<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 1-11113
RIVERWOOD HOLDING, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2205241
------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1013 Centre Road
Suite 350
Wilmington, Delaware 19805
- ------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
c/o Riverwood International Corporation
(770) 644-3000
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports 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 .
-------- -------
At May 5, 1998 there were 7,062,050 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" refers to RIC and its subsidiaries in
respect of periods prior to the Merger (as defined herein); the "Company"
refers to the registrant, Riverwood Holding, Inc., a Delaware corporation
formerly named New River Holding, Inc. ("Holding") and its subsidiaries;
"RIC Holding" refers to RIC Holding, Inc., a Delaware corporation,
successor by merger to RIC and a wholly-owned subsidiary of Holding; and
"Riverwood" refers to Riverwood International Corporation, a Delaware
corporation formerly named Riverwood International USA, Inc. and a
wholly-owned subsidiary of RIC Holding.
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MARCH 28, DECEMBER 31,
1998 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 19,624 $ 15,751
Receivables, net of allowances 151,328 151,554
Inventories 174,440 174,498
Prepaid expenses 6,996 10,451
---------- ----------
Total Current Assets 352,388 352,254
Property, Plant and Equipment, net of
accumulated depreciation of $237,170 in 1998
and $205,527 in 1997 1,609,953 1,644,835
Deferred Tax Assets 1,028 1,181
Investments in Net Assets of Equity Affiliates 143,561 141,690
Goodwill, net of accumulated amortization of $15,559 in
1998 and $13,475 in 1997 302,364 304,448
Other Assets 157,524 161,777
---------- ----------
Total Assets $2,566,818 $2,606,185
========== ==========
LIABILITIES
Current Liabilities:
Short-term debt $ 37,899 $ 44,330
Accounts payable 111,563 116,308
Compensation and employee benefits 36,934 37,510
Income taxes 22,010 22,475
Other accrued liabilities 104,738 93,694
---------- ----------
Total Current Liabilities 313,144 314,317
Long-Term Debt, less current portion 1,716,241 1,712,944
Deferred Income Taxes 13,834 14,383
Other Noncurrent Liabilities 77,622 79,062
---------- ----------
Total Liabilities 2,120,841 2,120,706
---------- ----------
Contingencies and Commitments (Note 5)
Redeemable Common Stock, at current redemption value 5,152 6,045
---------- ----------
SHAREHOLDERS' EQUITY
Nonredeemable Common Stock 75 75
Capital in Excess of Par Value 751,153 751,153
(Accumulated Deficit) (292,154) (257,609)
Cumulative Currency Translation Adjustment (18,249) (14,185)
---------- ----------
Total Shareholders' Equity 440,825 479,434
---------- ----------
Total Liabilities and Shareholders' Equity $2,566,818 $2,606,185
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 28, 1998 March 29, 1997
-------------- --------------
<S> <C> <C>
Net Sales $265,435 $267,188
Cost of Sales 227,962 235,209
Selling, General and Administrative 26,998 29,207
Research, Development and Engineering 1,737 1,689
Other Expenses, net 1,492 2,822
-------- --------
Income (Loss) from Operations 7,246 (1,739)
Interest Income 467 142
Interest Expense 43,999 38,901
-------- --------
(Loss) before Income Taxes and Equity in
Net Earnings of Affiliates (36,286) (40,498)
Income Tax Expense 940 901
-------- --------
(Loss) before Equity in Net Earnings
of Affiliates (37,226) (41,399)
Equity in Net Earnings of Affiliates 2,681 3,555
-------- --------
Net (Loss) $(34,545) $(37,844)
-------- --------
Other comprehensive income, net of tax
Foreign currency translation adjustments (4,064) (15,043)
-------- --------
Comprehensive (Loss) $(38,609) $(52,887)
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 28, 1998 MARCH 29, 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $(34,545) $(37,844)
Noncash Items Included in Net (Loss):
Depreciation and amortization 35,186 32,104
Deferred income taxes (31) 1,040
Pension, postemployment and postretirement expense,
net of benefits paid 857 1,430
Equity in net earnings of affiliates, net of dividends (2,063) (2,805)
Amortization of deferred debt issuance costs 2,482 2,891
Other, net 216 197
Decrease (Increase) in Current Assets:
Receivables 1,637 1,873
Inventories 1,553 3,685
Prepaid expenses 3,418 (742)
(Decrease) Increase in Current Liabilities:
Accounts payable (4,105) (5,192)
Compensation and employee benefits 273 1,513
Income taxes (371) (260)
Other accrued liabilities 10,071 8,015
Decrease in Other Noncurrent Liabilities (1,412) (2,522)
-------- --------
Net Cash Provided by Operating Activities 13,166 3,383
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (8,138) (44,738)
Payment of Merger costs - (3,389)
Proceeds from Sales of Assets 906 388
Decrease (Increase) in Other Assets 1,770 (4,031)
-------- --------
Net Cash Used in Investing Activities (5,462) (51,770)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of Redeemable Common Stock (893) -
Net Increase in Revolving Credit Facilities 5,890 43,280
Payments on Debt (8,677) (1,177)
-------- --------
Net Cash (Used in) Provided by Financing Activities (3,680) 42,103
-------- --------
Effect of Exchange Rate Changes on Cash (151) (861)
-------- --------
Net Increase (Decrease) in Cash and Equivalents 3,873 (7,145)
Cash and Equivalents at Beginning of Period 15,751 16,499
-------- --------
Cash and Equivalents at End of Period $ 19,624 $ 9,354
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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RIVERWOOD HOLDING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Holding, its wholly-owned subsidiaries RIC Holding and the corporation formerly
named CDRO Acquisition Corporation ("Acquisition Corp.") were incorporated in
1995 to acquire the stock of RIC.
On March 27, 1996, Holding, through its wholly-owned subsidiaries, acquired all
of the outstanding shares of common stock of RIC. On such date, Acquisition
Corp. was merged (the "Merger") into RIC. RIC, as the surviving corporation in
the Merger, became a wholly-owned subsidiary of RIC Holding. On March 28,
1996, RIC transferred substantially all of its properties and assets to
Riverwood, other than the capital stock of Riverwood, and RIC was merged (the
"Subsequent Merger") into RIC Holding. Thereupon, Riverwood was renamed
"Riverwood International Corporation." Upon consummation of the Subsequent
Merger, RIC Holding, as the surviving corporation in the Subsequent Merger,
became the parent company of Riverwood.
Holding and its subsidiaries conducted no significant business other than in
connection with the Merger and related transactions through March 27, 1996.
The Condensed Consolidated Financial Statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. Although management believes
that the disclosures are adequate to make the information presented not
misleading, it is suggested that the interim condensed financial statements be
read in conjunction with the Company's most recent audited financial statements
and notes thereto. 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, 1997 was derived from audited financial statements.
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 preliminary fair
market values of the assets acquired and liabilities assumed was recorded as
goodwill.
The Condensed Consolidated Financial Statements as of March 28, 1998 and March
29, 1997, and for the three months then ended, reflect the adjustments which
were made to record the Merger and represent the Company's new cost basis. 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
months ended March 28, 1998 and will continue to do so in future periods.
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 year ended December 31, 1997.
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
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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:
<TABLE>
<CAPTION>
MARCH 28, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
(IN THOUSANDS OF DOLLARS)
- -------------------------
Finished goods $ 76,047 $ 66,559
Work-in-process 10,869 11,173
Raw materials 59,352 65,030
Supplies 28,172 31,736
-------- --------
Total $174,440 $174,498
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 28, 1998 MARCH 29, 1997
-------------- --------------
<S> <C> <C>
(IN THOUSANDS OF DOLLARS)
- -------------------------
Net Sales $65,978 $56,402
Cost of Sales 49,292 40,286
------- -------
Gross Profit $16,686 $16,116
======= =======
Income from Operations $10,847 $ 9,702
======= =======
Net Income $ 4,843 $ 6,808
======= =======
</TABLE>
During the first quarters of 1998 and 1997, the Company received dividends from
Igaras totaling $0.6 million and nil, net of taxes of $0.1 million and nil,
respectively. The Company received net dividends from its investments in
affiliates other than Igaras, that are accounted for using the equity method of
accounting totaling nil and $0.8 million for the three months ended March 28,
1998 and the three months ended March 29, 1997, respectively.
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NOTE 5 - CONTINGENCIES AND COMMITMENTS
The Company is committed to compliance with all applicable environmental laws
and regulations throughout the world. Environmental law is, however, dynamic
rather than static. As a result, costs, which are unforeseeable at this time,
may be incurred when new laws are enacted, and when environmental agencies
promulgate or revise rules and regulations.
In late 1993, the U.S. Environmental Protection Agency (the "EPA") proposed
regulations (generally referred to as the "cluster rules" ) that would mandate
more stringent controls on air and water discharges from the United States pulp
and paper mills. The cluster rules were promulgated in April 1998 and the
Company 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 1998.
In late 1995, the Louisiana Department of Environmental Quality (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
received approval for a site sampling plan in November 1997 and completed the
sample collection in December 1997. The analytical results of this soil
sampling were submitted to the state in April 1998. 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 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.
The Company is a party to a number of lawsuits arising out of the ordinary
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 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
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<PAGE> 9
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. All of the briefs have been submitted to the court
and oral argument was held on February 13, 1998.
In connection with the Merger, the former majority owner of the Company agreed
to bear the cost of a Section 338(h)(10) election for U.S. federal tax purposes
and for purposes of state taxes for which the former majority owner and the
Company 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 paid $27.5 million in
estimated Louisiana stand-alone taxes relating to the election. 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 potential penalties and
statutory interest on the additional taxes). After consultation with Louisiana
tax counsel, the Company filed its Louisiana income tax return for the period
ended March 27, 1996 in reliance on the Louisiana tax law in effect at the time
of the Merger, without the payment of any additional tax due to the voiding of
the 1993 amendment. There can be no assurance, however, that 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 of such additional tax is
approximately $47 million (plus potential penalties and statutory interest on
any additional tax). 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 6 - INCOME TAXES
During the three months ended March 28, 1998 and March 29, 1997, the Company
recognized an income tax expense of $0.9 million and $0.9 million on a (Loss)
before Income Taxes and Equity in Net Earnings of Affiliates of $36.3 million
and $40.5 million. This expense 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.
NOTE 7 - DISPOSITION OF BUSINESS
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, two 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
$38.6 million and related principally to the severance of approximately 750
employees, relocation and other plant closure costs. At March 28, 1998, $10.9
million of this total was accrued in other accrued
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liabilities on the Condensed Consolidated Balance Sheets. During the first
quarter of 1998, $1.1 million was paid out and charged against the accrual and
related primarily to severance costs.
NOTE 8 - SUBSEQUENT EVENT - SALE OF AUSTRALIAN FOLDING CARTON BUSINESS
On March 12, 1998, the Company entered into an agreement with Carter Holt
Harvey ("Carter Holt") for the sale of Riverwood's folding carton business in
Australia. Proceeds from the sale were received on March 30, 1998. Under the
terms of the agreement for such sale, the Company sold to Carter Holt
substantially all of Riverwood's Australian folding carton assets, and Carter
Holt assumed certain specified liabilities. The Company retained substantially
all of its beverage multiple packaging business in Australia. Under the
agreement, Carter Holt has agreed to purchase from the Company a portion of its
coated board requirements in Australia and to supply beverage cartons to meet
the Company's needs for its Australian beverage business.
Net sales applicable to the Australian folding carton business were
approximately $65 million for the year ended December 31, 1997. Total net
assets applicable to the Australian folding carton business as of December 31,
1997, were approximately $24 million. The Australian folding carton business
remained substantially unchanged in the first quarter of 1998. The Company does
not expect to recognize any significant gain or loss on this sale.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On March 27, 1996, Holding, through its wholly-owned subsidiaries, acquired all
of the outstanding shares of common stock of RIC. On such date, Acquisition
Corp. was merged into RIC 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. Thereupon, Riverwood was renamed
"Riverwood International Corporation." Upon consummation of the Subsequent
Merger, RIC Holding, as the surviving corporation in the Subsequent Merger,
became the parent company of Riverwood.
The Merger was accounted for as a purchase in accordance with APB Opinion No.
16, "Business Combinations" ("APB 16"). Purchase accounting results in
increased cost of sales, amortization and depreciation. Additionally, the
post-Merger capital structure has resulted, and will continue to result, in
higher reported interest expense.
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 $643 million in outstanding term loans under a term loan facility
(the "Term Loan Facility") and a $400 million revolving credit facility (the
"Revolving Facility"). In addition, Riverwood International Machinery, Inc.
("RIMI"), a wholly-owned subsidiary of Riverwood, entered into a credit
agreement (as amended, the "Machinery Credit Agreement", and together with the
Senior Secured Credit Agreement, the "Credit Agreements") providing for a $140
million secured revolving credit facility (the "Machinery Facility," and
together with the Senior Secured Credit Facilities, the "Facilities") for the
purpose of financing or refinancing packaging machinery. In connection with
the Merger, the Company also completed an offering of $250 million aggregate
principal amount of 10 1/4% Senior Notes due 2006 (the "1996 Senior Notes") and
$400 million aggregate principal amount of 10 7/8% Senior Subordinated Notes
due 2008 (the "Senior Subordinated Notes" and together with the 1996 Senior
Notes, the "1996 Notes"). On July 28, 1997, the Company completed an offering
of $250 million principal amount of 10 5/8% Senior Notes due 2007 (the "Initial
Notes"). The net proceeds of this offering were applied to prepay certain
revolving credit borrowings under the Revolving Facility (without any
commitment reduction) and to refinance certain Tranche A term loans and other
borrowings under the Senior Secured Credit Agreement. A registration statement
under the Securities Act of 1933, as amended, registering senior notes of the
Company identical in all material respects to the Initial Notes (the "Exchange
Notes") offered in exchange for the Initial Notes became effective October 1,
1997. On November 3, 1997, the Company completed its exchange offer of the
Initial Notes for the Exchange Notes. The Initial Notes and the Exchange Notes
are referred to herein as the 1997 Notes.
Under the terms and definitions of the Senior Secured Credit Agreement and the
indentures (the "Indentures") for the 1996 Notes and 1997 Notes, certain
expenses and costs are excluded from the Company's Income (Loss) 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."
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During the three months ended March 28, 1998, the Company's Income from
Operations included Purchased Asset Costs as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 28,1998
--------------------------------
Coated Container-
Board board Total
------ ---------- -----
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cost of sales (excluding depreciation) $ 570 $ _ $ 570
Depreciation expense 4,558 911 5,469
Amortization of intangible assets 1,268 _ 1,268
------ ---- ------
Net Impact on Income from Operations $6,396 $911 $7,307
====== ==== ======
</TABLE>
During the three months ended March 29, 1997, the Company's (Loss) from
Operations included Purchased Asset Costs as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 29,1997
---------------------------------
Coated Container
Board board Total
------ --------- -----
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cost of sales (excluding depreciation) $ 136 $ _ $ 136
Depreciation expense 4,828 911 5,739
Amortization of intangible assets 1,255 _ 1,255
------ ---- ------
Net Impact on (Loss) from Operations $6,219 $911 $7,130
====== ==== ======
</TABLE>
GENERAL
The Company reports its results in two business segments: Coated Board and
Containerboard. The Coated Board business segment includes (i) the production
and sale of coated unbleached kraft paperboard ("CUK Board") for packaging
cartons from the paper mills in Macon, Georgia (the "Macon Mill") and in West
Monroe, Louisiana and white lined chip board ("WLC") at its paper mill in
Norrkoping, Sweden (the "Swedish Mill"); (ii) converting operations at
facilities in the United States, Australia and Europe; and (iii) 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 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, and other non-cash charges deducted in
determining consolidated net income and extraordinary items and the cumulative
effect of accounting changes and earnings of, but including dividends from,
non-controlled affiliates ("EBITDA") calculated in accordance with the
definitions in the Senior Secured Credit Agreement and the Indentures, based
upon the generally accepted accounting principles at the time of the Merger.
EBITDA excludes (i) the EBITDA of Igaras but includes dividends actually
received from Igaras and (ii) Purchased Asset Costs resulting from purchase
accounting for 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
Condensed Consolidated Statements of Operations or cash flow data.
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<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 28, 1998 MARCH 28, 1997
-------------- --------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Net Sales (Segment Data):
Coated Board $241,889 $240,110
Containerboard 23,546 27,078
-------- --------
Net Sales $265,435 $267,188
======== ========
(Loss) Income from Operations (Segment Data):
Coated Board $ 16,572 $ 15,779
Containerboard (4,620) (13,006)
Corporate and Eliminations (4,706) (4,512)
-------- --------
Income (Loss) from Operations $ 7,246 $ (1,739)
======== ========
EBITDA (Segment Data):
Coated Board $ 48,011 $ 44,485
Containerboard 455 (8,038)
Corporate and Eliminations (2,178) (3,294)
-------- --------
EBITDA $ 46,288 $ 33,153
======== ========
</TABLE>
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. During the second half of 1997
and the first quarter of 1998, the Company realized improvement in its
containerboard selling prices consistent with industry trends.
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. In June 1997, the Company completed the upgrade of the
second Macon Mill paperboard machine to begin CUK Board production. During the
first quarter of 1998, the Company produced approximately 30,000 tons of CUK
Board and 11,000 tons of linerboard on the second Macon Mill paperboard
machine. During the first quarter of 1998, productivity at the Macon Mill was
negatively effected by the labor situation. The Company expects that the
second Macon Mill paperboard machine will be able to produce approximately
275,000 tons of CUK Board annually in 18 to 24 months following the June 1997
start-up. In addition, the Company has taken actions to increase open market
folding cartonboard sales volume, completed a profit center reorganization of
its operations, implemented a number of cost saving measures and effected
several management changes and, as part of its ongoing reevaluation of current
operations and assets, has reduced U.S. staffing in the packaging machinery
division by 20%, reduced planned capital expenditures, and begun a Company-wide
inventory reduction initiative. As a result of the inventory reduction
initiative, inventory decreased by approximately $37 million at December 31,
1997 as compared to December 31, 1996. 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
folding carton businesses, converting assets and strategy.
I-13
<PAGE> 14
On March 12, 1998, the Company entered into an agreement with Carter Holt for
the sale of its folding carton business in Australia. The proceeds from the
sale were received on March 30, 1998. Under the terms of the agreement for such
sale, the Company sold to Carter Holt substantially all of its Australian
folding carton assets, and Carter Holt assumed certain specified liabilities.
The Company retained substantially all of its beverage multiple packaging
business in Australia. Under the agreement, Carter Holt has agreed to purchase
from the Company a portion of its coated board requirements in Australia and to
supply beverage cartons to meet the Company's needs for its Australian beverage
business. After applying the proceeds of the transaction to repay all
outstanding borrowings under its Australian revolving credit facility and to pay
transaction-related expenses, the Company expects to reinvest in its business
the remaining estimated net proceeds of approximately $30 million (subject to
certain post-closing adjustments). The Company does not expect the sale of its
Australian folding carton business to significantly impact its 1998 results of
operations or EBITDA.
Packaging machinery placements during the first quarter of 1998 decreased when
compared to the number of packaging machines placed during the first quarter of
1997 as the Company continues to shift its mix of packaging machinery
placements from the U.S. to international locations. The Company will continue
to be more selective in future packaging machinery placements to ensure
appropriate returns and, accordingly, expects a reduction of approximately 20%
in new packaging machinery placements for the year ended December 31, 1998.
Despite the expected reduction in the rate of new packaging machinery
placements, the Company expects an increase in beverage cartonboard tonnage in
1998 as the number of packaging machines in service and the cartonboard
throughput per machine increases.
During April and May 1998, the Company and the three unions at its Macon Mill
signed a new six-year collective bargaining agreement. The new contract is
retroactive to January 1, 1998 through December 31, 2003. Work had continued at
the Macon Mill under the prior contract that expired on January 1, 1998. The
new contract includes industry-average economic increases over six years. This
contract also retains language that allows the Company to outsource work and
sell mill assets. The Company expects that the new contract will have no
significant impact on the Company's financial results.
First quarter 1998 CUK Board sales and backlog are strong, but production
shortfalls at the Macon Mill reduced the Company's CUK Board inventory levels
below target levels. Principal contributors to the production shortfall were
temporary distractions associated with continuing efforts to negotiate a new
labor agreement at the Macon Mill and a failure to maintain ramp-up of
production on the second paper machine at the Macon Mill.
OUTLOOK
The Company expects that its 1998 EBITDA will significantly exceed its 1997
EBITDA, 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 significantly increasing open market folding
cartonboard sales volumes above 1997 levels, selling price improvements for
containerboard products, improvements in international converting operations,
improving U.S. mill throughput as the successful start-up of the second Macon
Mill paper machine continues, and continued cost savings from actions taken to
date. The Company anticipates that the cost savings from actions taken to date
will reduce expenditures by approximately $30 million on an annualized basis,
over half of which was realized during 1997. Management expects to identify an
additional $10 million of annualized cost savings to be acted upon in 1998.
The Company expects that it will achieve continued sales volume increases in
its international beverage and U.S. soft drink carton markets in 1998, while
its U.S. beer carton volume will remain relatively flat, consistent with U.S.
brewers trading market share, though no assurance can be given that this volume
growth will be achieved. The Company also expects to increase global open
market folding cartonboard sales volume above 1997 levels. The Company
I-14
<PAGE> 15
expects that U.S. open market board prices for SBS and CUK Board will not
increase substantially in 1998, despite announced price increases.
RESULTS OF OPERATIONS
FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997
The discussion of the Company's results of operations is based on the three
months ended March 28, 1998 compared to the three months ended March 29, 1997,
including the net effects of Purchased Asset Costs in each period. In all
previous reports filed subsequent to the Merger, results of operations were
provided on a pro forma basis exclusive of the net effects of Purchased Asset
Costs in order to present the Company's results of operations on a basis
comparable to those of Predecessor. Accordingly, the three months ended March
29, 1997, have been restated to include Purchased Asset Costs.
<TABLE>
<CAPTION>
% INCREASE
THREE MONTHS (DECREASE) THREE MONTHS
ENDED FROM PRIOR ENDED
MARCH 28, 1998 PERIOD MARCH 29, 1997
-------------- ---------- --------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net Sales (Segment Data):
Coated Board $241,889 0.7% $240,110
Containerboard 23,546 (13.0) 27,078
-------- --------
Net Sales $265,435 (0.7) 267,188
Cost of Sales 227,962 (3.1) 235,209
-------- --------
Gross Profit 37,473 17.2 31,979
Selling, General and Administrative 26,998 (7.6) 29,207
Research, Development and Engineering 1,737 2.8 1,689
Other Expenses, net 1,492 (47.1) 2,822
-------- --------
Income (Loss) from Operations $ 7,246 N/A $ (1,739)
======== ========
Income (Loss) from Operations
(Segment Data):
Coated Board $ 16,572 5.0% $ 15,779
Containerboard (4,620) 64.5 (13,006)
Corporate (4,706) (4.3) (4,512)
-------- --------
Income (Loss) from Operations $ 7,246 N/A $ (1,739)
======== ========
</TABLE>
PAPERBOARD SHIPMENTS
The following represents shipments of Coated Board and Containerboard to
outside customers. Shipments of Coated Board represent sales to customers of
beverage carrierboard, folding cartonboard and WLC (other than from the Swedish
Mill). Shipments from the Swedish Mill represent sales to customers of WLC
produced at this mill. Shipments of Containerboard represent sales to
customers of linerboard, corrugating medium and kraft paper. Total shipments
for the three months ended March 28, 1998 and March 29, 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 28, 1998 MARCH 29, 1997
------------------ ------------------
(IN THOUSANDS OF TONS)
<S> <C> <C>
Coated Board 231.0 216.8
Swedish Mill 32.6 32.0
Containerboard 81.9 108.6
----- -----
345.5 357.4
===== =====
</TABLE>
I-15
<PAGE> 16
NET SALES
Principally as a result of the factors described below, the Company's Net Sales
in the first quarter of 1998 decreased by $1.8 million, or 0.7 percent,
compared with the first quarter of 1997. Net Sales in the Coated Board
business segment increased $1.8 million, or 0.7 percent, in the first quarter
of 1998 to $241.9 million from $240.1 million in the first quarter of 1997, due
primarily to increased sales volumes in U.S. and international beverage and
international folding cartonboard markets, as well as slightly improved pricing
in U.S. beverage markets, substantially offset by the negative impact of the
strengthening of the U.S. dollar on net sales in its international beverage and
international folding cartonboard markets and lower prices in its international
folding cartonboard markets, as well as an unfavorable shift in product mix in
international folding cartonboard markets. Net Sales in the Containerboard
business segment decreased $3.5 million, or 13.0 percent, in the first quarter
of 1998, to $23.6 million from $27.1 million in the first quarter of 1997, due
principally to a continued reduction in linerboard production in favor of
coated board production offset somewhat by higher volume and improved selling
prices in the medium markets.
GROSS PROFIT
Primarily as a result of the factors discussed below, the Company's Gross Profit
for the first quarter of 1998 increased $5.5 million, or 17.2 percent, to $37.5
million from $32.0 million in the first quarter of 1997. The Company's gross
profit margin increased to 14.1 percent for the first quarter of 1998 from 12.0
percent in the first quarter of 1997. In the Containerboard business segment,
Gross Profit increased $8.2 million to a loss of $3.2 million in the first
quarter of 1998 as compared to a loss of $11.4 million in the first quarter
1997, due principally to improved selling prices of linerboard and medium.
Gross profit in the Coated Board business segment decreased by $2.8 million, or
6.4 percent, to $41.2 million in the first quarter of 1998 as compared to $44.0
million in the first quarter of 1997, while the segment's gross profit margin
decreased to 17.0 percent in the first quarter of 1998 from 18.3 percent in the
first quarter of 1997. These decreases in the Coated Board business segment
gross profit and gross profit margin resulted principally from higher production
costs at the Macon Mill (resulting from the labor situation and higher costs for
wood fiber due to wet weather in the South), and the negative impact of the
strengthening of the U.S. dollar on the Company's international beverage and
international folding cartonboard markets.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses decreased $2.2 million, or 7.6
percent, to $27.0 million in the first quarter of 1998 as compared to $29.2
million in the first quarter of 1997. This decrease was due primarily to the
Company's cost reduction initiatives that began in early 1997, offset somewhat
by incremental costs relating to the implementation of a new computerized
information system (see "-- Upgrade of Information Systems and Year 2000
Compliance"). As a percentage of Net Sales, Selling, General and
Administrative expenses decreased to 10.2 percent in the first quarter of 1998
from 10.9 percent in the same period of 1997.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses remained constant at $1.7
million.
OTHER EXPENSES, NET
Other Expenses, net, decreased by $1.3 million to $1.5 million due primarily to
the increase in the royalty income earned from Igaras.
I-16
<PAGE> 17
INCOME (LOSS) FROM OPERATIONS
As a result of the above factors, the Company's Income (Loss) from Operations
in the first quarter of 1998 increased by $8.9 million to $7.2 million from a
loss of $1.7 million in the first quarter of 1997, while Income (Loss) from
operations as a percent of Net Sales increased to 2.7 percent from (0.7)
percent. Income (Loss) from Operations in the Containerboard business segment
increased $8.4 million to a loss of $4.6 million in the first quarter of 1998
from a loss of $13.0 million in the first quarter of 1997, primarily as a
result of the factors described above. Income from Operations in the Coated
Board business segment increased $0.8 million, or 5.0 percent, to $16.6 million
in the first quarter of 1998 from $15.8 million in the first quarter of 1997,
while Income from Operations as a percent of Net Sales increased to 6.9 percent
from 6.6 percent for the same periods, primarily as a result of the factors
inscribed above. During the first quarter of 1998, the Company recognized
approximately $2 million in non-recurring income, primarily from an insurance
recovery.
U.S. DOLLAR CURRENCY EXCHANGE RATES
Fluctuations in U.S. dollar currency exchange rates did impact Net Sales and
Gross Profit as described above. However those fluctuations did not have a
significant impact on operating expenses or Income from Operations of the
Company during the first quarter of 1998 as compared to the same periods of
1997.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES AND EQUITY IN NET EARNINGS OF
AFFILIATES
INTEREST INCOME
Interest Income increased $0.3 million from the first quarter of 1997 to $0.5
million in the first quarter of 1998, primarily as a result of higher average
balances of cash and equivalents in 1998 as compared to 1997.
INTEREST EXPENSE
Interest Expense increased $5.1 million to $44.0 million in the first quarter
of 1998 from $38.9 million in the first quarter of 1997. The increase related
principally to an increase of debt levels resulting from additional working
capital funding throughout 1997 as well as a shift in existing debt toward
higher yield debt at higher coupon rates.
INCOME TAX EXPENSE (BENEFIT)
During the first quarter of 1998, the Company recognized an income tax expense
of $0.9 million on a (Loss) before Income Taxes and Equity in Net Earnings of
Affiliates of $36.3 million. During the first quarter of 1997, the Company
recognized an income tax expense of $0.9 million on a (Loss) before Income
Taxes and Equity in Net Earnings of Affiliates of $40.5 million. The 1998 and
1997 expense 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. Net cash refunds from income taxes during the first
quarter of 1998 were $4.3 million relating principally to the Merger.
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 of accounting.
Equity in Net Earnings of Affiliates decreased $0.9 million to $2.7 million in
the first quarter of 1998 from $3.6 million in the first quarter of 1997,
resulting primarily from additional expenses incurred by Igaras relating to the
purchase of three additional mills during the quarter.
I-17
<PAGE> 18
During the first quarter of 1998 and the first quarter of 1997, the Company
received dividends from Igaras of $0.6 million and nil, respectively, net of
taxes of $0.1 million and nil, respectively. The Company received net
dividends from its affiliates other than Igaras, that are accounted for using
the equity method of accounting, totaling nil and $0.8 million in the first
quarter of 1998 and 1997, respectively.
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 increased by approximately $3.8 million in the first
quarter of 1998 primarily as a result of $13.2 million of net cash provided by
operating activities, offset in part by $5.5 million and $3.7 million of net
cash used in investing and financing activities, respectively. Cash provided
by operating activities related principally to an increase in accrued interest
payable. Depreciation and amortization during the first quarter of 1998
totaled approximately $35.2 million, and is expected to be approximately $145
million to $150 million for fiscal 1998.
The Company's cash flows from its operations and EBITDA are subject to moderate
seasonality with demand usually increasing in the spring and summer. The
Company's Coated Board 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. As of March 28, 1998, the Company had
outstanding approximately $1,749 million of long-term debt, consisting
primarily of $650 million aggregate principal amount of the 1996 Notes, $250
million of the 1997 Notes, $643 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 quarter of
1998, the Company had a net decrease in borrowings of approximately $2.8
million.
DEBT SERVICE
Principal and interest payments under the Term Loan Facility, the Revolving
Facility and the Machinery Facility, together with interest payments on the
1997 Notes and 1996 Notes, represent significant liquidity requirements for the
Company. Scheduled term loan principal payments under the Term Loan Facility
will be approximately $2 million, $4 million, $4 million, $120 million, $173
million, $184 million and $156 million for each of the years 1998 through 2004,
respectively.
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
I-18
<PAGE> 19
interest rate option elected by the Company. The Tranche A term loans, Tranche
B term loans and Tranche C term loans under the Term Loan Facility bore
interest as of March 28, 1998 at an average rate per annum of 8.5 percent. The
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.
Interest expense in 1998 is expected to be approximately $190 million,
including approximately $10 million of non-cash amortization of deferred debt
issuance costs. During the first quarter of 1998, cash paid for interest was
approximately $27.8 million.
The Company uses interest rate swap and cap agreements to fix or cap a portion
of its variable rate Term Loan Facility to a fixed rate in order to reduce the
impact of interest rate changes on future income. The difference to be paid or
received under these agreements is recognized as an adjustment to interest
expense related to that debt. At March 28, 1998, the Company had interest rate
swap agreements (with a notional amount of $250 million) under which the
Company will pay fixed rates of 6.0675 percent to 6.3750 percent and receive
three-month LIBOR, and a three-month 7.0 percent LIBOR cap agreement (with a
notional amount of $50 million) that expires on May 31, 1998.
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, meet its capital spending program, provide for
unanticipated capital investments or 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 the Indentures also impose restrictions on the
operation of the Company's business. At March 28, 1998, the Company was in
compliance with the financial covenants in the Credit Agreements.
CAPITAL EXPENDITURES
Capital spending for the first quarter of 1998 was approximately $8.1 million.
Capital spending during this period related primarily to increasing paper
production efficiencies, manufacturing packaging machinery and upgrading the
Company's information systems. Total capital spending for fiscal 1998 is
expected to be no more than $100 million, and is expected to relate principally
to maintenance, environmental and productivity improvement projects, 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
$38.6 million and related principally to the severance of approximately 750
employees, relocation and other plant closure costs. At March 28, 1998, $10.9
million of this total was accrued in Other accrued liabilities on the Condensed
Consolidated Balance Sheets. During the first quarter of 1998, $1.1 million
was paid out and charged against the accrual and related primarily to severance
costs.
I-19
<PAGE> 20
At March 28, 1998, the Company and its U.S. and international subsidiaries had
the following amounts of commitments, amounts outstanding and amounts available
under revolving credit facilities:
<TABLE>
<CAPTION>
TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
OF OUTSTANDING AVAILABLE AT
COMMITMENTS MARCH 28, 1998 MARCH 28, 1998
----------- -------------- --------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revolving Facility $400,000 $150,000 $250,000
Machine Facility 140,000 17,000 34,000
International Facility 49,000 29,684 20,019
-------- -------- --------
$589,703 $196,684 $304,019
======== ======== ========
</TABLE>
The Australian credit facility was repaid in April 1998 and accounted for $21.8
million and $5.4 million in international amounts outstanding and facility
availability, respectively, at March 28, 1998.
The Machinery Facility is limited by a borrowing base. 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.
As described above, the Company has substantial liquidity, but anticipates
additional borrowings under the Revolving Facility throughout 1998. 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. See "--Business Trends and Initiatives."
While the Company believes that Igaras has adequate liquidity, the Company
shares control of Igaras with its joint venture partner and future dividend
payments from Igaras, if any, would be subject to restrictions in the joint
venture agreement and would reflect only the Company's 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 the United States pulp and paper mills. The cluster rules were
promulgated in April 1998 and the Company estimates the capital
I-20
<PAGE> 21
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 1998.
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 received approval for a site sampling plan in
November 1997 and completed the sample collection in December 1997. The
analytical results of this soil sampling were submitted to the state in April
1998. 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 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.
The Company is a party to a number of lawsuits arising out of the ordinary
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 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 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. All of the briefs have been submitted to the court
and oral argument was held on February 13, 1998.
I-21
<PAGE> 22
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
quarter of 1998 totaled approximately $2.3 million of which $1.5 million was
capitalized.
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 investment in
information systems of up to approximately $30 million). The Company believes
that it will be able to achieve compliance by June 1999, but would anticipate a
material disruption in its operations as the result of any failure by the
Company to be in compliance. In the event that any of the Company's
significant suppliers or customers do not successfully and timely achieve their
Year 2000 compliance, the Company's business or operations could be adversely
affected.
TAX MATTER RELATING TO THE MERGER
In connection with the Merger, the former majority owner of the Company agreed
to bear the cost of a Section 338(h)(10) election for U.S. federal tax purposes
and for purposes of state taxes for which the former majority owner and the
Company 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 paid $ 27.5 million
in estimated Louisiana stand-alone taxes relating to the election. 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 potential
penalties and statutory interest on the additional taxes). After consultation
with Louisiana tax counsel, the Company filed its Louisiana income tax return
for the period ended March 27, 1996 in reliance on the Louisiana tax law in
effect at the time of the Merger, without the payment of any additional tax due
to the voiding of the 1993 amendment. There can be no assurance, however, that
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 of such
additional tax is approximately $47 million (plus potential penalties and
statutory interest on any additional tax). 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 produce approximately 275,000 tons of
CUK Board in 18 to 24 months following the June 1997 start-up; (ii) the
statements in "-- Outlook" concerning (a) the Company's expectation that its
1998 EBITDA will exceed its 1997 EBITDA as well as each of the factors which
the Company believes support such expectation, (b) the Company's expectation
that it will achieve a reduction of expenditures of approximately $30 million
on an annualized basis, and will
I-22
<PAGE> 23
identify an additional $10 million of annualized cost savings to be acted upon
in 1998, (c) the Company's expectations that it will achieve continued sales
volume increases in its international beverage and U.S. soft drink carton
markets in 1998, while its U.S. beer carton volume will remain relatively flat,
(d) the Company's expectation that global open market folding cartonboard sales
volumes will increase above 1997 levels and (e) the Company's expectation that
U.S. open market board prices for SBS and CUK Board will not increase
substantially in 1998; (iii) the statements in "Financial Condition, Liquidity
and Capital Resources" concerning (a) the Company's expectation that total
capital spending for 1998 will be approximately $100 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), (b) the Company's belief that cash generated from operations,
together with amounts available under 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), (c) 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 (d) the Company's belief and estimates in respect
of certain Louisiana income tax matters relating to the Section 338(h)(10)
election, including, without limitations, management's belief that additional
tax ultimately paid, if any, would be substantially less than $47 million (iv)
other statements as to the Company's expectations and beliefs presented in this
"Management's Discussion and Analysis of Financial Conditions 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 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"), the Company's Report on
Form 10-K for the year ended December 31, 1997, 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.
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.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions
and other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 revises
disclosure requirements about employers' pension and other postretirement
benefit plans. SFAS No. 132 is effective for fiscal years beginning after
December 15, 1997. The Company has not determined the impact that SFAS No. 132
will have on its pension and other postretirement benefit disclosures.
I-23
<PAGE> 24
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization cost. It requires costs of start-up activities
and organization costs to be expensed as incurred. The Company does not
believe that the impact of SOP 98-5 will have a material impact on its
financial statements.
I-24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule (for SEC use only).
99 Reconciliation of Income (Loss) from Operations to EBITDA. Filed as an
exhibit hereto.
(b) Reports on Form 8-K.
Not applicable.
I-25
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVERWOOD HOLDING, INC.
----------------------------------
(Registrant)
Date: May 6, 1998 By: /s/ Bill H. Chastain
-------------------------
Bill H. Chastain
Secretary
Date: May 6, 1998 By: /s/ Thomas M. Gannon
-------------------------
Thomas M. Gannon
Senior Vice President and
Chief Financial Officer
I-26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RIVERWOOD HOLDING INC. FOR THE THREE MONTHS ENDED MARCH
28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-28-1998
<EXCHANGE-RATE> 1
<CASH> 19,624
<SECURITIES> 0
<RECEIVABLES> 151,328
<ALLOWANCES> 655
<INVENTORY> 174,440
<CURRENT-ASSETS> 352,388
<PP&E> 1,609,953
<DEPRECIATION> 237,170
<TOTAL-ASSETS> 2,566,818
<CURRENT-LIABILITIES> 313,144
<BONDS> 1,716,241
0
0
<COMMON> 75
<OTHER-SE> 440,750
<TOTAL-LIABILITY-AND-EQUITY> 2,566,818
<SALES> 265,435
<TOTAL-REVENUES> 265,435
<CGS> 227,962
<TOTAL-COSTS> 227,962
<OTHER-EXPENSES> 30,227
<LOSS-PROVISION> 119
<INTEREST-EXPENSE> 43,999
<INCOME-PRETAX> (36,286)
<INCOME-TAX> 940
<INCOME-CONTINUING> (34,545)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,545)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
RIVERWOOD HOLDING, INC.
RECONCILIATION OF INCOME (LOSS) FROM OPERATIONS TO EBITDA
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
COATED CONTAINER-
BOARD BOARD CORPORATE TOTAL
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
FIRST QUARTER 1998:
Income (Loss) from Operations $ 16,572 $ (4,620) $ (4,706) $ 7,246
Depreciation and amortization 24,285 3,878 286 28,449
Purchased Asset Costs(A) 6,396 911 -- 7,307
Other non-cash charges(B) 758 286 1,624 2,668
Dividends from equity investments -- -- 618 618
-------- -------- -------- --------
EBITDA(C) $ 48,011 $ 455 $ (2,178) $ 46,288
======== ======== ======== ========
FIRST QUARTER 1997:
Income (Loss) from Operations $ 15,779 $(13,006) $ (4,512) $ (1,739)
Depreciation and amortization 20,949 3,803 358 25,110
Purchased Asset Costs(A) 6,219 911 -- 7,130
Other non-cash charges(B) 1,538 254 110 1,902
Dividends from equity investments -- -- 750 750
-------- -------- -------- --------
EBITDA(C) $ 44,485 $ (8,038) $ (3,294) $ 33,153
======== ======== ======== ========
</TABLE>
Notes:
(A) Under the terms and definitions of the Senior Secured Credit
Facilities and the Indentures for the 1996 and 1997 Notes, certain
expenses and costs are excluded from the Company's Income from
Operations in determining EBITDA (as defined below), including
amortization, depreciation or expenses associated with the write-up
of inventory, fixed assets and intangible assets in accordance with
APB 16 and 17, collectively referred to as the "Purchased Asset
Costs."
(B) Other non-cash charges include non-cash charges for pension, postretirement
and postemployment benefits, and amortization of premiums on hedging
contracts deducted in determining net income other than Purchased Asset
Costs (see (A) above).
(C) 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, 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 (i) equity
earnings from the Company's investment in Igaras but includes dividends
actually received from Igaras and (ii) Purchased Asset Costs resulting from
purchase accounting for 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 Condensed Consolidated Statements Of Operations or cash
flow data.
I-27
