<PAGE>
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 27, 1997
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 3 ,1997 there were 7,105,900 shares and 500,000 shares of the
registrant's Class A and Class B common stock, respectively, outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION*
* As used in this Form 10-Q, unless the context otherwise requires, "RIC"
refers to the corporation formerly named Riverwood International
Corporation, the "Predecessor" or the "Predecessor Company" refers to RIC
and its subsidiaries in respect of periods prior to the Merger (as defined
herein), the "Company" refers to the registrant, Riverwood Holding, Inc., a
Delaware corporation formerly named New River Holding, Inc. ("Holding") and
its subsidiaries, "RIC Holding" refers to RIC Holding, Inc., a Delaware
corporation, successor by merger to RIC and a wholly owned subsidiary of
Holding, and "Riverwood" refers to Riverwood International Corporation, a
Delaware corporation formerly named Riverwood International USA, Inc. and a
wholly owned subsidiary of RIC Holding.
I-1
<PAGE>
RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Company
---------------------------
September 27, December 31,
ASSETS 1997 1996
------------- ------------
<S> <C> <C>
Current Assets
Cash and equivalents.............................................................. $ 12,553 $ 17,357
Receivables, net of allowances.................................................... 140,692 153,864
Inventories....................................................................... 200,271 211,965
Prepaid expenses.................................................................. 9,763 8,113
Deferred tax assets............................................................... 1,864 2,897
------------- ------------
Total Current Assets................................................................ 365,143 394,196
Property, Plant and Equipment, net of accumulated depreciation of $177,948 in 1997
and $85,768 in 1996............................................................... 1,670,630 1,675,217
Investments in Net Assets of Equity Affiliates...................................... 135,313 125,030
Goodwill, net of accumulated amortization of $12,191 in 1997 and $5,900 in 1996..... 296,444 318,543
Other Assets........................................................................ 169,388 158,501
------------- ------------
Total Assets........................................................................ $ 2,636,918 $2,671,487
------------- ------------
------------- ------------
LIABILITIES
Current Liabilities
Short-term debt................................................................... $ 20,160 $ 18,173
Accounts payable.................................................................. 118,283 125,014
Compensation and employee benefits................................................ 40,494 38,017
Income taxes payable.............................................................. 9,863 42,031
Other accrued liabilities......................................................... 130,283 112,205
------------- ------------
Total Current Liabilities........................................................... 319,083 335,440
Long-Term Debt, less current portion................................................ 1,683,564 1,567,259
Deferred Income Taxes............................................................... 21,956 19,722
Other Noncurrent Liabilities........................................................ 81,257 85,467
------------- ------------
Total Liabilities................................................................... 2,105,860 2,007,888
------------- ------------
Contingencies and Commitments (Note 5)
Redeemable Common Stock, at current redemption value................................ 8,880 9,390
------------- ------------
SHAREHOLDERS' EQUITY
Nonredeemable Common Stock.......................................................... 75 75
Capital in Excess of Par Value...................................................... 751,153 751,153
(Accumulated Deficit)............................................................... (216,150) (105,136)
Cumulative Currency Translation Adjustment.......................................... (12,900) 8,117
------------- ------------
Total Shareholders' Equity.......................................................... 522,178 654,209
------------- ------------
Total Liabilities and Shareholders' Equity.......................................... $ 2,636,918 $2,671,487
------------- ------------
------------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars)
(unaudited)
On March 27, 1996, Holding, through its wholly owned subsidiary RIC Holding,
acquired all of the outstanding shares of common stock of RIC. The purchase
method of accounting was used to record assets acquired and liabilities assumed
by Holding. As a result of the Merger, purchase accounting, the effect of the
disposition of substantially all of the U.S. Timberlands/Wood Products business
segment (see Note 8) and certain Other Costs of the Predecessor, the
accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
results of operations and cash flows of these two separate entities.
<TABLE>
<CAPTION>
Company Predecessor
---------------------------------------------------------- -------------
Three Months Three Months Nine Months Six Months Three Months
Ended Ended Ended Ended Ended
September 27, September 28, September 27, September 28, March 27,
1997 1996 1997 1996 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales.................................... $ 284,875 $ 291,645 $ 846,097 $ 585,529 $ 293,649
Cost of Sales................................ 245,611 250,564 739,545 502,959 232,701
Selling, General and Administrative.......... 29,154 31,854 90,417 63,485 30,936
Research, Development and Engineering........ 1,062 2,506 3,590 4,260 2,031
Other Costs.................................. -- -- -- -- 11,114
Other Expenses, net.......................... 1,533 3,677 6,523 5,669 1,217
------------- ------------- ------------- ------------- -------------
Income from Operations....................... 7,515 3,044 6,022 9,156 15,650
Interest Income.............................. 598 373 816 599 329
Interest Expense............................. 43,812 51,385 124,743 101,227 26,392
------------- ------------- ------------- ------------- -------------
(Loss) from Continuing Operations before
Income Taxes and Equity in Net Earnings of
Affiliates................................. (35,699) (47,968) (117,905) (91,472) (10,413)
Income Tax Expense (Benefit)................. 1,612 916 4,341 (1,356) (3,436)
------------- ------------- ------------- ------------- -------------
(Loss) from Continuing Operations before
Equity in Net Earnings of Affiliates....... (37,311) (48,884) (122,246) (90,116) (6,977)
Equity in Net Earnings of Affiliates......... 5,230 5,678 13,695 10,300 4,927
------------- ------------- ------------- ------------- -------------
(Loss) from Continuing Operations............ (32,081) (43,206) (108,551) (79,816) (2,050)
Income from Discontinued Operations, net of
tax of $0.................................. -- 17,452 -- 32,808 --
------------- ------------- ------------- ------------- -------------
(Loss) before Extraordinary Item............. (32,081) (25,754) (108,551) (47,008) (2,050)
Extraordinary Loss on Early Extinguishment of
Debt, net of tax of $0..................... 2,463 -- 2,463 -- --
------------- ------------- ------------- ------------- -------------
Net (Loss)................................... $ (34,544) $ (25,754) $ (111,014) $ (47,008) $ (2,050)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-3
<PAGE>
RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(unaudited)
On March 27, 1996, Holding, through its wholly owned subsidiary RIC Holding,
acquired all of the outstanding shares of common stock of RIC. The purchase
method of accounting was used to record assets acquired and liabilities assumed
by Holding. As a result of the Merger, purchase accounting, the effect of the
disposition of substantially all of the U.S. Timberlands/Wood Products business
segment (see Note 8) and certain Other Costs of the Predecessor, the
accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
results of operations and cash flows of these two separate entities.
<TABLE>
<CAPTION>
Company Predecessor
------------------------------ --------------
Nine Months Six Months Three Months
Ended Ended Ended
September 27, September 28, March 27,
1997 1996 1996
------------- ------------- --------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net (Loss)................................. $ (111,014) $ (47,008) $ (2,050)
Noncash Items Included in Net (Loss):
Depreciation, amortization and cost of
timber harvested....................... 100,219 73,528 24,438
Deferred income taxes.................... 4,206 (3,101) (3,574)
Pension, postemployment and
postretirement expense, net of benefits
paid................................... 3,723 1,113 1,861
Equity in net earnings of affiliates, net
of dividends........................... (10,978) (8,284) (4,927)
Extraordinary loss on early
extinguishment of debt, net............ 2,463 -- --
Amortization of deferred debt issuance
costs.................................. 9,111 8,045 619
Other, net............................... 589 -- (2,350)
(Increase) Decrease in Current Assets, net
of effects from the Merger:
Receivables.............................. 9,984 (16,660) 14,737
Inventories.............................. 9,769 (6,820) (14,659)
Prepaid expenses......................... (2,095) 3,262 8,298
Increase (Decrease) in Current Liabilities,
net of effects from the Merger:
Accounts payable......................... (1,977) (13,518) 18,182
Compensation and employee benefits....... 3,909 (4,084) (10,248)
Income taxes payable..................... 1,226 (4,426) (3,343)
Other accrued liabilities................ 17,292 17,811 12,360
Decrease in Other Noncurrent Liabilities... (7,635) (4,063) (2,569)
-------------- -------------- --------------
Net Cash Provided by (Used in) Operating
Activities............................... 28,792 (4,205) 36,775
-------------- -------------- --------------
Cash Flows from Investing Activities:
Acquisition of RIC, net of cash acquired... -- (1,365,202) --
Payment of Merger Related Costs............ (34,410) -- --
Purchases of Property, Plant and
Equipment................................ (126,893) (74,369) (44,074)
Acquisition of Equipment Previously Leased
Under Operating Leases................... -- (46,742) --
Proceeds from Marketable Securities Held to
Maturity................................. -- 167 439
Proceeds from Sale of Assets............... 7,478 3,214 623
Proceeds from Tax Matters Settlement....... 16,800 -- --
Increase in Other Assets................... (9,304) (12,260) (8,004)
-------------- -------------- --------------
Net Cash Used in Investing Activities...... (146,329) (1,495,192) (51,016)
-------------- -------------- --------------
Cash Flows from Financing Activities:
Issuance of Debt........................... 250,000 1,848,215 12,669
Increase in Debt Issuance Costs............ (7,746) (92,820) --
Net (Decrease) Increase in Notes Payable... (18,718) 146,909 (3,000)
Proceeds from Issuance of Common Stock..... -- 761,143 838
Payments on Debt........................... (108,227) (30,244) (2,833)
Predecessor Debt Paid at Merger............ -- (1,118,461) --
Repurchases of Redeemable Common Stock..... (510) -- --
Dividends.................................. -- -- (2,630)
-------------- -------------- --------------
Net Cash Provided by Financing
Activities............................... 114,799 1,514,742 5,044
-------------- -------------- --------------
Effect of Exchange Rate Changes on Cash.... (2,066) 1,161 (638)
-------------- -------------- --------------
Net (Decrease) Increase in Cash and
Equivalents.............................. (4,804) 16,506 (9,835)
Cash and Equivalents at Beginning of
Period................................... 17,357 1 35,870
-------------- -------------- --------------
Cash and Equivalents at End of Period...... $ 12,553 $ 16,507 $ 26,035
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
I-4
<PAGE>
RIVERWOOD HOLDING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
Holding and its wholly owned subsidiaries RIC Holding and the corporation
formerly named CDRO Acquisition Corporation ("Acquisition Corp.") were
incorporated in 1995 to acquire the stock of RIC.
On March 27, 1996, Holding, through its wholly owned subsidiaries, acquired
all of the outstanding shares of common stock of RIC. On such date, Acquisition
Corp. was merged (the "Merger") into RIC. RIC, as the surviving corporation in
the Merger, became a wholly owned subsidiary of RIC Holding. On March 28, 1996,
RIC transferred substantially all of its properties and assets to Riverwood,
other than the capital stock of Riverwood, and RIC was merged (the "Subsequent
Merger") into RIC Holding. Thereupon, Riverwood was renamed "Riverwood
International Corporation." Upon consummation of the Subsequent Merger, RIC
Holding, as the surviving corporation in the Subsequent Merger, became the
direct parent company of Riverwood.
Holding and its subsidiaries RIC Holding and Acquisition Corp. conducted no
significant business other than in connection with the Merger and related
transactions through March 27, 1996.
The condensed consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented have been made. The Condensed Consolidated Balance
Sheet as of December 31, 1996 was derived from audited financial statements.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1997.
In connection with the Merger, the purchase method of accounting was used to
establish and record a new cost basis for the assets acquired and liabilities
assumed. The difference between the purchase price and the fair market values of
the assets acquired and liabilities assumed was recorded as goodwill.
The condensed consolidated financial statements presented herein for the
three months ended March 27, 1996, represent the Predecessor's results of
operations and cash flows prior to the Merger and, consequently, are stated on
the Predecessor's historical cost basis. The condensed consolidated financial
statements as of September 27, 1997, and for the three and nine months then
ended and for the three and six months ended September 28, 1996, reflect the
adjustments which were made to record the Merger and represent the Company's new
cost basis. On October 18, 1996, the Company sold substantially all of the
assets of the U.S. Timberlands/Wood Products business segment (see Note 8). The
operating results for the U.S. Timberlands/Wood Products business segment were
classified as discontinued operations for periods beginning March 28, 1996 and
ending October 18, 1996 (the date of the sale). The operating results for the
U.S. Timberlands/Wood Products business segment have not been reclassified as
discontinued operations in the Predecessor's Condensed Consolidated Statement of
Operations or Condensed Consolidated Statement of Cash Flows for the three
months ended March 27, 1996. Accordingly, the financial statements of the
Predecessor for periods prior to March 28, 1996 are not comparable in all
material respects with the financial statements subsequent to the Merger date.
The most significant differences relate to amounts recorded for inventory,
property, plant and equipment, intangibles and debt which resulted in increased
cost of sales, amortization, depreciation and interest expense in the three and
nine months ended September 28, 1997, and for the three and six months ended
September 28, 1996, and will continue to do so in future periods.
I-5
<PAGE>
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a summary of the Company's significant accounting policies, please refer
to the Company's report on Form 10-K filed with the Securities and Exchange
Commission for the nine-month period ended December 31, 1996. For a summary of
RIC's significant accounting policies, please refer to the financial statements
incorporated by reference in RIC's annual report filed with the Securities and
Exchange Commission under Form 10-K for the year ended December 31, 1995.
The Company has reclassified the presentation of certain prior period
information to conform with the current presentation format.
The preparation of the condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual amounts could differ
from those estimates.
NOTE 3--INVENTORIES
The major classes of inventories were as follows:
<TABLE>
<CAPTION>
September 27, 1997 December 31, 1996
------------------ -----------------
(In thousands of dollars)
<S> <C> <C>
Finished goods............................................................. $ 86,874 89,412
Work-in-process............................................................ 14,390 12,496
Raw materials.............................................................. 64,827 71,075
Supplies................................................................... 34,180 38,982
-------- --------
Total................................................................ $ 200,271 $ 211,965
-------- --------
-------- --------
</TABLE>
In the fourth quarter of 1996, the Company adopted the Last-in, First-out
("LIFO") method of determining the cost of principally all of its inventories
effective March 28, 1996. Prior to the fourth quarter of 1996, the Company
determined the cost of principally all of its inventories using the First-in,
First-out ("FIFO") method. Accordingly, the three and six months ended September
28, 1996 have been restated to reflect the adoption of the LIFO method effective
March 28, 1996 as follows:
<TABLE>
<CAPTION>
(Loss)
Income
From Net
Net Sales Operations (Loss)
---------- ----------- ----------
(In thousands of dollars)
<S> <C> <C> <C>
Three months ended September 28, 1996 as originally reported................. $ 291,645 $ 3,460 $ (26,167)
Three months ended September 28, 1996 LIFO adjustment........................ -- (416) 413
---------- ----------- ----------
Three months ended September 28, 1996 as restated............................ $ 291,645 $ 3,044 $ (25,754)
---------- ----------- ----------
---------- ----------- ----------
Six months ended September 28,1996 as originally reported.................... $ 585,529 $ (16,831) $ (77,427)
Six months ended September 28, 1996 LIFO adjustment.......................... -- 25,987 30,419
---------- ----------- ----------
Six months ended September 28, 1996 as restated.............................. $ 585,529 $ 9,156 $ (47,008)
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
I-6
<PAGE>
NOTE 4--INVESTMENTS IN NET ASSETS OF EQUITY AFFILIATES
The Company has investments in affiliates that are accounted for using the
equity method of accounting. The most significant investment is the Company's 50
percent investment in Igaras Papeis e Embalagens S.A. ("Igaras").
The following represents the summarized income statement information for
Igaras, of which the Company recognizes 50 percent in its results of operations:
<TABLE>
<CAPTION>
Company Predecessor
---------------------------------------------------------- -------------
Three Months Three Months Nine Months Six Months Three Months
Ended Ended Ended Ended Ended
September 27, September 28, September 27, September 28, March 27,
1997 1996 1997 1996 1996
------------- ------------- ------------- ------------- -------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Net Sales............................ $ 60,579 $ 58,458 $ 175,667 $ 115,206 $ 59,573
Cost of Sales........................ 42,062 38,675 122,427 76,613 39,127
------------- ------------- ------------- ------------- -------------
Gross Profit......................... $ 18,517 $ 19,783 53,240 $ 38,593 $ 20,446
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Income from Operations............... $ 12,589 $ 14,885 35,334 $ 27,935 $ 14,275
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net Income........................... $ 9,765 $ 11,309 $ 25,847 $ 20,066 $ 10,249
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
During the third, second, and first quarters of 1997 and the third and
second quarters of 1996, the Company received dividends from Igaras of $1.0
million, $0.9 million, nil, $0.7 million and $1.0 million, respectively, net of
taxes of $0.2 million, $0.2 million, nil, nil and nil, respectively. During the
first quarter of 1996, the Predecessor did not receive a dividend from Igaras.
The Company received net dividends from its affiliates, other than Igaras, that
are accounted for using the equity method totaling $0.8 million and $0.4 million
in the first quarter of 1997 and second quarter of 1996, respectively.
NOTE 5--CONTINGENCIES AND COMMITMENTS
The Company is committed to compliance with all applicable laws and
regulations throughout the world. Environmental law is, however, dynamic rather
than static. As a result, costs, which are unforeseeable at this time, may be
incurred when new laws are enacted, and when environmental agencies promulgate
or revise rules and regulations.
In late 1993, the U.S. Environmental Protection Agency (the "EPA") proposed
regulations (generally referred to as the "cluster rules") that would mandate
more stringent controls on air and water discharges from the United States pulp
and paper mills. In 1996, the EPA released additional information regarding the
proposed cluster rules. Based on this information, the Company expects that the
cluster rules may be finally promulgated in 1997 and estimates the capital
spending that may be required to comply with the cluster rules could reach $55
million to be spent at its two U.S. paper mills over an eight-year period
beginning in 1997. The Company anticipates that the majority of this spending
for compliance with the cluster rules will occur later in the eight-year period.
The Company had no capital spending during the first nine months of 1997 related
to compliance with the cluster rules.
In late 1995, The Louisiana Department of Environmental Quality ("DEQ")
notified the Company that the Predecessor may be liable for the remediation
of hazardous substances at a wood treatment site in Shreveport, Louisiana,
that the Predecessor or its predecessor previously operated, and at a former
oil refinery site in Caddo Parish, Louisiana that the Company currently owns.
Neither the Company nor the Predecessor ever operated the oil refinery. In
response to the DEQ, the Company has provided additional information
concerning these sites and has commenced its own evaluation of any claims and
remediation liabilities for which it may be responsible. The Company received
a letter from the DEQ dated May 20, 1996, requesting a plan for soil and
groundwater sampling of the wood treatment site. The Company first met with
the DEQ on July 18, 1996, and then submitted a soil sampling plan to the DEQ.
The Company expects approval of this sampling plan in the second half of
1997. On September 6, 1996, the Company received from the DEQ a letter
requesting remediation of the former oil refinery site in Caddo Parish,
Louisiana. The Company met with the DEQ on February 17, 1997 to discuss these
matters. The Company anticipates entering into a cooperative agreement with
the DEQ to perform a phased-in evaluation of soil and groundwater conditions
at the Shreveport site. The Company is in discussions with the DEQ regarding
the participation of other responsible parties in any clean-up of hazardous
substances at both of these sites.
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
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<PAGE>
some instances cannot be estimated until the remediation process is
substantially underway. To address these contingent environmental costs, the
Company has accrued reserves when such costs are probable and can be reasonably
estimated. The Company believes that, based on current information and
regulatory requirements, the accruals established by the Company for
environmental expenditures are adequate. Based on current knowledge, to the
extent that additional costs may be incurred that exceed the accrued reserves,
such amounts are not expected to have a material impact on the results of
operations, cash flows or financial condition of the Company, although no
assurance can be given that material costs will not be incurred in connection
with clean-up activities at these properties, including the Shreveport and Caddo
Parish sites referred to above.
The Company is a party to a number of lawsuits arising out of the conduct of
its business. While there can be no assurance as to their ultimate outcome, the
Company does not believe that these lawsuits will have a material impact on the
results of operations, cash flows or financial condition of the Company.
On December 6, 1995, Forrest Kelly Clay, a former shareholder of the
Predecessor, commenced a purported class action lawsuit in the United States
District Court for the Northern District of Georgia, against the Company and
certain officers of the Company (the "Individual Defendants," and together with
the Company, the "Defendants"). In his complaint, Clay alleges that the
Defendants violated the federal securities laws by disseminating misleading
statements and by omissions concerning the strategic alternatives that the
Predecessor was considering, including its potential sale to a third-party
investor. The complaint also alleged that the Individual Defendants, through
their exercise of stock appreciation rights ("SARs"), violated the federal
securities laws by trading in the Predecessor's securities while in possession
of material, non-public information. The complaint generally seeks damages in an
unspecified amount, as well as other relief. On June 2, 1997, the court granted
Defendants' Motion for Summary Judgment and dismissed the action in its
entirety. The court based its ruling on the fact that (i) none of the statements
attributable to the Company concerning its review of strategic alternatives was
false and (ii) there is no causal relationship between plaintiff's purchase of
Riverwood common stock and the Individual Defendants' exercise of SARs.
Plaintiff filed his Notice of Appeal to the United States Court of Appeals for
the Eleventh Circuit on June 5, 1997. A briefing schedule has been set and all
of the briefs are expected to be before the Court as of mid-December. At that
juncture, the Court will determine whether oral argument is necessary.
NOTE 6--OTHER COSTS
Other Costs incurred by the Predecessor in 1996 included expenses associated
with stock-based compensation plans, expenses related to RIC's review of
strategic alternatives and provision for environmental reserves.
NOTE 7--INCOME TAXES
During the first nine months of 1997, the Company recognized an income tax
expense of $4.3 million on a (Loss) from Continuing Operations before Income
Taxes and Equity in Net Earnings of Affiliates of $117.9 million. During the six
months ended September 28, 1996, the Company recognized an income tax benefit of
$1.4 million on a (Loss) from Continuing Operations before Income Taxes and
Equity in Net Earnings of Affiliates of $91.5 million. The 1997 expense and 1996
benefit differed from the statutory federal income tax rate because of valuation
allowances established on net operating loss carryforward tax assets in the U.S.
and certain international locations where the realization of benefits is
uncertain.
In the first quarter of 1996, the Predecessor recognized an income tax
benefit of $3.4 million on a (Loss) from Continuing Operations before Income
Taxes and Equity in Net Earnings of Affiliates of $10.4 million.
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 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 has paid $33.1
million in estimated stand-alone taxes relating to the election, including $27.5
million in Louisiana income tax. The Company's calculation of its Louisiana tax
was based on state law in effect at the time of the Merger, including a 1993
amendment. In May 1997, the Louisiana Supreme Court declared the 1993 amendment
to be void under the Louisiana Constitution, retroactive to 1993. It is possible
that the voiding of the 1993 amendment could result in the Company being
required to pay significant additional Louisiana income tax relating to the
election (plus potential penalties and statutory interest on the additional
taxes). The Company's Louisiana tax return for the period that includes the
Merger is due November 17, 1997. After consultation with Louisiana tax counsel,
the Company intends to file its Louisiana income tax return for the period ended
March 27, 1996 (which is due November 17, 1997) in reliance on the Louisiana tax
law in effect at the time of the Merger, without the payment of any additional
tax due to the voiding of the 1993 amendment. There can be no assurance,
however, that the Company would ultimately prevail on this issue if Louisiana
were to challenge such filing position. If the Company were not to prevail in
such a challenge, significant additional Louisiana income tax relating to the
election could be payable. Management estimates that the maximum amount of such
additional tax is approximately $47 million (plus potential penalties and
statutory interest on any additional tax). Management believes that the
additional tax ultimately paid (if any) would be substantially less than the
estimated maximum amount, although no
I-8
<PAGE>
assurance can be given in this regard. The Company and its advisors are
continuing to study this situation. Since the law is unclear and the amounts
involved could be significant, it may be several years before this matter is
resolved.
NOTE 8--DISPOSITION OF BUSINESSES AND OPERATING ACTIVITIES
On October 18, 1996, the Company sold substantially all of the assets of the
U.S. Timberlands/Wood Products business segment for approximately $550 million
in cash. In addition, the buyer assumed certain specified preclosing
liabilities. Under the terms of the agreement for such sale, the Company and the
buyer, Plum Creek Timber Company, L.P., entered into a twenty-year supply
agreement with a ten-year renewal option for the purchase by the Company, at
market-based prices, of a majority of the Company's requirements for pine
pulpwood and residual chips at its paper mill in West Monroe, Louisiana (the
"West Monroe Mill"), as well as a portion of the Company's needs for hardwood
pulpwood at the West Monroe Mill. The Company did not realize any gain or loss
on the sale. The operating results for the U.S. Timberlands/Wood Products
business segment were classified as discontinued operations for periods
beginning March 28, 1996 and ending October 18, 1996 (the date of the sale). The
operating results of the U.S. Timberlands/Wood Products business segment have
not been reclassified as discontinued operations in the Predecessor's Condensed
Consolidated Statements of Operations or Condensed Consolidated Statements of
Cash Flows for periods prior to the Merger.
In connection with and following the Merger, the Company decided in 1996 to
exit certain businesses and operating activities, including the sale or closure
of the Company's last dedicated folding carton converting plant in the United
States, located in Kankakee, Illinois, packaging machinery manufacturing plants
in Marietta, Georgia and Koln, Germany, a beverage multiple packaging converting
plant in Bakersfield, California and the trucking transportation operations in
West Monroe, Louisiana, as well as the consolidation and realignment of certain
other operations in the United States, Australia and Europe. The cost of exiting
these businesses and operating activities was approximately $40.9 million which
was accrued during 1996 as a purchase accounting adjustment. These costs related
principally to the severance of approximately 750 employees, relocation and
other plant closure costs. At September 27, 1997, $18.0 million of this total
was unspent and accrued in Other accrued liabilities on the Condensed
Consolidated Balance Sheets. During the first nine months of 1997, $14.6 million
was paid out and charged against the accrual and related primarily to severance
costs.
NOTE 9--PRO FORMA DATA
The following unaudited pro forma financial data has been prepared assuming
that the Merger and related financings were consummated on January 1, 1996 and
excluding the results of operations of the U.S. Timberlands/Wood Products
business segment from the period presented. This pro forma financial data is
presented for informational purposes and is not necessarily indicative of the
operating results that would have occurred had the Merger been consummated on
January 1, 1996, nor is it necessarily indicative of future operations.
Three Months
Ended
March 27, 1996
----------------
(in thousands of
dollars)
Net Sales.............................................. $ 258,706
Net Loss............................................... $ (31,696)
NOTE 10--LONG-TERM DEBT
On July 28, 1997, the Company completed an offering of $250 million
principal amount of Senior Notes due 2007, bearing interest at 10 5/8 percent
(the "1997 Notes"). The net proceeds of this offering were applied to prepay
certain revolving credit borrowings under the Company's senior secured credit
agreement (without any commitment reduction), and to refinance certain Tranche A
term loans and other borrowings thereunder. A registration statement under the
Securities Act of 1933, as amended, registering senior notes of the Company
identical in all material respects to the 1997 Notes (the "New Notes") offered
in exchange for the 1997 Notes became effective October 1, 1997. On November 3,
1997, the Company completed its exchange offer of the 1997 Notes for the New
Notes. During the third quarter of 1997, the Company recorded a non-cash,
extraordinary charge to earnings of approximately $2.5 million, net of tax of
$0, related to the write-off of the applicable portion of deferred debt issuance
costs on the Tranche A term loans.
In connection with this refinancing, the Company's senior secured lenders
have modified certain financial covenants to reflect, among other things, the
Company's recent financial results. After giving effect to such refinancing,
outstanding revolving borrowings under the senior secured agreement at September
27, 1997 were approximately $95 million and scheduled principal payments on the
term loans thereunder are approximately $3 million, $4 million, $4 million, $120
million, $173 million, $184 million, and $156 million for 1998 through 2004,
respectively. The covenant modifications include reductions in permitted capital
expenditures, the elimination of the
I-9
<PAGE>
minimum consolidated net worth requirement, and reductions in minimum EBITDA (as
defined) and interest coverage ratio requirements. The amended covenants also
specify permitted capital expenditures (subject to certain carryover allowances
and other adjustments) of no more than $175 million, $140 million, $140 million,
and $135 million for 1997 through 2000, respectively, and $130 million per year
thereafter. The amended covenants specify, among other changes, the following
amended minimum EBITDA and interest coverage ratio requirements for each four
quarter period ending during the following test periods:
Interest Coverage
Period EBITDA Ratio
- ------------------------------------ -------------- ------------------
December 31, 1996-December 30, 1997 $130 million 0.80 to 1.00
December 31, 1997-December 30, 1998 $140 million 0.85 to 1.00
December 31, 1998-December 30, 1999 $200 million 1.00 to 1.00
December 31, 1999-December 30, 2000 $265 million 1.25 to 1.00
December 31, 2000-December 30, 2001 $325 million 1.50 to 1.00
December 31, 2001-December 30, 2002 $350 million 1.75 to 1.00
December 31, 2002-December 30, 2003 $375 million 2.00 to 1.00
Thereafter $400 million 2.25 to 1.00
NOTE 11--REDEEMABLE COMMON STOCK
During the third quarter of 1997, the Company repurchased 6,000 shares of
Redeemable Common Stock for $85 per share.
I-10
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Shareholders and Directors
of Riverwood Holding, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Riverwood Holding, Inc. and its subsidiaries as of September 27, 1997, and the
related condensed consolidated statements of operations for the three and nine
month periods ended September 27, 1997 and the three and six months ended
September 28, 1996 and condensed consolidated statements of cash flows for the
nine months ended September 27, 1997 and the six months ended September 28,
1996. These financial statements are the responsibility of the Company's
management. We were furnished with the report of other accountants dated
November 3, 1997, on their review of the interim financial information of Igaras
Papeis e Embalagens S.A. (Igaras) for the three and nine months ended September
30, 1997, the Company's investment in which is accounted for by use of the
equity method. The Company's equity of $131,533,000 in Igaras' net assets at
September 27, 1997, and of $4,875,000 and $12,683,000 in Igaras' net income for
the three and nine month periods ended September 27, 1997, respectively, are
included in the accompanying financial statements.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review and the report of other accountants, we are not aware of
any material modifications that should be made to such condensed consolidated
financial statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Riverwood Holding, Inc. and
subsidiaries as of December 31, 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the nine-month period ended
December 31, 1996 and the three-month period ended March 27, 1996 (Predecessor).
The consolidated statements of operations, shareholders' equity and cash flows
for the nine-month period ended December 31, 1996 and the consolidated
statements of shareholders' equity for the three-month period ended March 27,
1996 (Predecessor) are not presented herein. In our report dated March 17, 1997,
we expressed an unqualified opinion on those consolidated financial statements,
based on our audit and the report of other auditors. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1996 and condensed consolidated statements of operations and
cash flows for the three-month period ended March 27, 1996, are fairly stated,
in all material respects, in relation to the consolidated financial statements
from which they have been derived.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
November 3, 1997
I-11
<PAGE>
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
As a result of the Merger, purchase accounting, the effect of the
disposition of substantially all of the assets of the U.S. Timberlands/Wood
Products business segment and certain Other Costs of the Predecessor, the
results of operations of the Company for periods subsequent to the Merger are
not comparable in all material respects to the results of operations of the
Predecessor for periods prior to the Merger.
The Merger and Purchased Asset Costs
On March 27, 1996, Holding, through its wholly owned subsidiaries, acquired
all of the outstanding shares of common stock of RIC. On such date, Acquisition
Corp., Holding's acquisition subsidiary, was merged into RIC in the Merger. RIC,
as the surviving corporation of the Merger, became a wholly owned subsidiary of
RIC Holding. On March 28, 1996, RIC transferred substantially all of its
properties and assets to Riverwood, other than the capital stock of Riverwood,
and RIC was merged in the Subsequent Merger into RIC Holding. Upon consummation
of the Subsequent Merger, RIC Holding, as the surviving corporation in the
Subsequent Merger, became the direct parent company of Riverwood.
The Merger was accounted for as a purchase in accordance with APB Opinion
No. 16, "Business Combinations" ("APB 16"). Purchase accounting results in
increased cost of sales, amortization and depreciation. Additionally, the
post-Merger capital structure has resulted and will continue to result in higher
reported interest expense. The condensed consolidated financial statements for
the three months ended March 27, 1996 have been prepared on the historical cost
basis using accounting principles that had been adopted by the Predecessor. As a
result of the Merger, purchase accounting and the effect of the disposition of
substantially all of the U.S. Timberlands/Wood Products business segment,
operating results subsequent to the Merger are not comparable in all material
respects to the operating results prior to the Merger.
Certain expenses and costs are excluded from the Company's Net (Loss) in
determining EBITDA (as defined below), including amortization, depreciation or
expenses associated with the write-up of inventory, fixed assets and intangible
assets in accordance with APB 16 and APB Opinion No. 17, "Intangible Assets",
collectively referred to as the "Purchased Asset Costs."
During the three months ended September 27, 1997, the Company's Income from
Operations included Purchased Asset Costs as follows:
<TABLE>
<CAPTION>
Coated Board Containerboard Total
------------- ----------------- ---------
(In thousands of dollars)
<S> <C> <C> <C>
Cost of sales (excluding depreciation expense)........................... $ 717 $ -- $ 717
Depreciation expense..................................................... 4,827 911 5,738
Amortization of intangible assets........................................ 1,180 -- 1,180
------ ----- ---------
Net Impact on Income from Operations..................................... $ 6,724 $ 911 $ 7,635
------ ----- ---------
------ ----- ---------
</TABLE>
During the three months ended September 28, 1996, the Company's Income from
Operations included Purchased Asset Costs as follows:
<TABLE>
<CAPTION>
Coated Board Containerboard Corporate Total
------------- ----------------- ------------- ---------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Cost of sales (excluding depreciation expense)............... $ 197 $ -- $ -- $ 197
Depreciation expense......................................... 5,731 743 43 6,517
Amortization of intangible assets............................ 1,093 (43) 44 1,094
--------- --------- --------- ---------
Net Impact on Income from Operations......................... $ 7,021 $ 700 $ 87 $ 7,808
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
I-12
<PAGE>
During the nine months ended September 27, 1997, the Company's Income from
Operations included Purchased Asset Costs as follows:
<TABLE>
<CAPTION>
Coated board Containerboard Total
------------- --------------- ---------
(In thousands of dollars)
<S> <C> <C> <C>
Cost of sales (excluding depreciation expense).......................... $ 1,229 $ -- $ 1,229
Depreciation expense.................................................... 14,483 2,733 17,216
Amortization of intangible assets....................................... 3,098 -- 3,098
----------- --------- ---------
Net Impact on Income from Operations.................................... $ 18,810 $ 2,733 $ 21,543
----------- --------- ---------
----------- --------- ---------
</TABLE>
During the six months ended September 28, 1996, the Company's Income from
Operations included Purchased Asset Costs as follows:
<TABLE>
<CAPTION>
Coated Board Containerboard Corporate Total
------------- --------------- ------------- ---------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Cost of sales (excluding depreciation expense).............. $ 396 $ -- $ -- $ 396
Depreciation expense........................................ 15,214 2,010 (21) 17,203
Amortization of intangible assets........................... 1,288 (93) 67 1,262
----------- --------- --------- ---------
Net Impact on Income from Operations........................ $ 16,898 $ 1,917 $ 46 $ 18,861
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
Sale of U.S. Timberlands/Wood Products
On October 18, 1996, the Company sold substantially all of the assets of the
U.S. Timberlands/Wood Products business segment for approximately $550 million
in cash. In addition, the buyer assumed certain specified preclosing
liabilities. Under the terms of the agreement for such sale, the Company and the
buyer, Plum Creek Timber Company, L.P., entered into a 20-year supply agreement
with a 10-year renewal option for the purchase by the Company, at market-based
prices, of a majority of the West Monroe Mill's requirements for pine pulpwood
and residual chips, as well as a portion of the Company's needs for hardwood
pulpwood at the West Monroe Mill. The Company did not realize any gain or loss
on the sale. The operating results for the U.S. Timberlands/Wood Products
business segment were classified as discontinued operations for periods
beginning March 28, 1996 and ending October 18, 1996 (the date of the sale).
Discontinued operations have not been segregated in the statements of cash flows
nor have they been reclassified as discontinued operations in the Predecessor's
statements of operations and balance sheets.
Other Costs of Predecessor
Prior to March 28, 1996, the Predecessor Company incurred expenses
associated with stock-based compensation plans, expenses related to RIC's review
of strategic alternatives and provision for environmental reserves. These
expenses were classified as Other Costs on the Predecessor's Condensed
Consolidated Statements of Operations. Stock-based compensation expense was
allocated to each of the business segments based upon the responsibility of the
individuals holding or exercising the stock incentive benefits. During the three
months ended March 27, 1996, $1.2 million, $0.1 million, $0.2 million and $0.8
million of stock-based compensation expenses were allocated to the Coated Board,
Containerboard and U.S. Timberlands/Wood Products business segments and
Corporate and Eliminations, respectively. Expenses related to RIC's review of
strategic alternatives and environmental reserves were included in Corporate and
Eliminations for business segment reporting purposes.
I-13
<PAGE>
GENERAL
The Company reports its results in two business segments: Coated Board and
Containerboard. The operating results of the U.S. Timberlands/Wood Products
business segment have been classified as discontinued operations for the period
beginning March 28, 1996 through the date of the sale. The results of the
operations of the U.S. Timberlands/Wood Products business segment have not been
classified as discontinued operations in the Predecessor's Consolidated
Statements of Operations for periods prior to the Merger. The Coated Board
business segment includes the production and sale of coated unbleached kraft
paperboard ("CUK Board") for packaging cartons from the paper mill in Macon,
Georgia (the "Macon Mill") and at the West Monroe Mill, and white lined chip
board ("WLC") at its paper mill in Norrkoping, Sweden (the "Swedish Mill"),
converting operations at facilities in the United States, Australia and Europe;
and the design, manufacture and installation of packaging machinery related to
the assembly of beverage cartons. The Containerboard business segment includes
the production and sale of linerboard, corrugating medium and kraft paper from
paperboard mills in the United States. The discontinued U.S. Timberlands/Wood
Products business segment included timberlands and operations engaged in the
supply of pulpwood to the West Monroe Mill from the Company's former U.S.
timberlands, as well as the manufacture and sale of lumber and plywood.
The table below sets forth Net Sales, Income (Loss) from Operations and
EBITDA. EBITDA is defined as consolidated net income (exclusive of non-cash
charges resulting from purchase accounting during the periods subsequent to the
Merger) before consolidated interest expense, consolidated income taxes,
consolidated depreciation and amortization, cost of timber harvested and other
non-cash charges deducted in determining consolidated net income and
extraordinary items and the cumulative effect of accounting changes and earnings
of, but including dividends from, non-controlled affiliates. EBITDA excludes the
EBITDA of Igaras but includes dividends actually received from Igaras, excludes
Other Costs of the Predecessor and excludes Purchased Asset Costs resulting from
purchase accounting during periods subsequent to the Merger. The Company
believes that EBITDA provides useful information regarding the Company's debt
service ability, but should not be considered in isolation or as a substitute
for the Statements of Operations or cash flow data.
<TABLE>
<CAPTION>
Company Predecessor
---------------------------------------------------------- --------------
Three Months Three Months Nine Months Six Months Three Months
Ended Ended Ended Ended Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28, March 27,
1997 1996 1997 1996 1996
------------- ------------- ------------- ------------- --------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Net Sales (Segment Data):
Coated Board....................... $ 262,986 $ 252,293 $ 775,114 $ 518,524 $ 234,608
Containerboard..................... 21,889 39,352 70,983 67,005 25,496
U.S. Timberlands/Wood Products..... -- -- -- -- 37,336
Intersegment Eliminations.......... -- -- -- -- (3,791)
------------- ------------- ------------- ------------- --------------
Net Sales............................ $ 284,875 $ 291,645 $ 846,097 $ 585,529 $ 293,649
------------- ------------- ------------- ------------- --------------
------------- ------------- ------------- ------------- --------------
Income (Loss) from Operations
(Segment Data):
Coated Board....................... $ 17,996 $ 20,563 $ 53,082 $ 40,331 $ 24,638
Containerboard..................... (6,385) (12,207) (31,923) (19,467) (5,955)
U.S. Timberlands/Wood Products..... -- -- -- -- 13,868
Corporate and Eliminations......... (4,096) (5,312) (15,137) (11,708) (16,901)
------------- ------------- ------------- ------------- --------------
Income from Operations............... $ 7,515 $ 3,044 $ 6,022 $ 9,156 $ 15,650
------------- ------------- ------------- ------------- --------------
------------- ------------- ------------- ------------- --------------
EBITDA (Segment Data):
Coated Board....................... 49,188 46,574 $ 141,519 99,020 $ 47,174
Containerboard..................... (2,002) (7,398) (14,751) (9,662) (1,242)
U.S. Timberlands/Wood Products..... -- 22,145 -- 41,079 16,766
Corporate and Eliminations......... (1,823) (4,018) (8,672) (8,295) (6,565)
------------- ------------- ------------- ------------- --------------
EBITDA............................... $ 45,363 $ 57,303 $ 118,096 $ 122,142 $ 56,133
------------- ------------- ------------- ------------- --------------
------------- ------------- ------------- ------------- --------------
</TABLE>
I-14
<PAGE>
In the fourth quarter of 1996, the Company adopted the LIFO method of
determining the cost of principally all its inventories effective March 28,
1996. Prior to the fourth quarter of 1996, the Company determined the cost of
all its inventories using the FIFO method. Accordingly, 1996 operating results
have been restated to reflect the adoption of the LIFO method effective March
28, 1996. For a discussion of the impact of this accounting change on the
Condensed Consolidated Financial Statements, see Note 3 to the Condensed
Consolidated Financial Statements.
Business Trends and Initiatives
The Company's cash flow from operations and EBITDA are influenced by sales
volume and selling prices for its products and raw material costs, and are
affected by a number of significant business, economic and competitive factors.
Many of these factors are not within the Company's control. Historically, in the
Coated Board business segment, the Company has experienced stable pricing for
its integrated beverage carton products, and moderate cyclical pricing for its
folding cartonboard, which is principally sold in the open market. The Company's
folding cartonboard sales are affected by competition from competitors' CUK
Board and other substrates - solid bleached sulfate (SBS), recycled clay coated
news (CCN) and, internationally, WLC--as well as by general market conditions.
In the Containerboard business segment, conditions in the cyclical worldwide
commodity paperboard markets have a substantial impact on the Company's
Containerboard sales. During the third quarter of 1997, the Company realized
improvement in its containerboard selling prices consistent with industry
trends. During the third quarter of 1997, the Company announced price increases
of $40 per ton each for beverage carrierboard and folding cartonboard and $50
per ton each for corrugating medium, linerboard and kraft paper, in each case
for shipments beginning October 1, 1997. The Company expects to begin realizing
a portion of these price increases beginning in 1998, though no assurance can be
given that such price increases will be accepted by the customers.
The Company is pursuing a number of long-term initiatives designed to
improve productivity and profitability while continuing to implement its Coated
Board business strategy. In June 1997, the Company completed the upgrade of the
second Macon Mill paperboard machine to begin CUK Board production. During the
third quarter of 1997, the Company produced approximately 26,000 tons of CUK
Board on the second Macon Mill paperboard machine and, in addition to the
approximately 90,000 tons of linerboard produced on this paper machine during
the first half of 1997, expects to produce approximately 80,000 tons of both
linerboard and CUK Board on this paper machine during the last half of 1997,
with no downtime expected. The Company expects that the second Macon Mill
paperboard machine will be able to produce approximately 275,000 tons of CUK
Board in 18 to 24 months following the June 1997 start-up. In addition, the
Company has taken actions to increase open market folding cartonboard sales
volume above 1996 levels, has undertaken a profit center reorganization of its
operations, implemented a number of cost savings measures and effected several
management changes and, as part of its ongoing reevaluation of current
operations and assets, has reduced planned capital expenditures and begun a
Company-wide inventory reduction initiative. Inventory increased by
approximately $14 million in the third quarter of 1997 as compared to the second
quarter of 1997 principally due to seasonal increases in beverage carrierboard
and to logistics issues related to export shipments that have since been
corrected. The Company continues to evaluate its current operations and assets
with a view to rationalizing its operations and improving profitability, in
particular with respect to its international converting assets and strategy.
The Company continues to shift its mix of packaging machinery placements
from the U.S. to international locations. Packaging machinery placements for the
first nine months of 1997 were approximately equal to the number of packaging
machines placed during the year ended December 31, 1996.
Outlook
The Company expects that its 1997 full year EBITDA will exceed its 1996
EBITDA (excluding the results of the former U.S. Timberlands/Wood Products
business segment), although no assurance can be given in this regard. The
achievement of this expectation is dependent upon (among other things) a
number of profit improvement initiatives, including improving U.S. mill
throughput as the successful start-up of the second Macon Mill paper
machine continues, significantly increasing open market folding cartonboard
sales volumes above 1996 levels, selling price improvements for
containerboard products, improvements in international converting operations
and continued cost savings from actions taken to date. The Company
anticipates that the cost savings from actions taken to date will reduce
expenditures by approximately $30 million on an annualized basis, over half
of which is expected to be realized during 1997. Management expects to
identify an additional $10 million of annualized cost savings to be acted
upon in 1998 (see "--Business Trends and Initiatives"). 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.
I-15
<PAGE>
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations on a
pro forma basis. The discussion is based upon (a) the three-month period ended
September 27, 1997, exclusive of the net effect of Purchased Asset Costs made in
that period, in comparison to the three-month period ended September 28, 1996,
also exclusive of the net effect of Purchased Asset Costs made in that period
and (b) the nine-month period ended September 27, 1997, exclusive of the net
effect of Purchased Asset Costs made in that period, in comparison to the
six-month period ended September 28, 1996, exclusive of the net effect of
Purchased Asset Costs made in that period, plus the three-month period ended
March 27, 1996, exclusive of Other Costs and the U.S. Timberlands/Wood Products
business segment results of operations (the "first nine months of 1996" or "nine
months ended September 28, 1996"), as follows:
<TABLE>
<CAPTION>
Pro Forma Three Months Ended Pro Forma Nine Months Ended
------------------------------------- -------------------------------------
% Increase % Increase
(Decrease) (Decrease)
Sept. 27, From Prior Sept. 28, Sept. 27, From Prior Sept. 28,
1997 Period 1996 1997 Period 1996
---------- ------------- ---------- ---------- ------------- ----------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Net Sales (Segment Data):
Coated Board................................... $ 262,986 4.2 $ 252,293 $ 775,114 2.9 $ 753,133
Containerboard................................. 21,889 (44.4) 39,352 70,983 (23.3) 92,501
---------- ----- ---------- ---------- ----- ----------
Net Sales........................................ 284,875 (2.3) 291,645 846,097 0.1 845,634
Cost of Sales.................................... 238,155 (3.4) 246,578 721,100 2.8 701,575
---------- ----- ---------- ---------- ----- ----------
Gross Profit..................................... 46,720 3.7 45,067 124,997 (13.2) 144,059
Selling, General and Administrative.............. 29,153 (8.7) 31,928 90,417 (4.0) 94,159
Research, Development and Engineering............ 1,061 (57.7) 2,506 3,590 (42.7) 6,269
Other Expense, net............................... 354 (37.7) 568 3,425 (5.5) 3,624
---------- ----- ---------- ---------- ----- ----------
Income from Operations........................... $ 16,152 60.5 $ 10,065 $ 27,565 (31.1) $ 40,007
---------- ----- ---------- ---------- ----- ----------
---------- ----- ---------- ---------- ----- ----------
Income (Loss) from Operations (Segment Data):
Coated Board................................... $ 25,721 (8.2) $ 28,027 $ 71,892 (14.1) $ 83,651
Containerboard................................. (5,474) 57.0 (12,739) (29,190) (18.6) (24,616)
Corporate...................................... (4,095) 21.6 (5,223) (15,137) 20.4 (19,028)
---------- ----- ---------- ---------- ----- ----------
Income from Operations........................... $ 16,152 60.5 $ 10,065 $ 27,565 (31.1) $ 40,007
---------- ----- ---------- ---------- ----- ----------
---------- ----- ---------- ---------- ----- ----------
</TABLE>
THIRD QUARTER 1997 COMPARED WITH THIRD QUARTER 1996
Paperboard Shipments
The following represents shipments of coated board and containerboard to
outside customers. Shipments of coated board represent sales to customers of
beverage carrierboard, folding cartonboard, and WLC (other than from the
Swedish Mill). Shipments from the Swedish Mill represent sales to customers
of WLC produced at this mill. Shipments of containerboard represent sales to
customers of linerboard, corrugating medium, and kraft paper. Total shipments
for the third quarters of 1997 and 1996 were as follows:
Three Months Ended
------------------
Sept. 27, Sept. 28,
1997 1996
--------- ---------
(In thousands of tons)
Coated Board.................................... 237.4 214.2
Swedish Mill.................................... 32.6 30.0
Containerboard.................................. 87.7 153.1
------- -------
357.7 397.3
------- -------
------- -------
I-16
<PAGE>
Net Sales
Principally as a result of the factors described below, the Company's Net
Sales in the third quarter of 1997 decreased by $6.8 million, or 2.3 percent,
compared with the third quarter of 1996. Net Sales in the Coated Board
business segment increased $10.7 million, or 4.2 percent, in the third
quarter of 1997 to $263.0 million from $252.3 million in the third quarter of
1996, due primarily to increased sales volume in international and U.S.
beverage markets and U.S. folding cartonboard markets combined with improved
selling prices and product mix in U.S. beverage markets. These improvements
were offset somewhat by lower selling prices in U.S. folding cartonboard
markets and lower selling prices and sales volume in international folding
cartonboard markets. Net Sales in the Containerboard business segment
decreased $17.5 million, or 44.4 percent, to $21.9 million in the third
quarter of 1997 from $39.4 million in the third quarter of 1996, due
principally to a significant decrease in containerboard volumes as a result
of the significant decline in containerboard markets worldwide that began in
the latter part of 1995 and continued into the second quarter of 1997.
Although below 1996 levels, the Company's containerboard selling prices for
the third quarter of 1997 have improved over the second quarter of 1997.
Gross Profit
Primarily as a result of the factors discussed below, the Company's Gross
Profit for the third quarter of 1997 increased $1.6 million, or 3.7 percent,
to $46.7 million from $45.1 million in the third quarter of 1996. The
Company's gross profit margin increased to 16.4 percent for the third quarter
of 1997 from 15.5 percent in the third quarter of 1996. In the Containerboard
business segment, Gross Profit increased $6.0 million to a loss of $4.4
million in the third quarter of 1997 as compared to a loss of $10.4 million
in the third quarter of 1996, due principally to significantly lower sales
volume of containerboard (which was being sold at below related production
costs) and lower production costs, offset somewhat by lower selling prices.
Gross profit in the Coated Board business segment decreased by $4.2 million,
or 7.5 percent, to $51.7 million in the third quarter of 1997 as compared to
$55.9 million in the third quarter of 1996, while that segment's gross profit
margin decreased to 19.6 percent in the third quarter of 1997 from 22.2
percent in the third quarter of 1996. These decreases resulted principally
from lower worldwide folding cartonboard selling prices.
Selling, General and Administrative
Selling, General and Administrative expenses decreased $2.8 million, or 8.7
percent, to $29.1 million in the third quarter of 1997 as compared to $31.9
million in the third quarter of 1996. As a percentage of Net Sales, Selling,
General and Administrative expenses decreased to 10.2 percent in the third
quarter of 1997 from 10.9 percent in the same period of 1996. These decreases
were due principally to Company cost reduction initiatives which began in early
1997, offset somewhat by higher costs relating to the implementation of a new
computerized information system (see "--Liquidity and Capital Resources--Upgrade
of Information Systems and Year 2000 Compliance").
Research, Development and Engineering
Research, Development and Engineering expenses decreased by $1.4 million to
$1.1 million, due principally to reduced research and development activities on
packaging machinery resulting from the closure of the packaging machinery
facilities in Marietta, Georgia and Koln, Germany in April and June 1997,
respectively.
Other Expenses, net
Other Expenses, net, decreased by approximately $0.2 million to $0.4
million.
Income from Operations
Primarily as a result of the factors described above, the Company's Income
from Operations in the third quarter of 1997 increased by $6.1 million, or 60.5
percent, to $16.2 million from $10.1 million in the third quarter of 1996, while
operating margin as a percent of Net Sales increased to 5.7 percent from 3.5
percent. (Loss) from Operations in the Containerboard business segment decreased
$7.2 million to a loss of $5.5 million in the third quarter of 1997 from a
(Loss) from Operations of $12.7 million in the third quarter of 1996, primarily
as a result of the factors described above. Income from Operations in the Coated
Board business segment decreased $2.3 million, or 8.2 percent, to $25.7 million
in the third quarter of 1997 from $28.0 million in the third quarter of 1996,
while operating margin as a percent of Net Sales decreased to 9.8 percent from
11.1 percent for the same periods, primarily as a result of the factors
described above.
I-17
<PAGE>
FIRST NINE MONTHS OF 1997 COMPARED WITH FIRST NINE MONTHS OF 1996
Paperboard Shipments
The following represents shipments of coated board and containerboard to
outside customers. Shipments of coated board represent sales to customers of
beverage carrierboard, folding cartonboard, and WLC (other than from the
Swedish Mill). Shipments from the Swedish Mill represent sales to customers
of WLC produced at this mill. Shipments of containerboard represent sales to
customers of linerboard, corrugating medium, and kraft paper. Total shipments
for the first nine months of 1997 and 1996 were as follows:
Nine Months Ended
-----------------
Sept. 27, Sept. 28,
1997 1996
--------- ---------
(In thousands of tons)
Coated Board........................................ 700.3 635.0
Swedish Mill........................................ 101.5 90.6
Containerboard...................................... 293.0 330.4
------- -------
1,094.8 1,056.0
------- -------
------- -------
Net Sales
Principally as a result of the factors described below, the Company's Net
Sales in the first nine months of 1997 increased by $0.5 million, or 0.1
percent, compared with the first nine months of 1996. Net Sales in the Coated
Board business segment increased $22.0 million, or 2.9 percent, in the first
nine months of 1997 to $775.1 million from $753.1 million in the first nine
months of 1996, due primarily to increased sales volume in international and
U.S. beverage markets and U.S. folding cartonboard markets combined with
improved selling prices, lower distribution costs and product mix in U.S.
beverage markets. These improvements were offset somewhat by lower selling
prices in U.S. folding cartonboard markets and lower selling prices and sales
volume in international folding cartonboard markets. Net Sales in the
Containerboard business segment decreased $21.5 million, or 23.3 percent, to
$71.0 million in the first nine months of 1997 from $92.5 million in the
first nine months of 1996, due primarily to a decrease in containerboard
selling prices and sales volume as a result of the significant decline in
containerboard markets worldwide that began in the latter part of 1995 and
has continued into the second quarter of 1997. Although below 1996 levels,
the Company's containerboard selling prices for the third quarter of 1997
have improved over the second quarter of 1997.
Gross Profit
Principally as a result of the factors discussed below, the Company's
Gross Profit for the first nine months of 1997 decreased $19.1 million, or
13.2 percent, to $125.0 million from $144.1 million in the first nine months
of 1996. The Company's gross profit margin decreased to 14.8 percent for the
first nine months of 1997 from 17.0 percent in the first nine months of 1996.
In the Containerboard business segment, Gross Profit decreased $6.1 million
to a loss of $25.2 million in the first nine months of 1997 as compared to a
loss of $19.1 million in the first nine months of 1996. This decrease was due
principally to lower selling prices of containerboard. Gross profit in the
Coated Board business segment decreased by $12.5 million, or 7.6 percent, to
$151.9 million in the first nine months of 1997 as compared to $164.4 million
in the first nine months of 1996, while that segment's gross profit margin
decreased to 19.6 percent in the first nine months of 1997 from 21.8 percent
in the first nine months of 1996. This decrease in the gross profit resulted
principally from lower selling prices in worldwide folding cartonboard
markets, offset somewhat by lower production costs at the Company's U.S.
integrated beverage business.
Selling, General and Administrative
Selling, General and Administrative expenses decreased $3.8 million, or 4.0
percent, to $90.4 million in the first nine months of 1997 as compared to $94.2
million in the first nine months of 1996 and as a percentage of Net Sales,
Selling, General and Administrative expenses decreased to 10.7 percent in the
first nine months of 1997 from 11.1 percent in the same period of 1996. This
decrease was due principally to Company cost reduction initiatives which began
in early 1997, offset somewhat by higher costs relating to the implementation of
a new computerized information system (see "--Liquidity and Capital
Resources--Upgrade of Information Systems and Year 2000 Compliance").
Research, Development and Engineering
Research, Development and Engineering expenses decreased by $2.7 million to
$3.6 million due principally to reduced research and development
I-18
<PAGE>
activities on packaging machinery resulting from the closure of the packaging
machinery facilities in Marietta, Georgia and Koln, Germany in April and June
1997, respectively.
Other Expenses, net
Other Expenses, net, decreased by approximately $0.2 million to $3.4
million.
Income from Operations
Primarily as a result of the factors described above, the Company's Income
from Operations in the first nine months of 1997 decreased by $12.4 million, or
31.1 percent, to $27.6 million from $40.0 million in the first nine months of
1996, while the operating margin as a percent of Net Sales decreased to 3.3
percent from 4.7 percent. (Loss) from Operations in the Containerboard business
segment increased $4.6 million to a loss of $29.2 million in the first nine
months of 1997 from a (Loss) from Operations of $24.6 million in the first nine
months of 1996, primarily as a result of the factors described above. Income
from Operations in the Coated Board business segment decreased $11.8 million, or
14.1 percent, to $71.9 million in the first nine months of 1997 from $83.7
million in the first nine months of 1996, while the operating margin as a
percent of Net Sales decreased to 9.3 percent from 11.1 percent for the same
periods, primarily as a result of the factors described above.
U.S. DOLLAR CURRENCY EXCHANGE RATES
Fluctuations in U.S. dollar currency exchange rates did not have a
significant impact on Net Sales, Gross Profit, operating expenses or Income from
Operations of the Company during the third quarter or first nine months of 1997
as compared to the same periods of 1996.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES AND EQUITY IN
NET EARNINGS OF AFFILIATES
Interest Income
Interest income increased $0.2 million to $0.6 million in the third quarter
of 1997, compared to the third quarter of 1996, related mainly to monies
received in the third quarter of 1997 relating to a tax settlement (see
"--Liquidity and Capital Resources--Tax Matters Relating to the Merger").
Interest income decreased $0.1 million to $0.8 million in the first nine months
of 1997 compared to the first nine months of 1996, primarily as a result of
lower average balances of cash and equivalents in 1997 as compared to 1996.
Interest Expense
Interest Expense decreased $7.6 million to $43.8 million in the third
quarter of 1997 from $51.4 million in the third quarter of 1996. The decrease
related principally to a reduction of debt level resulting from the repayment of
term loans and a portion of the revolving credit facility from the net proceeds
of the sale of substantially all of the assets of the U.S. Timberlands/Wood
Products business segment in October 1996 (see Note 8 in Notes to Condensed
Consolidated Financial Statements). Interest expense decreased $2.9 million to
$124.7 million in the first nine months of 1997 from $127.6 million in the same
period of 1996, primarily as a result of the reduction in debt related to the
October 1996 repayment of term loans from a portion of the proceeds of the sale
of substantially all of the assets of the U.S. Timberlands/Wood Products
business segment, offset to some extent by the incremental indebtedness incurred
in connection with the Merger in March 1996.
Income Tax Expense (Benefit)
During the third quarter and first nine months of 1997, the Company
recognized an income tax expense of $1.6 million and $4.3 million, respectively,
on a (Loss) from Continuing Operations before Income Taxes and Equity in Net
Earnings of Affiliates of $35.7 million and $117.9 million, respectively. During
the three and six months ended September 28, 1996, the Company recognized an
income tax expense (benefit) of $0.9 million and $(1.4) million on a (Loss) from
Continuing Operations before Income Taxes and Equity in Net Earnings of
Affiliates of $48.0 million and $91.5 million, respectively. These income tax
amounts differed from the statutory federal income tax rate because of valuation
allowances established on net operating loss carryforward tax assets in the U.S.
and certain international locations where the realization of benefits is
uncertain. Cash paid for income taxes during the first nine months of 1997 was
$35.9 million relating principally to the Merger (see "--Liquidity and Capital
Resources--Tax Matters Relating to the Merger").
In the first quarter of 1996, the Predecessor recognized an income tax
benefit of $3.4 million on a (Loss) from Continuing Operations before Income
Taxes and Equity in Net Earnings of Affiliates of $10.4 million.
I-19
<PAGE>
Equity in Net Earnings of Affiliates
Equity in Net Earnings of Affiliates is comprised primarily of the Company's
equity in net earnings of Igaras, an integrated containerboard producer located
in Brazil, which produces linerboard, corrugating medium, corrugated boxes and
beverage cartons, and is accounted for using the equity method. Equity in Net
Earnings of Affiliates decreased $0.5 million to $5.2 million in the third
quarter of 1997 from $5.7 million in the third quarter of 1996, resulting
primarily from lower interest income at Igaras during the quarter. Equity in Net
Earnings of Affiliates decreased $1.5 million to $13.7 million in the first nine
months of 1997 from $15.2 million in the first nine months of 1996, primarily as
a result of the decline in containerboard markets worldwide and lower interest
income at Igaras, offset somewhat by a decrease in Igaras' income taxes.
During the third, second and first quarters of 1997 and the third and second
quarters of 1996, the Company received dividends from Igaras of $1.0 million,
$0.9 million, nil, $0.7 million and $1.0 million, respectively, net of taxes of
$0.2 million, $0.2 million, nil, nil and nil, respectively. During the first
quarter of 1996, the Predecessor did not receive a dividend from Igaras. The
Company received net dividends from its affiliates, other than Igaras, that are
accounted for using the equity method of accounting totaling $0.8 million and
$0.4 million in the first quarter of 1997 and second quarter of 1996,
respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company broadly defines liquidity as its ability to generate sufficient
cash flow from operating activities to meet its obligations and commitments. In
addition, liquidity includes the ability to obtain appropriate debt and equity
financing and to convert into cash those assets that are no longer required to
meet existing strategic and financial objectives. Therefore, liquidity cannot be
considered separately from capital resources that consist of current or
potentially available funds for use in achieving long-range business objectives
and meeting debt service commitments.
Cash Flows
Cash and equivalents decreased by approximately $4.8 million in the first
nine months of 1997 primarily as a result of $146.3 million of net cash used in
investing activities, offset in part by $114.8 million and $28.8 million of net
cash provided by financing and operating activities, respectively. Cash used in
investing activities related principally to the purchases of property, plant and
equipment (see "--Liquidity and Capital Resources--Capital Expenditures"). Cash
provided by financing activities resulted primarily from net debt borrowings
(see "--Liquidity and Capital Resources"). Cash provided by operating activities
resulted principally from lower seasonal working capital requirements and as a
result of the Company's ongoing program to reduce inventories (see "--Business
Trends and Initiatives"), and a reduction in receivables of approximately $10.0
million. Depreciation and amortization during the first nine months of 1997
totaled approximately $100.2 million, and is expected to be approximately $135
million to $140 million for fiscal 1997.
The Company's Coated Board business segment experiences seasonality
principally due to the seasonality of the worldwide multiple packaging beverage
segment. Historically, the Company's Coated Board business segment reports its
strongest sales in the second and third quarters of the fiscal year driven by
the seasonality of the Company's integrated beverage business.
Liquidity and Capital Resources
The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the Merger and from the
funding of its capital expenditures. In connection with the Merger, the Company
entered into a credit agreement (as amended, the "Senior Secured Credit
Agreement") that currently provides for senior secured credit facilities (the
"Senior Secured Credit Facilities") consisting of a term loan facility (the
"Term Loan Facility"), and a $400.0 million revolving credit facility (the
"Revolving Facility"). In addition, Riverwood International Machinery, Inc., a
wholly owned subsidiary of Riverwood, entered into a credit agreement (as
amended, the "Machinery Credit Agreement," and together with the Senior Secured
Credit Agreement, the "Credit Agreements") providing for a $140.0 million
secured revolving credit facility (the "Machinery Facility," and together with
the Senior Secured Credit Facilities, the "Facilities") for the purpose of
financing or refinancing packaging machinery. In connection with the Merger, the
Company also completed an offering of $250.0 million aggregate principal amount
of 10 1/4% Senior Notes due 2006 (the "1996 Senior Notes") and $400.0 million
aggregate principal amount of 10 7/8% Senior Subordinated Notes due 2008 (the
"Senior Subordinated Notes" and together with the 1996 Senior Notes, the "1996
Notes"). On July 28, 1997, the Company completed an offering of $250 million
aggregate principal amount of the 1997 Notes. The proceeds from this offering
were applied to prepay certain borrowings under the Revolving Facility and to
refinance certain Tranche A Term Loans and other borrowings under the Senior
Secured Credit Agreement (see Note 10 to the Condensed Consolidated Financial
Statements). See "--Debt Service." A registration statement under
I-20
<PAGE>
the Securities Act of 1933, as amended, registering senior notes of the Company
identical in all material respects to the 1997 Notes (the "New Notes") offered
in exchange for the 1997 Notes became effective October 1, 1997. On November 3,
1997, the Company completed its exchange offer of the 1997 Notes for the New
Notes. As of September 27, 1997, the Company had outstanding approximately
$1,703.7 million of long-term debt, consisting primarily of $650 million
aggregate principal amount of the 1996 Notes, $250 million of the 1997 Notes,
$644 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 1997, the Company had a net decrease
in revolving credit facilities of approximately $18.7 million and repaid or
refinanced approximately $108.2 million of debt.
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. The Company applied $105.0 million of the proceeds from the 1997 Notes
in July 1997 to refinance a portion of the Tranche A Term Loans under the Term
Loan Facility, $50 million of the proceeds of the 1997 Notes to refinance the
Tranche D Loan under the Senior Secured Credit Agreement, and the remaining
proceeds from the 1997 Notes to prepay outstanding revolving credit borrowings
under the Revolving Facility. Scheduled term loan principal payments under the
Term Loan Facility have been reduced to reflect this application of proceeds.
Annual term loan amortization requirements under the Term Loan Facility, after
giving effect to the refinancing of the Term Loan Facility from a portion of the
proceeds of the 1997 Notes, will be approximately $3 million, $4 million, $4
million, $120 million, $173 million, $184 million and $156 million for each of
the years 1998 through 2004, respectively. This application of proceeds did not
involve any reduction in the current aggregate Revolving Facility commitment of
$400 million. In the third quarter of 1997, the Company recorded a non-cash,
extraordinary charge to earnings of approximately $2.5 million, net of tax,
related to the write-off of the applicable portion of deferred debt issuance
costs on the Tranche A Term Loans under the Term Loan Facility.
The Revolving Facility will mature in March 2003 and the Machinery Facility
will mature in March 2001, with all amounts then outstanding becoming due. The
Company expects that its working capital and business needs will require it to
continue to have access to these or similar revolving credit facilities after
their respective maturity dates, and that the Company accordingly will have to
extend, renew, replace or otherwise refinance such facilities at or prior to
such dates. No assurance can be given that it will be able to do so. The loans
under the Facilities bear interest at floating rates based upon the interest
rate option elected by the Company. As of September 27, 1997, the Tranche A Term
Loans, Tranche B Term Loans and Tranche C Term Loans under the Term Loan
Facility bore interest at rates per annum equal to 8.13 percent, 8.63 percent
and 9.13 percent, respectively. Borrowings under each of the Revolving Facility
and the Machinery Facility bore interest as of September 27, 1997 at an average
rate per annum of 8.16 percent. The 1996 Senior Notes, the 1997 Notes and the
Senior Subordinated Notes bear interest at rates of 10 1/4 percent, 10 5/8
percent and 10 7/8 percent, respectively. Interest expense in 1997 is expected
to be approximately $170 million to $175 million, including approximately $10
million of non-cash amortization of deferred debt issuance costs. During the
first nine months of 1997, cash paid for interest was approximately $95.6
million. The Company's Australian revolving credit facility matures in September
1998, with all amounts then outstanding becoming due. The Company accordingly
will have to extend, renew, replace or otherwise refinance such facility at or
prior to such date. No assurance can be given that it will be able to do so. The
total amount outstanding under such facility was $22.0 million at September 27,
1997.
The Company uses interest rate swaps and cap agreements to fix or cap a
portion of its variable rate Term Loan Facility to a fixed rate in order to
reduce the impact of interest rate changes on future income. The difference
to be paid or received under these agreements is recognized as an adjustment
to interest expense related to that debt.
Covenant Restrictions
The Credit Agreements impose restrictions on the Company's ability to make
capital expenditures and both the Credit Agreements and the indentures governing
the 1996 Notes and the 1997 Notes limit the Company's ability to incur
additional indebtedness. Such restrictions, together with the highly leveraged
nature of the Company, could limit the Company's ability to respond to market
conditions, to meet its capital spending program, to provide for unanticipated
capital investments or to take advantage of business opportunities. The
covenants contained in the Credit Agreements also, among other things, restrict
the ability of the Company and its subsidiaries to dispose of assets, incur
guarantee obligations, repay the relevant 1996 Notes or the 1997 Notes, pay
dividends, create liens on assets, enter into sale and leaseback transactions,
make investments, loans or advances, make acquisitions, engage in mergers or
consolidations, make capital expenditures or engage in certain transactions with
affiliates, and otherwise restrict corporate activities. The covenants contained
in such indentures also impose restrictions on the operation of the Company's
business. At September 27, 1997, the Company was in compliance with the
financial covenants in the Credit Agreements.
In connection with the offering of the 1997 Notes, certain financial and
other covenants in the Credit Agreements were amended to reflect the Company's
recent financial results and market and operating conditions, as well as the
consummation of the 1997 Notes offering and the prepayment of the term loans and
other borrowings. Covenant modifications included reductions in permitted
capital expenditures, the elimination of the minimum consolidated net worth
requirement, and reduction in minimum EBITDA and interest coverage ratio
requirements. See Note 10 to the Condensed Consolidated Financial Statements.
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<PAGE>
Capital Expenditures
Capital spending for the first nine months of 1997 was approximately $127
million. During the first nine months of 1997, the Company completed projects to
modify the pulp mill at the Macon Mill and to convert the second paperboard
machine at the Macon Mill to CUK Board production. The cost of the pulp mill
modification, completed in February 1997, was approximately $32 million. The
paper machine conversion is expected to cost approximately $85 million.
Cumulative capital spending on this paper machine conversion project through
September 27, 1997, was approximately $81 million. For the first nine months of
1997, capital spending on these two projects totaled approximately $68 million.
Other capital spending during this period related primarily to increasing paper
production efficiencies, increasing converting capacity, manufacturing packaging
machinery and upgrading the Company's information systems. Total capital
spending for fiscal 1997 is expected to be approximately $155 million, and is
expected to relate principally to the pulp mill modification, the conversion of
the second paper machine at the Macon Mill, the production of packaging
machinery and the planned upgrading of the Company's information systems (which
is expected to cost up to approximately $30 million through 1999).
See "--Upgrade of Information Systems and Year 2000 Compliance".
Financing Sources and Cash Flows
In connection with and following the Merger, the Company decided in 1996 to
exit certain businesses and operating activities, including the sale or closure
of the Company's last dedicated folding carton converting plant in the United
States, located in Kankakee, Illinois, packaging machinery manufacturing plants
in Marietta, Georgia and Koln, Germany, a beverage multiple packaging converting
plant in Bakersfield, California and the trucking transportation operations in
West Monroe, Louisiana, as well as the consolidation and realignment of certain
operations in the United States, Australia and Europe. The cost of exiting these
businesses and operating activities was approximately $40.9 million which was
accrued during 1996 as a purchase accounting adjustment. The costs relate
principally to the severance of approximately 750 employees, relocation and
other plant closure costs. At September 27, 1997, $18.0 million of this total
was accrued in Other accrued liabilities on the Condensed Consolidated Balance
Sheets. During the first nine months of 1997, $14.6 million was paid out and
charged against the accrual and related primarily to severance costs.
At September 27, 1997, the Company and its U.S. and international
subsidiaries had the following amounts undrawn under revolving credit
facilities:
<TABLE>
<CAPTION>
Total Amount Total Amount Total Amount
Of Outstanding Available At
Commitments Sept. 27, 1997 Sept. 27, 1997
---------------- ---------------- ----------------
(In thousands of dollars)
<S> <C> <C> <C>
Revolving Facility.......................................... $ 400,000 $ 95,000 $ 305,000
Machinery Facility.......................................... 140,000 15,000 41,000
International Facilities.................................... 52,912 30,507 22,405
-------- -------- --------
$ 592,912 $ 140,507 $ 368,405
-------- -------- --------
-------- -------- --------
</TABLE>
The Machinery Facility is limited by a borrowing base. During December 1996,
the commitment for the Australian revolving facility was reduced from
approximately $37 million to approximately $32 million. Undrawn Revolving
Facility availability is expected to be used to meet future working capital and
other business needs of the Company. The Company anticipates pursuing additional
working capital financing for its foreign operations as necessary, and possibly
implementing a receivables securitization program.
As described above, the Company has substantial liquidity, but
anticipates additional borrowings under the Revolving Facility throughout
1997. The Company believes that cash generated from operations, together with
amounts available under its Revolving Facility, the Machinery Facility and
other available financing sources, will be adequate to permit the Company to
meet its debt service obligations, capital expenditure program requirements,
ongoing operating costs and working capital needs until the maturity of the
Revolving Facility (assuming extension or refinancing of the Machinery
Facility at its earlier maturity), although no assurance can be given in this
regard. The Company's future financial and operating performance, ability to
service or refinance its debt and ability to comply with the covenants and
restrictions contained in its debt agreements (see "--Covenant
Restrictions"), will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond the Company's
control and will be substantially dependent on the selling prices for the
Company's products and the Company's ability to successfully implement its
overall business and profitability strategies.
While the Company believes that Igaras has adequate liquidity, the Company
shares control of Igaras with its joint venture partner and future dividend
payments from Igaras, if any, would be subject to restrictions in the joint
venture agreement and would reflect only the Company's
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<PAGE>
remaining interest of 50 percent. Under the Igaras joint venture agreement,
Igaras is required to pay dividends equal to at least 25 percent of its net
profits. Due to currency fluctuations, inflation and changes in political and
economic conditions, earnings from Brazilian operations have been subject to
significant volatility. There can be no assurance that such volatility will not
recur in the future.
Environmental and Legal Matters
The Company is committed to compliance with all applicable environmental
laws and regulations throughout the world. Environmental law is, however,
dynamic rather than static. As a result, costs, which are unforeseeable at this
time, may be incurred when new laws are enacted, and when environmental agencies
promulgate or revise rules and regulations.
In late 1993, the EPA proposed regulations (generally referred to as the
"cluster rules") that would mandate more stringent controls on air and water
discharges from United States pulp and paper mills. In 1996, the EPA released
additional clarification of the proposed cluster rules. Based on this
information, the Company expects that the cluster rules may be finally
promulgated in 1997 and estimates the capital spending that may be required to
comply with the cluster rules could reach $55 million to be spent at its two
U.S. paper mills over an eight-year period beginning in 1997. The Company
anticipates that the majority of this spending for compliance with the cluster
rules will occur later in the eight-year period. The Company had no capital
spending during the first nine months of 1997 related to compliance with the
cluster rules.
In late 1995, the DEQ notified the Company that the Predecessor may be
liable for the remediation of hazardous substances at a wood treatment site in
Shreveport, Louisiana, that the Predecessor or its predecessor previously
operated, and at a former oil refinery site in Caddo Parish, Louisiana that the
Company currently owns. Neither the Company nor the Predecessor ever operated
the oil refinery. In response to the DEQ, the Company has provided additional
information concerning these sites and has commenced its own evaluation of any
claims and remediation liabilities for which it may be responsible. The Company
received a letter from the DEQ dated May 20, 1996, requesting a plan for soil
and groundwater sampling of the wood treatment site. The Company first met with
the DEQ on July 18, 1996, and then submitted a soil sampling plan to the DEQ.
The Company expects approval of this sampling plan in the second half of 1997.
On September 6, 1996, the Company received from the DEQ a letter requesting
remediation of the former oil refinery site in Caddo Parish, Louisiana. The
Company met with the DEQ on February 17, 1997 to discuss these matters. The
Company anticipates entering into a cooperative agreement with the DEQ to
perform a phased-in evaluation for evaluating soil and groundwater conditions at
the Shreveport site. The Company is in discussions with the DEQ regarding the
participation of other responsible parties in any clean up of hazardous
substances at both of these sites.
The Company is engaged in environmental remediation projects for certain
properties currently owned or operated by the Company and certain properties
divested by the Company for which responsibility was retained for pre-existing
conditions. The Company's costs in some instances cannot be reliably estimated
until the remediation process is substantially underway. To address these
contingent environmental costs, the Company has accrued reserves when such costs
are probable and can be reasonably estimated. The Company believes that, based
on current information and regulatory requirements, the accruals established by
the Company for environmental expenditures are adequate. Based on current
knowledge, to the extent that additional costs may be incurred that exceed the
accrued reserves, such amounts are not expected to have a material impact on the
results of operations, cash flows, or financial condition of the Company,
although no assurance can be given that material costs will not be incurred in
connection with clean-up activities at these properties, including the
Shreveport and Caddo Parish sites referred to above.
On December 6, 1995, Forrest Kelly Clay, a former shareholder of the
Predecessor, commenced a purported class action lawsuit in the United States
District Court for the Northern District of Georgia, against the Company and
certain officials of the Company (the "Individual Defendants," and together
with the Company, the "Defendants"). In his complaint, Clay alleges that the
Defendants violated the federal securities laws by disseminating misleading
statements and by omissions concerning the strategic alternatives that the
Predecessor was considering, including its potential sale to a third-party
investor. The complaint also alleged that the Individual Defendants, through
their exercise of stock appreciation rights ("SARs"), violated the federal
securities laws by trading in the Predecessor's securities while in
possession of material, non-public information. The complaint generally seeks
damages in an unspecified amount, as well as other relief. On June 2, 1997,
the court granted Defendants' Motion for Summary Judgment and dismissed the
action in its entirety. The court based its ruling on the fact that (i) none
of the statements attributable to the Company concerning its review of
strategic alternatives was false and (ii) there is no causal relationship
between plaintiff's purchase of Riverwood common stock and the Individual
Defendants' exercise of SARs.
I-23
<PAGE>
Plaintiff filed his Notice of Appeal to the United States Court of Appeals for
the Eleventh Circuit on June 5, 1997. A briefing schedule has been set and all
of the briefs are expected to be before the Court as of mid-December. At that
juncture, the Court will determine whether oral argument is necessary.
Upgrade of Information Systems and Year 2000 Compliance
The Company has begun to upgrade its information systems through an
initiative expected to cost up to approximately $30 million to be spent through
1999. When the upgrade is complete, the Company expects a major improvement in
its information systems and business processes. This initiative is expected to
be complete by June 1999. Capital spending on this project during the first nine
months of 1997 totaled approximately $4.7 million.
In conjunction with the information systems upgrade, the Company is also in
the process of replacing its computer software applications and systems to
accommodate the "Year 2000" dating changes necessary to permit correct recording
of yearly dates for 2000 and later years. The Company does not expect that the
cost of its Year 2000 compliance program will be material to its financial
condition or results of operations (other than the initial investment in
information systems of up to approximately $30 million). The Company believes
that it will be able to achieve compliance by the end of 1999, but would
anticipate a material disruption in its operations as the result of any failure
by the Company to be in compliance. In the event that any of the Company's
significant suppliers or customers does not successfully and timely achieve
their Year 2000 compliance, the Company's business or operations could be
adversely affected.
Tax Matters Relating to the Merger
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 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 has paid
$33.1 million in estimated stand-alone taxes relating to the election,
including $27.5 million in Louisiana income tax. The Company's calculation of
its Louisiana tax was based on state law in effect at the time of the Merger,
including a 1993 amendment. In May 1997, the Louisiana Supreme Court declared
the 1993 amendment to be void under the Louisiana Constitution, retroactive
to 1993. It is possible that the voiding of the 1993 amendment could result
in the Company being required to pay significant additional Louisiana income
tax relating to the election (plus potential penalties and statutory interest
on the additional taxes). The Company's Louisiana tax return for the period
that includes the Merger is due November 17, 1997. After consultation with
Louisiana tax counsel, the Company intends to file its Louisiana income tax
return for the period ended March 27, 1996 (which is due November 17, 1997)
in reliance on the Louisiana tax law in effect at the time of the Merger,
without the payment of any additional tax due to the voiding of the 1993
amendment. There can be no assurance, however, that the Company would
ultimately prevail on this issue if Louisiana were to challenge such filing
position. If the Company were not to prevail in such a challenge, significant
additional Louisiana income tax relating to the election could be payable.
Management estimates that the maximum amount of such additional tax is
approximately $47 million (plus potential penalties and statutory interest on
any additional tax). Management believes that the additional tax ultimately
paid (if any) would be substantially less than the estimated maximum amount,
although no assurance can be given in this regard. The Company and its
advisors are continuing to study this situation. Since the law is unclear and
the amounts involved could be significant, it may be several years before
this matter is resolved.
During the third quarter of 1997, the Company resolved certain tax issues
related to the Merger, pursuant to the Tax Matters Agreement, resulting in the
receipt of approximately $16.8 million (including $0.5 million of interest) in
cash from the former majority owner of the Company.
Information Concerning Forward-Looking Statements
Certain of the statements contained in this report (other than the financial
statements and other statements of historical fact) are forward-looking
statements, including, without limitation, (i) the statements in "--Business
Trends and Initiatives" concerning (a) the improvements which the Company's
long-term initiatives, including, without limitation, its profit center
reorganization, are designed to achieve and (b) the Company's expectation that
the second Macon Mill paper machine will produce approximately 80,000 tons of
linerboard and CUK Board
I-24
<PAGE>
during the last half of 1997 and that such machine will be able to produce
approximately 275,000 tons of CUK Board in 18 to 24 months following the June
1997 start-up; (ii) the statements in "--Outlook" concerning (a) the
Company's expectation that its 1997 EBITDA will exceed its 1996 EBITDA
(excluding the results of the former U.S. Timberlands/Wood Products business
segment) as well as each of the factors which the Company believes support
such expectation, (b) the Company's expectation that it will achieve a
reduction of expenditures of approximately $30 million on an annualized
basis, over half of which will be realized in 1997, and will identify an
additional $10 million of annualized cost savings to be acted upon in 1998
and (c) the Company's expectation 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; (iii)
the statements in "--Financial Condition, Liquidity and Capital
Resources--Liquidity and Capital Resources" concerning (a) the Company's
expectations that total capital spending for 1997 will be approximately $155
million and that the planned upgrading of the Company's information systems
will cost up to $30 million (and its belief that the Company will achieve
Year 2000 compliance by the end of 1999), (b) the Company's belief that cash
generated from operations, together with amounts available under available
financing sources, will be adequate to permit the Company to meet its debt
service obligations, capital expenditure program requirements, ongoing
operating costs and working capital needs until the maturity of the Revolving
Facility (assuming extension or refinancing of the Machinery Facility at its
earlier maturity), (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 beliefs and estimates in
respect of certain Louisiana income tax matters relating to the Section
338(h)(10) election, including, without limitation, management's belief that
additional tax ultimately paid (if any) would be substantially less than $47
million; and (iv) other statements as to management's or the Company's
expectations 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-Q
for the quarterly period ended June 28, 1997, or in other Securities and
Exchange Commission filings, could affect (and in some cases have affected) the
Company's actual results and could cause such results to differ materially from
estimates or expectations reflected in such forward-looking statements.
While the Company periodically reassesses material trends and uncertainties
affecting the Company's results of operations and financial condition in
connection with its preparation of management's discussion and analysis of
results of operations and financial condition contained in its quarterly and
annual reports, the Company does not intend to review or revise any particular
forward-looking statement referenced in this report in light of future events.
Accounting Changes
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way public companies report information about operating
segments in annual financial statements and requires that those companies report
selected information about operating segments in interim financial reports. SFAS
No. 131 is effective for fiscal years beginning after December 31, 1997. The
Company has not determined the impact that SFAS No. 131 will have on its
business segment disclosures.
I-25
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Effective July 28, 1997, Thomas M. Gannon was appointed as Senior Vice
President and Chief Financial Officer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
99(a) Reconciliation of (Loss) Income from Operations to EBITDA. Filed as
an exhibit hereto.
99(b) Schedule of Coated Board and Containerboard Shipments. Filed as an
exhibit hereto.
(b) Reports on Form 8-K.
Form 8-K dated July 11, 1997, and filed with the Securities and Exchange
Commission on July 11, 1997, regarding the offering of Riverwood
International Corporation of $250 million principal amount of 10 5/8%
Senior Notes due 2007.
Form 8-K dated July 11, 1997, and filed with the Securities and Exchange
Commission on July 11, 1997, regarding the Company's financial performance,
proposed Credit Agreement covenant modifications, completion of the Macon
Mill paper machine upgrade, upgrade of information systems, certain tax
matters and changes in management.
II-1
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVERWOOD HOLDING, INC.
------------------------------------------
(Registrant)
Date: November 7, 1997 By: /s/ Bill H. Chastain
-------------------------------------
Bill H. Chastain
Secretary
Date: November 7, 1997 By: /s/ Thomas M. Gannon
-------------------------------------
Thomas M. Gannon
Senior Vice President and
Chief Financial Officer
II-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RIVERWOOD
HOLDING, INC'S CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR THE
PERIOD ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-27-1997
<CASH> 12553
<SECURITIES> 0
<RECEIVABLES> 140692
<ALLOWANCES> 1238
<INVENTORY> 200271
<CURRENT-ASSETS> 365143
<PP&E> 1670630
<DEPRECIATION> 177948
<TOTAL-ASSETS> 2636918
<CURRENT-LIABILITIES> 319083
<BONDS> 1683564
0
0
<COMMON> 75
<OTHER-SE> 530,983
<TOTAL-LIABILITY-AND-EQUITY> 2636918
<SALES> 846097
<TOTAL-REVENUES> 846097
<CGS> 739545
<TOTAL-COSTS> 739545
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 589
<INTEREST-EXPENSE> 124743
<INCOME-PRETAX> (117905)
<INCOME-TAX> 4341
<INCOME-CONTINUING> (108551)
<DISCONTINUED> 0
<EXTRAORDINARY> 2463
<CHANGES> 0
<NET-INCOME> (111014)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99(a)
RIVERWOOD HOLDING, INC.
RECONCILIATION OF INCOME (LOSS) FROM OPERATIONS TO EBITDA
(In thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
U.S.
Timberlands/
Coated Wood
Company Board Containerboard Products Corporate Total
- ----------------------------------------------- ---------- -------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
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
---------- -------------- ------------ ----------- ----------
Pro Forma EBITDA (C)........................... $ 49,188 $ (2,002) -- $ (1,823) $ 45,363
---------- -------------- ------------ ----------- ----------
---------- -------------- ------------ ----------- ----------
Third Quarter 1996:
Income (Loss) from Operations.................. $ 20,563 $ (12,207) $ -- $ (5,312) $ 3,044
Income from discontinued operations............ -- -- 17,453 -- 17,453
Depreciation, amortization and cost of timber
harvested.................................... 17,484 4,644 2,241 475 24,844
Purchased asset costs (A)...................... 7,021 700 1,138 87 8,946
Other non-cash charges (B)..................... 1,506 (535) 1,313 36 2,320
Dividends from equity investments.............. -- -- -- 696 696
---------- -------------- ------------ ----------- ----------
Pro Forma EBITDA (C)........................... $ 46,574 $ (7,398) $ 22,145 $ (4,018) $ 57,303
---------- -------------- ------------ ----------- ----------
---------- -------------- ------------ ----------- ----------
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
---------- -------------- ------------ ----------- ----------
Pro Forma EBITDA (C)........................... $ 141,519 $ (14,751) -- $ (8,672) $ 118,096
---------- -------------- ------------ ----------- ----------
---------- -------------- ------------ ----------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S.
Timberlands/
Coated Wood
Board Containerboard Products Corporate Total
--------- -------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Six Months Ended Sept. 28, 1996:
Income (Loss) from Operations.................... $ 40,331 $ (19,467) $ -- $ (11,708) $ 9,156
Income from discontinued operations.............. -- -- 32,809 -- 32,809
Depreciation, amortization and cost of timber
harvested...................................... 38,779 8,964 4,191 1,147 53,081
Purchased asset costs (A)........................ 16,898 1,917 1,982 46 20,843
Other non-cash charges (B)....................... 3,012 (1,076) 2,097 116 4,149
Dividends from equity investments................ -- -- -- 2,104 2,104
--------- ---------- ---------- --------- ---------
Pro Forma EBITDA (C)............................. $ 99,020 $ (9,662) $ 41,079 $ (8,295) $ 122,142
--------- ---------- ---------- --------- ---------
--------- ---------- ---------- --------- ---------
Predecessor
- ------------------------------------------------------------------------------------------------------------------
First Quarter 1996:
Income (Loss) from Operations.................... $ 24,638 $ (5,955) $ 13,868 $ (16,901) $ 15,650
Depreciation, amortization and cost of timber
harvested...................................... 17,800 4,332 1,735 571 24,438
Other non-cash charges (B)....................... 1,265 261 945 232 2,703
Dividends from equity investments................ -- -- -- - --
Pro forma adjustments............................ 3,471 120 218 9,533 13,342
--------- ------- ------------ ----------- ---------
Pro Forma EBITDA (C)............................. $ 47,174 $ (1,242) $ 16,766 $ (6,565) $ 56,133
--------- ------- ------------ ----------- ---------
--------- ------- ------------ ----------- ---------
</TABLE>
- ------------------------
Notes:
(A) Certain expenses and costs are excluded from the Company's Income (Loss)
from Operations in determining EBITDA (as defined below), including
amortization, depreciation or expenses associated with the write-up of
inventory, fixed assets and intangible assets in accordance with APB 16 and
APB Opinion No. 17, "Intangible Assets", collectively referred to as the
"Purchased asset costs."
(B) Other non-cash charges include non-cash charges deducted for LIFO inventory
reserves, pension, postretirement and postemployment benefits, depletion of
prepaid timber and amortization of premiums on hedging contracts in
determining net income other than Purchased asset costs (see above).
(C) Pro Forma EBITDA is defined as consolidated net income (exclusive of
non-cash charges resulting from purchase accounting during the first quarter
of 1997) before consolidated interest expense, consolidated income taxes,
consolidated depreciation and amortization, cost of timber harvested and
other non-cash charges deducted in determining consolidated net income and
extraordinary items and the cumulative effect of accounting changes and
earnings of, but including dividends from, non-controlled affiliates, and
calculated on a pro forma basis to exclude Other Costs (see Note 6 in Notes
to Condensed Consolidated Financial Statements) of the Predecessor. The
Company believes that EBITDA provides useful information regarding the
Company's debt service ability, but should not be considered in isolation
or as a substitute for the Condensed Consolidated Statements of Operations
or cash flow data.
<PAGE>
Exhibit 99(b)
RIVERWOOD HOLDING, INC.
SCHEDULE OF COATED BOARD AND CONTAINERBOARD SHIPMENTS
(In thousands of tons)
(unaudited)
The following represents shipments of coated board and containerboard to
outside customers. Shipments of coated board represent sales to customers of
beverage carrierboard, folding cartonboard, and WLC (other than from the
Swedish Mill). Shipments from the Swedish Mill represent sales to customers
of WLC produced at this mill. Shipments of containerboard represent sales to
customers of linerboard, corrugating medium, and kraft paper.
1997 1996
-------- --------
First Quarter
Coated Board......................................... 218.5 195.9
Swedish Mill......................................... 32.0 29.8
Containerboard....................................... 108.6 78.3
------- -------
Total................................................ 359.1 304.0
------- -------
------- -------
Second Quarter
Coated Board......................................... 244.4 224.9
Swedish Mill......................................... 36.9 30.8
Containerboard....................................... 96.7 99.0
------- -------
Total................................................ 378.0 354.7
------- -------
------- -------
Third Quarter
Coated Board......................................... 237.4 214.2
Swedish Mill......................................... 32.6 30.0
Containerboard....................................... 87.7 153.1
------- -------
Total................................................ 357.7 397.3
------- -------
------- -------
Fourth Quarter
Coated Board......................................... -- 206.3
Swedish Mill......................................... -- 31.9
Containerboard....................................... -- 146.4
------- -------
Total................................................ -- 384.6
------- -------
------- -------
