<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 September 26, 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 November 7, 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
ITEM 1. FINANCIAL STATEMENTS
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>
SEPTEMBER 26, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 15,227 $ 15,751
Receivables, net of allowances 162,067 151,554
Inventories 154,752 174,498
Prepaid expenses 7,753 10,451
----------- -----------
Total Current Assets 339,799 352,254
Property, Plant and Equipment, net of accumulated
depreciation of $276,238 in 1998 and $205,527 in 1997 1,511,486 1,644,835
Investments in Net Assets of Equity Affiliates 148,173 141,690
Goodwill, net of accumulated amortization of $19,758 in 1998
and $13,475 in 1997 298,165 304,448
Other Assets 157,325 162,958
----------- -----------
Total Assets $ 2,454,948 $ 2,606,185
=========== ===========
LIABILITIES
Current Liabilities:
Short-term debt $ 17,090 $ 44,330
Accounts payable and other accrued liabilities 266,655 269,987
----------- -----------
Total Current Liabilities 283,745 314,317
Long-Term Debt, less current portion 1,670,933 1,712,944
Other Noncurrent Liabilities 97,830 93,445
----------- -----------
Total Liabilities 2,052,508 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) (336,487) (257,609)
Cumulative Currency Translation Adjustment (17,453) (14,185)
----------- -----------
Total Shareholders' Equity 397,288 479,434
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,454,948 $ 2,606,185
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-3
<PAGE> 4
RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 292,766 $ 284,875 $ 864,176 $ 846,097
Cost of Sales 236,390 245,611 714,074 739,545
Selling, General and Administrative 28,913 29,154 83,294 90,417
Research, Development and Engineering 980 1,062 4,170 3,590
Impairment Loss - - 13,342 -
Other (Income) Expenses, net (92) 1,533 5,168 6,523
--------- --------- --------- ---------
Income from Operations 26,575 7,515 44,128 6,022
Interest Income 291 598 958 816
Interest Expense 43,554 43,812 132,509 124,743
--------- --------- --------- ---------
(Loss) before Income Taxes and Equity in
Net Earnings of Affiliates (16,688) (35,699) (87,423) (117,905)
Income Tax (Benefit) Expense (1,864) 1,612 167 4,341
--------- --------- --------- ---------
(Loss) before Equity in Net Earnings
of Affiliates (14,824) (37,311) (87,590) (122,246)
Equity in Net Earnings of Affiliates 3,699 5,230 8,712 13,695
--------- --------- --------- ---------
(Loss) before Extraordinary Item (11,125) (32,081) (78,878) (108,551)
Extraordinary Loss on Early Extinguishment
of Debt, net of tax of $0 - 2,463 - 2,463
--------- --------- --------- ---------
Net (Loss) $ (11,125) $ (34,544) $ (78,878) $(111,014)
--------- --------- --------- ---------
Other comprehensive income, net of tax:
Foreign currency translation adjustments (1,259) (3,145) (3,268) (21,017)
--------- --------- --------- ---------
Comprehensive (Loss) $ (12,384) $ (37,689) $ (82,146) $(132,031)
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE> 5
RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $ (78,878) $ (111,014)
Noncash Items Included in Net (Loss):
Depreciation and amortization 105,346 100,219
Deferred income taxes (29) 4,206
Impairment loss 13,342 -
Pension, postemployment and postretirement benefits,
net of benefits paid 1,773 3,723
Equity in net earnings of affiliates, net of dividends (6,185) (10,978)
Extraordinary loss on early extinguishment of debt, net - 2,463
Amortization of deferred debt issuance costs 7,600 9,111
Other, net 97 589
(Increase) Decrease in Current Assets:
Receivables (21,801) 9,984
Inventories 8,343 9,769
Prepaid expenses 2,437 (2,095)
Increase in Current Liabilities:
Accounts payable and other accrued liabilities 1,770 20,450
Increase (Decrease) in Other Noncurrent Liabilities 5,200 (7,635)
----------- -----------
Net Cash Provided by Operating Activities 39,015 28,792
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (21,980) (126,893)
Payment of Merger Costs - (34,410)
Proceeds from Sale of Assets 50,755 7,478
Proceeds from Tax Matters Settlement - 16,800
Decrease (Increase) in Other Assets 648 (9,304)
----------- -----------
Net Cash Provided By (Used in) Investing Activities 29,423 (146,329)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of Redeemable Common Stock (893) (510)
Issuance of Debt - 250,000
Increase in Debt Issuance Costs - (7,746)
Net Decrease in Revolving Credit Facilities (57,189) (18,718)
Payments on Debt (11,729) (108,227)
----------- -----------
Net Cash (Used in) Provided by Financing Activities (69,811) 114,799
----------- -----------
Effect of Exchange Rate Changes on Cash 849 (2,066)
----------- -----------
Net (Decrease) in Cash and Equivalents (524) (4,804)
Cash and Equivalents at Beginning of Period 15,751 17,357
----------- -----------
Cash and Equivalents at End of Period $ 15,227 $ 12,553
=========== ===========
</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) SEPTEMBER 26, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Finished goods $ 63,219 $ 66,559
Work in-process 14,370 11,173
Raw materials 46,166 65,030
Supplies 30,997 31,736
-------- --------
Total $154,752 $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").
I-6
<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 NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
Net Sales $63,494 $60,579 $190,715 $175,667
Cost of Sales 50,722 42,062 148,526 122,427
------- ------- -------- --------
Gross Profit $12,772 $18,517 $ 42,189 $ 53,240
======= ======= ======== ========
Income from Operations $ 5,854 $12,589 $ 20,900 $ 35,334
======= ======= ======== ========
Net Income $ 3,964 $ 9,765 $ 12,726 $ 25,847
======= ======= ======== ========
</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. Certain of these projects are being carried out under federal and
state statutes, such as the Comprehensive Environmental Response Compensation
and Liability Act ("CERCLA"). 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
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<PAGE> 8
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 alleged 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. On
October 14, 1998, the U.S. Court of Appeals for the Eleventh Circuit affirmed
the dismissal. The Court of Appeals ruled that (i) none of the statements
attributable to the Company concerning its review of strategic alternatives was
false and (ii) the SARs were not securities.
On August 21, 1998, William D. Tatum, C. Steven Clark, Thomas W. Brabston, Sr.,
Joe O. Harper, Jr. ("Plaintiffs"), all former employees of the Company,
commenced a purported class action lawsuit in the Superior Court of Fulton
County, Georgia, against the Company and certain current and former officers of
the Company. In the complaint, Plaintiffs allege generally that the Company and
such officers (1) breached the terms of the contracts between Plaintiffs and the
Predecessor governing Premium Stock Appreciation Rights ("PSARs") as a result of
a suspension requested on August 23, 1995, (2) breached an implied covenant of
good faith and fair dealing in connection with both the suspension and the
lifting of that suspension, and (3) engaged in fraud and negligent
misrepresentation in connection with the lifting of the suspension by (a)
failing to tell Plaintiffs that certain officers of the Predecessor were
planning to exercise PSARs on September 21, 1995 and (b) failing to inform
Plaintiffs of the status of the Predecessor's review of strategic alternatives
as of September 21, 1995. Plaintiffs seek (a) an order granting class
certification, (b) an award of compensatory damages, (c) pre-judgment interest,
(d) punitive damages in an amount to be determined by the jury and (e)
litigation expenses, including attorney's fees. The defendants have answered the
complaint. In addition on October 16, 1998, the defendants moved to strike the
class allegations in the complaint, and, on October 30, 1998, moved to dismiss
the complaint. Plaintiffs have not yet responded to either motion.
The Company is a plaintiff in several actions against Mead Corporation ("Mead")
claiming infringement of Riverwood patents for its packaging machines. In the
furthest advanced of these actions, a federal court announced on October 27,
1998 that it would enter an order refusing to adopt a special master's
recommended finding that the Riverwood patent in issue was invalid. As a result
of this finding, the court indicated that it would enter an order concluding
that Mead has been unlawfully infringing Riverwood's patent. The court indicated
that it will permit Mead to pursue an immediate appeal from this ruling.
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
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<PAGE> 9
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.
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 nine months of 1998, $3.5 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 $641 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.
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 September 26, 1998 and September 27, 1997, the
Company's Income from Operations included Purchased Asset Costs as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 26, 1998 THREE MONTHS ENDED SEPT. 27, 1997
--------------------------------- ---------------------------------
Coated Container- Coated Container-
Board board Total Board board Total
------ ---------- ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Cost of sales
(excluding depreciation expense) $ 303 $ - $ 303 $ 717 $ - $ 717
Depreciation expense 4,558 911 5,469 4,827 911 5,738
Amortization of intangible assets 1,138 - 1,138 1,180 - 1,180
------ ------ ------ ------ ------- ------
Net Impact on Income from Operations $5,999 $ 911 $6,910 $6,724 $ 911 $7,635
====== ====== ====== ====== ======= ======
</TABLE>
During the nine months ended September 26, 1998 and September 27, 1997, the
Company's Income from Operations included Purchased Asset Costs as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT. 26, 1998 NINE MONTHS ENDED SEPT. 27, 1997
-------------------------------- --------------------------------
Coated Container- Coated Container-
Board board Total Board board Total
------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Cost of sales
(excluding depreciation expense) $ 911 $ - $ 911 $ 1,229 $ - $ 1,229
Depreciation expense 13,674 2,733 16,407 14,483 2,733 17,216
Amortization of intangible assets 3,373 - 3,373 3,098 - 3,098
------- ------ ------- ------- ------ -------
Net Impact on Income from Operations $17,958 $2,733 $20,691 $18,810 $2,733 $21,543
======= ====== ======= ======= ====== =======
</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, 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.
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<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 26, SEPTEMBER, 27 SEPTEMBER 26, SEPTEMBER, 27
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
EBITDA (Segment Data):
Coated Board $ 68,620 $ 49,188 $ 181,814 $ 141,519
Containerboard (233) (2,002) 663 (14,751)
Corporate (1,801) (1,823) (5,977) (8,672)
-------- -------- --------- ---------
EBITDA $ 66,586 $ 45,363 $ 176,500 $ 118,096
======== ======== ========= =========
</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.
Recently, SBS prices have declined sharply due to excess industry capacity. 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. However, the second and third quarters of 1998
showed a downturn in containerboard selling prices. As a result, the Company has
taken 31 days of market-related downtime on containerboard machines at the West
Monroe Mill, including 17 days on the medium machine and 14 days on the bag
machine, through the end of the third quarter.
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 nine
months of 1998, the Company produced approximately 137,000 tons of CUK Board and
15,000 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 by June 1999. 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 re-evaluation of current
operations and assets, has reduced U.S. staffing in the packaging machinery
division by 20%, and reduced planned capital expenditures, while continuing its
Company-wide inventory reduction initiative. As a result of the inventory
reduction initiative, inventory decreased by approximately $45.5 million at
September 26, 1998 as compared to September 27, 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 (see
"-General - Outlook").
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
I-12
<PAGE> 13
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 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 nine months of 1998 decreased
when compared to the number of packaging machines placed during the first nine
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 paperboard 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 additional restructuring in the next
six months, principally at its facilities in England and Spain. In connection
with such restructuring, the Company anticipates recording a charge in the
amount of $10 to $20 million. 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.
However, the Company anticipates that growth in coated board volumes could slow
and margins could be reduced due to excess global industry capacity and recent
price declines in competing substrates, particularly SBS. In the fourth quarter,
the Macon Mill will take 7 days of maintenance downtime on the first Macon Mill
paperboard machine that was originally scheduled in the second quarter, and 33
days of maintenance downtime on the second Macon Mill paperboard machine to
perform repairs. Looking forward, pricing pressures on corrugating medium and
linerboard are expected to continue through the remainder of 1998. The Company
will also take market-related downtime on medium and linerboard machines in the
fourth quarter.
I-13
<PAGE> 14
RESULTS OF OPERATIONS
The discussion of the Company's results of operations is based on the three
months and nine months ended September 26, 1998 compared to the three months and
nine months ended September 27, 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 nine months
ended September 27, 1997 have been restated to include Purchased Asset Costs.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------- ---------------------------------------
% INCREASE % INCREASE
(DECREASE) (DECREASE)
SEPT. 26, FROM PRIOR SEPT. 27, SEPT. 26, FROM PRIOR SEPT. 27,
(IN THOUSANDS OF DOLLARS) 1998 PERIOD 1997 1998 PERIOD 1997
------------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales (Segment Data):
Coated Board $ 272,806 3.7% $ 262,986 $ 804,035 3.7% $ 775,114
Containerboard 19,960 (8.8) 21,889 60,141 (15.3) 70,983
--------- --------- --------- ---------
Net Sales 292,766 2.8 284,875 864,176 2.1 846,097
Cost of Sales 236,390 (3.8) 245,611 714,074 (3.4) 739,545
--------- --------- --------- ---------
Gross Profit 56,376 43.6 39,264 150,102 40.9 106,552
Selling, General and Administrative 28,913 (0.8) 29,154 83,294 (7.9) 90,417
Research, Development and
Engineering 980 (7.7) 1,062 4,170 16.2 3,590
Impairment Loss - N/A - 13,342 N/A -
Other (Income) Expenses, net (92) (106.0) 1,533 5,168 (20.8) 6,523
--------- --------- --------- ---------
Income from Operations $ 26,575 253.6 $ 7,515 $ 44,128 632.8 $ 6,022
========= ========= ========= =========
Income (Loss) from Operations
(Segment Data):
Coated Board* $ 35,169 95.4% $ 17,996 $ 69,139 30.2% $ 53,082
Containerboard (4,482) 29.8 (6,385) (11,813) 63.0 (31,923)
Corporate (4,112) (0.4) (4,096) (13,198) 12.8 (15,137)
--------- --------- --------- ---------
Income from Operations $ 26,575 253.6 $ 7,515 $ 44,128 632.8 $ 6,022
========= ========= ========= =========
</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 nine months ended September 26, 1998 and September 27, 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS OF TONS)
Coated Board 269.9 237.4 781.3 700.3
Swedish Mill 34.6 32.6 104.2 101.5
Containerboard 68.4 87.7 205.3 293.0
----- ----- ------- -------
372.9 357.7 1,090.8 1,094.8
===== ===== ======= =======
</TABLE>
I-14
<PAGE> 15
THIRD QUARTER 1998 COMPARED WITH THIRD QUARTER 1997
NET SALES
Principally as a result of the factors described below, the Company's Net Sales
in the third quarter of 1998 increased by $7.9 million, or 2.8 percent, compared
with the third quarter of 1997. Net Sales in the Coated Board business segment
increased $9.8 million, or 3.7 percent, in the third quarter of 1998 to $272.8
million from $263.0 million in the third 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, as well as an unfavorable shift
in product mix in U.S beverage and international folding cartonboard markets.
Net Sales in the Containerboard business segment decreased $1.9 million, or 8.8
percent, in the third quarter of 1998, to $20.0 million from $21.9 million in
the third quarter of 1997, due principally to a continued reduction in
linerboard production in favor of coated board production offset somewhat by
improved selling prices in the linerboard and medium markets as compared to the
third quarter of 1997.
GROSS PROFIT
Primarily as a result of the factors discussed below, the Company's Gross Profit
for the third quarter of 1998 increased $17.1 million, or 43.6 percent, to $56.4
million from $39.3 million in the third quarter of 1997. The Company's gross
profit margin increased to 19.3 percent for the third quarter of 1998 from 13.8
percent in the third quarter of 1997. Gross profit in the Coated Board business
segment increased by $13.9 million, or 30.9 percent, to $59.1 million in the
third quarter of 1998 as compared to $45.1 million in the third quarter of 1997,
while the segment's gross profit margin increased to 21.6 percent in the third
quarter of 1998 from 17.2 percent in the third quarter of 1997. These increases
in the Coated Board business segment gross profit and gross profit margin
resulted principally from slightly improved selling prices in U.S. beverage and
U.S. folding cartonboard markets and overall cost reductions partially offset by
the negative impact of the strengthening of the U.S. dollar on the Company's
international beverage and international folding cartonboard markets. In the
Containerboard business segment, Gross Profit increased $2.6 million to a loss
of $2.7 million in the third quarter of 1998 as compared to a loss of $5.3
million in the third quarter of 1997, due principally to improved selling prices
of linerboard and medium compared to the third quarter of 1997, and overall cost
reductions.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses decreased $0.2 million, or 0.8
percent, to $28.9 million in the third quarter of 1998 as compared to $29.2
million in the third quarter of 1997. This decrease was due primarily to the
Company's cost reduction initiatives that began in early 1997, offset by
increasing incremental costs relating to the implementation of a new
computerized information system as the Company approaches implementation (see
"-Financial Condition, Liquidity and Capital Resources - Upgrade of Information
Systems and Year 2000 Compliance"). As a percentage of Net Sales, Selling,
General and Administrative expenses decreased to 9.9 percent in the third
quarter of 1998 from 10.2 percent in the same period of 1997.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses decreased $0.1 million to $1.0
million in the third quarter of 1998 from $1.1 million in the third quarter of
1997.
I-15
<PAGE> 16
OTHER (INCOME) EXPENSES, NET
Other (Income) Expenses, net, decreased by $1.6 million to $(0.1) million in the
third quarter of 1998 due primarily to increased royalty income from Igaras.
INCOME (LOSS) FROM OPERATIONS
Primarily as a result of the above factors, the Company's Income from Operations
in the third quarter of 1998 increased by $19.1 million, to $26.6 million from
$7.5 million in the third quarter of 1997, while operating margin increased to
9.1 percent from 2.6 percent. Income from Operations in the Coated Board
business segment increased $17.2 million, or 95.4 percent, to $35.2 million in
the third quarter of 1998 from $18.0 million in the third quarter of 1997, while
operating margin increased to 12.9 percent from 6.8 percent for the same
periods, primarily as a result of the factors described above. (Loss) from
Operations in the Containerboard business segment decreased $1.9 million to a
loss of $4.5 million in the third quarter of 1998 from a (Loss) from Operations
of $6.4 million in the third quarter of 1997, primarily as a result of 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 third quarter of 1998 as compared to the same period of 1997.
FIRST NINE MONTHS 1998 COMPARED WITH FIRST NINE MONTHS 1997
NET SALES
Principally as a result of the factors described below, the Company's Net Sales
in the first nine months of 1998 increased by $18.1 million, or 2.1 percent,
compared with the first nine months of 1997. Net Sales in the Coated Board
business segment increased $28.9 million, or 3.7 percent, in the first nine
months of 1998 to $804.0 million from $775.1 million in the first nine 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 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, as well as an unfavorable shift in product mix in U.S. beverage and
international folding cartonboard markets. Net Sales in the Containerboard
business segment decreased $10.8 million, or 15.3 percent, in the first nine
months of 1998, to $60.1 million from $71.0 million in the first nine months of
1997, due principally to a continued reduction in linerboard production in favor
of coated board production offset somewhat by slightly higher shipments of
corrugating medium and improved selling prices in the medium and linerboard
markets as compared to the first nine months of 1997.
GROSS PROFIT
Primarily as a result of the factors discussed below, the Company's Gross Profit
for the first nine months of 1998 increased $43.6 million, or 40.9 percent, to
$150.1 million from $106.6 million in the first nine months of 1997. The
Company's gross profit margin increased to 17.4 percent for the first nine
months of 1998 from 12.6 percent in the first nine months of 1997. Gross profit
in the Coated Board business segment increased by $22.1 million, or 16.2
percent, to $158.2 million in the first nine months of 1998 as compared to
$136.2 million in the first nine months of 1997, while the segment's gross
profit margin increased to 19.7 percent in the first nine months of 1998 from
17.6 percent in the first nine months of 1997. These increases in the Coated
Board business segment gross profit and gross profit margin resulted principally
from slightly improved selling prices in U.S. beverage and U.S. folding
cartonboard markets and overall cost reductions partially offset by the negative
impact of the strenghthening of the U.S. dollar on the Company's international
I-16
<PAGE> 17
beverage and international folding cartonboard markets. In the Containerboard
business segment, Gross Profit increased $20.7 million to a loss of $7.2 million
in the first nine months of 1998 as compared to a loss of $27.9 million in the
first nine months of 1997, due principally to improved selling prices of
linerboard and medium compared to the first nine months of 1997, and overall
cost reductions.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses decreased $7.1 million, or 7.9
percent, to $83.3 million in the first nine months of 1998 as compared to $90.4
million in the first nine 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 "- Financial Condition, Liquidity and Capital Resources
- - Upgrade of Information Systems and Year 2000 Compliance"). As a percentage of
Net Sales, Selling, General and Administrative expenses decreased to 9.6 percent
in the first nine months of 1998 from 10.7 percent in the same period of 1997.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses increased $0.6 million to $4.2
million for the first nine months of 1998.
IMPAIRMENT LOSS
The Company recorded an impairment loss of $13.3 million in the first nine
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 (INCOME) EXPENSES, NET
Other (Income) Expenses, net, decreased by $1.4 million to $5.2 million for the
first nine months of 1998, due to an increase in royalty income.
INCOME (LOSS) FROM OPERATIONS
Primarily as a result of the above factors, the Company's Income from Operations
in the first nine months of 1998 increased by $38.1 million to $44.1 million
from $6.0 million in the first nine months of 1997, while operating margin was
5.1 percent. Income from Operations in the Coated Board business segment
increased $16.1 million, or 30.2 percent, to $69.1 million in the first nine
months of 1998 from $53.1 million in the first nine months of 1997, while
operating margin increased to 8.6 percent from 6.8 percent for the same periods,
primarily as a result of the write-down of packaging machines as well as the
factors described above. (Loss) from Operations in the Containerboard business
segment decreased $20.1 million to a loss of $11.8 million in the first nine
months of 1998 from a (Loss) from Operations of $31.9 million in the first nine
months of 1997, primarily as a result of 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 first nine months of 1998 as compared to the same period of
1997.
I-17
<PAGE> 18
INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES AND EQUITY IN NET EARNINGS OF
AFFILIATES
INTEREST INCOME
Interest Income increased $0.1 million from the first nine months of 1997 to
$1.0 million in the first nine 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 $7.8 million to $132.5 million in the first nine
months of 1998 from $124.7 million in the first nine months of 1997. The
increase relates 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 (BENEFIT) EXPENSE
During the first nine months of 1998, the Company recognized an income tax
expense of $0.2 million on a (Loss) before Income Taxes and Equity in Net
Earnings of Affiliates of $87.4 million. During the first nine months of 1997,
the Company recognized an income tax expense of $4.3 million on a (Loss) before
Income Taxes and Equity in Net Earnings of Affiliates of $117.9 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
nine months of 1998 were $3.1 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 $5.0 million to $8.7 million in
the first nine months of 1998 from $13.7 million in the first nine months of
1997, resulting primarily from an overall downturn in the Brazilian markets, as
well as additional expenses incurred by Igaras relating to the purchase of three
additional facilities during the first quarter.
During the first nine months of 1998 and the first nine months of 1997, the
Company received dividends from Igaras of $2.5 million and $1.9 million,
respectively, net of taxes of $0.4 million and $0.3 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 nine 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 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.
I-18
<PAGE> 19
CASH FLOWS
Cash and equivalents decreased by approximately $0.5 million in the first nine
months of 1998 primarily as a result of $69.8 million of net cash used in
financing activities offset by $29.4 million of net cash provided by investing
activities and $39.0 million of net cash provided by operating activities,
respectively. Cash used in financing activities primarily relates to a decrease
in revolving credit facilities. Cash provided by investing activities related
principally to proceeds of $46.7 million from the sale of the Australian folding
carton business, partially offset by capital expenditures. Depreciation and
amortization during the first nine months of 1998 totaled approximately $105.3
million, and is expected to be approximately $145.0 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 September 26, 1998, the Company had
outstanding approximately $1,683 million of long-term debt, consisting primarily
of $650 million aggregate principal amount of the 1996 Notes, $250 million of
the 1997 Notes, $641 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 nine months of 1998, the
Company had a net decrease in borrowings of approximately $69.2 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 $4 million, $4 million, $120 million, $173 million, $184
million and $156 million for each of the years 1999 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
September 26, 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 nine months of 1998, cash paid for interest was
approximately $112.6 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 difference to be paid or received
under these agreements is recognized as an adjustment to interest expense
related to that debt. At September 26, 1998, the Company had interest rate swap
agreements (with a
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<PAGE> 20
notional amount of $200 million) under which the Company will pay fixed rates of
5.9000 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 September 26,
1998, the Company was in compliance with the financial covenants in the Credit
Agreements.
CAPITAL EXPENDITURES
Capital spending for the first nine months of 1998 was approximately $22.0
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 $50 to $60 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 "- Financial Condition, Liquidity and Capital Resources - Upgrade of
Information Systems and Year 2000 Compliance".
FINANCING SOURCES AND CASH FLOWS
At September 26, 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 AT AVAILABLE AT
COMMITMENTS SEPTEMBER 26, 1998 SEPTEMBER 26, 1998
------------ ------------------ ------------------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
- -------------------------
Revolving Facility $400,000 $102,650 $297,350
Machinery Facility 140,000 24,000 25,000
International Facilities 20,954 7,269 13,685
-------- -------- --------
$560,954 $133,919 $336,035
======== ======== ========
</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.
Availability under 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 in the fourth quarter 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 "- Financial Condition, Liquidity and
Capital Resources - 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 "-General-
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 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. Certain of these projects are being carried out under federal and
state statutes, such as the Comprehensive Environmental Response Compensation
and Liability Act ("CERCLA"). 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,
I-21
<PAGE> 22
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 alleged 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. On
October 14, 1998, the U.S. Court of Appeals for the Eleventh Circuit affirmed
the dismissal. The Court of Appeals ruled that (i) none of the statements
attributable to the Company concerning its review of strategic alternatives was
false and (ii) the SARs were not securities.
On August 21, 1998, William D. Tatum, C. Steven Clark, Thomas W. Brabston, Sr.,
Joe O. Harper, Jr. ("Plaintiffs"), all former employees of the Company,
commenced a purported class action lawsuit in the Superior Court of Fulton
County, Georgia, against the Company and certain current and former officers of
the Company. In the complaint, Plaintiffs allege generally that the Company and
such officers (1) breached the terms of the contracts between Plaintiffs and the
Predecessor governing Premium Stock Appreciation Rights ("PSARs") as a result of
a suspension requested on August 23, 1995, (2) breached an implied covenant of
good faith and fair dealing in connection with both the suspension and the
lifting of that suspension, and (3) engaged in fraud and negligent
misrepresentation in connection with the lifting of the suspension by (a)
failing to tell Plaintiffs that certain officers of the Predecessor were
planning to exercise PSARs on September 21, 1995 and (b) failing to inform
Plaintiffs of the status of the Predecessor's review of strategic alternatives
as of September 21, 1995. Plaintiffs seek (a) an order granting class
certification, (b) an award of compensatory damages, (c) pre-judgment interest,
(d) punitive damages in an amount to be determined by the jury and (e)
litigation expenses, including attorney's fees. The defendants have answered the
Complaint. In addition on October 16, 1998, the defendants moved to strike the
class allegations in the complaint, and, on October 30, 1998, moved to dismiss
the complaint. Plaintiffs have not yet responded to either motion.
The Company is a plaintiff in several actions against Mead Corporation ("Mead")
claiming infringement of Riverwood patents for its packaging machines. In the
furthest advanced of these actions, a federal court announced on October 27,
1998 that it would enter an order refusing to adopt a special master's
recommended finding that the Riverwood patent in issue was invalid. As a result
of this finding, the court indicated that it would enter an order concluding
that Mead has been unlawfully infringing Riverwood's patent. The court indicated
that it will permit Mead to pursue an immediate appeal from this ruling.
UPGRADE OF INFORMATION SYSTEMS AND YEAR 2000 COMPLIANCE
The Company is currently upgrading 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
nine months of 1998 totaled approximately $7.8 million of which $5.5 million was
capitalized. Total project spending to date was $17.8 million, of which $11.2
million was capitalized. Future expenditures will be funded by cash from
operations and current credit facilities.
In conjunction with the information systems upgrade, the Company is also in the
process of replacing its computer software applications and all information
technology ("IT") and non-IT systems to accommodate the "Year 2000" dating
changes necessary to permit correct recording of yearly dates for 2000 and later
years. This includes the analyzing of all manufacturing systems in the Company's
plants and mills to determine Year 2000 compliance. To the extent that material
manufacturing systems need to be replaced, additional material costs could be
incurred. The Company has also replaced all desktops, laptops, and network
hardware. The Company does not expect that other costs 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, of which $17.8 million has been spent to date, and
any material costs needed to replace material manufacturing systems, as to
which no determination has yet been made). At the end of the third quarter,
the Company was finalizing the testing of the new system, as performed by both
internal resources
I-22
<PAGE> 23
and independent firms, and was commencing the end-user training process.
The total project cost and the project's progress is in line with the initial
budget and established time-line. The Company expects that it will achieve
compliance by June 1999, but would anticipate a material disruption in its
operations as the result of any failure in a critical operation or information
system. However, the effect on the Company's business, financial condition or
results of operations can not be determined at this time. The Company believes
that it will implement Year 2000 compliant systems far enough in advance to
correct all anticipated issues by January 1, 2000. Accordingly, the Company does
not currently have a contingency plan relating to the Year 2000 issue (although
the Company will evaluate appropriate courses of action if circumstances
change). 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. The Company has
had contact with several significant suppliers and customers and expects that
they will achieve year 2000 compliance, although no assurance can be given in
this regard.
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).
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 "- General
- - 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 be able produce approximately
275,000 tons of CUK Board annually by June 1999 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
"- General -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
I-23
<PAGE> 24
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, (d) the Company's expectations
regarding anticipated restructuring and (e) the Company's expectations regarding
the effects of excess global, industry capacity and price declines of competing
substrates; (iii) the statements in "Financial Condition, Liquidity and Capital
Resources" concerning (a) the Company's expectation that total capital spending
for 1998 will range from $50 to $60 million and that the planned upgrading of
the Company's information systems will cost up to $30 million (and its other
statements and beliefs relating to Year 2000 compliance in "- Upgrade of
Information Systems and Year 2000 Compliance"), (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 Matter 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 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.
I-24
<PAGE> 25
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-25
<PAGE> 26
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
II-1
<PAGE> 27
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: November 6, 1998 By: /s/ Steve McLary
----------------------------------------
Steve McLary
Assistant Secretary
Date: November 6, 1998 By: /s/ Daniel J. Blount
----------------------------------------
Daniel J. Blount
Vice President and
Chief Financial Officer
II-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RIVERWOOD HOLDING, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 26, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-26-1998
<EXCHANGE-RATE> 1
<CASH> 15,227
<SECURITIES> 0
<RECEIVABLES> 162,067
<ALLOWANCES> 1,042
<INVENTORY> 154,752
<CURRENT-ASSETS> 339,799
<PP&E> 1,511,486
<DEPRECIATION> 276,238
<TOTAL-ASSETS> 2,454,948
<CURRENT-LIABILITIES> 283,745
<BONDS> 1,670,933
0
0
<COMMON> 75
<OTHER-SE> 397,213
<TOTAL-LIABILITY-AND-EQUITY> 2,454,948
<SALES> 864,176
<TOTAL-REVENUES> 864,176
<CGS> 714,074
<TOTAL-COSTS> 714,074
<OTHER-EXPENSES> 105,974
<LOSS-PROVISION> 322
<INTEREST-EXPENSE> 132,509
<INCOME-PRETAX> (87,423)
<INCOME-TAX> 167
<INCOME-CONTINUING> (78,878)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (78,878)
<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>
THIRD QUARTER 1998:
Income (Loss) from Operations $ 35,169 $ (4,482) $ (4,112) $ 26,575
Depreciation and amortization 25,861 2,963 (925) 27,899
Purchased asset costs (A) 5,999 911 - 6,910
Other non-cash charges (B) 1,591 375 2,321 4,287
Dividends from equity investments - - 915 915
-------- -------- -------- --------
EBITDA (C) $ 68,620 $ (233) $ (1,801) $ 66,586
======== ======== ======== ========
THIRD QUARTER 1997:
Income (Loss) from Operations $ 17,996 $ (6,385) $ (4,096) $ 7,515
Depreciation and amortization 23,969 3,397 265 27,631
Purchased asset costs (A) 6,724 911 - 7,635
Other non-cash charges (B) 499 75 986 1,560
Dividends from equity investments - - 1,022 1,022
-------- -------- -------- --------
EBITDA (C) $ 49,188 $ (2,002) $ (1,823) $ 45,363
======== ======== ======== ========
FIRST NINE MONTHS 1998:
Income (Loss) from Operations $ 69,139 $(11,813) $(13,198) $ 44,128
Depreciation and amortization 77,344 8,617 (395) 85,566
Purchased asset costs (A) 17,958 2,733 - 20,691
Other non-cash charges (B) 17,373 1,126 5,089 23,588
Dividends from equity investments - - 2,527 2,527
-------- -------- -------- --------
EBITDA (C) $181,814 $ 663 $ (5,977) $176,500
======== ======== ======== ========
FIRST NINE MONTHS 1997:
Income (Loss) from Operations $ 53,082 $(31,923) $(15,137) $ 6,022
Depreciation and amortization 67,850 11,144 912 79,906
Purchased asset costs (A) 18,810 2,733 - 21,543
Other non-cash charges (B) 1,777 3,295 2,836 7,908
Dividends from equity investments - - 2,717 2,717
-------- -------- -------- --------
EBITDA (C) $141,519 $(14,751) $ (8,672) $118,096
======== ======== ======== ========
</TABLE>
Notes:
- ------
(A) 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 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).
II-3
<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.
II-4
