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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11113
RIVERWOOD HOLDING, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-2205241
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1013 Centre Road
Suite 350
Wilmington, Delaware 19805
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(Address of principal executive offices)
(Zip Code)
c/o Riverwood International Corporation
(770) 644-3000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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At August 6, 1997 there were 7,605,900 shares and 500,000 shares of the
registrant's Class A and Class B common stock, respectively, outstanding.
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PART I. FINANCIAL INFORMATION*
* As used in this Form 10-Q, unless the context otherwise requires, "RIC"
refers to the corporation formerly named Riverwood International
Corporation, the "Predecessor" or the "Predecessor Company" refers to RIC
and its subsidiaries in respect of periods prior to the Merger (as defined
herein), the "Company" refers to the registrant, Riverwood Holding, Inc., a
Delaware corporation formerly named New River Holding, Inc. ("Holding") and
its subsidiaries, "RIC Holding" refers to RIC Holding, Inc., a Delaware
corporation, successor by merger to RIC and a wholly owned subsidiary of
Holding, and "Riverwood" refers to Riverwood International Corporation, a
Delaware corporation formerly named Riverwood International USA, Inc. and a
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wholly owned subsidiary of RIC Holding.
I-1
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
COMPANY
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<S> <C> <C>
JUNE 28, DECEMBER 31,
1997 1996
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ASSETS
Current Assets
Cash and equivalents............................................................... $ 11,406 $ 16,499
Marketable securities, at cost (approximates market)............................... 765 858
Receivables, net of allowances..................................................... 148,389 153,864
Inventories........................................................................ 186,295 211,965
Prepaid expenses................................................................... 7,861 8,113
Deferred tax assets................................................................ 2,043 2,897
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Total Current Assets................................................................. 356,759 394,196
Property, Plant and Equipment, net of accumulated depreciation of $135,606 in 1997
and $85,768 in 1996................................................................ 1,676,783 1,675,217
Investments in Net Assets of Equity Affiliates....................................... 131,334 125,030
Goodwill, net of accumulated amortization of $10,135 in 1997 and $5,900 in 1996...... 314,119 318,543
Other Assets......................................................................... 170,889 158,501
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Total Assets......................................................................... $ 2,649,884 $2,671,487
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LIABILITIES
Current Liabilities
Short-term debt.................................................................... $ 23,045 $ 18,173
Accounts payable................................................................... 117,371 125,014
Compensation and employee benefits................................................. 39,498 38,017
Income taxes....................................................................... 8,561 42,031
Other accrued liabilities.......................................................... 115,828 112,205
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Total Current Liabilities............................................................ 304,303 335,440
Long-Term Debt, less current portion................................................. 1,670,998 1,567,259
Deferred Income Taxes................................................................ 22,249 19,722
Other Noncurrent Liabilities......................................................... 83,077 85,467
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Total Liabilities.................................................................... 2,080,627 2,007,888
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Contingencies and Commitments (Note 5)
Redeemable Common Stock, at current redemption value................................. 9,390 9,390
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SHAREHOLDERS' EQUITY
Nonredeemable Common Stock........................................................... 75 75
Capital in Excess of Par Value....................................................... 751,153 751,153
(Accumulated Deficit)................................................................ (181,606) (105,136)
Cumulative Currency Translation Adjustment........................................... (9,755) 8,117
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Total Shareholders' Equity........................................................... 559,867 654,209
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Total Liabilities and Shareholders' Equity........................................... $ 2,649,884 $2,671,487
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-2
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars)
(unaudited)
On March 27, 1996, Holding, through its wholly owned subsidiary RIC Holding,
acquired all of the outstanding shares of common stock of RIC. The purchase
method of accounting was used to record assets acquired and liabilities assumed
by Holding. As a result of the Merger, purchase accounting, the effect of the
disposition of substantially all of the U.S. Timberlands/Wood Products business
segment (see Note 8) and certain Other Costs of the Predecessor, the
accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
results of operations and cash flows of these two separate entities.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
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THREE MONTHS THREE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997 MARCH 27, 1996
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Net Sales.............................................. $ 294,034 $ 293,884 $ 561,222 $ 293,649
Cost of Sales.......................................... 258,725 252,395 493,934 232,701
Selling, General and Administrative.................... 32,057 31,631 61,264 30,936
Research, Development and Engineering.................. 839 1,754 2,528 2,031
Other Costs............................................ -- -- -- 11,114
Other Expenses, net.................................... 2,168 1,992 4,990 1,217
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Income (Loss) from Operations.......................... 245 6,112 (1,494) 15,650
Interest Income........................................ 77 226 219 329
Interest Expense....................................... 42,030 49,842 80,931 26,392
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(Loss) from Continuing Operations before Income Taxes
and Equity in Net Earnings of Affiliates............. (41,708) (43,504) (82,206) (10,413)
Income Tax Expense (Benefit)........................... 1,828 (2,272) 2,729 (3,436)
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(Loss) from Continuing Operations before Equity in Net
Earnings of Affiliates............................... (43,536) (41,232) (84,935) (6,977)
Equity in Net Earnings of Affiliates................... 4,910 4,622 8,465 4,927
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(Loss) from Continuing Operations...................... (38,626) (36,610) (76,470) (2,050)
Income from Discontinued Operations, net of tax
of $0................................................ -- 15,356 -- --
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Net (Loss)............................................. $ (38,626) $ (21,254) $ (76,470) $ (2,050)
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-3
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(unaudited)
On March 27, 1996, Holding, through its wholly owned subsidiary RIC
Holding, acquired all of the outstanding shares of common stock of RIC. The
purchase method of accounting was used to record assets acquired and
liabilities assumed by Holding. As a result of the Merger, purchase
accounting, the effect of the disposition of substantially all of the U.S.
Timberlands/Wood Products business segment (see Note 8) and certain Other
Costs of the Predecessor, the accompanying financial statements of the
Predecessor and the Company are not comparable in all material respects since
the financial statements report results of operations and cash flows of these
two separate entities.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
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SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED
JUNE 28, 1997 JUNE 29, 1996 MARCH 27, 1996
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Cash Flows from Operating Activities:
Net (Loss).......................................................... $ (76,470) $ (21,254) $ (2,050)
Noncash Items Included in Net (Loss):
Depreciation, amortization and cost of timber harvested........... 65,670 39,935 24,438
Deferred income taxes............................................. 3,041 (2,467) (3,574)
Pension, postemployment and postretirement expense,
net of benefits paid............................................ 2,525 415 1,861
Equity in net earnings of affiliates, net of dividends............ (6,608) (3,214) (4,927)
Amortization of deferred debt issuance costs...................... 6,529 3,662 619
Other, net........................................................ 382 181 (2,350)
(Increase) Decrease in Current Assets, net of effects from the
Merger:
Receivables....................................................... 2,868 (17,203) 14,737
Inventories....................................................... 19,406 (9,353) (14,659)
Prepaid expenses.................................................. (49) (6,164) 8,298
Increase (Decrease) in Current Liabilities, net of effects from the
Merger:
Accounts payable.................................................. (4,118) (9,754) 18,182
Compensation and employee benefits................................ 2,451 (4,128) (10,248)
Income taxes...................................................... (177) 54 (3,343)
Other accrued liabilities......................................... 1,605 (930) 12,360
Decrease in Other Noncurrent Liabilities............................ (4,742) (2,119) (2,569)
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Net Cash Provided by (Used in) Operating Activities................. 12,313 (32,339) 36,775
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Cash Flows from Investing Activities:
Acquisition of RIC, net of cash acquired............................ -- (1,365,202) --
Payment of Merger Costs............................................. (33,761) -- --
Purchases of Property, Plant and Equipment.......................... (88,847) (34,299) (44,074)
Acquisition of equipment previously leased under operating leases... -- (46,742) --
Proceeds from Marketable Securities Held to Maturity................ 93 -- 439
Proceeds from Sale of Assets........................................ 836 214 623
Increase in Other Assets............................................ (6,425) (3,462) (8,004)
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Net Cash Used in Investing Activities............................... (128,104) (1,449,491) (51,016)
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Cash Flows from Financing Activities:
Issuance of Debt.................................................... -- 1,838,400 12 ,669
Increase in Debt Issuance Costs..................................... -- (92,820) --
Net Increase (Decrease) in Notes Payable............................ 113,573 114,303 (3,000)
Proceeds from Issuance of Common Stock.............................. -- 761,143 838
Payments on Debt.................................................... (1,672) (5,724) (2,833)
Predecessor Debt Paid at Merger..................................... -- (1,118,461) --
Dividends........................................................... -- -- (2,630)
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Net Cash Provided by Financing Activities........................... 111,901 1,496,841 5,044
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Effect of Exchange Rate Changes on Cash............................. (1,203) (107) (638)
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Net (Decrease) Increase in Cash and Equivalents..................... (5,093) 14,904 (9,835)
Cash and Equivalents at Beginning of Period......................... 16,499 1 35,870
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Cash and Equivalents at End of Period............................... $ 11,406 $ 14,905 $ 26,035
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-4
<PAGE>
RIVERWOOD HOLDING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
Holding, its wholly owned subsidiaries RIC Holding and the corporation
formerly named CDRO Acquisition Corporation ("Acquisition Corp.") were
incorporated in 1995 to acquire the stock of RIC.
On March 27, 1996, Holding, through its wholly owned subsidiaries, acquired
all of the outstanding shares of common stock of RIC. On such date, Acquisition
Corp. was merged (the "Merger") into RIC. RIC, as the surviving corporation in
the Merger, became a wholly owned subsidiary of RIC Holding. On March 28, 1996,
RIC transferred substantially all of its properties and assets to Riverwood,
other than the capital stock of Riverwood, and RIC was merged (the "Subsequent
Merger") into RIC Holding. Thereupon, Riverwood was renamed "Riverwood
International Corporation." Upon consummation of the Subsequent Merger, RIC
Holding, as the surviving corporation in the Subsequent Merger, became the
direct 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.
The condensed consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, all
adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented have been made. The Condensed Consolidated Balance
Sheet as of December 31, 1996 was derived from audited financial statements.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1997.
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 condensed consolidated financial statements presented herein for the
three months ended March 27, 1996, represent the Predecessor's results of
operations and cash flows prior to the Merger and, consequently, are stated on
the Predecessor's historical cost basis. The condensed consolidated financial
statements as of June 28, 1997, and for the three and six months then ended and
for the three months ended June 29, 1996, reflect the adjustments which were
made to record the Merger and represent the Company's new cost basis. On October
18, 1996, the Company sold substantially all of the assets of the U.S.
Timberlands/Wood Products business segment (see Note 8). The operating results
for the U.S. Timberlands/Wood Products business segment were classified as
discontinued operations for periods beginning March 28, 1996 and ending October
18, 1996 (the date of the sale). The operating results for the U.S.
Timberlands/Wood Products business segment have not been reclassified as
discontinued operations in the Predecessor's Condensed Consolidated Statement of
Operations or Condensed Consolidated Statement of Cash Flows for the three
months ended March 27, 1996. Accordingly, the financial statements of the
Predecessor for periods prior to March 28, 1996 are not comparable in all
material respects with the financial statements subsequent to the Merger date.
The most significant differences relate to amounts recorded for inventory,
property, plant and equipment, intangibles and debt which resulted in increased
cost of sales, amortization, depreciation and interest expense in the three and
six months ended June 28, 1997, and for the three months ended June 29, 1996,
and will continue to do so in future periods.
I-5
<PAGE>
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a summary of the Company's significant accounting policies, please refer
to the Company's report on Form 10-K filed with the Securities and Exchange
Commission for the nine month period ended December 31, 1996. For a summary of
RIC's significant accounting policies, please refer to the financial statements
incorporated by reference in RIC's annual report filed with the Securities and
Exchange Commission under Form 10-K for the year ended December 31, 1995.
The Company has reclassified the presentation of certain prior period
information to conform with the current presentation format.
The preparation of the condensed 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 condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual amounts could differ
from those estimates.
NOTE 3--INVENTORIES
The major classes of inventories were as follows:
(In thousands of dollars)
-------------------------
JUNE 28, 1997 DECEMBER 31, 1996
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Finished goods..................... $ 77,970 $ 89,412
Work-in-process.................... 15,335 12,496
Raw materials...................... 59,019 71,075
Supplies........................... 33,971 38,982
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Total.............................. $ 186,295 $ 211,965
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In the fourth quarter of 1996, the Company adopted the Last-in, First-out
("LIFO") method of determining the cost of principally all of its inventories
effective March 28, 1996. Prior to the fourth quarter of 1996, the Company
determined the cost of principally all of its inventories using the First-in,
First-out ("FIFO") method. Accordingly, the second quarter of 1996 has been
restated to reflect the adoption of the LIFO method effective March 28, 1996 as
follows:
(In thousands of dollars)
- -------------------------
(LOSS) INCOME
FROM NET
NET SALES OPERATIONS (LOSS)
---------- ------------- ----------
Second quarter 1996 as
originally reported................. $ 293,884 $ (20,291) $ (51,260)
Second quarter 1996 LIFO adjustment... -- 26,403 30,006
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Second quarter 1996 as restated....... $ 293,884 $ 6,112 $ (21,254)
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I-6
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NOTE 4--INVESTMENTS IN NET ASSETS OF EQUITY AFFILIATES
The Company has investments in affiliates that are accounted for using the
equity method of accounting. The most significant investment is the Company's 50
percent investment in Igaras Papeis e Embalagens S.A. ("Igaras").
The following represents the summarized income statement information for
Igaras, of which the Company recognizes 50 percent in its results of operations:
(In thousands of dollars)
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<TABLE>
<CAPTION>
COMPANY PREDECESSOR
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THREE MONTHS THREE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997 MARCH 27, 1996
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<S> <C> <C> <C> <C>
Net Sales............................................ $ 58,686 $ 56,748 $ 115,088 $ 59,573
Cost of Sales........................................ 40,079 37,938 80,365 39,127
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Gross Profit......................................... $ 18,607 $ 18,810 $ 34,723 $ 20,446
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Income from Operations............................... $ 13,043 $ 13,050 $ 22,745 $ 14,275
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Net Income........................................... $ 9,274 $ 8,757 $ 16,082 $ 10,249
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</TABLE>
During the second and first quarters of 1997 and the second quarter of 1996,
the Company received dividends from Igaras of $0.9 million, nil and $1.0
million, respectively, net of taxes of $0.2 million, nil and nil, respectively.
During the first quarter of 1996, the Predecessor did not receive a dividend
from Igaras. The Company received net dividends from its affiliates, other than
Igaras, that are accounted for using the equity method totaling $0.8 million and
$0.4 million in the first quarter of 1997 and second quarter of 1996,
respectively. The Company and the Predecessor did not receive dividends from
such affiliates during the three months ended June 28, 1997 and March 27, 1996.
NOTE 5--CONTINGENCIES AND COMMITMENTS
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 U.S. Environmental Protection Agency (the "EPA") proposed
regulations (generally referred to as the "cluster rules") that would mandate
more stringent controls on air and water discharges from the United States pulp
and paper mills. In 1996, the EPA released additional information regarding the
proposed cluster rules. Based on this 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 Company anticipates that the majority of this spending
for compliance with the cluster rules will occur later in the eight-year period.
The Company had no capital spending during the first half of 1997 related to
compliance with the cluster rules.
In late 1995, The Louisiana Department of Environmental Quality ("DEQ")
notified the Company that the Predecessor may be liable for the remediation
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
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 second 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 Company anticipates entering into a cooperative agreement with
the DEQ to perform a phased-in evaluation of 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.
I-7
<PAGE>
The Company is engaged in environmental remediation projects for certain
properties currently owned or operated by the Company and certain properties
divested by the Company for which responsibility was retained for pre-existing
conditions. The Company's costs in some instances cannot be estimated until the
remediation process is substantially underway. To address these contingent
environmental costs, the Company has accrued reserves when such costs are
probable and can be reasonably estimated. The Company believes that, based on
current information and regulatory requirements, the accruals established by the
Company for environmental expenditures are adequate. Based on current knowledge,
to the extent that additional costs may be incurred that exceed the accrued
reserves, such amounts are not expected to have a material impact on the results
of operations, cash flows or financial condition of the Company, although no
assurance can be given that material costs will not be incurred in connection
with clean-up activities at these properties, including the Shreveport and Caddo
Parish sites referred to above.
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.
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 June 2, 1997, the court granted
Defendants' Motion for Summary Judgment and dismissed the action in its
entirety. The court based its ruling on the fact that (i) none of the statements
attributable to the Company concerning its review of strategic alternatives was
false and (ii) there is no causal relationship between plaintiff's purchase of
Riverwood common stock and the Individual Defendants' exercise of SARs.
Plaintiff filed his Notice of Appeal to the United States Court of Appeals for
the Eleventh Circuit on June 5, 1997. A briefing schedule has not yet been set.
NOTE 6--OTHER COSTS
Other Costs incurred by the Predecessor in 1996 included expenses associated
with stock based compensation plans, expenses related to RIC's review of
strategic alternatives and provision for environmental reserves.
NOTE 7--INCOME TAXES
During the second quarter and first six months of 1997, the Company
recognized an income tax expense of $1.8 million and $2.7 million,
respectively, on a (Loss) from Continuing Operations before Income Taxes and
Equity in Net Earnings of Affiliates of $41.7 million and $82.2 million,
respectively. During the second quarter of 1996, the Company recognized an
income tax benefit of $2.3 million on a (Loss) from Continuing Operations
before Income Taxes and Equity in Net Earnings of Affiliates of $43.5
million. The 1997 expense and 1996 benefit differed from the statutory
federal income tax rate because of valuation allowances established on net
operating loss carryforward tax assets in the U.S. and certain international
locations where the realization of benefits is uncertain.
In the first quarter of 1996, the Predecessor recognized an income tax
benefit of $3.4 million on a (Loss) before Income Taxes and Equity in Net
Earnings of Affiliates of $10.4 million.
Pursuant to an election under Section 338(h)(10) of the Internal Revenue
Code of 1986, as amended, the Merger has been treated for income tax purposes as
a taxable sale of assets of RIC and a taxable sale of assets of RIC's
subsidiaries to which the election applies. Pursuant to a Tax Matters agreement,
Manville agreed to bear the cost of the Section 338(h)(10) election for federal
tax purposes and for purposes of state taxes for which Manville and the
Predecessor filed returns on a combined basis. The Company agreed to bear the
cost of this election for the purposes of other state taxes ("stand alone
taxes") including Louisiana income tax. During 1997, the Company has paid $33.1
million in estimated stand-alone taxes relating to the election, including $27.5
million in Louisiana income tax. The Company's calculation of its Louisiana tax
was based on state law in effect at the time of the Merger, including a 1993
amendment. In May 1997, the Louisiana Supreme Court declared the 1993 amendment
to be void under the Louisiana Constitution, retroactive to 1993. It is possible
that the voiding of the 1993 amendment could result in the Company being
required to pay significant additional Louisiana income tax relating to the
election (plus interest on the additional tax). The Company's Louisiana tax
return for the period that includes the Merger is due in November 1997. After
consultation with Louisiana tax counsel, the Company believes that it has a
reasonable basis for filing
I-8
<PAGE>
its Louisiana income tax return for 1996 (which is due in November 1997)
without the payment of any additional tax due to the voiding of the 1993
amendment. There can be no assurance, however, the Company would ultimately
prevail on this issue if Louisiana were to challenge such filing position. If
the Company were not to prevail in such a challenge, significant additional
Louisiana income tax relating to the election could be payable. Management
estimates that the maximum amount for such additional tax is approximately
$50 million (plus statutory interest on any additional tax). The Company
intends to file its tax return without the payment of additional tax due to
the voiding of the 1993 amendment, and management believes that the
additional tax ultimately paid (if any) would be substantially less than the
estimated maximum amount, although no assurance can be given in this regard.
The Company and its advisors are continuing to study this situation. Since
the law is unclear and the amounts involved could be significant, it may be
several years before this matter is resolved.
NOTE 8--DISPOSITION OF BUSINESSES AND OPERATING ACTIVITIES
On October 18, 1996, the Company sold substantially all of the assets of the
U.S. Timberlands/Wood Products business segment for approximately $550 million
in cash. 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 Company's requirements for pine
pulpwood and residual chips at its paper mill in West Monroe, Louisiana (the
"West Monroe Mill"), as well as a portion of the Company's needs for hardwood
pulpwood 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 were classified as discontinued operations for periods
beginning March 28, 1996 and ending October 18, 1996 (the date of the sale). The
operating results of the U.S. Timberlands/Wood Products business segment have
not been reclassified as discontinued operations in the Predecessor's Condensed
Consolidated Statements of Operations or Condensed Consolidated Statements of
Cash Flows for periods prior to the Merger.
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, packaging machinery
manufacturing plants in Marietta, Georgia and Koln, Germany, 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 other 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 during
1996 as a purchase accounting adjustment. These costs related principally to
the severance of approximately 750 employees, relocation and other plant
closure costs. At June 28, 1997, $22.8 million of this total was unspent and
accrued in Other accrued liabilities on the Condensed Consolidated Balance
Sheets. During the first half of 1997, $9.9 million was paid out and charged
against the accrual and related primarily to severance costs.
NOTE 9--PRO FORMA DATA
The following unaudited pro forma financial data has been prepared assuming
that the Merger and related financings were consummated on January 1, 1996 and
excluding the results of operations of the U.S. Timberlands/Wood Products
business segment from the period presented. This pro forma financial data is
presented for informational purposes and is not necessarily indicative of the
operating results that would have occurred had the Merger been consummated on
January 1, 1996, nor is it necessarily indicative of future operations.
THREE MONTHS
ENDED
MARCH 27, 1996
(IN THOUSANDS OF DOLLARS)
-------------------------
Net Sales........................$ 258,706
Net Loss.........................$ (31,696)
NOTE 10--SUBSEQUENT EVENT
On July 28, 1997, the Company completed an offering of $250 million
principal amount of Senior Notes due 2007, bearing interest at 10 5/8 percent
(the "1997 Notes"). The net proceeds of this offering were applied to prepay
certain revolving credit borrowings under the Company's senior secured credit
agreement (without any commitment reduction), and to refinance certain Tranche A
term loans and other borrowings thereunder. The notes have not been registered
under the Securities Act of 1933, as amended. During the third quarter of 1997,
the Company will record a non-cash, extraordinary charge to earnings of
approximately $2.5 million, net of tax, related to the write-off of the
applicable portion of deferred debt issuance costs on the Tranche A term loans.
I-9
<PAGE>
In connection with this refinancing, the Company's senior secured lenders
have modified certain financial covenants to reflect, among other things, the
Company's recent financial results. After giving effect to such refinancing,
outstanding revolving borrowings under the senior secured agreement were
approximately $69 million (on a pro forma basis as of June 28, 1997) and
scheduled principal payments on the term loans thereunder are approximately
$1 million, $3 million, $4 million, $4 million, $120 million, $173 million,
$184 million, and $156 million for 1997 through 2004, respectively. The
covenant modifications include reductions in permitted capital expenditures,
the elimination of the minimum consolidated net worth requirement, and
reductions in minimum EBITDA (as defined) and interest coverage ratio
requirements. The amended covenants also specify permitted capital
expenditures (subject to certain carryover allowances and other adjustments)
of no more than $175 million, $140 million, $140 million, and $135 million
for 1997 though 2000, respectively, and $130 million per year thereafter. The
amended covenants specify, among other changes, the following
amended minimum EBITDA and interest coverage ratio requirements for each four
quarter period ending during the following test periods:
<TABLE>
<CAPTION>
INTEREST COVERAGE
PERIOD EBITDA RATIO
- -------------------------------------------------------------------------- -------------- ---------------------
<S> <C> <C>
December 31, 1996--December 30, 1997....................................... $130 million 0.80 to 1.00
December 31, 1997--December 30, 1998....................................... $140 million 0.85 to 1.00
December 31, 1998--December 30, 1999....................................... $200 million 1.00 to 1.00
December 31, 1999--December 30, 2000....................................... $265 million 1.25 to 1.00
December 31, 2000--December 30, 2001....................................... $325 million 1.50 to 1.00
December 31, 2001--December 30, 2002....................................... $350 million 1.75 to 1.00
December 31, 2002--December 30, 2003....................................... $375 million 2.00 to 1.00
Thereafter ....................................... $400 million 2.25 to 1.00
</TABLE>
I-10
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Shareholders and Directors
of Riverwood Holding, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Riverwood Holding, Inc. and its subsidiaries as of June 28, 1997, and the
related condensed consolidated statements of operations for the three and six
month periods ended June 28, 1997 and the three months ended June 29, 1996 and
condensed consolidated statements of cash flows for the six months ended June
28, 1997 and the three months ended June 29, 1996. These financial statements
are the responsibility of the Company's management. We were furnished with the
report of other accountants dated August 5, 1997, on their review of the interim
financial information of Igaras Papeis e Embalagens S.A. (Igaras) for the three
and six months ended June 30, 1997, the Company's investment in which is
accounted for by use of the equity method. The Company's equity of $127,860,000
in Igaras' net assets at June 28, 1997, and of $4,551,000 and $7,808,000 in
Igaras' net income for the three and six month periods ended June 28, 1997,
respectively, are included in the accompanying financial statements.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review and the report of other accountants, we are not aware of
any material modifications that should be made to such condensed consolidated
financial statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the 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 nine-month period ended
December 31, 1996 and the three-month period ended March 27, 1996 (Predecessor).
The consolidated statements of operations, shareholders' equity and cash flows
for the nine-month period ended December 31, 1996 and the consolidated
statements of shareholders' equity for the three-month period ended March 27,
1996 (Predecessor) are not presented herein. In our report dated March 17, 1997,
we expressed an unqualified opinion on those consolidated financial statements,
based on our audit and the report of other auditors. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1996 and condensed consolidated statements of operations and
cash flows for the three-month period ended March 27, 1996, are fairly stated,
in all material respects, in relation to the consolidated financial statements
from which they have been derived.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 5, 1997
I-11
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As a result of the Merger, purchase accounting, the effect of the
disposition of substantially all of the assets of the U.S. Timberlands/Wood
Products business segment and certain Other Costs of the Predecessor, the
results of operations of the Company for periods subsequent to the Merger are
not comparable in all material respects to the results of operations of the
Predecessor for periods prior to the Merger.
THE MERGER AND PURCHASED ASSET COSTS
On March 27, 1996, Holding, through its wholly-owned subsidiaries, acquired
all of the outstanding shares of common stock of RIC. On such date, CDRO
Acquisition Corp., Holding's acquisition subsidiary, was merged into RIC in
the Merger. 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. Upon consummation of the Subsequent Merger, RIC Holding, as the
surviving corporation in the Subsequent Merger, became the direct 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 condensed consolidated financial statements for the three
months ended March 27, 1996 have been prepared on the historical cost basis
using accounting principles that had been adopted by the Predecessor. As a
result of the Merger, purchase accounting and the effect of the disposition of
substantially all of the U.S. Timberlands/Wood Products business segment,
operating results subsequent to the Merger are not comparable in all material
respects to the operating results prior to the Merger.
Certain expenses and costs are excluded from the Company's Net (Loss) 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 three months ended June 28, 1997, the Company's Income from
Operations included Purchased Asset Costs as follows:
(In thousands of dollars)
- -------------------------
<TABLE>
<CAPTION>
COATED BOARD CONTAINERBOARD TOTAL
------------- ----------------- ---------
<S> <C> <C> <C>
Cost of sales (excluding depreciation expense)........................... $ 376 $ -- $ 376
Depreciation expense..................................................... 3,827 911 4,738
Amortization of intangible assets........................................ 663 -- 663
------ ----- ---------
Net Impact on Income from Operations..................................... $ 4,866 $ 911 $ 5,777
------ ----- ---------
------ ----- ---------
</TABLE>
During the three months ended June 29, 1996, the Company's Income from
Operations included Purchased Asset Costs as follows:
(In thousands of dollars)
- -------------------------
<TABLE>
<CAPTION>
COATED BOARD CONTAINERBOARD CORPORATE TOTAL
------------ -------------- --------- -------
<S> <C> <C> <C> <C>
Cost of sales (excluding depreciation expense)....... $ 199 $ -- $ -- $ 199
Depreciation expense ................................ 9,483 1,267 (64) 10,686
Amortization of intangible assets.................... 195 (50) 23 168
------- ------ ----- -------
Net Impact on Income from Operations................. $ 9,877 $1,217 $(41) $11,053
------- ------ ----- -------
------- ------ ----- -------
</TABLE>
I-12
<PAGE>
During the six months ended June 28, 1997, the Company's (Loss) from
Operations included Purchased Asset Costs as follows:
(In thousands of dollars)
- -------------------------
<TABLE>
<CAPTION>
COATED BOARD CONTAINERBOARD TOTAL
------------- --------------- ---------
<S> <C> <C> <C>
Cost of sales (excluding depreciation expense).......................... $ 512 $ -- $ 512
Depreciation expense.................................................... 8,655 1,822 10,477
Amortization of intangible assets....................................... 1,918 -- 1,918
------------- ------ ---------
Net Impact on (Loss) from Operations.................................... $ 11,085 $ 1,822 $ 12,907
------------- ------ ---------
------------- ------ ---------
</TABLE>
SALE OF U.S. TIMBERLANDS/WOOD PRODUCTS
On October 18, 1996, the Company sold substantially all of the assets of the
U.S. Timberlands/Wood Products business segment for approximately $550 million
in cash. 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 20-year supply agreement
with a 10-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 were classified as discontinued operations for periods
beginning March 28, 1996 and ending October 18, 1996 (the date of the sale).
Discontinued operations have not been segregated in the statements of cash flows
nor have they been reclassified as discontinued operations in the Predecessor's
statements of operations and balance sheets.
OTHER COSTS OF PREDECESSOR
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 Predecessor's Condensed
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 expenses were allocated to the Coated Board,
Containerboard and U.S. Timberlands/Wood Products business segments and
Corporate and Eliminations, respectively. Expenses related to RIC's review of
strategic alternatives and environmental reserves were included in Corporate and
Eliminations for business segment reporting purposes.
I-13
<PAGE>
GENERAL
The Company reports its results in two business segments: Coated Board and
Containerboard. 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
the operations of the U.S. Timberlands/Wood Products business segment have
not been classified as discontinued operations in the Predecessor's
Consolidated Statements of Operations for periods prior to the Merger. The
Coated Board business segment includes the production and sale of coated
unbleached kraft paperboard ("CUK Board") for packaging cartons from the
paper mill in Macon, Georgia (the "Macon Mill") and at the West Monroe Mill,
and white lined chip board ("WLC") at its paper mill in Norrkoping, Sweden
(the "Swedish Mill"), converting operations at facilities in the United
States, Australia and Europe; and the design, manufacture and installation of
packaging machinery related to the 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.
The table below sets forth Net Sales, Income (Loss) from Operations and
EBITDA. EBITDA is defined as consolidated net income (exclusive of non-cash
charges resulting from purchase accounting during the periods subsequent to
the Merger) 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
excludes the EBITDA of Igaras but includes dividends actually received from
Igaras, excludes Other Costs of the Predecessor and excludes Purchased Asset
Costs resulting from purchase accounting during periods subsequent to the
Merger. 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 Statements of Operations or cash flow
data.
(In thousands of dollars)
- -------------------------
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------------------------- --------------
THREE MONTHS THREE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997 MARCH 27, 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Sales (Segment Data):
Coated Board....................................... $ 272,018 $ 266,231 $ 512,128 $ 234,608
Containerboard..................................... 22,016 27,653 49,094 25,496
U.S. Timberlands/Wood Products..................... -- -- -- 37,336
Intersegment Eliminations.......................... -- -- -- (3,791)
------------- ------------- ------------- --------------
Net Sales............................................ $ 294,034 $ 293,884 $ 561,222 $ 293,649
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Income (Loss) from Operations
Coated Board....................................... $ 19,307 $ 19,768 $ 35,086 $ 24,638
Containerboard..................................... (12,532) (7,260) (25,538) (5,955)
U. S. Timberlands/Wood Products.................... -- -- -- 13,868
Corporate and Eliminations......................... (6,530) (6,396) (11,042) (16,901)
------------- ------------- ------------- --------------
Income (Loss) from Operations........................ $ 245 $ 6,112 $ (1,494) $ 15,650
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
EBITDA (Segment Data):
Coated Board....................................... $ 47,846 $ 52,446 $ 92,331 $ 47,174
Containerboard..................................... (4,711) (2,264) (12,749) (1,242)
U. S. Timberlands/Wood Products.................... -- 18,934 -- 16,766
Corporate and Eliminations......................... (3,555) (4,277) (6,849) (6,565)
------------- ------------- ------------- --------------
EBITDA............................................... $ 39,580 $ 64,839 $ 72,733 $ 56,133
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
I-14
<PAGE>
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
all its inventories using the FIFO method. Accordingly, 1996 operating results
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
Condensed Consolidated Financial Statements, see Note 3 to the Condensed
Consolidated Financial Statements.
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 business segment, the Company has
experienced stable pricing for its integrated beverage carton products, and
moderate cyclical pricing for its folding cartonboard, which is principally
sold in the open market. The Company's folding cartonboard sales are affected
by competition from competitors' CUK Board and other substrates -solid
bleached sulfate (SBS), recycled clay coated news (CCN) and, internationally,
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.
The Company is pursuing a number of long-term initiatives designed to improve
productivity and profitability while continuing to implement its Coated Board
business strategy. First, with the completion in June 1997 of the upgrade of
the second Macon Mill paperboard machine to CUK Board production, the Company
has further reduced capacity dedicated to linerboard production, as part of
its strategy to emphasize the production and sale of CUK Board and CUK
Board-based products. The Company expects that the machine will achieve its
full annual production capacity of approximately 275,000 tons of CUK Board in
18 to 24 months. See also "Financial Condition, Liquidity and Capital
Resources--Liquidity and Capital Resources--Capital Expenditures." Second,
the Company has taken actions to increase open market folding cartonboard
sales volume above 1996 levels. 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 CUK Board. Certain multinational consumer
products companies have specified the Company's folding cartonboard for their
cartons, and the Company intends to pursue additional relationships of this
type. The Company believes that it has addressed and corrected the West
Monroe product quality issues that negatively impacted 1996 sales volumes. In
addition, the Company is undertaking a comprehensive, long-term marketing
initiative aimed at potential new folding cartonboard applications. Third,
the Company has undertaken profit center reorganization of its operations,
implemented a number of cost savings measures, effected several management
changes and, as part of its ongoing reevaluation of current operations and
assets, has reduced planned capital expenditures and begun a Company-wide
inventory reduction initiative.
The Company's profit center reorganization of its operations is designed to
(i) focus on profitability, (ii) reevaluate the Company's commitment of assets
to business sectors with relatively lower profitability, (iii) provide greater
control over costs and revenues and (iv) enhance managerial autonomy and
accountability. A major initial project was the reorganization of the Company's
North American beverage operations into three units, each of which is a separate
profit center serving a different customer market segment. To date, the
Company's cost savings measures have consisted of streamlining and consolidating
international and other operations to eliminate duplication and excess overhead.
These measures have included the sale or closure of (i) the Company's last
dedicated folding cartonboard plant in Kankakee, Illinois, (ii) a beverage
multiple packaging converting plant in Bakersfield, California, (iii) packaging
machinery manufacturing facilities in Marietta, Georgia and Koln, Germany, and
(iv) the trucking transportation operations in West Monroe, Louisiana, as well
as the consolidation and realignment of certain operations in the U.S.,
Australia and Europe. The Company's management changes included the hiring of
Stephen M. Humphrey as President and Chief Executive Officer in March 1997 and
the replacement of the managers of certain key Company operations. The Company
continues to evaluate its current operations and assets with a view to
rationalizing its operations and improving profitability, in particular with
respect to its international converting assets and strategy.
OUTLOOK
The Company expects that its 1997 full year EBITDA will exceed its 1996
EBITDA (excluding the results of the former U.S. Timberlands/Wood Products
business segment), although no assurance can be given in this regard. The
achievement of this expectation is dependent upon (among other things) a
number of profit improvement initiatives, including the continued successful
start-up of the second Macon Mill paper machine, significantly increasing
open market folding cartonboard sales volumes above 1996 levels, selling
price improvements for containerboard products, improvements in international
converting operations and continued cost savings from actions taken to date.
The Company anticipates that these cost savings actions will reduce
expenditures by at least $20 million on an annualized basis. (see"--Business
Trends and Initiatives").
I-15
<PAGE>
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 (a) the three-month period ended
June 28, 1997, exclusive of the net effect of Purchased Asset Costs made in that
period, in comparison to the three-month period ended June 29, 1996, also
exclusive of the net effect of Purchased Asset Costs made in that period and (b)
the six-month period ended June 28, 1997, exclusive of the net effect of
Purchased Asset Costs made in that period, in comparison to the three-month
period ended June 29, 1996, exclusive of the net effect of Purchased Asset Costs
made in that 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 "first six months of 1996" or "six months ended June 29,
1996"), as follows:
(In thousands of dollars)
- -------------------------
<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS ENDED PRO FORMA SIX MONTHS ENDED
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
% INCREASE % INCREASE
(DECREASE) (DECREASE)
JUNE 28, FROM PRIOR JUNE 29, JUNE 28, FROM PRIOR JUNE 29,
1997 PERIOD 1996 1997 PERIOD 1996
---------- ------------- ---------- ---------- ------------- ----------
Net Sales (Segment Data):
Coated Board.................................. $ 272,018 2.2 $ 266,231 $ 512,128 2.3 $ 500,837
Containerboard................................ 22,016 (20.4) 27,653 49,094 (7.6) 53,149
---------- ---------- ---------- ----------
Net Sales....................................... 294,034 0.1 293,884 561,222 1.3 553,986
Cost of Sales................................... 253,611 5.0 241,510 482,945 6.1 455,096
---------- ---------- ---------- ----------
Gross Profit.................................... 40,423 (22.8) 52,374 78,277 (20.8) 98,890
Selling, General and Administrative............. 32,057 1.3 31,631 61,264 (0.8) 61,772
Research, Development and Engineering........... 839 (52.2) 1,754 2,528 (32.5) 3,744
Other Expenses, net............................. 1,505 (17.5) 1,824 3,072 (10.5) 3,432
---------- ---------- ---------- ----------
Income from Operations.......................... $ 6,022 (64.9) $ 17,165 $ 11,413 (61.9) $ 29,942
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (Loss) from Operations (Segment Data):
Coated Board.................................. $ 24,173 (18.5) $ 29,645 $ 46,171 (17.0) $ 55,625
Containerboard................................ (11,621) (92.3) (6,043) (23,716) (99.7) (11,878)
Corporate..................................... (6,530) (1.4) (6,437) (11,042) 20.0 (13,805)
---------- ---------- ---------- ----------
Income from Operations.......................... $ 6,022 (64.9) $ 17,165 $ 11,413 (61.9) $ 29,942
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
PAPERBOARD PRODUCTION
Total tons of paperboard produced at the Company's paper mills for the
second quarters and first six months of 1997 and 1996 were as follows:
(In thousands of tons)
- ----------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
<S> <C> <C> <C> <C>
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Carrierboard............................................................. 149.3 168.3 307.8 339.0
Folding Cartonboard...................................................... 74.1 78.0 139.8 140.5
WLC...................................................................... 30.2 29.0 57.2 58.1
----- ----- ----- -----
Total Coated Board....................................................... 253.6 275.3 504.8 537.6
Containerboard........................................................... 88.1 99.7 173.7 195.0
----- ----- ----- -----
341.7 375.0 678.5 732.6
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
This tonnage represents production at the Company's paper mills and does not
represent shipments or sales of paperboard to customers. Containerboard
production included 3,900 tons, 6,700 tons, 9,600 tons and 15,000 tons of
saleable off-specification CUK Board for the three months ended June 28, 1997
and June 29, 1996 and the six months ended June 28, 1997 and June 29, 1996,
respectively, produced on dedicated CUK Board paper machines and sold in the
Containerboard business segment. The Company's U.S. mill production of
containerboard decreased by approximately 11,600 tons and 21,300 tons in the
second quarter and first six months of 1997, respectively, compared to the same
I-16
<PAGE>
periods of 1996, while its production of CUK Board decreased by approximately
22,900 tons and 31,900 tons in the second quarter and first six months of
1997, respectively, as compared to the same periods of 1996. The decrease in
production is due principally to lower daily production rates for both
containerboard and CUK Board to enhance the Company's ability to produce
quality paperboard, to higher maintenance-related down time on one of four
U.S. CUK Board paper machines and to the shut down of the second Macon Mill
linerboard machine in preparation for the conversion to CUK Board production.
During the second quarters of 1997 and 1996 and the first six months of 1997
and 1996, the Company took 8, 0, 38 and 49 machine days, respectively, of
unscheduled corrugating medium paper machine outages to balance inventory
levels. The Company's CUK Board capacity can also be used for linerboard
production when market conditions warrant. During the first six months of
1997 and 1996, the Company produced approximately 4,000 and 1,400 tons,
respectively, of linerboard on U.S. CUK Board paper machines. The Company
expects to produce linerboard on its dedicated CUK Board paper machines
during the second half of 1997. The second paper machine at the Macon Mill is
expected to produce approximately 170,000 tons of linerboard and CUK Board
during 1997. The amount of CUK Board produced on this machine during the
second half of 1997 will depend on the progress of the start-up process for
the machine and CUK Board market conditions, as well as mill scheduling
considerations.
SECOND QUARTER 1997 COMPARED WITH SECOND QUARTER 1996
NET SALES
Principally as a result of the factors described below, the Company's Net
Sales in the second quarter of 1997 increased by $0.2 million, or 0.1 percent,
compared with the second quarter of 1996. Net Sales in the Coated Board business
segment increased $5.8 million, or 2.2 percent, in the second quarter of 1997 to
$272.0 million from $266.2 million in the second quarter of 1996, due primarily
to increased sales volume of approximately 19,000 tons in worldwide folding
cartonboard open markets, substantially offset by lower average selling prices
in those markets. In addition, the Company's domestic integrated beverage
business benefited from increased sales volumes, slight selling price
improvement and favorable product mix. Net Sales in the Containerboard business
segment decreased $5.6 million, or 20.4 percent, to $22.0 million in
the second quarter of 1997 from $27.6 million in the second quarter of 1996, due
principally to a decrease in containerboard selling prices and sales volumes as
a result of the significant decline in containerboard markets worldwide that
began in the latter part of 1995 and has continued into the second quarter of
1997.
GROSS PROFIT
Primarily as a result of the factors discussed below, the Company's gross
profit for the second quarter of 1997 decreased $12.0 million, or 22.8 percent,
to $40.4 million from $52.4 million in the second quarter of 1996. The Company's
gross profit margin decreased to 13.7 percent for the second quarter of 1997
from 17.8 percent in the second quarter of 1996. In the Containerboard business
segment, gross profit decreased $6.1 million to a loss of $10.3 million in the
second quarter of 1997 as compared to a loss of $4.2 million in the second
quarter of 1996, due principally to lower selling prices of Containerboard.
Gross profit in the Coated Board business segment decreased by $5.9 million, or
10.3 percent, to $51.3 million in the second quarter of 1997 as compared to
$57.2 million in the second quarter of 1996, while that segment's gross profit
margin decreased to 18.9 percent in the second quarter of 1997 from 21.5 percent
in the second quarter of 1996. This decrease in the gross profit resulted
principally from lower selling prices in worldwide folding cartonboard open
markets offset in part by lower production costs at the Company's integrated
beverage business.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses increased $0.4 million, or 1.3
percent, to $32.1 million in the second quarter of 1997 as compared to $31.6
million in the second quarter of 1996. As a percentage of Net Sales, Selling,
General and Administrative expenses increased slightly to 10.9 percent in the
second quarter of 1997 from 10.8 percent in the same period of 1996.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses decreased by $0.9 million to
$0.8 million, due principally to reduced research and development activities on
packaging machinery resulting from the closure of the packaging machinery
facilities in Marietta, Georgia and Koln, Germany.
I-17
<PAGE>
OTHER EXPENSES, NET
Other Expenses, net, decreased by approximately $0.3 million to $1.5
million.
INCOME FROM OPERATIONS
Primarily as a result of the above factors, the Company's Income from
Operations in the second quarter of 1997 decreased by $11.1 million, or 64.9
percent, to $6.0 million from $17.2 million in the second quarter of 1996,
while operating margin as a percent of Net Sales decreased to 2.0 percent
from 5.8 percent. (Loss) from Operations in the Containerboard business
segment increased $5.6 million to a loss of $11.6 million in the second
quarter of 1997 from a (Loss) from Operations of $6.0 million in the second
quarter of 1996, primarily as a result of the factors described above. Income
from Operations in the Coated Board business segment decreased $5.4 million,
or 18.5 percent, to $24.2 million in the second quarter of 1997 from $29.6
million in the second quarter of 1996, while operating margin as a percent of
Net Sales decreased to 8.9 percent from 11.1 percent for the same periods,
primarily as a result of the factors described above.
FIRST SIX MONTHS OF 1997 COMPARED WITH FIRST SIX MONTHS OF 1996
NET SALES
Principally as a result of the factors described below, the Company's Net
Sales in the first six months of 1997 increased by $7.2 million, or 1.3
percent, compared with the first six months of 1996. Net Sales in the Coated
Board business segment increased $11.3 million, or 2.3 percent, in
the first six months of 1997 to $512.1 million from $500.8 million in the
first six months of 1996, due primarily to increased sales volume of
approximately 45,000 tons in worldwide folding cartonboard open markets,
substantially offset by lower average selling prices in those markets. In
addition, the Company's domestic integrated beverage business benefited from
increased sales volumes, slight selling price improvement, lower distribution
costs and favorable product mix. Net Sales in the Containerboard business
segment decreased $4.1 million, or 7.6 percent, to $49.1 million in the first
six months of 1997 from $53.2 million in the first six months of 1996, due
primarily to a decrease in containerboard selling prices as a result of the
significant decline in containerboard markets worldwide that began in the
latter part of 1995 and has continued into the first six months of 1997,
offset somewhat by higher sales volumes.
GROSS PROFIT
Principally as a result of the factors discussed below, the Company's gross
profit for the first six months of 1997 decreased $20.6 million, or 20.8
percent, to $78.3 million from $98.9 million in the first six months of 1996.
The Company's gross profit margin decreased to 14.0 percent for the first six
months of 1997 from 17.8 percent in the first six months of 1996. In the
Containerboard business segment, gross profit decreased $12.2 million to a loss
of $20.8 million in the first six months of 1997 as compared to a loss of $8.6
million in the first six months of 1996. This decrease was due principally to
sales volume increases combined with declining selling prices of containerboard
which were below related production costs. Gross profit in the Coated Board
business segment decreased by $8.1 million, or 7.5 percent, to $100.2 million in
the first six months of 1997 as compared to $108.3 million in the first six
months of 1996, while that segment's gross profit margin decreased to 19.6
percent in the first six months of 1997 from 21.6 percent in the first six
months of 1996. This decrease in the gross profit resulted principally
from lower selling prices in worldwide folding cartonboard open markets, offset
somewhat by lower production costs at the Company's domestic integrated beverage
business.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses decreased $0.5 million, or 0.8
percent, to $61.3 million in the first six months of 1997 as compared to $61.7
million in the first six months of 1996 and as a percentage of Net Sales,
Selling, General and Administrative expenses decreased to 10.9 percent in the
first six months of 1997 from 11.1 percent in the same period of 1996.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses decreased by $1.2 million to
$2.5 million due principally to reduced research and development activities on
packaging machinery resulting from the closure of the packaging machinery
facilities in Marietta, Georgia and Koln, Germany.
I-18
<PAGE>
OTHER EXPENSES, NET
Other Expenses, net, decreased by approximately $0.3 million to $3.1
million.
INCOME FROM OPERATIONS
Primarily as a result of the above factors, the Company's Income from
Operations in the first six months of 1997 decreased by $18.5 million, or
61.9 percent, to $11.4 million from $29.9 million in the first six months of
1996, while the operating margin as a percent of Net Sales decreased to 2.0
percent from 5.4 percent. (Loss) from Operations in the Containerboard
business segment increased $11.8 million to a loss of $23.7 million in the
first six months of 1997 from a (Loss) from Operations of $11.9 million in
the first six months of 1996, primarily as a result of the factors described
above. Income from Operations in the Coated Board business segment decreased
$9.4 million, or 17.0 percent, to $46.2 million in the first six months of
1997 from $55.6 million in the first six months of 1996, while the operating
margin as a percent of Net Sales decreased to 9.0 percent from 11.1 percent
for the same periods, primarily as a result of the factors described above.
U.S. DOLLAR CURRENCY EXCHANGE RATES
Fluctuations in U.S. dollar currency exchange rates did not have a
significant impact on Net Sales, Gross Profit, operating expenses or Income from
Operations of the Company during the second quarter or first six months of 1997
as compared to the same periods of 1996.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES AND EQUITY IN NET
EARNINGS OF AFFILIATES
INTEREST INCOME
Interest Income decreased $0.1 million and $0.3 million to $0.1 million and
$0.2 million in the second quarter and first six months of 1997, respectively,
from the second quarter and first six months of 1996, respectively, primarily as
a result of lower average balances of cash and equivalents and marketable
securities in 1997 as compared to 1996.
INTEREST EXPENSE
Interest Expense decreased $7.8 million to $42.0 million in the second
quarter of 1997 from $49.8 million in the second quarter of 1996. The decrease
related principally to a reduction of debt level resulting from the repayment of
term loans and a portion of the revolving credit facility from the net proceeds
of the sale of substantially all of the assets of the U.S. Timberlands/Wood
Products business segment in October 1996 (see Note 8 in Notes to Condensed
Consolidated Financial Statements). Interest expense increased $4.7 million to
$80.9 million in the first six months of 1997 from $76.2 million in the same
period of 1996, primarily as a result of the incremental indebtedness incurred
in connection with the Merger, offset to some extent by the reduction in debt
related to the October 1996 repayment of term loans from a portion of the
proceeds of the sale of substantially all of the assets of the U.S.
Timberlands/Wood Products business segment.
INCOME TAX EXPENSE (BENEFIT)
During the second quarter and first six months of 1997, the Company
recognized an income tax expense of $1.8 million and $2.7 million, respectively,
on a (Loss) from Continuing Operations before Income Taxes and Equity in Net
Earnings of Affiliates of $41.7 million and $82.2 million, respectively. During
the second quarter of 1996, the Company recognized an income tax benefit of $2.3
million on a (Loss) from Continuing Operations before Income Taxes and Equity in
Net Earnings of Affiliates of $43.5 million. The 1997 expense and 1996 benefit
differed from the statutory federal income tax rate because of valuation
allowances established on net operating loss carryforward tax assets in the U.S.
and certain international locations where the realization of benefits is
uncertain. Cash paid for income taxes during the first six months of 1997 was
$34.9 million relating principally to the Merger (see "--Liquidity and Capital
Resources--Tax Matters Relating to the Merger").
In the first quarter of 1996, the Predecessor recognized an income tax
benefit of $3.4 million on a (Loss) from Continuing Operations before Income
Taxes and Equity in Net Earnings of Affiliates of $10.4 million.
I-19
<PAGE>
EQUITY IN NET EARNINGS OF AFFILIATES
Equity in Net Earnings of Affiliates is comprised primarily of the Company's
equity in net earnings of Igaras, an integrated containerboard producer
located in Brazil, which produces linerboard, corrugating medium, corrugated
boxes and beverage cartons, and is accounted for using the equity method.
Equity in Net Earnings of Affiliates increased $0.3 million to $4.9 million
in the second quarter of 1997 from $4.6 million in the second quarter of
1996, resulting primarily from a decrease in Igaras' income taxes offset
somewhat by lower interest income at Igaras during the quarter. Equity in Net
Earnings of Affiliates decreased $1.1 million to $8.5 million in the first
six months of 1997 from $9.6 million in the first six months of 1996,
primarily as a result of the decline in containerboard markets worldwide and
lower interest income at Igaras, offset somewhat by a decrease in Igaras'
income taxes.
During the second and first quarters of 1997 and the second quarter of 1996,
the Company received dividends from Igaras of $0.9 million, nil and $1.0
million, respectively, net of taxes of $0.2 million, nil and nil, respectively.
During the first quarter of 1996, the Predecessor did not receive a dividend
from Igaras. The Company received net dividends from its affiliates, other than
Igaras, that are accounted for using the equity method of accounting totaling
$0.8 million and $0.4 million in the first quarter of 1997 and second quarter of
1996, respectively. The Company and the Predecessor did not receive dividends
from such affiliates during the three months ended June 28, 1997 and March 27,
1996.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company broadly defines liquidity as its ability to generate sufficient
cash flow from operating activities to meet its obligations and commitments. In
addition, liquidity includes the ability to obtain appropriate debt and equity
financing and to convert into cash those assets that are no longer required to
meet existing strategic and financial objectives. Therefore, liquidity cannot be
considered separately from capital resources that consist of current or
potentially available funds for use in achieving long-range business objectives
and meeting debt service commitments.
CASH FLOWS
Cash and equivalents decreased by approximately $5.1 million in the first six
months of 1997 primarily as a result of $128.1 million of net cash used in
investing activities, offset in part by $111.9 million and $12.3 million of
net cash provided by financing and operating activities, respectively. Cash
provided by operating activities included a reduction in inventories of
approximately $19.4 million as a result of the Company's ongoing program to
reduce inventories (see "-Business Trends and Initiatives"). Cash used in
investing activities related principally to the purchases of property, plant
and equipment (see "-Liquidity and Capital Resources--Capital Expenditures").
Depreciation and amortization during the first six months of 1997 totaled
approximately $65.7 million, and is expected to be approximately $140 million
to $145 million for fiscal 1997.
The Company's Coated Board business segment experiences seasonality
principally due to the seasonality of the worldwide multiple packaging beverage
segment. Historically, the Company's Coated Board 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
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. In connection with the Merger, the
Company entered into a credit agreement (as amended, the "Senior Secured
Credit Agreement") that currently provides for senior secured credit
facilities (the "Senior Secured Credit Facilities") consisting of a term loan
facility (the "Term Loan Facility"), and a $400.0 million revolving credit
facility (the "Revolving Facility"). In addition, Riverwood International
Machinery, Inc., a wholly owned subsidiary of Riverwood, entered into a
credit agreement (as amended, the "Machinery Credit Agreement," and together
with the Senior Secured Credit Agreement, the "Credit Agreements") providing
for a $140.0 million secured revolving credit facility (the "Machinery
Facility," and together with the Senior Secured Credit Facilities, the
"Facilities") for the purpose of financing or refinancing packaging
machinery. In connection with the Merger, the Company also completed an
offering of $250.0 million aggregate principal amount of 10 1/4% Senior Notes
due 2006 (the "1996 Senior Notes") and $400.0 million aggregate principal
amount of 10 7/8% Senior Subordinated Notes due 2008 (the "Senior
Subordinated Notes" and together with the 1996 Senior Notes, the "1996
Notes"). As of June 28, 1997, the Company had outstanding approximately
$1,671 million of long-term debt, consisting primarily of $650 million
aggregate principal amount of the 1996 Notes, $750 million outstanding under
the Term Loan Facility and additional amounts under the Revolving Facility,
the Machinery Facility and other debt issues and facilities. During the first
six months of 1997, the Company had a net increase in revolving credit
facilities of approximately $113.6 million and repaid approximately $1.7
million of debt.
I-20
<PAGE>
On July 28, 1997, the Company completed an offering of $250 million of
aggregate principal amount of the 1997 Notes. The proceeds from this offering
were applied to prepay certain borrowings under the Revolving Facility and to
refinance certain Tranche A Term Loans and other borrowings under the Term
Loan Facility (see Note 10 to the Condensed Consolidated Financial
Statements). See "--Debt Service." The 1997 Notes have not been registered
under the Securities Act of 1933, as amended (the "Securities Act"). The
Company has agreed to make a registration exchange offer of registered 1997
Notes for the unregistered 1997 Notes, and use its best efforts to cause the
related registration statement to be declared effective under the Securities
Act on or before November 10, 1997. If the registration statement is not
filed by September 10, 1997, or not declared effective on or before November
10, 1997, or such exchange offer is not completed by December 10, 1997, the
Company will be required to pay an amount equal to $0.096 per week per $1,000
principal amount of the 1997 Notes until the registration statement is filed
or declared effective.
DEBT SERVICE
Principal and interest payments under the Term Loan Facility, the Revolving
Facility and the Machinery Facility, together with interest payments on the
1996 Notes represent significant liquidity requirements for the Company. The
Company applied $105.0 million of the proceeds from the 1997 Notes in July
1997 to refinance a portion of the Tranche A Term Loans under the Term Loan
Facility, $50 million of the proceeds of the 1997 Notes to refinance the
Tranche D Loan under the Senior Secured Credit Agreement, and the remaining
proceeds from the 1997 Notes to prepay outstanding revolving credit
borrowings under the Revolving Facility. Scheduled term loan principal
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, after giving effect to the refinancing of the Term Loan
Facility from a portion of the proceeds of the 1997 Notes, will be
approximately $1 million, $3 million, $4 million, $4 million, $120 million,
$173 million, $184 million and $156 million for each of the years 1997
through 2004, respectively. This application of proceeds did not involve any
reduction in the current aggregate Revolving Facility commitment of $400
million. In the third quarter of 1997, the Company will record a non-cash,
extraordinary charge to earnings of approximately $2.5 million, net of tax,
related to the write-off of the applicable portion of deferred debt issuance
costs on the Tranche A Term Loans under the Term Loan Facility.
The Revolving Facility will mature in March 2003 and the Machinery Facility
will mature in March 2001, with all amounts then outstanding becoming due.
The Company expects that its working capital and business needs will require
it to continue to have access to these or similar revolving credit facilities
after their respective maturity dates, and that the Company accordingly will
have to extend, renew, replace or otherwise refinance such facilities at or
prior to such dates. No assurance can be given that it will be able to do so.
The loans under the Facilities bear interest at floating rates based upon the
interest rate option elected by the Company. As of June 28, 1997, the Tranche
A Term Loans, Tranche B Term Loans and Tranche C Term Loans under the Term
Loan Facility bore interest at average rates per annum equal to 8.23 percent,
8.82 percent and 9.19 percent, respectively. Borrowings under each of the
Revolving Facility and the Machinery Facility bore interest bore interest as
of June 28, 1997 at an average rate per annum of 8.19 percent. The 1996
Senior Notes, the 1997 Notes and the Senior Subordinated Notes bear interest
at rates of 10 1/4 percent, 10 5/8 percent and 10 7/8 percent, respectively.
After giving effect to the 1997 Notes, interest expense in 1997 is expected
to be approximately $170 million to $175 million, including approximately $10
million of non-cash amortization of deferred debt issuance costs. During the
first six months of 1997, cash paid for interest was approximately $72.4
million. The Company's Australian revolving credit facility matures in
September 1998, with all amounts then outstanding becoming due. The total
amount outstanding under such facility was $22.0 million at June 28, 1997.
While the Company expects to extend, renew, replace or otherwise refinance
such facility at or prior to such date, no assurance can be given that it
will be able to do so.
The Company uses interest rate swaps 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 difference to
be paid or received under these agreements is recognized as an adjustment to
interest expense related to the debt.
COVENANT RESTRICTIONS
The Credit Agreements impose restrictions on the Company's ability to make
capital expenditures and both the Credit Agreements and the indentures
governing the 1996 Notes and the 1997 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 relevant 1996 Notes
or the 1997 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 such indentures also impose
restrictions on the operation of the Company's business. At June 28, 1997,
the Company was in compliance with the financial covenants in the Credit
Agreements.
I-21
<PAGE>
In connection with the offering of the 1997 Notes, certain financial and
other covenants in the Credit Agreements were amended to reflect the Company's
recent financial results and market and operating conditions, as well as the
consummation of the 1997 Notes offering and the prepayment of the term loans and
other borrowings. Covenant modifications included reductions in permitted
capital expenditures, the elimination of the minimum consolidated net worth
requirement, and reduction in minimum EBITDA and interest coverage ratio
requirements. The amended covenants specify permitted capital expenditures
(subject to certain carryover allowances and other adjustments) of no more than
$175 million, $140 million $140 million and $135 million for 1997 through 2000,
respectively, and $130 million per year thereafter.
The amended covenants also specify, among other changes, the following
amended minimum EBITDA and interest coverage ratio requirements for each four
quarter period ended during the following test periods:
<TABLE>
<CAPTION>
INTEREST COVERAGE
PERIOD EBITDA RATIO
- -------------------------------------------------------------------------- -------------- ---------------------
<S> <C> <C>
December 31, 1996--December 30, 1997........................................$130 million 0.80 to 1.00
December 31, 1997--December 30, 1998........................................$140 million 0.85 to 1.00
December 31, 1998--December 30, 1999........................................$200 million 1.00 to 1.00
December 31, 1999--December 30, 2000........................................$265 million 1.25 to 1.00
December 31, 2000--December 30, 2001........................................$325 million 1.50 to 1.00
December 31, 2001--December 30, 2002........................................$350 million 1.75 to 1.00
December 31, 2002--December 30, 2003........................................$375 million 2.00 to 1.00
Thereafter ........................................$400 million 2.25 to 1.00
</TABLE>
CAPITAL EXPENDITURES
Capital spending for the first six months of 1997 was approximately $89
million. During the first six months of 1997, the Company completed projects to
modify the pulp mill at the Macon Mill and to convert the second linerboard
paper machine at the Macon Mill to CUK board production. The cost of the pulp
mill modification, completed in February 1997, was approximately $32 million.
The paper machine conversion is expected to cost approximately $85 million.
Cumulative capital spending on this paper machine conversion project through
June 28, 1997, was approximately $63 million. For the first six months of 1997,
capital spending on these two projects totaled approximately $49 million. The
pulp mill modification project and the conversion of the second Macon Mill
linerboard paper machine were each on budget and on schedule. Other capital
spending during this period related primarily to increasing paper production
efficiencies, increasing converting capacity, manufacturing packaging machinery
and upgrading the Company's information systems. Total capital spending for
fiscal 1997 is expected to be approximately $155 million, and is expected to
relate principally to the pulp mill modification, the conversion of the second
paper machine at the Macon Mill, the production of packaging machinery and the
planned upgrading of the Company's information systems (which is expected to
cost up to approximately $30 million through 1999). See "--Upgrade of
Information Systems and Year 2000 Compliance".
FINANCING SOURCES AND CASH FLOWS
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, packaging machinery manufacturing plants
in Marietta, Georgia and Koln, Germany, 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 during 1996 as a purchase accounting adjustment. The costs relate
principally to the severance of approximately 750 employees, relocation and
other plant closure costs. At June 28, 1997, $22.8 million of
this total was accrued in Other accrued liabilities on the Condensed
Consolidated Balance Sheet. During the first six months of 1997, $9.9 million
was paid out and charged against the accrual and related primarily to severance
costs.
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<PAGE>
At June 28, 1997, the Company and its U.S. and international subsidiaries
had the following amounts undrawn under revolving credit facilities:
(In thousands of dollars)
- -------------------------
<TABLE>
<CAPTION>
TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
OF OUTSTANDING AVAILABLE AT
COMMITMENTS JUNE 28, 1997 JUNE 28, 1997
-------------------- ------------- -------------
<S> <C> <C> <C>
Revolving Facility............................................ $ 400,000 $ 206,000 $ 194,000
Machinery Facility............................................ 140,000 35,000 21,000
International Facilities...................................... 54,720 32,567 22,153
------------ ------------- -------------
$ 594,720 $ 273,567 $ 237,153
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
In July, 1997, the Company applied approximately $87 million of the net
proceeds from the 1997 Notes offering and $50 million in proceeds from the
Tranche D Loan, which became available to the Company upon the closing of the
1997 Notes offering, to repay a portion of the outstanding borrowings under
the Revolving Facility (without any revolving commitment reduction). As a
result, the total amount outstanding under the Revolving Facility at July 29,
1997 was approximately $91 million resulting in approximately $309 million of
borrowing availability under the Revolving Facility at that date.
The Machinery Facility is Limited by a Borrowing Base. During December
1996, the commitment for the Australian revolving facility was reduced from
approximately $37 million to approximately $32 million. Undrawn Revolving
Facility availability is expected to be used to meet future working capital and
other business needs of the Company. The Company anticipates pursuing additional
working capital financing for its foreign operations as necessary, and possibly
implementing a receivables securitization program.
As described above, the Company has substantial liquidity, but anticipates
additional borrowings under the Revolving Facility throughout 1997. The Company
believes that cash generated from operations, together with amounts available
under its 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 until the maturity of the Revolving Facility
(assuming extension or refinancing of the Machinery Facility at its earlier
maturity), although no assurance can be given in this regard. The Company's
future financial and operating performance, ability to service or refinance its
debt and ability to comply with the covenants and restrictions contained in
its debt agreements (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 the selling prices for the Company's products and the Company's ability to
successfully implement its overall business and profitability strategies.
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 remaining 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.
ENVIRONMENTAL AND LEGAL 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
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 Company
anticipates that the majority of this spending for compliance with the cluster
rules will occur later in the eight-year period. The Company had no capital
spending during the first six months of 1997 related to
I-23
<PAGE>
compliance with the cluster rules.
In late 1995, the DEQ notified the Company that the Predecessor may be
liable for the remediation 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 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 second 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
Company anticipates entering into a cooperative agreement with the DEQ to
perform a phased-in evaluation 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 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 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.
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 officials 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 June 2, 1997, the court granted
Defendants' Motion for Summary Judgment and dismissed the action in its
entirety. The court based its ruling on the fact that (i) none of the statements
attributable to the Company concerning its review of strategic alternatives was
false and (ii) there is no causal relationship between plaintiff's purchase of
Riverwood common stock and the Individual Defendants' exercise of SARs.
Plaintiff filed his Notice of Appeal to the United States Court of Appeals for
the Eleventh Circuit on June 5, 1997. A briefing schedule has not yet been set.
UPGRADE OF INFORMATION SYSTEMS AND YEAR 2000 COMPLIANCE
The Company has begun to upgrade its information systems through an
initiative expected to cost up to approximately $30 million to be spent through
1999. When the upgrade is complete, the Company expects a major improvement in
its information systems and business processes. This initiative is expected to
be complete by June 1999. Capital spending on this project during the first six
months of 1997 totaled approximately $1.6 million.
In conjunction with the information systems upgrade, the Company is also in
the process of replacing its computer software applications and systems to
accommodate the "Year 2000" dating changes necessary to permit correct recording
of yearly dates for 2000 and later years. The Company does not expect that the
cost of its Year 2000 compliance program will be material to its financial
condition or results of operations (other than the initial investment in
information systems of up to approximately $30 million). The Company believes
that it will be able to achieve compliance by the end of 1999, but would
anticipate a material disruption in its operations as the
I-24
<PAGE>
result of any failure by the Company to be in compliance. In the event that
any of the Company's significant suppliers or customers does not successfully
and timely achieve their Year 2000 compliance, the Company's business or
operations could be adversely affected.
TAX MATTERS RELATING TO THE MERGER
Pursuant to an election under Section 338(h)(10) of the Internal Revenue
Code of 1986, as amended, the Merger has been treated for income tax purposes as
a taxable sale of assets of RIC and a taxable sale of assets of RIC's
subsidiaries to which the election applies. Pursuant to a Tax Matters agreement,
Manville agreed to bear the cost of the Section 338(h)(10) election for federal
tax purposes and for purposes of state taxes for which Manville and the
Predecessor filed returns on a combined basis. The Company agreed to bear the
cost of this election for the purposes of other state taxes ("stand alone
taxes") including Louisiana income tax. During 1997, the Company has paid $33.1
million in estimated stand-alone taxes relating to the election, including $27.5
million in Louisiana income tax. The Company's calculation of its Louisiana tax
was based on state law in effect at the time of the Merger, including a 1993
amendment. In May 1997, the Louisiana Supreme Court declared the 1993 amendment
to be void under the Louisiana Constitution, retroactive to 1993. It is possible
that the voiding of the 1993 amendment could result in the Company being
required to pay significant additional Louisiana income tax relating to the
election (plus interest on the additional tax). The Company's Louisiana tax
return for the period that includes the Merger is due in November 1997. After
consultation with Louisiana tax counsel, the Company believes that it has a
reasonable basis for filing its Louisiana income tax return for 1996 (which is
due in November 1997) without the payment of any additional tax due to the
voiding of the 1993 amendment. There can be no assurance, however, the Company
would ultimately prevail on this issue if Louisiana were to challenge such
filing position. If the Company were not to prevail in such a challenge,
significant additional Louisiana income tax relating to the election could be
payable. Management estimates that the maximum amount for such additional tax is
approximately $50 million (plus statutory interest on any additional tax). The
Company intends to file its tax return without the payment of additional tax due
to the voiding of the 1993 amendment, and management believes that the
additional tax ultimately paid (if any) would be substantially less than the
estimated maximum amount, although no assurance can be given in this regard.
The Company and its advisors are continuing to study this situation. Since
the law is unclear and the amounts involved could be significant, it may be
several years before this matter is resolved.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report (other than the financial
statements and other statements of historical fact) are forward-looking
statements, including, without limitation, (i) the statements in "--Business
Trends and Initiatives" concerning (a) the improvements which the Company's
long-term initiatives, including, without limitation, its profit center
reorganization, are designed to achieve and (b) the Company's expectation
that the second Macon Mill paper machine will achieve its full annual
production capacity of approximately 275,000 tons in 18 to 24 months; (ii)
the statements in "--Outlook" concerning (a) the Company's expectation that
its 1997 EBITDA will exceed its 1996 EBITDA (excluding the results of the
former U.S. Timberlands/Wood Products business segment) as well as each of
the factors which the Company believes support such expectation, and (b) the
Company's expectation that it will achieve a reduction of expenditures of at
least $20 million on an annualized basis; (iii) the statements in "--Results
of Operations--Paperboard Production" concerning the Company's expectation
that the second Macon Mill paper machine will produce approximately 170,000
tons of linerboard and CUK Board during 1997; (iv) the statements in
"--Financial Condition, Liquidity and Capital Resources--Liquidity and
Capital Resources" concerning (a) the Company's expectation that it will
extend, renew, replace or otherwise refinance its Australian revolving
facility prior to September 1998, (b) the Company's expectations that total
capital spending for 1997 will be approximately $155 million and that the
planned upgrading of the Company's information systems will cost up to $30
million (and its belief that the Company will achieve Year 2000 compliance by
the end of 1999), (c) the Company's belief that cash generated from
operations, together with amounts available under 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 until the maturity of the Revolving Facility
(assuming extension or refinancing of the Machinery Facility at its earlier
maturity), (d) the Company's expectations with respect to capital spending
that may be required to comply with the cluster rules and that, based on
current knowledge, environmental costs are not expected to have a material
impact on the results of operations, cash flows or financial condition of the
Company and (e) the Company's beliefs and estimates in respect of certain
Louisiana income tax matters relating to the Section 338(h)(10) election,
including, without limitation, management's belief that additional tax
ultimately paid (if any) would be substantially less than $50 million; and
(v) other statements as to management's or the Company's expectations and
beliefs presented in this "Management's Discussion
I-25
<PAGE>
and Analysis of Financial Condition and Results of Operations."
Forward-looking statements are made based upon management's current
expectations and beliefs concerning future developments and their potential
effects upon the Company. There can be no assurance that future developments
will be in accordance with management's expectations or that the effect of
future developments on the Company will be those anticipated by management.
The following important factors, and those important factors described
elsewhere in this report (including, without limitation, those discussed in
"--Financial Condition, Liquidity and Capital Resources--Liquidity and
Capital Resources--Environmental and Legal Matters" and "--Tax Matters
Relating to the Merger"), or in other Securities and Exchange Commission
filings, could affect (and in some cases have affected) the Company's actual
results and could cause such results to differ materially from estimates or
expectations reflected in such forward-looking statements:
- - The Company's high degree of leverage could have important consequences
to the Company, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired in the future; (ii) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds
available to the Company for other purposes; (iii) certain of the Company's
borrowings will be at variable rates of interest, which will expose the
Company to the risk of increased interest rates; and (iv) the Company's
flexibility to adjust to changing market conditions and ability to withstand
competitive pressures could be limited, and the Company may be more
vulnerable to a downturn in general economic conditions or its business
or be unable to carry out capital spending that is important to its strategy
and productivity improvement programs.
- - The Company's ability to make scheduled payments on or to refinance its
obligations with respect to its indebtedness, and to comply with the
covenants and restrictions contained in the instruments governing such
indebtedness, will depend on its financial and operating performance, which,
in turn, is subject to prevailing economic and competitive conditions and to
certain financial, business and other factors beyond its control, including
operating difficulties, increased operating costs, market cyclicality,
product prices, the response of competitors, regulatory developments, and
delays in implementing strategic projects.
- - The Company's ability to meet its debt service and other obligations
will depend in significant part on the selling prices that the Company
realizes for its open market folding cartonboard and containerboard
products. Notwithstanding the steps taken by the Company to improve its
operating results, at the depressed selling prices for open market folding
cartonboard and containerboard that have prevailed since 1996, the Company's
cash flow from operations has been less than its debt service and
maintenance capital expenditure requirements. Accordingly, the Company's
long-term prospects will depend on its realizing improved pricing for these
products.
- - The Company's ability to meet its debt service and other obligations
will depend in significant part on the extent to which the Company can
implement successfully its business strategy. The components of the
Company's strategy are subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
control of the Company.
- - The Company currently estimates that it will take several years for
coated board markets to absorb the significant increase in the Company's CUK
Board capacity resulting from the upgrade of the second Macon Mill paper
machine. The Company expects to sell a significant portion of its additional
CUK Board production in open markets, principally internationally. There can
be no assurance that additional CUK Board output can be sold in these
markets or that such additional CUK Board can be sold without experiencing
price reductions. Efficient start-up and production of CUK Board from the
upgraded second Macon Mill machine is dependent upon many manufacturing
process and engineering factors, and there can be no assurance that the
Company will not experience equipment failures, lengthy shut-downs or other
disruptions in production during the start-up process.
I-26
<PAGE>
- - All of the Company's CUK Board is produced at its West Monroe and Macon
Mills. Any prolonged disruption in either facility's production due to labor
difficulties, equipment failures, destruction of or material damage to such
facility, or other reasons, could have a material adverse effect on the
Company's results of operations.
- - The Company faces significant competition in its CUK Board business
segment from The Mead Corporation ("Mead"). The highly leveraged nature of
the Company could limit the Company's ability to respond to market
conditions or to make necessary or desirable capital expenditures as
effectively as Mead, which is not as leveraged as the Company. In addition,
there can be no assurance that there will not be new entrants in the CUK
Board market segment. The Company's folding cartonboard sales are affected
by competition from Mead's CUK Board and from other substrates: SBS and CCN
and, internationally, WLC and folding boxboard. There are a large number of
suppliers of paperboard for folding carton applications. CUK Board competes
in niche applications in folding cartonboard markets, serving only a small
portion thereof. There can be no assurance that the Company will be able to
continue to compete successfully in folding cartonboard markets.
- - Amounts paid by the Company for pine pulpwood, hardwood and recycled
fibers, used in the manufacture of paperboard, and various chemicals used in
the coating of CUK Board, represent the largest components of the Company's
variable costs of CUK Board and containerboard production. The cost of these
materials is subject to market fluctuations caused by factors beyond the
Company's control. OCC recycled fiber pricing tends to be very volatile.
With the October 1996 sale of the Company's timberlands, the Company now
relies on private land owners and the open market for all of its virgin
and recycled fiber requirements (except for CUK Board clippings from its
converting operations). Under the terms of the sale of those timberlands,
the Company and the buyer entered into a 20-year supply agreement, with a
10-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. While the Company has not
experienced any significant difficulty in obtaining adequate supplies of
virgin or recycled fiber for its West Monroe Mill or Macon Mill, there
can be no assurance that this will continue to be the case for either
such mill. Moreover, significant increases in the cost of these
materials, to the extent not reflected in prices for the Company's
products, could have a material adverse effect on the Company's results
of operations.
- - The Company is subject to risks associated with operating in foreign
countries, including devaluations and fluctuations in currency exchange
rates, imposition of limitations on conversion of foreign currencies into
U.S. dollars or remittance of dividends and other payments by foreign
subsidiaries, imposition or increase of withholding and other taxes on
remittances and other payments by foreign subsidiaries, hyperinflation in
certain foreign countries and imposition or increase of investment and other
restrictions by foreign governments. No assurance can be given that such
risks will not have a material adverse effect on the Company in the future.
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 in this report in light of future events.
ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way public companies report information about operating
segments in annual financial statements and requires that those companies report
selected information about operating segments in interim financial reports. SFAS
No. 131 is effective for fiscal years beginning after December 31, 1997. The
Company has not determined the impact that SFAS No. 131 will have on its
business segment disclosures.
I-27
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 6, 1997, a Written Consent in Lieu of Annual Meeting was executed by
the stockholders of Riverwood Holding, Inc. and the following items were
approved by the stockholders:
1. The following Directors were elected by the stockholders:
B. Charles Ames Stephen M. Humphrey
G. Andrea Botta Samuel M. Mencoff
Kevin J. Conway Joseph E. Parzick
Alberto Cribiore Brian J. Richmand
Leon J. Hendrix, Jr. Lawrence C. Tucker
Hubbard C. Howe
2. Appointment of Deloitte & Touche, LLP as independent public accountants
of the Company for the year 1997.
ITEM 5. OTHER INFORMATION.
Effective July 28, 1997, Thomas M. Gannon was appointed as Senior Vice
President and Chief Financial Officer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
99 Reconciliation of (Loss) Income from Operations to EBITDA.
Filed as an exhibit hereto.
(b) Reports on Form 8-K.
Form 8-K dated July 11, 1997, and filed with the Securities and Exchange
Commission on July 11, 1997, regarding the offering of Riverwood
International Corporation of $250 million principal amount of 10 5/8%
Senior Notes due 2007.
Form 8-K dated July 11, 1997, and filed with the Securities and Exchange
Commission on July 11, 1997, regarding the Company's financial performance,
proposed Credit Agreement covenant modifications, completion of the Macon
Mill paper machine upgrade, upgrade of information systems, certain tax
matters and changes in management.
II-1
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVERWOOD HOLDING, INC.
--------------------------------------------
(REGISTRANT)
DATE: AUGUST 8, 1997 BY: /S/ BILL H. CHASTAIN
--------------------------------------------
BILL H. CHASTAIN
SECRETARY
DATE: AUGUST 8, 1997 BY: /S/ THOMAS M. GANNON
--------------------------------------------
THOMAS M. GANNON
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from
Riverwood Holding Inc.'s Condensed Consolidated Balance Sheets
and Statements of Operations for the period ended June 28, 1997
and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-28-1997
<CASH> 11,406
<SECURITIES> 765
<RECEIVABLES> 148,389
<ALLOWANCES> 1,033
<INVENTORY> 186,295
<CURRENT-ASSETS> 356,759
<PP&E> 1,676,783
<DEPRECIATION> 135,606
<TOTAL-ASSETS> 2,649,884
<CURRENT-LIABILITIES> 304,303
<BONDS> 1,670,998
0
0
<COMMON> 75
<OTHER-SE> 559,792
<TOTAL-LIABILITY-AND-EQUITY> 2,649,884
<SALES> 561,222
<TOTAL-REVENUES> 561,222
<CGS> 493,934
<TOTAL-COSTS> 493,934
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 382
<INTEREST-EXPENSE> 80,931
<INCOME-PRETAX> (82,206)
<INCOME-TAX> 2,729
<INCOME-CONTINUING> (76,470)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (76,470)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99
RIVERWOOD HOLDING, INC.
RECONCILIATION OF (LOSS) INCOME FROM OPERATIONS TO EBITDA
(In thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
U.S.
TIMBERLANDS/
COATED CONTAINER- WOOD
COMPANY BOARD BOARD PRODUCTS CORPORATE TOTAL
--------- ------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Second Quarter 1997:
(Loss) Income from Operations......... $ 19,307 $ (12,532) $ -- $ (6,530) $ 245
Depreciation and amortization........ 23,420 3,944 -- 289 27,653
Purchased asset costs (A)............ 4,866 911 -- -- 5,777
Other non-cash charges (B)........... 253 2,966 -- 1,741 4,960
Dividends from equity investments.... -- -- -- 945 945
--------- ------------- --------------- -------------- ------------
Pro Forma EBITDA (C)................. $ 47,846 $ (4,711) $ -- $ (3,555) $ 39,580
--------- ------------- --------------- -------------- ------------
--------- ------------- --------------- -------------- ------------
Second Quarter 1996:
Income (Loss) from Operations........ $ 19,768 $ (7,260) $ -- $ (6,396) $ 6,112
Income from discontinued
operations......................... -- -- 15,356 -- 15,356
Depreciation, amortization and cost
of timber harvested................ 21,295 4,320 1,950 672 28,237
Purchased asset costs (A)............ 9,877 1,217 844 (41) 11,897
Other non-cash charges (B)........... 1,506 (541) 784 80 1,829
Dividends from equity investments.... -- -- -- 1,408 1,408
--------- ------------- ------------------ ----------------- ---------
Pro Forma EBITDA (C)................. $ 52,446 $ (2,264) $ 18,934 $ (4,277) $ 64,839
--------- ------------- ------------------ ----------------- ---------
--------- ------------- ------------------ ----------------- ---------
First Six Months 1997:
(Loss) Income from Operations........ $ 35,086 $ (25,538) $ -- $ (11,042) $ (1,494)
Depreciation and amortization........ 44,369 7,747 -- 647 52,763
Purchased asset costs (A)............ 11,085 1,822 -- -- 12,907
Other non-cash charges (B)........... 1,791 3,220 -- 1,851 6,862
Dividends from equity investments.... -- -- -- 1,695 1,695
--------- ------------- ------------------ ----------------- ---------
Pro Forma EBITDA (C)................. $ 92,331 $ (12,749) $ -- $ (6,849) $ 72,733
--------- ------------- ------------------ ----------------- ---------
--------- ------------- ------------------ ----------------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S.
TIMBERLANDS/
COATED CONTAINER- WOOD
PREDECESSOR BOARD BOARD PRODUCTS CORPORATE TOTAL
--------- ------------- ------------------ ----------------- ---------
<S> <C> <C> <C> <C> <C>
First Quarter 1996:
Income (Loss) from Operations........ $ 24,638 $ (5,955) $ 13,868 $ (16,901) $ 15,650
Depreciation, amortization and cost
of timber harvested................ 17,800 4,332 1,735 571 24,438
Other non-cash charges (B)........... 1,265 261 945 232 2,703
Dividends from equity investments.... -- -- -- -- --
Pro forma adjustments................ 3,471 120 218 9,533 13,342
--------- ------------- ------------------ ----------------- ---------
Pro Forma EBITDA (C)................. $ 47,174 $ (1,242) $ 16,766 $ (6,565) $ 56,133
--------- ------------- ------------------ ----------------- ---------
--------- ------------- ------------------ ----------------- ---------
</TABLE>
Notes:
(A) Certain expenses and costs are excluded from the Company's (Loss) Income
from Operations in determining EBITDA (as defined below), including
amortization, depreciation or expenses associated with the write-up of
inventory, fixed assets and intangible assets in accordance with APB 16 and
APB Opinion No. 17, "Intangible Assets", collectively referred to as the
"Purchased asset costs."
(B) Other non-cash charges include non-cash charges deducted for LIFO inventory
reserves, 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 above).
(C) Pro Forma EBITDA is defined as consolidated net income (exclusive of
non-cash charges resulting from purchase accounting during the first quarter
of 1997) 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, and
calculated on a pro forma basis to exclude Other Costs (see Note 6 in Notes
to Condensed 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 Condensed Consolidated Statements of Operations
or cash flow data.
