<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 June 27, 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 August 3, 1998 there were 7,062,050 shares and 500,000 shares of
the registrant's Class A and Class B common stock, respectively, outstanding.
<PAGE> 2
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 acquisition on March 27, 1996 by Holding, through its wholly-owned
subsidiaries, of RIC (the "Merger"); the "Company" refers to the registrant,
Riverwood Holding, Inc., a Delaware corporation formerly named New River
Holding, Inc. ("Holding") and its subsidiaries; and "Riverwood" refers to
Riverwood International Corporation, a Delaware corporation formerly named
Riverwood International USA, Inc. and an indirect wholly-owned subsidiary of
Holding.
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<PAGE> 3
RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 27, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 11,943 $ 15,751
Receivables, net of allowances 161,490 151,554
Inventories 151,516 174,498
Prepaid expenses 8,226 10,451
------------ -----------
Total Current Assets 333,175 352,254
Property, Plant and Equipment, net of accumulated
depreciation of $253,723 in 1998 and $205,527 in 1997 1,538,626 1,644,835
Investments in Net Assets of Equity Affiliates 144,771 141,690
Goodwill, net of accumulated amortization of $17,658 in 1998
and $13,475 in 1997 300,265 304,448
Other Assets 160,939 162,958
------------ -----------
Total Assets $ 2,477,776 $ 2,606,185
============ ===========
LIABILITIES
Current Liabilities:
Short-term debt $ 16,593 $ 44,330
Accounts payable and other accrued liabilities 256,025 269,987
------------ -----------
Total Current Liabilities 272,618 314,317
Long-Term Debt, less current portion 1,692,154 1,712,944
Other Noncurrent Liabilities 98,180 93,445
------------ -----------
Total Liabilities 2,062,952 2,120,706
------------ -----------
Contingencies and Commitments (Note 5)
Redeemable Common Stock, at current redemption value 5,152 6,045
------------ -----------
SHAREHOLDERS' EQUITY
Nonreedemable Common Stock 75 75
Capital in Excess of Par Value 751,153 751,153
(Accumulated Deficit) (325,362) (257,609)
Cumulative Currency Translation Adjustment (16,194) (14,185)
------------ -----------
Total Shareholders' Equity 409,672 479,434
------------ -----------
Total Liabilities and Shareholders' Equity $ 2,477,776 $ 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 ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 305,975 $ 294,034 $ 571,410 $ 561,222
Cost of Sales 249,722 258,725 477,684 493,934
Selling, General and Administrative 27,383 32,057 54,381 61,264
Research, Development and Engineering 1,453 839 3,190 2,528
Impairment Loss 13,342 - 13,342 -
Other Expenses, net 3,768 2,168 5,260 4,990
---------- ---------- ---------- ----------
Income (Loss) from Operations 10,307 245 17,553 (1,494)
Interest Income 200 77 667 219
Interest Expense 44,956 42,030 88,955 80,931
---------- ---------- ---------- ----------
(Loss) before Income Taxes and Equity in
Net Earnings of Affiliates (34,449) (41,708) (70,735) (82,206)
Income Tax Expense 1,091 1,828 2,031 2,729
---------- ---------- ---------- ----------
(Loss) before Equity in Net Earnings
of Affiliates (35,540) (43,536) (72,766) (84,935)
Equity in Net Earnings of Affiliates 2,332 4,910 5,013 8,465
---------- ---------- ---------- ----------
Net (Loss) $ (33,208) $ (38,626) $ (67,753) $ (76,470)
---------- ---------- ---------- ----------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 2,055 (2,829) (2,009) (17,872)
---------- ---------- ---------- ----------
Comprehensive (Loss) $ (31,153) $ (41,455) $ (69,762) $ (94,342)
========== ========== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE> 5
RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
JUNE 27, JUNE 28
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $ (67,753) $ (76,470)
Noncash Items Included in Net (Loss):
Depreciation and amortization 70,840 65,670
Deferred income taxes 152 3,041
Impairment loss 13,342 --
Pension, postemployment and postretirement benefits,
net of benefits paid 1,306 2,525
Equity in net earnings of affiliates, net of dividends (3,401) (6,608)
Amortization of debt issuance costs 5,041 6,529
Other, net (230) 382
(Increase) Decrease in Current Assets:
Receivables (17,627) 2,868
Inventories 14,059 19,406
Prepaid expenses 1,974 (49)
(Decrease) in Current Liabilities:
Accounts payable and other accrued liabilities (8,379) (239)
Decrease (Increase) in Other Noncurrent Liabilities 5,218 (4,742)
----------- -----------
Net Cash Provided by Operating Activities 14,542 12,313
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (14,547) (88,847)
Payment of Merger Costs -- (33,761)
Proceeds from Sale of Assets 48,781 929
Increase in Other Assets (3,250) (6,425)
----------- -----------
Net Cash Provided By (Used in) Investing Activities 30,984 (128,104)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of Redeemable Common Stock (893) --
Net (Decrease) Increase in Revolving Credit Facilities (38,839) 113,573
Payments on Debt (9,339) (1,672)
----------- -----------
Net Cash (Used in) Provided by Financing Activities (49,071) 111,901
----------- -----------
Effect of Exchange Rate Changes on Cash (263) (1,203)
----------- -----------
Net (Decrease) in Cash and Equivalents (3,808) (5,093)
Cash and Equivalents at Beginning of Period 15,751 16,499
----------- -----------
Cash and Equivalents at End of Period $ 11,943 $ 11,406
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-5
<PAGE> 6
RIVERWOOD HOLDING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements of the Company
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, 1997 was
derived from audited financial statements.
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 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>
(IN THOUSANDS OF DOLLARS) JUNE 27, 1998 DECEMBER 31, 1997
- ------------------------- ------------- -----------------
<S> <C> <C>
Finished goods $ 62,784 $ 66,559
Work-in process 9,292 11,173
Raw materials 51,660 65,030
Supplies 27,780 31,736
------------- -----------------
Total $ 151,516 $ 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").
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<PAGE> 7
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 ENDED SIX MONTHS ENDED
--------------------- --------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
---------- --------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Net Sales $ 61,243 $ 58,686 $ 127,221 $ 115,088
Cost of Sales 48,512 40,079 97,804 80,365
---------- --------- --------- ---------
Gross Profit $ 12,731 $ 18,607 $ 29,417 $ 34,723
========== ========= ========= =========
Income from Operations $ 4,199 $ 13,043 $ 15,046 $ 22,745
========== ========= ========= =========
Net Income $ 3,919 $ 9,274 $ 8,762 $ 16,082
========== ========= ========= =========
</TABLE>
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 ("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 soil and groundwater sampling will be completed
in late 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. Ongoing discussions with the DEQ continue 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,
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<PAGE> 8
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 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). The tax period ended March 27, 1996, is currently under
audit by the State of Louisiana. If the Company receives an assessment from the
State, the Company will consider paying the assessed amount to avoid further
interest accruals as it contests the assessment. Management believes that the
additional tax ultimately paid (if any) will 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 - IMPAIRMENT LOSS
During the second quarter of 1998, the Company recorded an impairment loss in
accordance with FAS 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" totaling $13.3 million relating to the
revaluation of packaging machinery. The fair value of the machines was
determined based on expected future lease revenues and potential disposition.
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<PAGE> 9
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, 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 $38.6 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. During
the first six months of 1998, $2.3 million was paid out and charged against the
accrual and related primarily to severance costs.
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 totaling $46.7 million 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 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 1998 through the date of sale. The Company
did not recognize any significant gain or loss on this sale.
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<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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 Opinion No. 16, "Business
Combinations" ("APB16") and APB Opinion No. 17, "Intangible Assets,"
collectively referred to as the "Purchased Asset Costs." The Merger was
accounted for as a purchase in accordance with APB 16.
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<PAGE> 11
During the three months ended June 27, 1998 and June 28, 1997, the Company's
Income from Operations included Purchased Asset Costs as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 27, 1998 THREE MONTHS ENDED JUNE 28, 1997
---------------------------------- -----------------------------------
Coated Container- Coated Container-
Board board Total Board board Total
---------- ----------- --------- ---------- ----------- ----------
(IN THOUSANDS OF DOLLARS)
- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost of sales
(excluding depreciation expense) $ 38 $ -- $ 38 $ 376 $ -- $ 376
Depreciation expense 4,558 911 5,469 4,827 911 5,738
Amortization of intangible assets 967 -- 967 663 -- 663
---------- ----------- --------- ---------- ----------- ----------
Net Impact on Income from Operations $ 5,563 $ 911 $ 6,474 $ 5,866 $ 911 $ 6,777
========== =========== ========= ========== =========== ==========
</TABLE>
During the six months ended June 27, 1998 and June 28, 1997, the Company's
Income from Operations included Purchased Asset Costs as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 27, 1998 SIX MONTHS ENDED JUNE 28, 1997
---------------------------------- -----------------------------------
Coated Container- Coated Container-
Board board Total Board board Total
---------- ----------- --------- ---------- ----------- ----------
(IN THOUSANDS OF DOLLARS)
- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost of sales
(excluding depreciation expense) $ 608 $ -- $ 608 $ 512 $ -- $ 512
Depreciation expense 9,116 1,822 10,938 9,655 1,822 11,477
Amortization of intangible assets 2,235 -- 2,235 1,918 -- 1,918
---------- ----------- --------- ---------- ----------- ----------
Net Impact on Income from Operations $ 11,959 $ 1,822 $ 13,781 $ 12,085 $ 1,822 $ 13,907
========== =========== ========= ========== =========== ==========
</TABLE>
GENERAL
The Company reports its results in two business segments: Coated Board and
Containerboard. The Coated Board business segment includes 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 (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 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.
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, calculated in accordance with 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)
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.
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<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -----------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
----------- ----------- ----------- ---------
(IN THOUSANDS OF DOLLARS)
- -------------------------
<S> <C> <C> <C> <C>
EBITDA (Segment Data):
Coated Board $ 65,183 $ 47,846 $ 113,194 $ 92,331
Containerboard 441 (4,711) 896 (12,749)
Corporate (1,998) (3,555) (4,176) (6,849)
----------- ----------- ----------- ----------
EBITDA $ 63,626 $ 39,580 $ 109,914 $ 72,733
=========== =========== =========== ==========
</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 CUK Board production. During the first
six months of 1998, the Company produced approximately 87,100 tons of CUK Board
and 11,000 tons of linerboard on the second Macon Mill paperboard machine. 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 startup. 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 this 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 $22
million at June 27, 1998 as compared to June 28, 1997. 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.
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 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 reinvested in its business the
remaining estimated net proceeds
I-12
<PAGE> 13
of approximately $27 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 six months of 1998 decreased
when compared to the number of packaging machines placed during the first six
months 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.
In the second quarter of 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 and runs 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.
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 most significant improvement in EBITDA
in 1998 will result from cost savings from actions taken to date that have
reduced expenditures. 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 has realized a portion of a price increase announced in the fourth
quarter of 1997 for U.S. open market beverage board and folding cartonboard.
The Company expects that U.S. open market board prices for SBS and CCN will not
increase substantially in 1998. Looking forward, pricing pressures on
corrugating medium and linerboard are expected to continue through the
remainder of 1998.
I-13
<PAGE> 14
RESULTS OF OPERATIONS
The discussion of the Company's results of operations is based on the three
months and six months ended June 27, 1998 compared to the three months and six
months ended June 28, 1997, respectively, including the net effects of
Purchased Asset Costs in each period. In all previous reports filed subsequent
to the Merger and prior to the first quarter of 1998, 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 the Predecessor. Accordingly, the three and six months
ended June 28, 1997, have been restated to include Purchased Asset Costs.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------- --------------------------------------
% Increase % Increase
(Decrease) (Decrease)
June 27, From Prior June 28, June 27, From Prior June 28,
(IN THOUSANDS OF DOLLARS) 1998 Period 1997 1998 Period 1997
-------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Sales (Segment Data):
Coated Board $289,340 6.4% $272,018 $531,229 3.7% $512,128
Containerboard 16,635 (24.4) 22,016 40,181 (18.2) 49,094
-------- -------- -------- --------
Net Sales 305,975 4.1 294,034 571,410 1.8 561,222
Cost of Sales 249,722 (3.5) 258,725 477,684 (3.3) 493,934
-------- -------- -------- --------
Gross Profit 56,253 59.3 35,309 93,726 39.3 67,288
Selling, General and Administrative 27,383 (14.6) 32,057 54,381 (11.2) 61,264
Research, Development and
Engineering 1,453 73.2 839 3,190 26.2 2,528
Impairment Loss 13,342 N/A -- 13,342 N/A --
Other Expenses, net 3,768 73.8 2,168 5,260 5.4 4,990
-------- -------- -------- --------
Income (Loss) from Operations $ 10,307 N/A $ 245 $ 17,553 N/A $ (1,494)
======== ======== ======== ========
Income (Loss) from Operations
(Segment Data):
Coated Board* $ 17,398 (9.9)% $ 19,307 $ 33,970 (3.2)% $ 35,086
Containerboard (2,711) 78.4 (12,532) (7,331) 71.3 (25,538)
Corporate (4,380) 32.9 (6,530) (9,086) 17.7 (11,042)
-------- -------- -------- --------
Income (Loss) from Operations $ 10,307 N/A $ 245 $ 17,553 N/A $ (1,494)
======== ======== ======== ========
</TABLE>
* Included in Income from Operations for Coated Board is an impairment loss of
$13.3 million taken in the second quarter of 1998.
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 the Swedish Mill. Shipments of containerboard represent sales to
customers of linerboard, corrugating medium and kraft paper. Total shipments
for the three and six months ended June 27, 1998 and June 28, 1997 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
(IN THOUSANDS OF TONS) -------- -------- -------- --------
- ----------------------
<S> <C> <C> <C> <C>
Coated Board 281.4 240.6 511.4 455.8
Swedish Mill 37.0 36.9 69.6 68.9
Containerboard 55.0 96.8 136.9 205.4
-------- -------- -------- --------
373.4 374.3 717.9 730.1
======== ======== ======== ========
</TABLE>
I-14
<PAGE> 15
SECOND QUARTER 1998 COMPARED WITH SECOND QUARTER 1997
NET SALES
Principally as a result of the factors described below, the Company's Net Sales
in the second quarter of 1998 increased by $11.9 million, or 4.1 percent,
compared with the second quarter of 1997. Net Sales in the Coated Board
business segment increased $17.3 million, or 6.4 percent, in the second quarter
of 1998 to $289.3 million from $272.0 million in the second quarter of 1997,
due primarily to increased sales volumes in U.S. and international beverage and
U.S. folding cartonboard markets, as well as slightly improved pricing in U.S.
beverage and U.S. folding cartonboard 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
sales volumes 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 $5.4 million, or
24.4 percent, in the second quarter of 1998, to $16.6 million from $22.0
million in the second quarter of 1997, due principally to a continued reduction
in linerboard production in favor of coated board production offset somewhat by
higher shipments of corrugating medium and bag kraft and improved selling
prices in the linerboard and medium markets as compared to 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 1998 increased $20.9 million, or 59.3 percent,
to $56.3 million from $35.3 million in the second quarter of 1997. The
Company's gross profit margin increased to 18.4 percent for the second quarter
of 1998 from 12.0 percent in the second quarter of 1997. In the Containerboard
business segment, Gross Profit increased $9.9 million to a loss of $1.3 million
in the second quarter of 1998 as compared to a loss of $11.2 million in the
second quarter of 1997, due principally to improved selling prices of medium
and overall cost reductions. Gross profit in the Coated Board business segment
increased by $10.9 million, or 23.2 percent, to $58.0 million in the second
quarter of 1998 as compared to $47.1 million in the second quarter of 1997,
while the segment's gross profit margin increased to 20.1 percent in the second
quarter of 1998 from 17.3 percent in the second quarter of 1997. These
increases in the Coated Board business segment gross profit and gross profit
margin resulted principally from improved selling prices in U.S. beverage and
U.S. folding cartonboard markets and overall cost reductions offset by the
negative impact of the strengthening of the U.S. dollar on the Company's
international beverage and folding cartonboard markets.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses decreased $4.7 million, or 14.6
percent, to $27.4 million in the second quarter of 1998 as compared to $32.1
million in the second 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 8.9 percent in the second quarter of 1998 from 10.9
percent in the same period of 1997.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses increased $0.6 million to $1.5
million in the second quarter of 1998 from $0.8 million in the second quarter
of 1997 due to a lower level of packaging machinery costs being deferred in the
second quarter of 1998 as compared with the second quarter of 1997 resulting
from the timing and nature of packaging machinery under development.
I-15
<PAGE> 16
IMPAIRMENT LOSS
The Company recorded an impairment loss of $13.3 million in the second quarter
of 1998 due to a write-down of packaging machines, recorded in accordance with
FAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (FAS 121). The fair value of the machines was
determined based on expected future lease revenues and potential disposition.
OTHER EXPENSES, NET
Other Expenses, net, increased by $1.6 million to $3.8 million in the second
quarter of 1998 due primarily to hedging activity losses, inventory adjustments
and certain litigation related charges.
INCOME (LOSS) FROM OPERATIONS
Primarily as a result of the above factors, the Company's Income from
Operations in the second quarter of 1998 increased by $10.1 million, to $10.3
million from $0.2 million in the second quarter of 1997, while operating margin
as a percent of Net Sales increased to 3.4 percent from 0.1 percent. (Loss)
from Operations in the Containerboard business segment increased $9.8 million
to a loss of $2.7 million in the second quarter of 1998 from a (Loss) from
Operations of $12.5 million in the second quarter of 1997, primarily as a
result of the factors described above. Income from Operations in the Coated
Board business segment decreased $1.9 million, or 9.9 percent, to $17.4 million
in the second quarter of 1998 from $19.3 million in the second quarter of 1997,
while operating margin as a percent of Net Sales decreased to 6.0 percent from
7.1 percent for the same periods, primarily as a result of the write-down of
packaging machines as well as the factors described above.
U.S. DOLLAR CURRENCY EXCHANGE RATES
Fluctuations in U.S. dollar currency exchange rates did impact Net Sales, Gross
Profit, and Income from Operations as described above. However, these
fluctuations did not have a significant impact on operating expenses of the
Company during the second quarter of 1998 as compared to the same period of
1997.
FIRST SIX MONTHS 1998 COMPARED WITH FIRST SIX MONTHS 1997
NET SALES
Principally as a result of the factors described below, the Company's Net Sales
in the first six months of 1998 increased by $10.2 million, or 1.8 percent,
compared with the first six months of 1997. Net Sales in the Coated Board
business segment increased $19.1 million, or 3.7 percent, in the first six
months of 1998 to $531.2 million from $512.1 million in the first six months of
1997, due primarily to increased sales volumes in U.S. and international
beverage and U.S. 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 as well as an
unfavorable shift in product mix in international folding cartonboard markets.
Net Sales in the Containerboard business segment decreased $8.9 million, or
18.2 percent, in the first six months of 1998, to $40.2 million from $49.1
million in the first six months of 1997, due principally to a continued
reduction in linerboard production in favor of coated board production offset
somewhat by higher shipments of corrugating medium and bag kraft and improved
selling prices in the medium and linerboard markets as compared to the first
six months of 1997.
I-16
<PAGE> 17
GROSS PROFIT
Primarily as a result of the factors discussed below, the Company's Gross
Profit for the first six months of 1998 increased $26.4 million, or 39.3
percent, to $93.7 million from $67.3 million in the first six months of 1997.
The Company's gross profit margin increased to 16.4 percent for the first six
months of 1998 from 12.0 percent in the first six months of 1997. In the
Containerboard business segment, Gross Profit increased $18.1 million to a loss
of $4.5 million in the first six months of 1998 as compared to a loss of $22.6
million in the first six months of 1997, due principally to improved selling
prices of linerboard and medium and overall cost reductions. Gross profit in
the Coated Board business segment increased by $8.1 million, or 8.9 percent, to
$99.2 million in the first six months of 1998 as compared to $91.1 million in
the first six months of 1997, while the segment's gross profit margin increased
to 18.7 percent in the first six months of 1998 from 17.8 percent in the first
six months of 1997. These increases in the Coated Board business segment gross
profit and gross profit margin resulted principally from improved selling
prices in U.S. beverage markets and overall cost reductions offset by the
negative impact of the strenghthening of the U.S. dollar on the Company's
international beverage and folding cartonboard markets.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses decreased $6.9 million, or 11.2
percent, to $54.4 million in the first six months of 1998 as compared to $61.3
million in the first six months 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 9.5 percent in the first six months of 1998 from 10.9
percent in the same period of 1997.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses increased $0.7 million to $3.2
million for the first six months of 1998.
IMPAIRMENT LOSS
The Company recorded an impairment loss of $13.3 million in the first six
months of 1998 due to a write-down of packaging machines recorded in accordance
with FAS 121. The fair value of the machines was determined based on expected
future lease revenues and potential disposition.
OTHER EXPENSES, NET
Other Expenses, net, increased by $0.3 million to $5.3 million for the first
six months of 1998.
INCOME (LOSS) FROM OPERATIONS
Primarily as a result of the above factors, the Company's Income from
Operations in the first six months of 1998 increased by $19.1 million to $17.6
million from a loss of $1.5 million in the first six months of 1997, while
operating margin as a percent of Net Sales was 3.1 percent. (Loss) from
Operations in the Containerboard business segment increased $18.2 million to a
loss of $7.3 million in the first six months of 1998 from a (Loss) from
Operations of $25.5 million in the first six months of 1997, primarily as a
result of the factors described above. Income from Operations in the Coated
Board business segment decreased $1.1 million, or 3.2 percent, to $34.0 million
in the first six months of 1998 from $35.1 million in the first six months of
1997, while operating margin as a percent of Net Sales decreased to 6.4 percent
from 6.9 percent for the same periods, primarily as a result of the write-down
of packaging machines as well as the factors described above.
I-17
<PAGE> 18
U.S. DOLLAR CURRENCY EXCHANGE RATES
Fluctuations in U.S. dollar currency exchange rates did impact Net Sales, Gross
Profit, and Income from Operations as described above. However, these
fluctuations did not have a significant impact on operating expenses of the
Company during the first six months of 1998 as compared to the same period of
1997.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES AND EQUITY IN NET EARNINGS OF
AFFILIATES
INTEREST INCOME
Interest Income increased $0.4 million from the first six months of 1997 to
$0.7 million in the first six months 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 $8.0 million to $89.0 million in the first six
months of 1998 from $80.9 million in the first six months of 1997. The increase
related principally to an increase of debt levels resulting from capital
expenditure funding throughout 1997 as well as a shift in existing debt toward
higher coupon debt.
INCOME TAX EXPENSE
During the first six months of 1998, the Company recognized an income tax
expense of $2.0 million on a (Loss) before Income Taxes and Equity in Net
Earnings of Affiliates of $70.7 million. During the first six months of 1997,
the Company recognized an income tax expense of $2.7 million on a (Loss) before
Income Taxes and Equity in Net Earnings of Affiliates of $82.2 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 six months of 1998 were $3.8 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 $3.5 million to $5.0 million in
the first six months of 1998 from $8.5 million in the first six months of 1997,
resulting primarily from additional expenses incurred by Igaras relating to the
purchase of three additional facilities during the first quarter.
During the first six months of 1998 and the first six months of 1997, the
Company received dividends from Igaras of $1.6 million and $0.9 million,
respectively, net of taxes of $0.3 million and $0.2 million, 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 six months 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
I-18
<PAGE> 19
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 $3.8 million in the first six
months of 1998 primarily as a result of $49.1 million of net cash used in
financing activities offset by $31.0 million of net cash provided by investing
activities and $14.5 million of net cash provided by operating activities,
respectively. Cash provided by investing activities related principally to
proceeds of $46.7 million from the sale of the Australian folding carton
business. Depreciation and amortization during the first six months of 1998
totaled approximately $70.8 million, and is expected to be approximately $145
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 June 27, 1998, the Company had
outstanding approximately $1,703 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 six months of
1998, the Company had a net decrease in borrowings of approximately $48.2
million. Approximately $21.8 million of the net reduction related to a
permanent reduction of the Australian facility.
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 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
June 27, 1998 at an average rate per annum of 8.6 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 $180 to $185 million, including
approximately $10 million of non-cash amortization of deferred debt issuance
costs. During the first six months of 1998, cash paid for interest was
approximately $81.3 million.
The Company uses interest rate swap 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
I-19
<PAGE> 20
difference to be paid or received under these agreements is recognized as an
adjustment to interest expense related to that debt. At June 27, 1998, the
Company had interest rate swap agreements (with a notional amount of $200
million) under which the Company will pay fixed rates of 5.875 percent to
6.3750 percent and receive three-month LIBOR.
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 June 27, 1998, the Company was in compliance with
the financial covenants in the Credit Agreements.
CAPITAL EXPENDITURES
Capital spending for the first six months of 1998 was approximately $14.5
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 $75 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
At June 27, 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 JUNE 27, 1998 JUNE 27, 1998
------------ ------------- -------------
(IN THOUSANDS OF DOLLARS)
- -------------------------
<S> <C> <C> <C>
Revolving Facility $ 400,000 $ 127,000 $ 273,000
Machinery Facility 140,000 16,000 35,000
International Facilities 21,765 8,472 13,292
------------ ------------- -------------
$ 561,765 $ 151,472 $ 321,292
============ ============= =============
</TABLE>
The Company applied $21.8 million of the proceeds from the sale of the
Australian folding carton business to repay all outstanding borrowings under
its Australian facility during the second quarter.
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.
I-20
<PAGE> 21
As described above, the Company has substantial liquidity, but anticipates
additional borrowings under the Revolving Facility throughout the remainder of
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" and
"-Outlook."
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 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 Company's predecessor ( 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 soil and groundwater sampling will be completed in late 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. Ongoing discussions
with the DEQ continue 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,
I-21
<PAGE> 22
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. 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.
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 will utilize both
internal and external resources. Total spending on this project during the
first six months of 1998 totaled approximately $4.8 million of which $3.4
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,
I-22
<PAGE> 23
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). The tax period ended March 27, 1996,
is currently under audit by the State of Louisiana. If the Company receives an
assessment from the State, the Company will consider paying the assessed amount
to avoid further interest accruals as it contests the assessment. Management
believes that the additional tax ultimately paid (if any) will 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, (b) the Company's expectation that the
second Macon Mill paper machine will produce approximately 275,000 tons of CUK
Board annually in 18 to 24 months following the June 1997 start-up and (c) the
Company's expectation that beverage cartonboard tonnage will increase in 1998
despite expected reduction in new packaging machinery placements; (ii) the
statements in "-Outlook" concerning (a) the Company's expectation that its 1998
EBITDA will significantly exceed its 1997 EBITDA as well as each of the factors
which the Company believes support such expectation, (b) 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, (c) the Company's
expectation that global open market folding cartonboard sales volumes will
increase above 1997 levels and (d) 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 no more than $75 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 June 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 limitation, management's belief that additional tax
ultimately paid (if any) would be substantially less than $47 million and (iv)
other statements as to the Company's expectation and beliefs presented in this
"Management's Discussion 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
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.
I-23
<PAGE> 24
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 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 established accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company has not determined the impact that SFAS No.
133 will have on its financial statements.
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.
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 costs. 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 (Loss) Income 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: August 5, 1998 By: /s/ Bill H. Chastain
--------------------------------------
Bill H. Chastain
Secretary
Date: August 5, 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 FOR THE SIX MONTHS ENDED JUNE 27, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-27-1998
<EXCHANGE-RATE> 1
<CASH> 11,943
<SECURITIES> 0
<RECEIVABLES> 161,490
<ALLOWANCES> 1,115
<INVENTORY> 151,516
<CURRENT-ASSETS> 333,175
<PP&E> 1,538,626
<DEPRECIATION> 253,723
<TOTAL-ASSETS> 2,477,776
<CURRENT-LIABILITIES> 272,618
<BONDS> 1,692,154
0
0
<COMMON> 75
<OTHER-SE> 409,597
<TOTAL-LIABILITY-AND-EQUITY> 2,477,776
<SALES> 571,410
<TOTAL-REVENUES> 571,410
<CGS> 477,684
<TOTAL-COSTS> 477,684
<OTHER-EXPENSES> 76,173
<LOSS-PROVISION> 230
<INTEREST-EXPENSE> 88,955
<INCOME-PRETAX> (70,735)
<INCOME-TAX> 2,031
<INCOME-CONTINUING> (67,753)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67,753)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
RIVERWOOD HOLDING, INC.
RECONCILIATION OF (LOSS) INCOME FROM OPERATIONS TO EBITDA
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Coated Container-
Board board Corporate Total
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SECOND QUARTER 1998:
Income (Loss) from Operations $ 17,398 $ (2,711) $ (4,380) $ 10,307
Depreciation and amortization 27,198 1,776 244 29,218
Purchased asset costs (A) 5,563 911 - 6,474
Other non-cash charges (B) 15,024 465 1,144 16,633
Dividends from equity investments - - 994 994
--------- --------- --------- ----------
EBITDA (C) $ 65,183 $ 441 $ (1,998) $ 63,626
========= ========= ========= ==========
SECOND QUARTER 1997:
Income (Loss) 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
--------- --------- --------- ----------
EBITDA (C) $ 47,846 $ (4,711) $ (3,555) $ 39,580
========= ========= ========= ==========
FIRST SIX MONTHS 1998:
Income (Loss) from Operations $ 33,970 $ (7,331) $ (9,086) $ 17,553
Depreciation and amortization 51,483 5,654 530 57,667
Purchased asset costs (A) 11,959 1,822 - 13,781
Other non-cash charges (B) 15,782 751 2,768 19,301
Dividends from equity investments - - 1,612 1,612
--------- --------- --------- ----------
EBITDA (C) $ 113,194 $ 896 $ (4,176) $ 109,914
========= ========= ========= ==========
FIRST SIX MONTHS 1997:
Income (Loss) 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
--------- --------- --------- ----------
EBITDA (C) $ 92,331 $ (12,749) $ (6,849) $ 72,733
========= ========= ========= ==========
</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 deducted for
write-downs of packaging machines, LIFO inventory reserves, pension,
postretirement and postemployment benefits, and amortization of
premiums on hedging contracts in determining net income other than
Purchased Asset Costs (see above).
<PAGE> 2
(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.
