<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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.)
1105 North Market Street
Suite 1300
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 9, 1999 there were 7,062,880 shares and 500,000 shares of
the registrant's Class A and Class B common stock, respectively, outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
As used in this Form 10-Q, unless the context otherwise requires, "RIC" refers
to the corporation formerly named Riverwood International Corporation; the
"Predecessor" refers to RIC and its subsidiaries in respect of periods prior to
the acquisition on March 27, 1996 by Holding, through its wholly-owned
subsidiaries, of RIC (the "Merger"); the "Company" refers to the registrant,
Riverwood Holding, Inc., a Delaware corporation formerly named New River
Holding, Inc. ("Holding") and its subsidiaries; and "Riverwood" refers to
Riverwood International Corporation, a Delaware corporation formerly named
Riverwood International USA, Inc. and an indirect wholly-owned subsidiary of
Holding.
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 9,496 $ 13,840
Receivables, net of allowances 167,523 142,221
Inventories 176,062 167,388
Prepaid expenses 10,749 8,579
Deferred tax assets 273 298
------------- -------------
Total Current Assets 364,103 332,326
Property, Plant and Equipment, net of accumulated
depreciation of $398,256 in 1999 and $310,008 in 1998 1,446,657 1,495,490
Investments in Net Assets of Equity Affiliates 139,328 143,611
Goodwill, net of accumulated amortization of $27,818 in 1999
and $21,857 in 1998 290,104 296,065
Other Assets 142,611 150,109
------------- -------------
Total Assets $ 2,382,803 $ 2,417,601
============= =============
LIABILITIES
Current Liabilities:
Short-term debt $ 9,032 $ 17,613
Accounts payable and other accrued liabilities 252,309 261,164
------------- -------------
Total Current Liabilities 261,341 278,777
Long-Term Debt, less current portion 1,727,406 1,680,415
Other Noncurrent Liabilities 103,364 115,435
------------- -------------
Total Liabilities 2,092,111 2,074,627
------------- -------------
Contingencies and Commitments (Note 5)
Redeemable Common Stock, at current redemption value 6,307 6,205
------------- -------------
SHAREHOLDERS' EQUITY
Nonredeemable Common Stock 75 75
Capital in Excess of Par Value 750,365 750,100
(Accumulated Deficit) (448,038) (397,913)
Cumulative Currency Translation Adjustment (18,017) (15,493)
------------- -------------
Total Shareholders' Equity 284,385 336,769
------------- -------------
Total Liabilities and Shareholders' Equity $ 2,382,803 $ 2,417,601
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- --------------------------------
September 30, September 26, September 30, September 26,
1999 1998 1999 1998
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 268,694 $ 292,766 $ 824,058 $ 864,176
Cost of Sales 211,217 236,390 652,393 714,074
Selling, General and Administrative 25,935 28,913 83,041 83,294
Research, Development and Engineering 1,028 980 3,014 4,170
Impairment Loss -- -- -- 13,342
Other (Income) Expense, net (1,219) (92) (248) 5,168
--------- --------- --------- ---------
Income from Operations 31,733 26,575 85,858 44,128
Interest Income 119 291 756 958
Interest Expense 45,313 43,554 133,492 132,509
--------- --------- --------- ---------
(Loss) before Income Taxes and Equity in
Net Earnings (Loss) of Affiliates (13,461) (16,688) (46,878) (87,423)
Income Tax Expense (Benefit) 770 (1,864) 1,674 167
--------- --------- --------- ---------
(Loss) before Equity in Net Earnings (Loss)
of Affiliates (14,231) (14,824) (48,552) (87,590)
Equity in Net Earnings (Loss) of Affiliates 518 3,699 (1,573) 8,712
--------- --------- --------- ---------
Net (Loss) $ (13,713) $ (11,125) $ (50,125) $ (78,878)
--------- --------- --------- ---------
Other comprehensive Income (Loss), net of tax:
Foreign currency translation adjustments 2,314 (1,259) (2,524) (3,268)
--------- --------- --------- ---------
Comprehensive (Loss) $ (11,399) $ (12,384) $ (52,649) $ (82,146)
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 26, 1998
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $ (50,125) $ (78,878)
Noncash Items Included in Net (Loss):
Depreciation and amortization 106,972 105,346
Deferred income taxes (656) (29)
Impairment loss -- 13,342
Pension, postemployment and postretirement benefits,
net of benefits paid 3,304 1,773
Equity in net loss (earnings) of affiliates, net of dividends 4,331 (6,185)
Amortization of deferred debt issuance costs 7,688 7,600
Other, net 1,660 97
(Increase) Decrease in Current Assets:
Receivables (24,835) (21,801)
Inventories (18,256) 8,343
Prepaid expenses (2,012) 2,437
(Decrease) Increase in Accounts payable and other accrued liabilities (9,490) 1,770
(Decrease) Increase in Other Noncurrent Liabilities (11,311) 5,200
--------- ---------
Net Cash Provided by Operating Activities 7,270 39,015
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (47,689) (21,980)
Proceeds from Sale of Assets -- 50,755
(Increase) Decrease in Other Assets (1,428) 648
--------- ---------
Net Cash (Used in) Provided by Investing Activities (49,117) 29,423
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Notes Payable 51,600 (57,189)
Proceeds from Issuance (Repurchases) of Redeemable
Common Stock, net 367 (893)
Payments on Debt (13,283) (11,729)
--------- ---------
Net Cash Provided by (Used in) Financing Activities 38,684 (69,811)
--------- ---------
Effect of Exchange Rate Changes on Cash (1,181) 849
--------- ---------
Net (Decrease) in Cash and Equivalents (4,344) (524)
Cash and Equivalents at Beginning of Period 13,840 15,751
--------- ---------
Cash and Equivalents at End of Period $ 9,496 $ 15,227
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
RIVERWOOD HOLDING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements of the Company
included herein have been prepared by the Company without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented have
been made. The Condensed Consolidated Balance Sheet as of December 31, 1998 was
derived from audited financial statements.
Effective January 1, 1999, the Company changed its fiscal quarter end dates to
correspond to the calendar quarter end dates. Previously, the Company's interim
periods were based on a thirteen week per quarter cycle. This change did not
materially impact the consistency of interim period reporting.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a summary of the Company's significant accounting policies, please refer to
the Company's report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1998.
The preparation of the Condensed Consolidated Financial Statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the Condensed Consolidated Financial Statements and the reported amounts of
revenues and expenses during the reporting period. Actual amounts could differ
from those estimates.
NOTE 3 - INVENTORIES
The major classes of inventories were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS) SEPTEMBER 30, 1999 DECEMBER 31, 1998
- ------------------------- ------------------ -----------------
<S> <C> <C>
Finished goods $ 87,279 $ 72,120
Work-in-process 14,633 7,157
Raw materials 42,651 52,669
Supplies 31,499 35,442
-------------- --------------
Total $ 176,062 $ 167,388
============== ==============
</TABLE>
NOTE 4 - INVESTMENTS IN NET ASSETS OF EQUITY AFFILIATES
The Company has investments in affiliates that are accounted for using the
equity method of accounting. The most significant investment is the Company's
50 percent investment in Igaras Papeis e Embalagens S.A. ("Igaras").
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<PAGE> 7
The following represents the summarized income statement information for
Igaras, of which the Company recognizes 50 percent in its results of
operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- -----------------------------------
SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Net Sales $52,055 $63,494 $ 142,513 $190,715
Cost of Sales 40,814 50,722 120,777 148,526
------- ------- --------- --------
Gross Profit $11,241 $12,772 $ 21,736 $ 42,189
======= ======= ========= ========
Income from Operations $ 5,070 $ 5,854 $ 6,529 $ 20,900
======= ======= ========= ========
Net (Loss) Income $ 1,055 $ 3,964 $ (5,003) $ 12,726
======= ======= ========= ========
</TABLE>
During the first nine months of 1999 and 1998, the Company received dividends
from Igaras totaling $1.4 million and $2.5 million, respectively, net of taxes
of $0.3 million and $0.4 million respectively. Under the Igaras joint venture
agreement, Igaras is required to pay dividends equal to at least 25 percent of
its net profits.
On January 14, 1999, the Central Bank of Brazil changed the foreign exchange
policy by eliminating the exchange rate band, which had been used as a means to
control the fluctuation of the Real against the U.S. dollar. The exchange rate
is now determined by market forces. As a consequence of such change, the Real
suffered a significant devaluation related to the U.S. dollar during the
beginning of 1999. At this time, it is not practicable to determine whether or
at what level the exchange rate will stabilize as well as the effect of such
exchange rate fluctuations on Igaras' long term operations or the Company's
investment in the net assets of Igaras.
During the third quarter of 1999, the Company sold an investment other than
Igaras, resulting in a receipt of a final dividend of $0.8 million. No
significant gain or loss was recognized in accordance with the sale.
NOTE 5 - CONTINGENCIES AND COMMITMENTS
The Company is committed to compliance with all applicable environmental laws
and regulations throughout the world. Environmental law is, however, dynamic
rather than static. As a result, costs, which are unforeseeable at this time,
may be incurred when new laws are enacted, and when environmental agencies
promulgate or revise rules and regulations.
In late 1993, the U.S. Environmental Protection Agency proposed regulations
(generally referred to as the "cluster rules") that would mandate more
stringent controls on air and water discharges from the United States pulp and
paper mills. The cluster rules were promulgated in April 1998, and the Company
estimates the capital spending that may be required to comply with the cluster
rules could reach $55 million to be spent at its two U.S. paper mills over a
seven-year period beginning in 1999.
In late 1995, the Louisiana Department of Environmental Quality ("DEQ")
notified the Predecessor of potential liability for the remediation of
hazardous substances at a wood treatment site in Shreveport, Louisiana that the
Predecessor or its predecessors previously operated, and at a former oil
refinery site in Caddo Parish, Louisiana which is on land that the Company
currently owns. In response to these notices, 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. Subsequent to receipt in May 1996 of a Special Demand Letter from
DEQ to remediate the site in Shreveport, the Company entered into an agreement
with DEQ to perform a soil and groundwater investigation at the site. The
Company expects this investigation to be completed during 1999. In September
1996, the Company received a Special Demand Letter from DEQ to remediate the
site in Caddo Parish. The Company performed a waste inventory and
7
<PAGE> 8
treatability study at the site and is discussing with DEQ its responsibility
and the participation of other potentially responsible parties at the site, as
well as remediation options at the site.
The Company is involved in environmental remediation projects for certain
properties currently owned or operated by the Company, certain properties
divested by the Company for which responsibility was retained, and waste sites
where waste was shipped by predecessors of the Company or for which the Company
might have corporate successor liability. Certain of these projects are being
addressed under federal and state statutes, such as the Comprehensive
Environmental Response, Compensation and Liability Act and the state law
counterparts. The Company's costs in some instances cannot be reliably
estimated until the remediation process is substantially underway or liability
at multiparty sites has been addressed. To address these contingent
environmental costs, the Company has accrued reserves when such costs are
probable and can be reasonably estimated. The Company believes that, based on
current information and regulatory requirements, the accruals established by
the Company for environmental expenditures are adequate. Based on current
knowledge, to the extent that additional costs may be incurred that exceed the
accrued reserves, such amounts are not expected to have a material impact on
the results of operations, cash flows or financial condition of the Company,
although no assurance can be given that material costs will not be incurred in
connection with clean-up activities at these properties, including the
Shreveport and Caddo Parish sites referred to above.
The Company is a party to a number of lawsuits arising out of the ordinary
conduct of its business. While there can be no assurance as to their ultimate
outcome, the Company does not believe that these lawsuits will have a material
impact on the results of operations, cash flows or financial condition of the
Company.
The Company is a plaintiff in several actions against Mead claiming
infringement of the Company's patents for its packaging machines, as to which
Mead has filed counterclaims asserting that the Company's patents are invalid.
In the furthest advanced of these actions, on November 18, 1998, a federal
court entered an order refusing to adopt a special master's recommended finding
that the Company's patent in issue was invalid, and ruled that Mead had been
unlawfully infringing the Company's patent. On February 16, 1999, Mead filed an
appeal from that decision.
In connection with the Merger, the former majority owner of the Company agreed
to bear the cost of a Section 338(h)(10) election for U.S. federal tax purposes
and for purposes of state taxes for which the former majority owner and the
Company filed returns on a combined basis. The Company agreed to bear the cost
of this election for the purposes of other state taxes ("stand-alone taxes"),
including Louisiana income tax. During 1997, the Company paid $27.5 million in
estimated Louisiana stand-alone taxes relating to the election. The Company's
calculation of its Louisiana tax was based on state law in effect at the time
of the Merger, including a 1993 amendment. In May 1997, the Louisiana Supreme
Court declared the 1993 amendment to be void under the Louisiana Constitution,
retroactive to 1993. It is possible that the voiding of the 1993 amendment
could result in the Company being required to pay significant additional
Louisiana income tax relating to the election (plus potential penalties and
statutory interest on the additional taxes).
8
<PAGE> 9
After consultation with Louisiana tax counsel, the Company filed its Louisiana
income tax return for the period ended March 27, 1996 in reliance on the
Louisiana tax law in effect at the time of the Merger, without the payment of
any additional tax due to the voiding of the 1993 amendment. There can be no
assurance, however, that the Company would ultimately prevail on this issue if
Louisiana were to challenge such filing position. If the Company were not to
prevail in such a challenge, significant additional Louisiana income tax
relating to the election could be payable. Management estimates that the
maximum amount of such additional tax is approximately $47 million (plus
potential penalties and statutory interest on any additional tax). The tax
period ended March 27, 1996, is currently under audit by the State of
Louisiana. If the Company receives an assessment from the State, the Company
will consider paying the assessed amount to avoid further interest accruals as
it contests the assessment. Management believes that the additional tax
ultimately paid (if any) will be substantially less than the estimated maximum
amount, although no assurance can be given in this regard. The Company and its
advisors are continuing to study this situation. Since the law is unclear and
the amounts involved could be significant, it may be several years before this
matter is resolved.
NOTE 6 - IMPAIRMENT LOSS
The Company recorded an impairment loss of $13.3 million in the second quarter
of 1998 due to a write-down of packaging machines in accordance with Statement
of Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
The fair value of the machines was determined based on discounted expected
future lease revenues and estimated disposition proceeds.
NOTE 7 - DISPOSITION OF BUSINESS
In connection with the global restructuring program initiated in the fourth
quarter of 1998, the Company plans to reduce its European workforce by
approximately 300 employees in 1999 and to implement other initiatives designed
to improve productivity and profitability across the global organization. This
program will cost approximately $25.6 million and is on target and expected to
be completed in 1999. At September 30, 1999, $15.4 million of this total was
accrued in Accounts payable and other accrued liabilities on the Condensed
Consolidated Balance Sheets. During the first nine months of 1999, $9.3 million
was utilized and charged against the accrual and related primarily to severance
costs.
On March 12, 1998, the Company entered into an agreement with Carter Holt
Harvey ("Carter Holt") for the sale of the Company's folding carton business in
Australia. Proceeds from the sale totaling $46.7 million were received on March
30, 1998. Under the terms of the agreement for such sale, the Company sold to
Carter Holt substantially all of the Company's Australian folding carton
assets, and Carter Holt assumed certain specified liabilities. The Company
retained substantially all of its beverage multiple packaging business in
Australia. Under the agreement, Carter Holt agreed to purchase from the Company
a portion of its coated board requirements in Australia and to supply beverage
cartons to meet the Company's needs for its Australian beverage business.
In connection with the Merger, the Company decided to exit certain businesses
and operating activities, including the sale or closure of the Company's last
dedicated folding carton converting plant in the U.S., located in Kankakee,
Illinois, a packaging machinery manufacturing plant in Marietta, Georgia, 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 U.S., Australia and
Europe. The cost of exiting these businesses and operating activities was
recorded as an adjustment to the market value of assets acquired in the Merger
and totaled approximately $38.6 million and related to the severance of
approximately 750 employees, relocation and other plant closure costs. During
the first nine months of 1999, $1.5 million was utilized and charged against
the accrual and primarily related to severance costs. At September 30, 1999,
$3.3 million of this total was included in Accounts payable and other accrued
liabilities in the Condensed Consolidated Balance Sheets and is expected to be
paid out through 1999.
9
<PAGE> 10
NOTE 8 - BUSINESS SEGMENT INFORMATION
Business segment information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------ ------------------------------------
SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26,
(In thousands of dollars) 1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES:
Coated Board $ 245,005 $ 272,806 $ 755,686 $ 804,035
Containerboard 23,689 19,960 68,372 60,141
--------- --------- --------- ---------
$ 268,694 $ 292,766 $ 824,058 $ 864,176
========= ========= ========= =========
INCOME (LOSS) FROM OPERATIONS:
Coated Board* $ 36,977 $ 35,169 $ 110,283 $ 69,139
Containerboard (1,009) (4,482) (12,343) (11,813)
Corporate (4,235) (4,112) (12,082) (13,198)
--------- --------- --------- ---------
$ 31,733 $ 26,575 $ 85,858 $ 44,128
========= ========= ========= =========
EBITDA:
Coated Board $ 67,048 $ 68,620 $ 202,313 $ 181,814
Containerboard 3,425 (233) 679 663
Corporate 124 (1,801) (3,191) (5,977)
--------- --------- --------- ---------
$ 70,597 $ 66,586 $ 199,801 $ 176,500
========= ========= ========= =========
</TABLE>
* Included in Income from Operations for Coated Board is an impairment loss of
$13.3 million taken during the three months ended June 27, 1998.
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<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In connection with the Merger, the Company entered into a credit agreement (as
amended, the "Senior Secured Credit Agreement") that currently provides for
senior secured credit facilities (the "Senior Secured Credit Facilities")
consisting of $637 million in outstanding term loans under a term loan facility
(the "Term Loan Facility") and a $400 million revolving credit facility (the
"Revolving Facility"). In addition, Riverwood International Machinery, Inc.
("RIMI"), a wholly-owned subsidiary of Riverwood, entered into a credit
agreement (as amended, the "Machinery Credit Agreement", and together with the
Senior Secured Credit Agreement, the "Credit Agreements") providing for a $140
million secured revolving credit facility (the "Machinery Facility," and
together with the Senior Secured Credit Facilities, the "Facilities") for the
purpose of financing or refinancing packaging machinery. In connection with the
Merger, the Company also completed an offering of $250 million aggregate
principal amount of 10 1/4% Senior Notes due 2006 (the "1996 Senior Notes") and
$400 million aggregate principal amount of 10 7/8% Senior Subordinated Notes
due 2008 (the "Senior Subordinated Notes" and together with the 1996 Senior
Notes, the "1996 Notes"). On July 28, 1997, the Company completed an offering
of $250 million principal amount of 10 5/8% Senior Notes due 2007 (the "Initial
Notes"). The net proceeds of this offering were applied to prepay certain
revolving credit borrowings under the Revolving Facility (without any
commitment reduction) and to refinance certain Tranche A term loans and other
borrowings under the Senior Secured Credit Agreement. A registration statement
under the Securities Act of 1933, as amended, registering senior notes of the
Company identical in all material respects to the Initial Notes (the "Exchange
Notes") offered in exchange for the Initial Notes became effective October 1,
1997. On November 3, 1997, the Company completed its exchange offer of the
Initial Notes for the Exchange Notes. The Initial Notes and the Exchange Notes
are referred to herein as the 1997 Notes.
GENERAL
The Company reports its results in two business segments: Coated Board and
Containerboard. The Coated Board business segment includes (i) the production
and sale of coated unbleached kraft paperboard ("CUK Board") for packaging
cartons from the paper mills in Macon, Georgia (the "Macon Mill") and in West
Monroe, Louisiana (the "West Monroe Mill") and white lined chip board ("WLC")
at its paper mill in Norrkoping, Sweden (the "Swedish Mill"); (ii) converting
operations facilities in the United States, Australia (up to the date of sale)
and Europe; and (iii) the design, manufacture and installation of packaging
machinery related to the assembly of beverage cartons. The Containerboard
business segment includes the production and sale of linerboard, corrugating
medium and kraft paper from paperboard mills in the United States.
EBITDA is defined as consolidated net income (exclusive of non-cash charges
resulting from purchase accounting during the periods subsequent to the Merger)
before consolidated interest expense, consolidated income taxes, consolidated
depreciation and amortization, and other non-cash charges deducted in
determining consolidated net income, extraordinary items and the cumulative
effect of accounting changes and earnings of, but including dividends from,
non-controlled affiliates. EBITDA excludes equity earnings of Igaras from the
Company's investment in Igaras but includes dividends actually received from
Igaras. 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.
11
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ------------------------------------
SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
EBITDA (Segment Data):
Coated Board $67,048 $ 68,620 $ 202,313 $ 181,814
Containerboard 3,425 (233) 679 663
Corporate 124 (1,801) (3,191) (5,977)
------- -------- --------- ---------
EBITDA $70,597 $ 66,586 $ 199,801 $ 176,500
======= ======== ========= =========
</TABLE>
BUSINESS TRENDS AND INITIATIVES
The Company's cash flow from operations and EBITDA are influenced by sales
volume and selling prices for its products and raw material costs, and are
affected by a number of significant business, economic and competitive factors.
Many of these factors are not within the Company's control. Historically, in
the Coated Board business segment, the Company has experienced stable pricing
for its integrated beverage carton products, and moderate cyclical pricing for
its folding cartonboard, which is principally sold in the open market. The
Company's folding cartonboard sales are affected by competition from
competitors' CUK Board and other substrates - solid bleached sulfate ("SBS"),
recycled clay coated news ("CCN") and, internationally, WLC -- as well as by
general market conditions.
In the Containerboard business segment, conditions in the cyclical worldwide
commodity paperboard markets have a substantial impact on the Company's
Containerboard sales. The Company is continuing to benefit from its multiple
price increases for linerboard, corrugated medium, and kraft paper announced
during the first nine months of 1999.
The Company is pursuing a number of long-term initiatives designed to improve
productivity and profitability while continuing to implement its Coated Board
business strategy. In June 1997, the Company completed the upgrade of the second
Macon Mill paperboard machine to begin CUK Board production. During the first
nine months of 1999, the Company produced approximately 135,500 tons of CUK
Board on the second Macon Mill paperboard machine. In addition, the Company
produced approximately 29,000 tons of linerboard on this paper machine during
the first nine months of 1999. The Company had expected that the second Macon
Mill paperboard machine would be able to produce a full range of calipers of CUK
Board of approximately 250,000 tons annually by June 1999. However, as a result
of the Company's decision to produce mainly lower caliper CUK Board on that
machine, the Company now expects that the second Macon Mill paperboard machine
will be at full capacity by the end of 1999.
During the third quarter of 1999, total shipments decreased by approximately
31,000 tons when compared to the third quarter of 1998. This decrease is not the
result of reduced production capability or a significant inventory change.
Approximately two-thirds of the decrease is due to the rescheduling to the third
quarter of a routine maintenance outage at the West Monroe Mill that is
typically taken in the fourth quarter and the reduction of non-Riverwood
produced folding cartonboard sold in Europe. The maintenance outage negatively
impacted EBITDA by approximately $2 million in the third quarter and the Company
expects to have a corresponding increase in EBITDA in the fourth quarter. The
remainder of the decrease is due to an accounting change due to the
implementation of the Company's SAP information system that caused the Company
to treat certain low grade coated tons as by-products and not coated board
shipments and other miscellaneous adjustments resulting from the Company's SAP
conversion.
The Company has undertaken a profit center reorganization of its operations,
implemented a global restructuring program (see below), implemented a number of
cost saving measures and effected several management changes and, as part of
its ongoing reevaluation of current operations and assets, has lowered planned
capital expenditures. However, the Company expects capital expenditures will
range from $65 to $75 million in 1999 as the Company invests to improve its
process capabilities and implements SAP R3 software (see "-Financial Condition,
Liquidity and Capital Resources - Upgrade of Information Systems and
12
<PAGE> 13
Year 2000 Compliance"). 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. As part of this effort, the Company initiated a $25.6 million
global restructuring program in the fourth quarter of 1998 aimed at achieving
annualized savings and cost avoidance of approximately $20 million when fully
implemented. The global restructuring program is focused in the Company's
European operations, and is expected to be completed by the end of 1999 (see
"--Financial Condition, Liquidity and Capital Resources--Financing Sources and
Cash Flows"). The Company is continuing its inventory reduction initiative.
Packaging machinery placements during the first nine months of 1999 decreased
approximately 13% compared to the first nine months of 1998. The Company has
been and will continue to be more selective in future packaging machinery
placements to ensure appropriate returns. The Company has introduced some new
machines in its Quikflex and Autoflex families and has experienced positive
results.
OUTLOOK
The Company expects that its 1999 full year EBITDA will significantly exceed its
1998 EBITDA, although no assurance can be given in this regard. The achievement
of this expectation is dependent upon (among other things) a number of profit
improvement initiatives, including increasing worldwide beverage sales volumes
above 1998 levels, improvements in international converting operations,
improving U.S. mill throughput as the start-up of the second Macon Mill paper
machine continues, the global restructuring program, continued cost savings from
other actions taken to date and selling price improvements for containerboard
products. In 1999, the Company expects that it will achieve modest sales volume
increases in its worldwide beverage markets with the exception of Brazil. The
Company also expects sales volume increases in 1999 for its U.S. soft drink
markets and, to a lesser extent, its U.S. beer markets, though no assurance can
be given that this volume growth will be achieved. The Company is optimistic
about containerboard prices as several major containerboard producers recently
announced additional price increases. The Company's worldwide folding
cartonboard volumes and margins were reduced in the third quarter due to market
conditions in Asia and price declines in competing substrates. During the first
nine months of 1999, although international folding cartonboard volumes are
down, domestic folding cartonboard volumes are consistent with the first nine
months of 1998. In response to pressures from competing substrates, the Company
selectively reduced folding cartonboard prices to maintain sales volumes.
However, based on recent price increases announced for competing substrates, the
Company expects its domestic folding cartonboard volumes and pricing to increase
in the near term. In response to these announcements, the Company rescinded the
selective price reductions and announced a $40 per ton price increase for its
domestic folding carton and beverage products effective December 1, 1999.
13
<PAGE> 14
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------- --------------------------------------
% INCREASE % INCREASE
(DECREASE) (DECREASE)
SEPT. 30, FROM PRIOR SEPT. 26, SEPT. 30, FROM PRIOR SEPT. 26,
(IN THOUSANDS OF DOLLARS) 1999 PERIOD 1998 1999 PERIOD 1998
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales (Segment Data):
Coated Board $ 245,005 (10.2)% $ 272,806 $ 755,686 (6.0)% $ 804,035
Containerboard 23,689 18.7 19,960 68,372 13.7 60,141
--------- --------- --------- ---------
Net Sales 268,694 (8.2) 292,766 824,058 (4.6) 864,176
Cost of Sales 211,217 (10.6) 236,390 652,393 (8.6) 714,074
--------- --------- --------- ---------
Gross Profit 57,477 2.0 56,376 171,665 14.4 150,102
Selling, General and Administrative 25,935 (10.3) 28,913 83,041 (0.3) 83,294
Research, Development and
Engineering 1,028 4.9 980 3,014 (27.7) 4,170
Impairment Loss -- N/A -- -- (100.0) 13,342
Other Expenses (Income), net (1,219) (1,225.0) (92) (248) (100.0) 5,168
--------- --------- --------- ---------
Income from Operations $ 31,733 19.4 $ 26,575 $ 85,858 94.6 $ 44,128
========= ========= ========= =========
Income (Loss) from Operations
(Segment Data):
Coated Board* $ 36,977 5.1% $ 35,169 $ 110,283 59.5% $ 69,139
Containerboard (1,009) 77.5 (4,482) (12,343) (4.5) (11,813)
Corporate (4,235) (3.0) (4,112) (12,082) 8.5 (13,198)
--------- --------- --------- ---------
Income from Operations $ 31,733 19.4 $ 26,575 $ 85,858 94.6 $ 44,128
========= ========= ========= =========
</TABLE>
* Included in Income from Operations for Coated Board is an impairment loss of
$13.3 million taken in the three months ended June 27, 1998.
PAPERBOARD SHIPMENTS
The following represents shipments of Coated Board and Containerboard to
outside customers. Shipments of Coated Board represent sales to customers of
beverage carrierboard, folding cartonboard and WLC (other than from the Swedish
Mill). Shipments from the Swedish Mill represent sales to customers of WLC
produced at this mill. Shipments of Containerboard represent sales to customers
of linerboard, corrugating medium kraft paper and various other items,
principally off-specification coated board. Total shipments for the three and
nine months ended September 30, 1999 and September 26, 1998 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- ----------------------------------
SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26,
1999 1998 1999 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS OF TONS)
Coated Board 240.9 269.9 727.1 781.3
Swedish Mill 32.3 34.6 98.5 104.2
Containerboard 68.6 68.4 230.1 205.3
----- ----- ------- -------
341.8 372.9 1,055.7 1,090.8
===== ===== ======= =======
</TABLE>
THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998
NET SALES
As a result of the factors described below, the Company's Net Sales in the
third quarter of 1999 decreased by $24.1 million, or 8.2 percent, compared with
the third quarter of 1998. Net Sales in the Coated Board
14
<PAGE> 15
business segment decreased by $27.8 million in the third quarter of 1999, or
10.2 percent, to $245.0 million from $272.8 million in the third quarter of
1998, due primarily to lower sales volume in international folding cartonboard
markets resulting principally from lower demand in Asia, exiting certain low
margin business in the U.K., and lower sales volumes and slightly lower pricing
in the U.S. folding cartonboard markets due primarily to pressures from
competing substrates. These decreases were somewhat offset by higher worldwide
beverage volumes due principally to increased market penetration and strong
demand in Japan. Net Sales in the Containerboard business segment increased $3.7
million, or 18.7 percent, to $23.7 million in the third quarter of 1999 from
$20.0 million in the third quarter of 1998, due principally to higher pricing.
GROSS PROFIT
As a result of the factors discussed below, the Company's Gross Profit for the
third quarter of 1999 increased $1.1 million, or 2.0 percent, to $57.5 million
from $56.4 million in the third quarter of 1998. The Company's gross profit
margin increased to 21.4 percent for the third quarter of 1999 from 19.3 percent
in the third quarter of 1998. Gross Profit in the Coated Board business segment
decreased by $1.8 million, or 3.0 percent, to $57.3 million in the third quarter
of 1999 as compared to $59.1 million in the third quarter of 1998, while its
gross profit margin increased to 23.4 percent in the third quarter of 1999 from
21.6 percent in the third quarter of 1998. While the decrease in Coated Board
Gross Profit is due directly to lower Net Sales, the increase in gross profit
margin resulted principally from a shift in mix towards more profitable beverage
sales and worldwide cost reductions. In the Containerboard business segment,
Gross Profit increased $3.0 million to a gain of $0.3 million in the third
quarter of 1999 as compared to a loss in the third quarter of 1998 of $2.7
million due principally to increased pricing.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses decreased $3.0 million, or 10.3
percent, to $25.9 million in the third quarter of 1999 as compared to $28.9
million in the third quarter of 1998, due mainly to lower expenses related to
the implementation and start-up of SAP. As a percentage of Net Sales, Selling,
General and Administrative expenses decreased from 9.9 percent in the third
quarter of 1998 to 9.7 percent in the third quarter of 1999.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses remained stable at $1.0 million
in the third quarter of 1999 and in the third quarter of 1998.
OTHER (INCOME) EXPENSE, NET
Other (Income) Expense, net, increased by approximately $1.1 million to $(1.2)
million in the third quarter of 1999 due primarily to a net gain resulting from
certain foreign currency hedging activities.
INCOME (LOSS) FROM OPERATIONS
Primarily as a result of the factors discussed above, the Company's Income from
Operations in the third quarter of 1999 increased by $5.2 million, or 19.4
percent, to $31.7 million from $26.6 million in the third quarter of 1998,
while the Company's operating margin increased to 11.8 percent in the third
quarter of 1999 from 9.1 percent in the third quarter of 1998. Income from
Operations in the Coated Board business segment increased $1.8 million, or 5.1
percent, to $37.0 million in the third quarter of 1999 from $35.2 million in
the third quarter of 1998, while the operating margin increased to 15.1 percent
in the third quarter of 1999 from 12.9 percent in the third quarter of 1998,
primarily as a result of the factors described above. (Loss) from Operations in
the Containerboard business segment increased $3.5 million to a loss of $1.0
million in the third quarter of 1999 from a (Loss) from Operations of $4.5
million in the third quarter of 1998, primarily as a result of the factors
described above.
FLUCTUATIONS IN U.S. CURRENCY EXCHANGE RATES
Fluctuations in U.S. dollar currency exchange rates did not significantly
impact the Company's operations during the third quarter of 1999 as compared to
the same period of 1998.
15
<PAGE> 16
FIRST NINE MONTHS 1999 COMPARED WITH FIRST NINE MONTHS 1998
NET SALES
As a result of the factors described below, the Company's Net Sales in the
first nine months of 1999 decreased by $40.1 million, or 4.6 percent, compared
with the first nine months of 1998. Net Sales in the Coated Board business
segment decreased by $48.3 million in the first nine months of 1999, or 6.0
percent, to $755.7 million from $804.0 million in the first nine months of
1998, due primarily to lower sales volume in international folding cartonboard
markets resulting principally from lower demand in Asia, exiting certain low
margin business in the U.K., the sale of the Australian folding carton business
in March 1998, as well as a substantial decrease in sales volume in Brazil.
This decrease was somewhat offset by higher sales volume in U.S. beverage
markets principally in the soft drink market segment and higher sales volumes
in the international beverage markets due principally to increased market
penetration and strong demand in Japan. Net Sales in the Containerboard
business segment increased $8.2 million, or 13.7 percent, to $68.4 million in
the first nine months of 1999 from $60.1 million in the first nine months of
1998, due principally to higher linerboard sales volumes compared to the prior
year period as a result of producing linerboard to cover demand shortages in
the folding cartonboard markets and higher pricing.
GROSS PROFIT
As a result of the factors discussed below, the Company's Gross Profit for the
first nine months of 1999 increased $21.6 million, or 14.4 percent, to $171.7
million from $150.1 million in the first nine months of 1998. The Company's
gross profit margin increased to 20.8 percent for the first nine months of 1999
from 17.4 percent in the first nine months of 1998. Gross Profit in the Coated
Board business segment increased by $21.9 million, or 13.8 percent, to $180.1
million in the first nine months of 1999 as compared to $158.2 million in the
first nine months of 1998, while its gross profit margin increased to 23.8
percent in the first nine months of 1999 from 19.7 percent in the first nine
months of 1998. This increase in gross profit, despite lower sales, resulted
principally from a shift in mix towards more profitable beverage sales and
worldwide cost reductions. In the Containerboard business segment, Gross Profit
decreased $0.9 million to a loss of $8.1 million in the first nine months of
1999 as compared to a loss in the first nine months of 1998 of $7.2 million.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses decreased $0.3 million, or 0.3
percent, to $83.0 million in the first nine months of 1999 as compared to $83.3
million in the first nine months of 1998, and as a percentage of Net Sales,
increased from 9.6 percent in the first nine months of 1998 to 10.1 percent in
the first nine months of 1999.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses decreased by $1.2 million, or
27.7 percent, to $3.0 million in the first nine months of 1999 from $4.2
million in the first nine months of 1998.
IMPAIRMENT LOSS
The Company recorded an impairment loss of $13.3 million in the first nine
months of 1998 due to a write-down of packaging machines in accordance with
SFAS 121. The fair value of the machines was determined based on expected
future lease revenues and potential disposition.
OTHER (INCOME) EXPENSE, NET
Other (Income) Expense, net, decreased by approximately $5.4 million to $(0.2)
million in the first nine months of 1999 from $5.2 million in the first nine
months of 1998 due primarily to non-recurring credits in the first nine months
of 1999 relating to utility recoveries and a reversal of a litigation reserve,
and a net gain resulting from certain foreign currency hedging activities.
16
<PAGE> 17
INCOME (LOSS) FROM OPERATIONS
Primarily as a result of the factors discussed above, the Company's Income from
Operations in the first nine months of 1999 increased by $41.7 million, or 94.6
percent, to $85.9 million from $44.1 million in the first nine months of 1998,
while the Company's operating margin increased to 10.4 percent in the first
nine months of 1999 from 5.1 percent in the first nine months of 1998. Income
from Operations in the Coated Board business segment increased $41.1 million,
or 59.5 percent, to $110.3 million in the first nine months of 1999 from $69.1
million in the first nine months of 1998, while the operating margin increased
to 14.6 percent in the first nine months of 1999 from 8.6 percent in the first
nine months of 1998, primarily as a result of the factors described above.
(Loss) from Operations in the Containerboard business segment decreased $0.5
million to a loss of $12.3 million in the first nine months of 1999 from a
(Loss) from Operations of $11.8 million in the first nine months of 1998,
primarily as a result of the factors described above.
FLUCTUATIONS IN U.S. CURRENCY EXCHANGE RATES
Fluctuations in U.S. dollar currency exchange rates did not significantly
impact the Company's operations during the first nine months of 1999 as
compared to the same period of 1998.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, EQUITY IN NET EARNINGS
(LOSS) OF AFFILIATES
INTEREST INCOME
Interest Income decreased to $0.8 million in the first nine months of 1999 from
$1.0 million in the first nine months of 1998.
INTEREST EXPENSE
Interest Expense increased $1.0 million to $133.5 million in the first nine
months of 1999 from $132.5 million in the first nine months of 1998.
INCOME TAX EXPENSE
During the first nine months of 1999, the Company recognized an income tax
expense of $1.7 million on a (Loss) before Income Taxes and Equity in Net
Earnings (Loss) of Affiliates of $46.9 million. During the first nine months of
1998, the Company recognized an income tax expense of $0.2 million on a (Loss)
before Income Taxes and Equity in Net Earnings (Loss) of Affiliates of $87.4
million. These expenses differed from the statutory federal income tax rate
primarily because of valuation allowances established on net operating loss
carryforward tax assets in the U.S. and certain international locations where
the realization of such benefits is less likely than not.
EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES
Equity in Net Earnings (Loss) of Affiliates is comprised primarily of the
Company's equity in net earnings of Igaras, which is accounted for under the
equity method of accounting. Equity in Net Earnings (Loss) of Affiliates
decreased $10.3 million to a (Loss) of $(1.6) million in the first nine months
of 1999 from Earnings of $8.7 million in the first nine months of 1998
resulting from an overall downturn in the Brazilian markets and the devaluation
of the Real as described below.
On January 14, 1999, the Central Bank of Brazil changed the foreign exchange
policy by eliminating the exchange rate band, which had been used as a means to
control the fluctuation of the Real against the U.S. dollar. The exchange rate
is now determined by market forces. As a consequence of such change, the Real
suffered a significant devaluation related to the U.S. dollar during the
beginning of 1999. At this time, it is not practicable to determine whether or
at what level the exchange rate will stabilize as well as the effect of such
exchange rate fluctuations on Igaras' long term operations.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
17
<PAGE> 18
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 $4.3 million in the first nine
months of 1999 primarily as a result of $49.1 million net cash used in investing
activities somewhat offset by $7.3 million of net cash provided by operating
activities and by $38.7 million of net cash provided by financing activities.
Cash used in investing activities resulted primarily from purchases of property,
plant and equipment. Cash provided by financing activities resulted primarily
from net borrowings under the Revolving Facility. Depreciation and amortization
during the first nine months of 1999 totaled approximately $107 million, and is
expected to be approximately $145 million to $155 million for 1999.
The Company's cash flows from its operations and EBITDA are subject to moderate
seasonality with demand usually increasing in the spring and summer. The
Company's Coated Board business segment experiences seasonality principally due
to the seasonality of the worldwide multiple packaging beverage segment.
Historically, the Company's Coated Board business segment reports its strongest
sales in the second and third quarters of the fiscal year driven by the
seasonality of the Company's integrated beverage business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the Merger and from the
funding of its capital expenditures. As of September 30, 1999, the Company had
outstanding approximately $1,732 million of long-term debt, consisting
primarily of $650 million aggregate principal amount of the 1996 Notes, $250
million of the 1997 Notes, $637 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
1999, the Company repaid approximately $13.3 million of debt. The Company had a
net increase in revolving credit facilities borrowings of approximately $51.6
million due primarily to increased capital spending and cash payments relating
to the restructuring charge taken in the fourth quarter of 1998.
DEBT SERVICE
Principal and interest payments under the Term Loan Facility, the Revolving
Facility and the Machinery Facility, together with interest payments on the
1997 Notes and 1996 Notes, represent significant liquidity requirements for the
Company. Scheduled remaining term loan principal payments under the Term Loan
Facility will be approximately $4 million, $120 million, $173 million, $184
million and $156 million for each of the years 2000 through 2004, respectively.
The Revolving Facility will mature in March 2003 and the Machinery Facility
will mature in March 2001, with all amounts then outstanding becoming due. The
Company expects that its working capital and business needs will require it to
continue to have access to these or similar revolving credit facilities after
their respective maturity dates, and that the Company accordingly will have to
extend, renew, replace or otherwise refinance such facilities at or prior to
such dates. No assurance can be given that it will be able to do so. The loans
under the Facilities bear interest at floating rates based upon the interest
rate option elected by the Company. The Tranche A term loans, Tranche B term
loans and Tranche C term loans under the term loan Facility bore interest as of
September 30, 1999 at an average rate per annum of 7.9 percent. The Senior
Notes, the 1997 Notes and the Senior Subordinated Notes bear interest at rates
of 10 1/4 percent, 10 5/8 percent and 10 7/8 percent, respectively. Interest
expense in 1999 is expected to be approximately $175 million, including
approximately $10 million of non-cash amortization of deferred debt issuance
costs. During the first nine months of 1999, cash paid for interest was
approximately $115.9 million.
18
<PAGE> 19
The Company uses interest rate swaps to fix a portion of its variable rate Term
Loan Facility to a fixed rate in order to reduce the impact of interest rate
changes on future income. The difference to be paid or received under these
agreements is recognized as an adjustment to interest expense related to that
debt. At September 30, 1999, the Company had interest rate swap agreements with
a notional amount of $300 million, under which the Company will pay fixed rates
of 5.05 percent to 5.945 percent and receive three-month LIBOR.
COVENANT RESTRICTIONS
The Credit Agreements impose restrictions on the Company's ability to make
capital expenditures and both the Credit Agreements and the indentures
governing the 1996 Notes and the 1997 Notes limit the Company's ability to
incur additional indebtedness. Such restrictions, together with the highly
leveraged nature of the Company, could limit the Company's ability to respond
to market conditions, meet its capital spending program, provide for
unanticipated capital investments or take advantage of business opportunities.
The covenants contained in the Credit Agreements also, among other things,
restrict the ability of the Company and its subsidiaries to dispose of assets,
incur guarantee obligations, repay the relevant 1996 Notes or the 1997 Notes,
pay dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, make capital expenditures or engage in certain
transactions with affiliates, and otherwise restrict corporate activities. The
covenants contained in such indentures also impose restrictions on the
operation of the Company's business. At September 30, 1999, the Company was in
compliance with the financial covenants in the Credit Agreements.
CAPITAL EXPENDITURES
Capital spending for the first nine months of 1999 was approximately $47.7
million, up 117.0% from $22.0 million in the first nine months of 1998. Capital
spending during the first nine months of 1999 related primarily to upgrading the
Company's information systems, increasing paper production efficiencies,
increasing converting capacity and manufacturing packaging machinery. Total
capital spending for 1999 is expected to be between $65 million and $75 million,
and is expected to relate principally to the implementation of SAP, improving
the Company's process capabilities, the production of packaging machinery, and
cluster rule compliance. The Company expects that capital expenditures for 2000
will be at similar levels. See "--Upgrade of Information Systems and Year 2000
Compliance".
FINANCING SOURCES AND CASH FLOWS
In connection with the global restructuring program initiated in the fourth
quarter of 1998, the Company plans to reduce its European workforce by
approximately 300 employees in 1999 and to implement other initiatives designed
to improve productivity and profitability across the global organization. This
program will cost approximately $25.6 million and is on target and expected to
be completed by the end of 1999. At September 30, 1999, $15.4 million of this
total was accrued in Accounts payable and other accrued liabilities on the
Condensed Consolidated Balance Sheets. During the first nine months of 1999,
$9.3 million was utilized and charged against the accrual and related primarily
to severance costs.
On March 12, 1998, the Company entered into an agreement with Carter Holt
Harvey ("Carter Holt") for the sale of the Company's folding carton business in
Australia. Proceeds from the sale totaling $46.7 million were received on March
30, 1998. Under the terms of the agreement for such sale, the Company sold to
Carter Holt substantially all of the Company's Australian folding carton
assets, and Carter Holt assumed certain specified liabilities. The Company
retained substantially all of its beverage multiple packaging business in
Australia. Under the agreement, Carter Holt agreed to purchase from the Company
a portion of its coated board requirements in Australia and to supply beverage
cartons to meet the Company's needs for its Australian beverage business.
At September 30, 1999, the Company and its U.S. and international subsidiaries
had the following amounts of commitments, amounts outstanding and amounts
available under revolving credit facilities:
19
<PAGE> 20
<TABLE>
<CAPTION>
TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
OF OUTSTANDING AT AVAILABLE AT
COMMITMENTS SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------- ------------------ ------------------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Revolving Facility $400,000 $167,000 $233,000
Machinery Facility 140,000 21,000 24,000
International Facilities 18,116 4,892 13,224
-------- -------- --------
$558,116 $192,892 $270,224
======== ======== ========
</TABLE>
The Machinery Facility is limited by a borrowing base. Undrawn Revolving
Facility availability is expected to be used to meet future working capital and
other business needs of the Company. The Company anticipates pursuing
additional working capital financing for its foreign operations as necessary.
As described above, the Company has substantial liquidity. However, the Company
does anticipate that its liquidity position at December 31, 1999 will be
modestly lower than year-end 1998 levels, due mainly to the effect of
restructuring payments as well as a temporary increase in accounts receivable
as a result of the increased linerboard sales, which typically have longer
payment terms. The Company believes that cash generated from operations,
together with amounts available under its Revolving Facility, the Machinery
Facility and other available financing sources, will be adequate to permit the
Company to meet its debt service obligations, capital expenditure program
requirements, ongoing operating costs and working capital needs until the
maturity of the Revolving Facility (assuming extension or refinancing of the
Machinery Facility at its earlier maturity), although no assurance can be given
in this regard. The Company's future financial and operating performance,
ability to service or refinance its debt and ability to comply with the
covenants and restrictions contained in its debt agreements (see "--Covenant
Restrictions"), will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond the Company's control and
will be substantially dependent on the selling prices for the Company's
products and the Company's ability to successfully implement its overall
business and profitability strategies.
While the Company believes that Igaras has adequate liquidity, the Company
shares control of Igaras with its joint venture partner and future dividend
payments from Igaras, if any, would be subject to restrictions in the joint
venture agreement and would reflect only the Company's remaining interest of 50
percent. Under the Igaras joint venture agreement, Igaras is required to pay
dividends equal to at least 25 percent of its net profits. Due to currency
fluctuations, inflation and changes in political and economic conditions,
earnings from Brazilian operations have been subject to significant volatility.
There can be no assurance that such volatility will not recur in the future.
ENVIRONMENTAL AND LEGAL MATTERS
The Company is committed to compliance with all applicable environmental laws
and regulations throughout the world. Environmental law is, however, dynamic
rather than static. As a result, costs, which are unforeseeable at this time,
may be incurred when new laws are enacted, and when environmental agencies
promulgate or revise rules and regulations.
In late 1993, the U.S. Environmental Protection Agency proposed regulations
(generally referred to as the "cluster rules") that would mandate more
stringent controls on air and water discharges from the United States pulp and
paper mills. The cluster rules were promulgated in April 1998 and the Company
estimates the capital spending that may be required to comply with the cluster
rules could reach $55 million to be spent at its two U.S. paper mills over a
seven-year period beginning in 1999.
In late 1995, the Louisiana Department of Environmental Quality notified the
Predecessor of potential liability for the remediation of hazardous substances
at a wood treatment site in Shreveport, Louisiana that the Predecessor or its
predecessors previously operated, and at a former oil refinery site in Caddo
Parish, Louisiana which is on land that the Company currently owns. In response
to these notices, 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. Subsequent to receipt in May 1996
of a Special Demand Letter from DEQ to remediate the site in Shreveport, the
Company entered into an agreement with
20
<PAGE> 21
DEQ to perform a soil and groundwater investigation at the site. The Company
expects this investigation to be completed during 1999. In September 1996, the
Company received a Special Demand Letter from DEQ to remediate the site in
Caddo Parish. The Company performed a waste inventory and treatability study at
the site and is discussing with DEQ its responsibility and the participation of
other potentially responsible parties at the site, as well as remediation
options at the site.
The Company is involved in environmental remediation projects for certain
properties currently owned or operated by the Company, certain properties
divested by the Company for which responsibility was retained, and waste sites
where waste was shipped by predecessors of the Company or for which the Company
might have corporate successor liability. Certain of these projects are being
addressed under federal and state statutes, such as the Comprehensive
Environmental Response, Compensation and Liability Act and the state law
counterparts. The Company's costs in some instances cannot be reliably
estimated until the remediation process is substantially underway or liability
at multiparty sites has been addressed. To address these contingent
environmental costs, the Company has accrued reserves when such costs are
probable and can be reasonably estimated. The Company believes that, based on
current information and regulatory requirements, the accruals established by
the Company for environmental expenditures are adequate. Based on current
knowledge, to the extent that additional costs may be incurred that exceed the
accrued reserves, such amounts are not expected to have a material impact on
the results of operations, cash flows or financial condition of the Company,
although no assurance can be given that material costs will not be incurred in
connection with clean-up activities at these properties, including the
Shreveport and Caddo Parish sites referred to above.
The Company is a party to a number of lawsuits arising out of the ordinary
conduct of its business. While there can be no assurance as to their ultimate
outcome, the Company does not believe that these lawsuits will have a material
impact on the results of operations, cash flows or financial condition of the
Company.
The Company is a plaintiff in several actions against Mead claiming
infringement of the Company's patents for its packaging machines, as to which
Mead has filed counterclaims asserting that the Company's patents are invalid.
In the furthest advanced of these actions, on November 18, 1998, a federal
court entered an order refusing to adopt a special master's recommended finding
that the Company's patent in issue was invalid, and ruled that Mead had been
unlawfully infringing the Company's patent. On February 16, 1999, Mead filed an
appeal from that decision.
UPGRADE OF INFORMATION SYSTEMS AND YEAR 2000 COMPLIANCE
On April 1, 1999, the Company successfully implemented a new information
system, based on the SAP R3 software, in all its domestic locations as part of
a project designed to upgrade its worldwide information systems that is
expected to cost up to approximately $35 million to be spent through 1999. This
amount includes expenditures for the new enterprise-wide information system,
replacement of computer hardware and related machinery and equipment, training,
third party consultants and some additional costs designed to
21
<PAGE> 22
greater improve the business operational systems not initially budgeted at the
beginning of the project. Under SAP, the Company expects a major improvement in
its information systems and business processes, as well as achievement of Year
2000 compliance with regards to its information systems. This initiative
utilized both internal and external resources. Total spending on all SAP
related projects during the first nine months of 1999 was $15.8 million, all of
which was capitalized. Total spending on all SAP related projects to date was
$36.0 million, of which $29.1 million was capitalized. Future expenditures will
be funded by cash from operations and current credit facilities.
As part of the information systems upgrade, the Company has replaced its
computer software applications and substantially all information technology
("IT") and non-IT systems to accommodate the Year 2000 dating changes necessary
to permit correct recording of yearly dates for 2000 and later years. To date,
the Company has replaced all domestic desktops, laptops, and network hardware.
The Year 2000 compliance program also includes an analysis of all manufacturing
systems in the Company's plants and mills to determine Year 2000 compliance. At
this time, the Company believes that substantially all of the Company's Year
2000 compliance projects relating to its information and manufacturing systems
are completed. As a result, all such systems are in compliance with vendor
specifications. During the fourth quarter of 1999, the Company expects to
perform final tests designed to ensure that all of its systems will be
unaffected by the year 2000 date issue.
The Company expects that it will achieve Year 2000 compliance by the end of
1999, but would anticipate a material disruption in its operations as the result
of any failure in a critical manufacturing, operations or information system.
However, the effect on the Company's business, financial condition or results of
operations cannot be determined at this time. The Company believes that it will
implement Year 2000 compliant systems far enough in advance of January 1, 2000
to correct all anticipated issues. Accordingly, the Company does not currently
have a contingency plan relating to the Year 2000 issue (although the Company
will evaluate appropriate courses of action if circumstances change). The
Company has been communicating with all of its significant suppliers and
customers over the past 18 months about compliance of their own systems and,
based on information received to date from such suppliers and customers, expects
that they will achieve Year 2000 compliance, although no assurance can be given
in this regard. If the Company or any of its significant suppliers, utilities or
customers fails to achieve Year 2000 compliance on a timely basis, the possible
material consequences could include, among other things, temporary plant
closings, delays in delivery of products, delays in receipt of supplies, and
invoice and collection errors.
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 U.S. federal tax purposes
and for purposes of state taxes for which the former majority owner and the
Company filed returns on a combined basis. The Company agreed to bear the cost
of this election for the purposes of other state taxes ("stand-alone taxes"),
including Louisiana income tax. During 1997, the Company paid $27.5 million in
estimated Louisiana stand-alone taxes relating to the election. The Company's
calculation of its Louisiana tax was based on state law in effect at the time
of the Merger, including a 1993 amendment. In May 1997, the Louisiana Supreme
Court declared the 1993 amendment to be void under the Louisiana Constitution,
retroactive to 1993. It is possible that the voiding of the 1993 amendment
could result in the Company being required to pay significant additional
Louisiana income tax relating to the election (plus potential penalties and
statutory interest on the additional taxes). After consultation with Louisiana
tax counsel, the Company filed its Louisiana income tax return for the period
ended March 27, 1996 in reliance on the Louisiana tax law in effect at the time
of the Merger, without the payment of any additional tax due to the voiding of
the 1993 amendment. There can be no assurance, however, that the Company would
ultimately prevail on this issue if Louisiana were to challenge such filing
position. If the Company were not to prevail in such a challenge, significant
additional Louisiana income tax relating to the election could be payable.
Management estimates that the maximum amount of such additional tax is
approximately $47 million (plus potential penalties and statutory interest on
any additional tax). The tax period ended March 27, 1996, is currently under
audit by the State of Louisiana. If the Company receives an assessment from the
State, the Company will consider paying the assessed amount to avoid further
interest accruals as it contests the assessment. Management believes that the
additional tax ultimately paid (if any) will be substantially less than the
estimated maximum amount, although no assurance can be given in this regard.
The Company and its advisors are continuing to study this situation. Since the
22
<PAGE> 23
law is unclear and the amounts involved could be significant, it may be several
years before this matter is resolved.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report (other than the financial
statements and other statements of historical fact) are forward-looking
statements, including, without limitation, (i) the statements in "- General -
Business Trends and Initiatives" concerning (a) the improvements which the
Company's long-term initiatives, including, without limitation, its profit
center reorganization and global restructuring program, are designed to achieve,
(b) the Company's expectation that the second Macon Mill paper machine will be
able produce approximately 250,000 tons annually of a full range of caliper CUK
Board by the end of 1999, and (c) the Company's expectation of an increase in
the fourth quarter resulting from the maintenance outage being taken in the
third quarter, (d) the Company's expectation that capital expenditures will
range from $65 million to $75 million in 1999 and (e) the Company's expectation
that its global restructuring program will be completed by the end of 1999;
(ii) the statements in "-Outlook" concerning (a) the Company's expectation that
its 1999 EBITDA will significantly exceed its 1998 EBITDA as well as each of the
factors which the Company believes support such expectation, (b) the Company's
expectations that it will achieve continued sales volume increases in its
worldwide beverage markets with the exception of Brazil, (c) the Company's
expectations that it will achieve sales volume increases in 1999 for its U.S.
soft drink markets and its U.S. beer markets, and (d) the Company's expectations
regarding increased volumes and pricing in its domestic folding cartonboard
markets in the near term as a result of recent price increases in competing
substrates; (iii) the statements in "Financial Condition, Liquidity and Capital
Resources" concerning (a) the Company's expectation that depreciation and
amortization for 1999 will be approximately $145 million to $155 million, (b)
the Company's expectation that 1999 interest expense will be approximately $175
million including approximately $10 million of non-cash amortization of deferred
debt issuance costs, (c) the Company's expectation that total capital spending
for 1999 will range from $65 to $75 million and that the planned upgrading of
the Company's information systems will cost up to $35 million through 1999 (and
its belief that the Company will achieve Year 2000 compliance by the end of 1999
and its other statements and beliefs in "- Upgrade of Information Systems and
Year 2000 Compliance"), (d) the Company's anticipation that its liquidity
position at year-end 1999 will be modestly lower than at year-end 1998, (e) 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), (f) 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, (g) the Company's belief and estimates in respect of
certain Louisiana income tax matters relating to the Section 338(h)(10)
election, including, without limitation, management's belief that additional tax
ultimately paid (if any) would be substantially less than $47 million and (h)
the Company's expectation that capital expenditures for 2000 will be at similar
levels as 1999 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 Matter Relating to the Merger"), the Company's Report on Form 10-K
for the year ended December 31, 1998, 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.
23
<PAGE> 24
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes standards
for the way companies account for and report on derivative instruments and
hedging activities. SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company has not determined the
impact that SFAS No. 133 will have on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For a discussion of certain market risks related to the Company, see Part II,
Item 7A, "Quantitative and Qualitative Disclosure about Market Risk", in the
Company's Annual Report on Form 10-K for the fiscal period ended December 31,
1998. There have been no significant developments with respect to interest
rates, derivatives or exposure to market risk during the first nine months of
1999.
24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The stockholders of Riverwood Holding, Inc. and the sole stockholder of RIC
Holding, Inc. and Riverwood International Corporation, acting by written consent
in lieu of a special meeting effective September 20, 1999, accepted the
resignation of Joseph E. Parzick as one of the Exor Group S. A. Nominated
Directors and accepted the nomination of Exor Group, S. A. to appoint Gianluigi
Gabetti as Mr. Parzick's replacement, effective September 20, 1999, to hold
office until the next annual meeting of the Stockholders or until his successor
shall have been elected and qualified, or until his earlier death, resignation
or removal, as provided in the By-Laws.
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule (For SEC use only)
99 Reconciliation of Income (Loss) from Operations to EBITDA. Filed as an
exhibit hereto.
(b) Reports on Form 8-K.
Not applicable
25
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVERWOOD HOLDING, INC.
-------------------------------------------
(Registrant)
Date: November 12, 1999 By:
/s/ Edward W. Stroetz Jr.
-------------------------------------------
Edward W. Stroetz Jr.
Secretary
Date: November 12, 1999 By:
/s/ Daniel J. Blount
-------------------------------------------
Daniel J. Blount
Vice President and
Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RIVERWOOD HOLDING, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 9,496
<SECURITIES> 0
<RECEIVABLES> 167,523
<ALLOWANCES> 1,250
<INVENTORY> 176,062
<CURRENT-ASSETS> 364,103
<PP&E> 1,446,657
<DEPRECIATION> 398,256
<TOTAL-ASSETS> 2,382,803
<CURRENT-LIABILITIES> 261,341
<BONDS> 1,727,406
0
0
<COMMON> 75
<OTHER-SE> 284,310
<TOTAL-LIABILITY-AND-EQUITY> 2,382,803
<SALES> 824,058
<TOTAL-REVENUES> 824,058
<CGS> 652,393
<TOTAL-COSTS> 652,393
<OTHER-EXPENSES> 85,807
<LOSS-PROVISION> (1,038)
<INTEREST-EXPENSE> 133,492
<INCOME-PRETAX> (46,878)
<INCOME-TAX> 1,674
<INCOME-CONTINUING> (50,125)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50,125)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
RIVERWOOD HOLDING, INC.
RECONCILIATION OF INCOME (LOSS) FROM OPERATIONS TO EBITDA
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Coated Container-
Board board Corporate Total
--------- ---------- --------- --------
<S> <C> <C> <C> <C>
THIRD QUARTER 1999:
Income (Loss) from Operations $ 36,977 $ (1,009) $ (4,235) $ 31,733
Add: Depreciation and amortization 30,907 4,336 1,050 36,293
Dividends from equity investments -- -- 1,873 1,873
Other non-cash charges (A) (836) 98 1,436 698
--------- -------- -------- --------
EBITDA (B) $ 67,048 $ 3,425 $ 124 $ 70,597
========= ======== ======== ========
THIRD QUARTER 1998:
Income (Loss) from Operations $ 35,169 $ (4,482) $ (4,112) $ 26,575
Add: Depreciation and amortization 31,557 3,874 (925) 34,506
Dividends from equity investments -- -- 915 915
Other non-cash charges (A) 1,894 375 2,321 4,590
--------- -------- -------- --------
EBITDA (B) $ 68,620 $ (233) $ (1,801) $ 66,586
========= ======== ======== ========
FIRST NINE MONTHS 1999:
Income (Loss) from Operations $ 110,283 $(12,343) $(12,082) $ 85,858
Add: Depreciation and amortization 92,014 12,718 2,240 106,972
Dividends from equity investments -- -- 2,758 2,758
Other non-cash charges (A) 16 304 3,893 4,213
--------- -------- -------- --------
EBITDA (B) $ 202,313 $ 679 $ (3,191) $199,801
========= ======== ======== ========
FIRST NINE MONTHS 1998:
Income (Loss) from Operations $ 69,139 $(11,813) $(13,198) $ 44,128
Add: Depreciation and amortization 94,391 11,350 (395) 105,346
Dividends from equity investments -- -- 2,527 2,527
Other non-cash charges (A) 18,284 1,126 5,089 24,499
--------- -------- -------- --------
EBITDA (B) $ 181,814 $ 663 $ (5,977) $176,500
========= ======== ======== ========
</TABLE>
Notes:
(A) Other non-cash charges include non-cash charges for LIFO accounting,
pension, postretirement and postemployment benefits, expenses associated
with the write-up of inventory, depletion of prepaid timber and
amortization of premiums on hedging contracts deducted in determining net
income.
(B) EBITDA is defined as consolidated net income (exclusive of non-cash charges
resulting from purchase accounting during the periods subsequent to the
Merger) before consolidated interest expense, consolidated income taxes,
consolidated depreciation and amortization, and other non-cash charges
deducted in determining consolidated net income, extraordinary items and
the cumulative effect of accounting changes and earnings of, but including
dividends from, non-controlled affiliates. EBITDA excludes equity earnings
of Igaras from the Company's investment in Igaras but includes dividends
actually received from Igaras. 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.
27
