, 1996. The Company also manufactures and sells
linerboard, corrugating medium and kraft paper (collectively, "containerboard")
through its Containerboard business segment.
On October 18, 1996, the Company sold substantially all of the assets of the
U.S. Timberlands/Wood Products business segment for cash of approximately $550
million. In addition, the buyer assumed certain specified preclosing
liabilities. Under the terms of the agreement for such sale, the Company and the
buyer entered into a twenty-year supply agreement with a ten-year renewal option
for the purchase by the Company, at market based prices, of a majority of the
requirements of its West Monroe, Louisiana paper mill (the "West Monroe Mill")
for pine pulpwood and residual chips, as well as a portion of the Company's
needs for hardwood pulpwood at the West Monroe Mill. The operating results for
the U.S. Timberlands/Wood Products business segment have been classified as
discontinued operations for the nine months ended December 31, 1996.
The Company is pursuing a number of long-term initiatives designed to improve
productivity and profitability while continuing to implement its Coated Board
System business strategy, including a recently announced reorganization of its
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Business Trends and Initiatives."
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Coated Board System
Overview
The Company's primary focus is the production and sale of CUK Board for use as
multiple packaging beverage cartons ("carrierboard") for beer, soft drinks and
other beverages, and folding cartons ("folding cartonboard") for confectionary,
frozen and dry foods, toys and other consumer products. The Company sells
carrierboard under the brand name Aqua-Kote(R) and Kraftbrite(R) and folding
cartonboard under the brand names Pearl-Kote(R) and OmniKote(R). In the
carrierboard segment, the Company provides integrated beverage packaging
solutions which include three primary elements: (i) the design and manufacture
of proprietary packaging machines and installation of the machines at beverage
customer locations, (ii) the production of CUK Board for beverage cartons and
(iii) the printing and cutting, and conversion of CUK Board into beverage
cartons with high-resolution graphics for use on packaging machines. In the
folding cartonboard segment, the Company manufactures and markets folding
cartonboard which is converted into folding cartons for packaging a variety of
consumer products and focuses on applications for consumer products companies
seeking the strength characteristics and printability of CUK Board. The
Company's ability to produce either carrierboard or folding cartonboard enables
the Company to respond to changes in supply and demand in both segments. The
Company seeks to meet market demand for carrierboard and will continue to pursue
applications for and demand for its folding cartonboard products to fully
utilize its production capacity. The Company also has the ability to produce
linerboard (see "- Containerboard") on its CUK Board machines, providing
additional flexibility to balance supply and demand in the Company's core Coated
Board System business segment. Additionally, at its paper mill in Norrkoping,
Sweden (the "Swedish Mill"), the Company manufactures white lined chip board
("WLC"), a coated 100% recycled paperboard grade used principally in European
folding carton applications.
Proprietary Packaging Machinery and Carton Designs
The Company employs a "pull through" marketing strategy, the key elements of
which are the design and manufacture of proprietary packaging machines and
installation of the machines at beverage customer locations under multi-year
machinery use arrangements and the development of proprietary cartons for use on
those machines. The Company leases substantially all of its packaging machines
to customers, typically under machinery use agreements with original terms of
three to six years.
The Company's packaging machines are designed to package PET and glass bottles,
cans and other primary containers, using cartons designed by the Company and
made from CUK Board produced by the Company and converted into cartons by the
Company, its joint venture partners or its licensees. In order to meet customer
requirements, the Company has developed an extensive portfolio of packaging
machines consisting of several principal machinery lines, including over 60
different models of packaging machines. The Company's machines package cans and
PET or glass bottles in a number of formats including baskets, clips, trays,
wraps and fully enclosed cartons. These machines have packaging ranges from two
to 36 cans per package and have the ability to package cans at speeds of up to
3,000 cans per minute. The Company also manufactures ancillary equipment, such
as machines for taping and placing coupons in cartons.
The Company designs cartons and designs, tests and manufactures prototype
packaging machinery at its Product Development Center (the "PDC") in Marietta,
Georgia, which was established in 1992. At the PDC, the Company integrates
carton and packaging machinery designs to create packaging solutions to meet
customer needs. The Company manufactures and also designs packaging machinery at
its
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principal U.S. manufacturing facility in Crosby, Minnesota and at a facility
near Barcelona, Spain. As part of its ongoing reorganization of operations, the
Company has announced the closing of its packaging machinery manufacturing
facilities in Marietta, Georgia in April 1997. The Company has also announced
the closing of its packaging machinery manufacturing facility in Koln, Germany
on June 30, 1997. By manufacturing packaging machinery in one U.S. location, the
Company expects to improve customer service, simplify its work processes, reduce
costs and operate with enhanced accountability.
The Company's investments in packaging machinery over the last five years have
been made primarily in the carrierboard beverage segment. However, the Company
has also been developing packaging machinery systems for non-beverage packaging
uses.
CUK Board Production
The Company produces CUK Board at its West Monroe Mill and its Macon, Georgia
mill (the "Macon Mill") with current total combined annual production capacity
of over one million tons. In 1992, the Company acquired the Macon Mill with the
intention of upgrading the mill's two linerboard manufacturing machines in order
to shift production from linerboard to CUK Board. The upgrading of the first
Macon Mill machine (together with the construction of a new recovery boiler and
related projects) was completed in the third quarter of 1994 at a cost of
approximately $275 million. In 1996, the paper machine completed its start-up
process and is expected to increase the Company's CUK Board production capacity
by approximately 300,000 tons per year (included in the combined capacity of
over one million tons). In 1996, the Company began modifications to the pulp
mill at the Macon Mill and the conversion of the second Macon Mill linerboard
paper machine to CUK Board production (with expected annual capacity of 275,000
tons) at an incremental cost of approximately $32 million for the pulp
mill and $85 million for the paper machine, with a projected start-up of CUK
Board production on that machine in mid-1997.
The Company's CUK Board production at its West Monroe Mill was approximately
652,000 tons during the year ended December 31, 1996. The Macon Mill produced
approximately 218,000 tons of CUK Board during the year ended December 31, 1996.
CUK Board is manufactured from pine and hardwood fibers and, in some cases,
recycled fibers, such as old corrugated containers ("OCC"). Virgin fiber is
obtained in the form of wood chips acquired through open market purchases. These
chips are chemically treated to form softwood and hardwood pulp, which are then
blended (together, in some cases, with recycled fibers). In the case of
carrierboard, a chemical is added to increase moisture resistance. The pulp is
then processed through the mill's paper machines, which consist of a
paper-forming section, a press section (where water is removed by pressing the
wet paperboard between rolls), a drying section and the coating section. Coating
on CUK Board, principally a mixture of pigments, binding agents and water,
provides a white, smooth finish, and is applied in multiple steps to achieve
desired levels of brightness, smoothness and shade. After the CUK Board is
coated, it is wound into rolls, which are then shipped to the Company's
converting plants or to outside converters worldwide.
Converting Operations
The Company converts CUK Board as well as other grades of paperboard into
cartons at 16 carton converting plants which it operates in the United States,
the United Kingdom, Spain, France and
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Australia, as well as through converting plants associated with its joint
ventures in Brazil, Japan and Denmark and licensees in other markets outside the
United States. The converting plants print and cut paperboard on multi-color
printing presses into cartons designed to meet customer specifications.
The Company's U.S. converting plants are principally dedicated to converting
carrierboard produced by the Company into beverage cartons. In 1994, the Company
began a program to upgrade its existing domestic converting plants with new
printing presses and cutting lines. In 1996, the Company completed construction
of a new converting plant located in Perry, Georgia near the Macon Mill. As part
of its ongoing reorganization of operations, the Company closed its last
dedicated folding carton converting plant in the U.S., located in Kankakee,
Illinois in 1996 and is closing a beverage multiple packaging converting plant
in Bakersfield, California in April 1997.
The Company's international converting plants convert carrierboard and folding
cartonboard produced by the Company into cartons as well as paperboard supplied
by outside producers. The Company has increased its converting capacity by
purchasing converting facilities in key strategic international markets, having
acquired 12 converting plants since the first quarter of 1990, 11 of which are
located outside the United States. At the time of their acquisition, these
international converting plants were dedicated principally to the production of
folding cartons using folding cartonboard produced by third parties. The Company
has shifted a portion of the production capacity of these plants to the
conversion of both its carrierboard and folding cartonboard, and intends to
increase the amounts of its CUK Board converted at these plants.
Marketing and Distribution
The Company markets its CUK Board-based products principally to multinational
brewers, soft drink bottlers, food companies and other consumer products
companies that use printed packaging for retail display, multiple packaging and
shipment of their products. The Company markets CUK Board under the names
Aqua-Kote(R) (carrierboard), Pearl-Kote(R) and OmniKote(R) (folding cartonboard)
and Kraftbrite(R) (a carrierboard grade).
Carrierboard. In the carrierboard segment, the Company's major customers for
beverage cartons include Anheuser-Busch Companies, Inc., Miller Brewing Company,
numerous Coca-Cola bottling companies and PepsiCo, Inc.
Folding cartonboard. In the folding cartonboard segment, the Company's customers
for folding cartonboard include consumer products companies, such as M&M Mars (a
division of Mars, Inc.), Sara Lee Corporation, Mattel, Inc., and Unilever N.V.
Distribution and Sales. Distribution of carrierboard and folding cartonboard is
primarily accomplished through direct sales offices in the United States,
Australia, Brazil, Cyprus, Hong Kong, Italy, Japan, Mexico, Singapore, Sweden
and the United Kingdom. The establishment of these non-U.S. direct sales offices
has been part of the Company's strategy to develop further its international
operations.
Joint Ventures. The Company is a party to joint ventures with Rengo Company
Limited and Danapak Holding A/S to market machinery-based packaging systems in
Japan and Scandinavia, respectively. The joint ventures cover CUK Board supply,
carton production and marketing and distribution of packaging systems. In
addition, a Brazilian joint venture produces and markets cartons for
machinery-based multiple packaging customers in Argentina, Brazil, Paraguay and
Uruguay, with carrierboard and packaging machines supplied by the Company.
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<PAGE>
Raw Materials
Pine pulpwood, hardwood and recycled fibers are the principal raw materials used
in the manufacture of the Company's CUK Board products. With the October 1996
sale of the Company's timberlands in Louisiana, Texas and Arkansas, the Company
now relies on private land owners and the open market for its fiber
requirements. Under the terms of the sale of those timberlands, the Company and
the buyer, Plum Creek Timber Company, L.P., entered into a twenty-year supply
agreement with a ten-year renewal option for the purchase by the Company, at
market based prices, 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 at the West Monroe Mill. The Company purchases the
remainder of the wood fiber used in CUK Board production at the West Monroe Mill
from other private land owners in this region. The Company believes that
adequate supplies of open market timber currently are available to meet its
fiber needs at the West Monroe Mill.
The Macon Mill purchases most of its fiber requirements on the open market, and
as such is a significant consumer of recycled fiber, primarily in the form of
OCC, as well as clippings from the Company's domestic converting plants. The
Company has not experienced any difficulties obtaining sufficient OCC for its
Macon Mill operations, which it purchases in part from brokers located in the
eastern United States. OCC pricing, however, is very volatile since it is based
largely on the demand for this fiber from recycled linerboard mills. The Macon
Mill purchases all of its virgin pine and hardwood requirements from private
landowners in central and southern Georgia. Because of the adequate supply and
large concentration of private landowners in this area, the Company believes
that adequate supplies of pine and hardwood timber currently are available to
meet its fiber needs at the Macon Mill.
The Company purchases a variety of other raw materials for the manufacture of
its paperboard, primarily process chemicals and coating chemicals such as kaolin
and titanium dioxide. All such raw materials are readily available, and the
Company is not dependent upon any one source of such raw materials.
White Lined Chip Production
The Company produces WLC at its Swedish Mill, which produced approximately
119,600 tons of such board during 1996. WLC is used for a variety of folding
carton applications throughout Europe.
Competition
There are only two major producers of CUK Board for carrierboard applications,
the Company and Mead Corporation ("Mead"). The Company faces significant
competition in the CUK Board segment from Mead, which, like the Company,
produces and converts CUK Board and provides packaging machinery to customers.
In the beverage industry, CUK Board competes with plastics and corrugated
packaging for packaging glass or PET bottles, cans and other primary containers.
Although plastics and corrugated packaging generally provide lower cost and
moderately faster packaging solutions, the Company believes that CUK Board
offers advantages over these materials, in areas such as distribution, high
quality graphics, carton designs, environmental friendliness and design
flexibility.
In the folding cartonboard segment, CUK Board competes principally with
recycled clay-coated news ("CCN") and solid bleached sulphate board ("SBS").
Folding cartonboard grades compete based on price, strength and printability.
CUK Board has generally been priced in a range that is higher than CCN and lower
than SBS. CUK Board has slightly better tear strength characteristics than SBS
and
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significantly better tear strength and cross-direction stiffness than CCN. There
are a large number of producers of paperboard for the folding cartonboard
segment, which is subject to significant competitive and other business
pressures.
Containerboard
In the United States, the Company manufactures containerboard, namely
linerboard, corrugating medium and kraft paper, all of which are sold to third
parties. Corrugating medium is combined with linerboard to make corrugated
containers and kraft paper is used primarily to make grocery bags and sacks.
Although the Company has used some of its CUK Board machines to produce
linerboard, the Company intends to continue to shift its U.S. production
capacity to the production of CUK Board and away from the production of
containerboard. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - 1996 Compared with 1995 Results of Operations." With
the planned upgrade of the second Macon Mill linerboard machine to CUK Board
production, the Company will replace over 50% of its remaining U.S. dedicated
containerboard production capacity with CUK Board production capacity. The
Company will have the ability to still produce linerboard on its converted CUK
Board machines, providing additional flexibility to balance supply and demand.
In 1996, the Company produced approximately 255,600 tons of linerboard from the
Macon Mill and approximately 119,100 tons of corrugating medium, 54,400 tons of
linerboard and 29,400 tons of kraft paper from its West Monroe Mill.
The primary customers for the Company's U.S. containerboard production are
independent and integrated corrugated converters. The Company sells corrugating
medium and linerboard through direct sales offices in the United States. Outside
of the United States, linerboard is primarily distributed through independent
sales representatives. Almost all of the kraft paper produced by the Company is
sold under a long-term supply contract at market price, with an initial
renewable term expiring in July 1999, to Gaylord Container Corporation, an
integrated producer and converter of kraft paper.
The Company's Containerboard business segment operates within a highly
fragmented industry. Most products within this industry are viewed as
commodities; consequently, selling prices tend to be cyclical, being affected by
economic activity and industry capacity.
In addition to the Company's U.S. Containerboard operations, the Company
currently owns 50% of Igaras Papeis e Embalagens S.A. ("Igaras"), an integrated
containerboard producer located in Brazil, which was acquired by Riverwood's
predecessor companies in 1958. Igaras was a wholly owned subsidiary of the
Company prior to the Company's sale of approximately 50% of its interest in
Igaras on December 29, 1994 to Companhia Suzano Papel e Celulose, S.A.
("Suzano") for $100 million. In connection with the Merger, Suzano received an
additional share of common stock of Igaras, and as a result the Company and
Suzano each own 50% of the common stock of Igaras. The arrangements between the
Company and Suzano were not otherwise affected. Igaras is Brazil's second
largest containerboard company and fourth largest corrugated container
converter. Igaras operates two mills and three corrugated box plants and owns or
leases approximately 176,000 acres of timberlands, which are used exclusively
for wood chip and energy requirements of the paper mills. In 1996 Igaras
completed the construction of a multiple packaging plant in Brazil. At its
mills, Igaras operates three paper machines primarily for the production of
linerboard, with a fourth paper machine for production of corrugating medium.
Igaras's total containerboard production in 1996 was approximately 480,800 tons.
Igaras sold approximately 40% of its 1996 linerboard production in export
markets. Igaras also sells
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linerboard, corrugating medium and corrugated boxes through direct sales offices
in Brazil. Outside of Brazil, Igaras distributes linerboard primarily through
independent sales representatives.
U.S. Timberlands/Wood Products
On October 18, 1996, the Company sold substantially all of the assets of its
U.S. Timberlands/Wood Products business segment for cash of approximately $550
million. The operating results for the U.S. Timberlands/Wood Products business
segment have been classified as discontinued operations for the nine months
ended December 31, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview."
Patents, Trademarks and Licenses
The Company has a large patent portfolio, presently owning, controlling or
holding rights to approximately 1,445 U.S. and foreign patents, with 2,940
patent applications currently pending. The Company believes that its patents and
patent applications are important to its business, particularly in the Coated
Board System business segment. The Company's patents fall into two principal
categories: packaging machinery and structural carton designs.
The Company is the plaintiff in an action against Mead with respect to the
Company's Twin-Stack(R) system. Mead has brought suit in England and France
against the Company with respect to a carrier handle patent. The Company does
not expect these lawsuits, either individually or in the aggregate, to have a
material adverse effect on the Company's business, results of operations or
financial condition.
Employees and Labor Relations
As of December 31, 1996, the Company had approximately 5,600 employees worldwide
(excluding employees of joint ventures), approximately 3,600 of whom were
members of unions and covered by collective bargaining agreements. The Company
has experienced a long history of good working relationships with its employees.
On January 1, 1998, the Company's collective bargaining agreement covering
employees at the Macon Mill will expire.
There are five unions representing the Company's U.S. employees, one of which,
the United Paperworkers International Union, is associated with the West Monroe
Mill and converting facility and the Macon Mill, where it represents
approximately 1,200 and 400 employees, respectively, through three local unions.
There has not been a work stoppage at the West Monroe Mill in the last ten
years, nor at the Macon Mill since its acquisition by the Company in 1992. The
current union contract covering the West Monroe Mill was negotiated and ratified
by the union in February 1997 and covers the six-year period from March 1, 1997
to February 28, 2003. The contract covering employees at the adjacent converting
plant was negotiated and ratified by the union in 1996 and covers the four-year
period from September 1, 1996 through August 31, 2000. The Clinton, Mississippi
converting facility contract was negotiated and ratified by the union in January
1997 and covers the six-year period from February 1, 1997 through January 31,
2003. The Company's U.S. converting plants are represented by three unions.
The Company's international employees are represented by unions in the United
Kingdom, Germany, Sweden, France, Spain and Australia.
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Environmental Matters
The Company is committed to compliance with all applicable environmental laws
and regulations throughout the world. 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 United States pulp and
paper mills. In 1996, the EPA released additional clarification of the proposed
cluster rules. Based on this new information, the Company expects that the
cluster rules may be finally promulgated in 1997 and estimates the capital
spending that may be required to comply with the cluster rules could reach $55
million to be spent at its two U.S. paper mills over an eight-year period
beginning in 1997.
The Louisiana Department of Environmental Quality ("DEQ") has notified the
Company by letters dated December 19, 1995, that the Predecessor 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 Predecessor or its
predecessor previously operated, and at a former oil refinery site in Caddo
Parish, Louisiana that the Company currently owns. Neither the Company nor the
Predecessor ever operated the oil refinery. In response to the DEQ, 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 first met with the DEQ on July 18, 1996 and
then submitted a soil sampling plan to the DEQ. The Company expects approval of
this sampling plan in the first half of 1997. On September 6, 1996, the Company
received from the DEQ a letter requesting remediation of the former oil refinery
site in Caddo Parish, Louisiana. The Company met with the DEQ on February 17,
1997 to discuss these matters. The DEQ requested that the Company enter into a
cooperative agreement to perform a phased-in approach for evaluating soil and
groundwater conditions at the Shreveport site. The Company is in discussions
with the DEQ regarding the participation of other responsible parties in any
clean up of hazardous substances at both of these sites.
The Company is engaged in environmental remediation projects at 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 reliably 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 flow, 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.
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ITEM 2. PROPERTIES
Headquarters
Holding and RIC Holding are headquartered in Delaware. Riverwood is
headquartered and leases approximately 70,000 square feet of office space in
Atlanta, Georgia.
Manufacturing Facilities
A listing of the major plants and properties owned, or leased, and operated by
the Company is set forth below. The Company's buildings are adequate and
suitable for the business of the Company, have been well maintained and are in
sound operating condition and in regular use. The Company also leases certain
facilities, warehouses and office space throughout the United States and in
foreign countries.
<TABLE>
<CAPTION>
Approx. No. of
Type of Facility and Location(1) Sq. Feet of Floor Space Principal Products Manufactured or Use of Facility
- -------------------------------- ----------------------- --------------------------------------------------
<S> <C> <C>
Paperboard Mills:
West Monroe, LA..................... 1,535,000 CUK Board; linerboard; corrugating
medium; kraft paper
Macon, GA........................... 756,000 CUK Board; linerboard
Norrkoping, Sweden.................. 417,000 White lined chip board
Converting Plants:
West Monroe, LA..................... 621,000 Beverage carriers
Cincinnati, OH...................... 241,800 Beverage carriers
Clinton, MS......................... 210,000 Beverage carriers
Perry, GA(2)........................ 130,000 Beverage carriers
Ft. Atkinson, WI.................... 120,000 Beverage carriers
Bristol, Avon, United Kingdom....... 428,000 Beverage carriers; folding cartons
Smithfield, New South Wales,
Australia........................... 230,000 Beverage carriers; folding cartons
Reservoir, Victoria, Australia...... 136,000 Beverage carriers; folding cartons and
litho laminate
Woodville, South Australia,
Australia........................... 71,000 Beverage carriers; folding cartons
Dandenong, Victoria, Australia...... 59,000 Beverage carriers; folding cartons
Marsden, Queensland, Australia...... 56,000 Beverage carriers; folding cartons
Igualada, Barcelona, Spain.......... 131,000 Beverage carriers; folding cartons
Beauvois en Cambresis, France....... 70,000 Beverage carriers; folding cartons
Le Pont de Claix, France............ 120,000 Folding cartons
St. Paul Trois Chateaux, France..... 15,000 Folding cartons
Montdidier, France.................. 50,000 Beverage carriers; folding cartons
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
Packaging Machinery/Other:
Crosby, MN.......................... 188,000 Packaging machinery engineering design
and manufacturing
Marietta, GA....................... 64,000 PDC - Research and development;
packaging machinery engineering design
and prototype machine manufacturing;
carton engineering design
Igualada, Barcelona, Spain.......... 12,000 Packaging machinery engineering design
and manufacturing
</TABLE>
- -------------
(1) The facilities in Marietta, Georgia; Clinton, Mississippi (part only);
Dandenong, Victoria, Australia; Marsden, Queensland, Australia (underlying
land only); Reservoir, Victoria, Australia; Beauvois en Cambresis, France;
Le Pont De Claix, France; St. Paul Trois Chateaux, France; and Montdidier,
France, are leased. All other facilities listed are owned by the Company.
(2) The facility located in Perry, Georgia is leased from the Middle Georgia
Regional Development Authority (the "Issuer") in consideration of the
issuance of Bonds by the Issuer.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in legal proceedings that, either
individually or in the aggregate, are expected by the Company to have a material
adverse effect on the Company's business, results of operations or financial
condition.
On December 6, 1995, Forrest Kelly Clay, a former shareholder of the
Predecessor, commenced a purported class action lawsuit in the United States
District Court for the Northern District of Georgia, against the Company and
certain officers of the Company (the "Individual Defendants," and together with
the Company, the "Defendants"). In his complaint, Clay alleges that the
Defendants violated the federal securities laws by disseminating misleading
statements and by omissions concerning the strategic alternatives that the
Predecessor was considering, including its potential sale to a third-party
investor. The complaint also alleged that the Individual Defendants, through
their exercise of stock appreciation rights ("SARs"), violated the federal
securities laws by trading in the Predecessor's securities while in possession
of material, non-public information. The complaint generally seeks damages in an
unspecified amount, as well as other relief. On January 29, 1996, Defendants
filed a motion to dismiss the complaint for failure to state a claim and failure
to plead fraud with particularity. On March 29, 1996, the court denied
Defendants' motion to dismiss and allowed limited discovery to proceed with
regard to statements attributable to the Company and the nature of the SARs.
That discovery is now complete, and plaintiff has twice amended his complaint
(each time putting forward the same claims made in the initial complaint but
amending certain of the factual allegations). On November 1, 1996, the
Defendants moved to dismiss the amended complaint, noting (i) none of the
statements attributable to the Company concerning its review of strategic
alternatives was false and (ii) that there is no causal relationship between
plaintiff's purchase of Riverwood common stock and the Individual Defendants'
exercise of SARs. That motion has been fully briefed and is currently before the
Court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, there were no matters submitted to a vote of
security holders.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Class A Common Stock or
Class B Common Stock of Holding. The shares of Class A Common Stock and Class B
Common Stock are held of record by 71 stockholders and one stockholder,
respectively. Holding did not pay any dividends on either class of Common Stock
during 1996. The Company's debt instruments restrict the ability of the Company
to pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition, Liquidity and Capital
Resources - Covenant Restrictions."
On March 27, 1996, Holding completed an offering of 7,500,000 shares of Class A
Common Stock and Class B Common Stock (the "Equity Offering") to the
institutional investors (the "Equity Investors") named in Item 12, "Security
Ownership of Certain Beneficial Owners and Management," of this Report on Form
10-K at a purchase price of $100 per share for an aggregate purchase price of
$750,000,000. No underwriters participated in such sales of Common Stock which
were consummated in transactions not involving any public offering and exempt
from the registration requirements of the Securities Act of 1933, as amended, by
virtue of Section 4(2) thereof.
11
<PAGE>
ITEM 6. SELECTED FIVE-YEAR FINANCIAL DATA
On March 27, 1996, Holding, through its wholly owned subsidiaries,
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. As a result of the Merger, purchase accounting and the effect of
discontinued operations (see Notes 1 and 25 in Notes to Consolidated Financial
Statements), 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.
(In thousands of dollars)
<TABLE>
<CAPTION>
Company Predecessor
- --------------------------------------------------------- --------------------------------------------------------------------------
Nine Months Three Months Year Ended Year Ended Year Ended Year Ended
ended ended December 31, December 31, December 31, December 31,
December 31, 1996 March 27, 1996 1995 1994 1993 1992
- --------------------------------------------------------- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME (LOSS)
Net Sales $ 852,112 $ 293,649 $1,342,304 $1,282,788 $1,120,366 $1,118,227
Income from Operations (A)(B) 1,419 15,650 133,137 154,187 83,497 146,092
(Loss) Income from Continuing Operations (130,362) (2,050) 45,538 10,249 3,234 43,787
Income from Discontinued Operations (A) 35,546 -- -- -- -- --
Net (Loss) Income (C)(D) (105,136) (2,050) $ 45,538 $ 2,377 1,071 43,787
- --------------------------------------------------------- --------------------------------------------------------------------------
FINANCIAL POSITION (as of Period End)
Total Assets $ 2,680,145 $ 2,206,206 $2,201,328 $2,102,292 $2,070,306 $1,904,039
Long-Term Debt 1,567,259 1,063,798 1,053,794 994,770 1,049,425 905,941
Redeemable Common Stock 9,390 -- -- -- -- --
Shareholders' Equity 654,209 557,487 562,310 516,251 500,139 477,208
- --------------------------------------------------------- --------------------------------------------------------------------------
ADDITIONAL DATA
Additions to Property, Plant
and Equipment (E) $ 132,286 $ 44,074 $ 170,085 $ 240,222 $ 288,851 $ 378,592
Research, Development and
Engineering Expense $ 7,339 $ 2,031 $ 9,909 $ 9,356 $ 8,771 $ 5,773
Pro Forma EBITDA (F) $ 148,560 $ 56,133 $ 263,707 $ 210,164 $ 183,351 $ 210,675
========================================================= ==========================================================================
</TABLE>
Notes:
(A) On October 18, 1996, the Company sold substantially all of the assets of
the U.S. Timberlands/Wood Products business segment for cash of
approximately $550 million. The operating results for the U.S.
Timberlands/Wood Products business segment have been classified as
discontinued operations for the nine months ended December 31, 1996.
Discontinued operations of the U.S. Timberlands/Wood Products business
segment have not been reclassified in the Predecessor's Statement of
Operations. See Note 28 in Notes to Consolidated Financial Statements for
results of operations of the U.S. Timberlands/Wood Products business
segment for periods prior to the date of the sale.
(B) On December 29, 1994, the Predecessor sold approximately 50 percent of its
investment in Igaras, an integrated containerboard producer located in
Brazil, which produces linerboard, corrugating medium and corrugated boxes,
after first spinning off a wholly owned subsidiary to operate the
Predecessor's packaging machinery operations in Brazil. Prior to that date,
the Predecessor included the results of operations of Igaras in the
Consolidated Financial Statements through the date of the sale. Subsequent
to December 29, 1994, neither the Company nor the Predecessor consolidates
Igaras, but instead reports its investment in Igaras using the equity
method of accounting.
(C) Net (Loss) Income for the nine months ended December 31, 1996 and the year
ended December 31, 1994 included an Extraordinary Loss on Early
Extinguishment of Debt of $10.3 million and $7.9 million, respectively, net
of tax where applicable, as described in Note 22 in Notes to Consolidated
Financial Statements.
(D) Net Income for the year ended December 31, 1993 included a charge of $2.2
million, net of tax, for the cumulative effect of a change in accounting
for postemployment benefits.
(E) Includes amounts invested in packaging machinery and capitalized interest.
Additions in 1995, 1994, and 1992 included $13.2 million, $7.8 million and
$201.5 million, respectively, related to the acquisition of businesses.
(F) Pro Forma EBITDA is defined as consolidated net income (exclusive of
non-cash charges resulting from purchase accounting during the nine months
ended December 31, 1996) before consolidated interest expense, consolidated
income taxes, consolidated depreciation and amortization, cost of timber
harvested and other non-cash charges deducted in
12
<PAGE>
determining consolidated net income and extraordinary items and the
cumulative effect of accounting changes and earnings of, but including
dividends from, non-controlled affiliates calculated in accordance with
definitions in the Senior Secured Credit Agreement (as defined in Item 7)
and the Indentures (as defined in Item 7) and on a pro forma basis to
exclude Other Costs (see Note 18 in Notes to Consolidated Financial
Statements) of the Predecessor. 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 Consolidated
Statements of Operations or cash flow data.
13
<PAGE>
ITEM 7. 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 in the Merger 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 in 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.
The Merger was accounted for as a purchase in accordance with APB Opinion No. 16
"Business Combinations" ("APB 16"). Purchase accounting results in increased
cost of sales, amortization and depreciation. Additionally, the new capital
structure has resulted and will continue to result in higher reported interest
expense. The 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 consolidated balance sheet at
December 31, 1996 is not comparable with the December 31, 1995 historical
balance sheet of the Predecessor. As a result of the Merger, purchase accounting
and the effect of discontinued operations, operating results subsequent to the
Merger are not comparable in all material respects to the operating results
prior to the Merger.
On October 18, 1996, the Company sold substantially all of the assets of the
U.S. Timberlands/Wood Products business segment for cash of approximately $550
million. In addition, the buyer assumed certain specified preclosing
liabilities. Under the terms of the agreement for such sale, the Company and the
buyer, Plum Creek Timber Company, L.P., entered into a twenty-year supply
agreement with a ten-year renewal option for the purchase by the Company, at
market-based prices, 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 at the West Monroe Mill. The Company did not realize any
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 period beginning March 28, 1996 and ending October 18, 1996 (the date of the
sale) in the Consolidated Statements of Operations. Discontinued operations have
not been segregated in the Consolidated Statements of Cash Flows nor have they
been reclassified as discontinued operations in the Predecessor's Consolidated
Statements of Operations and Consolidated Balance Sheets. See "- Financial
Condition, Liquidity and Capital Resources."
In connection with the Merger, the Company entered into a credit agreement (the
"Senior Secured Credit Agreement") with certain lenders providing for 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 sale of substantially all of the assets of the U.S. Timberlands/Wood
Products business segment, (i) the Company applied the sale proceeds to repay
outstanding borrowings under the Term Loan Facility and the Revolving Facility
and (ii) financial and other covenants in the Credit Agreements have been
modified. See "- Financial Condition, Liquidity and Capital Resources." 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").
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 Net (Loss)
14
<PAGE>
Income 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 nine-month period ended December 31, 1996, the Company's (Loss)
Income from Operations and Income from Discontinued Operations included
Purchased Asset Costs as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Coated Total Dis-
Board Container- Continuing continued
Description System board Corporate Operations Operations
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost of sales $ 581 $ -- $ -- $ 581 $ --
Depreciation expense 10,472 2,687 -- 13,159 2,277
Amortization of intangible assets 2,576 -- -- 2,576 --
- ---------------------------------------------------------------------------------------------------------------------
Net impact on income from
operations $13,629 $2,687 $ -- $16,316 $2,277
=====================================================================================================================
</TABLE>
In the fourth quarter of 1996, the Company adopted the Last-in, First-out
("LIFO") method of determining the cost of principally all its inventories
effective March 28, 1996. Prior to the fourth quarter of 1996, the Company
determined the cost of all its inventory using the First-in, First-out ("FIFO")
method. Accordingly, the second and third quarters of 1996 have been restated to
reflect the adoption of the LIFO method effective March 28, 1996. For a
discussion of the impact of this accounting change on the consolidated financial
statements, see Note 23 in Notes to Consolidated Financial Statements and
"Selected Quarterly Financial Data (Unaudited)" in Item 8 of this Form 10-K.
General
The Company reports its results in two business segments: Coated Board System
and Containerboard. On October 18, 1996, the Company sold substantially all of
the assets of the U.S. Timberlands/Wood Products business segment. The operating
results of the U.S. Timberlands/Wood Products business segment have been
classified as discontinued operations for the period beginning March 28, 1996
through the date of the sale. The results of operations of the U.S.
Timberlands/Wood Products business segment have not been reclassified as
discontinued operations in the Predecessor's Consolidated Statements of
Operations. The Coated Board System business segment includes the production and
sale of coated board for packaging cartons from the West Monroe Mill, Macon Mill
and Swedish Mill; converting operations 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 included
timberlands and operations engaged in the supply of pulpwood to the West Monroe
Mill from the Company's former U.S. timberlands, as well as the manufacture and
sale of lumber and plywood.
15
<PAGE>
The table below sets forth Net Sales, Income (Loss) from Operations and
consolidated net income (exclusive of non-cash charges resulting from purchase
accounting during the nine months ended December 31, 1996) before consolidated
interest expense, consolidated income taxes, consolidated depreciation and
amortization, cost of timber harvested and other non-cash charges deducted in
determining consolidated net income and extraordinary items and the cumulative
effect of accounting changes and earnings of, but including dividends from
non-controlled affiliates ("EBITDA"), calculated in accordance with definitions
in the Senior Secured Credit Agreement and the Indentures and on a pro forma
basis to exclude Other Costs (see below and Note 18 in Notes to Consolidated
Financial Statements) of the Predecessor ("Pro Forma EBITDA"). 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 Consolidated Statements of Operations or cash flow data.
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- ------------------------------------------------------------------- --------------------------------------------------------------
Nine months Three months Year Ended Year Ended
ended ended December 31, December 31,
December 31, 1996 March 27, 1996 1995 1994
- ------------------------------------------------------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales (Segment Data):
Coated Board System $ 749,688 $ 234,608 $ 1,007,123 $ 793,983
Containerboard 102,424 25,496 192,497 342,614
U.S. Timberlands/Wood Products - 37,336 159,749 164,944
Intersegment Eliminations - (3,791) (17,065) (18,753)
- ------------------------------------------------------------------- --------------------------------------------------------------
Net Sales $ 852,112 $ 293,649 $ 1,342,304 $ 1,282,788
=================================================================== ==============================================================
Income (Loss) from Operations (Segment Data):
Coated Board System $ 54,976 $ 24,638 $ 103,683 $ 89,704
Containerboard (30,969) (5,955) 17,539 23,781
U.S. Timberlands/Wood Products - 13,868 49,583 67,645
Corporate and Eliminations (22,588) (16,901) (37,668) (26,943)
- ------------------------------------------------------------------- --------------------------------------------------------------
Income from Operations $ 1,419 $ 15,650 $ 133,137 $ 154,187
=================================================================== ==============================================================
Pro Forma EBITDA (Segment Data):
Coated Board System $ 135,449 $ 47,174 $ 176,606 $ 139,155
Containerboard (15,624) (1,242) 38,403 22,673
U.S. Timberlands/Wood Products 44,805 16,766 57,805 72,329
Corporate and Eliminations (16,070) (6,565) (9,107) (23,993)
- ------------------------------------------------------------------- --------------------------------------------------------------
Pro Forma EBITDA $ 148,560 $ 56,133 $ 263,707 $ 210,164
=================================================================== ==============================================================
</TABLE>
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 Consolidated Statements 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 $7.4 million, $0.9 million, $0.8 million and $8.7
million, respectively for the year ended December 31, 1995, and $0.6 million,
$0.2 million, $0.1 million and $0.4 million, respectively, for the year ended
December 31, 1994. Expenses related to RIC's review of strategic alternatives
and environmental reserves were included in Corporate and Eliminations for
business segment reporting purposes.
Business Trends and Initiatives
The Company's cash flow from operations and EBITDA are influenced by sales
volume and selling prices for its products and raw material costs, and are
affected by a number of significant business, economic and competitive factors.
Many of these factors are not within the Company's control. Historically, in the
Coated Board System business segment, the Company has experienced stable pricing
for its integrated beverage carton products, and cyclical pricing for its
folding carton and open market coated board products. The Company's open market
coated board sales are affected by competition from competitors' coated board
and other substrates - solid bleached sulfate (SBS), recycled clay coated news
(CCN) and, internationally, white lined chip (WLC) - as well as by general
market conditions. In the Containerboard business segment, conditions in the
cyclical worldwide commodity paperboard markets have a substantial impact on the
Company's containerboard sales.
16
<PAGE>
The Company's financial performance during 1996 fell significantly short of its
business plan for the year, which had anticipated substantial improvements over
1995 results. Although raw material costs for paperboard generally remained
stable or decreased in 1996 as compared to 1995, a number of factors had a
substantial negative impact on paperboard sales volumes and selling prices. In
the Coated Board System business segment, the Company's open market coated board
sales volume in 1996 was approximately 21 percent below 1995 due to a
combination of factors. First, excess supply and soft demand drove folding
carton substrate pricing down which had a negative impact on both selling price
and volume of the Company's coated board. Open market coated board prices fell
more rapidly than they had historically, and the Company's delay in lowering its
selling prices resulted in a loss of certain customer accounts. Second, product
quality problems arising from production issues at the West Monroe Mill also
resulted in a loss of certain accounts and applications. The Company's folding
carton and coated board open market sales also were negatively impacted in part
by a slower than expected recovery of general market conditions in European
markets. The Company believes that it has addressed and corrected the West
Monroe Mill quality and production issues and, as discussed below, is
implementing long-term initiatives designed to rebuild the Company's open market
coated board sales volumes, which were substantially below the levels initially
planned for 1996. However, weakness in coated board open markets, including
depressed prices, continued throughout 1996, and the Company believes this
weakness is likely to continue for certain markets, particularly Europe, for the
near term.
In the Containerboard business segment, the Company's results were adversely
affected by declines in market pricing that began in the latter part of 1995 and
continued through 1996. Average transaction selling prices for the Company's
containerboard in 1996 were significantly below average transaction prices in
1995. The Company also shifted a limited amount of production from coated board
to linerboard in the last half of 1996 to correct imbalances in coated board
inventory levels due to softness in worldwide coated board open markets. This
action resulted in increased containerboard sales volumes but had a negative
impact on the Company's results because of depressed containerboard selling
prices. These lower prices have continued through early 1997. In the event that
the containerboard market experiences continued weakness and industry inventory
levels were to increase as a result, the Company may consider effecting
containerboard machine outages at its mills, as it has in the past in response
to industry weakness and excess capacity.
The Company is pursuing a number of long-term initiatives designed to improve
productivity and profitability while continuing to implement its Coated Board
System business strategy. First, the Company has taken actions to rebuild open
market coated board sales volumes. The Company has established key account
relationships with a number of major independent converters, involving
multi-year commitments by the Company to supply a significant portion of these
customers' requirements for coated board. The Company is also undertaking a
comprehensive, long-term marketing initiative aimed at potential new folding
carton applications for coated board. Second, the Company has undertaken a
profit-center oriented reorganization of its operations, designed to focus on
profitability and to reevaluate its commitment of assets to business sectors
with low profitability, and to provide greater control over costs and revenues,
as well as managerial autonomy and accountability. A major initial project was
the reorganization of the Company's North American beverage operations into
three business units, each of which is a separate profit center serving a
different customer segment. Third, the Company is implementing a number of cost
saving measures, including reorganizing operations to remove duplication and
excess overhead, and streamlining and consolidating international and other
operations. These measures include the sale or closure of the Company's last
dedicated folding carton converting plant in the United States, located in
Kankakee, Illinois, a packaging machinery manufacturing plant in Marietta,
Georgia, a beverage multiple packaging converting plant in Bakersfield,
California, and the trucking transportation operations in West Monroe,
Louisiana, as well as the consolidation and realignment of certain operations in
the United States, Australia and Europe. Finally, the Company has reevaluated
and reduced its planned capital expenditures, and is reducing inventory levels
without impacting seasonal inventory requirements, as well as considering the
sale of surplus assets. There can be no assurance, however, that any of these
business initiatives can be successfully implemented or will result in improved
cash flows from operations and EBITDA.
17
<PAGE>
1996 COMPARED WITH 1995
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations on a pro
forma basis. The discussion is based upon the nine-month period ended December
31, 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 "Year ended December 31, 1996"), in comparison to the year ended
December 31, 1995, exclusive of Other Costs and the U.S. Timberlands/Wood
Products business segment results of operations as follows:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Year ended % Increase (Decrease) Year ended
December 31, From Prior December 31,
(In thousands of dollars) 1996 Year 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales (Segment Data):
Coated Board System $ 984,296 (2.3) $ 1,007,123
Containerboard 127,920 (33.6) 192,497
- --------------------------------------------------------------------------------------------------------------
Net Sales 1,112,216 (7.3) 1,199,620
Cost of Sales 937,149 (2.2) 957,951
- --------------------------------------------------------------------------------------------------------------
Gross Profit 175,067 (27.6) 241,669
Selling, General and Administrative 130,821 5.7 123,737
Research, Development and Engineering 9,349 (4.8) 9,819
Other Expense, net 4,487 16.9 3,838
- --------------------------------------------------------------------------------------------------------------
Income from Operations $ 30,410 (70.8) $ 104,275
==============================================================================================================
Income (Loss) from Operations (Segment Data):
Coated Board System $ 94,486 (14.9) $ 111,070
Containerboard (34,117) -- 18,460
Corporate (29,959) (18.6) (25,255)
- --------------------------------------------------------------------------------------------------------------
Income from Operations $ 30,410 (70.8) $ 104,275
==============================================================================================================
</TABLE>
Paperboard Production
Total tons of paperboard produced at the Company's paper mills for 1996 and
1995, were as follows:
(In thousands of tons) 1996 1995
----------------------------------------------------
Carrierboard 606.0 615.1
Folding cartonboard 264.1 312.0
WLC board 119.6 131.1
----------------------------------------------------
Total Coated Board 989.7 1,058.2
Containerboard 488.0 469.5
----------------------------------------------------
1,477.7 1,527.7
====================================================
This tonnage represents production at the Company's paper mills and does not
represent shipments or sales of paperboard to customers. Containerboard
production included 25,900 tons and 48,400 tons of saleable off-specification
coated board for 1996 and 1995, respectively, produced on dedicated coated board
paper machines and sold in the Containerboard business segment. The Company's
U.S. mill production of containerboard increased by approximately 18,500 tons,
while its production of coated board decreased by approximately 68,500 tons in
1996 as compared to 1995. The Company's coated board capacity can also be used
for linerboard production when market conditions warrant. During 1996, the
Company produced approximately 77,000 tons of linerboard on U.S. coated board
paper machines of which approximately 33,000 tons were produced in the third
quarter and approximately 43,000 tons were produced in the fourth quarter. This
shift in production was a result of the Company's efforts to produce and sell
additional linerboard rather than coated board during 1996 to correct imbalances
in the coated board inventory levels due to softness in the worldwide coated
board open markets. The Company anticipates an insignificant amount of
linerboard production on its dedicated coated board paper machines during the
first half of 1997 and will review the need for producing linerboard on coated
board paper machines in the second half of 1997 based on existing market
conditions and the start-up of the second coated board
18
<PAGE>
paper machine at the Macon Mill. In addition, the Company took 49 days of
unscheduled corrugating medium paper machine outages in the first quarter of
1996 and 15 days of unscheduled coated board paper machine outages during the
fourth quarter of 1996 to correct imbalances in medium and coated board
inventories, respectively. During 1995, the Company took 94 combined machine
operating days of paper machine outages to begin to correct imbalances in
containerboard inventories that resulted from weakness in the containerboard
industry in 1995. The Company anticipates taking approximately 27 days of
unscheduled market-related corrugating medium machine outages in the first
quarter of 1997. The second paper machine at the Macon Mill is expected to
produce approximately 110,000 tons of linerboard in 1997, and, during the
start-up of the conversion to coated board production in the second half of
1997, is expected to produce approximately 50,000 tons of coated board.
Net Sales
As a result of the factors described below, the Company's Net Sales in 1996
declined by $87.4 million, or 7.3 percent, compared with 1995. Net Sales in the
Containerboard business segment decreased $64.6 million, or 33.6 percent, to
$127.9 million in 1996 from $192.5 million in 1995, due principally to selling
price declines as a result of the significant decline in containerboard markets
worldwide that began in the latter part of 1995 and continued through 1996,
which were partially offset by increased sales volumes. Net Sales in the Coated
Board System business segment decreased by $22.8 million in 1996, or 2.3
percent, to $984.3 million from $1,007.1 million in 1995, due primarily to
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 to pricing pressures, quality and
production issues at the West Monroe Mill and other competitive factors. Sales
volume in worldwide coated board open markets declined by approximately 86,000
tons, or 21 percent, in 1996 when compared with 1995. These decreases were
offset somewhat by increased sales growth in the Company's integrated beverage
products markets as well as selling price increases in U.S. integrated beverage
markets.
Gross Profit
As a result of the factors discussed below, the Company's Gross Profit for 1996
decreased $66.6 million, or 27.6 percent, to $175.1 million from $241.7 million
in 1995. The Company's gross profit margin decreased to 15.7 percent for 1996
from 20.1 percent in 1995. In the Containerboard business segment, Gross Profit
decreased $52.4 million in 1996 as compared to 1995, to a loss in 1996 of $27.1
million. This decrease was due principally to selling price declines resulting
from the significant decline in containerboard markets worldwide that began in
the latter part of 1995 and continued through 1996. In the Coated Board System
business segment, Gross Profit decreased by $12.5 million, or 5.8 percent, to
$204.7 million in 1996 as compared to $217.2 million in 1995, while its gross
profit margin decreased to 20.8 percent in 1996 from 21.6 percent in 1995. The
decrease in the gross profit margin percentage resulted principally from a shift
in sales from coated board open markets to lower margin U.S. integrated beverage
products combined with increased production costs in certain international
folding carton markets, lower selling prices in U.S. coated board open markets
and unabsorbed fixed costs at the two U.S. paper mills as a result of coated
board paper machine outages effected in the fourth quarter of 1996 in order to
correct coated board inventory imbalances. These factors were offset somewhat by
selling price increases in U.S. domestic integrated beverage markets.
Selling, General and Administrative
Selling, General and Administrative expenses increased $7.1 million, or 5.7
percent, to $130.8 million in 1996 as compared to $123.7 million in 1995, and as
a percentage of Net Sales, increased from 10.3 percent in 1995 to 11.8 percent
in 1996. This increase is primarily a result of higher warehousing expenses and
lower deferral of packaging machine design costs, which were somewhat offset by
a decline in incentive compensation expenses.
19
<PAGE>
Research, Development and Engineering
Research, Development and Engineering expenses decreased by $0.5 million, or 4.8
percent, to $9.3 million in 1996.
Other Expenses, net
Other Expenses, net, increased by approximately $0.6 million, or 16.9 percent,
to $4.5 million in 1996 primarily as a result of lower sales of minor surplus
assets and higher banking fees, partially offset by higher gains on foreign
currency transactions.
Income from Operations
Primarily as a result of the factors discussed above, the Company's Income from
Operations in 1996 decreased by $73.9 million, or 70.8 percent, to $30.4 million
from $104.3 million in 1995, while the Company's operating margin decreased to
2.7 percent in 1996 from 8.7 percent in 1995. Income from Operations in the
Containerboard business segment decreased $52.6 million to a loss of $34.1
million in 1996 from Income from Operations of $18.5 million in 1995, primarily
as a result of the factors described above. Income from Operations in the Coated
Board System business segment decreased $16.6 million, or 14.9 percent, to $94.5
million in 1996 from $111.1 million in 1995, while the operating margin
decreased to 9.6 percent from 11.0 percent for 1995, primarily as a result of
the factors described above.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES, EQUITY IN NET EARNINGS OF
AFFILIATES, DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT
Interest Income
Interest Income decreased $1.0 million to $1.0 million in the Year ended
December 31, 1996 from the same period in 1995, primarily as a result of lower
average balances of cash and equivalents and marketable securities in 1996 as
compared to 1995.
Interest Expense
Interest Expense increased $66.5 million to $172.2 million in the Year ended
December 31, 1996 from 1995 primarily as a result of incremental indebtedness
incurred in connection with the Merger. During the Years ended December 31, 1996
and 1995, the Company capitalized interest of $2.5 million and $2.3 million,
respectively. Amortization of deferred debt issuance costs, exclusive of the
amount recognized as an extraordinary loss on early extinguishment of debt (see
"- Extraordinary Loss on Early Extinguishment of Debt"), for the Years ended
December 31, 1996 and 1995 was $12.4 million and $2.7 million, respectively. The
increase in the amortization of deferred debt issuance costs in 1996 is a result
of significantly higher deferred debt issuance costs incurred in connection with
the above mentioned incremental borrowings.
Income Tax Expense (Benefit)
During the Year ended December 31, 1996, the Company recognized an income tax
expense of $0.7 million on a Loss from Continuing Operations before Income Taxes
and Equity in Net Earnings of Affiliates of $154.1 million. This expense
differed from the statutory federal income tax rate primarily because of
valuation allowances established on net operating loss carryforward tax assets
in the United States and certain international locations where the realization
of such benefits is less likely than not. During 1995, the Predecessor received
$16.1 million of gross dividends from its equity investment in Igaras, of which
$12.1 million was a special dividend. Accordingly, the Predecessor recognized
the related income taxes and withholding taxes on these dividends. As a result,
the effective income tax rate for 1995 was 64 percent.
20
<PAGE>
Equity in Net Earnings of Affiliates
Equity in Net Earnings of Affiliates comprises primarily the Company's equity in
net earnings of Igaras, which is accounted for under the equity method of
accounting. Equity in Net Earnings of Affiliates decreased $12.4 million to
$22.5 million for the Year ended December 31, 1996, primarily as a result of the
significant decline in containerboard markets worldwide. During 1996, the
Company received dividends from Igaras of approximately $5.0 million. Under the
Igaras joint venture agreement, Igaras is required to pay dividends equal to at
least 25 percent of its net profits.
Discontinued Operations
On October 18, 1996, the Company sold substantially all of the assets of the
U.S. Timberlands/Wood Products business segment for cash of approximately $550
million. The Company did not recognize any gain or loss on the sale. Net Sales
in the U.S. Timberlands/Wood Products business segment decreased by $28.0
million, or 19.6 percent, in 1996 as compared to 1995, due principally to the
partial year of sales reported in 1996 and to decreased plywood selling prices,
partially offset by higher lumber selling prices. Excluding the effects of
Purchased Asset Costs for 1996, and excluding Other Costs for periods prior to
the Merger, Income from Operations in the U.S. Timberlands/Wood Products
business segment increased $1.5 million, or 3.0 percent, in 1996 as compared to
1995, primarily as a result of lower log costs and increased selling prices for
lumber.
Extraordinary Loss on Early Extinguishment of Debt
In October 1996, the Company applied the proceeds from the sale of the U.S.
Timberlands/Wood Products business segment to loans outstanding under the Term
Loan Facility and to outstanding borrowings under the Revolving Credit Facility.
This early retirement of debt resulted in a non-cash extraordinary charge in
1996 of $10.3 million, net of income taxes of zero, relating to the write-off of
deferred debt issuance costs.
1995 COMPARED WITH 1994
RESULTS OF OPERATIONS
Excluding Other Costs and including the operations of the U.S. Timberlands/Wood
Products business segment, Income from Operations for 1995 and 1994 was as
follows:
<TABLE>
<CAPTION>
%Increase
Year Ended (Decrease) Year Ended
(In thousands of dollars) December 31, 1995 from Prior Year December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from Operations (Excluding Other Costs):
Coated Board System $111,070 23.0 $ 90,279
Containerboard 18,460 (23.0) 23,975
U.S. Timberlands/Wood Products 50,378 (25.6) 67,726
Corporate and Eliminations (25,255) (4.7) (26,491)
- ----------------------------------------------------------------------------------------------------------------------------
Income from Operations $154,653 (0.5) $155,489
============================================================================================================================
</TABLE>
21
<PAGE>
Paperboard Production
Total tons of paperboard produced at the Predecessor's paper mills for 1995 and
1994, were as follows:
(In thousands of tons) 1995 1994
-------------------------------------------------------
Carrierboard 615.1 484.2
Folding cartonboard 312.0 246.4
WLC board 131.1 127.2
-------------------------------------------------------
Total coated board 1,058.2 857.8
Containerboard, (excluding
production from Igaras) 469.5 605.7
-------------------------------------------------------
1,527.7 1,463.5
=======================================================
The Predecessor's U.S. mill production of coated board increased by
approximately 196,500 tons, while its production of containerboard decreased by
approximately 136,200 tons in 1995 as compared to 1994. Containerboard
production included 48,400 tons and 39,500 tons of saleable off-specification
coated board for 1995 and 1994, respectively, produced on dedicated coated board
paper machines and sold in the containerboard business segment. For comparative
purposes, containerboard production in 1994 is presented as if the sale of
approximately 50 percent of Igaras occurred as of December 31, 1993. In 1994,
the Predecessor completed a two-year construction project to upgrade over half
of the 525,000 ton annual linerboard capacity at its Macon Mill in order to
convert production from linerboard to coated board (the "Macon Conversion").
With this accomplished, dedicated annual linerboard capacity decreased by
275,000 tons and will gradually be replaced as production of coated board at the
Macon Mill reaches the machine's design capacity of 300,000 tons. Total
production of coated board from the Macon Mill during 1995 and 1994 was
approximately 230,600 and 80,200 tons, respectively. From its acquisition in
mid-1992 through the first quarter of 1994, most of the Macon Mill operations
were reported in the Containerboard business segment. Beginning in the second
quarter of 1994, the coated board portion of these operations has been reported
in the Coated Board System business segment.
Net Sales
As a result of the factors described below, Net Sales in 1995 increased by $59.5
million, or 4.6 percent, compared with 1994. Net Sales in the Coated Board
System business segment increased by $213.1 million, or 26.8 percent, due
principally to increased worldwide volume in most coated board markets, and to a
lesser extent, increased selling prices in most coated board open markets,
higher revenues in European integrated beverage markets and the positive effect
on sales volumes of the acquisition of the converting facility in France. These
increases were partially offset by decreased volume in European folding carton
markets in 1995 and a decrease in packaging machinery leasing revenues in
comparison to 1994 results, which benefited from the introduction in 1994 of a
new packaging machinery program. Net Sales in the Containerboard business
segment decreased by $150.1 million, or 43.8 percent, in 1995 compared with
1994. Excluding the operations of Igaras, which were consolidated in 1994 and
included net sales of $155.1 million in this business segment in 1994, Net Sales
in the Containerboard business segment increased $5.0 million, or 2.7 percent,
due primarily to selling price increases in the first half of 1995 which were
offset significantly by a decrease in volume resulting from the Macon Conversion
and lower demand in the containerboard market worldwide that began in the third
quarter of 1995 and continued through the fourth quarter of 1995. Although
containerboard selling prices in 1995 were higher than 1994, the Predecessor had
experienced selling price decreases for containerboard since the beginning of
the third quarter of 1995. Net Sales in the U.S. Timberlands/Wood Products
business segment decreased by $5.2 million, or 3.1 percent, due principally to
selling price and volume decreases in lumber which were somewhat offset by
increased plywood selling prices.
22
<PAGE>
Gross Profit
As a result of the factors discussed below, Gross Profit for 1995 increased $4.7
million, or 1.6 percent, from 1994. The gross profit margin decreased to 21.8
percent for 1995 from 22.4 percent for 1994. Excluding the operations of Igaras,
which were consolidated in 1994 and accounted for as an equity investment in
1995, Gross Profit increased $57.4 million, or 24.5 percent in 1995, while the
gross profit margin increased to 21.8 percent from 20.8 percent in 1994. Gross
Profit in the Coated Board System business segment increased $39.5 million, or
22.2 percent in 1995, while its gross profit margin decreased to 21.6 percent
from 22.4 percent in 1994. The increase in Gross Profit was the result of
increased volume and selling prices in most worldwide coated board markets and
lower domestic converting costs as the Predecessor incurred higher costs in 1994
to meet U.S. beverage market demand that exceeded the Predecessor's U.S.
converting capacity. In 1995, the Predecessor increased its converting capacity
through the addition of new converting presses and equipment that significantly
reduced costs incurred from subcontracting carton production. The increase in
Gross Profit was partially offset by an increase in the cost of coated board
production as a result of increased recycled fiber costs, higher fixed costs at
the Macon Mill and increased production costs at the Macon Mill during the
start-up period following the Macon Conversion. Additionally, lower packaging
machinery leasing revenues and the effect of acquisitions of converting
facilities in each of France and the United States reduced the Coated Board
System business segment's gross profit margin in 1995 as compared to 1994. In
the Containerboard business segment, Gross Profit decreased $27.5 million, or
52.0 percent, to $25.4 million in 1995 from $52.9 million in 1994, with a 1995
gross profit margin of 13.2 percent. Excluding the operations of Igaras, which
were included in this business segment in 1994, Gross Profit increased $25.3
million from $0.1 million in 1994. The increase in Gross Profit was due
principally to higher containerboard selling prices worldwide which were offset
in part by higher costs of recycled fiber, higher costs at the Macon Mill, and
unabsorbed fixed costs at both the West Monroe and Macon Mills as a result of 94
combined machine operating days of paper machine outages effected in order to
begin to correct imbalances in containerboard inventories that resulted from
weakness in the containerboard industry in late 1995. Gross Profit in the U.S.
Timberlands/Wood Products business segment decreased by $8.9 million, or 15.0
percent, in 1995, and the gross profit margin decreased to 31.6 percent from
36.1 percent in 1994 due principally to selling price and volume decreases for
lumber which were partially offset by higher plywood selling prices and lower
log costs relating to a change in the estimate of ultimate yield of timber.
Based on improved measurements of existing volume and growth rates, the
Predecessor adjusted its estimate in 1995 of the total future yield of timber to
be harvested resulting in a lower unit rate of cost of timber harvested, which
in turn reduced cost of timber harvested by $6.7 million.
Selling, General and Administrative
Selling, General and Administrative expenses decreased $4.9 million, or 3.7
percent, in 1995 compared with 1994, and as a percent of Net Sales, decreased to
9.4 percent in 1995 from 10.2 percent in 1994. Excluding the operations of
Igaras, which were reported on a consolidated basis in 1994, Selling, General
and Administrative expenses increased $10.5 million, or 9.0 percent, in 1995
compared with 1994, and as a percentage of Net Sales, decreased to 9.4 percent
in 1995 from 10.3 percent in 1994. The increase in Selling, General and
Administrative expenses was primarily a result of increases in selling and
marketing expenses to support the Predecessor's efforts to further penetrate
worldwide coated board markets.
Research, Development and Engineering
Research, Development and Engineering expenses in 1995 versus 1994 increased by
$0.6 million, or 5.9 percent, to $9.9 million, primarily due to a higher level
of packaging machinery engineering costs associated with expanding packaging
machinery operations.
23
<PAGE>
Other Costs
Other Costs increased $20.2 million to $21.5 million in 1995 from $1.3 million
in 1994. The increase in Other Costs was the result of $16.5 million of
increased expenses associated with the stock based compensation plans and $3.7
million of costs relating to the Predecessor's review of strategic alternatives.
The increase in stock based compensation expense was the result of both an
increase in the Predecessor's common stock closing price on the New York Stock
Exchange (the "Closing Price") at December 31, 1995 as compared to December 31,
1994, and from the exercise of stock based compensation benefits throughout 1995
at prices that exceeded the December 31, 1994 Closing Price. The Predecessor's
common stock closed at $19.125 per share and $15.625 per share at December 31,
1995 and 1994, respectively.
Other (Expense) Income, net
Other (Expense) Income, net, decreased $9.9 million to a net expense of $1.5
million in 1995 from income of $8.4 million in 1994. This decrease was primarily
due to an $8.9 million pretax gain on the sale of certain oil and gas mineral
rights on the Predecessor's U.S. timberlands in 1994 and higher amortization
expense on certain intangible assets in 1995.
Income from Operations
As a result of the above factors, Income from Operations in 1995 decreased by
$21.1 million, or 13.7 percent, to $133.1 million from 1994, while the operating
margin decreased to 9.9 percent from 12.0 percent. Excluding the operations of
Igaras which were consolidated in 1994 and Other Costs recorded in 1995 and
1994, Income from Operations increased by $33.8 million, or 28.0 percent, while
the operating margin increased to 11.5 percent from 10.7 percent. Income from
Operations in the Coated Board System business segment increased $14.0 million,
or 15.6 percent, in 1995 compared to 1994. Excluding Other Costs recorded in the
Coated Board System business segment in 1995 and 1994, the Coated Board System's
Income from Operations increased $20.8 million, or 23.0 percent, to $111.1
million in 1995 compared to $90.3 million in 1994, while the operating margin
remained relatively constant from year to year, primarily as a result of the
factors described above. Income from Operations in the Containerboard business
segment decreased $6.3 million to $17.5 million in 1995 from $23.8 million in
1994. Excluding the operations of Igaras which were included in this business
segment in 1994, and excluding Other Costs recorded in 1995 and 1994, Income
from Operations increased $29.1 million to $18.5 million in 1995 from a loss of
$10.6 million in 1994, while the operating margin increased to 9.6 percent in
1995, primarily as a result of the factors described above. Income from
Operations in the U.S. Timberlands/Wood Products business segment decreased
$18.0 million, or 26.6 percent, to $49.6 million in 1995 compared to 1994.
Excluding Other Costs recorded in 1995 and 1994, and the $8.9 million pretax
gain on the sale of certain oil and gas mineral rights included in this business
segment in 1994, Income from Operations in the U.S. Timberlands/Wood Products
business segment decreased $8.4 million, or 14.4 percent, to $50.4 million in
1995, while the operating margin decreased to 31.5 percent from 35.7 percent in
1994, primarily as a result of the factors described above.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES, EQUITY IN NET EARNINGS OF
AFFILIATES AND EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
Interest Income
Interest Income decreased by $1.5 million, or 42.6 percent, to $2.0 million in
1995. Excluding the interest income related to Igaras, Interest Income decreased
by $0.6 million in 1995 as compared to 1994 due to lower average balances of
cash and equivalents and marketable securities.
24
<PAGE>
Interest Expense
Compared with 1994, Interest Expense increased by $12.5 million, or 13.4
percent, to $105.7 million from $93.2 million. Capitalized interest in 1995
decreased to $2.3 million from $23.0 million in 1994, due primarily to the
completion of the Macon Conversion in late 1994. Excluding interest expense
related to Igaras in 1994, gross interest expense remained unchanged in 1995 as
compared to 1994.
Income Taxes
The Predecessor had income tax expense of $18.8 million and $54.2 million in
1995 and 1994, respectively, on Income from Continuing Operations before Income
Taxes and Equity in Net Earnings of Affiliates of $29.4 million and $64.4
million, respectively.
During 1995, the Predecessor received $16.1 million of dividends from Igaras, of
which amount $12.1 million was a special dividend. Accordingly, the Predecessor
recognized the related income taxes and withholding taxes on these dividends
which resulted in an effective income tax rate of 64 percent. Excluding the tax
effects of the special dividend from Igaras, the Predecessor's effective income
tax rate for 1995 was approximately 45 percent.
On December 29, 1994, the Predecessor sold approximately 50 percent of its
investment in Igaras for $100 million in cash after first spinning off a
wholly owned subsidiary to operate the packaging machinery operations in Brazil.
Prior to that date, the Predecessor owned 100 percent of Igaras. As a result of
the sale of its investment in Igaras, the Predecessor recorded a pretax loss of
$0.6 million and an income tax expense of approximately $27.5 million in 1994.
The gain on this sale was significantly higher for income tax purposes than for
financial reporting purposes, resulting in the additional income tax expense in
1994. In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), these additional income taxes
were not recognized until the sale was apparent. In the first quarter of 1994,
the Predecessor recognized a tax benefit of $0.8 million, primarily relating to
a tax law change that reduced the Swedish statutory federal tax rate from 30
percent to 28 percent. Excluding the effects of the items described above, the
Predecessor's effective income tax rate for 1994 was approximately 42 percent.
Equity in Net Earnings of Affiliates
Equity in Net Earnings of Affiliates, which was $34.9 million in 1995, comprised
the Predecessor's equity in net earnings of Igaras under the equity method of
accounting.
During 1995, the Predecessor received gross dividends from Igaras totaling $16.1
million, including a special dividend of $12.1 million received in December
1995.
Extraordinary Loss on Early Extinguishment of Debt
On June 30, 1994, the Predecessor used the proceeds of new borrowings to prepay
approximately $179 million principal of notes payable to insurance companies
and banks and to pay related accrued interest and expenses of refinancing. This
early extinguishment of debt resulted in an extraordinary charge to 1994 net
earnings of approximately $7.9 million, net of income taxes of approximately
$5.0 million.
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
25
<PAGE>
from capital resources that consist of current or potentially available funds
for use in achieving long-range business objectives and meeting debt service
commitments.
Cash Flows
Cash and equivalents increased by approximately $25 million in the nine months
ended December 31, 1996, primarily as a result of $1,135 million of net cash
provided by financing activities, offset in part by $1,095 million and $16
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, offset somewhat by the sales
of assets. See "-Liquidity and Capital Resources - Capital Expenditures."
Depreciation, amortization and cost of timber harvested during the nine months
ended December 31, 1996 totaled approximately $100.8 million. The Company
expects depreciation and amortization expense for 1997 to be approximately $125
million to $130 million.
The Company's cash flows from its operations and EBITDA 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 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.
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 December 31, 1996, the Company had
outstanding approximately $1,579 million of indebtedness, consisting primarily
of $650 million aggregate principal amount of the Notes, $750 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 10 in Notes to Consolidated Financial Statements). Proceeds from the
sale of substantially all of the assets of the U.S. Timberlands/Wood Products
business segment were used to pay down, in October 1996, a significant portion
of the Company's senior secured indebtedness. See "-Debt Service."
Historical Financing Arrangements
With certain limited exceptions, the debt of RIC and its subsidiaries at the
date of the 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 arrangements RIMI sold and leased back certain
of its packaging machinery, and then subleased them to customers under machinery
use agreements. The Company has terminated such sale and leaseback arrangements
and refinanced them under the $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 Term Loan Facility, the Company applied $400.0 million of the
proceeds from the sale of substantially all of the assets of the U.S.
Timberlands/Wood Products business segment to repay term loans under the Term
Loan Facility, including approximately $375.0 million of tranche "A" term loans,
approximately $18.4 million of tranche "B" term loans and approximately $6.6
million of tranche "C" term loans. Scheduled term loan principal
26
<PAGE>
payments under the Term Loan Facility have been reduced to reflect this
application of proceeds. Annual term loan amortization requirements under the
Term Loan Facility will be approximately $1.0 million, $3.0 million, $28.0
million, $80.2 million, $124.7 million, $173.0 million, $184.1 million and
$156.0 million for each of the years 1997 through 2004, respectively. The
Company applied the remaining proceeds from such sale to pay outstanding
revolving credit borrowings under the Revolving Facility. This application of
proceeds did not involve any Revolving Facility commitment reduction. Such
commitment remains at $400 million.
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 and the Senior
Subordinated Notes 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. Interest
expense in 1997 is expected to be approximately $170 million to $175 million.
The Company uses interest rate swap and cap agreements to fix 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 December 31, 1996, the Company had interest rate
swap agreements (with a notional amount of $250 million), under which the
Company will pay fixed rates of 6.07 percent to 6.38 percent and receive
three-month LIBOR and 7.0 percent, three-month LIBOR cap agreements (with a
notional amount of $400 million) that expire through November 30, 1998.
Capital Expenditures
In connection with the Merger, the Company acquired assets with a fair value of
approximately $3,096 million (including cash of $26 million) and assumed
liabilities of approximately $1,606 million.
Capital spending for the nine months ended December 31, 1996 was approximately
$132 million. The Company is in the process of modifying the pulp mill at the
Macon Mill and converting the second linerboard paper machine at the Macon Mill
to coated board production. The cost of the pulp mill modification was
approximately $32 million and was completed in early 1997 while the paper
machine conversion is expected to cost approximately $85 million and is expected
to be completed in mid-1997. For the nine months ended December 31, 1996,
capital spending on these two projects totaled approximately $44 million. To
date, these projects are on budget and on schedule. Other capital spending
during this period related primarily to increasing paper production
efficiencies, increasing converting capacity, and manufacturing packaging
machinery. Additionally, at the date of the Merger, the Company reacquired
packaging machinery and purchased a converting press, totaling $47 million, that
were previously financed under operating lease arrangements. Total capital
spending for the twelve months ended December 31, 1997 is expected to be
approximately $155 million, which represents a reduction from the Company's
previous planned capital expenditures, and is expected to relate principally to
the pulp mill modification, the conversion of the second paper machine at the
Macon Mill and the production of packaging machinery.
During the nine months ended December 31, 1996, the Company sold assets for
gross proceeds of approximately $555 million which consisted primarily of
substantially all of the assets of the U.S. Timberlands/Wood Products business
segment and the machinery and equipment of the Company's last dedicated folding
carton converting plant in the United States, located in Kankakee, Illinois.
Financing Sources and Cash Flows
During the nine months ended December 31, 1996, Holding completed an offering of
shares of Holding Common Stock to certain members of management and key
employees (the
27
<PAGE>
"Management Investors") of the Company. During the nine months ended December
31, 1996, the Company issued 111,900 shares of Holding Common Stock to the
Management Investors for gross proceeds of $11.2 million. See Note 11 in Notes
to Consolidated Financial Statements.
The amount under the Revolving Facility that remained undrawn as of December 31,
1996, was approximately $299 million. Undrawn Revolving Facility availability is
expected to be used to pay taxes and other remaining costs of the Merger of
approximately $46 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 $25 million was utilized at December 31, 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. At December 31, 1996, approximately $27 million was
outstanding under this revolving facility. Subsequent to December 31, 1996, the
commitment for the Australian revolving facility was reduced to approximately
$32 million. 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 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 financial and 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 its debt agreements, including the Credit Agreements and the Indentures (see
"- Covenant Restrictions"), will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond the Company's
control, and will be substantially dependent on its ability to successfully
implement its overall business strategy, as well as initiatives to improve
profitability. See "-Business Trends and Initiatives."
While the Company believes that 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 interest of 50 percent.
Under the Igaras joint venture agreement, Igaras is required to pay dividends
equal to at least 25 percent 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.
In connection with and following the Merger, the Company decided in 1996 to
exit certain businesses and operating activities, including the sale or closure
of the Company's last dedicated folding carton converting plant in the United
States, located in Kankakee, Illinois, a packaging machinery manufacturing plant
in Marietta, Georgia, a beverage multiple packaging converting plant in
Bakersfield, California and the trucking transportation operations in West
Monroe, Louisiana, as well as the consolidation and realignment of certain
operations in the United States, Australia and Europe. The cost of exiting these
businesses and operating activities was approximately $40.9 million which was
accrued as a purchase accounting adjustment. The costs relate principally to the
severance of approximately 750 employees, relocation and other plant closure
costs. At December 31, 1996, $32.6 million of this total was included in Other
accrued liabilities in the Consolidated Balance Sheets and is expected to be
paid out primarily in 1997 and 1998.
Covenant Restrictions
In connection with the sale of substantially all of the assets of the U.S.
Timberlands/Wood Products business segment, financial and other covenants in the
Company's Credit Agreements have been modified to reflect the sale as well as
the Company's financial results and market and operating conditions.
Covenant modifications under the Credit Agreements included the addition of a
minimum
28
<PAGE>
EBITDA requirement, the elimination of a maximum leverage ratio, the reduction
of the interest coverage ratio, the reduction of minimum consolidated net worth
requirements, the reduction in capital expenditure limits and a reduction in
management stock repurchase limits. The initial application of the interest
coverage covenant under the Credit Agreements was as of December 1996. The
Company was in compliance with the covenants in the Credit Agreements at
December 31, 1996.
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 throughout the world. 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. In 1996, the EPA released
additional clarification of the proposed cluster rules. Based on this new
information, the Company expects that the cluster rules may be finally
promulgated in 1997 and estimates the capital spending that may be required to
comply with the cluster rules could reach $55 million to be spent at its two
United States paper mills over an eight-year period beginning in 1997.
The DEQ notified the Predecessor by letters, dated December 19, 1995, that the
Predecessor 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 Predecessor or its predecessor previously operated, and at a
former oil refinery site in Caddo Parish, Louisiana that the Company currently
owns. Neither the Company nor the Predecessor ever operated the oil refinery. In
response to the DEQ, 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 first met with the
DEQ on July 18, 1996, and then submitted a soil sampling plan to the DEQ. The
Company expects approval of this sampling plan in the first half of 1997. On
September 6, 1996, the Company received from the DEQ a letter requesting
remediation of the former oil refinery site in Caddo Parish, Louisiana. The
Company met with the DEQ on February 17, 1997 to discuss these matters. The DEQ
has requested that the Company enter into a cooperative agreement to perform a
phased-in approach for evaluating soil and groundwater conditions at the
Shreveport site. The Company is in discussions with the DEQ regarding the
participation of other responsible parties in any clean-up of hazardous
substances at both of these sites.
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
29
<PAGE>
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.
International Operations
At December 31, 1996, approximately 21 percent of the Company's total net assets
were denominated in currencies other than the U.S. dollar. The Company has
significant operations in countries that use the Swedish krona, the British
pound sterling, the German mark, the Spanish peseta, the French franc or the
Australian dollar as their functional currencies. The offsetting effect of
generally stronger U.S. dollar currency exchange rates in Britain and Australia
and the effect of weaker U.S. dollar currency exchange rates in Sweden, Germany,
Spain and France combined to produce a cumulative net translation adjustment
gain of approximately $8 million, which was recorded as an adjustment to
shareholders' equity for the nine months ended December 31, 1996. The magnitude
and direction of this adjustment in the future depends on the relationship of
the U.S. dollar to other currencies. The Company cannot predict major currency
fluctuations. The Company's revenues from export sales fluctuate with changes in
foreign currency exchange rates. The Company pursues a currency hedging program
in order to limit the impact of foreign currency exchange fluctuations on
financial results. See "-Financial Instruments."
Financial Instruments
The functional currency for most of the Company's 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 shareholders' equity. Gains and losses on foreign currency
transactions are included in Other (Expense) Income, net, in the Consolidated
Statements of Operations for the period in which the exchange rate changes.
The Company pursues a currency hedging program which utilizes derivatives to
limit the impact of foreign currency exchange fluctuations on its consolidated
financial results. Under this program, the Company enters into forward exchange
and option contracts in the normal course of business to hedge certain foreign
currency denominated transactions. Realized and unrealized gains and losses on
these forward contracts are 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 (Expense) Income,
net, over the term of the contract. These instruments involve, to varying
degrees, elements of market and credit risk in excess of the amounts recognized
in the Consolidated Balance Sheets. The Company does not hold or issue financial
instruments for trading purposes.
Fluctuations in U.S. 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 Predecessor or any of their business segments during the nine
months ended December 31, 1996, the three months ended March 31, 1996 or for
either of the years ended December 31, 1995 and 1994.
30
<PAGE>
Impact of Inflation
In the United States, the inflation rate was approximately 3 percent for 1996.
In both Europe and Australia, where the Company has manufacturing facilities,
the inflation rate for 1996 was approximately 2 percent. Net sales from
international operations during the nine months ended December 31, 1996 amounted
to approximately $303 million, or 33 percent of the Company's combined Net
Sales for the nine months ended December 31, 1996.
Relating to the Merger
U.S. Taxes
Pursuant to an election under section 338(h)(10) of the Internal Revenue Code of
1986, as amended ("IRC") the Merger has been 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 are substantially equal to their fair
market value. The excess of the Merger consideration over the fair market value
of the taxable net assets is deductible over 15 years for federal income tax
purposes. The Company's future taxable income will be reduced by such
amortization deductions and increased depreciation and other deductions
resulting from the stepped-up tax basis of those assets, together with
deductions for interest on indebtedness and certain other expenses incurred in
connection with the Merger.
For periods prior to the Merger, the Predecessor had historically been included
in the consolidated federal and certain combined state income tax returns of a
company formerly known as Manville Corporation ("Manville"). For periods after
the Merger, 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 Sharing Agreement was terminated upon the closing of the Merger.
The Tax Matters Agreement, dated as of October 25, 1995, among Manville, RIC,
RIC Holding and Acquisition Corp. (the "Tax Matters Agreement") was entered into
in connection with the Merger. The Tax Matters Agreement requires the Company to
make tax sharing payments to Manville (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 IRC Section 338(h)(10), to the extent such amounts have not
previously been paid pursuant to the Tax Sharing Agreement.
Pursuant to the Tax Matters Agreement, Manville will bear the federal and
combined state taxes and the Company will bear the separate state taxes
associated with the election under Section IRC 338 (h)(10).
The Tax Matters Agreement further requires Manville to bear the risk of federal
and state tax audits, and the Company to bear the risk of foreign tax audits for
periods prior to the Merger.
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
31
<PAGE>
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 United States 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 "- Business Trends and Initiatives".
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.
Accounting Changes
In the fourth quarter of 1996, the Company adopted the LIFO method of
determining the cost of principally all its inventories effective March 28,
1996. Prior to the fourth quarter of 1996, the Company determined the cost of
principally all its inventory using the FIFO method. The Company believes that
the LIFO method results in a better matching of current costs with current
revenues. Additionally, the LIFO method is widely used in the paper products
industry. This change in accounting principle was applied retroactively.
Accordingly, the second and third quarters of 1996 have been restated to reflect
the adoption of the LIFO method effective March 28, 1996 (see Note 23 in Notes
to Consolidated Financial Statements and "Selected Quarterly Financial Data" in
Item 8 of this Form 10-K).
Effective January 1, 1996, the Predecessor adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No.
121 establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangible assets, and goodwill related to those assets to
be held and used and for long-lived assets and certain identifiable intangible
assets to be disposed of. The adoption of SFAS No. 121 by the Predecessor did
not have a significant impact on its operations.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Riverwood Holding, Inc.:
Consolidated Balance Sheets 34
Consolidated Statements of Operations 36
Consolidated Statements of Cash Flows 37
Consolidated Statements of Shareholders' Equity 38
Notes to Consolidated Financial Statements 39
Selected Quarterly Financial Data (Unaudited) 74
Management's Report 76
Reports of Independent Accountants 77
Igaras Papeis e Embalagens S.A.:
Consolidated Balance Sheets 79
Consolidated Statements of Operations 81
Consolidated Statements of Cash Flows 82
Consolidated Statements of Shareholders' Equity 83
Notes to Consolidated Financial Statements 84
Report of Independent Accountants 98
33
<PAGE>
RIVERWOOD HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
On March 27, 1996, Holding, through its wholly owned subsidiaries, 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. As a result of the Merger, purchase accounting and the effect of
discontinued operations (see Notes 1 and 25), 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
- --------------------------------------------------------------------------------- -----------------
December 31, December 31,
ASSETS 1996 1995
- --------------------------------------------------------------------------------- -----------------
<S> <C> <C>
Current Assets:
Cash and equivalents $ 25,157 $ 35,870
Marketable securities 858 1,375
Receivables, net of allowances 153,864 187,621
Inventories 211,965 193,703
Prepaid expenses 8,113 23,229
Deferred tax assets 2,897 18,754
- --------------------------------------------------------------------------------- -----------------
Total Current Assets 402,854 460,552
Property, Plant and Equipment, at cost:
Land and improvements 35,761 52,292
Buildings 117,042 160,388
Machinery and equipment 1,608,182 1,490,420
- --------------------------------------------------------------------------------- -----------------
1,760,985 1,703,100
Less, Accumulated Depreciation 85,768 475,897
- --------------------------------------------------------------------------------- -----------------
1,675,217 1,227,203
Timber and Timberlands, less cost of timber harvested - 238,887
- --------------------------------------------------------------------------------- -----------------
Property, Plant and Equipment, net 1,675,217 1,466,090
Deferred Tax Assets 1,532 8,333
Investments in Net Assets of Equity Affiliates 125,030 119,592
Goodwill, net of accumulated amortization of $5,900 in 1996
and $14,996 in 1995 318,543 59,229
Other Assets 156,969 87,532
- --------------------------------------------------------------------------------- -----------------
Total Assets $ 2,680,145 $ 2,201,328
================================================================================= =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
RIVERWOOD HOLDING, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands of dollars)
Company Predecessor
- ------------------------------------------------------------------ -------------
December 31, December 31,
LIABILITIES 1996 1995
- ------------------------------------------------------------------ -------------
Current Liabilities:
Short-term debt $ 18,173 $ 60,692
Accounts payable 133,672 114,293
Compensation and employee benefits 38,017 56,495
Income taxes 42,031 4,688
Other accrued liabilities 112,205 58,384
- ------------------------------------------------------------------ -------------
Total Current Liabilities 344,098 294,552
Long-Term Debt, less current portion 1,567,259 1,041,221
Debt to Affiliate - 12,573
Deferred Income Taxes 19,722 232,195
Other Noncurrent Liabilities 85,467 58,477
- ------------------------------------------------------------------ -------------
Total Liabilities 2,016,546 1,639,018
- ------------------------------------------------------------------ -------------
CONTINGENCIES AND COMMITMENTS (Note 15)
REDEEMABLE COMMON STOCK, at current redemption value 9,390 -
SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------ -------------
Nonredeemable Common Stock 75 657
Capital in Excess of Par Value 751,153 526,814
(Accumulated Deficit) Retained Earnings (105,136) 45,309
Cumulative Currency Translation Adjustment 8,117 (10,470)
- ------------------------------------------------------------------ -------------
Total Shareholders' Equity 654,209 562,310
- ------------------------------------------------------------------ -------------
Total Liabilities and Shareholders' Equity $ 2,680,145 $ 2,201,328
================================================================== =============
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
RIVERWOOD HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars)
On March 27, 1996, Holding, through its wholly owned subsidiaries, 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. As a result of the Merger, purchase accounting and the effect of
discontinued operations (see Notes 1 and 25), 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
- ---------------------------------------------------------------------- ------------------------------------------------------
Nine months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------- ------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 852,112 $ 293,649 $ 1,342,304 $ 1,282,788
Cost of Sales 734,314 232,701 1,050,081 995,238
Selling, General and Administrative 99,819 30,936 126,191 131,073
Research, Development and Engineering 7,339 2,031 9,909 9,356
Other Costs - 11,114 21,516 1,302
Other (Expense) Income, net (9,221) (1,217) (1,470) 8,368
- ---------------------------------------------------------------------- ------------------------------------------------------
Income from Operations 1,419 15,650 133,137 154,187
Interest Income 702 329 2,006 3,493
Interest Expense 145,845 26,392 105,741 93,243
- ---------------------------------------------------------------------- ------------------------------------------------------
(Loss) Income from Continuing Operations before
Income Taxes and Equity in Net Earnings of
Affiliates (143,724) (10,413) 29,402 64,437
Income Tax Expense (Benefit) 4,180 (3,436) 18,797 54,188
- ---------------------------------------------------------------------- ------------------------------------------------------
(Loss) Income from Continuing Operations before
Equity in Net Earnings of Affiliates (147,904) (6,977) 10,605 10,249
Equity in Net Earnings of Affiliates 17,542 4,927 34,933 -
- ---------------------------------------------------------------------- ------------------------------------------------------
(Loss) Income from Continuing Operations (130,362) (2,050) 45,538 10,249
Income from Discontinued Operations,
net of tax of $0 35,546 - - -
- ---------------------------------------------------------------------- ------------------------------------------------------
(Loss) Income before Extraordinary Item (94,816) (2,050) 45,538 10,249
Extraordinary Loss on Early Extinguishment of
Debt, net of tax (10,320) - - (7,872)
- ---------------------------------------------------------------------- ------------------------------------------------------
Net (Loss) Income $(105,136) $ (2,050) $ 45,538 $ 2,377
====================================================================== ======================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE>
RIVERWOOD HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
On March 27, 1996, Holding, through its wholly owned subsidiaries, 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. As a result of the Merger, purchase accounting and the effect of
discontinued operations (see Notes 1 and 25), 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
- -------------------------------------------------------------------------------- --------------------------------------------------
Nine months Three months Year ended
ended ended Year ended December
December 31, 1996 March 27, 1996 December 31, 1995 31, 1994
- -------------------------------------------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income $ (105,136) $ (2,050) $ 45,538 $ 2,377
Noncash Items Included in Net (Loss) Income:
Depreciation, amortization and cost of timber harvested 100,846 24,438 92,646 95,004
Extraordinary loss on early extinguishment of debt, net 10,320 -- -- 7,872
Deferred income taxes (403) (3,574) 7,047 34,172
Pension, postemployment and postretirement benefits
expense (credit), net of benefits paid (553) 1,861 (277) 2,305
Translation loss -- -- -- 7,609
Write-off of deferred debt issuance costs -- -- -- 2,040
Net gain on sale of assets -- -- (1,781) (9,409)
Equity in net earnings of affiliates, net of dividends (12,136) (4,927) (18,818) --
Amortization of debt issuance costs 11,226 619 2,635 2,368
Other, net 979 (2,350) 278 475
Changes Net of Effects of Acquisitions/Dispositions:
Decrease (Increase) in Current Assets:
Receivables 7,934 14,737 (30,598) (33,870)
Inventories 21,261 (14,659) (29,075) (15,040)
Prepaid expenses (1,670) 8,298 (3,144) (591)
(Decrease) Increase in Current Liabilities:
Accounts payable (5,833) 18,182 3,484 5,822
Compensation and employee benefits (9,977) (10,248) 5,669 22,950
Income taxes 344 (3,343) (9,969) 722
Other accrued liabilities (29,267) 12,360 7,024 3,304
Decrease in Other Noncurrent Liabilities (4,199) (2,569) (2,413) (10,749)
- -------------------------------------------------------------------------------- --------------------------------------------------
Net Cash (Used In) Provided by Operating Activities (16,264) 36,775 68,246 117,361
- -------------------------------------------------------------------------------- --------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of RIC, net of Cash Acquired (1,459,372) -- -- --
Purchases of Marketable Securities Classified as
Held-to-Maturity -- -- (1,375) (34,948)
Proceeds from the Maturities of Marketable Securities 78 439 2,630 90,147
Acquisition of Equipment Previously Leased under
Operating Leases (46,742) -- -- --
Purchases of Property, Plant and Equipment (132,286) (44,074) (156,875) (232,472)
Payment for Acquisitions, net -- -- (1,087) (20,819)
Proceeds from Sales of Assets, net of selling costs 550,727 623 20,669 134,180
Increase in Other Assets (7,407) (8,004) (11,401) (23,177)
- -------------------------------------------------------------------------------- --------------------------------------------------
Net Cash Used in Investing Activities (1,095,002) (51,016) (147,439) (87,089)
- -------------------------------------------------------------------------------- --------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock, net 760,617 838 2,986 619
Issuance of Debt 1,803,146 12,669 1,500 200,213
Increase in Debt Issuance Costs (89,792) -- -- (14,909)
Net Increase (Decrease) in Notes Payable 111,073 (3,000) 45,000 115,000
Payments on Debt (403,801) (2,833) (42,533) (290,369)
Predecessor Debt Paid at Merger (1,046,690) -- -- --
Dividends -- (2,630) (10,506) (10,481)
- -------------------------------------------------------------------------------- --------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 1,134,553 5,044 (3,553) 73
- -------------------------------------------------------------------------------- --------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,869 (638) 904 1,364
- -------------------------------------------------------------------------------- --------------------------------------------------
Net Increase (Decrease) in Cash and Equivalents 25,156 (9,835) (81,842) 31,709
Cash and Equivalents at Beginning of Period 1 35,870 117,712 86,003
- -------------------------------------------------------------------------------- --------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 25,157 $ 26,035 $ 35,870 $ 117,712
================================================================================ ==================================================
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
37
<PAGE>
RIVERWOOD HOLDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars)
On March 27, 1996, Holding, through its wholly owned subsidiaries, 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. As a result of the Merger, purchase accounting and the effect of
discontinued operations (see Notes 1 and 25), 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>
(Accumulated
Nonredeemable Capital in Deficit)
Common Excess of Retained
PREDECESSOR: Stock Par Value Earnings
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1993 $ 655 $ 523,211 $ 18,381
Net Income - - 2,377
Currency translation adjustment - - -
Issuance of 36,411 shares of Common Stock - 619 -
Dividends of $0.16 per share on Common Stock - - (10,481)
Pension liability adjustment - - -
- --------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 655 523,830 10,277
Net Income - - 45,538
Currency translation adjustment - - -
Issuance of 162,052 shares of Common Stock 2 2,984 -
Dividends of $0.16 per share on Common Stock - - (10,506)
- --------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 657 526,814 45,309
Net (Loss) - - (2,050)
Currency translation adjustment - - -
Issuance of 43,148 shares of Common Stock - 846 -
Dividends of $0.04 per share on Common Stock - - (2,630)
- --------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 27, 1996 $ 657 $ 527,660 $ 40,629
==========================================================================================================================
COMPANY:
- --------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 28, 1996 $ - $ 1 $ -
Net (Loss) - - (105,136)
Currency translation adjustment - - -
Issuance of 7,000,000 shares of Class A Common Stock 70 699,930 -
Issuance of 500,000 shares of Class B Common Stock 5 49,995 -
Stock Issuance Costs - (451) -
Adjustment to redemption value of Redeemable Common Stock - 1,678 -
- --------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 $ 75 $ 751,153 $ (105,136)
==========================================================================================================================
<CAPTION>
Cumulative
Currency Pension Total
Translation Liability Shareholders'
PREDECESSOR: Adjustment Adjustment Equity
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1993 $ (37,926) $ (4,182) $ 500,139
Net Income - - 2,377
Currency translation adjustment 19,415 - 19,415
Issuance of 36,411 shares of Common Stock - - 619
Dividends of $0.16 per share on Common Stock - - (10,481)
Pension liability adjustment - 4,182 4,182
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 (18,511) - 516,251
Net Income - - 45,538
Currency translation adjustment 8,041 - 8,041
Issuance of 162,052 shares of Common Stock - - 2,986
Dividends of $0.16 per share on Common Stock - - (10,506)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 (10,470) - 562,310
Net (Loss) - - (2,050)
Currency translation adjustment (989) - (989)
Issuance of 43,148 shares of Common Stock - - 846
Dividends of $0.04 per share on Common Stock - - (2,630)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 27, 1996 $ (11,459) $ - $ 557,487
==================================================================================================================================
COMPANY:
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 28, 1996 $ - $ - $ 1
Net (Loss) - - (105,136)
Currency translation adjustment 8,117 - 8,117
Issuance of 7,000,000 shares of Class A Common Stock - - 700,000
Issuance of 500,000 shares of Class B Common Stock - - 50,000
Stock Issuance Costs - - (451)
Adjustment to redemption value of Redeemable Common Stock - - 1,678
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 $ 8,117 $ - $ 654,209
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
38
<PAGE>
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Holding and its wholly owned subsidiaries RIC Holding and 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 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 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 RIC Holding and Acquisition Corp. conducted no
significant business other than in connection with the Merger and related
transactions through March 27, 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 difference between the purchase price and the fair market values of
the assets acquired and liabilities assumed was recorded as goodwill.
The allocation of the $1,459.4 million net cash paid for the acquisition is
summarized as follows:
(In thousands of dollars)
------------------------------------------------
Current assets $ 412,165
Property, plant and equipment 2,130,012
Intangible assets 385,819
Other noncurrent assets 137,476
Liabilities (1,606,100)
------------------------------------------------
Total $ 1,459,372
================================================
The consolidated financial statements presented herein for the periods prior to
March 28, 1996, represent the Predecessor's financial position, 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 December 31, 1996, and for nine months then ended, reflect the adjustments
which were made to record the Merger. On October 18, 1996, the Company sold
substantially all of the assets of the U.S. Timberlands/Wood Products business
segment. The operating results for the U.S. Timberlands/Wood Products business
segment have been classified as discontinued operations for the period beginning
March 28, 1996 and ending October 18, 1996 (the date of sale) in the
Consolidated Statements of Operations. Discontinued operations have not been
segregated in the Consolidated Statements of Cash Flows nor have they been
reclassified as discontinued operations in the Predecessor's Consolidated
Statements of Operations and Consolidated Balance Sheets. 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 date of the Merger. The most significant differences relate to
discontinued operations and to amounts recorded in connection with the Merger
for inventory, property, plant and equipment, intangibles and debt which
resulted in increased cost of sales, amortization, depreciation and interest
expense in the nine months ended December 31, 1996 and will continue to do so in
future periods.
39
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The following is a summary of significant accounting policies of the Company.
For a summary of the Predecessor's significant accounting policies, please refer
to the Predecessor's financial statements incorporated by reference in the
annual report filed with the Securities and Exchange Commission on Form 10-K
dated December 31, 1995.
The accompanying consolidated financial statements include all of the accounts
of Riverwood Holding, Inc. and its subsidiaries. The accompanying consolidated
financial statements include the worldwide operations of the paperboard,
packaging and packaging machinery businesses and through the date of sale (see
Note 25), the wood products business. All significant transactions and balances
between the consolidated operations have been eliminated.
The Company's international subsidiaries are principally consolidated and
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 will 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 investments in debt securities with maturities in
excess of three months and are valued at amortized cost, which approximates
market. All marketable securities at December 31, 1996 and 1995 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. Cost of inventories is
determined principally on the last-in, first-out ("LIFO") basis. Average cost
bases are used to determine the cost of supplies 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 Company's cost and
related accumulated depreciation applicable to assets retired or sold 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. Capitalized interest was approximately $2.0 million, $0.5
million, $2.3 million and $23.0 million in the nine month period ended December
31, 1996, the three month period ended March 27, 1996, and the years ended
December 31, 1995 and 1994, respectively.
40
<PAGE>
(F) DEPRECIATION, AMORTIZATION AND COST OF TIMBER HARVESTED
Depreciation and amortization are principally computed using the straight-line
method based on the following estimated useful lives of the related assets:
Buildings 10 to 40 years
Land improvements 3 to 20 years
Machinery and equipment 2 to 40 years
Furniture and fixtures 1 to 12 years
Automobiles and light trucks 2 to 5 years
For certain major capital additions, the Company computes depreciation on the
units-of-production method until the asset's designed level of production is
achieved and sustained.
Cost of timber harvested was based on unit cost rates calculated using the total
estimated yield of timber to be harvested and the unamortized timber costs.
The Company assesses its long-lived assets other than goodwill 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 such assets.
If these projected cash flows are less than the carrying amount, an impairment
would be recognized, resulting in a write-down of assets with a corresponding
charge to earnings. The impairment loss is measured based upon the difference
between the carrying amount and the fair value of the assets.
Goodwill is amortized on a straight-line basis over 40 years. The cost of
patents, licenses and trademarks is amortized on a straight-line basis over 15
to 20 years. The related amortization expense is included in Other (Expense)
Income, net, in the Consolidated Statements of Operations. The Company assesses
goodwill 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 goodwill. If these projected cash flows are less than the
carrying amount of the goodwill, an impairment 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) CAPITALIZATION AND AMORTIZATION OF CERTAIN COSTS
Certain pre-operating and start-up costs are incurred during the process of
bringing major projects into production. Such costs are deferred until the
project becomes commercially operational. These costs are then amortized over a
five-year period. Included in Other Assets were $0.8 and $12.9 million of
unamortized, pre-operating and start-up costs at December 31, 1996 and 1995,
respectively.
(H) INTERNATIONAL CURRENCY
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 Shareholders' Equity. Gains and losses on foreign currency
transactions are included in Other (Expense) Income, net, in the Consolidated
Statements of Operations for the period in which the exchange rate changes.
The Company enters into forward exchange contracts to hedge certain foreign
currency denominated exposures and option contracts to hedge anticipated
transactions denominated in foreign currency. Realized and unrealized gains and
losses on these contracts are included in Other (Expense) Income, net, in the
Consolidated Statements of Operations. 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 (Expense) Income, net, over the
term of the contract.
41
<PAGE>
The Igaras operations are in a highly inflationary economy and use the U.S.
dollar as the functional currency. Therefore, in accordance with accounting
standards, certain assets of this entity were translated at historical exchange
rates and all translation adjustments were reflected in the Consolidated
Statements of Operations in 1994 when the Brazilian operations were consolidated
(see Note 27). Certain amounts reported as exchange gains and losses associated
with these Brazilian operations were reflected on a gross basis against the Net
Sales and Cost of Sales line items in 1994. The effect of this accounting
treatment was to decrease Net Sales and Cost of Sales for Brazilian operations,
thereby reflecting actual U.S. dollar prices and terms and reducing the
financial reporting effects of hyperinflation. All other Brazilian translation
gains and losses were included in Other (Expense) Income, net.
(J) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109. The
Standard 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. A valuation allowance is established for deferred tax assets
when it is more likely than not that the benefits of such assets will not be
realized.
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.
(K) REVENUE RECOGNITION
The Company recognizes revenue primarily when goods are shipped to customers.
Revenues from packaging machinery use agreements are recognized on a
straight-line basis over the term of the agreements.
(L) 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 are
recorded based on the Company's estimates, on an undiscounted basis, of the
aggregate liabilities for known claims and estimated claims incurred but not
reported.
(M) 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.
(N) 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 assets and 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.
42
<PAGE>
NOTE 3 - RECEIVABLES
The components of receivables at December 31 were as follows:
(In thousands of dollars) Company Predecessor
----------------------------------------- ------------------------------
1996 1995
----------------------------------------- ------------------------------
Trade $ 138,587 $ 178,845
Less, allowance 829 1,476
----------------------------------------- ------------------------------
137,758 177,369
Other 16,106 10,252
----------------------------------------- ------------------------------
$ 153,864 $ 187,621
========================================= ==============================
Selling, General and Administrative expenses included provisions for losses on
receivables of $1.0 million in the nine month period ended December 31, 1996,
$0.2 million in the three month period ended March 27, 1996, $0.6 million in
fiscal year 1995 and $0.1 million in fiscal year 1994.
NOTE 4 - FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business. These financial instruments include foreign
currency forward exchange and option contracts and interest rate swap and cap
agreements. These instruments involve, to varying degrees, elements of market
and credit risk in excess of the amounts recognized in the Consolidated Balance
Sheets. The Company does not hold or issue financial instruments for trading
purposes.
The Company enters into forward exchange contracts to hedge substantially all
accounts receivable and certain accounts payable resulting from transactions
denominated in nonfunctional currencies. The purpose of the forward exchange
contracts is to protect the Company from the risk that the eventual functional
currency cash flows resulting from the collection of the hedged accounts
receivable or payment of the hedged accounts payable will be adversely affected
by changes in exchange rates. At December 31, 1996 and 1995, the Company and the
Predecessor had various forward exchange contracts, with maturities ranging up
to one year, to exchange nonfunctional currencies for functional currencies (to
hedge accounts receivable and payable denominated in non-functional currencies).
When aggregated and measured in U.S. dollars at year-end exchange rates, these
forward exchange contracts totaled approximately $60.0 million and $74.6 million
at December 31, 1996 and 1995, respectively. Generally, unrealized gains and
losses resulting from these contracts are recognized currently in operations and
approximately offset corresponding unrealized gains and losses recognized on the
hedged accounts receivable or accounts payable.
The Predecessor also entered into forward contracts to hedge the debt incurred
in connection with the acquisition of a beverage and folding carton converting
business in France (see Note 27). The Company assumed these forward contracts in
the Merger. The purpose of the forward contract was to protect the Company from
the risk that the eventual functional currency cost of the debt incurred in
connection with the acquisition would be adversely affected by changes in
exchange rates. At December 31, 1996 and 1995, these forward contracts totaled
approximately $5.7 million and $11.3 million, respectively. Unrealized losses
resulting from these forward contracts were not significant at both December 31,
1996 and 1995.
During 1996 and 1995, the Company and the Predecessor entered into option
contracts to hedge certain anticipated foreign currency transactions. The
purpose of the option contracts is to protect the Company from the risk that the
eventual functional currency cash flows resulting from anticipated foreign
currency transactions will be adversely affected by changes in exchange rates.
At December 31, 1996 and 1995, various option contracts existed, with maturities
ranging up to six and nine months, respectively. When aggregated and measured in
U.S. dollars at year-end
43
<PAGE>
exchange rates, the notional amounts under these purchased option contracts
totaled approximately $40.4 million and $35.3 million at December 31, 1996 and
1995, respectively. Option contract premiums are amortized over the term of the
contract. Gains, if any, related to these contracts are recognized in income
when the anticipated transaction occurs. Total gains recognized on option
contracts during the nine month period ended December 31, 1996, the three-month
period ended March 27, 1996, and fiscal years 1995 and 1994 totaled
approximately $0.1 million, nil, $2.1 million and $0.1 million, respectively. At
both December 31, 1996 and 1995, unrealized gains on these option contracts were
nil. Also included as part of its option contracts at December 31, 1995, the
Predecessor had outstanding call spreads that operated as an initial option
contract cost reduction device. When aggregated and measured in U.S. dollars at
year-end exchange rates, these call spreads totaled approximately $11.3 million
at December 31, 1995. There were no call spreads outstanding at December 31,
1996. Gains and losses resulting from call spreads are recognized currently in
operations based on quoted market prices. Net gains resulting from call spreads
recognized during the nine months ended December 31, 1996, the three months
ended March 27, 1996, and fiscal years 1995 and 1994 totaled approximately nil,
$0.1 million, $0.3 million and $0.2 million, respectively.
The Company uses interest rate swap and cap agreements to fix 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 December 31, 1996, the Company had interest rate
swap agreements (with a notional amount of $250 million) under which the Company
will pay fixed rates of 6.07 percent to 6.38 percent and receive three-month
LIBOR. At December 31, 1996, the Company capped its three-month LIBOR interest
rate exposure to 7.0 percent under cap agreements (with a notional amount of
$400 million) that expire through November 30, 1998.
The Company's customers are not concentrated in any specific geographic region,
but are concentrated in certain industries. Customers of the Coated Board System
business segment include the beverage and packaged foods industries. Customers
of the Containerboard business segment include integrated and non-integrated
containerboard converters. Customers of the U.S. Timberlands/Wood Products
business segment (through the date of sale, see Note 25) included building
material suppliers and related brokers. During the nine months ended December
31, 1996, one customer accounted for approximately 11 percent of the Company's
net sales. During the three months ended March 27, 1996 and the years ended
December 31, 1995 and 1994, no single customer accounted for more than 10
percent of the Predecessor's net sales. There were no significant accounts
receivable from a single customer at December 31, 1996 and 1995. The Company
reviews a customer's credit history before extending credit. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends, and other information.
The following methods and assumptions were used to estimate the fair value of
each category of financial instrument for which it is practicable to estimate
that value:
CASH, EQUIVALENTS, MARKETABLE SECURITIES, NONTRADE RECEIVABLES AND SHORT TERM
BORROWINGS
The carrying amount of these instruments approximates fair value due to their
short-term nature.
LONG-TERM DEBT
The fair value of long-term debt is based on quoted market prices or the
discounted cash flows method.
44
<PAGE>
FORWARD EXCHANGE AND OPTION CONTRACTS
The fair value of forward and option contracts is based on notional amounts
at quoted market prices.
INTEREST RATE SWAP AND CAP AGREEMENTS
The fair value of interest rate swap and cap agreements is based on notional
amounts and adjusted for quoted market prices by counter parties.
45
<PAGE>
The carrying amounts and estimated fair value of the Company's financial
instruments as of December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- -------------------------------------------------------------------------------- ------------------------------
1996 1995
- -------------------------------------------------------------------------------- ------------------------------
Carrying Fair Carrying Fair
Amounts Value Amounts Value
- -------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Cash, equivalents and marketable
securities $ 26,015 $ 26,015 $ 37,245 $ 37,245
Nontrade receivables $ 16,106 $ 16,106 $ 10,252 $ 10,252
Short-term borrowings $ 6,919 $ 6,919 $ 10,489 $ 10,489
Long-term debt $ 1,578,513 $ 1,521,444 $ 1,103,997 $ 1,170,548
Currency forward exchange contracts $ 65,666 $ 65,518 $ 85,861 $ 86,297
Currency option contracts $ 90 $ 196 $ 156 $ 151
Interest rate swap contracts $ - $ (1,689) $ - $ -
Interest rate cap contracts $ 992 $ 160 $ - $ -
================================================================================ ==============================
</TABLE>
NOTE 5 - INVENTORIES
The major classes of inventories at December 31 were as follows:
- ------------------------------------------- -----------------------------------
(In thousands of dollars) Company Predecessor
- ------------------------------------------- -----------------------------------
1996 1995
- ------------------------------------------- -----------------------------------
Finished goods $ 89,412 $ 67,336
Work-in-process 12,496 19,941
Raw materials 71,075 61,298
Supplies 38,982 45,128
- ------------------------------------------- -----------------------------------
$ 211,965 $ 193,703
=========================================== ===================================
Inventories in the amount of $33.0 million and $121.1 million at December 31,
1996 and 1995, respectively, were valued using the first-in, first-out ("FIFO")
or average cost method. The balance of the inventories was valued using the LIFO
method (see Note 23). The excess of current values over amounts for financial
reporting purposes was $1.5 million and $29.4 million at December 31, 1996 and
1995, respectively. The Predecessor valued its U.S. inventories principally on
the LIFO basis while all international inventories were valued on the FIFO
basis.
In connection with the Merger, the Company adjusted its inventory balances to
its estimated fair value which resulted in the elimination of the Predecessor's
LIFO reserve of approximately $28.3 million and a write-up of the acquired
inventory to a value which exceeded the Predecessor's FIFO cost by approximately
$16.3 million. The write-up to inventory is charged to cost of sales when, and
if, the March 27, 1996 LIFO base inventory layers are liquidated. Approximately
$0.6 million of this fair value write-up of inventories was charged to cost of
sales during the nine months ended December 31, 1996.
As it relates to discontinued operations (see Note 25), the Company wrote up its
acquired inventory to a value which exceeded the Predecessor's FIFO cost of
approximately $2.7 million and such inventory was included in the value of the
assets sold as no liquidation of base inventory layers occurred in the
discontinued operations inventories through the date of sale.
46
<PAGE>
NOTE 6 - INVESTMENTS IN NET ASSETS OF EQUITY AFFILIATES
The major components of Investments in Net Assets of Equity Affiliates at
December 31 were as follows:
(In thousands of dollars) Company Predecessor
- ----------------------------------------------- -------------------------------
1996 1995
- ----------------------------------------------- -------------------------------
Equity investment in
Igaras $ 121,163 $ 118,177
Other equity investments 3,867 1,415
- ----------------------------------------------- -------------------------------
$ 125,030 $ 119,592
=============================================== ===============================
Investments are accounted for using the equity method of accounting. The most
significant of these investments is Igaras. On December 29, 1994, Predecessor
sold approximately 50 percent of its investment in Igaras to Companhia Suzano
Papel e Celulose, S.A. ("Suzano") for $100 million in cash after first spinning
off a wholly owned subsidiary to operate its packaging machinery operations in
Brazil. Prior to that date, the Predecessor owned 100 percent of Igaras. The
results of operations of Igaras are consolidated with the Predecessor's results
of operations through the date of sale. In connection with the Merger, Suzano
received an additional share of common stock of Igaras, and as a result, the
Company and Suzano each own 50 percent of the common stock of Igaras.
As of December 29, 1994, the Company (and prior to the Merger, the Predecessor)
has the ability to exercise significant influence, but not control, over the
operating and financial policies of Igaras. The agreement governing the Igaras
joint venture relationship specifies that each party has equal representation on
the board of directors and each party exercises equal influence over Igaras's
accounting and operating activities. Accordingly, the Company reports its
investment in Igaras using the equity method of accounting. The following
unaudited pro forma data summarize the results of operations for 1994 as if the
sale of approximately 50 percent of Igaras had occurred prior to 1994, and the
equity method was used to record Predecessor's interest in Igaras's 1994 results
of operations.
For the Year Ended December 31, 1994
(In thousands of dollars)
(unaudited)
- --------------------------------------------------------------------------------
Net Sales $ 1,129,633
Cost of Sales 894,940
Selling, General and Administrative 115,733
Research, Development, and Engineering 9,220
Other Costs 1,302
Other Income, net 11,653
- --------------------------------------------------------------------------------
Income from Operations 120,091
Interest Income 2,550
Interest Expense 85,175
- --------------------------------------------------------------------------------
Income before Income Taxes, Equity in Net
Earnings of Affiliate and Extraordinary Item 37,466
Income Taxes 18,818
Equity in Net Earnings of Affiliate 9,869
- --------------------------------------------------------------------------------
Income before Extraordinary Item $ 28,517
================================================================================
47
<PAGE>
The following represents the summarized balance sheet information for Igaras as
of December 31:
(In thousands of dollars) Company Predecessor
- -------------------------------------------- -----------------
1996 1995
- -------------------------------------------- -----------------
Current Assets $87,543 $109,985
Noncurrent Assets $286,382 $243,369
Current Liabilities $70,678 $90,278
Noncurrent Liabilities $31,964 $26,465
Shareholders' Equity $271,283 $236,611
============================================ =================
The following represents the summarized income statement information for Igaras
for the nine months ended December 31, 1996, the three months ended March 27,
1996 and the year ended December 31, 1995:
(In thousands of dollars) Company Predecessor
- ----------------------------------------- -------------------------------------
Nine Months ended Three Months ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995
- ----------------------------------------- -------------------------------------
Net Sales $175,116 $59,582 $275,551
Cost of Sales 117,615 38,962 139,011
- ----------------------------------------- -------------------------------------
Gross Profit $ 57,501 $20,620 $136,540
========================================= =====================================
Income from Operations $42,350 $14,521 $108,532
Net Income $34,552 $10,113 $70,010
========================================= =====================================
During the nine month period ended December 31, 1996, the three month period
ended March 27, 1996 and the year ended December 31, 1995, paperboard was sold
to Igaras totaling approximately $4.8 million, $0.3 million and $6.0 million,
respectively. The amount of the carrying value of the investment in Igaras at
December 31, 1996 differs from the underlying equity in net assets by $14.5
million and relates to the write-down of this investment to estimated fair value
in purchase accounting and to the elimination of profit in Igaras's ending
inventory. The amount of the carrying value of the investment in Igaras at
December 31, 1995 differs from the underlying equity in net assets by $0.1
million and relates to the elimination of profit in Igaras's ending inventory.
Included in Receivables at December 31, 1996 and 1995 were amounts due from
Igaras of $4.2 million and $0.6 million, respectively.
The amount of the Company's portion of Igaras's undistributed earnings at
December 31, 1996 and 1995 was approximately $12.2 million and $32.8 million,
respectively. The amount of dividends received from Igaras during the nine
months ended December 31, 1996, the three months ended March 27, 1996 and the
year ended December 31, 1995 were $5.0, nil and $16.1 million, respectively.
48
<PAGE>
NOTE 7 - OTHER ASSETS
Other Assets included the following at December 31 as follows:
(In thousands of dollars) Company Predecessor
- ----------------------------------------------- -------------------------------
1996 1995
- ----------------------------------------------- -------------------------------
Patents, licenses,
and trademarks $ 61,376 $ 9,827
Deferred start-up costs 809 15,680
Other -- 5,765
- ----------------------------------------------- -------------------------------
Total amortizable assets 62,185 31,272
Less, accumulated
amortization 2,281 7,246
- ----------------------------------------------- -------------------------------
59,904 24,026
Deferred debt issuance costs,
net 68,247 13,492
Pension assets 13,880 33,818
Capitalized spare parts 9,440 1,054
Deferred design costs 1,229 8,852
Other 4,269 6,290
- ----------------------------------------------- -------------------------------
Total Other Assets $156,969 $ 87,532
============================================== ===============================
NOTE 8 - SHORT-TERM DEBT
Short-term debt at December 31 consisted of the following:
(In thousands of dollars) Company Predecessor
- ----------------------------------------------- -------------------------------
1996 1995
- ----------------------------------------------- -------------------------------
Short-term borrowings $ 6,919 $ 10,489
Current portion of long-
term debt 11,254 50,203
- ----------------------------------------------- -------------------------------
$ 18,173 $ 60,692
=============================================== ===============================
In connection with the Merger, the Company called $125 million of Convertible
Subordinated Notes, of which $6.1 million was not redeemed at December 31, 1996
and is included in current portion of long-term debt.
Short-term borrowings were principally at the Company's international
subsidiaries. The weighted average interest rate on short-term borrowings as of
December 31, 1996 and 1995 was 8.9 percent and 9.3 percent, respectively.
NOTE 9 - COMPENSATION AND EMPLOYEE BENEFITS
Accruals for future compensated employee absences, principally vacation, were
$18.0 million and $21.3 million at December 31, 1996 and 1995, respectively, and
were included in Compensation and employee benefits on the Consolidated Balance
Sheets.
NOTE 10 - LONG-TERM DEBT
In connection with the Merger, the Company entered into the Senior Secured
Credit Agreement with certain lenders providing the Senior Secured Credit
Facilities with aggregate commitments not to exceed $1,550 million, including
the $1,150 million Term Loan Facility and the $400 million Revolving Facility.
In addition,
49
<PAGE>
RIMI, entered into the Machinery Credit Agreement providing for the $140 million
Machinery Facility with certain lenders for the purpose of financing or
refinancing packaging machinery. In connection with the Merger, the Company also
completed the Notes Offering of $250 million aggregate principal amount of
10 1/4% Senior Notes due 2006 and $400 million aggregate principal amount of
10 7/8% Senior Subordinated Notes due 2008. 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.
The Term Loan Facility will mature in 2004, the Revolving Facility will mature
in 2003 and the Machinery Facility will mature in 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.
On October 18, 1996, the Company sold substantially all of the assets of the
U.S. Timberlands/Wood Products business segment for cash of approximately $550
million (see Note 25). The Company applied $400.0 million of the sale proceeds
to repay term loans under the Term Loan Facility, including approximately $375.0
million of tranche "A" term loans, approximately $18.4 million of tranche "B"
term loans and approximately $6.6 million of tranche "C" term loans. The Company
applied the remaining sale proceeds to outstanding revolving credit borrowings
under the Revolving Credit Facility. This application of proceeds did not
involve any revolving credit commitment reduction. Such commitment remains at
$400 million.
The initial application of the interest coverage covenant under the Credit
Agreements is as of December 1996. 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.
Also, in connection with the sale of substantially all of the assets of the U.S.
Timberlands/Wood Products business segment, financial and other covenants in the
Company's Credit Agreements have been modified to reflect the sale as well as
the Company's financial results and market and operating conditions. Covenant
modifications under the Credit Agreements included the addition of a minimum
EBITDA requirement, the elimination of a maximum leverage ratio, the reduction
of the interest coverage ratio, the reduction of minimum consolidated net worth
requirements, the reduction in capital expenditure limits and a reduction in
management stock repurchase limits. The Company was in compliance with the
covenants in the Credit Agreements at December 31, 1996.
50
<PAGE>
At December 31, 1996, the Company and its U.S. and international subsidiaries
had the following amounts undrawn under revolving credit facilities:
<TABLE>
<CAPTION>
Total Amount
Total Amount of Outstanding at Total Amount Available
(In thousands of dollars) Commitments December 31,1996 at December 31, 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revolving Facility $400,000 $101,300 $298,700
Machinery Facility 140,000 25,000 29,000
International facilities 47,861 33,630 14,231
- ----------------------------------------------------------------------------------------
Total $587,861 $159,930 $341,931
========================================================================================
</TABLE>
The Machinery Facility availability is limited by a borrowing base.
During 1995, the maturity of a $37 million revolving credit facility used in the
Company's Australian operations was extended from September 1995 to September
1998. At December 31, 1996 and 1995, $27 million and $30 million, respectively,
were outstanding under this facility and were classified as long-term debt.
Subsequent to December 31, 1996, the commitment for the Australian revolving
facility was reduced to approximately $32 million.
51
<PAGE>
Long-Term Debt, excluding Long-Term Debt to Affiliate, at December 31 consisted
of the following:
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- -------------------------------------------------------------------------------------------------------------- --------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------- --------------------
<S> <C> <C>
Senior Notes with interest payable semi-annually at 10.25 percent, payable in 2006 $ 250,000 $ -
Senior Subordinated Notes with interest payable semi-annually at 10.875 percent,
payable in 2008 400,000 -
Senior Secured Term Loan Facility with interest payable at various dates less than one
year at floating rates (8.0 percent to 9.13 percent at December 31, 1996), payable
through 2004 750,000 -
Senior Secured Revolving Credit Facility with interest payable at various dates less than
one year at floating rates (8.04 percent to 9.75 percent at December 31, 1996),
payable in 2003 101,300 -
Machinery Facility with interest payable at various dates less than one year at floating
rates (8.13 percent at December 31, 1996), payable in 2001 25,000 -
Senior Notes with interest payable semi-annually at 10.75 percent, payable in 2000 529 150,000
Senior Notes II with interest payable semi-annually at 10.75 percent, paid in 1996 - 37,500
Senior Subordinated Notes with interest payable semi-annually at 11.25 percent,
payable in 2002 804 250,000
Senior Subordinated Notes II with interest payable semi-annually at 11.25 percent,
paid in 1996 - 62,500
Convertible Subordinated Notes with interest payable semi-annually at 6.75 percent,
payable in 2003, convertible beginning March 27, 1996 6,141 125,000
Senior Subordinated Notes with interest payable semi-annually at 10.375 percent,
payable in 2004 15 100,000
Notes payable to insurance companies with interest payable semi-annually from 8.84 to
10.48 percent, paid in 1996 - 139,581
Notes payable to banks with interest payable no less often than quarterly at floating
rates, paid in 1996 - 120,000
Note payable to a bank with interest payable no less often than quarterly at floating
rates, paid in 1996 - 45,000
Pollution control revenue bonds with interest payable semi-annually at 6.25 percent,
payable through 2007 1,000 8,500
Notes payable to individuals with interest payable in January 1998
at 6.0 percent, payable January 1998 5,256 11,305
International Notes payable to banks with interest payable at various dates less than one
year at interest rates ranging from 4.0 percent to 7.5 percent at December 31, 1996,
payable through 1998 33,247 33,670
Capitalized leases with interest payable from 6.52 percent to 10.25 percent, payable
through 2002 5,185 8,285
Other 36 83
- -------------------------------------------------------------------------------------------------------------- --------------------
1,578,513 1,091,424
Less, current portion 11,254 50,203
- -------------------------------------------------------------------------------------------------------------- --------------------
$1,567,259 $ 1,041,221
============================================================================================================== ====================
</TABLE>
52
<PAGE>
The Term Loan Facility, the Revolving Facility and the Machinery Facility were
collateralized by substantially all of the net assets (including the capital
stock of certain international subsidiaries) of the Company.
Debt to Affiliate at December 31, 1995 consisted of obligations to Manville.
These obligations were repaid in connection with the Merger. Interest expense to
Manville totaled approximately $0.2 million, $1.0 million and $0.7 million for
the three months ended March 27, 1996, and the years ended December 31, 1995 and
1994, respectively.
Long-term debt maturities and expirations of funded long-term working capital
commitments at December 31, 1996, were as follows:
(In thousands of dollars)
--------------------------------------------
1997 $ 11,254
1998 39,728
1999 28,675
2000 81,509
2001 150,448
After 2001 1,266,899
--------------------------------------------
$ 1,578,513
============================================
NOTE 11 - REDEEMABLE COMMON STOCK
During the nine months ended December 31, 1996, Holding completed an offering of
Holding Common Stock to certain members of management and key employees of the
Company. As of December 31, 1996, the Company had issued 111,900 shares of Class
A Common Stock to Management Investors at fair value for gross cash proceeds of
$11.2 million, less issuance costs of $0.1 million. In certain circumstances the
Management Investors can require the Company to repurchase their shares of Class
A Common Stock at fair market value as determined by the Executive Committee of
the Board of Directors. These shares are classified as Redeemable Common Stock
on the Consolidated Balance Sheets and are carried at their redemption value at
December 31, 1996. Accordingly, the difference between the original issue price
of $100 per share and the redemption value at December 31, 1996 of $85 per share
as determined by the Executive Committee of the Board of Directors is accounted
for as a credit to Capital in Excess of Par Value. There were no redemptions of
Redeemable Common Stock during the nine months ended December 31, 1996.
In connection with the issuance of Redeemable Common Stock to Management
Investors, the Company has guaranteed loans, with full recourse, from a bank to
certain Management Investors totaling approximately $2.6 million at December 31,
1996. The Company and the bank have the right to recover the loan proceeds from
a Management Investor's personal assets, including the purchased stock, in the
event of default.
NOTE 12 - NONREDEEMABLE COMMON STOCK
On March 27, 1996, Holding completed an offering of 7,000,000 shares of Class A
Common Stock with a par value of $0.01 per share to certain institutional
investors for $700 million. Total Class A Common Stock authorized for issuance
at December 31, 1996 was 9,000,000 shares, of which amount 7,111,900 shares were
outstanding, including 111,900 shares issued to Management Investors as
Redeemable Common Stock (see Note 11). Also on March 27, 1996, Holding completed
an offering of 500,000 shares of Class B Common Stock with a par value of $0.01
per share to an institutional investor for $50 million. Total Class B Common
Stock, which is non-voting, authorized for issuance at December 31, 1996 was
3,000,000 shares, of which 500,000 shares were outstanding.
53
<PAGE>
NOTE 13 - STOCK INCENTIVE PLANS
On June 4, 1996, the Management Investors received a total of 296,550
non-qualified options to purchase additional shares of redeemable Class A 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 have accelerated vesting
based on achievement of certain financial goals or on December 4, 2005,
whichever occurs first. As of December 31, 1996, no Stock Options were
exercised, canceled or had vested.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for the Stock Options.
Accordingly, under fixed plan accounting, no compensation expense has been
recognized for the Stock Options as the exercise price approximated fair value
at the date of grant. Had compensation expense for the Company's 1996 grants of
Stock Options been determined in accordance with Statement of Financial
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
the Company's Net Loss for the nine months ended December 31, 1996 would
approximate $106.0 million. The fair value of the Stock Options was estimated to
be $22.36 per option on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: dividend yield of zero, no volatility,
risk-free interest rate of 6.53 percent, a zero forfeiture rate and an expected
life of four years. The effects of applying SFAS No. 123 in this pro forma
disclosure are not indicative of future amounts.
In 1992, Predecessor adopted the Riverwood International Corporation 1992
Long-Term Incentive Plan and in 1994, the Predecessor adopted the Riverwood
International Corporation 1994 Long-Term Incentive Plan (the "Incentive Plans").
The Incentive Plans permitted the granting of stock options, stock appreciation
rights, restricted stock units, performance units, dividend equivalents and
other awards valued in whole or in part by reference to or otherwise based on
the Company's common stock. Prior to 1993, no awards had been granted under
terms of the Incentive Plans. In conjunction with the Merger, the Predecessor's
Incentive Plans were terminated and all outstanding restricted stock units and
stock appreciation rights were exercised at a price of $20.25 per unit/right.
NOTE 14 - CURRENCY TRANSLATION ADJUSTMENT
An analysis of changes in the Cumulative Currency Translation Adjustment
included in Shareholders' Equity at December 31 was as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- ----------------------------------------------------------------- ----------------------------------------------------------
Nine Months Three Months Year Ended Year Ended
Ended Ended December 31, December 31,
December 31, 1996 March 31, 1996 1995 1994
- ----------------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative currency translation adjustment
at beginning of period $ - $ (10,470) $(18,511) $ (37,926)
Currency translation adjustments 8,121 (989) 8,126 19,450
Income taxes related to currency translation
adjustments (4) - (85) (35)
- ----------------------------------------------------------------- ----------------------------------------------------------
Cumulative currency translation adjustment $ 8,117 $ (11,459) $(10,470) $ (18,511)
================================================================= ==========================================================
</TABLE>
54
<PAGE>
NOTE 15 - CONTINGENCIES AND COMMITMENTS
Total rental expense was approximately $14.3 million in the nine-month period
ended December 31, 1996, $3.8 million in the three-month period ended March 27,
1996, $21.7 and $10.2 for the years ended December 31, 1995 and 1994,
respectively.
At December 31, 1996, total commitments of the Company under long-term,
noncancelable contracts were as follows:
(In thousands of dollars)
----------------------------------------
1997 $ 13,108
1998 12,174
1999 10,655
2000 9,326
2001 7,353
After 2001 18,016
----------------------------------------
$ 70,632
========================================
The Company is committed to compliance with all applicable laws and regulations
throughout the world. 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 the cluster rules that would mandate more
stringent controls on air and water discharges from the United States pulp and
paper mills. In 1996, the EPA released additional clarification of the proposed
cluster rules. Based on this new information, the Company expects that the
cluster rules may be finally promulgated in 1997 and estimates the capital
spending that may be required to comply with the cluster rules could reach $55
million to be spent at its two U.S. paper mills over an eight-year period
beginning in 1997.
The DEQ notified the Predecessor by letters, dated December 19, 1995, that the
Predecessor 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 Predecessor or its predecessor previously operated, and at a
former oil refinery site in Caddo Parish, Louisiana that the Company currently
owns. Neither the Company nor the Predecessor ever operated the oil refinery. In
response to the DEQ, 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 first met with the
DEQ on July 18, 1996, and then submitted a soil sampling plan to the DEQ. The
Company expects approval of this sampling plan in the first half of 1997. On
September 6, 1996, the Company received from the DEQ a letter requesting
remediation of the former oil refinery site in Caddo Parish, Louisiana. The
Company met with the DEQ on February 17, 1997 to discuss these matters. The DEQ
has requested that the Company enter into a cooperative agreement to perform a
phased-in approach for evaluating soil and groundwater conditions at the
Shreveport site. The Company is in discussions with the DEQ regarding the
participation of other responsible parties in any clean-up of hazardous
substances at both of these sites.
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 where such costs
55
<PAGE>
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 party to a number of lawsuits arising out of the conduct of its
business. While there can be no assumptions as to their 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.
On December 6, 1995, Forrest Kelly Clay, a former shareholder of the
Predecessor, commenced a purported class action lawsuit in the United States
District Court for the Northern District of Georgia, against the Company and
certain officers of the Company (the "Individual Defendants," and together with
the Company, the "Defendants"). In his complaint, Clay alleges that the
Defendants violated the federal securities laws by disseminating misleading
statements and by omissions concerning the strategic alternatives that the
Predecessor was considering, including its potential sale to a third-party
investor. The complaint also alleged that the Individual Defendants, through
their exercise of stock appreciation rights ("SARs"), violated the federal
securities laws by trading in the Predecessor's securities while in possession
of material, non-public information. The complaint generally seeks damages in an
unspecified amount, as well as other relief. On January 29, 1996, Defendants
filed a motion to dismiss the complaint for failure to state a claim and failure
to plead fraud with particularity. On March 29, 1996, the Court denied
Defendants' motion to dismiss and allowed limited discovery to proceed with
regard to statements attributable to the Company and the nature of the SARs.
That discovery is now complete, and plaintiff has twice amended his complaint
(each time putting forward the same claims made in the initial complaint but
amending certain of the factual allegations). On November 1, 1996, the
Defendants moved to dismiss the amended complaint, noting (i) none of the
statements attributable to the Company concerning its review of strategic
alternatives was false and (ii) that there is no causal relationship between
plaintiff's purchase of Riverwood common stock and the Individual Defendants'
exercise of SARs. That motion has been fully briefed and is currently before the
Court.
NOTE 16 - PENSIONS
U.S. HOURLY AND SALARIED PENSION PLANS
All of the Company's U.S. hourly union employees are participants in the
Company's noncontributory defined benefit hourly plan (the "Hourly plan"). The
pension expense of the Hourly plan is based primarily on years of service and
the pension rate near retirement. The Company's U.S. salaried and nonunion
hourly employees are participants in the Company's noncontributory defined
benefit plan that was established during 1992 (the "Salaried plan").
The Company's funding policies with respect to its U.S. pension plans are to
contribute funds to trusts as necessary to at least meet the minimum funding
requirements of the U.S. Internal Revenue Code. Plan assets are invested
primarily in equities and fixed income securities.
56
<PAGE>
(A) PENSION EXPENSE
The pension expense related to the Hourly plan and Salaried plan consisted of
the following:
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- ---------------------------------------------------------------------- ------------------------------------------------------------
Nine months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Service costs - benefits earned during
the period $ 3,925 $ 1,482 $ 4,001 $ 5,102
Interest cost on projected benefit obligation 10,141 3,197 12,928 12,057
Estimated return on assets:
- actual (gain) loss (17,056) (970) (41,716) 7,590
- deferred gain (loss) 3,450 (3,180) 27,751 (22,788)
Net amortization and deferral - (98) (1,251) (254)
- ---------------------------------------------------------------------- ------------------------------------------------------------
Total pension expense $ 460 $ 431 $ 1,713 $ 1,707
====================================================================== ============================================================
</TABLE>
Certain assumptions used in determining the pension expense related to the
Hourly plan and Salaried plan were as follows:
<TABLE>
<CAPTION>
Company Predecessor
- ------------------------------------------------------------------------ ---------------------------------------------------------
Nine months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------ ---------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rates 7.50% 7.00% 9.00% 7.00%
Rates of increase in future compensation levels 4.50% 5.50% 5.50% 5.50%
Expected long-term rates of return on assets 9.50% 9.00% 9.00% 9.00%
======================================================================== =========================================================
</TABLE>
(B) FUNDED STATUS
The following table sets forth the funded status of the Company's Hourly plan
and Salaried plan as of December 31:
<TABLE>
<CAPTION>
(In thousands of dollars) The Company Predecessor
- -------------------------------------------------------------------------------- ---------------------------------------
1996 1995
- --------------------------------------------------------------------------------- ----------------------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
--------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 171,501 $ 843 $ 63,700 $ 108,224
- ------------------- ------------------------------------------------------------ --------------------------------------
Accumulated benefit obligation $ 175,399 $ 930 $ 63,955 $ 113,721
- -------------------------------------------------------------------------------- --------------------------------------
Projected benefit obligation $ 184,879 $ 2,008 $ 63,955 $ 130,374
Plan assets at fair value 202,543 - 69,198 125,610
- -------------------------------------------------------------------------------- --------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 17,664 (2,008) 5,243 (4,764)
Unrecognized net loss (gain) (4,764) 116 8,366 23,597
Unrecognized prior service cost (benefit) 980 - 5,135 (287)
Unrecognized net transition asset - - (4,826) (3,260)
- -------------------------------------------------------------------------------- --------------------------------------
Net pension asset (liability) $ 13,880 $ (1,892) $ 13,918 $ 15,286
================================================================================ =======================================
</TABLE>
57
<PAGE>
Projected benefit obligations were determined using a discount rate of 7.5
percent in 1996 and 7.0 percent in 1995. The rate of increase in future
compensation levels for the Salaried plan was 4.5 percent and 5.5 percent in
1996 and 1995, respectively. The vested benefit obligation reflects the benefits
the employees would be entitled to receive if the employees were to terminate
their employment immediately.
On October 18, 1996, the Company sold substantially all of the assets of the
U.S. Timberlands/Wood Products business segment (see Note 25). Accordingly, the
pension expense related to the U.S. Timberlands/Wood Products employees was
included through the date of sale and the funded status of the U.S.
Timberlands/Wood Products portion of the pension plan was excluded from the
funded status as of December 31, 1996. In connection with this sale, pension
benefits were curtailed. Accordingly, the pension benefit obligation was reduced
by approximately $2.7 million and was recorded as an adjustment to the market
value of assets acquired in the Merger.
As of December 31, 1996 and 1995, accrued retirement contributions for both the
Hourly plan and the Salaried plan included in Compensation and employee benefits
on the Consolidated Balance Sheets were nil and $3.7 million, respectively.
During 1995, the accumulated benefit obligation under the Salaried plan
exceeded such plan's assets. Effective December 31, 1994, three hourly pension
plans were merged into one plan with plan assets exceeding accumulated benefits.
The credit to shareholders' equity for 1994 was $4.2 million.
INTERNATIONAL PENSION PLANS
(A) PENSION EXPENSE
The international defined benefit pension plans are both noncontributory and
contributory and are funded in accordance with applicable local laws. Assets of
the funded plans are invested primarily in equities and fixed income securities.
The pension or termination benefits are based primarily on years of service and
the employees' compensation.
The pension expense related to the international plans consisted of the
following:
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- ---------------------------------------------------------------- ---------------------------------------------------------
Nine Months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Service costs - benefits earned
during the period $ 1,683 $ 552 $ 2,337 $ 2,498
Interest cost on projected benefit
obligation 3,682 1,208 4,444 4,735
Estimated return on assets:
- actual (gain) loss (4,914) (1,612) (9,417) 805
- deferred gain (loss) 544 178 4,392 (5,738)
Net amortization and deferral - (1) - 121
- ---------------------------------------------------------------- ---------------------------------------------------------
Total pension expense $ 995 $ 325 $ 1,756 $ 2,421
================================================================ =========================================================
</TABLE>
58
<PAGE>
Certain assumptions used in determining the pension expense related to the
international plans were as follows:
<TABLE>
<CAPTION>
Company Predecessor
- ----------------------------------------------------------- ---------------------------------------------------------------------
Nine months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- ----------------------------------------------------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rates 6.5 - 8.0% 6.5 - 8.0% 6.5 - 9.0% 5.0 - 8.0%
Rates of increase in future
compensation levels 2.5 - 6.5% 2.5 - 6.5% 2.5 - 7.5% 3.0 - 7.0%
Expected long-term rates
of return on assets 6.5 - 9.5% 6.5 - 9.5% 6.5 - 9.5% 5.0 - 9.0%
=========================================================== =====================================================================
</TABLE>
Approximately 330 employees participate in a multi-employer pension plan that
provides defined benefits to employees under certain union-employer organization
agreements. Pension expense for this plan was $2.5 million, $0.9 million, $2.5
million and $2.1 million in the nine-month period ended December 31, 1996, the
three-month period ended March 27, 1996 and in fiscal years 1995 and 1994,
respectively.
(B) FUNDED STATUS
The following table sets forth the funded status of the international pension
plans as of December 31:
(in thousands of dollars) Company Predecessor
- -------------------------------------------------------- ----------------------
1996 1995
- -------------------------------------------------------- ----------------------
Accumulated Accumulated
Benefits Benefits
Exceed Exceed
Assets Assets
- -------------------------------------------------------- ----------------------
Actuarial present value of:
Vested benefit obligation $ 43,873 $ 32,041
- -------------------------------------------------------- ----------------------
Accumulated benefit obligation $ 45,245 $ 33,614
- -------------------------------------------------------- ----------------------
Projected benefit obligation $ 75,132 $ 62,448
- -------------------------------------------------------- ----------------------
Plan assets at fair value 72,305 61,184
- -------------------------------------------------------- ----------------------
Plan assets less than
projected benefit obligation (2,827) (1,264)
Unrecognized net loss 4,012 1,662
Unrecognized prior service cost - -
Unrecognized net transition asset - (13)
- -------------------------------------------------------- ----------------------
Net pension asset $ 1,185 $ 385
================================================================================
Projected benefit obligations were determined using discount rates ranging from
6.5 percent to 8.0 percent in 1996 and 6.5 percent to 9.0 percent in 1995. The
rate of increase in future compensation levels ranged from 2.5 percent to 6.5
percent in 1996 and 2.5 percent to 7.5 percent in 1995. The vested benefit
obligation reflects the benefits the employees would be entitled to receive if
the employees were to terminate their employment immediately.
On December 29, 1994, Predecessor sold approximately 50 percent of its
investment in Igaras (see Note 27). Prior to that date, Predecessor owned 100
percent of Igaras. Accordingly, the pension expense related to Igaras's pension
plan was included in the international plans' pension expense for 1994 through
the date of the sale. Subsequent to December 29, 1994, neither the Company nor
Predecessor consolidates Igaras, but instead reports the investment in Igaras
under the equity method of accounting.
As of December 31, 1996 and 1995, accrued retirement contributions for the
international pension plans included in Compensation and employee benefits on
the Consolidated Balance Sheets were $1.2 and $0.9 million, respectively.
59
<PAGE>
VOLUNTARY SAVINGS AND DEFINED CONTRIBUTION PLANS
The Company provides voluntary savings plans for eligible U.S. employees.
Employees may make contributions of up to 16 percent of their compensation (6
percent pretax and 10 percent after tax). The Company matches 3 percent and may
match up to a total of 6 percent of the eligible compensation, depending on the
Company's performance.
The Company's wholly owned Australian subsidiary has defined contribution plans
for eligible salaried and hourly employees. Both groups of employees may
contribute up to 100 percent of their compensation. Through June 30, 1995, the
Predecessor was required by law to contribute 5 percent of all eligible
employees' compensation. Subsequent to June 30, 1995 and during 1996, the
Company and Predecessor were required by law to contribute 6 percent of all
eligible employees' compensation. Furthermore, Predecessor matched up to an
additional 1 percent of all employees' contributions for the first six months of
1995. Subsequent to June 30, 1995, neither the Company nor Predecessor made any
further matching contributions beyond the required 6 percent.
Contributions to these plans were $2.9 million in the nine-month period ended
December 31, 1996, $1.0 million in the three-month period ended March 27, 1996,
$3.5 million in fiscal year 1995 and $3.1 million in fiscal year 1994.
Accrued savings plan contributions included in Compensation and employee
benefits on the Consolidated Balance Sheets were nil and $0.5 million at
December 31, 1996 and 1995, respectively.
NOTE 17 - OTHER POSTRETIREMENT BENEFITS
The Company sponsors defined benefit postretirement health care plans that
provide medical and life insurance coverage to eligible salaried and hourly
retired U.S. employees and their dependents. The base level of medical coverage
is provided to the retiree at no cost. No postretirement medical benefits are
offered to salaried employees who began employment after December 31, 1993.
During 1994, the postemployment benefit plan was modified to vary cost-sharing
provisions based on age and years of service of the retiree. The amount of
unrecognized gain as of December 31, 1995 resulting from the 1994 plan
amendments totaled approximately $8.2 million.
60
<PAGE>
The other postretirement benefits expense consisted of the following:
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- ----------------------------------------------------------------------- ----------------------------------------------------
Nine months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C>
Service costs - benefits earned during the year $ 398 $ 141 $ 411 $ 890
Interest cost on accumulated postretirement benefits 1,511 491 2,248 2,526
Net amortization (gain) loss - (158) (633) 5
- ----------------------------------------------------------------------- ----------------------------------------------------
Total other postretirement benefit expense $1,909 $ 474 $ 2,026 $3,421
======================================================================= ====================================================
Discount rate used in calculation 7.5% 7.0% 9.0% 7.0%
======================================================================= ====================================================
</TABLE>
The unfunded accrued postretirement benefit obligation cost reconciled with the
amounts shown in the Consolidated Balance Sheets at December 31 was as follows:
(In thousands of dollars) Company Predecessor
- ------------------------------------------------ ----------------
1996 1995
- ------------------------------------------------ ----------------
Actuarial present value of the
accumulated postretirement
benefit obligation:
Retirees $ 17,060 $ 19,543
Fully eligible active
plan participants 2,530 3,097
Other active plan
participants 7,169 8,854
- ------------------------------------------------ ----------------
Accumulated postretirement
benefit obligation 26,759 31,494
Unrecognized prior
service cost - 8,233
Unrecognized net gain (loss) - (2,874)
- ------------------------------------------------ ----------------
Unfunded accrued postretirement
benefit obligation cost $ 26,759 $ 36,853
================================================ ================
The current portion of the postretirement benefit obligations were approximately
$2.2 million and $2.1 million as of December 31, 1996 and 1995, respectively.
The actuarial present values of accumulated postretirement benefit obligations
were determined using a discount rate of 7.5 percent and 7.0 percent in 1996 and
1995, respectively. For measurement purposes, a 7.0 percent annual rate of
increase in the per capita cost of covered medical benefits was assumed for 1996
for all current retirees. This rate was assumed to decrease gradually to 5.5
percent by the year 2002 and to remain at that level thereafter. For future
retirees, a 6.0 percent annual rate of increase in the per capita cost of
covered medical benefits was assumed for 1996. This rate was assumed to decrease
gradually to 5.5 percent by the year 2000 and to remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the actuarial
present value of accumulated postretirement benefit obligation as of December
31, 1996 by $1.1 million and the aggregate of the service and interest cost
components of the periodic cost for the nine months then ended by $0.1 million.
On October 18, 1996, the Company sold substantially all of the assets of the
U.S. Timberlands/Wood Products business segment (see Note 25). Accordingly, the
other postretirement benefit expense related to the U.S. Timberlands/Wood
Products employees was included through the date of sale and the unfunded
accrued postretirement benefit obligation cost at December 31, 1996 excluded
amounts relating to the U.S. Timberlands/Wood Products business segment. In
connection with this sale, postretirement benefits were curtailed. Accordingly,
the unfunded accrued postretirement benefit was reduced by approximately $1.6
million and was recorded as an adjustment to the market value of assets acquired
in the Merger.
61
<PAGE>
NOTE 18 - OTHER COSTS
Other Costs include expenses associated with stock based compensation plans and
other expenses related to Predecessor's review of strategic alternatives
beginning in April 1995 through the date of the Merger (see Note 1). For the
three-month period ended March 27, 1996 and for fiscal years 1995 and 1994,
Predecessor recognized charges of $2.3 million, $17.8 million and $1.3 million,
respectively, related to the stock based compensation plans. For business
segment reporting purposes, these expenses are allocated either to the
respective business segments or Corporate segment based upon the responsibility
of the individuals holding or exercising the stock incentive benefits.
Predecessor incurred $8.0 million and $3.7 million of other expenses in the
three-month period ended March 27, 1996 and in fiscal year 1995, respectively,
related to its review of strategic alternatives and included such expenses in
Corporate and Eliminations for business segment reporting purposes.
Additionally, in the three-month period ended March 27, 1996, the Predecessor
accrued approximately $0.8 million of environmental expenses and included such
expenses in Corporate and Eliminations for business segment reporting purposes.
NOTE 19 - FOREIGN CURRENCY MOVEMENT EFFECT
Net international currency transaction and translation gains (losses) included
in determining Income from Operations for the nine-month period ended December
31, 1996, three-month period ended March 27, 1996 and fiscal years 1995 and 1994
were $1.4 million, $(0.5) million, $(0.3) million and $(6.6) million,
respectively, of which $(7.6) million related to Brazil for fiscal year 1994.
NOTE 20 - SALE OF OIL AND GAS MINERAL RIGHTS
In October 1994, Predecessor sold certain oil and gas mineral rights on its U.S.
timberlands. This sale resulted in a pretax gain of $8.9 million which was
included in Other (Expense) Income, net, in the U.S. Timberlands/Wood Products
business segment.
62
<PAGE>
NOTE 21 - INCOME TAXES
Income taxes payable at December 31 consisted of the following:
(In thousands of dollars) Company Predecessor
- --------------------------------------------- --------------
1996 1995
- --------------------------------------------- --------------
U.S. federal and inter-
national income taxes $ 2,290 $ 1,453
Deferred income taxes - 385
State and local taxes 39,741 2,850
- --------------------------------------------- --------------
$ 42,031 $ 4,688
============================================= ==============
Included in state and local taxes at December 31, 1996, were $36.3 million of
taxes related to the Merger. Refundable amounts related to federal income taxes
were nil and $4.8 million as of December 31, 1996 and 1995, respectively, and
were included in Prepaid expenses. Refundable amounts related to state income
taxes were $0.6 million and $3.6 million as of December 31, 1996 and 1995,
respectively, and were included in Prepaid expenses.
63
<PAGE>
The approximate tax effects of temporary differences giving rise to net deferred
tax assets at December 31 were as follows:
(in thousands of dollars) Company Predecessor
- ------------------------------------------------- -----------------
1996 1995
- ------------------------------------------------- -----------------
U.S. Deferred Tax Assets:
Federal net operating
loss carryforward $ 57,232 $ -
Goodwill 16,592 -
Other postretirement
benefits 11,165 -
State and local net operat-
ing loss carryforward 10,100 -
Deferred revenues 5,095 -
Other compensation
and benefits 4,526 6,192
Inventories - 4,878
Vacation and holiday
wages and salaries 3,319 3,975
Environmental Reserve 2,763 -
Doubtful accounts 2,213 52
State and local benefit 985 -
Other 7,444 2,342
- ------------------------------------------------- -----------------
121,434 17,439
- ------------------------------------------------- -----------------
International Deferred Tax
Assets:
Revaluation of assets 10,682
Net operating loss carry-
forwards 3,930 6,112
Inventories - 5,606
Compensation and benefits 1,494 1,317
Other 659 3,935
- ------------------------------------------------- -----------------
16,765 16,970
- ------------------------------------------------- -----------------
Total Deferred Tax
Assets 138,199 34,409
- ------------------------------------------------- -----------------
U.S. Deferred Tax Liabilities:
Property, plant and equipment 54,188 -
Inventories 6,678 6,315
Deferred state and local 2,815 -
Other 1,937 7
- ------------------------------------------------- -----------------
65,618 6,322
- ------------------------------------------------- -----------------
International Deferred
Tax Liabilities 1,686 -
- ------------------------------------------------- -----------------
Total Deferred Tax
Liabilities 67,304 6,322
- ------------------------------------------------- -----------------
Net Deferred Tax Assets
before Valuation
Allowance 70,895 28,087
Less Valuation Allowance (66,466) (1,000)
- ------------------------------------------------- -----------------
NET DEFERRED TAX ASSETS $ 4,429 $ 27,087
================================================= =================
64
<PAGE>
The current and long-term portions of the net deferred tax assets were $2.9
million and $1.5 million, respectively, in 1996 and $18.8 million and $8.3
million, respectively, in 1995.
The approximate tax effects of temporary differences giving rise to the net
deferred tax liabilities at December 31 were as follows:
(In thousands of dollars) Company Predecessor
- ---------------------------------------------------- -----------------
1996 1995
- ---------------------------------------------------- -----------------
U.S. Deferred Tax Assets:
Other postretirement benefits $ - $ 12,132
State and local benefit - 15,817
Federal net operating loss
carryforward - 29,162
Credit for prior year
minimum tax carry-
forward - 24,218
State and local net oper-
ating loss carryforward - 9,680
Other - 4,354
- ---------------------------------------------------- -----------------
- 95,363
- ---------------------------------------------------- -----------------
International Deferred Tax
Assets:
Revaluation of assets 23,912 -
Net operating loss
carryforwards 9,785 1,772
Capital lease obligation 1,103 1,233
Other 1,104 358
- ---------------------------------------------------- -----------------
35,904 3,363
- ---------------------------------------------------- -----------------
Total Deferred Tax Assets 35,904 98,726
- ---------------------------------------------------- -----------------
U.S. Deferred Tax Liabilities:
Property, plant and equipment - 157,092
Deferred state and local taxes - 45,191
Timber and timberlands - 66,841
Leasing arrangements - 12,500
Pensions - 11,836
Deferred start-up costs - 4,326
Other - 5,996
- ---------------------------------------------------- -----------------
- 303,782
- ---------------------------------------------------- -----------------
International Deferred Tax
Liabilities:
Property, plant and equipment 25,530 25,657
Other 4,543 992
- ---------------------------------------------------- -----------------
30,073 26,649
- ---------------------------------------------------- -----------------
Total Deferred Tax Liabilities 30,073 330,431
- ---------------------------------------------------- -----------------
Net Deferred Tax (Assets)
Liabilities before
Valuation Allowance (5,831) 231,705
Add Valuation Allowance 25,553 875
- ---------------------------------------------------- -----------------
NET DEFERRED
TAX LIABILITIES $ 19,722 $ 232,580
==================================================== =================
The current and long-term portions of the net deferred tax liabilities were nil
and $19.7 million, respectively, in 1996 and $0.4 million and $232.2 million,
respectively, in 1995.
The Company has assessed its earnings history and trends, sales backlog,
budgeted pretax earnings, deferred tax liabilities against which deferred tax
assets could be offset, and expiration dates of carryforwards and has determined
that, as of December 31, 1996, it is more likely than not that $4.4 million of
deferred tax assets will be realized. The valuation allowance of $92.0 million
at December 31, 1996 is maintained on net deferred tax assets for which the
Company has not determined that realization is more likely than not. The amounts
of deferred tax assets and liabilities are subject to change pending the filing
of the federal income tax return for the period ended on the Merger date. The
Company will continue to assess the valuation allowance and make adjustments as
appropriate.
65
<PAGE>
The U.S. federal net operating loss carryforward amount totals $168.3 million
which expires in 2012. International net operating loss carryforward amounts
total $35.9 of which $9.1 million expire through 2002 and $26.8 million have no
expiration date.
The U.S. and international components of (Loss) Income from Continuing
Operations before Income Taxes and Equity in Net Earnings of Affiliates
consisted of the following:
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- ----------------------------------------------------- --------------------------------------------------------------------
Nine months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- ----------------------------------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. $ (142,884) $ (6,223) $ 36,543 $ 45,220
International (840) (4,190) (7,141) 19,217
- ----------------------------------------------------- --------------------------------------------------------------------
$ (143,724) $ (10,413) $ 29,402 $ 64,437
===================================================== ====================================================================
</TABLE>
The provision for income tax expense (benefit) on (Loss) Income from Continuing
Operations before Income Taxes and Equity in Net Earnings of Affiliates
consisted of the following:
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- ----------------------------------------------------- --------------------------------------------------------------------
Nine months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- ----------------------------------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current
U.S. federal $ - $ - $ 5,180 $ 11,957
U.S. state and local 2,700 1,084 2,942 2,130
International 430 (1,241) 3,628 5,929
- ----------------------------------------------------- --------------------------------------------------------------------
Total Current 3,130 (157) 11,750 20,016
- ----------------------------------------------------- --------------------------------------------------------------------
Deferred
U.S. - (3,519) 13,477 30,068
International 1,050 240 (6,430) 4,104
- ----------------------------------------------------- --------------------------------------------------------------------
Total Deferred 1,050 (3,279) 7,047 34,172
- ----------------------------------------------------- --------------------------------------------------------------------
Income Tax Expense (Benefit) $ 4,180 $ (3,436) $ 18,797 $ 54,188
===================================================== ====================================================================
</TABLE>
66
<PAGE>
The reported amount of income tax expense (benefit) on (Loss) Income from
Continuing Operations before Income Taxes and Equity in Net Earnings of
Affiliates differed from the amount of income tax (benefit) expense that would
result from applying the U.S. federal statutory income tax rate to (Loss) Income
from Continuing Operations before Income Taxes and Equity in Net Earnings of
Affiliates for the following reasons:
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- --------------------------------------------------------------------- -------------------------------------------------------------
Nine months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- --------------------------------------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. federal statutory (benefit) expense $ (50,303) $ (3,649) $ 10,291 $ 22,553
Increase (decrease) resulting from:
Sale of Igaras - - - 27,522
Igaras dividend - 560 7,225 2,717
International income taxes at higher (lower) rates 1,774 860 (1,264) (2,213)
Goodwill amortization not included for tax purposes - 130 2,107 1,023
U.S. state and local taxes (4,446) (340) 3,875 3,836
Change in valuation allowance 55,813 (997) (2,452) 665
Tax rate changes - - - (770)
Other, net 1,342 - (985) (1,145)
- --------------------------------------------------------------------- -------------------------------------------------------------
Income Tax Expense (Benefit) $ 4,180 $ (3,436) $ 18,797 $ 54,188
===================================================================== =============================================================
</TABLE>
During 1995, Predecessor received $16.1 million of gross dividends from Igaras,
of which amount $12.1 million was a special, one-time dividend. Accordingly, the
Company recognized the related income taxes and withholding taxes on these
dividends during 1995.
On December 29, 1994, Predecessor sold approximately 50 percent of its
investment in Igaras for $100 million in cash after first spinning off a
wholly owned subsidiary to operate the packaging machinery operations in Brazil.
Prior to that date, the Company owned 100 percent of Igaras. As a result of this
sale, Predecessor recorded a pretax loss of $0.6 million and an income tax
expense of approximately $27.5 million. The gain on this sale was significantly
higher for income tax purposes than for financial reporting purposes resulting
in the additional income tax expense in 1994. In accordance with SFAS No. 109,
these additional income taxes were not recognized until the sale was apparent.
Undistributed earnings intended to be reinvested indefinitely by the
international subsidiaries and equity affiliates totaled approximately $18.2
million at December 31, 1996. No U.S. deferred income tax has been recorded on
these undistributed earnings.
NOTE 22 - EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
In October, 1996, the Company applied the proceeds from the sale of the U.S.
Timberlands/Wood Products business segment (see Note 25) to loans outstanding
under the Term Loan Facility and to outstanding borrowings under the Revolving
Credit Facility (see Note 10). This early retirement of debt resulted in a
non-cash extraordinary charge of $10.3 million, net of income taxes of $0,
relating to the write-off of deferred debt issuance costs.
On June 30, 1994, the Predecessor used the proceeds of new borrowings to prepay
approximately $179 million principal of notes payable to insurance companies and
banks and to pay related accrued interest and expenses of refinancing. This
early retirement of debt resulted in an extraordinary charge to 1994 net
earnings of $7.9 million, net of income taxes of $5.0 million.
NOTE 23 - CHANGE IN ACCOUNTING
In the fourth quarter of 1996, the Company adopted the LIFO method of
determining the cost of principally all its inventories effective March 28,
1996. Prior to the fourth quarter of 1996, the Company determined the cost of
principally all its inventory using the FIFO method. The Company believes that
the LIFO method results in a better matching of current costs with current
revenues. Additionally, the LIFO method is widely used in the paper products
industry. This change in accounting principle was applied retroactively.
Accordingly, the second and third quarters of 1996 have been restated to reflect
the adoption of the LIFO method effective March 28, 1996 (see "Selected
Quarterly Financial Data").
67
<PAGE>
Effective January 1, 1996, the Predecessor adopted SFAS No. 121. SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangible assets, and goodwill related to those assets to
be held and used and for long-lived assets and certain identifiable intangible
assets to be disposed of. The adoption of SFAS No. 121 by the Predecessor did
not have a significant impact on its operations.
NOTE 24 - SUPPLEMENTAL CASH FLOW INFORMATION
The following is a summary of net cash paid in connection with the Merger (see
Note 1):
Details of the Merger: (In thousands of dollars)
- --------------------------------------------------------------------------------
Fair value of assets acquired $ 3,091,507
Liabilities assumed (1,606,100)
- --------------------------------------------------------------------------------
Cash paid 1,485,407
Less, cash acquired (26,035)
- --------------------------------------------------------------------------------
Net cash paid for acquisition $ 1,459,372
================================================================================
Cash paid for interest and cash paid (received), net of refunds, for income
taxes was as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- ---------------------------------------------------------------- ------------------------------------------------------------------
Nine months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest $ 151,371 $ 15,118 $ 109,739 $ 108,745
================================================================ ==================================================================
Income taxes $ 23,335 $ (810) $ 23,203 $ 16,829
================================================================ ==================================================================
</TABLE>
At the date of the Merger, the Company purchased packaging machinery and a
converting press, totaling approximately $47 million, that were previously
financed under operating lease arrangements.
NOTE 25 - DISCONTINUED OPERATIONS
On October 18, 1996, the Company sold substantially all of the assets of the
U.S. Timberlands/Wood Products business segment for cash of approximately $550
million. In addition, the buyer assumed certain specified preclosing
liabilities. Under the terms of the agreement for such sale, the Company and the
buyer entered into a twenty-year supply agreement with a ten-year renewal option
for the purchase by the Company, at market-based prices, of a majority of the
Company's requirements for pine pulpwood and residual chips at the West Monroe
Mill, as well as a portion of the Company's needs for hardwood pulpwood at the
West Monroe Mill. The Company did not recognize any 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 period beginning March
28, 1996 through October 18, 1996 (the date of sale) in the Consolidated
Statements of Operations. Discontinued operations have not been segregated in
the Consolidated Statements of Cash Flows nor have they been reclassified as
discontinued operations in the Predecessor's Consolidated Statements of
Operations and Consolidated Balance Sheets.
Net sales of the discontinued U.S. Timberlands/Wood Products business segment
for the period beginning March 28, 1996 through October 18, 1996 (the date of
sale) and income from operations for the same period was $81.1 million, and
$35.5 million, respectively.
68
<PAGE>
NOTE 26 - 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
excludes from all periods presented the results of operations of the U.S.
Timberlands/Wood Products business segment which was sold on October 18, 1996
(see Note 25) and the interest and extraordinary charge on debt retired from the
proceeds of such sale (see Note 22). 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.
(In thousands of dollars)
Year Year
ended ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
Net Sales $1,110,818 $ 1,199,270
Net Loss $ (135,514) $ (61,265)
================================================================================
NOTE 27 - BUSINESS COMBINATIONS AND DISPOSALS
In connection with and following the Merger, the Company decided in 1996 to exit
certain businesses and operating activities, including the sale or closure of
the Company's last dedicated folding carton converting plant in the United
States, located in Kankakee, Illinois, a packaging machinery manufacturing plant
in Marietta, Georgia, a beverage multiple packaging converting plant in
Bakersfield, California and the trucking transportation operations in West
Monroe, Louisiana, as well as the consolidation and realignment of certain
operations in the United States, Australia and Europe. The cost of exiting these
businesses and operating activities was approximately $40.9 million which was
accrued as a purchase accounting adjustment. These costs related principally to
the severance of approximately 750 employees, relocation and other plant closure
costs. At December 31, 1996, $32.6 million of this total was included in Other
accrued liabilities in the Consolidated Balance Sheets and is expected to be
paid out primarily in 1997 and 1998.
In January of 1995, Predecessor acquired a 70 percent interest in the Lemaire
Group, a French company which supplies beverage and folding cartons in France
and central Europe from four carton converting facilities in France. Terms of
the acquisition require the Company to purchase the Lemaire Group's remaining 30
percent interest in early 1998. The aggregate purchase price for a 100 percent
interest in the Lemaire Group was $17.6 million, of which $6.3 million was paid
in January 1995. Predecessor recorded a note payable in the amount of $11.3
million for the unpaid portion of the initial purchase price and the remaining
30 percent interest. The Company assumed this note payable in the Merger and
repaid approximately $6.0 million during the nine months ended December 31,
1996. The Predecessor accounted for this business combination using the purchase
method.
On December 29, 1994, Predecessor sold approximately 50 percent of its
investment in Igaras for $100 million in cash. As a result of this sale,
Predecessor recorded a pretax loss of $0.6 million and an income tax expense of
approximately $27.5 million (see Note 21).
69
<PAGE>
NOTE 28 - BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company reports its results in two business segments: Coated Board System
and Containerboard. On October 18, 1996, the Company sold substantially all of
the assets of the U.S. Timberlands/Wood Products business segment. The operating
results of the U.S. Timberlands/Wood Products business segment have been
classified as discontinued operations for the period beginning March 28, 1996
through the date of the sale. The results of operations of the U.S.
Timberlands/Wood Products business segment have not been reclassified as
discontinued operations in the Predecessor's Consolidated Statements of
Operations. The Coated Board System business segment includes the production and
sale of coated board for packaging cartons from its West Monroe and Macon Mills
and from its mill in Sweden; carton converting 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 included
timberlands and operations engaged in the supply of pulpwood to the West Monroe
Mill from the Company's former U.S. timberlands, as well as the manufacture and
sale of lumber and plywood. Prior to the sale of approximately 50 percent of
Igaras on December 29, 1994, the Containerboard business segment included
timberlands and associated containerboard mills and corrugated box plants owned
by Igaras.
The Company's four separate geographic areas are the United States,
Central/South America, Europe and Asia-Pacific. The United States area includes
paper mills, beverage and folding carton facilities, packaging machinery
facilities and prior to the sale of the U.S. Timberlands/Wood Products (see Note
25), 538,000 acres of owned and leased timberlands, lumber mills and a plywood
plant. The Central/South America area includes linerboard and medium mills,
corrugated box plants and 174,000 acres of owned and leased timberlands through
the date of the sale of approximately 50 percent of Igaras (see Note 27) and a
packaging machinery operation. The Europe area includes a coated recycled
paperboard mill, beverage and folding carton plants and a packaging machinery
facility. The Asia-Pacific area includes beverage and folding carton plants.
70
<PAGE>
Business segment information is as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) Company Predecessor
- --------------------------------------------------------------- ----------------------------------------------------------
Nine months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- --------------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES
Coated Board System $ 749,688 $ 234,608 $ 1,007,123 $ 793,983
Containerboard (G) 102,424 25,496 192,497 342,614
U.S. Timberlands/Wood products (H) - 37,336 159,749 164,944
Intersegment Eliminations (A) - (3,791) (17,065) (18,753)
- --------------------------------------------------------------- ----------------------------------------------------------
$ 852,112 $ 293,649 $ 1,342,304 $ 1,282,788
=============================================================== ==========================================================
INCOME (LOSS) FROM OPERATIONS
Coated Board System (B) $ 54,976 $ 24,638 $ 103,683 $ 89,704
Containerboard (B) (G) (30,969) (5,955) 17,539 23,781
U.S. Timberlands/Wood Products (B) (C) (H) - 13,868 49,583 67,645
Corporate (B) (D) (G) (22,588) (16,901) (37,668) (26,943)
- --------------------------------------------------------------- ----------------------------------------------------------
$ 1,419 $ 15,650 $ 133,137 $ 154,187
=============================================================== ==========================================================
CAPITAL EXPENDITURES
Coated Board System $ 121,997 $ 39,779 $ 147,097 $ 206,958
Containerboard (G) 6,784 1,919 16,490 30,423
U.S. Timberlands/Wood Products (H) 2,223 2,004 3,650 1,810
Corporate 1,282 372 2,848 1,031
- --------------------------------------------------------------- ----------------------------------------------------------
$ 132,286 $ 44,074 $ 170,085 $ 240,222
=============================================================== ==========================================================
DEPRECIATION, AMORTIZATION AND COST
OF TIMBER HARVESTED
Coated Board System $ 75,748 $ 17,800 $ 63,800 $ 46,778
Containerboard (G) 17,005 4,332 19,553 33,073
U.S. Timberlands/Wood Products (H) 7,086 1,735 7,118 13,062
Corporate 1,007 571 2,175 2,091
- --------------------------------------------------------------- ----------------------------------------------------------
$ 100,846 $ 24,438 $ 92,646 $ 95,004
=============================================================== ==========================================================
<CAPTION>
Company Predecessor
- --------------------------------------------------------------- ----------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS AT DECEMBER 31
Coated Board System $ 1,952,069 $ 1,262,164 $ 1,102,161
Containerboard (G) 482,902 378,910 385,757
U.S. Timberlands/Wood Products (H) - 279,763 287,690
Corporate (E) (G) 245,174 280,491 326,684
- --------------------------------------------------------------- ----------------------------------------------------------
$ 2,680,145 $ 2,201,328 $ 2,102,292
=============================================================== ==========================================================
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Geographic area information is as follows:
(In thousands of dollars) Company Predecessor
- -------------------------------------------------------------- -------------------------------------------------------------------
Nine months Three months
ended ended Year ended Year ended
December 31, 1996 March 27, 1996 December 31, 1995 December 31, 1994
- -------------------------------------------------------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES
United States $ 604,990 $ 223,257 $ 1,037,419 $ 898,213
Central/South America (G) 880 30 137 161,044
Europe 195,335 58,821 263,108 177,739
Asia-Pacific 107,270 30,693 108,629 85,863
Eliminations (F) (56,363) (19,152) (66,989) (40,071)
- -------------------------------------------------------------- -------------------------------------------------------------------
$ 852,112 $ 293,649 $ 1,342,304 $ 1,282,788
============================================================== ===================================================================
INCOME (LOSS) FROM OPERATIONS
United States (B) $ (3,606) $ 19,204 $ 154,478 $ 126,933
Central/South America (B) (G) (1,795) (451) (2,485) 32,138
Europe (B) 4,950 (1,930) 58 6,981
Asia-Pacific (B) 824 (112) (1,695) 4,213
Eliminations (F) 1,046 (1,061) (17,219) (16,078)
- -------------------------------------------------------------- -------------------------------------------------------------------
$ 1,419 $ 15,650 $ 133,137 $ 154,187
============================================================== ===================================================================
<CAPTION>
Company Predecessor
- -------------------------------------------------------------- -------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------- -------------------------------------------------------------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS AT DECEMBER 31
United States $ 1,885,303 $ 1,464,546 $ 1,439,767
Central/South America (G) 17,971 12,710 5,632
Europe 356,317 298,711 202,677
Asia-Pacific 184,105 159,411 135,386
Corporate (E) (G) 245,174 280,491 326,684
Eliminations (8,725) (14,541) (7,854)
- -------------------------------------------------------------- -------------------------------------------------------------------
$ 2,680,145 $ 2,201,328 $ 2,102,292
============================================================== ===================================================================
</TABLE>
Notes:
(A) Represents the elimination of intersegment sales from the U.S.
Timberlands/Wood Products business segment of pulpwood and chips used in
the Coated Board System and the Containerboard business segments.
(B) Stock based compensation expense has been allocated to each of the
business segments based upon the responsibility of the individuals holding
or exercising the stock incentive benefits. During the 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. During 1995, $7.4
million, $0.9 million, $0.8 million and $8.7 million were recorded in the
Coated Board System, Containerboard, U.S. Timberlands/Wood Products and
Corporate and Eliminations business segments, respectively, as compared to
$0.6 million, $0.2 million, $0.1 million and $0.4 million, respectively in
1994. Expenses associated with the Company's review of strategic
alternatives and environmental reserves are included in Corporate for
business segment reporting purposes and have been allocated for geographic
area information.
(C) U.S. Timberlands/Wood Products business segment included a pretax gain of
$8.9 million on the sale of certain oil and gas mineral rights on its U.S.
timberlands in 1994.
(D) Primarily consists of unallocated general corporate expenses.
(E) Corporate assets are principally U.S. cash and equivalents, marketable
securities, prepaid pension costs and other prepayments, deferred loan
costs, deferred tax assets and a portion of property, plant and equipment.
Corporate assets as of December 31, 1996, 1995 and 1994 also included the
equity investment in Igaras.
(F) Represents primarily the elimination of intergeographic sales and profits
from transactions between the Company's U.S., Europe, Asia-Pacific and
Central/South America operations.
72
<PAGE>
(G) On December 29, 1994, Predecessor sold approximately 50 percent of its
investment in Igaras after first spinning off a wholly owned subsidiary to
operate the packaging machinery operations in Brazil (see Note 27). Prior
to that date, Predecessor owned 100 percent of Igaras. As a result of this
sale, Predecessor recorded a pretax loss of $0.6 million which was
included in the Corporate section of Income from Operations. The results
of operations of Igaras were included in the Containerboard business
segment through the date of sale. Subsequent to December 29, 1994, neither
the Company nor Predecessor consolidates Igaras, but instead reports the
investment in Igaras using the equity method of accounting and includes it
in Corporate assets.
(H) On October 18, 1996, the Company sold substantially all of the assets of
the U.S. Timberlands/Wood Products business segment for cash of
approximately $550 million. The Company did not recognize any 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
period beginning March 28, 1996 through October 18, 1996 (see Note 25).
NOTE 29 - RELATED PARTY TRANSACTIONS
The Company receives certain management services provided by Clayton, Dubilier
and Rice, Inc. ("CD&R"), an affiliate of an equity investor in the Company.
Charges for such services, including reimbursement of expenses, totaled
approximately $0.6 million for the nine-month period ended December 31, 1996 and
were included in operating expenses in the Consolidated Statements of
Operations. Additionally, the Company paid fees totaling approximately $15.1
million to CD&R and an affiliate of another equity investor in connection with
the Merger and related financing.
Predecessor received a portion of its corporate and other related services from
Manville. These services, which terminated in connection with the Merger, and
amounts are summarized as follows:
TREASURY MANAGEMENT AGREEMENT
Effective May 1992, Predecessor entered into a Treasury Management Agreement
with Manville that provided for Predecessor's excess cash balances to be
invested separately from Manville. Pursuant to the Treasury Management
Agreement, Manville provided Predecessor with certain treasury management
services on a fee basis.
INTERCOMPANY AGREEMENT
Predecessor had a formalized Intercompany Agreement with Manville that provided,
among other things, that Manville make available to Predecessor certain
management services for a fee. The Intercompany Agreement provided for certain
legal services, U.S. income tax compliance, internal audit and health, safety
and environmental services. Fees charged to Predecessor took into consideration
sales, personnel, estimates of time spent to provide such services or other
appropriate bases that management believed to be representative of the services
received.
Selling, General and Administrative expenses included $0.8 million, $4.7 million
and $5.1 million for the three-month period ended March 27, 1996 and the years
ended December 31, 1995 and 1994 respectively, reflecting a reimbursement of the
costs estimated to have been incurred by Manville on behalf of Predecessor for
Corporate, General and Administrative services to Predecessor. In addition,
Predecessor participated in Manville's various property, general liability and
other insurance programs. Additionally, prior to 1994, Predecessor participated
in Manville's medical insurance program. Under these programs, insurance expense
was charged to Predecessor based on its claims experience, property values or
other appropriate bases. Insurance expense charged Predecessor from Manville was
$0.6 million, $6.3 million and $6.8 million for the three-month period ended
March 27, 1996 and the years ended December 31, 1995 and 1994, respectively.
These charges were made on a basis management believed reasonable. A payable to
Manville of approximately $5.5 million was included in Other accrued liabilities
on the Consolidated Balance Sheets as of December 31, 1995.
TAX SHARING AGREEMENT
Predecessor had entered into a Tax Sharing Agreement with Manville to provide
for: (i) the payment of taxes for periods during which Manville and Predecessor
are included in the same consolidated group for U.S. federal, state or local
income tax purposes, (ii) the cooperation of the parties in realizing certain
tax benefits and (iii) the conduct of tax audits and various related matters.
Refundable amounts from Manville related to federal income taxes of $4.8 million
as of December 31, 1995 were included in Prepaid expenses.
73
<PAGE>
RIVERWOOD INTERNATIONAL CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Results of operations for the four quarters of 1996 and 1995 are shown below (in
thousands of dollars):
<TABLE>
<CAPTION>
Income (Loss) Income
(Loss) before
Gross from Extraordinary Net (Loss)
Quarter Net Sales Profit Operations Item Income (A)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Company:
1996
Second (B) $ 293,884 $ 41,489 $ 6,112 $ (21,254) $ (21,254)
Third (B) 291,645 41,081 3,044 (25,754) (25,754)
Fourth 266,583 35,228 (7,737) (47,808) (58,128)
- --------------------------------------------------------------------------------------------------------
Total $ 852,112 $ 117,798 $ 1,419 $ (94,816) $(105,136)
========================================================================================================
========================================================================================================
========================================================================================================
Predecessor:
1996
First $ 293,649 $ 60,948 $ 15,650 $ (2,050) $ (2,050)
========================================================================================================
1995
First $ 313,176 $ 69,393 $ 30,902 $ 10,860 $ 10,860
Second 366,265 85,577 36,650 17,107 17,107
Third 342,219 76,195 38,316 16,631 16,631
Fourth 320,644 61,058 27,269 940 940
- --------------------------------------------------------------------------------------------------------
Total $ 1,342,304 $ 292,223 $ 133,137 $ 45,538 $ 45,538
========================================================================================================
</TABLE>
NOTES:
(A) On October 18, 1996, the Company sold substantially all of the assets of
the U.S. Timberlands/Wood Products business segment for cash of
approximately $550 million. In addition, the buyer assumed certain
specified preclosing liabilities. Under the terms of the agreement for such
sale, the Company and the buyer entered into a twenty-year supply agreement
with a ten-year renewal option for the purchase by the Company, at
market-based prices, of a majority of the Company's requirements for pine
pulpwood and residual chips at its West Monroe Mill, as well as a portion
of the Company's needs for hardwood pulpwood at the West Monroe Mill. The
Company did not recognize any gain or loss on the sale. The Company applied
the proceeds from this sale to outstanding loans under the Term Loan
Facility and to outstanding borrowings under the Revolving Credit
Agreement. This early retirement of debt resulted in a non-cash
extraordinary charge to fourth quarter 1996 Net Loss of $10.3 million, net
of income taxes of zero, relating to the write-off of deferred debt
issuance costs.
(B) In the fourth quarter of 1996, the Company adopted the LIFO method of
determining the cost of principally all its inventories effective March
28, 1996. Prior to the fourth quarter of 1996, the Company determined the
cost of principally all its inventory using the FIFO method. Accordingly,
the second and third quarters of 1996 have been restated to reflect the
adoption of the LIFO method effective March 28, 1996 as follows:
74
<PAGE>
<TABLE>
<CAPTION>
(Loss) Income from (Loss) before
Net Sales Gross Profit Operations Extraordinary Item Net (Loss)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Second quarter
1996 as originally
reported $293,884 $15,086 $ (20,291) $(51,260) $(51,260)
Second quarter
1996 LIFO
adjustment - 26,403 26,403 30,006 30,006
- -------------------------------------------------------------------------------------------------------------------------
Second quarter
1996 as restated $293,884 $41,489 $ 6,112 $(21,254) $(21,254)
=========================================================================================================================
Third quarter
1996 as originally
reported $291,645 $41,497 $ 3,460 $(26,167) $(26,167)
Third quarter
1996 LIFO
adjustment - (416) (416) 413 413
- -------------------------------------------------------------------------------------------------------------------------
Third quarter
1996 as restated $291,645 $41,081 $ 3,044 $(25,754) $(25,754)
=========================================================================================================================
</TABLE>
75
<PAGE>
Management's Report
The accompanying consolidated financial statements have been prepared by
Management in conformity with generally accepted accounting principles
appropriate under the circumstances. The representations in the financial
statements and the fairness and integrity of such statements are the
responsibility of Management. All of the other financial information in the
Annual Report on Form 10-K is consistent with the financial statements.
The financial statements necessarily include some amounts that are based on
Management's best estimates and judgments. Management believes that the
financial statements reflect, in all material respects, the substance of
transactions that should be included and appropriately account for or disclose
all material uncertainties.
The consolidated financial statements prepared by Management have been audited
in accordance with generally accepted auditing standards by Deloitte & Touche
LLP (for the nine months ended December 31, 1996 and three months ended March
27, 1996) and Coopers & Lybrand L.L.P. (1995 and 1994), Independent Accountants,
whose reports are also presented.
Riverwood Holding, Inc. maintains internal accounting control systems to provide
reliable financial information for preparation of financial statements, to
safeguard assets against loss or unauthorized use and to ensure proper
authorization and accounting for all transactions. Management is responsible for
maintenance of these systems, which is accomplished through communication of
established written codes of conduct, systems, policies and procedures; employee
training; and appropriate delegation of authority and segregation of
responsibilities.
In establishing and maintaining its internal accounting control systems,
Management considers the inherent limitations of the various control procedures
and weighs their costs against the benefits derived. Management believes that
existing internal accounting control systems are achieving their objectives and
that they provide reasonable assurance concerning the accuracy of the financial
statements.
Oversight of Management's financial reporting and internal accounting control
responsibilities is exercised by the Board of Directors through the Audit
Committee, which consists solely of outside directors. The Audit Committee meets
periodically with financial management and the Independent Accountants to review
how each is carrying out its responsibilities and to discuss matters concerning
auditing, internal accounting control and financial reporting. The Independent
Accountants have free access to meet with the Audit Committee without
Management's presence.
B. Charles Ames James O. Egan
chief executive officer Senior Vice President
and Chief Financial Officer
76
<PAGE>
Report of Independent Accountants
To the Stockholders and Directors of Riverwood Holding, Inc.:
We have audited the accompanying consolidated balance sheet of Riverwood
Holding, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the three months ended March 27, 1996 (Predecessor) and the nine months ended
December 31, 1996. Our audits also included the financial statement Schedule II
for three months ended March 27, 1996 (Predecessor) and the nine months ended
December 31, 1996. These financial statements and financial statement Schedule
II are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
Schedule II based on our audits. We did not audit the financial statements of
Igaras Papeis e Embalagens S.A. (Igaras), the Company's investment in which is
accounted for by use of the equity method. The Company's equity of $121,163,000
in Igaras' net assets at December 31, 1996, and of $4,927,000 and $17,542,000 in
Igaras' net income for the three months ended March 27, 1996 and the nine months
ended December 31, 1996, are included in the accompanying financial statements.
The financial statements of Igaras for the year ended December 31, 1996 were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such company, is
based on the report of such other auditors.
We conducted our audits in accordance with generally acceptable auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Riverwood Holding, Inc. and subsidiaries at December 31,
1996, and the results of their operations and their cash flows for the three
months ended March 27, 1996 (Predecessor) and the nine months ended December 31,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 17, 1997
77
<PAGE>
Report of Independent Accountants
To the Stockholders and Directors of Riverwood Holding, Inc.:
We have audited the accompanying consolidated balance sheets of Riverwood
International Corporation as of December 31, 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the two
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Riverwood
International Corporation as of December 31, 1995, and the consolidated results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
January 22, 1996
78
<PAGE>
IGARAS PAPEIS E EMBALAGENS S.A.
CONSOLIDATED BALANCE SHEETS
-------
December 31,
-------------------
1996 1995
---- ----
(in thousands of dollars)
ASSETS
Current Assets:
Cash and Equivalents $ 23,177 $ 50,229
Receivables, Net 27,296 21,897
Inventories 31,601 33,178
Other Assets 5,469 4,681
-------- --------
Total Current Assets 87,543 109,985
Property, Plant and Equipment, Net 274,404 231,562
Deferred Tax Assets 5,331 6,779
Other Noncurrent Assets 6,647 5,028
-------- --------
Total Assets $373,925 $353,354
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
79
<PAGE>
IGARAS PAPEIS E EMBALAGENS S.A.
CONSOLIDATED BALANCE SHEETS (Continued)
-------
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
---- ----
(in thousands of dollars)
<S> <C> <C>
LIABILITIES
Current Liabilities:
Short-Term Debt $ 30,774 $ 19,372
Current Portion of Long-Term Debt 5,724 9,427
Accounts Payable 14,550 13,106
Income Taxes 4,502 34,564
Deferred Income Taxes 130 100
Other Accrued Liabilities 14,998 13,709
-------- --------
Total Current Liabilities 70,678 90,278
Long-Term Debt, less Current Portion 14,587 11,424
Pension Fund 2,032 1,922
Deferred Income Taxes 14,474 12,188
Other Noncurrent Liabilities 871 931
-------- --------
Total Liabilities 102,642 116,743
-------- --------
Contingencies and Commitments (Note 10)
Shareholders' Equity
Preferred Stock:
Class A (No par Value; 32 and 16 Shares Authorized,
Issued and Outstanding in 1996 and 1995, respectively) -- --
Class B (No par Value; no shares and 1 Share Authorized,
Issued and Outstanding in 1996 and 1995 respectively) -- --
Common Stock (No par Value;167,309,968 and 116,999,983
Shares Authorized, Issued and Outstanding in 1996 and
1995, respectively) 170,984 170,984
Retained Earnings 100,299 65,627
-------- --------
Total Shareholders' Equity 271,283 236,611
-------- --------
Total Liabilities and Shareholders' Equity $373,925 $353,354
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
80
<PAGE>
IGARAS PAPEIS E EMBALAGENS S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars)
-------
For the Years Ended
---------------------------
December 31,
---------------------------
1996 1995 1994
---- ---- ----
Net Sales $ 234,698 $ 275,551 $ 160,526
Cost of Sales 156,577 139,011 105,869
Selling, General and Administrative Expenses 19,989 19,049 15,622
Translation Losses, Net 2,115 2,457 6,628
Other (Expense) Income, Net 854 (6,502) 747
--------- --------- ---------
Income from Operations 56,871 108,532 33,154
Interest Income 8,872 16,171 889
Interest Expense 4,914 5,909 7,976
--------- --------- ---------
Income before Income Taxes 60,829 118,794 26,067
Current Income Tax Expense 12,400 45,226 4,079
Deferred Income Tax Expense 3,764 3,558 3,769
--------- --------- ---------
Net Income $ 44,665 $ 70,010 $ 18,219
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
81
<PAGE>
IGARAS PAPEIS E EMBALAGENS S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
-------
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 44,665 $ 70,010 $ 18,219
Noncash Items Included in Net Income:
Depreciation, Amortization and Cost of
Timber Harvested 16,632 14,847 15,231
Deferred Income Tax Expense 3,764 3,558 3,769
Pension Expense, Net of Funding 337 168 325
Other, Net (306) (313) (132)
(Increase) Decrease in Current Assets:
Receivables (5,399) (3,786) (9,098)
Inventories 1,577 (12,937) (1,854)
Other Assets (788) (2,975) 49
Increase (Decrease) in Current Liabilities:
Accounts Payable 1,444 2,065 2,838
Income Taxes (30,062) 34,038 526
Other Current Liabilities 1,289 3,253 4,410
Increase (Decrease) in Other Noncurrent Liabilities (60) 931 --
--------- --------- ---------
Net Cash Provided by Operating Activities: 33,093 108,859 34,283
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of Property, Plant and Equipment (60,010) (41,343) (19,997)
Proceeds from Sales of Property, Plant and Equipment 615 457 147
Increase (Decrease) in Other Noncurrent Assets (1,619) 947 57
--------- --------- ---------
Net Cash Used in Investing Activities (61,014) (39,939) (19,793)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from Long-Term Debt 9,350 6,084 11,036
Proceeds from Short-Term Debt 70,476 92,889 88,040
Payments on Debt (68,964) (88,677) (106,405)
Dividends (9,993) (32,233) (6,029)
--------- --------- ---------
Net Cash Provided by (Used in) Financing Activities 869 (21,937) (13,358)
--------- --------- ---------
Net Increase (Decrease) in Cash and Equivalents (27,052) 46,983 1,132
Cash and Equivalents at Beginning of Period 50,229 3,246 2,114
--------- --------- ---------
Cash and Equivalents at End of Period $ 23,177 $ 50,229 $ 3,246
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash Paid during the Year for:
Income Taxes $ 40,161 $ 8,583 $ 3,582
Interest $ 6,776 $ 6,982 $ 7,993
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
82
<PAGE>
IGARAS PAPEIS E EMBALAGENS S.A.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands of dollars)
-------
<TABLE>
<CAPTION>
Preferred Stock Total
------------------ Common Retained Shareholders'
Class A Class B Stock Earnings Equity
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 -- -- $ 176,351 $ 15,660 $ 192,011
Net Income -- -- -- 18,219 18,219
Dividends of $0.052 per Share on
Common Stock -- -- -- (6,029) (6,029)
Capital Increase -- -- 264 -- 264
Partial Spin-off -- -- (5,631) -- (5,631)
Conversion of Common Stock to
Preferred Stock -- -- -- -- --
--------- --------- --------- --------- ---------
Balances at December 31, 1994 -- -- 170,984 27,850 198,834
Net Income -- -- -- 70,010 70,010
Dividends of $0.275 per Share on
Common Stock -- -- -- (32,233) (32,233)
--------- --------- --------- --------- ---------
Balances at December 31, 1995 -- -- 170,984 65,627 236,611
Net Income -- -- -- 44,665 44,665
Dividends of $0.060 per Share on
Common Stock -- -- -- (9,993) (9,993)
--------- --------- --------- --------- ---------
Balances at December 31, 1996 $ 170,984 $ 100,299 $ 271,283
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
83
<PAGE>
IGARAS PAPEIS E EMBALAGENS S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
-------
Note 1 Summary of Significant Accounting Policies
(A) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Igaras Papeis e Embalagens S.A. and its wholly-owned
subsidiary, Igaras Agro-Florestal Ltda. (herein referred to as "the
Company"). All significant transactions and balances between the
consolidated operations have been eliminated.
(B) Principles of Translation
The accounting records of the Company are maintained in local
currency. The Company's financial statements, including the
adjustments made outside the local books of account, have been
translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency
Translation" ("SFAS No. 52"), as follows:
Balance Sheets
Inventories; Prepaid Expenses; Property, Plant and
Equipment
Advances for Energy Supply and Shareholders' Equity At Historical
Exchange Rates
All Other Assets and Liabilities At the Year End
Exchange Rates of:
1996 1995
R$1.0394 R$0.9725
US$1.00 US$1.00
84
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
Statements of Operations
Cost of Sales; Depreciation; Cost of Timber Harvested At Historical
and Amortization of Other Assets Exchange Rates
All Other Income and Expense Items At the Average
Exchange rate for
the Period
Allgains and losses on translation are included in income from
operations.
(C) Cash and Equivalents
Cash and equivalents include time deposits, certificates and
receipts of deposits and other marketable securities with original
maturities of three months or less.
(D) Inventories
Inventories are stated at average cost which is lower than market.
(E) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Cost includes
capitalized interest incurred during the construction phase. In
1996, 1995 and 1994, $2,504,000, $736,000 and $468,000 of interest
expense was capitalized, respectively.
Expenditures for significant improvements, or for replacement parts,
which extend the useful life of an asset for more than one year, are
capitalized, while maintenance and repair costs are charged against
operations as incurred.
Gains and losses from normal retirement or replacement of property,
plant and equipment are reflected in accumulated depreciation with
no effect on current period earnings. The amount of related
accumulated deferred losses, net of accumulated depreciation, was
$369,000 and $460,000 as of December 31, 1996
85
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
and 1995, respectively. Gains and losses arising from abnormal
disposals are included in income from operations.
(F) Depreciation and Cost of Timber Harvested
Depreciation of cost is provided over the estimated useful lives of
the related assets using the straight-line method.
The estimated useful lives used in computing depreciation were as
follows for all years presented:
Land Improvements 35 years
Buildings and Building Equipment 35 years
Machinery, Equipment and Vehicles 5 to 20 years
Furniture and Fixtures 16 years
Computer Hardware 4 to 5 years
Timber and timberlands are stated at cost. 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.
(G) Income Taxes
Deferred income taxes are recognized in accordance with SFAS No.
109, "Accounting for Income Taxes". The standard 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.
86
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
(H) Revenue Recognition
The Company recognizes revenue primarily when goods are shipped to
customers.
(I) Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
Note 2 Effects of Inflation
Brazilian corporate law and tax regulations required monetary
correction, until December 31, 1995, (price-level restatement) of
permanent assets (fixed assets, deferred charges and permanent
investments) and shareholders' equity accounts using the Ufir index
published by the Brazilian Government. The computed monetary
correction amounts were recorded in the respective Brazilian balance
sheet accounts with the net amount recorded as a gain or loss in the
Brazilian statement of operations. As of January 1, 1996, as
established by the Brazilian corporation law and tax regulations
(Law No. 9249/95), the monetary correction of the financial
statements was abolished. Consequently, there are no effects of
monetary correction in the income tax for 1996.
87
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
Note 3 Receivables
The components of receivables were as follows at December 31:
1996 1995
---- ----
(in thousands of dollars)
Trade $ 40,957 $ 38,743
Less:
Export Drafts Discounted with Recourse (13,465) (16,841)
Allowance for Bad Debts (196) (5)
-------- --------
$ 27,296 $ 21,897
======== ========
Export sales by geographic area were as follows:
For the Years Ended December 31
-------------------------------
1996 1995 1994
---- ---- ----
(in thousands of
dollars)
Europe $10,511 $28,348 $19,167
Asia-Africa 21,242 28,395 18,620
Latin America, Other than Brazil 22,979 27,454 19,103
------- ------- -------
Total Export Sales $54,732 $84,197 $56,890
======= ======= =======
The remaining net sales for each of the periods presented were to
customers which were not concentrated in any specific region, but
were concentrated primarily in the consumer products industry. No
single customer accounted for more than 10% of the Company's net
sales, and there were no significant accounts receivable from a
single customer. The Company reviews a customer's credit history
before extending credit. The Company establishes an allowance for
doubtful accounts
88
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
based upon factors surrounding the credit risk of specific
customers, historical trends and other information. Bad debt expense
(credit) was $191, $0 and $(60) for the years ended December 31,
1996, 1995 and 1994, respectively.
Note 4 Inventories
The major classes of inventories were as follows at December 31:
1996 1995
---- ----
(in thousands of dollars)
Finished Goods $ 2,580 $ 3,336
Work-in-Process 1,180 786
Raw Materials 12,177 17,013
Maintenance Materials and Other Supplies 17,349 13,638
Less: Reserve for Obsolete and Slow-Moving Inventory (1,685) (1,595)
-------- --------
$ 31,601 $ 33,178
======== ========
Note 5 Property, Plant and Equipment
The components of property, plant and equipment were as follows at
December 31:
1996 1995
---- ----
(in thousands of
dollars)
Land and Land Improvements $ 8,095 $ 7,038
Buildings and Building Equipment 38,812 32,318
Machinery, Equipment and Vehicles 259,112 225,171
Furniture and Fixtures 4,568 4,179
Computer Hardware 1,743 1,308
Construction in Progress 33,560 27,629
-------- --------
345,890 297,643
Less: Accumulated Depreciation 131,692 124,927
-------- --------
214,198 172,716
Timber and Timberlands, less Cost of Timber Harvested 60,206 58,846
-------- --------
$274,404 $231,562
======== ========
89
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
Note 6 Long-Term Debt
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
Principle Period
Due Outstanding Annual Interest Rate 1996 1995
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Credibanco Annually 1993-1997 9.7 % $ 492 $ 1,679
ING Bank Annually 1996 Libor + 2.5% (8.06% at December 31, 1996) -- 12
Frances e Brasileiro Monthly 1995-1999 5.18% 405 567
Frances e Brasileiro Monthly 1995-1999 5.54% 502 702
ING Bank Annually 1996 Libor + 2.5% (8.06% at December 31, 1995) -- 3,374
ING Bank Annually 1996 Libor + 2.5% (8.06% at December 31,1995) -- 659
Credibanco Semi-annualy 1996-1997 Libor + 1.5% (7.3% at December 31,1996) 431 --
Credibanco Semi-annualy 1996-1997 Libor + 1.5% (7.3% at December 31,1996) 368 --
Credibanco Semi-annualy 1996-1997 Libor + 1.5% (7.3% at December 31,1996) 640 --
ING Bank Annually 1996-1997 5.8% 3,374 --
ING Bank Annually 1996-1997 5.8% 658 --
Finame Monthly 1993-1996 12.0% -- 119
Finame Monthly 1993-1998 12.0% 6,186 9,171
BNDES Monthly 1994-1999 12.0% 1,457 2,156
BNDES Monthly 1997-1999 12.0% 779 574
BNDES Monthly 1997-2000 12.5% 842 877
BNDES Monthly 1997-2000 10.5% 771 430
BNDES Monthly 1998-2001 12.0% 3,229 --
Others 177 531
-------- --------
20,311 20,851
Less Current
Portion 5,724 9,427
-------- --------
$ 14,587 $ 11,424
======== ========
</TABLE>
Long-term debt maturities and expirations of funded long-term
working capital commitments at December 31, 1996 were as follows:
(in thousands
of dollars)
1997 $ 5,724
1998 10,729
1999 2,034
2000 1,143
2001 681
--------
90
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
$ 20,311
========
No restrictions, guarantees or covenants are associated with
long-term debt.
The weighted average interest rate on short-term debt approximated
8% and at December 31,1996 and 1995, respectively
Note 7 Other Accrued Liabilities
The components of other accrued liabilities were as follows at
December 31:
1996 1995
---- ----
(in thousands of dollars)
Wages and Compensation $ 7,389 $ 6,654
Value-Added and Other Taxes Payable 1,579 4,731
Amount Due to Affiliate 3,137 624
Other 2,893 1,700
-------- --------
$ 14,998 $ 13,709
======== ========
Note 8 Pension Fund
The Company maintains a noncontributory defined benefit plan to
supplement the pension benefit provided by the government pension
system. The plan covers all employees meeting minimum eligibility
requirements. Pension benefits are based primarily on years of
service and the employee's compensation near retirement. The
Company's funding policy is to contribute funds to trusts as
necessary to maintain the plan on an actuarially sound basis. Plan
assets are primarily invested in listed stocks and Brazilian
government bonds.
91
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
The components of the periodic pension expense were as follows for
the following years:
For the Years Ended
-------------------
December 31
-----------
1996 1995 1994
---- ---- ----
(in thousands of dollars)
Service Cost - Benefits Earned during the Year $ 820 $ 721 $ 503
Interest Cost on Projected Benefit Obligation 562 469 311
Actual Return on Plan Assets Gain (357) (162) (168)
Amortization of Prior Service Cost 112 112 112
------- ------- -------
Total Pension Expense $ 1,137 $ 1,140 $ 758
======= ======= =======
Certain assumptions used in determining the pension expense and net
pension liability for 1996, 1995 and 1994 were as follows:
Discount Rates 5% per year above Inflation in
Brazil
Rates of Increase in Future Compensation 3% per year above Inflation in
Levels Brazil
Expected Long-Term Rates of Return on Assets 5% per year above Inflation in
Brazil
92
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
The following table sets forth the funded status of the plan as of
December 31:
1996 1995
---- ----
(in thousands of dollars)
Actuarial Present Value of:
Vested Benefit Obligation $ 6,694 $ 5,181
======== ========
Accumulated Benefit Obligation $ 8,683 $ 7,284
======== ========
Projected Benefit Obligation $(12,527) $(10,848)
Plan Assets at Fair Value 8,662 6,806
-------- --------
Plan Assets less Projected Benefit Obligation (3,865) (4,042)
Unrecognized Net Gain 24 269
Unrecognized Prior Service Cost 1,683 1,795
-------- --------
Pension Liability - Current (126) (56)
Pension Liability - Long-Term (2,032) (1,922)
-------- --------
Net Pension Liability $ (2,158) $ (1,978)
======== ========
The unrecognized prior service cost is amortized on a straight-line
basis over the average remaining service of employees, which
approximates 23 years.
Note 9 Income Taxes
During 1996, 1995 and 1994, the statutory income tax rates including
the social contribution tax on ordinary profits were approximately
32%, 48%, and 41%, respectively. The statutory income tax rate on
agricultural profits including the social contribution tax was 32%
for these years.
On December 27, 1996, the government enacted Law No. 9430/96
changing the statutory income tax rate from 32% to 33% (including
social contribution),
93
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
effective January 1, 1997. This rate change caused an increase of
$89,000 in deferred income taxes which was recognized during 1996.
Approximate tax effects of temporary differences giving rise to the
net deferred tax assets and liabilities were as follows at December
31:
1996 1995
---- ----
(in thousands of dollars)
Deferred Tax Assets:
Provision for Loss on Electrobras Bonds $ 1,019 $ 1,043
Inflationary Losses 1,842 2,953
Pensions 712 612
Miscellaneous 1,758 2,171
------- -------
Total Deferred Tax Assets $ 5,331 $ 6,779
======= =======
Deferred Tax Liabilities:
Inflationary Profit $ 9,749 $10,937
Property, Plant and Equipment 4,670 1,054
Miscellaneous 185 297
------- -------
Total Deferred Tax Liabilities $14,604 $12,288
======= =======
The current and long-term portions of the net deferred tax liability
were $130,000 and $14,474,000, respectively, in 1996, and $100,000
and $12,188,000, respectively, in 1995.
The reported amount of income tax expense on income before income
taxes differs from the amount of income tax expense that would
result from applying the
94
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
Brazilian statutory income tax rate to income before income taxes
for the following reasons:
For the Years Ended
-------------------
December 31
-----------
1996 1995 1994
---- ---- ----
(in thousands of dollars)
Brazilian Statutory Expense $ 20,074 $ 57,235 $ 10,515
Accelerated Depreciation -- (8,069) (3,372)
Interest on Own Capital (4,089) -- --
Other, Net 179 (382) 705
-------- -------- --------
Income Tax Expense $ 16,164 $ 48,784 $ 7,848
======== ======== ========
Note 10 Contingencies and Commitments
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.
As of December 31, 1996, outstanding purchase commitments relating
to capital projects totaled approximately $81 million.
Note 11 Shareholders' Equity
During December 1994, the Company changed from a limited liability
company (Ltd.) to a public company (S.A.). In addition, Riverwood
International Corporation ("Riverwood", the former 100% shareholder
of the Company) sold just under 50% of its shares to Saragy S.A.
95
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
The capital shares consist of 167,309,968 common shares, of which
83,654,984 common shares are owned by Riverwood and 83,654,984
common shares are owned by Saragy S.A. In addition, the Company has
authorized and issued 32 shares of Class A preferred stock. These
preferred shares have preference in the event of a liquidation of
the Company.
These Class A preferred shares also have rights to dividends equal
to those of the common shares.
The Class A preferred shares are not entitled to vote and are not
convertible into common shares. As of April 30, 1996, one Class B
preferred share was converted into one common share with no par
value for Saragy S.A. and, additionally, 50,309,984 common shares
with no par value were issued of which 25,154,992 was distributed to
Riverwood and 25,154,992 to Saragy S.A.
Earnings may be distributed only out of Reais retained earnings
reflected in the books of Igaras Papeis e Embalagens S.A. As of
December 31, 1996, the U.S. dollar equivalent of this amount
available for distribution was approximately $10,960,000.
Note 12 Partial Spin-off
In November 1994, the Board of Directors approved the partial
spin-off of assets of Igaras Papeis e Embalagens Ltda., creating
Riverwood do Brasil Ltda.
96
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Concluded
-------
This newly formed company was created to manage the Riverwood's
packaging machinery business. All shares issued were distributed to
Riverwood. At November 30, 1994, the net assets of Riverwood do
Brasil Ltda., were as follows:
(in thousands of
dollars)
Assets
Current $ 553
Property, Plant and Equipment 5,078
------
Net Assets $5,631
======
The impact of this spin-off on the Company's statements of
operations is not material.
Note 13 Related Party Transactions
During the years ended December 31, 1996, 1995 and 1994, the Company
purchased approximately $5.1 million, $5.7 million and $4.0 million,
respectively, from Riverwood. Intercompany profits in ending
inventory are not material at December 31, 1996 and 1995.
Note 14 Other (Expense) Income, Net
Other (expense) income, net in 1995 included approximately $3.6
million of expenses related to the settlement of certain sales tax
matters and approximately $2.3 million of bonus compensation
expenses.
97
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the
Shareholders and Directors of
Igaras Papeis e Embalagens S.A.:
We have audited the accompanying consolidated balance sheets of IGARAS PAPEIS E
EMBALAGENS S.A., as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Igaras Papeis e
Embalagens S.A. as of December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles in the United States of America.
Coopers & Lybrand, Biedermann, Bordasch
Sao Paulo, Brazil
January 30, 1997
98
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting or
financial disclosure.
99
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The names, ages and positions of the current directors of the registrant and
executive officers of Riverwood International Corporation are set forth below.
Name Age Position
- --------------------- ----- --------------------------------------------------
B. Charles Ames 71 Chairman of the Board and chief executive officer
James O. Egan 48 Senior Vice President and Chief Financial Officer
Robert H. Burg 52 Senior Vice President, Human Resources
Robert C. Hart 59 Senior Vice President, Paperboard Operations
Frank R. McCauley 47 Senior Vice President, Forest Resources and
Corporate Development
Octavio Orta 52 Senior Vice President, Coated Board Sales and
Packaging Operations
Kevin J. Conway 38 Director
Alberto Cribiore 51 Director
Leon J. Hendrix, Jr. 55 Director
Hubbard C. Howe 68 Director
Brian J. Richmand 43 Director
Lawrence C. Tucker 54 Director
Samuel M. Mencoff 40 Director
G. Andrea Botta 43 Director
Joseph E. Parzick 41 Director
B. Charles Ames is chief executive officer and Chairman of the Board of Holding,
RIC Holding and Riverwood. Mr. Ames is a professional employee, and since 1989
has been a principal, of Clayton, Dubilier & Rice, Inc., a Delaware corporation
("CD&R"). Mr Ames is also Vice President and a director of CD&R Investments
Associates, Inc., a Delaware corporation ("Associates, Inc."), a general partner
of the general partner of Clayton, Dubilier & Rice Fund V Limited Partnership, a
Cayman Islands exempted limited partnership ("CD&R Fund V"), and a limited
partner of CD&R Associates V Limited Partnership, a Cayman Islands exempted
limited partnership ("Associates V") which is a general partner of CD&R Fund"
V). Mr. Ames serves on the Boards of Directors of several publicly held
companies including The Progressive Corporation, the M.A. Hanna Company, and the
Warner-Lambert Company.
James O. Egan is Senior Vice President and Chief Financial Officer of Riverwood.
Mr. Egan joined Riverwood in his current position in 1996 from Coopers & Lybrand
L.L.P. ("C&L"), where he was a Partner and Board Member.
Robert H. Burg is Senior Vice President, Human Resources of Riverwood. Mr. Burg
joined Riverwood in January 1993. From 1981 until he joined Riverwood, Mr. Burg
was employed by Colgate-Palmolive Company, most recently as Vice President of
Global Compensation and Development.
100
<PAGE>
Robert C. Hart is Senior Vice President, Paperboard Operations of Riverwood. Mr.
Hart joined Riverwood in 1967 in a position at the West Monroe Mill and has been
in his current position as Senior Vice President since 1992.
Frank R. McCauley is Senior Vice President, Forest Resources and Corporate
Development of Riverwood. Mr. McCauley joined the Company in 1990 as Senior Vice
President, Finance.
Octavio Orta is Senior Vice President, Coated Board Sales & Packaging Operations
of Riverwood. Mr. Orta joined the company in 1990 as Vice President,
International Division.
Kevin J. Conway has been a professional employee of CD&R since December 1994 and
a principal since January 1996. Mr. Conway is also a limited partner of
Associates V. Prior to joining CD&R, Mr. Conway was a Vice President at Goldman,
Sachs & Co., an investment banking firm.
Alberto Cribiore has been a principal of CD&R since 1985 and President of CD&R
since 1995. Mr. Cribiore is also Vice President, Treasurer and Assistant
Secretary and a director of Associates, Inc. and a limited partner of Associates
V. Mr. Cribiore has indicated that he intends to resign, effective March 31,
1997, as an officer, director and employee of CD&R, and, concurrent with his
resignation from CD&R, expects to withdraw as a limited partner of Associates V
and resign as a director and officer of Associates, Inc. Mr. Cribiore also
serves as a director of WESCO Distribution, Inc., and as chairman and a director
of MCM Group, Inc. and its wholly owned subsidiary, McCarthy, Crisanti & Maffei,
Inc.
Leon J. Hendrix, Jr. is a principal of CD&R and a limited partner of Associates
V. Prior to joining CD&R in 1993, he was employed by Reliance Electric Company
and served as chief operating officer and a member of the board of directors.
Mr. Hendrix also serves as a director of Keithley Instruments, Inc., National
City Bank, the Cleveland Chapter of the American Red Cross, WESCO Distribution,
Inc., Nacco Industries Incorporated, Cambrex Corporation and the Clemson
University Foundation and is a member of Clemson University's President's
Advisory Council.
Hubbard C. Howe is a principal of and has been a professional employee of CD&R
since 1991. Mr. Howe is Vice President and a director of Associates, Inc., a
limited partner of Associates V, and is Chairman and a director of A.P.S.
Holding Corporation, Inc., acting Chief Executive Officer, Chairman and a
director of A.P.S., Inc., Chairman and director of Remington Arms Company, Inc.,
and Vice Chairman and a director of Nu-kote Holding, Inc. and Nu-kote
International, Inc.
Brian J. Richmand has been employed principally as a General Partner of Chase
Capital Partners, formerly known as Chemical Venture Partners, the general
partner of Chase Equity Associates, L.P., since 1993. Prior to joining Chase
Capital Partners, Mr. Richmand was a partner at the law firm of Kirkland &
Ellis. Mr. Richmand is also currently a director of Physical Electronics, Inc.,
Western Pork Production Co., Inc., OCI Holdings, Inc, and Qualitech Steel
Corporation.
Lawrence C. Tucker has been a General Partner of Brown Brothers Harriman & Co.,
a private banking firm, since 1979. He also serves as a director of WorldCom,
Inc. and WellCare Management Group, Inc. Brown Brothers Harriman & Co. is the
general partner of The 1818 Fund, L.P., The 1818 Fund II, L.P. ("The 1818
Fund"), and The 1818 Mezzanine Fund, L.P.
101
<PAGE>
Samuel M. Mencoff has been employed principally as a Vice President of Madison
Dearborn Partners, Inc., the general partner of Madison Dearborn Partners, L.P.,
the general partner of Madison Dearborn Capital Partners, L.P., since 1993. From
1987 until 1993, Mr. Mencoff served as Vice President of First Chicago Venture
Capital. Mr. Mencoff is a member of the operating committees of the general
partners of Huntway Partners, L.P. and Golden Oak Mining Company, L.P.,
respectively, and a member of the board of directors of Buckeye Cellulose
Corporation and Bay State Paper Holding Company.
G. Andrea Botta has been President of EXOR America Inc. (formerly IFINT-USA
Inc.) ("EXOR America") since 1993 and for more than five years prior thereto,
Vice President of Acquisitions of IFINT-USA Inc. EXOR Group S.A., the parent
company of EXOR America, is the international investment holding company of the
Agnelli Group. Mr. Botta is a director of Lear Corporation, Western Industries
Inc., Rockefeller Center Properties and Constitution Reinsurance Corporation.
Joseph E. Parzick has been a professional employee of EXOR America since 1996.
Prior to joining EXOR America, Mr. Parzick was a Managing Director of Lehman
Brothers Inc., an investment banking firm.
Election and Compensation of Directors
All directors are elected annually and hold office until their successors are
elected and qualified, or until their earlier removal or resignation. The
Stockholders Agreement entered into in connection with the Equity Offering to
the Equity Investors provides that CD&R Fund V is entitled to nominate five
persons, FIMA Finance Management Inc., ("FIMA") is entitled to nominate two
persons, The 1818 Fund is entitled to nominate one person and Madison Dearborn
Capital Partners, L.P. is entitled to nominate one person to serve on the Boards
of Directors of each of Holding, RIC Holding and Riverwood (the "Boards"). There
is also an understanding between Chase Equity Associates, L.P., formerly known
as Chemical Equity Associates ("Chase"), and CD&R Fund V with respect to the
nomination of CD&R Fund V's fifth nominee to such Boards. CD&R Fund V exercised
its intention to nominate a designee of Chase (the "Chase Designee") as its
nominee to such Boards; however, Chase does not have a legally enforceable right
to such directorship. The Chairman of each of the Boards is to be selected from
one of the CD&R Fund V nominees (other than the Chase Designee). Each of the
Boards of Holding, RIC Holding and Riverwood has an Executive Committee, a
Compensation and Benefits Committee and an Audit Committee. The Executive
Committee consists of the chief executive officer, two of the CD&R Fund
V-nominated directors (other than the Chase Designee), one of the FIMA-nominated
directors and the director nominated by The 1818 Fund. The Compensation and
Benefits Committee consists of two of the CD&R Fund V-nominated directors (other
than the Chase Designee), one of the FIMA-nominated directors and two directors
nominated by the Equity Investors other than CD&R Fund V and FIMA (but including
the Chase Designee) (the "Other Investors"). The Audit Committee consists of one
of the CD&R Fund V-nominated directors (other than the Chase Designee), one of
the FIMA-nominated directors, two of the Other Investor-nominated directors and
one independent director. The Executive Committee's current members are Messrs.
Ames, Hendrix, Botta, Conway and Tucker. The members of the Compensation and
Benefits Committee are currently Messrs. Hendrix, Ames, Botta, Cribiore and
Richmand; and the Audit Committee consists of Messrs. Tucker, Conway, Mencoff
and Parzick.
Non-employee directors who are not employed by or affiliated with CD&R will
receive compensation for their services on the Boards of $30,000 per year plus
$2,500 per board meeting attended. Currently, five of the Company's directors
are employees of CD&R, to which the Company pays fees for advisory and
management consulting services. See Item 13.
102
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Management Compensation Summary
The following table summarizes the compensation paid for services rendered
during the fiscal year indicated below by the Company or, in the case of
services rendered prior to the Merger, the Predecessor Company, to the current
and former Chief Executive Officers and the four most highly compensated other
executive officers (the "Named Executive Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Securities Underlying Long Term
------------------- --------------------------------
Compensation Awards
-------------------
(4) (6) (7)
Salary Bonus Other Annual (5) Stock All Other
Name Year $ $ Compensation SARs Options Compensation
<S> <C> <C> <C> <C> <C> <C> <C>
B. Charles Ames(1) -- -- -- -- -- -- --
Chairman and chief
executive officer
James O. Egan 1996 181,364 270,000(3) 9,939 0 0 0
Sr. Vice President
and Chief Financial
Officer
Octavio Orta 1996 272,083 0 2 0 30,000 4,500
Sr. Vice President,
Coated Board Sales 1995 226,250 98,000 0 0 0 5,575
and Packaging
Operations 1994 210,000 100,000 1,994 195,000 0 7,970
</TABLE>
103
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Robert C. Hart 1996 259,583 0 0 0 15,000 4,500
Sr. Vice President, 1995 226,250 91,045 5,363 0 0 5,575
Paperboard
Operations 1994 210,000 115,000 27,461 195,000 0 7,970
Robert H. Burg 1996 215,000 0 0 0 9,000 4,500
Sr. Vice President, 1995 185,000 59,532 0 0 0 5,575
Human
Resources 1994 175,000 94,029 22,789 140,000 0 7,970
Thomas H. Johnson 1996 483,333 0 0 0 90,000 4,500
Vice Chairman, 1995 400,000 100,000 0 0 0 5,575
former President
and Chief Executive 1994 340,000 200,000 0 675,000 0 7,970
Officer(2)
</TABLE>
(1) Mr. Ames assumed the positions of Chairman and chief executive officer of
the Company on October 8, 1996. Mr. Ames is a principal and an employee
of CD&R and received no compensation directly from the Company for his
services as Chairman and chief executive officer. The Company pays CD&R an
annual fee for management and financial consulting services (see "Certain
Relationships and Related Transactions" below), which include Mr. Ames's
services as Chairman and chief executive officer.
(2) Mr. Johnson served as President and Chief Executive Officer until November
11, 1996, when he assumed the position of Vice-Chairman. The information
contained in the Summary Compensation Table with respect to Mr. Johnson
does not include certain payments to him in connection with the change in
his employment status. See "Employment Agreements" below.
(3) Upon the commencement of his employment with the Company on May 8, 1996,
the Company paid Mr. Egan a commencement incentive of $150,000 and
guaranteed a minimum annual bonus to Mr. Egan for 1996 of at least
$120,000.
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(4) Amounts consist of tax reimbursement payments to the Named Executive
Officers in respect of certain taxable perquisites provided to them.
(5) Stock appreciation rights ("SARs") with respect to the common stock of the
Predecessor Company were granted during 1994 to the Named Executive
Officers indicated in the Summary Compensation Table. None of the SARs are
currently outstanding; all of the SARs were exercised prior to or in
connection with the Merger.
(6) In June, 1996 certain Named Executive Officers received options to
purchase shares of Common Stock of the Company, as indicated in the
Summary Compensation Table.
(7) Amounts consist of Company contributions on behalf of the Named Executive
Officers to the Company's savings plan.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Name Number of Percent of Exercise Price Expiration Date Grant Date
Securities Total Options Per Share Percent Value
Underlying Granted to ($/Share) ($)(3)
Options Employees in
Granted (#) Fiscal Year
J. Egan -- -- -- -- --
O. Orta 20,000(1) 10.1% $100 June 3, 2006 $447,200
10,000(2) $223,600
R. Hart 10,000(1) 5.1% $100 June 3, 2006 $223,600
5,000(2) $111,800
R. Burg 6,000(1) 3.0% $100 June 3, 2006 $134,160
3,000(2) $67,080
T. Johnson 60,000(4) 30.3% $100 June 3, 2006 $1,341,600
30,000(5) $670,800
</TABLE>
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<PAGE>
(1) The Options will become vested in five equal annual installments on each
of the first five anniversaries of June 4, 1996 (the "Date of Grant"),
subject in each case to the Named Executive Officer's continued
employment.
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<PAGE>
(2) The Options become vested nine years and six months following the Date of
Grant, or as of any earlier date as of which the Company achieves its five
year EBITDA target.
(3) The dollar amounts set forth under this heading are based on an economic
option pricing model commonly used to value option grants on the basis of
certain assumptions. An economic option pricing model will produce
different results depending on the assumptions made, and the values shown
above are merely good faith estimates of the present value of the option
grants. Because one of the assumptions in the model is the future
volatility in the value of the Common Stock, the actual present value of
such option grants cannot be determined.
(4) The terms governing, among other things, the vesting of Mr. Johnson's
options were modified in connection with the change in Mr. Johnson's
employment status as follows: with respect to options covering 60,000
Shares (the "Service Options"), 20% of the options will become vested on
June 3, 1997 and an additional 20% of such Service Options will become
vested on December 31, 1997, subject, in each such case, to Mr. Johnson's
continued employment through such date pursuant to the Services Agreement
(see "Employment Agreement" below) or earlier termination due to death or
disability.
With respect to options covering 30,000 Shares (the "Performance
Options"), such Performance Options will become vested as provided in
footnote (2) above, except that upon the termination of Mr. Johnson's
services pursuant to the Services Agreement, a proportionate share of any
Performance Options that have not yet become vested on or prior to the
date of such termination shall become vested as of such date.
Any options held by Mr. Johnson as of the date of the termination of his
services pursuant to the Services Agreement that have not become vested on
or prior to such date will be canceled immediately on such date.
Pension Plan
All U.S. salaried employees and hourly employees at non-union locations who
satisfy the service eligibility criteria are participants in the Riverwood
International Employees Retirement Plan (the "Retirement Plan"). Pension
benefits under the Retirement Plan are limited in accordance with the provisions
of the IRC, governing tax qualified pension plans. The Company has adopted a
Supplemental Pension Plan (the "Supplemental Plan") that provides for payment to
participants of retirement benefits equal to the excess of the benefits that
would have been earned by each such participant had the limitations of the IRC
not applied to the Retirement Plan and the amount actually earned by such
participant under the Retirement Plan. Each of the Named Executive Officers
(other than Mr. Egan who has not yet satisfied the plan's service criteria, and
the chief executive officer, who is not eligible to participate under the plan
terms) is eligible to participate in the Supplemental Plan. Benefits under the
Supplemental Plan are not pre-funded; such benefits are paid by the Company when
due. The Pension Plan Table below sets
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<PAGE>
forth the estimated annual benefits payable upon retirement, including amounts
attributable to the Supplemental Plan, for specified remuneration levels and
years of service.
PENSION PLAN TABLE
Years of Service
-------------------------------------------------------------
Remuneration 15 20 25 30 35
- ------------ ---------- ---------- ---------- ---------- ----------
$125,000 $ 24,773 $ 33,030 $ 41,288 $ 49,545 $ 57,803
150,000 30,023 40,030 50,038 60,045 70,053
175,000 35,273 47,030 58,788 70,545 82,303
200,000 40,523 54,030 67,538 81,045 94,553
225,000 45,773 61,030 76,288 91,545 106,803
250,000 51,023 68,030 85,038 102,045 119,053
300,000 61,523 82,030 102,538 123,045 143,553
400,000 82,523 110,030 137,538 165,045 192,553
450,000 93,023 124,030 165,038 186,045 217,053
500,000 103,523 138,030 172,538 207,045 241,553
600,000 124,523 166,030 207,538 249,045 290,553
- --------------------------------------------------------------------------------
A. Had the Named Executive Officers in the Summary Compensation Table retired
as of December 31, 1996, their respective five-year average salaries, plus
bonus, for purposes of the table set forth above, would have been as
follows: Mr. Johnson, $532,867; Mr. Hart, $313,208; Mr. Orta, $309,143; Mr.
Burg, $241,640.
B. On December 31, 1996, the Named Executive Officers in the Summary
Compensation Table had the following years of credited service under the
Retirement Plan: Mr. Hart --- 30, Mr. Johnson --- 7, Mr Orta --- 7, Mr.
Burg --- 4.
C. Salary as defined in the Retirement Plan includes payments under the annual
incentive compensation plan but excludes payments under any equity
incentive plan of the Company or the Predecessor Company.
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<PAGE>
Employment Agreements
Each of the Named Executive Officers (other than the chief executive officer) is
a party to an employment agreement with the Company providing for an employment
term of five years for Mr. Octavio Orta and three years for each other Named
Executive Officer. The agreements provide that, in the event of a termination of
any such Named Executive Officer's employment by the Company without "cause" (as
defined in the employment agreements) or by such Named Executive Officer for
"good reason" (as so defined), such Named Executive Officer is entitled to
continued salary and welfare benefits generally for a period of one year or, if
greater, for the balance of the employment term or one month for each year of
service, and a pro rata incentive bonus for the year of termination. The
agreements also contain certain noncompetition and nonsolicitation provisions
and provide for the termination of previously existing employment agreements.
On October 8, 1996, Holding, RIC Holding, Riverwood, and CD&R entered into an
agreement (the "Loanout Agreement") providing CD&R to make available to Holding,
Riverwood and RIC Holding the services of Mr. Ames, a principal and employee of
CD&R. No consideration is to be paid under the Loanout Agreement for Mr. Ames's
services in addition to that already owed under the consulting agreement
pursuant to which CD&R provides management and financial consulting services to
the Company. The Loanout Agreement will terminate on the earliest to occur of
(i) the termination of such consulting agreement in accordance with its terms,
(ii) termination of the Loanout Agreement by any party, (iii) the election of a
successor Chief Executive Officer of the Company and (iv) Mr. Ames's death,
permanent disability or resignation from his employment with CD&R.
On November 11, 1996, Holding, RIC Holding and Riverwood entered into a services
agreement with Mr. Johnson (the "Services Agreement"), providing, among other
things, for a change in Mr. Johnson's status from President and Chief Executive
Officer to Vice-Chairman of each of Holding, RIC Holding and Riverwood.
Under the Services Agreement, on November 11, 1996, Riverwood made a lump-sum
payment to Mr. Johnson equal to $2,793,043.24 and, on January 15, 1998,
Riverwood will make an additional lump-sum payment to Mr. Johnson of $22,958.13.
In addition, following the termination of Mr. Johnson's services under the
Services Agreement, Mr. Johnson will receive an additional lump-sum payment, in
an amount to be calculated by Riverwood's actuary as of the date of such
termination of Mr. Johnson's services, with respect to Mr. Johnson's
participation in Riverwood's supplemental executive retirement plan after
November 11, 1996 and through such termination date.
The Services Agreement further provides that, during the period of his services
pursuant to such agreement, Mr. Johnson will receive fees for his services at an
annual rate of $500,000, will be eligible for payments of incentive compensation
of up to $1,000,000 if Riverwood meets certain set revenue targets during 1997
and will continue to participate in all pension, welfare and fringe benefit
programs, other than Riverwood's long-term disability benefit program, of
Riverwood in which he was participating immediately prior to November 11, 1996.
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<PAGE>
Compensation Committee Interlocks
The two CD&R Fund V-nominated directors who serve on the Compensation and
Benefits Committee are employees of CD&R. CD&R received a fee from RIC Holding
of $12 million, and Brown Brothers Harriman & Co., the general partner of The
1818 Fund, received a fee of $3 million, in each case, in connection with the
Merger and arranging the financing thereof. CD&R receives an annual fee of
$500,000 for advisory, management consulting and monitoring services from
Riverwood. Holding, RIC Holding and Riverwood have also agreed to indemnify the
members of the Boards employed by CD&R and CD&R against liabilities incurred
under securities laws with respect to their services for Holding, RIC Holding
and Riverwood.
Messrs. Hendrix and Cribiore are the CD&R Fund V-nominated directors on the
Compensation and Benefits Committees of Holding and Riverwood.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Holding owns all of the outstanding common stock of RIC Holding. RIC Holding
owns all of the outstanding common stock of Riverwood. The Holding Common Stock
is beneficially owned as follows:
Number of Percent of
Name of Beneficial Owner Shares Class
- ------------------------------------------------------ ------------ -----------
Clayton, Dubilier & Rice Fund V Limited Partnership(1) 2,250,000 29.5%
501 Silverside Road
Suite 91
Silverside Carr Executive Ctr.
Wilmington, Delaware 19809
FIMA Finance Management Inc. (2) 2,250,000 29.5
Citco Building, Wickhams Cay
P.O. Box 662
Roadtown, Tortola
British Virgin Islands
The 1818 Fund II, L.P. 750,000 9.9
c/o Brown Brothers Harriman & Co.
59 Wall Street
New York, NY 10005
HWH Investment Pte Ltd 700,000 9.2
250 North Bridge Road
Singapore 179101
Republic of Singapore
Chase Equity Associates, L.P. (3) 500,000 6.6
380 Madison Avenue
New York, NY 10017
First Plaza Group Trust 500,000 6.6
Mellon Bank, N.A., as Trustee
c/o General Motors Investment Management Corporation
767 Fifth Avenue
New York, NY 10153
Madison Dearborn Capital Partners, L.P. 500,000 6.6
Three First National Plaza
Chicago, IL 60602
Wolfensohn-River LLC 50,000 0.6
599 Lexington Avenue --------- ----
New York, NY 10022
Total Equity Investors 7,500,000 98.5%
========= ====
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<PAGE>
Number of Percent of
Name of Beneficial Owner Shares Class
- ------------------------------------------------------ ------------ -----------
Total Management Investors 111,900 1.5
--------- -----
Total Equity Investors and Management Investors 7,611,900 100.0%
========= =====
- ----------
(1) B. Charles Ames, William A. Barbe, Kevin J. Conway, Alberto Cribiore,
Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe, Andrall E. Pearson
and Joseph L. Rice, III may be deemed to share beneficial ownership of the
shares owned of record by CD&R Fund V by virtue of their status as
stockholders of the general partner of the general partner of CD&R Fund V,
but each expressly disclaims such beneficial ownership of the shares owned
by CD&R Fund V. The stockholders of Associates, Inc. share investment and
voting power with respect to securities owned by CD&R Fund V. The business
address for each of them is 501 Silverside Road, Suite 91, Silverside Carr
Executive Ctr., Wilmington, Delaware 19809.
(2) Reflects transfer on January 6, 1997 of shares formerly held by EXOR Group
S.A. to its affiliate, FIMA, a wholly owned subsidiary.
(3) Chase Equity Associates, L.P., formerly known as Chemical Equity
Associates, purchased shares of Class B Holding Common Stock, which does
not have voting rights.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CD&R Fund V, which is one of Holding's largest stockholders, is a private
investment fund managed by CD&R. Amounts contributed to CD&R Fund V by its
limited partners are invested at the discretion of the general partner in equity
or equity-related securities of entities formed to effect leveraged acquisition
transactions and in the equity of corporations where the infusion of capital,
coupled with the provision of managerial assistance by CD&R, can be expected to
generate returns on investments comparable to returns historically achieved in
leveraged buyout transactions. The general partner of CD&R Fund V is Associates
V, and the general partners of Associates V are Associates, Inc. and CD&R Cayman
Investment Associates, Inc., a Cayman Islands exempted company. Mr. Ames , who
is a principal of CD&R and Vice President and a director of Associates, Inc. and
a limited partner of Associates V, is chief executive officer of Holding, RIC
Holding and Riverwood. Mr. Conway, who is a principal of CD&R and a limited
partner of Associates V, is a director of Holding, RIC Holding and Riverwood.
Mr. Cribiore, who is principal and a President of CD&R and is Vice President,
Treasurer and Assistant Secretary and a director of Associates Inc., also serves
as a director of Holding, RIC Holding and Riverwood. See "Item 10. Directors and
Executive Officers of the Registrant - Directors and Executive Officers." Mr.
Hendrix, who is principal and a limited partner of Associates V, is a director
of Holding, RIC Holding and Riverwood. Mr. Howe, who is a principal of CD&R and
is Vice President and a director of Associates, Inc., is a director of Holding,
RIC Holding and Riverwood. CD&R Fund V purchased $225 million of equity of
Holding in connection with the Merger.
CD&R is a private investment firm which is organized as a Delaware corporation.
CD&R is the manager of a series of investment funds, including CD&R Fund V. CD&R
generally assists in structuring, arranging financing for and negotiating the
transactions in which the funds it manages invest. After the
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<PAGE>
consummation of such transactions, CD&R generally provides management and
financial consulting services to the companies in which its investment funds
have invested during the period of such fund's investment. Such services include
helping the company to establish effective banking, legal and other business
relationships and assisting management in developing and implementing strategies
for improving the operational, marketing and financial performance of the
company.
CD&R received an initial annual fee of $500,000 for providing such management
and financial consulting services to the Company and reimbursement of
out-of-pocket expenses it incurs for so long as CD&R Fund V has an investment in
the Company, pursuant to a consulting agreement. The indentures relating to the
Notes allow the payment to CD&R of annual fees for management and financial
consulting services of up to $1 million, although there is no current intention
to increase the amount of the annual fee to be received by CD&R. In connection
with the Merger and arranging the financing thereof, at the closing of the
Merger, RIC Holding paid CD&R a fee of $12 million and Brown Brothers Harriman &
Co. a fee of $3 million, and reimbursed each of them for their out-of-pocket
expenses.
CD&R, CD&R Fund V, Holding, Riverwood and RIC Holding entered into an
indemnification agreement dated as of March 27, 1996, pursuant to which Holding,
RIC Holding and Riverwood have agreed to indemnify CD&R, CD&R Fund V, Associates
V, Associates Inc. (together with any other general partner of Associates V) and
their respective directors, officers, partners, employees, agents, advisors,
representatives and controlling persons against certain liabilities arising
under the federal securities laws, liabilities arising out of the performance of
the consulting agreement and certain other claims and liabilities.
Management
Following the consummation of the Merger, Holding adopted the Equity Incentive
Plan providing for the issuance of up to 695,000 shares of Holding Common Stock
pursuant to the sale of shares of Holding Common Stock and the grant of options
with respect to Holding Common Stock under the plan.
On June 4, 1996, certain members of management of the Company purchased shares
of Holding Common Stock, at a purchase price of $100.00 per share, pursuant to
the Equity Incentive Plan, including purchases of 30,000; 10,000; 5,000; 3000;
and 53,000 shares of Holding by Messrs. Johnson, Orta, Hart, Burg and by all
executive officers of the Company as a group, respectively. The Company
guaranteed certain loans for $400,000; $600,000; $150,000; and $715,000 extended
to Messrs. Johnson, Orta, Burg and to all executive officers as a group,
respectively.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Financial statements, financial statement schedule and exhibits filed
as part of this report:
1. Consolidated balance sheet of Riverwood Holding, Inc. and subsidiaries
as of December 31, 1996 and the related statements of operations,
shareholders' equity and cash flows for the three months ended March
27, 1996 (Predecessor) and the nine months ended December 31, 1996.
Consolidated balance sheets of Riverwood International Corporation as
of December 31, 1995 and the related consolidated statements of
income, shareholders' equity and cash flows for each of the two years
in the period ended December 31, 1995.
2. Schedule II--Valuation and Qualifying Accounts.
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; Form 8-K dated
August 7, 1996 and filed with the Securities and Exchange Commission
on August 22, 1996; and Form 8-K dated October 18, 1996 and filed with
the Securities and Exchange Commission on October 21, 1996.
c. Exhibit Index to Annual Report on Form 10-K for Year Ended December
31, 1996.
Description Cross Reference or Page Number
------------------------------------- ------------------------------
2.1 Agreement and Plan of Merger, dated as Filed as Exhibit 2.1 to the
of October 25, 1995, by and among RIC, Registration Statement on Form
RIC Holding and Acquisition Corp. S-1 (Registration No.
33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
2.2 Voting and Indemnification Agreement, Filed as Exhibit 2.2 to the
dated as of October 25, 1995, by and Registration Statement on Form
among RIC, Manville, RIC Holding and S-1 (Registration No.
Acquisition Corp. 33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
2.3 Tax Matters Agreement, dated as of Filed as Exhibit 10.3 to the
October 25, 1995, by and among Registration Statement on Form
Manville, RIC, RIC Holding and S-1 (Registration No.
Acquisition Corp. 33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
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<PAGE>
Description Cross Reference or Page Number
------------------------------------- ------------------------------
2.4 Asset Purchase Agreement, dated as of Filed as Exhibit 2 to the
August 6, 1996, by and among Plum Registrant's Current Report on
Creek Timber Company, L.P., Form 8-K filed August 22, 1996
Riverwood International Corporation and Exhibit 2a to the
and New River Timber, LLC Registrant's Current Report on
Form 8-K filed October 21,
1996 (Commission File No.
1-11113), and incorporated
herein by reference.
2.5 Amendment to Asset Purchase Filed as Exhibit 2b to the
Agreement, dated as of October 16, Registrant's Current Report on
1996, by and among Plum Creek Timber Form 8-K filed October 21,
Company, L.P., Riverwood 1996 (Commission File No.
International Corporation and New 1-11113), and incorporated
River Timber, LLC. herein by reference.
2.6 Wood Products Supply Agreement, Filed as Exhibit 2c to the
dated as of October 18, 1996, between Registrant's Current Report on
Plum Creek Timber Company, L.P. and Form 8-K filed October 21,
Riverwood International Corporation. 1996 (Commission File No.
1-11113), and incorporated
herein by reference.
3.1 Certificate of Incorporation of Filed as Exhibit 3.3 to the
Riverwood Holding, Inc. (formerly Registration Statement on Form
known as New River Holding, Inc.), S-1 (Registration No.
dated December 7, 1995 33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
3.2 Certificate of Amendment of Filed as an exhibit hereto.
Certificate of Incorporation of
New River Holding, Inc., dated March
27, 1996
3.3 Restated By-Laws of Riverwood Holding, Filed as Exhibit 3.1 to the
Inc., as amended effective October 8, Registrant's Form 10-Q filed
1996. November 8, 1996, and
incorporated herein by
reference.
4.1 Senior Secured Credit Agreement, dated Filed as Exhibit 10.1 to RIC
March 27, 1996, among RIC Holding, the Holding, Inc.'s Annual Report
other borrowers thereto, Chemical Bank, on Form 10-K filed April 16,
as administrative agent, and the 1996 (Commission File No.
lenders party thereto. 1-11113), and incorporated
herein by reference.
4.2 Machinery Credit Agreement, dated Filed as Exhibit 10.1 to RIC
March 27, 1996, among Riverwood Holding, Inc.'s Annual Report
International Machinery, Inc., the on Form 10-K filed April 16,
other borrowers thereto, Chemical 1996 (Commission File No.
Bank, as administrative agent, and 1-11113), and incorporated
the lenders party thereto. herein by reference.
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<PAGE>
Description Cross Reference or Page Number
------------------------------------- ------------------------------
4.3 Amendment No. 1, dated as of September Filed as Exhibit 4a to the
13, 1996, to the Credit Agreement, Registrant's Current Report on
dated as of March 20, 1996, among Form 8-K filed October 21,
Riverwood International Corporation, 1996 (Commission File No.
the lenders party thereto, and The 1-11113), and incorporated
Chase Manhattan Bank (formerly known herein by reference.
as Chemical Bank), as administrative
agent.
4.4 Amendment No. 2, dated as of September Filed as Exhibit 4b to the
17, 1996, to the Credit Agreement, Registrant's Current Report on
dated as of March 20, 1996, among Form 8-K filed October 21,
Riverwood International Corporation, 1996 (Commission File No.
the lenders party thereto, and 1-11113), and incorporated
The Chase Manhattan Bank (formerly herein by reference.
known as Chemical Bank), as
administrative agent.
4.5 Amendment No. 3, dated as of November Filed as an exhibit hereto.
4, 1996, to the Credit Agreement, dated
as of March 20, 1996, among Riverwood
International Corporation, the lenders
party thereto, and The Chase Manhattan
Bank (formerly known as Chemical
Bank), as administrative agent.
4.6 Indenture, dated March 27, 1996, among Filed as Exhibit 4.6 to RIC
RIC Holding, Inc., Riverwood Holding, Holding, Inc.'s Annual Report
Inc., CDRO Acquisition Corporation and on Form 10-K filed April 16,
Fleet National Bank of Connecticut, as 1996 (Commission File No.
trustee, relating to the 10 1/4% 1-11113), and incorporated
Senior Notes due 2006 of Riverwood herein by reference.
International Corporation, together
with the First Supplemental Indenture
and the Second Supplemental Indenture
thereto.
4.7 Indenture, dated March 27, 1996, among Filed as Exhibit 4.7 to RIC
RIC Holding, Inc., Riverwood Holding, Holding, Inc.'s Annual Report
Inc., CDRO Acquisition Corporation and on Form 10-K filed April 16,
Fleet National Bank of Massachusetts, 1996 (Commission File No.
as trustee, relating to the 10 7/8% 1-11113), and incorporated
Senior Subordinated Notes due 2008 of herein by reference.
Riverwood International Corporation,
together with the First Supplemental
Indenture and the Second Supplemental
Indenture thereto.
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<PAGE>
Description Cross Reference or Page Number
------------------------------------- ------------------------------
10.1 Form of Investor Stock Subscription Filed as Exhibit 10.6 to
Agreement between Riverwood Holding, Registration Statement on Form
Inc. (formerly named New River Holding, S-1 (Registration No.
Inc.) and each of the investors named 33-80475) of New River
on the schedule thereto. Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
10.2 Form of Management Stock Subscription Filed as Exhibit 10.4 to
Agreement between New River Holding, Registration Statement on Form
Inc. (renamed Riverwood Holding, Inc.) S-1 (Registration No.
and the purchasers named therein. 33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
10.3 Form of Management Stock Option Filed as Exhibit 10.5 to
Agreement between New River Holding, Registration Statement on Form
Inc. (renamed Riverwood Holding, Inc.) S-1 (Registration No.
and the grantees named therein. 33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
10.4 Form of Registration and Participation Filed as Exhibit 10.7 to
Agreement among New River Holding, Registration Statement on Form
Inc. (renamed Riverwood Holding, Inc.) S-1 (Registration No.
and certain stockholders of New River 33-80475) of New River
Holding, Inc. Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
10.5 Form of New River Holding, Inc. Stock Filed as Exhibit 10.10 to
Incentive Plan. Registration Statement on Form
S-1 (Registration No.
33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
10.6 Form of Stockholders Agreement among Filed as Exhibit 10.11 to
New River Holding, Inc. (renamed Registration Statement on Form
Riverwood Holding, Inc.) and the S-1 (Registration No.
stockholders of New River Holding, Inc. 33-80475) of New River
named therein. Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
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<PAGE>
Description Cross Reference or Page Number
------------------------------------- ------------------------------
10.7 Form of Indemnification Agreement, Filed as Exhibit 10.8 to the
among Riverwood Holding, Inc., RIC Registration Statement on Form
Holding, Inc., Riverwood International S-1 (Registration No.
Corporation, Clayton, Dubilier & 33-80475) of New River
Rice, Inc. and Clayton, Dubilier & Holding, Inc. (renamed
Rice Fund V Limited Partnership. Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
10.8 Form of Amended and Restated Filed as Exhibit 10.9 to the
Employment Agreements, among Registration Statement on Form
Riverwood, Holding and each of Thomas S-1 (Registration No.
H. Johnson, Robert C. Hart, Octavio 33-80475) of New River
Orta and Frank R. McCauley. Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
10.9 Form of Consulting Agreement, among Filed as Exhibit 10.12 to the
Riverwood Holding, Inc., RIC Holding, Registration Statement on Form
Inc., the corporation formerly known S-1 (Registration No.
as Riverwood International Corporation, 33-80475) of New River
Riverwood International Corporation and Holding, Inc. (renamed
Clayton, Dubilier & Rice, Inc. Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
10.10 Agreement dated as November 11, 1996 Filed as an exhibit hereto
among Riverwood Holding, Inc., RIC
Holding, Inc., Riverwood International
Corporation and Thomas H. Johnson
10.11 Loanout Agreement dated as of October Filed as an exhibit hereto.
8, 1996 by and among Riverwood Holding
Inc., RIC Holding, Inc., Riverwood
International Corporation and Clayton,
Dubilier & Rice, Inc.
18 Letter re: Change in Accounting Filed as an exhibit hereto.
Principles.
21 List of subsidiaries. Filed as an exhibit hereto.
27 Financial Data Schedule Filed as an exhibit hereto.
99 Reconciliation of Income(Loss) from Filed as an exhibit hereto.
Operations to EBITDA.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, Holding hereby
agrees to furnish a copy of each document set forth below upon request of the
Securities and Exchange Commission:
Indenture, dated as of June 24, 1992, between RIC and Continental Bank, National
Association, as trustee, relating to 10 3/4% Senior Notes Due 2000 (the "10 3/4%
Indenture").
First Supplemental Indenture to the 10 3/4% Indenture, dated as of February 13,
1996, between RIC and First Trust of Illinois, National Association (as
successor trustee to Continental Bank, National Association).
Indenture, dated as of June 24, 1992, between RIC and NationsBank of Georgia,
National Association, as trustee, relating to 11 1/4% Senior Subordinated Notes
Due 2002 (the "11 1/4% Indenture").
First Supplemental Indenture to the 11 1/4% Indenture, dated as of February 13,
1996, between RIC and The Bank of New York (as successor trustee to NationsBank
of Georgia, National Association).
118
<PAGE>
Indenture, dated as of June 30, 1994, between RIC and The Bank of New York, as
trustee, relating to 10 3/8% Senior Subordinated Notes Due 2004 (the "10 3/8%
Indenture").
First Supplemental Indenture to the 10 3/8% Indenture, dated as of February 13,
1996, between RIC and The Bank of New York, as trustee.
Indenture, dated as of September 15, 1993, between RIC and Morgan Guaranty Trust
Company of New York, relating to 6 3/4% Convertible Subordinated Notes due 2003
(the "6 3/4% Indenture").
First Supplemental Indenture to the 6 3/4% Indenture, dated as of March 27,
1996, between RIC and First Trust of New York, National Association (as
successor trustee to Morgan Guaranty Trust Company of New York).
Second Supplemental Indenture to the 6 3/4% Indenture, dated as of March 28,
1996, between RIC Holding, Inc. (as successor to RIC) and First Trust of New
York, National Association (as successor trustee to Morgan Guaranty Trust
Company of New York).
119
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of the 26 day of
March, 1997.
RIVERWOOD HOLDING, INC.
By: /s/ B. Charles Ames
-----------------------
B. Charles Ames
chief executive officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ------------------------- -------------------------------- -------------------
/s/ B. Charles Ames Chairman of the Board and March 26, 1997
- ------------------------- chief executive officer
B. Charles Ames (Principal Executive Officer)
/s/ James O. Egan Senior Vice President and March 26, 1997
- ------------------------- Chief Financial Officer
James O. Egan (Principal Financial Officer)
/s/ C. E. Jenness Vice President March 26, 1997
- ------------------------- and Corporate Controller
C. E. Jenness (Principal Accounting Officer)
120
<PAGE>
Signatures Title Date
- ------------------------- -------------------------------- -------------------
/s/ Kevin J. Conway Director March 26, 1997
- -------------------------
Kevin J. Conway
/s/ Alberto Cribiore Director March 26, 1997
- -------------------------
Alberto Cribiore
/s/ Leon J. Hendrix, Jr. Director March 26, 1997
- -------------------------
Leon J. Hendrix, Jr.
Director March 26, 1997
- -------------------------
Hubbard C. Howe
/s/ Brian J. Richmand Director March 26, 1997
- -------------------------
Brian J. Richmand
/s/ G. Andrea Botta Director March 26, 1997
- -------------------------
G. Andrea Botta
/s/ Joseph E. Parzick Director March 26, 1997
- -------------------------
Joseph E. Parzick
/s/ Lawrence C. Tucker Director March 26, 1997
- -------------------------
Lawrence C. Tucker
/s/ Samuel M. Mencoff Director March 26, 1997
- -------------------------
Samuel M. Mencoff
121
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors
of Riverwood Holding, Inc.
In connection with our audits of the consolidated financial statements of
Riverwood International Corporation as of December 31, 1995 and 1994, and for
each of the two years in the period ended December 31, 1995, which financial
statements are included in this Annual Report on Form 10-K of Riverwood Holding,
Inc. we have also audited the financial statement schedule listed in Item
14(a)(2) herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
January 22, 1996
122
<PAGE>
RIVERWOOD HOLDING, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<TABLE>
<CAPTION>
Additions
---------------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other Deductions at End
Classification of Period Expenses Accounts (a) of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Company:
Nine Months ended December 31, 1996
- -----------------------------------
Allowances Reducing the Assets
in the Balance Sheet:
Doubtful accounts receivable $ - $ 952 $ - $ (123) $ 829
Deferred tax assets 33,263 58,756 - - 92,019
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 33,263 $ 59,708 $ - $ (123) $ 92,848
====================================================================================================================================
====================================================================================================================================
====================================================================================================================================
Three Months ended March 27, 1996
- ---------------------------------
Allowances Reducing the Assets
in the Balance Sheet:
Doubtful accounts receivable $ 1,476 $ 197 $ - $ (82) $ 1,591
Deferred tax assets 1,875 - - (1,000) 875
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 3,351 $ 197 $ - $ (1.082) $ 2,466
====================================================================================================================================
Predecessor:
Twelve Months ended December 31, 1995
- -------------------------------------
Allowances Reducing the Assets
in the Balance Sheet:
Doubtful accounts receivable $ 1,105 $ 589 $ 299 $ (517) $ 1,476
Deferred tax assets 4,327 - - (2,452) 1,875
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 5,432 $ 589 $ 299 $ (2,969) $ 3,351
====================================================================================================================================
Twelve Months ended December 31, 1994
- -------------------------------------
Allowances Reducing the Assets
in the Balance Sheet:
Doubtful accounts receivable $ 1,202 $ 88 $ 148 $ (333) $ 1,105
Deferred tax assets 3,662 - 665 - 4,327
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 4,864 $ 88 $ 813 $ (333) $ 5,432
====================================================================================================================================
</TABLE>
Notes:
(a) The reductions in the allowance for doubtful accounts receivable relate
principally to charges for which reserves were provided, net of
recoveries. The reduction in the valuation allowance for deferred tax
assets represents the reversal of a valuation allowance on certain
international deferred tax net operating loss carryforward assets for
which realization
123
<PAGE>
became more likely than not.
124
<PAGE>
EXHIBIT INDEX
Exhibit Exhibit
Number Description Cross Reference or Page Number
- ------- ----------- ------------------------------
2.1 Agreement and Plan of Merger, dated as Filed as Exhibit 2.1 to the
of October 25, 1995, by and among RIC, Registration Statement on Form
RIC Holding and Acquisition Corp. S-1 (Registration No.
33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
2.2 Voting and Indemnification Agreement, Filed as Exhibit 2.2 to the
dated as of October 25, 1995, by and Registration Statement on Form
among RIC, Manville, RIC Holding and S-1 (Registration No.
Acquisition Corp. 33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
2.3 Tax Matters Agreement, dated as of Filed as Exhibit 10.3 to the
October 25, 1995, by and among Registration Statement on Form
Manville, RIC, RIC Holding and S-1 (Registration No.
Acquisition Corp. 33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
2.4 Asset Purchase Agreement, dated as of Filed as Exhibit 2 to the
August 6, 1996, by and among Plum Registrant's Current Report on
Creek Timber Company, L.P., Form 8-K filed August 22, 1996
Riverwood International Corporation and Exhibit 2a to the
and New River Timber, LLC Registrant's Current Report on
Form 8-K filed October 21,
1996 (Commission File No.
1-11113), and incorporated
herein by reference.
2.5 Amendment to Asset Purchase Filed as Exhibit 2b to the
Agreement, dated as of October 16, Registrant's Current Report on
1996, by and among Plum Creek Timber Form 8-K filed October 21,
Company, L.P., Riverwood 1996 (Commission File No.
International Corporation and New 1-11113), and incorporated
River Timber, LLC. herein by reference.
125
<PAGE>
Exhibit Exhibit
Number Description Cross Reference or Page Number
- ------- ----------- ------------------------------
2.6 Wood Products Supply Agreement, Filed as Exhibit 2c to the
dated as of October 18, 1996, between Registrant's Current Report on
Plum Creek Timber Company, L.P. and Form 8-K filed October 21,
Riverwood International Corporation, 1996 (Commission File No.
including a list of omitted annexes 1-11113), and incorporated
and an undertaking of the registrant herein by reference.
to furnish supplementally a copy of
any such omitted annex to the
Securities and Exchange Commission
upon request.
3.1 Certificate of Incorporation of Filed as Exhibit 3.3 to the
Riverwood Holding, Inc. (formerly Registration Statement on Form
known as New River Holding, Inc.), S-1 (Registration No.
dated December 7, 1995 33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
3.2 Certificate of Amendment of Filed as an exhibit hereto.
Certificate of Incorporation of
New River Holding, Inc., dated
March 27, 1996
3.3 Restated By-Laws of Riverwood Holding, Filed as Exhibit 3.1 to the
Inc., as amended effective October 8, Registrant's Form 10-Q filed
1996. November 8, 1996, and
incorporated herein by
reference.
4.1 Senior Secured Credit Agreement, dated Filed as Exhibit 10.1 to RIC
March 27, 1996, among RIC Holding, the Holding, Inc.'s Annual Report
other borrowers thereto, Chemical Bank, on Form 10-K filed April 16,
as administrative agent, and the 1996 (Commission File No.
lenders party thereto. 1-11113), and incorporated
herein by reference.
4.2 Machinery Credit Agreement, dated Filed as Exhibit 10.1 to RIC
March 27, 1996, among Riverwood Holding, Inc.'s Annual Report
International Machinery, Inc., the on Form 10-K filed April 16,
other borrowers thereto, Chemical 1996 (Commission File No.
Bank, as administrative agent, and 1-11113), and incorporated
the lenders party thereto. herein by reference.
4.3 Amendment No. 1, dated as of September Filed as Exhibit 4a to the
13, 1996, to the Credit Agreement, Registrant's Current Report on
dated as of March 20, 1996, among Form 8-K filed October 21,
Riverwood International Corporation, 1996 (Commission File No.
the lenders party thereto, and The 1-11113), and incorporated
Chase Manhattan Bank (formerly known herein by reference.
as Chemical Bank), as administrative
agent.
126
<PAGE>
Exhibit Exhibit
Number Description Cross Reference or Page Number
- ------- ----------- ------------------------------
4.4 Amendment No. 2, dated as of September Filed as Exhibit 4b to the
17, 1996, to the Credit Agreement, Registrant's Current Report on
dated as of March 20, 1996, among Form 8-K filed October 21,
Riverwood International Corporation, 1996 (Commission File No.
the lenders party thereto, and 1-11113), and incorporated
The Chase Manhattan Bank (formerly herein by reference.
known as Chemical Bank), as
administrative agent.
4.5 Amendment No. 3, dated as of November Filed as an exhibit hereto.
4, 1996, to the Credit Agreement, dated
as of March 20, 1996, among Riverwood
International Corporation, the lenders
party thereto, and The Chase Manhattan
Bank (formerly known as Chemical
Bank), as administrative agent.
4.6 Indenture, dated March 27, 1996, among Filed as Exhibit 4.6 to RIC
RIC Holding, Inc., Riverwood Holding, Holding, Inc.'s Annual Report
Inc., CDRO Acquisition Corporation and on Form 10-K filed April 16,
Fleet National Bank of Connecticut, as 1996 (Commission File No.
trustee, relating to the 10 1/4% 1-11113), and incorporated
Senior Notes due 2006 of Riverwood herein by reference.
International Corporation, together
with the First Supplemental Indenture
and the Second Supplemental Indenture
thereto.
4.7 Indenture, dated March 27, 1996, among Filed as Exhibit 4.7 to RIC
RIC Holding, Inc., Riverwood Holding, Holding, Inc.'s Annual Report
Inc., CDRO Acquisition Corporation and on Form 10-K filed April 16,
Fleet National Bank of Massachusetts, 1996 (Commission File No.
as trustee, relating to the 10 7/8% 1-11113), and incorporated
Senior Subordinated Notes due 2008 of herein by reference.
Riverwood International Corporation,
together with the First Supplemental
Indenture and the Second Supplemental
Indenture thereto.
127
<PAGE>
Exhibit Exhibit
Number Description Cross Reference or Page Number
- ------- ----------- ------------------------------
10.1 Form of Investor Stock Subscription Filed as Exhibit 10.6 to
Agreement between New River Holding, Registration Statement on Form
Inc. (renamed Riverwood Holding, S-1 (Registration No.
Inc.) and each of the investors 33-80475) of New River
named on the schedule thereto. Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
10.2 Form of Management Stock Subscription Filed as Exhibit 10.4 to
Agreement between New River Holding, Registration Statement on Form
Inc. (renamed Riverwood Holding, Inc.) S-1 (Registration No.
and the purchasers named therein. 33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
10.3 Form of Management Stock Option Filed as Exhibit 10.5 to
Agreement between New River Holding, Registration Statement on Form
Inc. (renamed Riverwood Holding, Inc.) S-1 (Registration No.
and the grantees named therein. 33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
10.4 Form of Registration and Participation Filed as Exhibit 10.7 to
Agreement among New River Holding, Registration Statement on Form
Inc. (renamed Riverwood Holding, Inc.) S-1 (Registration No.
and certain stockholders of New River 33-80475) of New River
Holding, Inc. Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
10.5 Form of New River Holding, Inc. Stock Filed as Exhibit 10.10 to
Incentive Plan. Registration Statement on Form
S-1 (Registration No.
33-80475) of New River
Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
128
<PAGE>
Exhibit Exhibit
Number Description Cross Reference or Page Number
- ------- ----------- ------------------------------
10.6 Form of Stockholders Agreement among Filed as Exhibit 10.11 to
New River Holding, Inc. (renamed Registration Statement on Form
Riverwood Holding, Inc.) and the S-1 (Registration No.
stockholders of New River Holding, Inc. 33-80475) of New River
named therein. Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, incorporated herein
by reference.
10.7 Form of Indemnification Agreement, Filed as Exhibit 10.8 to the
among Riverwood Holding, Inc., RIC Registration Statement on Form
Holding, Inc., Riverwood International S-1 (Registration No.
Corporation, Clayton, Dubilier & 33-80475) of New River
Rice, Inc. and Clayton, Dubilier & Holding, Inc. (renamed
Rice Fund V Limited Partnership. Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
10.8 Form of Amended and Restated Filed as Exhibit 10.9 to the
Employment Agreements, among Registration Statement on Form
Riverwood, Holding and each of Thomas S-1 (Registration No.
H. Johnson, Robert C. Hart, Octavio 33-80475) of New River
Orta and Frank R. McCauley. Holding, Inc. (renamed
Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
10.9 Form of Consulting Agreement, among Filed as Exhibit 10.12 to the
Riverwood Holding, Inc., RIC Holding, Registration Statement on Form
Inc., the corporation formerly known S-1 (Registration No.
as Riverwood International Corporation, 33-80475) of New River
Riverwood International Corporation and Holding, Inc. (renamed
Clayton, Dubilier & Rice, Inc. Riverwood Holding, Inc.) under
the Securities Act of 1933, as
amended, and incorporated
herein by reference.
10.10 Agreement dated as November 11, 1996 Filed as an exhibit hereto
among Riverwood Holding, Inc., RIC
Holding, Inc., Riverwood International
Corporation and Thomas H. Johnson
10.11 Loanout Agreement dated as of October Filed as an exhibit hereto.
8, 1996 by and among Riverwood Holding
Inc., RIC Holding, Inc., Riverwood
International Corporation and Clayton,
Dubilier & Rice, Inc.
18 Letter re: Change in Accounting Filed as an exhibit hereto.
Principles.
21 List of subsidiaries. Filed as an exhibit hereto.
27 Financial Data Schedule Filed as an exhibit hereto.
99 Reconciliation of Income(Loss) from Filed as an exhibit hereto.
Operations to EBITDA.
129
Exhibit 3.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NEW RIVER HOLDING, INC.
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
New River Holding, Inc. (the "Corporation"), a corporation organized under
the General Corporation Law of the State of Delaware (the "General Corporation
Law") hereby certifies as follows:
FIRST: That the Board of Directors of the Corporation, by unanimous
written consent, duly adopted a resolution setting forth the following proposed
amendment to the Certificate of Incorporation of the Corporation and declaring
such amendment to be advisable:
1. ARTICLE FIRST of the Certificate of Incorporation of the
Corporation is hereby amended to change the name of the Corporation to
"Riverwood Holding, Inc."
SECOND: That in lieu of a meeting and vote of the stockholders of the
Corporation, the stockholders have by unanimous written consent, dated as of
March 27, 1996, approved the adoption of the foregoing amendment in accordance
with the provisions of Section 228 of the General Corporation Law, and that such
consent has been filed with the minutes of the proceedings of the stockholders
of the Corporation.
THIRD: That the foregoing amendment of the Certificate of Incorporation
was duly adopted pursuant to the applicable provisions of Sections 141, 228 and
242 of the General Corporation Law.
<PAGE>
Exhibit 3.2
IN WITNESS WHEREOF, the undersigned, being a duly authorized Vice
President of the Corporation, for the purpose of amending the Certificate of
Incorporation of the Corporation pursuant to Section 242 of the General
Corporation Law of the State of Delaware, does make and file this Certificate,
hereby declaring and certifying that the facts herein stated are true, and
accordingly has hereunto set his hand, this 27th day of March, 1996.
NEW RIVER HOLDING, INC.
/s/ Kevin J. Conway
----------------------
Kevin J. Conway
Vice President
Exhibit 4.5
EXECUTION COPY
AMENDMENT No. 3, dated as of November 4, 1996 (this "Amendment"), to
the Credit Agreement, dated as of March 20, 1996, as hereby or hereafter
amended, supplemented or otherwise modified, the "Credit Agreement"), among
Riverwood International Corporation (as successor to RIC Holding, Inc.) (the
"Parent Borrower"), the Foreign Subsidiary Borrowers (as therein defined), the
several banks and other financial institutions parties to the Credit Agreement
(the "Lenders") and The Chase Manhattan Bank (formerly known as Chemical Bank),
as administrative agent for the Lenders thereunder (in such capacity, the
"Administrative Agent").
W I T N E S S E T H :
WHEREAS, the Parent Borrower has requested that the Administrative
Agent, the Lenders and the Machinery Credit Agreement Lenders agree to amend
subsection 8.7(d) of the Credit Agreement; and
WHEREAS, the Administrative Agent, the Lenders and the Machinery
Credit Agreement Lenders are willing to agree to the requested amendment but
only on the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
A. Definitions. Unless otherwise defined herein, terms defined in
the Credit Agreement shall have their defined meanings when used herein.
B. Amendment of Subsection 8.7(d) (Limitation on Dividends).
Subsection 8.7(d) of the Credit Agreement is hereby amended by deleting the last
proviso contained therein (which proviso was added in Amendment No.2, dated as
of September 17, 1996) in its entirety and substituting in place thereof the
following:
"provided, further, that the cash dividends paid in respect of repurchases
from Management Investors shall not exceed in the aggregate during each
fiscal year of Holding set forth below the amount set forth opposite such
fiscal year below:
Fiscal Year Amount
----------- ------
1996 $4,000,000
1997 $4,000,000
1998 $5,000,000
1999 and thereafter $6,000,000
<PAGE>
2
C. Conditions to Effectiveness. The effectiveness of this Amendment
shall be subject to the satisfaction of the following conditions precedent:
1. Amendment. The Administrative Agent shall have received
counterparts of this Amendment executed by the Parent Borrower and
consented to by the Combined Required Lenders.
2. Reaffirmation of Guarantees. The Administrative Agent shall have
received a reaffirmation of the Holding Guarantee and the Subsidiaries
Guarantee executed by Holding and the Domestic Subsidiaries, respectively,
forms of which are attached hereto as Exhibit A and Exhibit B,
respectively.
D. Representations and Warranties.
In order to induce the Administrative Agent, the Lenders and the
Machinery Credit Agreement Lenders to enter into this Amendment, the Parent
Borrower hereby represents and warrants to the Administrative Agent and such
lenders as follows:
The representations and warranties of the Parent Borrower contained
in Section 5 of the Credit Agreement are true and correct in all material
respects on and as of the Amendment Effective Date (after giving effect hereto)
as if made on and as of the Amendment Effective Date (except where such
representations and warranties expressly relate to an earlier date in which case
such representations and warranties were true and correct in all material
respects as of such earlier date); provided that all references to the "Credit
Agreement" in such Section 5 shall be and are deemed to mean this Amendment as
well as the Credit Agreement as amended hereby.
E. Miscellaneous.
1. Effective Date. As used in this Amendment the term "Amendment
Effective Date" shall mean the date on which all conditions precedent pursuant
to Section C hereof shall have been satisfied.
2. Applicable Law and Jurisdiction. This Amendment has been executed
and delivered in New York, New York, and the rights and obligations of the
parties hereto shall be governed by, and shall be construed and enforced in
accordance with, the laws of the State of New York.
3. Counterparts. This Amendment may be executed by the parties
hereto in any number of separate counterparts and all of said counterparts taken
together shall be deemed to constitute one and the same instrument.
<PAGE>
3
4. Fees and Expenses. The Parent Borrower agrees to pay and
reimburse the Administrative Agent for all of its reasonable out-of-pocket costs
and expenses in connection with the negotiation, preparation, execution and
delivery of this Amendment, including without limitation the reasonable fees and
expenses of Simpson Thacher & Bartlett.
5. Successors and Assigns. This Amendment shall be binding upon and
inure to the benefit of the Parent Borrower and its successors and assigns, and
upon the Administrative Agent, the Lenders and the Machinery Credit Agreement
Lenders and their successors and assigns. The execution and delivery of this
Amendment by any Lender shall be binding upon its successors and assigns.
6. Continuing Effect. Except as expressly amended and waived hereby,
the Credit Agreement as amended by this Amendment shall continue to be and shall
remain in full force and effect in accordance with its terms. This Amendment
shall not constitute an amendment or waiver of any provision of the Credit
Agreement not expressly referred to herein and shall not be construed as an
amendment, waiver or consent to any action on the part of the Borrowers that
would require an amendment, waiver or consent of the Administrative Agent, the
Lenders or the Machinery Credit Agreement Lenders except as expressly stated
herein. Any reference to the "Credit Agreement" in the Loan Documents or any
related documents shall be deemed to be a reference to the Credit Agreement as
amended by this Amendment.
<PAGE>
4
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and delivered by their respective duly authorized officers as of the
day and year first above written.
RIVERWOOD INTERNATIONAL CORPORATION
By:___________________________________
Title:
THE CHASE MANHATTAN BANK (formerly
known as Chemical Bank), as
Administrative Agent, Swing Line
Lender, Issuing Lender and Lender
By:___________________________________
Title:
Consented to:
ACADIA PARTNERS, L.P.
By: Acadia FW Partners, L.P.
as General Partner of Acadia
Partners, L.P.
By: Acadia MGP, Inc. as
Managing General
Partner of the General
Partner
By:______________________________
Title:
AERIES FINANCE LTD.
By:_______________________________
Title:
ARAB AMERICAN BANK
By:_______________________________
Title:
<PAGE>
5
BHF-BANK AKTIENGESELLSCHAFT
By:________________________________
Title:
By:________________________________
Title:
BANCO ESPIRITO SANTO e COMERCIAL
de LISBOA, NASSAU BRANCH
By:________________________________
Title:
By:________________________________
Title:
BANK OF AMERICA ILLINOIS
By:________________________________
Title:
BANK OF MONTREAL
By:________________________________
Title:
THE BANK OF NOVA SCOTIA
By:________________________________
Title:
BANK OF TOKYO-MITSUBISHI, LTD.
By:________________________________
Title:
<PAGE>
6
THE BANK OF NEW YORK
By:________________________________
Title:
BANQUE NATIONALE DE PARIS
By:________________________________
Title:
By:________________________________
Title:
BANQUE WORMS CAPITAL CORPORATION
By:________________________________
Title:
By:________________________________
Title:
BZW DIVISION OF BARCLAYS BANK PLC
By:________________________________
Title:
CAPTIVA FINANCE LTD.
By:________________________________
Title:
CHL HIGH YIELD LOAN PORTFOLIO,
a unit of The Chase Manhattan Bank
By:________________________________
Title:
<PAGE>
7
CIBC INC.
By:________________________________
Title:
CERES FINANCE, LTD.
By:________________________________
Title:
CHRISTIANIA BANK OG KREDITKASSE
By:________________________________
Title:
By:________________________________
Title:
CITIBANK
By:________________________________
Title:
CoBANK, ACB
By:________________________________
Title: CoBANK, ACB
[COMERICA BANK
By:________________________________
Title:]
COMPAGNIE FINANCIERE DE CIC ET
DE L'UNION EUROPEENNE
By:________________________________
Title:
By:________________________________
Title:
<PAGE>
8
CREDIT AGRICOLE
By:________________________________
Title:
COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK B.A.,
"RABOBANK NEDERLAND", NEW YORK BRANCH
By:________________________________
Title:
By:________________________________
Title:
CREDITANSTALT-BANKVERIEN
By:________________________________
Title:
By:________________________________
Title:
CREDIT SUISSE
By:________________________________
Title:
By:________________________________
Title:
DLJ CAPITAL FUNDING, INC.
By:________________________________
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By:________________________________
Title:
<PAGE>
9
FIRSTRUST BANK
By:________________________________
Title:
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By:________________________________
Title:
THE FUJI BANK, LIMITED,
ATLANTA AGENCY
By:________________________________
Title:
GOLDMAN SACHS CREDIT PARTNERS
By:________________________________
Title:
HIBERNIA NATIONAL BANK
By:________________________________
Title:
IMPERIAL BANK
By:________________________________
Title:
INDOSUEZ CAPITAL FUNDING II, LTD.
By: Indosuez Capital, as Portfolio Advisor
By:________________________________
Title:
<PAGE>
10
ING CAPITAL CORPORATION
By:________________________________
Title:
ING CAPITAL ADVISORS, INC.
By:________________________________
Title:
KEYPORT LIFE INSURANCE COMPANY
By: Chancellor Senior Management, Inc.
as Portfolio Advisor
By:________________________________
Title:
MEDICAL LIABILITY MUTUAL INSURANCE COMPANY
By: Chancellor Senior Secured Management, Inc.
as Investment Manager
By:________________________________
Title:
MELLON BANK, N.A.
By:________________________________
Title:
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By:________________________________
Title:
<PAGE>
11
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By:________________________________
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
By:________________________________
Title:
MIDLAND BANK PLC, NEW YORK BRANCH
By:________________________________
Title:
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By:________________________________
Title:
MORGAN GUARANTY TRUST CO.
By:________________________________
Title:
MORGAN STANLEY SENIOR FUNDING INC.
By:________________________________
Title:
NATIONAL BANK OF KUWAIT
By:________________________________
Title:
<PAGE>
12
NATIONAL CITY BANK
By:________________________________
Title:
NATIONSBANK, N.A.
By:________________________________
Title:
NEW YORK LIFE INSURANCE AND ANNUITY
CORPORATION
By:________________________________
Title:
NEW YORK LIFE INSURANCE
COMPANY
By:________________________________
Title:
ORIX USA CORPORATION
By:________________________________
Title:
PNC BANK, NATIONAL ASSOCIATION
By:________________________________
Title:
PILGRIM AMERICA PRIME RATE TRUST
By:________________________________
Title:
<PAGE>
13
PROTECTIVE LIFE INSURANCE COMPANY
By:________________________________
Title:
RESTRUCTURED OBLIGATIONS BACKED
BY SENIOR ASSETS B.V.
By: Chancellor Senior Management, Inc.
as Portfolio Advisor
By:________________________________
Title:
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
By:________________________________
Title:
SENIOR HIGH INCOME PORTFOLIO, INC.
By:________________________________
Title:
SOCIETE GENERALE
By:________________________________
Title:
SOUTHERN PACIFIC THRIFT & LOAN
ASSOCIATION
By:________________________________
Title:
STRATA FUNDING LTD.
By:________________________________
Title:
<PAGE>
14
TORONTO DOMINION (TEXAS), INC.
By:________________________________
Title:
WELLS FARGO BANK, N.A.
By:________________________________
Title:
THE YASUDA TRUST BANKING COMPANY,
LTD.
By:________________________________
Title:
<PAGE>
15
REAFFIRMATION OF HOLDING GUARANTEE
The undersigned hereby (i) acknowledges receipt of a copy of, and
hereby consents to the matters set forth in, the foregoing Amendment and (ii)
ratifies and confirms in all respects its obligations under the Holding
Guarantee (as defined in such Amendment).
Dated as of: November __, 1996
RIVERWOOD HOLDING, INC.
By: _________________________
Title:
<PAGE>
16
REAFFIRMATION OF SUBSIDIARIES GUARANTEE
The undersigned hereby (i) acknowledge receipt of a copy of, and
hereby consent to the matters set forth in, the foregoing Amendment and (ii)
ratify and confirm in all respects their obligations under the Subsidiaries
Guarantee (as defined in such Amendment).
Dated as of: November __, 1996
NEW RIVER TIMBER, INC.
By:___________________________
Title:
SLEVIN SOUTH COMPANY
By:___________________________
Title:
RIVERWOOD INTERNATIONAL
ENTERPRISES, INC.
By:___________________________
Title:
RIVERWOOD INTERNATIONAL
MACHINERY, INC.
By:___________________________
Title:
PINE PIPELINE, INC.
By:___________________________
Title:
<PAGE>
17
RIVERWOOD SWEDISH INVESTMENTS,
INC.
By:___________________________
Title:
[CONFORMED COPY]
Exhibit 10.10
AGREEMENT, dated as of November 11, 1996 (this "Agreement"), among
Riverwood International Corporation, a Delaware corporation (the "Company"), RIC
Holding, Inc., a Delaware corporation ("RIC Holding"), Riverwood Holding, Inc.,
a Delaware corporation ("Holding"), and Thomas H. Johnson ("Executive"),
W I T N E S S E T H :
WHEREAS, Executive and RIC Holding (as successor by merger to the
former Riverwood International Corporation) were parties to an Employment
Agreement, dated as of April 10, 1992, as amended from time to time prior to
March 27, 1996 (as so amended, the "Prior Agreement");
WHEREAS, the Prior Agreement was amended and restated pursuant to an
Amended and Restated Employment Agreement, dated as of March 27, 1996 (the
"Amended Agreement"), among the Company (formerly named Riverwood International
USA, Inc.), Holding (formerly named New River Holding, Inc.) and Executive;
WHEREAS, the Prior Agreement was superseded in its entirety by the
terms of the Amended Agreement, and the terms of the Prior Agreement are of no
further force or effect, except that certain provisions of section 9 of the
Prior Agreement continue in effect;
WHEREAS, Holding and Executive are parties to a Management Stock
Subscription Agreement, dated as of June 4, 1996 (the "Subscription Agreement");
WHEREAS, Holding and Executive are parties to a Management Stock
Option Agreement, dated as of June 4, 1996 (the "Option Agreement");
WHEREAS, Executive is currently employed as President and Chief
Executive Officer of the Company pursuant to the terms of the Amended
Agreement, and is also (i) the President and Chief Executive Officer of each of
Holding and RIC Holding, (ii) a member of the Boards of Directors of Holding,
RIC Holding, the Company and various other direct and indirect subsidiaries of
Holding and (iii) an officer of various other direct and indirect subsidiaries
of Holding;
<PAGE>
WHEREAS, in connection with a realignment of the executive
management of the Company, on October 8, 1996, the Board of Directors of each of
Holding, RIC Holding and the Company elected Mr. B. Charles Ames to act as chief
executive officer of such corporation, respectively, and granted and delegated
to Mr. Ames in such capacity the authority, powers and duties theretofore held,
exercised and performed by Executive as the President and Chief Executive
Officer of such corporation, respectively;
WHEREAS, Executive wishes to terminate his employment as the
President and Chief Executive Officer of the Company, and the parties hereto
have agreed that such termination would constitute a termination for Good
Reason (as defined in the Amended Agreement);
WHEREAS, a termination by Executive of his employment for Good
Reason would have certain consequences under the Amended Agreement, the
Subscription Agreement and the Option Agreement;
WHEREAS, in conjunction with the termination of his employment as
the President and Chief Executive Officer of the Company, Executive wishes to
resign from (i) his position as the President and Chief Executive Officer of
each of Holding and RIC Holding, (ii) the Boards of Directors (including, to the
extent applicable, all committees thereof) of Holding, RIC Holding, the Company
and all other direct and indirect subsidiaries of Holding and (iii) all his
positions as an officer of all other direct and indirect subsidiaries of
Holding;
WHEREAS, the Company desires to secure the continued services of
Executive, and Executive desires to continue in the employment of the Company,
following Executive's termination of his employment as the President and Chief
Executive Officer of the Company, and, in connection therewith, the Company and
Executive desire to amend and restate the terms and provisions of the Amended
Agreement to, among other things, set forth the terms of such continued
employment;
WHEREAS, Executive has served as President and Chief Executive
Officer, and will serve as Vice-Chairman of the Company pursuant to the terms
hereof, and in such positions has been and will be exposed to a substantial
amount of confidential and proprietary information concerning the business and
operations of the Company and its affiliates; and
2
<PAGE>
WHEREAS, Holding, RIC Holding, the Company and Executive wish to
agree upon the consequences of the termination by Executive of his employment
as the President and Chief Executive Officer of the Company,
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and promises contained herein and for other good and valuable
consideration, the Company and Executive hereby agree to amend and restate the
Amended Agreement in its entirety, and Holding, RIC Holding, the Company and
Executive hereby agree with respect to certain matters, as follows:
1. Agreement to Employ. Upon the terms and subject to the conditions
of this Agreement, the Company hereby employs Executive, and Executive hereby
accepts employment by the Company. The Company, Holding, RIC Holding and
Executive shall use their respective best efforts to avoid the imposition of any
excise tax under section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), with respect to all payments made by the Company or any of its
affiliates to or for the benefit of Executive, provided that Executive shall in
no event be required to forgo, reduce or delay any payment or benefit provided
for by the Company or any of its affiliates in order to avoid or reduce any such
excise tax, and provided, further, that Holding shall use its best efforts to
obtain the approval of holders of at least 75% of its shares to the terms of
this Agreement as contemplated by section 280G(b)(5)(B) of the Code, except that
any disclosure to shareholders need be made only to holders of 75% of its
shares.
2. Term; Position and Responsibilities.
(a) Term of Service. The period during which Executive shall perform
services for the Company pursuant to this Agreement (the "Service Period") will
commence on November 11, 1996 and will expire on the first to occur of the
following dates (the "Service Termination Date"): (i) December 31, 1997, (ii)
June 30, 1997, if either the Company or Executive gives written notice prior to
May 31, 1997 of its or his intention to terminate such services as of June 30,
1997 or (iii) the date of death or Disability of Executive. For purposes of this
Agreement, "Disability" shall mean a physical or mental disability that prevents
or would prevent the performance by Executive of his duties hereunder for a
continuous period of six months or longer. The determination of Executive's
Disability shall be
3
<PAGE>
(x) made by an independent physician who is reasonably acceptable to the Company
and Executive (or his representative), (y) final and binding and (z) based on
such competent medical evidence as shall be presented to him by Executive
and/or the Company or by any physician or group of physicians or other competent
medical experts employed by Executive and/or the Company to advise such
independent physician. The date of any Disability shall be the date of such
determination. The Company and Executive hereby agree that the concepts of
constructive termination, termination for good reason and termination with or
without cause shall not apply to this Agreement.
(b) Position and Responsibilities. During the Service Period,
Executive shall serve as Vice-Chairman of the Company, performing such duties
(consistent with his title and position) as the Chairman of the Board of
Directors of the Company (the "Chairman") may request, which shall include but
not be limited to liaison with customers and joint venture partners, development
of growth initiatives and strategic alliances, and advising the Chairman on
similar matters. Executive shall devote all of his skill and knowledge and shall
make available to the Company no less than one-half of his working time (except
for vacation time as set forth in Section 6(b) and absence for sickness or
similar disability) over the Service Period to his duties as Vice-Chairman
(recognizing that for particular periods of time Executive may devote more or
less than the specified portion of his time to such duties), or such lesser
portion of his time as the Chairman may designate, and shall make himself
reasonably available to perform services under this Agreement in locations
outside the Atlanta, Georgia area, but it shall be expressly understood that
Executive may also pursue other interests (including searching for new full-time
employment), and that he may serve as a member of the boards of directors of
other corporations and entities, subject to the provisions of Section 9. The
Company and Executive hereby agree that the position of Vice-Chairman shall not
constitute a position as an "officer" of the Company or a "member" of the "board
of directors" of the Company within the meaning of such terms under the Delaware
General Corporation Law, that Executive shall not be treated as an officer or
director of the Company under, and shall not be assigned any functions or
responsibilities in, the by-laws or certificate of incorporation of the Company,
that Executive shall not have any power or authority as Vice-Chairman not
expressly delegated to him by the Chairman, and that without limiting the
foregoing Executive shall not have any power or authority to sign certificates
representing
4
<PAGE>
shares of stock in the Company or to serve as the Chairman in the absence of the
Chairman.
3. Service Fee. As compensation for the services to be performed by
Executive during the Service Period, the Company shall pay Executive a service
fee (the "Service Fee") at an annualized rate of $500,000.00, payable in pro
rata installments on the Company's regular payroll dates, with the first
installment being paid on the Company's first regular payroll date occurring
after November 11, 1996. The Company shall pay to Executive (or his estate, in
the event of the death of Executive) the Service Fee through and including the
Service Termination Date.
4. Other Payments and Compensation Arrangements.
(a) Incentive Compensation. If the Service Termination Date is no
earlier than June 30, 1997, Executive will receive, no later than August 15,
1997, an incentive bonus of $250,000.00 if the following target (the "Six-Month
Target") is attained: the Company's actual Coated Board revenues net of returns
and allowances, expressed in dollars ("Net Revenues"), for the first six months
of 1997 equal or exceed the product obtained by multiplying (i)
$1,118,400,000.00 by (ii) the quotient obtained by dividing (A) the Coated Board
Net Revenues projected for the first six months of 1997 under the Company's 1997
business plan as approved in good faith by the Board of Directors of the Company
on or before February 28, 1997 (the "Company Plan") by (B) the Coated Board Net
Revenues projected for the Company's fiscal year ending December 31, 1997 under
the Company Plan. The Company shall send a copy of the Company Plan to Executive
no later than March 15, 1997. If no 1997 business plan is approved in good faith
by the Board of Directors of the Company on or before February 28, 1997, then
the quotient set forth in clause (ii) of the immediately preceding sentence
shall be 0.45. In addition, if the Service Termination Date is no earlier than
December 31, 1997, Executive will receive, no later than February 15, 1998, an
incentive bonus of $750,000.00 if the following target (the "Twelve-Month
Target") is attained: the Company's actual Coated Board Net Revenues for the
Company's fiscal year ending December 31, 1997 equal or exceed
$1,118,400,000.00. If the Service Termination Date is the date of death or
Disability of Executive and is (i) on or after January 1, 1997 but prior to June
30, 1997, if the Six-Month Target is achieved, then Executive (or his estate)
will receive, no later than August 15, 1997, an incentive bonus of $250,000.00
multiplied by the number of days from
5
<PAGE>
January 1, 1997 to the date of death or Disability and divided by 181, or (ii)
on or after July 1, 1997 but prior to December 31, 1997, if the Twelve-Month
Target is achieved, then Executive (or his estate) will receive, no later than
February 15, 1998, an additional incentive bonus of $750,000.00 multiplied by
the number of days from January 1, 1997 to the date of death or Disability and
divided by 365.
(b) Repurchase of Shares. Executive currently owns 30,000 shares
(the "Shares") of the Class A Common Stock of Holding, par value $.01 per share
(the "Common Stock"), which shares were acquired pursuant to and are subject to
the provisions of the Subscription Agreement. Holding and Executive each hereby
agrees that the Subscription Agreement shall be amended as of the date hereof
pursuant to an amendment substantially in the form of Exhibit A hereto.
Notwithstanding any provisions to the contrary contained in the Subscription
Agreement, the rights and obligations to repurchase or to require the
repurchase of the Shares pursuant to the Subscription Agreement shall not be
triggered as a result of Executive's change in status from President and Chief
Executive Officer to Vice-Chairman. The Company and Holding shall use their best
efforts to obtain, and Executive shall cooperate with them in obtaining, a
waiver of any provisions allowing the lender under any loan made to Executive to
finance his purchase of the Shares to accelerate the repayment of the principal
thereof or interest thereon as a result of Executive's change in status from
President and Chief Executive Officer to Vice-Chairman. Without the express
written consent of Executive, neither the Company, Holding nor RIC Holding shall
initiate the imposition of any restrictions on repurchases of the Shares by
Holding other than those in effect on the date hereof.
(c) Options. With respect to the Service Options (as such term is
defined in the Option Agreement) to purchase up to 60,000 shares of Common Stock
granted to Executive pursuant to the Option Agreement and the Performance
Options (as such term is defined in the Option Agreement) to purchase up to
30,000 shares of Common Stock granted to Executive pursuant to the Option
Agreement, Holding and Executive each hereby agrees that the Option Agreement
shall be amended as of the date hereof pursuant to an amendment substantially in
the form of Exhibit B hereto. Notwithstanding any provisions to the contrary
contained in the Option Agreement, the vesting and exercise of such options
shall not be affected as a result of Executive's
6
<PAGE>
change in status from President and Chief Executive Officer to Vice-Chairman,
except as reflected in Exhibit B hereto.
(d) Additional Payment. On November 11, 1996 Executive will receive
from the Company an amount equal to $2,714,161.71, reduced by the amount of any
applicable withholding taxes thereon.
(e) Supplemental Executive Retirement Plan. On November 11, 1996
Executive will receive a lump-sum payment of $78,881.53 with respect to his
participation in the Company's supplemental executive retirement plan through
such date, reduced by the amount of any applicable with holding taxes thereon.
On the fifteenth day of the first month after the end of the calendar quarter in
which the Service Termination Date occurs, Executive will receive an additional
lump-sum payment, the amount to be calculated by the Company's actuary as of the
Service Termination Date, with respect to his participation in the Company's
supplemental executive retirement plan after November 11, 1996 and through the
Service Termination Date, reduced by the amount of any applicable withholding
taxes thereon.
5. Service Benefits.
(a) Service Period Benefits. To the extent eligible, and subject to
the provisions set forth in Section 5(b), during the Service Period, Executive
will continue to participate in all pension, welfare and fringe benefit plans
and programs of the Company in which he is participating immediately prior to
November 11, 1996, other than long-term disability benefits and the perquisites
set forth on Schedule I to the Amended Agreement, without any reduction in
benefits or coverage, or any increase in net after-tax cost to Executive other
than any such increase that applies generally to other senior executives of the
Company. The benefits referred to in the preceding sentence include, but are not
limited to, the following: (i) benefits under applicable retirement and savings
programs (including the Company's section 401(k) plan) and (ii) life insurance,
medical, dental, accidental death and dismemberment and prescription drug
benefits.
(b) Benefit Reductions. If, during the Service Period, any benefits
under any pension, welfare or fringe benefit plan or program of the Company in
which Executive is participating immediately prior to November 11, 1996, other
than long-term disability benefits and the perquisites set forth on Schedule I
to the Amended Agreement, are reduced or
7
<PAGE>
are not available to Executive for any reason (whether because he is providing
services to the Company on a part-time basis, because the Company changes any
such plan or program covering its executive officers, because he is no longer an
officer of the Company, or otherwise), the Company shall provide Executive
additional compensation or benefits having an after-tax economic value to
Executive equal to the after-tax economic value to him of such benefit reduction
or unavailable benefit.
(c) Post-Service Period Benefits. For the period following the
Service Period and ending March 27, 2001, in lieu of Executive's participation
in welfare and fringe benefit plans and programs of the Company, he will receive
a lump-sum payment of $22,958.13 on January 15, 1998, reduced by the amount of
any applicable withholding taxes thereon. Executive shall become eligible for
COBRA continuation beginning on the Service Termination Date. The pro visions
of this Section 5(c), except those relating to COBRA continuation rights, shall
not apply if Executive's employment shall terminate upon his death.
6. Expenses, etc.
(a) Business Travel, Lodging, etc. The Company shall reimburse
Executive, in accordance with policies and procedures no less favorable
(including with respect to timing of reimbursement) to Executive than to other
senior executives of the Company, for reasonable travel, lodging, meal and other
reasonable expenses incurred by him in connection with his performance of
services hereunder upon submission of evidence, satisfactory to the Company, of
the incurrence and purpose of each such expense and otherwise consistent with
the Company's business travel reimbursement policy applicable to senior
executives as in effect from time to time.
(b) Vacation. During the Service Period, Executive shall be entitled
to four weeks of paid vacation on an annualized basis.
(c) Office Space; Secretarial Assistance. During the Service Period,
Executive shall be provided office space, office equipment and furnishings and
secretarial assistance, in the Atlanta, Georgia executive offices of the
Company, in all cases consistent with Executive's title and position and his
search for new full-time employment, including the services of Executive's
current administrative assistant. At the request of the Chairman or Executive,
8
<PAGE>
such office space shall be an office other than Executive's current office and,
with the mutual consent of the Company and Executive, may be at a location in
the Atlanta area other than within the executive offices of the Company.
(d) Outplacement Services. During the Service Period and thereafter,
the Company shall reimburse Executive for expenses incurred by Executive for
outplacement and career counseling services provided to Executive for an
aggregate amount not to exceed $25,000.00, in accordance with reimbursement
policies and procedures similar to those provided for in Section 6(a).
7. Resignations.
(a) Resignation from Current Positions. Effective as of November
11, 1996, Executive shall resign, in writing, from all positions he holds, as of
such date, with Holding, RIC Holding, the Company and their respective
affiliates, and shall thereafter serve solely in the position of Vice-Chairman
of the Company pursuant to the terms hereof, except as the parties may hereafter
agree.
(b) Resignation upon Termination. Effective as of the Service
Termination Date, Executive shall resign, in writing, from the position of
Vice-Chairman of the Company and from all other positions he then holds with
Holding, RIC Holding, the Company and their respective affiliates.
8. Unauthorized Disclosure. During the Service Period and the period
thereafter ending on the tenth anniversary of the Service Termination Date,
without the prior written consent of the Board or its authorized representative,
except to the extent required by an order of a court having apparent
jurisdiction or under subpoena from an appropriate government agency, in which
event, Executive shall use his best efforts to consult with the Board prior to
responding to any such order or subpoena, and except in connection with the
performance of his duties hereunder, Executive shall not disclose any
confidential or proprietary trade secrets, customer lists, drawings, designs,
information regarding product development, marketing plans, sales plans,
manufacturing plans, management organization information (including data and
other information relating to members of the Board, the Board of Directors of
Holding and management of the Company or Holding), operating policies or
manuals, business plans, financial records, packaging design or other financial,
commercial, business or technical information relating to Holding, the Company
or any of their
9
<PAGE>
respective subsidiaries or affiliates or that Holding, the Company or any of
their respective subsidiaries or affiliates may receive belonging to suppliers,
customers or others who do business with Holding, the Company or any of their
respective subsidiaries or affiliates (collectively, "Confidential Information")
to any third person unless such Confidential Information has been previously
disclosed to the public or is in the public domain (other than by reason of
Executive's breach of this Section 8).
9. Non-Competition. During the Service Period and the period
thereafter ending on the first anniversary of the Service Termination Date (such
periods referred to collectively as the "Restriction Period"), Executive shall
not, directly or indirectly, engage in, become employed by, serve as an agent or
consultant to, or become a partner, principal or stockholder (other than a
holder of less than 1% of the outstanding voting shares of any publicly held
company) of The Mead Corporation or any of its subsidiaries or of any other
current or future direct competitor throughout the world (or any of such direct
competitor's subsidiaries or affiliates) of Holding, the Company or any of their
respective subsidiaries, as determined in good faith by the Board.
10. Non-Solicitation of Employees. During the Restriction Period,
Executive shall not, directly or indirectly, for his own account or for the
account of any other person or entity with which he is or shall become
associated in any capacity, (a) solicit for employment, employ or otherwise
interfere with the relationship of Holding, the Company or any of their
respective subsidiaries with any person throughout the world who at any time
during the six months preceding such solicitation, employment or interference is
or was employed by or otherwise engaged to perform services for Holding, the
Company or any of their respective subsidiaries, other than any such
solicitation or employment on behalf or for the benefit of the Company during
Executive's employment with the Company, or (b) induce any employee of Holding,
the Company or any of their respective subsidiaries who is a member of
management to engage in any activity which Executive is prohibited from engaging
in under any of Sections 8, 9, 10 or 11 or to terminate his employment with the
Company.
11. Non-Solicitation of Customers. During the Restriction Period,
Executive shall not, directly or indirectly, solicit or otherwise attempt to
establish, for himself or any other person, firm or entity, any business
relationship of a nature that is competitive with the busi-
10
<PAGE>
ness or relationship of Holding, the Company or any of their respective
subsidiaries with any person, firm or corporation throughout the world which
during the twelve-month period preceding the Service Termination Date was a
customer, client or distributor of Holding, the Company or any of their
respective subsidiaries, other than any such solicitation on behalf or for the
benefit of the Company during Executive's employment with the Company.
12. Return of Documents. Upon the Service Termination Date,
Executive shall deliver to the Company all of Holding's, the Company's or any of
their respective subsidiaries' property, and Holding's, the Company's or any of
their respective subsidiaries' non-personal documents and data of any nature and
in whatever medium pertaining to Executive's employment with Holding, the
Company or any of their respective subsidiaries, and he shall not take with him
any such property, documents or data of any description or any reproduction
thereof, or any documents containing or pertaining to any Confidential
Information. Whether documents or data are "personal" or "non-personal" shall
be determined as follows: Executive shall present any documents or data that he
wishes to take with him to the chief legal officer of the Company for his
review. The chief legal officer shall make an initial determination whether any
such documents or data are personal or non-personal, and with respect to such
documents or data that he determines to be non-personal, shall notify Executive
either that such documents or data must be retained by the Company or that the
Company must make and retain a copy thereof before Executive takes such
documents or data with him. Any disputes as to the personal or non-personal
nature of any such documents or data shall first be presented to the Chairman,
and if such disputes are not promptly resolved by Executive and the Chairman,
such disputes shall be resolved through arbitration pursuant to Section 23(b).
13. Injunctive Relief with Respect to Covenants; Forum, Venue and
Jurisdiction. Executive acknowledges and agrees that the covenants, obligations
and agreements of Executive contained in Sections 8, 9, 10, 11, 12 and 13 relate
to special, unique and extraordinary matters and that a violation of any of the
terms of such covenants, obligations and agreements will cause the Company
irreparable injury for which adequate remedies are not available at law.
Therefore, Executive agrees that the Company shall be entitled to an injunction,
restraining order or such other equitable relief (without the requirement to
post bond) as a court of competent jurisdiction may deem necessary or
11
<PAGE>
appropriate to restrain Executive from committing any violation of such
covenants, obligations and agreements. These injunctive remedies are cumulative
and in addition to any other rights and remedies the Company may have. If the
Company does not substantially prevail in obtaining and confirming the
injunctive relief it seeks, the Company shall reimburse the Executive for any
and all legal expenses (including attorneys' fees and reasonable travel
expenses) incurred by him in defending against the imposition of such injunctive
relief. Holding, RIC Holding, the Company and Executive hereby irrevocably
submit to the exclusive jurisdiction of the courts of the State of New York and
the Federal courts of the United States of America, in each case located in New
York City, solely in respect of the injunctive remedies set forth in this
Section 13 and the interpretation and enforcement of Sections 8, 9, 10, 11, 12
and 13 solely insofar as such interpretation and enforcement relate to an
application for injunctive relief in accordance with the provisions of this
Section 13, and the parties hereto hereby irrevocably agree that (i) the sole
and exclusive appropriate venue for any suit or proceeding relating solely to
such injunctive relief shall be in such a court, (ii) all claims with respect to
any application solely for such injunctive relief shall be heard and deter mined
exclusively in such a court, (iii) any such court shall have exclusive
jurisdiction over the person of such parties and over the subject matter of any
dispute relating to an application solely for such injunctive relief, and (iv)
each hereby waives any and all objections and defenses based on forum, venue or
personal or subject matter jurisdiction as they may relate to an application
solely for such injunctive relief in a suit or proceeding brought before such a
court in accordance with the provisions of this Section 13. All disputes not
relating to requests for injunctive relief in accordance with this Section 13
shall be resolved by arbitration in accordance with Section 23(b).
14. Assumption of Agreement. Holding, RIC Holding and the Company
shall require any successor (by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets thereof, by agreement in
form and substance reasonably satisfactory to Executive, to expressly assume and
agree to perform this Agreement in the same manner and to the same extent that
it would be required to perform this Agreement if no such succession had taken
place.
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15. Waiver of Certain Rights. Holding, RIC Holding, the Company and
Executive hereby acknowledge and agree that the Amended Agreement is superseded
in its entirety by the terms of this Agreement, and the terms of the Amended
Agreement shall, from and after the date hereof, be of no further force or
effect, except that the provisions of section 9 of the Prior Agreement, attached
as Exhibit C hereto, shall continue in effect with respect to any Excise Tax (as
defined therein) required to be paid by Executive with respect to "excess
parachute payments" (within the meaning of section 280G of the Code), if any,
received by Executive in connection with the Merger (as defined in the Amended
Agreement), under the terms of the Amended Agreement and under the terms of this
Agreement, except any such payments received by Executive that are contingent on
any corporate transaction occurring after the Merger, within the meaning of
section 280G of the Code.
16. Entire Agreement; Related Documents. Except as and to the extent
set forth in other written agreements or corporate governance documents, this
Agreement (including the Exhibits hereto) constitutes the entire agreement among
the parties hereto with respect to the subject matter hereof. All prior
correspondence and proposals (including summaries of proposed terms) and all
prior promises, representations, understandings, arrangements and agreements
(except for other written agreements and corporate governance documents)
relating to such subject matter (including but not limited to those made to or
with Executive by any other person or entity or pursuant to the Amended
Agreement) are merged herein and superseded hereby. This Agreement supersedes
and discharges the obligations of all parties to the Amended Agreement and any
other employment agreement currently in effect for Executive with Holding or
any of its subsidiaries, except to the extent specifically set forth in Section
15. The Subscription Agreement, the Option Agreement and all other relevant
agreements, plans and documents shall be amended as appropriate to carry out
the provisions of this Agreement.
17. Indemnification. The Company hereby agrees that it shall
indemnify and hold harmless Executive to the fullest extent permitted by
Delaware law from and against any and all liabilities, costs, claims and
expenses including but not limited to all costs and expenses incurred in
defense of litigation, including attorneys' fees, arising out of, or relating
to, the employment of Executive by the Company or Executive's services to or for
the Company or its
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affiliates, except to the extent arising out of or based upon the gross
negligence or willful misconduct of Executive. Notwithstanding any other
provision of this Agreement (including but not limited to the exception
contained in the immediately preceding sentence), costs and expenses incurred by
Executive in defense of such litigation, including attorneys' fees, shall be
paid by the Company in advance of the final disposition of such litigation
promptly upon receipt by the Company of (i) a written request for payment, (ii)
appropriate documentation evidencing the incurrence, amount and nature of the
costs and expenses for which payment is being sought, and (iii) an undertaking
adequate under Delaware law made by or on behalf of Executive to repay the
amounts so paid if it shall ultimately be determined that Executive is not
entitled to be indemnified by the Company under this Agreement, including but
not limited to as a result of such exception.
18. Cooperation. Executive hereby agrees to cooperate (subject to
reasonable personal and other business commitments) with Holding and its
subsidiaries in connection with the Clay v. Riverwood International Corporation
et al. and related litigation (the "Clay Litigation") and any other litigation
involving Holding, the Company or their respective subsidiaries. The Company
shall reimburse Executive for all of Executive's out-of-pocket expenses and
costs relating to such cooperation promptly upon receipt by the Company of (i) a
written request for reimbursement and (ii) appropriate documentation evidencing
the incurrence, amount and nature of the expenses and costs for which
reimbursement is being sought, provided that the Company shall not thereby be
required to pay the fees and expenses of separate counsel for Executive (x) in
connection with the Clay Litigation in any event (as long as the Company is
providing counsel, which may be the Company's counsel, for Executive), or (y) in
connection with any other litigation (or the Clay Litigation if the Company is
not providing counsel for Executive), if the Company determines in good faith
that such separate counsel is not reasonably acceptable to it, for reasons
explained to Executive within 15 days after Executive first gives written notice
of his intent to engage separate counsel, which notice shall contain the name
and business address and telephone number of such separate counsel. After the
Service Termination Date, the Company shall compensate Executive for his own
time relating to such cooperation at an hourly rate commensurate with the
Service Fee, which the parties hereby agree shall be equal to $500.00 per hour.
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19. Reimbursement of Certain Expenses. The Company shall reimburse
Executive for all reasonable expenses, including legal fees and disbursements,
incurred by Executive in connection with his entering into this Agreement upon
submission of evidence, satisfactory to the Company, of the incurrence and
purpose of such expenses.
20. Mutual Releases. At the end of the Restriction Period, (a) the
Company, Holding and RIC Holding and (b) Executive shall execute mutual releases
substantially in the forms of Exhibit D1 and Exhibit D2 hereto.
21. Representations and Warranties. (a) Executive hereby represents
and warrants to Holding, RIC Holding and the Company that:
(i) This Agreement and the amendments to the Subscription Agreement
and the Option Agreement provided for herein have been duly executed and
delivered by him and constitute his valid and binding obligation,
enforceable against him in accordance with the terms
hereof and thereof.
(ii) The execution, delivery and performance by him of this
Agreement and the amendments to the Subscription Agreement and the Option
Agreement provided for herein are voluntary and will not result in (x)
any breach or violation of or default under any law, statute, rule,
regulation, judgment, order or decree or any mortgage, agreement,
indenture or any other instrument to which he is a party or by which he or
any of his properties or assets are bound, or (y) the creation or
imposition of any lien, mortgage, security interest, restriction or other
encumbrance on him or his assets or properties.
(iii) No consent, approval or authorization of or filing with any
court, arbitrator, tribunal, administrative or regulatory authority or
agency is required on his part in connection with the execution, delivery
or performance of this Agreement or the amendments to the Subscription
Agreement or the Option Agreement provided for herein.
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(b) Holding hereby represents and warrants to Executive that:
(i) This Agreement and the amendments to the Subscription Agreement
and the Option Agreement provided for herein have been duly executed and
delivered by it and constitute its valid and binding obligation,
enforceable against it in accordance with the terms hereof and thereof.
(ii) The execution, delivery and performance by it of this Agreement
and the amendments to the Subscription Agreement and the Option Agreement
provided for herein are voluntary and will not result in (x) any breach or
violation of or default under any law, statute, rule, regulation,
judgment, order or decree or any mortgage, agreement, indenture or any
other instrument to which it is a party or by which it or any of its
properties or assets are bound, or (y) the creation or imposition of any
lien, mortgage, security interest, restriction or other encumbrance on it
or its assets or properties, other than as reflected in this Agreement and
any other agreement or corporate governance document not superseded by
this Agreement, including but not limited to the Subscription Agreement
and the Option Agreement.
(iii) No consent, approval or authorization of or filing with any
court, arbitrator, tribunal, administrative or regulatory authority or
agency is required on its part in connection with the execution, delivery
or performance of this Agreement or the amendments to the Subscription
Agreement or the Option Agreement provided for herein.
(iv) It is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has all
requisite corporate power and authority to execute and deliver this
Agreement and the amendments to the Subscription Agreement and the Option
Agreement provided for herein, and to perform its obligations hereunder
and there under. The execution, delivery and performance by it of this
Agreement and the amendments to the Subscription Agreement and the Option
Agreement provided for herein have been duly authorized by its Board,
which constitutes all necessary corporate action on its part for such
authorization.
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(v) The execution, delivery and performance by it of this Agreement
and the amendments to the Subscription Agreement and the Option Agreement
provided for herein will not result in any conflict with its charter
documents or by-laws.
(vi) Pursuant to section 1 of the Amended Agreement, it has obtained
the approval of at least 75% of its shareholders to the terms of the
Amended Agreement as contemplated by section 280G(b)(5)(B) of the Code.
(vii) There are no direct restrictions on repurchases of the Shares
by it in effect on the date hereof and imposed under any agreement to
which it is a party or by which it is bound that is referred to in section
11(a)(i) of the Subscription Agreement, other than any such restriction
pursuant to (A) the Credit Agreement, dated as of March 20, 1996, as
amended, among the Company (as successor to RIC Holding), the lenders
party thereto and The Chase Manhattan Bank as administrative agent, or any
Loan Document (as such term is defined therein) referred to therein, (B)
the Machinery Credit Agreement, dated as of March 27, 1996, as amended,
among Riverwood International Machinery, Inc., the lenders party thereto,
The Chase Manhattan Bank as administrative agent and Bank of America NT &
SA as documentation agent, or any Loan Document (as such term is defined
therein) referred to therein, (C) the Indenture, dated as of March 27,
1996, as supplemented, among the Company, RIC Holding, Holding and Fleet
National Bank of Connecticut as Trustee, relating to RIC Holding's 10-1/4%
Senior Notes due 2006 that have been assumed by the Company, or (D) the
Indenture, dated as of March 27, 1996, as supplemented, among the Company,
RIC Holding, Holding and Fleet National Bank of Massachusetts as Trustee,
relating to RIC Holding's 10-7/8% Senior Subordinated Notes due 2008 that
have been assumed by the Company.
(c) RIC Holding hereby represents and warrants to Executive that:
(i) This Agreement has been duly executed and delivered by it and
constitutes its valid and binding obligation, enforceable against it in
accordance with the terms hereof.
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(ii) The execution, delivery and performance by it of this Agreement
are voluntary and will not result in (x) any breach or violation of or
default under any law, statute, rule, regulation, judgment, order or
decree or any mortgage, agreement, indenture or any other instrument to
which it is a party or by which it or any of its properties or assets are
bound, or (y) the creation or imposition of any lien, mortgage, security
interest, restriction or other encumbrance on it or its assets or
properties, other than as reflected in this Agreement and any other
agreement or corporate governance document not superseded by this
Agreement, including but not limited to the Subscription Agreement and the
Option Agreement.
(iii) No consent, approval or authorization of or filing with any
court, arbitrator, tribunal, administrative or regulatory authority or
agency is required on its part in connection with the execution, delivery
or performance of this Agreement.
(iv) It is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has all
requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. The execution,
delivery and performance by it of this Agreement have been duly authorized
by its Board, which constitutes all necessary corporate action on its part
for such authorization.
(v) The execution, delivery and performance of this Agreement by it
will not result in any conflict with its charter documents or by-laws.
(d) The Company hereby represents and warrants to Executive that:
(i) This Agreement has been duly executed and delivered by it and
constitutes its valid and binding obligation, enforceable against it in
accordance with the terms hereof.
(ii) The execution, delivery and performance by it of this Agreement
are voluntary and will not result in (x) any breach or violation of or
default under any law, statute, rule, regulation, judgment, order or
decree or any mortgage, agreement, indenture or any other instrument to
which it is a party or by which it
18
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or any of its properties or assets are bound, or (y) the creation or
imposition of any lien, mortgage, security interest, restriction or other
encumbrance on it or its assets or properties, other than as reflected in
this Agreement and any other agreement or corporate governance document
not superseded by this Agreement, including but not limited to the
Subscription Agreement and the Option Agreement.
(iii) No consent, approval or authorization of or filing with any
court, arbitrator, tribunal, administrative or regulatory authority or
agency is required on its part in connection with the execution, delivery
or performance of this Agreement.
(iv) It is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has all
requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. The execution,
delivery and performance by it of this Agreement have been duly authorized
by its Board, which constitutes all necessary corporate action on its part
for such authorization.
(v) The execution, delivery and performance by it of this Agreement
will not result in any conflict with its charter documents or by-laws.
(vi) The amendment in the form of Exhibit E hereto has received all
required consents and has become effective.
22. Directors and Officers Liability Insurance. The Company shall
continue directors and officers liability insurance coverage for Executive at
least through March 27, 2001 for all claims and expenses relating to Executive's
service with the Company and its affiliates prior to November 11, 1996
(including but not limited to his service as President and Chief Executive
Officer and as a member of the Boards of Directors of Holding and the Company
and their respective affiliates). The Company shall continue directors and
officers liability insurance coverage for Executive through March 27, 2001 for
all claims and expenses relating to Executive's service during the Service
Period. All coverage referred to in the two immediately preceding sentences
shall provide insurance protection to Executive no less than (including with
respect to scope, exclusions, deductibles and maximum liability) the insurance
protection
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provided to Executive as of October 1, 1996, or such lesser protection as may be
applicable from time to time to the person then serving as the chief executive
officer of the Company (regardless of such person's title), taking into account
all coverages (whether supplied by the Company or otherwise) made available to
that person by the Company or any of its affiliates. The Company shall in all
events maintain in effect directors and officers liability insurance covering
Executive to the extent, and for the period, provided for in section 5.8(b) of
the Agreement and Plan of Merger dated as of October 25, 1995, to which RIC
Holding is a party.
23. Miscellaneous.
(a) Binding Effect; Assignment. This Agreement shall be binding on
and inure to the benefit of Holding, RIC Holding and the Company and their
respective successors and permitted assigns. This Agreement shall also be
binding on and inure to the benefit of Executive and his heirs, executors,
administrators and legal representatives. This Agreement shall not be assignable
by any party hereto with out the prior written consent of the other parties
hereto, except as provided pursuant to this Section 23(a). Each of Holding, RIC
Holding and the Company may effect such an assignment without prior written
approval of Executive upon the transfer of all or substantially all of its
business and/or assets (whether by purchase, merger, consolidation or
otherwise), provided that the successor to such business and/or assets shall
expressly assume and agree to perform this Agreement in accordance with the
provisions of Section 14.
(b) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement (except in connection with any request for
injunctive relief in accordance with Section 13) shall be resolved by binding
arbitration. The arbitration shall be held in the city of Atlanta, Georgia and,
except to the extent inconsistent with this Agreement, shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect at the time of the arbitration, and otherwise in
accordance with principles which would be applied by a court of law or equity.
The arbitrator shall be acceptable to both the Company and Executive. If the
parties cannot agree on an acceptable arbitrator, the dispute shall be heard by
a panel of three arbitrators, one appointed by each of the parties and the third
appointed by the other two arbitrators. All expenses of arbitration
20
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shall be borne by the party who incurs the expense, or, in the case of joint
expenses, by both parties in equal portions, except that, in the event
Executive prevails on the principal issues of such dispute or controversy, all
such expenses shall be borne by the Company.
(c) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York without reference to
principles of conflict of laws.
(d) Taxes. The Company may withhold from any payments made under
this Agreement all federal, state, city or other applicable taxes as shall be
required by law.
(e) Amendments. No provision of this Agreement may be modified,
waived or discharged unless such modification, waiver or discharge is approved
by the Board or a person authorized thereby and is agreed to in writing by
Executive and, in the case of any such modification, waiver or discharge
affecting the rights or obligations of Holding or RIC Holding, is approved by
the Board of Directors of Holding or RIC Holding or a person authorized by such
Board of Directors, as the case may be. No waiver by any party hereto at any
time of any breach by any other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No waiver of any provision of this
Agreement shall be implied from any course of dealing between or among the
parties hereto or from any failure by any party hereto to assert its rights
hereunder on any occasion or series of occasions.
(f) Severability. In the event that any one or more of the
provisions of this Agreement shall be or become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
(g) Notices. Any notice or other communication required or permitted
to be delivered under this Agreement shall be (i) in writing, (ii) delivered
personally, by courier service or by certified or registered mail, first-class
postage prepaid and return receipt requested, (iii) deemed to have been received
on the date of delivery or on the third business day after the mailing thereof,
provided that the party giving such notice or communication shall have attempted
to telephone the party or parties to
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<PAGE>
which notice is being given during regular business hours on or before the day
such notice or communication is being sent, to advise such party or parties that
such notice is being sent, and (iv) addressed as follows (or to such other
address as the party entitled to notice shall hereafter designate in accordance
with the terms hereof):
(A) if to the Company, Holding or RIC Holding, to it at:
Riverwood International Corporation
3350 Cumberland Circle
Suite 1400
Atlanta, Georgia 30339
Attention: General Counsel
(B) if to Executive, to him at his permanent home address as
currently on file with the Company.
Copies of any notices or other communications given under this Agreement shall
also be given to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue
New York, New York 10152
Attention: Mr. Kevin J. Conway
and
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention: Robert J. Cubitto, Esq.
and
Such other person or firm as Executive may designate in
writing from time to time in accordance with the terms hereof.
(h) Execution and Delivery of Documents; Payments. The documents
delivered in connection with the change of Executive's status from President and
Chief Executive Officer to Vice-Chairman of the Company, including but not
limited to this Agreement and the amendments to the Subscription Agreement and
Option Agreement provided for herein, shall be executed and delivered, and the
payments to be made pursuant hereto on the date hereof shall be made, at the
offices of Debevoise & Plimpton, 875 Third Avenue,
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New York, New York 10022, at 2:00 p.m., New York time, on November 11, 1996.
(i) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
(j) Headings. The section and other headings contained in this
Agreement are for the convenience of the parties only and are not intended to be
a part hereof or to affect the meaning or interpretation hereof.
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<PAGE>
IN WITNESS WHEREOF, the Company, Holding and RIC Holding have duly
executed this Agreement by their authorized representatives and Executive has
hereunto set his hand, in each case effective as of the date first above
written.
RIVERWOOD INTERNATIONAL
CORPORATION
By:/s/ B.H. Chastain
----------------------------------
Name: B.H. Chastain
Title: Secretary
RIVERWOOD HOLDING, INC.
By:/s/ B.H. Chastain
----------------------------------
Name: B.H. Chastain
Title: Secretary
RIC HOLDING, INC.
By:/s/ B.H. Chastain
----------------------------------
Name: B.H. Chastain
Title: Secretary
EXECUTIVE
/s/ Thomas H. Johnson
-------------------------------------
Thomas H. Johnson
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EXHIBIT A
AMENDMENT TO
MANAGEMENT STOCK SUBSCRIPTION AGREEMENT
AMENDMENT, dated as of November 11, 1996, to Management Stock
Subscription Agreement, dated as of June 4, 1996 (the "Subscription Agreement"),
between Riverwood Holding, Inc., a Delaware corporation formerly known as New
River Holding, Inc. (the "Company"), and Thomas H. Johnson (the "Purchaser"),
W I T N E S S E T H :
WHEREAS, on June 4, 1996, pursuant to the Subscription Agreement,
Purchaser acquired from the Company, and the Company issued and sold to
Purchaser, 30,000 shares of the Class A Common Stock, par value $.01 per share
(the "Shares"), of the Company at a purchase price of $100.00 per share; and
WHEREAS, the Purchaser has entered into an Agreement, dated as of
November 11, 1996 (the "Services Agreement"), with Riverwood International
Corporation, a Delaware corporation ("RIC"), RIC Holding, Inc., a Delaware
corporation, and the Company, providing, among other things, for a change in
the status of the Purchaser from President and Chief Executive Officer to
Vice-Chairman of RIC; and
WHEREAS, pursuant to the Services Agreement, the Company and the
Purchaser have agreed to amend certain pro visions of the Subscription
Agreement, as provided in this Amendment,
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the Company and the Purchaser
hereby agree as follows:
1. Definitions. Capitalized terms used in this Amendment without
definitions shall have the meanings set forth in the Subscription Agreement or,
if not set forth in the Subscription Agreement, in the Services Agreement.
Section references used in this Amendment are to sections of the Subscription
Agreement.
<PAGE>
2. Amendment to Section 6(a). Section 6(a) is hereby amended by
deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"(a) Termination of Employment. Upon the Service Termination Date,
the Company shall have an initial option to repurchase all or any portion
of the Shares then held by the Purchaser (or, if the Purchaser's
employment with RIC ("Employment") was terminated by the Purchaser's
death, the Purchaser's estate) and shall have 60 days from the Service
Termination Date (such 60-day period being hereinafter referred to as the
"First Option Period") during which to give notice in writing to the
Purchaser (or the Purchaser's estate) of its election to exercise or not
to exercise such initial option. The Company hereby undertakes to use
reasonable efforts to act as promptly as practicable following such
termination to make such election. If the Company (i) fails to give notice
that it intends to exercise such option within the First Option Period or
(ii) chooses to repurchase none or only a portion of the Shares then held
by the Purchaser (or the Purchaser's estate), by giving such notice, the
CD&R Fund shall have an additional option to repurchase all or any portion
of the Shares not repurchased by the Company, and shall have until the
expiration of the earlier of (x) 60 days following the end of the First
Option Period and (y) 60 days from the date of receipt by the CD&R Fund of
written notice that the Company does not intend to exercise its initial
option with respect to all of the Purchaser's Shares (such 60-day period
being hereinafter referred to as the "Second Option Period") to give
notice in writing to the Purchaser (or the Purchaser's estate) of the
CD&R Fund's exercise of its option. If the Company and the CD&R Fund have
failed to exercise their respective options pursuant to this Section 6(a)
or have exercised such options with respect to less than all of the Shares
held by the Purchaser (or his estate) within the time periods specified
herein, then on notice from the Purchaser (or his estate) in writing and
delivered to the Company within 30 days following the end of the Second
Option Period, the Company shall be required to purchase all (but not
less than all) of the Shares then held by the Purchaser (or his estate).
All purchases pursuant to this Section 6(a) by the Company or the CD&R
Fund shall be for a purchase price and effected in the manner prescribed
by Section 7 hereof."
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3. Amendment to Section 6(c). Section 6(c) is hereby amended by
deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"(c) Certain Definitions. As used in this Agreement the following
terms shall have the following meanings:
(i) 'Service Termination Date' shall have the meaning assigned to
such term in the Agreement, dated as of November 11, 1996, among RIC,
Parent, the Company and the Purchaser.
(ii) 'Subsidiary' shall mean any corporation or other Person (other
than RIC), a majority of whose outstanding voting securities or other
equity interests is owned, directly or indirectly, by the Company.
(iii) 'Unforeseen Personal Hardship' shall mean financial hardship
arising from (x) extraordinary medical expenses or other expenses
directly related to ill ness or disability of the Purchaser, a member of
the Purchaser's immediate family or one of the Purchaser's parents or (y)
payments necessary or required to prevent the eviction of the Purchaser
from the Purchaser's principal residence or foreclosure on the mortgage on
that residence. The Board's reasoned and good faith determination of
Unforeseen Personal Hardship shall be binding on the Company and the
Purchaser."
4. Amendment to Section 6(d). Section 6(d) is hereby amended by
deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"(d) Notice of Termination. The Company shall give written notice of
the occurrence of the Service Termination Date to the CD&R Fund."
5. Amendment to Section 7(a)(i). Section 7(a)(i) is hereby amended
by deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"(a) Purchase Price. (i) For the purposes of any purchase of the
Shares pursuant to Section 6, and subject to Section 11(c), the purchase
price per Share to be paid to the Purchaser (or his estate) for each Share
(the "Purchase Price") shall be the Fair Market Value (as defined in
paragraph (ii) below) of such
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Share as of the Service Termination Date or the effective date of a
determination of financial hardship, as the case may be."
6. Amendment to Section 11(a). Section 11(a) is hereby amended by
deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"(a) Financing Agreements, etc. Notwithstanding any other provision
of this Agreement, the Company shall not be obligated or permitted to
complete a repurchase of any Shares from the Purchaser if (i) such
repurchase would result in a violation of the terms or provisions of, or
result in a default or an event of default under, (A) the Credit
Agreement, dated as of March 20, 1996, as amended (the "Credit
Agreement"), among RIC (as successor to Parent), the lenders party thereto
and The Chase Manhattan Bank as administrative agent, (B) the Machinery
Credit Agreement, dated as of March 27, 1996, as amended (the "Machinery
Credit Agreement"), among Riverwood International Machinery, Inc., the
lenders party thereto, The Chase Manhattan Bank as administrative agent
and Bank of America NT & SA as documentation agent, (C) the Indenture,
dated as of March 27, 1996, as supplemented, among RIC, Parent, the
Company and Fleet National Bank of Connecticut as Trustee, relating to
Parent's 10-1/4% Senior Notes due 2006 that have been assumed by RIC (the
"Senior Note Indenture"), (D) the Indenture, dated as of March 27, 1996,
as supplemented, among RIC, Parent, the Company and Fleet National Bank of
Massachusetts as Trustee, relating to Parent's 10-7/8% Senior Subordinated
Notes due 2008 that have been assumed by RIC (together with the Senior
Note Indenture, the "Indentures"), or (E) any other guarantee, financing
or security agreement or document entered into (I) by Riverwood or any of
its subsidiaries prior to the Effective Time that remains outstanding in
any part on or after the Effective Time, (II) by the Company or any of its
subsidiaries in connection with the Acquisition, or the financing of the
Acquisition or (III) otherwise from time to time in connection with the
operations of the Company, RIC or the Subsidiaries (the Credit Agreement,
the Machinery Credit Agreement, the Indentures and such other agreements
and documents, as each may be amended, modified or supplemented from time
to time, are referred to herein as the "Financing Agreements"), in each
case as the same may be amended, modified or supplemented from time to
time, (ii) such repurchase would
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violate any of the terms or provisions of the Certificate of
Incorporation of the Company or (iii) the Company has no funds legally
available therefor under the General Corporation Law of the State of
Delaware."
7. Amendment to Section 11(c). Section 11(c) is hereby amended by
deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"(c) Purchase Price Adjustment. In the event that a repurchase of
Shares from the Purchaser is delayed pursuant to this Section 11, the
purchase price per Share when the repurchase of such Shares eventually
takes place as contemplated by Section 11(b) shall be equal to (i) the
Purchase Price per Share determined under Section 7 as of the Service
Termination Date or the effective date of a determination of financial
hardship, as the case may be, increased by interest on such Purchase Price
for the period from the date such repurchase would have taken place but
for a delay of such repurchase pursuant to Section 11(a) to the date on
which the repurchase actually takes place (the "Delay Period"), at an
annual rate of interest equal to the weighted average cost of the
Company's bank indebtedness outstanding during the Delay Period or (ii)
if elected in writing by the Purchaser within ten days following notice to
the Purchaser of any delay pursuant to Section 11(b) hereof, the Fair
Market Value of a Share, determined in accordance with Section 7(a)(ii) as
of last day of the month immediately preceding the date such repurchase
actually takes place."
8. Amendment to Section 12(a)(ii). Section 12(a)(ii) is hereby
amended by deleting the text thereof in its entirety and inserting in lieu
thereof the following:
"(ii) if to the Purchaser, to the Purchaser at his permanent home
address as currently on file with the Company."
9. Amendment to Section 12(a). Section 12(a) is hereby amended by
deleting the first sentence of the flush left language following clause (iii)
thereof and inserting in lieu thereof the following:
"All such notices and communications shall be deemed to have been received
on the date of delivery if delivered personally or on the third business
day after the mail ing thereof, provided that the party giving such notice
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or communication shall have attempted to telephone the party or parties to
which notice is being given during regular business hours on or before the
day such notice or communication is being sent, to advise such party or
parties that such notice is being sent."
10. Amendment to Section 12(a). The name and ad dress of Simpson,
Thacher & Bartlett is hereby deleted in its entirety from Section 12(a), and the
following is inserted in lieu thereof:
"Such other person or firm as the Purchaser may designate in writing
from time to time in accordance with the terms hereof."
11. Miscellaneous.
(a) Subscription Agreement. Except as expressly amended and modified
hereby, the Subscription Agreement is hereby ratified and reaffirmed in all
respects and all the terms and provisions thereof shall be and remain in full
force and effect, provided that the rights and obligations to repurchase or
require the repurchase of the Shares, pursuant to the Subscription Agreement,
shall not be triggered as a result of the Purchaser's change in status from
President and Chief Executive Officer to Vice-Chairman of RIC.
(b) Applicable Law. This Amendment shall be governed by and
construed in accordance with the law of the State of New York, except to the
extent that the corporate law of the State of Delaware specifically and
mandatorily applies.
(c) Section and Other Headings. The section and other headings in
this Amendment are inserted solely as a matter of convenience and for reference
purposes only and shall not affect the meaning or interpretation of this
Amendment.
(d) Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, each party hereto has executed or caused this
Amendment to be executed on its behalf, all as of the date first above written.
RIVERWOOD HOLDING, INC.
By:__________________________
Name:
Title:
THE PURCHASER:
_____________________________
Thomas H. Johnson
ACKNOWLEDGED AND CONSENTED TO:
CLAYTON, DUBILIER & RICE
FUND V LIMITED PARTNERSHIP
By: CD&R Associates V
Limited Partnership,
the General Partner
By: CD&R Investment
Associates, Inc.,
its managing general partner
By:____________________
Name:
Title:
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EXHIBIT B
AMENDMENT TO
MANAGEMENT STOCK OPTION AGREEMENT
AMENDMENT, dated as of November 11, 1996, to Management Stock Option
Agreement, dated as of June 4, 1996 (the "Option Agreement"), between Riverwood
Holding, Inc., a Delaware corporation formerly known as New River Holding, Inc.
(the "Company"), and Thomas H. Johnson (the "Grantee"),
W I T N E S S E T H :
WHEREAS, the Company and the Grantee have executed and delivered the
Option Agreement, pursuant to which the Grantee has been granted options to
purchase up to 90,000 shares of the Class A Common Stock, par value $.01 per
share, of the Company; and
WHEREAS, the Grantee has entered into an Agreement, dated as of
November 11, 1996 (the "Services Agreement"), with Riverwood International
Corporation, a Delaware corporation ("RIC"), RIC Holding, Inc. and the Company,
providing, among other things, for a change in the status of the Grantee from
President and Chief Executive Officer to Vice-Chairman of RIC; and
WHEREAS, pursuant to the Services Agreement, the Company and the
Grantee have agreed to amend certain provisions of the Option Agreement, as
provided in this Amendment,
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the Company and the Grantee
hereby agree as follows:
1. Definitions. Capitalized terms used in this Amendment without
definitions shall have the meanings set forth in the Option Agreement or, if not
set forth in the Option Agreement, in the Services Agreement. Section references
used in this Amendment are to sections of the Option Agreement.
2. Amendment to Section 1. Section 1 is hereby amended by deleting
the text thereof in its entirety and inserting in lieu thereof the following:
"1. Certain Definitions. As used in this Agreement, the following
terms shall have the following meanings:
<PAGE>
(a) 'Acquisition' shall have the meaning set forth in the Recitals
hereto.
(b) 'Affiliate' shall mean, with respect to any person, any other
person controlled by, controlling or under common control with such
person.
(c) 'Board' shall have the meaning set forth in the Recitals hereto.
(d) 'CD&R Fund' shall mean Clayton, Dubilier & Rice Fund V Limited
Partnership, a Cayman Islands exempted limited partnership, and any
successor investment vehicle managed by Clayton, Dubilier & Rice, Inc.
(e) 'Change in Control' shall mean the first to occur of the
following events after the date hereof:
(i) the acquisition by any person, entity or "group" (as
defined in Section 13(d) of the Exchange Act), other than the
Company, the Subsidiaries, any employee benefit plan of the Company
or the Subsidiaries, the CD&R Fund, any Investor or any Affiliate of
the CD&R Fund or of an Investor, of 50% or more of the combined
voting power of the Company's or RIC's then outstanding voting
securities;
(ii) the merger or consolidation of the Company or RIC, as a
result of which persons who were stockholders of the Company or RIC,
as the case may be, immediately prior to such merger or
consolidation, do not, immediately thereafter, own, directly or
indirectly, more than 50% of the combined voting power entitled to
vote generally in the election of directors of the merged or
consolidated company;
(iii) the liquidation or dissolution of the Company or RIC
other than a liquidation of RIC into the Company or into any
Subsidiary; and
(iv) the sale, transfer or other disposition of all or
substantially all of the assets of the Company or RIC to one or more
persons or entities that are not, immediately prior to such sale,
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transfer or other disposition, Affiliates of the
Company, RIC, the CD&R Fund or any Investor.
(f) 'Change in Control Price' shall mean the price per share of
Common Stock paid in conjunction with any transaction resulting in a
Change in Control (as determined in good faith by the Board if any part of
such price is payable other than in cash).
(g) 'Common Stock' shall mean the Class A Common Stock, par value
$.01 per share, of the Company.
(h) 'Company' shall have the meaning set forth in the introductory
paragraph hereof.
(i) 'Disability' shall have the meaning assigned to such term in the
Services Agreement. The date of any Disability shall be the date fixed by
the Services Agreement.
(j) 'EBITDA' shall have the meaning assigned to such term in the
Credit Agreement, dated as of March 20, 1996, as amended, among RIC (as
successor to Parent), the lenders party thereto and The Chase Manhattan
Bank as administrative agent, as such agreement may be amended from time
to time.
(k) 'EBITDA Target' shall mean the sum of (x) the cumulative EBITDA
target for the fourth fiscal year of the Company set forth in the original
investment case under the business plan developed by the Company in
connection with the financing of the Acquisition and (y) the EBITDA target
reflected for fiscal year 2000 of the Company in the five year business
plan of the Company approved by the Board during the fourth quarter of
fiscal year 1996 of the Company.
(l) 'Effective Date' shall mean June 4, 1996.
(m) 'Effective Time' shall have the meaning set forth in the
Recitals hereto.
(n) 'Exchange Act' shall mean the U.S. Securities Exchange Act of
1934, as amended.
(o) 'Exercise Date' shall have the meaning set forth in Section 6
hereof.
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(p) 'Exercise Price' shall have the meaning set forth in Section 6
hereof.
(q) 'Exercise Shares' shall have the meaning set forth in Section 6
hereof.
(r) 'Extraordinary Termination' shall mean a termination of the
Grantee's employment with the Company and the Subsidiaries by reason of
the Grantee's death or Disability.
(s) 'Fair Market Value' shall mean, as of any date, the fair market
value on such date per share of Common Stock as determined in good faith
by the Executive Committee of the Board. In making a determination of
Fair Market Value, the Executive Committee shall give due consideration to
such factors as it deems appropriate, including, without limitation, the
earnings and certain other financial and operating information of the
Company and the Subsidiaries in recent periods, the potential value of the
Company and the Subsidiaries as a whole, the future prospects of the
Company and the Subsidiaries and the industries in which they compete, the
history and management of the Company and the Subsidiaries, the general
condition of the securities markets, the fair market value of securities
of companies engaged in businesses similar to those of the Company and the
Subsidiaries and a valuation of the Common Stock, which shall be per
formed, with respect to the 1996 fiscal year, as promptly as practicable
following the first business day of the 1997 fiscal year of the Company
and each subsequent fiscal year by an independent valuation firm chosen by
the Executive Committee, provided, however, that the Fair Market Value per
share of Common Stock determined as of any date prior to January 1, 1997
shall be deemed to equal $100 unless the Executive Committee determines
otherwise. Notwithstanding the foregoing, following a Public Offering,
Fair Market Value shall mean the average of the high and low trading
prices for a share of Common Stock on the primary national exchange
(including NASDAQ) on which the Common Stock is then traded on the trading
day immediately preceding the date as of which such Fair Market Value is
determined. The determination of Fair Market Value will not give effect to
any restrictions on transfer of the shares of Common Stock or the fact
that such Common Stock would represent a minority interest in the Company.
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(t) 'Financing Agreements' shall mean (A) the Credit Agreement,
dated as of March 20, 1996, as amended, among RIC (as successor to
Parent), the lenders party thereto and The Chase Manhattan Bank as
administrative agent, (B) the Machinery Credit Agreement, dated as of
March 27, 1996, as amended, among Riverwood International Machinery, Inc.,
the lenders party thereto, The Chase Manhattan Bank as administrative
agent and Bank of America NT & SA as documentation agent, (C) the
Indenture, dated as of March 27, 1996, as supplemented, among RIC, Parent,
the Company and Fleet National Bank of Connecticut as Trustee, relating to
Parent's 10-1/4% Senior Notes due 2006 that have been assumed by RIC, (D)
the Indenture, dated as of March 27, 1996, as supplemented, among RIC,
Parent, the Company and Fleet National Bank of Massachusetts as Trustee,
relating to Parent's 10-7/8% Senior Subordinated Notes due 2008 that have
been assumed by RIC, or (E) any other guarantee, financing or security
agreement or document entered into (I) by Riverwood or any of its
subsidiaries prior to the Effective Time that remains outstanding in any
part on or after the Effective Time, (II) by the Company or any of its
subsidiaries in connection with the Acquisition, or the financing of the
Acquisition, or (III) otherwise from time to time in connection with the
operations of the Company, RIC or the Subsidiaries, as each may be
amended, modified or supplemented from time to time.
(u) 'Grant Date' shall mean the date hereof, which is the date on
which the Options are granted to the Grantee.
(v) 'Grantee' shall have the meaning set forth in the introductory
paragraph hereof.
(w) 'Investors' shall mean each of the investors who purchased
shares of Common Stock or shares of Class B Common Stock of the Company
concurrently with the consummation of the merger contemplated by the
Merger Agreement, and their "specified affiliates", within the meaning of
the Stockholders Agreement of the Company, as amended from time to time.
(x) 'Management Stock Subscription Agreement' shall mean the
management stock subscription agreement entered into by the Company and
the Grantee in connection with the Grantee's exercise of any of the
Options and purchase of the Shares subject to any such
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Options pursuant to Section 6 hereof, as such agreement may be amended
from time to time.
(y) 'Merger Agreement' shall have the meaning set forth in the
Recitals hereto.
(z) 'New Employer' shall mean the Grantee's employer, or the parent
or a subsidiary of such employer, immediately following a Change in
Control.
(aa) 'Newco' shall have the meaning set forth in the Recitals
hereto.
(bb) 'Normal Termination Date' shall mean the 90th day following the
tenth anniversary of the date hereof.
(cc) 'Option Price' shall mean the exercise price under each Option
as set forth in Section 2 hereof.
(dd) 'Options' shall mean, collectively, the Performance Options and
the Service Options granted to the Grantee hereby.
(ee) 'Parent' shall have the meaning set forth in the Recitals
hereto.
(ff) 'Performance Options' shall mean the options to purchase Shares
granted to the Grantee pursuant to this Agreement which shall vest, if at
all, in accordance with the provisions of Section 3(b) hereof based upon
the financial performance of the Company and the Subsidiaries. Performance
Options have been granted to the Grantee pursuant to this Agreement with
respect to the number of Shares specified under Item B on the signature
page hereof.
(gg) 'Plan' shall have the meaning set forth in the Recitals hereto.
(hh) 'Public Offering' shall mean the first day as of which sales of
Common Stock are made to the public in the United States pursuant to an
underwritten public offering of the Common Stock led by one or more
underwriters at least one of which is an underwriter of nationally
recognized standing.
(ii) 'Registration and Participation Agreement' shall have the
meaning set forth in Section 7(f) hereof.
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(jj) 'Restriction Period' shall have the meaning assigned to such
term in the Services Agreement.
(kk) 'RIC' shall have the meaning set forth in the Recitals hereto.
(ll) 'Riverwood' shall have the meaning set forth in the Recitals
hereto.
(mm) 'Rule 144' shall mean Rule 144 promulgated under the Securities
Act.
(nn) 'Securities Act' shall mean the U.S. Securities Act of 1933, as
amended.
(oo) 'Service Options' shall mean the options to purchase Shares
granted to the Grantee pursuant to this Agreement which shall vest, if at
all, in accordance with the provisions of Section 3(a) hereof based upon a
Grantee's completion of service. Service Options have been granted to the
Grantee pursuant to this Agreement with respect to the number of Shares
specified under Item A on the signature page hereof.
(pp) 'Service Termination Date' shall have the meaning assigned to
such term in the Services Agreement.
(qq) 'Services Agreement' shall mean the Agreement, dated as of
November 11, 1996, among RIC, Parent, the Company and the Grantee.
(rr) 'Shares' shall mean the shares of Common Stock subject to the
Options. The number of Shares subject to the Options is set forth on the
signature page hereof.
(ss) 'Subsidiary' shall mean any corporation or other person, a
majority of whose outstanding voting securities or other equity interests
are owned, directly or indirectly, by the Company."
2. Amendment to Section 3(a). Section 3(a) is hereby amended by
deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"(a) Service Options. Except as otherwise provided in this
Agreement, 20% of the Service Options granted hereby shall vest and become
exercisable on
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<PAGE>
June 3, 1997 (unless the Service Termination Date shall have previously
occurred), and an additional 20% of the Service Options shall vest and
become exercisable on December 31, 1997 (unless the Service Termination
Date shall have previously occurred); provided that, if the Service Period
ends by reason of an Extraordinary Termination, a portion of the Service
Options held by the Grantee as of the date of such Extraordinary
Termination, which portion shall be equal to 40% minus any portion thereof
that shall have theretofore become vested and exercisable, shall become
immediately vested and exercisable. Any Service Options held by the
Grantee as of the Service Termination Date that have not become vested and
exercisable on or prior to such date in accordance with this Section 3(a)
shall terminate and be canceled immediately on such date."
3. Amendment to Section 3(b). Section 3(b) is hereby amended by
deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"(b) Performance Options. Except as otherwise provided in this
Agreement, no portion of any Performance Options shall vest or become
exercisable (i) unless and until the Company shall have achieved the
EBITDA Target and (ii) unless the Grantee shall have been continuously
employed by the Company or one of the Subsidiaries from the Grant Date
until the date as of which the EBITDA Target is achieved; provided that,
upon the Service Termination Date, a proportionate share of any
Performance Options that have not vested and become exercisable on or
prior to the Service Termination Date shall vest and become exercisable as
of such date. Such proportionate share of Performance Options that shall
become vested and exercisable shall equal the product of (i) the
percentage obtained by dividing (x) the cumulative EBITDA achieved by the
Company as of the last day of the calendar quarter ending coincident with
or immediately prior to the Service Termination Date by (y) the EBITDA
Target, multiplied by (ii) the total number of Shares subject to the
Performance Options. Any Performance Options held by the Grantee as of the
Service Termination Date that have not become vested and exercisable on or
prior to such date in accordance with this Section 3(b) shall terminate
and be canceled immediately on such date. Notwithstanding the foregoing
provisions of this paragraph (b), subject to the continuous employment of
the Grantee with the
8
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Company or one of the Subsidiaries, Performance Options shall vest and
become exercisable nine years and six months following the Grant Date,
regardless of whether the EBITDA Target has been achieved."
4. Amendment to Section 4(b). Section 4(b) is hereby amended by
deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"(b) Early Termination. Upon the Service Termination Date, any
Options held by the Grantee that have not vested and become exercisable
shall be canceled on such date. Subject to the provisions of Section 5(a),
all Options held by the Grantee on the Service Termination Date that shall
have become vested and exercisable on or before such date shall remain
exercisable through the end of the Restriction Period or through the date
which is 60 days after the Normal Termination Date, whichever date is
earlier, and if not exercised within such period, shall terminate and be
canceled upon the expiration of such period. Nothing in this Agreement
shall be deemed to confer on the Grantee any right to continue in the
employ of the Company or any Subsidiary, or to interfere with or limit in
any way the right of the Company or any Subsidiary to terminate such
employment at any time."
5. Amendment to Section 5(a). Section 5(a) is hereby amended by
deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"5. Restrictions on Exercise; Non-Transferability of Options.
(a) Restrictions on Exercise. The Options may be exercised only with
respect to full shares of Common Stock. No fractional shares of Common
Stock shall be issued. Notwithstanding any other provision of this
Agreement, the Options may not be exercised in whole or in part, and no
certificates representing Shares shall be delivered, (i) (A) unless all
requisite approvals and consents of any governmental authority of any kind
having jurisdiction over the exercise of the Options shall have been
secured, (B) unless the purchase of the Shares upon the exercise of the
Options shall be exempt from registration under applicable U.S. federal
and state securities laws, and applicable non-U.S. securities laws, or
the Shares shall have been registered under such laws, and (C) unless all
applicable U.S.
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federal, state and local and non-U.S. tax withholding requirements shall
have been satisfied or (ii) if such exercise would result in a violation
of the terms or provisions of or a default or an event of default under
any of the Financing Agreements. The Company shall use commercially
reasonable efforts to obtain the consents and approvals referred to in
clause (i)(A) of the preceding sentence, to satisfy the withholding
requirements referred to in clause (i)(C) of the preceding sentence and to
obtain the consent of the parties to the Financing Agreements referred to
in clause (ii) of the preceding sentence so as to permit the Options to be
exercised. If the operation of the third sentence of this Section 5(a)
shall prevent the exercise of all or any part of the Options (such Options
or such part thereof, the "Restricted Options") that the Grantee attempts
to exercise otherwise in accordance with the provisions of this Agreement,
then the period during which the Restricted Options are exercisable as
provided in Section 4(b) shall be extended by the lesser of (i) 90 days
and (ii) the length of the period during which the Grantee is so prevented
from exercising the Restricted Options, provided that the extension
provided for in this sentence shall not exceed 90 days in the aggregate
with respect to any particular Restricted Options."
6. Amendment to Section 5(b). Section 5(b) is hereby amended by
deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"(b) Non-Transferability of Options. The Options may be exercised
only by the Grantee or by the Grantee's estate. The Option is not
assignable or transferable, in whole or in part, and it may not, directly
or indirectly, be offered, transferred, sold, pledged, assigned,
alienated, hypothecated or otherwise disposed of or encumbered (including
without limitation by gift, operation of law or otherwise) other than by
will or by the laws of descent and distribution to the estate of the
Grantee upon the Grantee's death, provided that the deceased Grantee's
beneficiary or the representative of the Grantee's estate shall
acknowledge and agree in writing, in a form reasonably acceptable to the
Company, to be bound by the pro visions of this Agreement and the Plan as
if such beneficiary or the estate were the Grantee."
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7. Amendments to Sections 5(c) through 5(i). Sections 5(c) through
5(i) are hereby amended by deleting the text of Sections 5(c) through 5(i) in
its entirety and inserting in lieu thereof the following:
"(c) Withholding. Whenever Shares are to be issued pursuant to the
Options, the Company may require the recipient of the Shares to remit to
the Company an amount sufficient to satisfy any applicable U.S. federal,
state and local and non-U.S. tax withholding requirements. If shares of
Common Stock are traded on a national securities exchange or bid and ask
prices for shares of Common Stock are quoted on the NASDAQ, the Company
may, if requested by the Grantee, withhold shares of Common Stock to
satisfy the minimum applicable withholding requirements, subject to the
provisions of the Plan and any rules adopted by the Board regarding
compliance with applicable law, including, but not limited to, Section
16(b) of the Exchange Act."
8. Amendment to Section 6. Section 6 is hereby amended by deleting
the text thereof in its entirety and inserting in lieu thereof the following:
"6. Manner of Exercise. To the extent that any of the Options shall
have become and remain vested and exercisable as provided in Section 3 and
subject to such reasonable administrative regulations as the Board may
have adopted, such Options may be exercised, in whole or in part, by
notice to the Secretary of the Company in writing given on the date as of
which the Grantee will so exercise the Options (the "Exercise Date"),
specifying the number of Shares with respect to which the Options are
being exercised (the "Exercise Shares"), subject to the execution by the
Company and the Grantee of a management stock subscription agreement
substantially in the form of the Management Stock Subscription Agreement,
dated as of June 4, 1996, between the Company and the Grantee, as amended
through the date of exercise, or in such other form as may be agreed upon
by the Company and the Grantee, and the delivery to the Company by the
Grantee, on or within five days following the Exercise Date, in accordance
with the Management Stock Subscription Agreement, full payment for the
Exercise Shares in United States dollars in cash, or cash equivalents
satisfactory to the Company, and in an amount equal to the product of the
number of Exercise Shares, multiplied by the Option
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Price (such amount, the "Exercise Price"). Upon execution by the Company
and the Grantee of the Management Stock Subscription Agreement and
delivery to the Company by the Grantee of the Exercise Price, the Company
shall deliver to the Grantee a certificate or certificates representing
the Exercise Shares, registered in the name of the Grantee and bearing
appropriate legends as provided in Section 7(b) hereof. If shares of
Common Stock are traded on a U.S. national securities exchange or bid and
ask prices for shares of Common Stock are quoted over NASDAQ, the Grantee
may, in lieu of cash, tender shares of Common Stock that have been owned
by the Grantee for at least six months, having a Fair Market Value on the
Exercise Date equal to the Exercise Price or may deliver a combination of
cash and such shares of Common Stock having a Fair Market Value equal to
the difference between the Exercise Price and the amount of such cash as
payment of the Exercise Price, subject to such rules and regulations as
may be adopted by the Board to provide for the compliance of such payment
procedure with applicable law, including Section 16(b) of the Exchange
Act. The Company may require the Grantee to furnish or execute such other
documents as the Company shall reasonably deem necessary (i) to evidence
such exercise, (ii) to determine whether registration is then required
under the Securities Act and (iii) to comply with or satisfy the
requirements of the Securities Act, applicable state or non-U.S.
securities laws or any other law."
9. Amendment to Section 10. Section 10 is hereby amended by deleting
the text thereof in its entirety and inserting in lieu thereof the following:
"10. INTENTIONALLY OMITTED."
10. Amendment to Section 13(a)(ii). Section 13(a)(ii) is hereby
amended by deleting the text thereof in its entirety and inserting in lieu
thereof the following:
"(ii) if to the Grantee, to the Grantee at his permanent home
address as currently on file with the Company."
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11. Amendment to Section 13(a). Section 13(a) is hereby amended by
deleting the first sentence of the flush left language following clause (iii)
thereof and inserting in lieu thereof the following:
"All such notices and communications shall be deemed to have been received
on the date of delivery if delivered personally or on the third business
day after the mailing thereof, provided that the party giving such notice
or communication shall have attempted to telephone the party or parties to
which notice is being given during regular business hours on or before the
day such notice or communication is being sent, to advise such party or
parties that such notice is being sent."
12. Amendment to Section 13(a). The name and address of Simpson,
Thacher & Bartlett is hereby deleted in its entirety from Section 13(a), and the
following is inserted in lieu thereof:
"Such other person or firm as the Grantee may designate in writing
from time to time in accordance with the terms hereof."
13. Amendment to Section 13(c)(i). Section 13(c)(i), which was
erroneously numbered as Section 13(b)(i), is hereby amended by deleting the text
thereof in its entirety and inserting in lieu thereof the following:
"(c) Waiver; Amendment.
(i) Waiver. Any party hereto or beneficiary hereof may by written
notice to the other parties (A) extend the time for the performance of any
of the obligations or other actions of the other parties under this
Agreement, (B) waive compliance with any of the conditions or covenants of
the other parties contained in this Agreement and (C) waive or modify
performance of any of the obligations of the other parties under this
Agreement. Except as provided in the preceding sentence, no action taken
pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party or beneficiary, shall be deemed
to constitute a waiver by the party or beneficiary taking such action of
compliance with any representations, warranties, covenants or agreements
contained
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herein. The waiver by any party hereto or beneficiary hereof of a breach
of any provision of this Agreement shall not operate or be construed as a
waiver of any preceding or succeeding breach and no failure by a party or
beneficiary to exercise any right or privilege hereunder shall be deemed a
waiver of such party's or beneficiary's rights or privileges hereunder or
shall be deemed a waiver of such party's or beneficiary's rights to
exercise the same at any subsequent time or times hereunder."
14. Amendment to Section 13(d). Section 13(d) is hereby amended by
deleting the text thereof in its entirety and inserting in lieu thereof the
following:
"(d) Assignability. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof shall be
assignable by the Company or the Grantee without the prior written consent
of the other parties and the CD&R Fund."
15. Miscellaneous.
(a) Option Agreement. Except as expressly amended and modified
hereby, the Option Agreement is hereby ratified and reaffirmed in all respects
and all the terms and provisions thereof shall be and remain in full force and
effect, provided that the vesting and exercise of the Options shall not be
affected as a result of the Grantee's change in status from President and Chief
Executive Officer to Vice-Chairman of RIC, except as reflected herein.
(b) Applicable Law. This Amendment shall be governed by and
construed in accordance with the law of the State of New York, except to the
extent that the corporate law of the State of Delaware specifically and
mandatorily applies.
(c) Section and Other Headings. The section and other headings in
this Amendment are inserted solely as a matter of convenience and for reference
purposes only and shall not affect the meaning or interpretation of this
Amendment.
(d) Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, each party hereto has executed or caused this
Amendment to be executed on its behalf, all as of the date first above written.
RIVERWOOD HOLDING, INC.
By:__________________________
Name:
Title:
THE GRANTEE:
______________________________
Thomas H. Johnson
ACKNOWLEDGED AND CONSENTED TO:
CLAYTON, DUBILIER & RICE
FUND V LIMITED PARTNERSHIP
By: CD&R Associates V
Limited Partnership,
the General Partner
By: CD&R Investment
Associates, Inc.,
its managing general partner
By:______________________
Name:
Title:
15
<PAGE>
EXHIBIT C
Section 9 of the Employment Agreement
"9. Excise Tax.
(a) In the event that Executive is determined (as described below)
to be subject to excise tax under Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code"), with respect to any payments hereunder other than
payments provided pursuant to Section 8(d)(ix) hereunder (the "Excise Tax"), the
Company shall pay to Executive as additional compensation an amount (the
"Gross-Up Payment") which, after taking into account any federal, state and
local income tax, Medicare payroll deduction and excise tax under Section 4999
of the Code (the "Executive Taxes") upon the payment provided for by this
Section 9, shall be equal to the amount of such Excise Tax. For purposes of
determining whether Executive is subject to the Excise Tax, (i) any payments or
benefits received by Executive (whether pursuant to the terms hereof or pursuant
to any plan, arrangement or other agreement with the Company or any entity
affiliated with the Company) which payments (the "Contingent Payments") are
deemed contingent on a change described in Section 280G(b)(2)(A)(i) of the Code
shall be taken into account, (ii) the amount of payments or benefits under this
Agreement treated as subject to the Excise Tax shall be equal to the lesser of
(A) the total amount of all such payments and benefits hereunder as are
Contingent Payments and (B) the amount of excess parachute payments within the
meaning of Section 280G(b)(1) of the Code payable to Executive and (iii)
Executive shall be deemed to pay the Executive Taxes at the highest marginal
applicable rates of such taxation for the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and local Executive Taxes.
In the event that the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder, Executive shall repay to the Company, at
the time that the amount of such reduction in Excise Tax is finally determined,
the portion of the Gross-Up Payment attributable to such reduction (plus that
portion of the Gross-Up Payment attributable to the Excise Tax and Executive
Taxes thereon) plus interest on the amount of such repayment at the rate
provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing,
in the event any portion of the Gross-Up Payment to be refunded to the Company
has been paid to any federal, state or local tax authority, repayment thereof
shall not be required until actual refund or credit
<PAGE>
of such portion has been made to the Executive (which the Executive shall
request, with the Company's assistance using the same procedure as set forth in
paragraph (g) below) and interest payable to the Company shall not exceed
interest received or credited to the Executive by such tax authority for the
period it held such portion. The Executive and the Company shall mutually agree
upon the course of action to be pursued (and the method of allocating the
expenses thereof) if the Executive's good faith claim for refund or credit is
denied. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder (including by reason of any payment the existence
and amount of which cannot be determined at the time of the Gross-Up Payment),
the Company shall make an additional Gross-Up Payment in respect of such excess
(plus any interest, penalties or additions payable by Executive with respect to
such excess) at the time that the amount of such excess is finally determined.
Notwithstanding the foregoing, no Gross-Up Payment shall be made with respect to
any payments made pursuant to Section 8(d) hereunder by reason of termination of
employment by Executive for the reasons specified in Section 8(e)(i) or (ii)
hereof.
(b) if (I) the quotient of (i) the Net After-Tax Amount with respect
to the Contingent Payments paid or payable to Executive by the Company or any
affiliate thereof divided by (ii) the Net After-Tax Cost (as such term is
defined below) to the Company or any affiliate thereof of providing such
Contingent Payments (including the cost of the Gross-Up Payment) exceeds 33% or
if (II) the quotient of (i) the increase in such Net After-Tax Amount (as such
term is defined below) by reason of the amendment to Section 9 effected hereby
divided by (ii) the increase in the Net After-Tax Cost to the Company or any
affiliate thereof as a result of the amendment to Section 9 dated as of July 31,
1995 exceeds 11% (the tests referred to in (I) and (II) above shall be referred
to as the "Limitation Tests"), then, in either event, the Gross-Up Payment
provided in paragraph (a) above shall not be available and the provisions of
paragraph (c) below shall apply. The term "Net After-Tax Cost" shall mean the
net cost to the Company and any affiliate thereof after giving effect to the
Gross-Up Payment, if any, and all federal, state and local tax deductions which
would be applicable to such payments, taking into account any disallowance of
deduction pursuant to Section 280G of the Code, assuming the Company is subject
to income tax at the highest marginal applicable rates. The term "Net After-Tax
Amount" shall mean the net amount of the Contingent Payments and the Gross-up
Payment after giving
2
<PAGE>
effect to all Executive Taxes which would be applicable to such payments,
assuming all such payments were subject to income tax at the highest marginal
applicable rates, net of the maximum reduction in federal income taxes which
could be obtained from deduction of such state and local Executive Taxes.
(c) If the Gross-Up Payment is not payable to Executive by reason of
paragraph (b) above, then the reduction provided in paragraph (d) below shall
apply unless such reduction fails to satisfy the Limitation Tests (without
regard to any Gross-Up Payment), in which case the provisions of paragraph (e)
below shall apply.
(d) If the Gross-Up Payment is not payable by reason of paragraph
(b) above, then, notwithstanding any other provision of this Agreement (other
than paragraph (c) above) or any other agreement between Executive and the
Company or any affiliate thereof, if a reduction of payments Executive otherwise
would be entitled to receive hereunder from the Company, after taking into
account all other payments paid or payable to Executive by the Company or any
affiliate thereof (including, but not limited to, payments paid or payable
pursuant to the PSAR Agreement), to the extent such payments constitute
Contingent Payments, would result in a greater Net After-Tax Amount, then such
payments made under this Agreement shall be reduced to provide the greatest Net
After-Tax Amount.
(e) If the provisions of this paragraph (e) are applicable by reason
of paragraph (c) above, then the amounts paid or payable under this Agreement
shall be reduced to the extent necessary (but not below zero) that will result
in the payments, if any, hereunder not constituting excess parachute payments
within the meaning of Section 280G(b)(1) of the Code.
(f) The determination of whether Executive is subject to the Excise
Tax and the amounts of such Excise Tax and Gross-Up Payment and, if applicable,
the determination of whether any payment reduction shall be effected and the
amount thereof, as well as all other calculations hereunder, shall be made by
the Company, which shall provide Executive prompt written notice (the "Company
Notice") setting forth its determinations and calculations. Within 30 days
following the receipt by Executive of the Company Notice, Executive may notify
(the "Executive Notice") the Company in writing if he disagrees with such
determinations or calculations, setting forth the reasons for any such
3
<PAGE>
disagreement. If the Company and Executive do not resolve such disagreement
within 10 business days following receipt by the Company of the Executive
Notice, the Company and Executive shall agree upon a nationally recognized
accounting or compensation firm (the "Resolving Firm") to make a determination
with respect to such disagreements. If Executive and the Company are unable to
agree upon the Resolving Firm within 20 business days following the Executive
Notice, the Atlanta, Georgia office of Towers, Perrin shall be the Resolving
Firm. Within 30 business days following the Executive Notice, if the
disagreement is not resolved by such time, each of Executive and the Company
shall submit its position to the Resolving Firm, which shall make a
determination as to all such disagreements within 30 days following the last of
such submissions, which determination shall be binding upon Executive and the
Company. Each party shall pay its own expenses in connection with any
determinations, calculations, disagreements or resolutions pursuant to this
paragraph (f); provided that the expenses of the Resolving Firm shall be paid by
the Company, unless the Resolving Firm determines that there was no reasonable
basis for Executive's position, in which case Executive shall pay such fees and
expenses. In the event that Executive is successful in any material respect, the
Company shall also pay all reasonable fees and expenses incurred by Executive.
(g) The Company agrees to reimburse Executive for reasonable fees
and expenses in connection with any audit or assessment by the Internal Revenue
Service or any administrative or judicial proceedings if a claim (the "Claim")
arises out of, or results from the treatment or characterization of any payments
made by the Company as Contingent Payments or Gross-Up Payments. Executive shall
notify the Company in writing of any such Claim as soon as practicable but in no
event later than 10 business days after the Executive is informed of such Claim
and the parties shall cooperate with each other in good faith to effectively
contest the Claim. One or more attorneys chosen by the Company (which shall be
responsible for all reasonable fees and expenses of such attorneys) and approved
by Executive, which approval shall not be unreasonably withheld, shall control
all proceedings taken in connection with such contest and may pursue or forego
any and all administrative appeals, proceedings, hearings and conferences with
the taxing authority in respect of such Claim as the Company shall reasonably
determine; provided, however, that no position may be taken nor any final
resolution of such Claim may be made by the Company without
4
<PAGE>
Executive's consent if such position or resolution could reasonably be expected
to adversely affect Executive (including any other tax position of Executive
unrelated to the matters covered hereby). Notwithstanding the foregoing, if the
Company forgoes further prosecution of such contest, Executive may elect to
continue such prosecution; provided, however, that the Company shall not be
liable for the fees and expenses in connection with such further prosecution,
except that if the Executive prevails in any material respect in such further
prosecution, the Company shall pay (or reimburse the Executive for) all
reasonable fees and expenses incurred by Executive in connection with such
claims, including without limitation any such fees and expenses incurred prior
to the date of such further prosecution."
5
<PAGE>
EXHIBIT D1
This RELEASE, dated __________, 199_ [end of Restriction Period], is
given by each of RIVERWOOD INTERNATIONAL CORPORATION, a Delaware corporation
("Riverwood"), RIVERWOOD HOLDING, INC., a Delaware corporation ("Holding"), and
RIC HOLDING, INC., a Delaware corporation ("RIC Holding"), in favor of THOMAS H.
JOHNSON ("Executive"),
W I T N E S S E T H:
WHEREAS, Riverwood, Holding, RIC Holding and Executive executed and
delivered an Agreement, dated as of November 11, 1996 (the "Services
Agreement"), regarding Executive's employment with Riverwood and certain other
matters; and
WHEREAS, this Release is being delivered by Riverwood, Holding and
RIC Holding pursuant to section 20 of the Services Agreement,
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, each of Riverwood, Holding and RIC Holding hereby agrees as
follows:
1. Release. Each of Riverwood, Holding and RIC Holding hereby
releases, acquits and forever discharges Executive from any and all liability or
obligation of any character whatsoever which Executive had, has or may in the
future have, directly or indirectly, to Riverwood, Holding or RIC Holding,
respectively, except for the matters set forth in Section 2 hereof.
2. Matters Not Covered. This Release shall not release Executive
from any liability or obligation on account of any act or acts taken by
Executive, or any act or acts authorized by Executive to be taken, which
constitute a breach under or non-performance of any of the provisions of the
Services Agreement or of any other agreement or corporate governance document
not superseded by the Services Agreement, including but not limited to the
Management Stock Subscription Agreement and Management Stock Option Agreement
referred to in, and amended in connection with, the Services Agreement. In
addition, this Release shall not release Executive from any liability or
obligation relating to claims made and not settled or discharged by Riverwood,
Holding or RIC Holding prior to the date hereof.
<PAGE>
3. Automatic Revocation. If Executive shall revoke the Release
granted by him today to Riverwood, Holding and RIC Holding, this Release shall
be automatically revoked and of no further force or effect as though this
Release had never been granted.
4. No Admission of Liability. This Release is not intended to be,
nor shall it be deemed, construed or treated in any respect as, an admission of
liability by any person or entity for any purpose.
5. Amendments. This Release may not be amended or modified orally,
and may be amended or modified only with the prior written consent of Riverwood,
Holding, RIC Holding and Executive.
6. Governing Law. This Release shall be governed by and construed in
accordance with the laws of the State of New York without reference to
principles of conflict of laws.
7. Miscellaneous. This Release shall be binding upon the successors,
assigns and representatives of each of Riverwood, Holding and RIC Holding and
shall inure to the benefit of the successors, assigns and representatives of
Executive. The headings in this Release are for convenience of reference only
and shall not define or limit the provisions hereof.
2
<PAGE>
IN WITNESS WHEREOF, Riverwood, Holding and RIC Holding have each
caused its respective duly authorized officer to execute this Release as of the
date first above written.
RIVERWOOD INTERNATIONAL
CORPORATION
By:________________________
Name:
Title:
RIVERWOOD HOLDING, INC.
By:________________________
Name:
Title:
RIC HOLDING, INC.
By:________________________
Name:
Title:
3
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
Be it remembered that on this ____ day of ________________ 199_ A.D.
personally came before me, the undersigned, a Notary Public in and for said
State duly commissioned and sworn, ________________________________, who is the
__________________________ of Riverwood International Corporation, a Delaware
corporation, signatory to the within and foregoing instrument, known to me
personally to be such and the person who executed such instrument on behalf of
such corporation, and acknowledged to me that such instrument was his own act
and deed, that the signature therein is his own proper handwriting, that his act
of executing and delivering such instrument was duly authorized by such
corporation and that the facts stated therein are true. Given under my hand and
seal of office the day and year aforesaid.
[Seal]
___________________________________
Signature of Notary Public
4
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
Be it remembered that on this ____ day of ________________ 199_ A.D.
personally came before me, the undersigned, a Notary Public in and for said
State duly commissioned and sworn, ________________________________, who is the
__________________________ of Riverwood Holding, Inc., a Delaware corporation,
signatory to the within and foregoing instrument, known to me personally to be
such and the person who executed such instrument on behalf of such corporation,
and acknowledged to me that such instrument was his own act and deed, that the
signature therein is his own proper handwriting, that his act of executing and
delivering such instrument was duly authorized by such corporation and that the
facts stated therein are true. Given under my hand and seal of office the day
and year aforesaid.
[Seal]
___________________________________
Signature of Notary Public
5
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
Be it remembered that on this ____ day of ________________ 199_ A.D.
personally came before me, the undersigned, a Notary Public in and for said
State duly commissioned and sworn, ________________________________, who is the
__________________________ of RIC Holding, Inc., a Delaware corporation,
signatory to the within and foregoing instrument, known to me personally to be
such and the person who executed such instrument on behalf of such corporation,
and acknowledged to me that such instrument was his own act and deed, that the
signature therein is his own proper handwriting, that his act of executing and
delivering such instrument was duly authorized by such corporation and that the
facts stated therein are true. Given under my hand and seal of office the day
and year aforesaid.
[Seal]
___________________________________
Signature of Notary Public
6
<PAGE>
EXHIBIT D2
This RELEASE, dated __________, 199_ [end of Restriction Period], is
given by THOMAS H. JOHNSON ("Executive") in favor of each of RIVERWOOD
INTERNATIONAL CORPORATION, a Delaware corporation ("Riverwood"), RIVERWOOD
HOLDING, INC., a Delaware corporation ("Holding"), and RIC HOLDING, INC., a
Delaware corporation ("RIC Holding"),
W I T N E S S E T H:
WHEREAS, Executive, Riverwood, Holding and RIC Holding executed and
delivered an Agreement, dated as of November 11, 1996 (the "Services
Agreement"), regarding Executive's employment with Riverwood and certain other
matters; and
WHEREAS, this Release is being delivered by Executive pursuant to
section 20 of the Services Agreement,
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Executive hereby agrees as follows:
1. Release. Executive hereby releases, acquits and forever
discharges each of Riverwood, Holding and RIC Holding from any and all liability
or obligation of any character whatsoever which Riverwood, Holding or RIC
Holding, respectively, had, has or may in the future have, directly or
indirectly, to Executive, except for the matters set forth in Section 2 hereof.
2. Matters Not Covered. This Release shall not release Riverwood,
Holding or RIC Holding from any liability or obligation on account of any act or
acts taken by Riverwood, Holding or RIC Holding, or any act or acts authorized
by Riverwood, Holding or RIC Holding to be taken, which constitute a breach
under or non-performance of any of the provisions of the Services Agreement or
of any other agreement or corporate governance document not superseded by the
Services Agreement, including but not limited to the Management Stock
Subscription Agreement and Management Stock Option Agreement referred to in, and
amended in connection with, the Services Agreement. In addition, this Release
shall not release Riverwood, Holding or RIC Holding from any liability or
obligation relating to claims made and not settled or discharged by Executive
prior to the date hereof.
<PAGE>
3. Review of Release. Executive understands that he has been given a
period of twenty-one (21) days to review and consider this Release before
signing it. Executive further understands that he may use as much of this 21-day
period as he wishes prior to signing.
4. Consultation. Executive is strongly encouraged to consult with an
attorney before signing this Release. He understands that whether or not to do
so is his own independent and voluntary decision.
5. Revocation. Executive understands that this Release can be
revoked within seven (7) days of his signing. Revocation can be made by
delivering a written revocation to [Edward W. Stroetz, Jr., Labor and Benefits
Counsel,] Riverwood International Corporation, 3350 Cumberland Circle, Suite
1400, Atlanta, Georgia 30339. For this revocation to be effective, written
notice must be received by [Edward W. Stroetz, Jr.] no later than the close of
business on the seventh day after Executive signs this Release. Executive
understands that if he revokes this Release, the Release granted to him today by
Riverwood, Holding and RIC Holding shall be automatically revoked, and such
Release shall not be effective or enforceable and Executive shall not receive
the benefits described in such Release.
6. Acknowledgement. Executive acknowledges that he has carefully
read and understands the contents of this Release. He further acknowledges and
agrees that the consideration recited in this Release is the sole and only
consideration for this Release, and no representations, promises, or inducements
have been made by any party or its officers, employees, agents or attorneys
thereof other than appear in this Release.
7. No Admission of Liability. This Release is not intended to be,
nor shall it be deemed, construed or treated in any respect as, an admission of
liability by any person or entity for any purpose.
8. Amendments. This Release may not be amended or modified orally,
and may be amended or modified only with the prior written consent of Riverwood,
Holding, RIC Holding and Executive.
9. Governing Law. This Release shall be governed by and construed in
accordance with the laws of the State of New York without reference to
principles of conflict of laws.
2
<PAGE>
10. Miscellaneous. This Release shall be binding upon the
successors, assigns and representatives of Executive and shall inure to the
benefit of the successors, assigns and representatives of each of Riverwood,
Holding and RIC Holding. The headings in this Release are for convenience of
reference only and shall not define or limit the provisions hereof.
3
<PAGE>
IN WITNESS WHEREOF, Executive has hereunto set his hand as of the
date first above written.
EXECUTIVE:
__________________________________
Thomas H. Johnson
STATE OF )
) ss.:
COUNTY OF )
Be it remembered that on this ____ day of ________________ 199_ A.D.
personally came before me, the undersigned, a Notary Public in and for said
State duly commissioned and sworn, Thomas H. Johnson, signatory to the within
and foregoing instrument, known to me personally to be such and the person who
executed such instrument, and acknowledged to me that such instrument was his
own act and deed, that the signature therein is his own proper handwriting, and
that the facts stated therein are true. Given under my hand and seal of office
the day and year aforesaid.
[Seal]
___________________________________
Signature of Notary Public
4
<PAGE>
EXHIBIT E
EXHIBIT E TO THE SERVICES AGREEMENT
IS FILED SEPARATELY AS EXHIBIT 4.5
Exhibit 10.11
LOANOUT AGREEMENT
This LOANOUT AGREEMENT, dated as of October 8, 1996 (the
"Agreement"), among Riverwood International Corporation, a Delaware corporation
(the "Company"), Riverwood Holding, Inc., a Delaware corporation ("Holding"),
RIC Holding, Inc., a Delaware corporation ("RIC Holding", and collectively with
the Company and Holding, the "Company Group"), and Clayton, Dubilier & Rice,
Inc., a Delaware corporation ("CD&R").
W I T N E S S E T H:
WHEREAS, the Company Group and CD&R are parties to a Consulting
Agreement, dated as of March 27, 1996 (the "Consulting Agreement"), among the
Company, Holding, RIC Holding and CD&R, and an Indemnification Agreement, dated
as of March 27, 1996 (the "Indemnification Agreement"), among the Company,
Holding, RIC Holding, CD&R and Clayton, Dubilier & Rice Fund V Limited
Partnership, a Cayman Islands exempted limited partnership ("CD&R Fund");
WHEREAS, the Company Group desires to obtain the services of Mr. B.
Charles Ames ("Ames"), an employee of CD&R, to perform the functions of Chairman
and acting chief executive officer of each of the Company, Holding and RIC
Holding, and CD&R is willing to make such services available to the Company
Group upon and subject to the terms and conditions hereof; and
WHEREAS, this Agreement has been approved by nine directors of each
of the Company, Holding and RIC Holding, including a majority of the
disinterested directors of the Company, Holding and RIC Holding;
NOW, THEREFORE, in consideration of the foregoing premises and the
respective agreements hereinafter set forth and the mutual benefits to be
derived herefrom, the parties hereto hereby agree as follows:
1. Services, etc.
(a) CD&R shall make the services of Ames available to the Company
Group and the Company Group shall make use of the services of Ames to serve as
Chairman and acting chief executive officer of each of the Company, Holding and
RIC Holding commencing and effective as of October 8, 1996,
<PAGE>
until the expiration of the Term (as defined in Section 2 hereof). Ames shall be
available to render such services on a part-time basis mutually agreeable to the
Company Group, CD&R and Ames. Without limiting the foregoing, Ames will continue
to serve as an employee of CD&R and may serve as an officer or director of CD&R
or other corporations and devote such time to performing such services as Ames,
in his sole discretion, shall deem appropriate.
(b) The services of Ames to be made available to the Company Group
hereunder (the "Services") shall be deemed part of the services provided by CD&R
pursuant to the Consulting Agreement. No separate or additional consideration
shall be payable hereunder for the Services, beyond that payable under the
Consulting Agreement.
2. Term.
(a) This Agreement shall be effective as of October 8, 1996. The
term of this Agreement (the "Term") commenced as of October 8, 1996 and shall
terminate on the earliest to occur of (i) the termination of the Consulting
Agreement in accordance with its terms, (ii) the date that is ten (10) business
days following delivery of written notice of such termination by any party
hereto to the other parties hereto, (iii) the election of a successor Chief
Executive Officer of the Company, Holding or RIC Holding by the Board of
Directors of each such company in accordance with its respective By-laws
thereof, and (iv) Ames's death, permanent disability or resignation from his
employment with CD&R.
(b) The expiration of the Term shall not affect the continuing
effectiveness of the Consulting Agreement (subject to Section 2(a)(i) hereof)
and the Indemnification Agreement, each of which shall continue to be in full
force and effect and enforceable in accordance with its terms. Without limiting
the foregoing, the Company Group shall continue to, and to be obligated to, pay
and reimburse all fees, expenses and other amounts as and when due under the
Consulting Agreement and Indemnification Agreement and perform all its other
obligations thereunder.
3. Indemnification.
All performance by, and all actions or omissions of, CD&R or Ames
under or in respect of this Agreement shall be deemed to be pursuant to the
Consulting Agreement, and each of CD&R and Ames shall be entitled to the
benefits of
2
<PAGE>
the indemnification and other provisions of the Consulting Agreement and the
Indemnification Agreement.
4. Independent Contractor Status.
Each of CD&R and the Company Group hereby agree that the furnishing
of Ames's services hereunder by CD&R is solely as an independent contractor,
with CD&R retaining control over and responsibility for its own operations and
personnel, including Ames. Neither CD&R nor any of its directors, officers,
employees or agents (including Ames) shall, solely by virtue of the Agreement or
the arrangements hereunder, be considered employees, principals, partners,
co-venturers or agents of the Company Group.
5. Notices.
Any notice or other communication required or permitted to be given
or made under this Agreement by one party to the other parties shall be in
writing and shall be deemed to have been duly given and to be effective (i) on
the date of delivery if delivered personally or (ii) when sent if sent by
prepaid telegram, or mailed first-class, postage prepaid, by registered or
certified mail or confirmed facsimile transmission, as follows (or to such
other address as shall be given in writing by one party to the other parties in
accordance herewith):
(a) If to any member of the Company Group, to:
Riverwood International Corporation
3550 Cumberland Circle
Suite 1400
Atlanta, Georgia 30339
Attn: Corporate Counsel
Telephone: (770) 644-3000
Telecopy: (770) 644-2929
(b) If to CD&R, to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue, 18th Floor
New York, New York 10152
Attn: Joseph L. Rice, III
Telephone: (212) 407-5200
Telecopy: (212) 407-5252
3
<PAGE>
With a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attn: David A. Brittenham, Esq.
Telephone: (212) 909-6000
Telecopy: (212) 909-6836
6. General.
(a) Entire Agreement. This Agreement together with the Consulting
Agreement and the Indemnification Agreement (a) contain the complete and entire
understanding and agreement of CD&R and the Company Group with respect to the
subject matter hereof, and (b) supersede all prior and contemporaneous
understandings, conditions and agreements, oral or written, express or implied,
in respect of the subject matter hereof, including but not limited to in respect
of the furnishing of the services of Ames in connection with the subject matter
hereof. There are no representations or warranties of Ames or CD&R in connection
with this Agreement or the services to be made available hereunder, except as
expressly made and contained in this Agreement.
(b) Headings. The headings contained in this Agreement are for
purposes of convenience only and shall not affect the meaning or interpretation
of this Agreement.
(c) Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original and all of which shall
together constitute one and the same instrument.
(d) Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties to this Agreement and their respective
successors and assigns; provided that neither CD&R nor the Company Group may
assign any of its rights or obligations under this Agreement without the express
written consent of the other party hereto.
(e) Governing Law. This Agreement shall be deemed to be a contract
made under, and is to be governed and construed in accordance with, the laws of
the State of New York, without regard to the conflict of laws principles or
rules thereof. Each of the Company Group and CD&R hereby irrevocably submit to
the exclusive jurisdiction of the
4
<PAGE>
courts of the State of New York and the Federal courts of the United States of
America located in the State, City and County of New York solely in respect of
the interpretation and enforcement of the provisions of this Agreement, and the
parties hereto hereby irrevocably agree that (i) the sole and exclusive
appropriate venue for any action, suit or proceeding relating to such
interpretation and enforcement shall be in such a court, (ii) all claims with
respect to such provisions shall be heard and determined exclusively in such a
court, (iii) any such court shall have exclusive jurisdiction over the person of
such parties and over the subject matter of any dispute relating to such
provisions, and (iv) each hereby waives, and agrees not to assert, any and all
objections and defenses based on forum, venue or personal or subject matter
jurisdiction as they may relate to such an action, suit or proceeding before
such a court in accordance with the provisions of this Section 6(e), provided
that enforcement of a judgment rendered by such a court may be sought in any
court of competent jurisdiction for the enforcement thereof. Each of the Company
Group and CD&R hereby consent to and grant any such court jurisdiction over the
person of such parties and over the subject matter of any such dispute and agree
that mailing of process or other papers in connection with any such action or
proceeding in the manner provided in Section 5, or in such other manner as may
be permitted by law, shall be valid and sufficient service thereof.
(f) Waiver of Jury Trial. Each party hereto acknowledges and agrees
that any controversy that may arise under this Agreement is likely to involve
complicated and difficult issues, and therefore it hereby irrevocably and
unconditionally waives any right it may have to a trial by jury in respect of
any litigation directly or indirectly arising out of or relating to this
Agreement, or the breach, termination or validity of this Agreement, or the
transactions contemplated by this Agreement. Each party certifies and
acknowledges that (i) no representative, agent or attorney of any other party
has represented, expressly or otherwise, that such other party would not, in the
event of litigation, seek to enforce the foregoing waiver, (ii) it understands
and has considered the implications of this waiver, (iii) it makes this waiver
voluntarily, and (iv) it has been induced to enter into this Agreement by, among
other things, the mutual waivers and certifications contained in this Section
6(f).
5
<PAGE>
(g) Amendment; Waivers. No amendment, modification, supplement or
discharge of this Agreement, and no waiver hereunder, shall be valid or binding
unless set forth in writing and duly executed by the party against whom
enforcement of the amendment, modification, supplement, discharge or waiver is
sought (and in the case of the Company Group, approved by resolution of the
Board of Directors of each of the Company, Holding and RIC Holding). Any such
waiver shall constitute a waiver only with respect to the specific matter
described in such writing and shall in no way impair the rights of the party
granting such waiver in any other respect or at any other time. Neither the
waiver by any party hereto of a breach of or a default under any of the
provisions of this Agreement, nor the failure by any party, on one or more
occasions, to enforce any of the provisions of this Agreement or to exercise any
right or privilege hereunder, shall be construed as a waiver of any other breach
or default of a similar nature, or as a waiver of any of such provisions, rights
or privileges hereunder. The rights and remedies herein provided are cumulative
and are not exclusive of any rights or remedies that any party may otherwise
have at law or in equity or otherwise.
6
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
RIVERWOOD INTERNATIONAL
CORPORATION
By: /s/ Bill H. Chastain
------------------------------
Name: Bill H. Chastain
Title: Secretary
RIVERWOOD HOLDING, INC.
By: /s/ Bill H. Chastain
------------------------------
Name: Bill H. Chastain
Title: Secretary
RIC HOLDING, INC.
By: /s/ Bill H. Chastain
------------------------------
Name: Bill H. Chastain
Title: Secretary
CLAYTON, DUBILIER & RICE, INC.
By: /s/ Joseph L. Rice, III
------------------------------
Name: Joseph L. Rice, III
Title: Chairman and Chief
Executive Officer
7
Exhibit 18.
March 17, 1997
Riverwood Holding, Inc.
Atlanta, Georgia
Dear Sirs/Madams:
We have audited the consolidated financial statements of Riverwood Holding, Inc.
as of December 31, 1996, and the for the nine month period ended December 31,
1996, included in your Annual Report on Form 10-K to the Securities and Exchange
Commission and have issued our report thereon dated March 17, 1997. Note 23 to
such financial statements contains a description of your adoption during the
quarter ended December 31, 1996 of the change from the FIFO method to the LIFO
method of accounting for certain inventories. In our judgment, such change is to
an alternative accounting principle that is preferable under the circumstances.
Yours truly,
DELOITTE & TOUCHE LLP
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Jurisdiction of
Subsidiary Incorporation
- ---------- ---------------
Creacom S.A.............................................................France
Danapak Riverwood Multipack A/S........................................Denmark
Entreprise Maillet E.U.R.L. ............................................France
Fadec E.U.R.L. .........................................................France
Financiere de Developpement S.A.........................................France
Fiskeby Board AB........................................................Sweden
Fiskeby Board A/S......................................................Denmark
Fiskeby Board Ltd. .............................................United Kingdom
Fiskeby Holding AB......................................................Sweden
Igaras Agro-Florestal Ltda. ...........................................Brazil
Igaras Papeis e Embalagens S.A. ........................................Brazil
Imprimerie Generale S.A.................................................France
Lemaire S.A.............................................................France
New Materials Limited...........................................United Kingdom
New River Timber, Inc. ...............................................Delaware
New River Timber, LLC.................................................Delaware
Ouachita Machine Works...........................................United States
Pine Pipeline, Inc...................................................Louisiana
Rengo Riverwood Packaging, Ltd...........................................Japan
RIC Holding, Inc......................................................Delaware
Riverwood Brazilian Investments, Inc. ................................Delaware
Riverwood Cartons Pty. Ltd. .........................................Australia
Riverwood do Brazil Ltda................................................Brazil
Riverwood Espana, S.A. .................................................Spain
Riverwood International Asia Pacific Limited.........................Hong Kong
Riverwood International Asia Pte Ltd.................................Singapore
Riverwood International B.V. .....................................Netherlands
Riverwood International Canada Inc......................................Canada
Riverwood International Corporation...................................Delaware
Riverwood International Corporation Philanthropic Fund................Delaware
Riverwood International (Cyprus) Limited................................Cyprus
Riverwood International Enterprises, Inc..............................Delaware
Riverwood International Japan, Ltd.......................................Japan
Riverwood International Limited.................................United Kingdom
Riverwood International Machinery, Inc. ..............................Delaware
Riverwood International Mexicana, S. de R.L. de C.V. ..................Mexico
Riverwood International, S.A. ..........................................France
Riverwood International S.p.A. ..........................................Italy
Riverwood Mehrstruckverpackung G.m.b.H. ..............................Germany
Riverwood Packaging Systems Pty. Ltd. ..............................Australia
Riverwood Swedish Investments, Inc. .................................Delaware
Slevin South Company..................................................Arkansas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RIVERWOOD
HOLDING, INC.'S CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF
OPERATIONS AS OF AND FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> MAR-28-1996
<PERIOD-END> DEC-31-1996
<CASH> 25,157
<SECURITIES> 858
<RECEIVABLES> 154,693
<ALLOWANCES> 829
<INVENTORY> 211,965
<CURRENT-ASSETS> 402,854
<PP&E> 1,760,985
<DEPRECIATION> 85,768
<TOTAL-ASSETS> 2,680,145
<CURRENT-LIABILITIES> 344,098
<BONDS> 1,567,259
0
0
<COMMON> 75
<OTHER-SE> 654,134
<TOTAL-LIABILITY-AND-EQUITY> 2,680,145
<SALES> 852,112
<TOTAL-REVENUES> 852,112
<CGS> 734,314
<TOTAL-COSTS> 734,314
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 979
<INTEREST-EXPENSE> 145,845
<INCOME-PRETAX> (143,724)
<INCOME-TAX> 4,180
<INCOME-CONTINUING> (130,362)
<DISCONTINUED> 35,546
<EXTRAORDINARY> (10,320)
<CHANGES> 0
<NET-INCOME> (105,136)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
RIVERWOOD HOLDING, INC. Exhibit 99
RECONCILIATION OF INCOME (LOSS) FROM OPERATIONS TO EBITDA
(In thousands of dollars)
<TABLE>
<CAPTION>
U.S.
Coated Timberlands/
Board Container- Wood
Company System board Products Corporate Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Second Quarter 1996
Income (Loss) from Operations (A) $ 19,768 $ (7,260) $ - $ (6,396) $ 6,112
Income from discontinued operations - - 15,356 - 15,356
Add: Depreciation and amortization 21,295 4,320 1,950 672 28,237
Purchased asset costs (B) 9,877 1,217 844 (41) 11,897
Dividends from equity
investments - - - 1,408 1,408
Other non-cash charges (C) 1,506 (541) 784 80 1,829
- ------------------------------------------------------------------------------------------------------------------------------------
EBITDA (D) $ 52,446 $ (2,264) $ 18,934 $ (4,277) $ 64,839
====================================================================================================================================
Third Quarter 1996
Income (Loss) from Operations (A) $ 20,563 $ (12,207) $ - $ (5,312) $ 3,044
Income from discontinued operations - - 17,453 - 17,453
Add: Depreciation and amortization 17,484 4,644 2,241 475 24,844
Purchased asset costs (B) 7,021 700 1,138 87 8,946
Dividends from equity
investments - - - 696 696
Other non-cash charges (C) 1,506 (535) 1,313 36 2,320
- ------------------------------------------------------------------------------------------------------------------------------------
EBITDA (D) $ 46,574 $ (7,398) $ 22,145 $ (4,018) $ 57,303
====================================================================================================================================
Fourth Quarter 1996
Income (Loss) from Operations $ 14,645 $ (11,502) $ - $ (10,880) $ (7,737)
Income from discontinued operations - - 2,737 - 2,737
Add: Depreciation and amortization 23,921 5,354 618 (140) 29,753
Purchased asset costs (B) (3,269) 770 295 (46) (2,250)
Dividends from equity
investments - - - 3,287 3,287
Other non-cash charges (C) 1,132 (584) 76 4 628
- ------------------------------------------------------------------------------------------------------------------------------------
EBITDA (D) $ 36,429 $ (5,962) $ 3,726 $ (7,775) $ 26,418
====================================================================================================================================
Nine Months Ended
December 31, 1996
Income from Operations (A) $ 54,976 $ (30,969) $ - $ (22,588) $ 1,419
Income from discontinued operations - - 35,546 - 35,546
Add: Depreciation and amortization 62,700 14,318 4,809 1,007 82,834
Purchased asset costs (B) 13,629 2,687 2,277 - 18,593
Dividends from equity
investments - - - 5,391 5,391
Other non-cash charges (C) 4,144 (1,660) 2,173 120 4,777
- ------------------------------------------------------------------------------------------------------------------------------------
EBITDA (D) $ 135,449 $ (15,624) $ 44,805 $ (16,070) $ 148,560
====================================================================================================================================
</TABLE>
================================================================================
================================================================================
<PAGE>
<TABLE>
<CAPTION>
U.S.
Coated Timberlands/
Board Container- Wood
Predecessor System board Products Corporate Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Quarter 1996
Income (Loss) from Operations (A) $ 24,638 $ (5,955) $ 13,868 $ (16,901) $ 15,650
Add: Depreciation and amortization 17,800 4,332 1,735 571 24,438
Dividends from equity
investments - - - - -
Pro forma adjustments 3,471 120 218 9,533 13,342
- ------------------------------------------------------------------------------------------------------------------------------------
Other non-cash charges (C) 1,265 261 945 232 2,703
- ------------------------------------------------------------------------------------------------------------------------------------
Pro Forma EBITDA (D) $ 47,174 $ (1,242) $ 16,766 $ (6,565) $ 56,133
====================================================================================================================================
</TABLE>
Notes:
(A) In the fourth quarter of 1996, the Company adopted the LIFO method of
determining the cost of principally all its inventories effective March
28, 1996. Prior to the fourth quarter of 1996, the Company determined the
cost of principally all its inventory using the FIFO method. Accordingly,
the second and third quarters of 1996 have been restated to reflect the
adoption of the LIFO method effective March 28, 1996 (see Selected
Quarterly Financial Data).
(B) Under the terms and definitions of the Senior Secured Credit Facilities
and the indentures (the "Indentures") for the Notes, certain expenses and
costs are excluded from the Company's 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."
(C) Other non-cash charges include non-cash charges deducted for pension,
postretirement and postemployment benefits, depletion of prepaid timber
and amortization of premiums on hedging contracts in determining net
income other than Purchased asset costs (see (B) above).
(D) Pro Forma EBITDA is defined as consolidated net income (exclusive of
non-cash charges resulting from purchase accounting during the nine months
ended December 31, 1996) before consolidated interest expense,
consolidated income taxes, consolidated depreciation and amortization,
cost of timber harvested and other non-cash charges deducted in
determining consolidated net income and extraordinary items and the
cumulative effect of accounting changes and earnings of, but including
dividends from, non-controlled affiliates calculated in accordance with
definitions in the Senior Secured Credit Agreement and the Indentures and
on a pro forma basis to exclude Other Costs (see Note 18 in Notes to
Consolidated Financial Statements) of the Predecessor. 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 Consolidated Statement of Operations or cash flow data.
