<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
<TABLE>
<S> <C>
Delaware 58-2205241
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1013 Centre Road
Suite 350
Wilmington, Delaware 19805
(Address of principal executive offices)
(Zip Code)
c/o Riverwood International Corporation
(770) 644-3000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
_______ ______
At May 10, 1999 there were 7,041,230 shares and 500,000 shares of the
registrant's Class A and Class B common stock, respectively, outstanding.
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PART I. FINANCIAL INFORMATION
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>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and equivalents $ 13,791 $ 13,840
Receivables, net of allowances 141,294 142,221
Inventories 177,005 167,388
Prepaid expenses 8,271 8,579
Deferred tax assets 293 298
----------- -----------
Total Current Assets 340,654 332,326
Property, Plant and Equipment, net of accumulated
depreciation of $337,399 in 1999 and $310,008 in 1998 1,478,012 1,495,490
Investments in Net Assets of Equity Affiliates 141,641 143,611
Goodwill, net of accumulated amortization of $23,844 in 1999
and $21,857 in 1998 294,078 296,065
Other Assets 150,668 150,109
----------- -----------
Total Assets $ 2,405,053 $ 2,417,601
=========== ===========
LIABILITIES
Current Liabilities:
Short-term debt $ 15,163 $ 17,613
Accounts payable and other accrued liabilities 236,006 261,164
----------- -----------
Total Current Liabilities 251,169 278,777
Long-Term Debt, less current portion 1,726,034 1,680,415
Other Noncurrent Liabilities 113,575 115,435
----------- -----------
Total Liabilities 2,090,778 2,074,627
----------- -----------
Contingencies and Commitments (Note 5)
Redeemable Common Stock, at current redemption value 4,673 6,205
SHAREHOLDERS' EQUITY
Nonredeemable Common Stock 75 75
Capital in Excess of Par Value 750,365 750,100
(Accumulated Deficit) (424,392) (397,913)
Cumulative Currency Translation Adjustment (16,446) (15,493)
----------- -----------
Total Shareholders' Equity 309,602 336,769
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,405,053 $ 2,417,601
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 28, 1998
-------------- --------------
<S> <C> <C>
Net Sales $ 255,867 $ 265,435
Cost of Sales 207,759 227,962
Selling, General and Administrative 27,887 26,998
Research, Development and Engineering 1,086 1,737
Other Expenses, net 264 1,492
--------- ---------
Income from Operations 18,871 7,246
Interest Income 199 467
Interest Expense 43,156 43,999
--------- ---------
(Loss) before Income Taxes and Equity in
Net (Loss) Earnings of Affiliates (24,086) (36,286)
Income Tax Expense 409 940
--------- ---------
(Loss) before Equity in Net (Loss) Earnings
of Affiliates (24,495) (37,226)
Equity in Net (Loss) Earnings of Affiliates (1,984) 2,681
--------- ---------
Net (Loss) $ (26,479) $ (34,545)
--------- ---------
Other comprehensive (Loss), net of tax:
Foreign currency translation adjustments (953) (4,064)
--------- ---------
Comprehensive (Loss) $ (27,432) $ (38,609)
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 28, 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $(26,479) $(34,545)
Noncash Items Included in Net (Loss):
Depreciation and amortization 35,251 35,186
Deferred income taxes (328) (31)
Pension, postemployment and postretirement benefits,
net of benefits paid 998 857
Net loss on disposal of assets 546 --
Equity in net (loss) earnings of affiliates, net of dividends 1,984 (2,063)
Amortization of deferred debt issuance costs 2,544 2,482
Other, net 43 216
(Increase) Decrease in Current Assets:
Receivables (111) 1,637
Inventories (12,393) 1,553
Prepaid expenses 289 3,418
(Decrease) Increase in Current Liabilities:
Accounts payable and other accrued liabilities (24,264) 5,868
(Decrease) in Other Noncurrent Liabilities (1,418) (1,412)
-------- --------
Net Cash (Used in) Provided by Operating Activities (23,338) 13,166
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (13,330) (7,938)
Proceeds from Sale of Assets -- 906
(Increase) Decrease in Other Assets (5,220) 1,570
-------- --------
Net Cash (Used in) Investing Activities (18,550) (5,462)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Notes Payable 45,900 5,890
Repurchases of Redeemable Common Stock (1,267) (893)
Payments on Debt (2,589) (8,677)
-------- --------
Net Cash Provided by (Used in) Financing Activities 42,044 (3,680)
-------- --------
Effect of Exchange Rate Changes on Cash (205) (151)
-------- --------
Net (Decrease) Increase in Cash and Equivalents (49) 3,873
Cash and Equivalents at Beginning of Period 13,840 15,751
-------- --------
Cash and Equivalents at End of Period $ 13,791 $ 19,624
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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RIVERWOOD HOLDING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
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) MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Finished goods $ 79,390 $ 72,120
Work in-process 5,112 7,157
Raw materials 61,975 52,669
Supplies 30,528 35,442
-------- --------
Total $177,005 $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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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 THREE MONTHS ENDED
MARCH 31, MARCH 28,
1999 1998
--------- ---------
(In thousands of dollars)
<S> <C> <C>
Net Sales $ 42,295 $ 65,978
Cost of Sales 39,061 49,292
-------- --------
Gross Profit $ 3,234 $ 16,686
======== ========
(Loss) Income from Operations $ (1,348) $ 10,847
======== ========
Net (Loss) Income $ (4,922) $ 4,843
======== ========
</TABLE>
During the first quarter of 1998, the Company received dividends from Igaras
totaling $0.6 million, net of taxes of $0.1 million.
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.
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 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.
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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.
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 of its officers (the "Individual Defendants," and together with the
Company, the "Defendants"). In his complaint, Clay generally alleged that the
Defendants violated the federal securities laws by disseminating misleading
statements and by omissions concerning the strategic alternatives that the
Predecessor was considering, including its potential sale to a third-party
investor. The complaint also alleged that the Individual Defendants, through
their exercise of stock appreciation rights ("SARs"), violated the federal
securities laws by trading in the Predecessor's securities while in possession
of material, non-public information. The complaint generally sought 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 facts that (i) none of the
statements attributable to the Company concerning its review of strategic
alternatives was false and (ii) there is no causal relationship between
plaintiff's purchase of Riverwood common stock and the Individual Defendants'
exercise of SARs. On October 14, 1998, the U.S. Court of Appeals for the
Eleventh Circuit affirmed the dismissal. The Court of Appeals ruled that (i)
none of the statements attributable to the Company concerning its review of
strategic alternatives was false and (ii) the SARs were not securities. On
November 5, 1998, Clay filed a motion seeking rehearing en banc. The court has
not yet ruled on that motion.
On August 21, 1998 William D. Tatum, C. Steven Clark, Thomas W. Brabston, Sr.,
and Joe O. Harper, Jr. ("Plaintiffs"), all former employees of the Company,
commenced a purported class action lawsuit in the Superior Court of Fulton
County, Georgia, against the Company and certain current and former officers of
the Company. In the complaint, Plaintiffs alleged generally that the Company and
such officers (1) breached the terms of the contracts between Plaintiffs and the
Predecessor governing Premium Stock Appreciation Rights ("PSARs") as a result of
a suspension requested on August 23, 1995, (2) breached an implied covenant of
good faith and fair dealing in connection with both the suspension and the
lifting of that suspension and (3) engaged in fraud and negligent
misrepresentation in connection with the lifting of the suspension by (a)
failing to tell Plaintiffs that certain officers of the Predecessor were
planning to exercise PSARs on September 21, 1995 and (b) failing to inform
Plaintiffs of the status of the Predecessor's review of strategic alternatives
as of September 21, 1995. Plaintiffs sought (i) an order granting class
certification, (ii) an award of compensatory damages, (iii) pre-judgment
interest, (iv) punitive damages in an amount to be determined by the jury and
(v) litigation expenses, including attorneys' fees. The defendants have answered
the complaint. In addition, on October 16, 1998, the defendants moved to strike
the class allegations in the complaint, and, on October 30, 1998, moved to
dismiss the complaint. On January 6, 1999, the court granted the motion to
strike the class allegations and denied the motion to dismiss the complaint. One
additional plaintiff has been added. The parties are now engaged in discovery.
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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). 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 - 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. The
cost of this program was approximately $25.6 million and is expected to be
completed in 1999. At March 31, 1999, $19.8 million of this total was accrued in
Accounts payable and other accrued liabilities on the Condensed Consolidated
Balance Sheets. During the first quarter of 1999, $4.9 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
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related to the severance of approximately 750 employees, relocation and other
plant closure costs. During the first quarter of 1999, $0.3 million was utilized
and charged against the accrual and primarily related to severance costs. At
March 31, 1999, $4.5 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.
NOTE 7 - BUSINESS SEGMENT INFORMATION
Business segment information is as follows:
<TABLE>
<CAPTION>
Three Months ended Three Months ended
March 31, March 28,
(In thousands of dollars) 1999 1998
--------- ---------
<S> <C> <C>
NET SALES:
Coated Board $234,532 $241,889
Containerboard 21,335 23,546
-------- --------
$255,867 $265,435
======== ========
INCOME (LOSS) FROM OPERATIONS:
Coated Board $ 29,769 $ 16,572
Containerboard (7,448) (4,620)
Corporate (3,450) (4,706)
-------- --------
$ 18,871 $ 7,246
======== ========
EBITDA:
Coated Board $ 59,793 $ 48,011
Containerboard (2,430) 455
Corporate (1,674) (2,178)
-------- --------
$ 55,689 $ 46,288
======== ========
</TABLE>
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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 $639 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.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 28,
1999 1998
--------- ---------
(IN THOUSANDS OF DOLLARS)
- -------------------------
<S> <C> <C>
EBITDA (Segment Data):
Coated Board $ 59,793 $ 48,011
Containerboard (2,430) 455
Corporate (1,674) (2,178)
-------- --------
EBITDA $ 55,689 $ 46,288
======== ========
</TABLE>
BUSINESS TRENDS AND INITIATIVES
The Company's cash flow from operations and EBITDA are influenced by sales
volume and selling prices for its products and raw material costs, and are
affected by a number of significant business, economic and competitive factors.
Many of these factors are not within the Company's control. Historically, in the
Coated Board business segment, the Company has experienced stable pricing for
its integrated beverage carton products, and moderate cyclical pricing for its
folding cartonboard, which is principally sold in the open market. The Company's
folding cartonboard sales are affected by competition from competitors' CUK
Board and other substrates - solid bleached sulfate ("SBS"), recycled clay
coated news ("CCN") and, internationally, WLC -- as well as by general market
conditions. In the Containerboard business segment, conditions in the cyclical
worldwide commodity paperboard markets have a substantial impact on the
Company's Containerboard sales. During the first quarter of 1999, the Company
announced a $50 per ton price increase for both linerboard and medium. The
Company realized approximately $25 of this increase by the end of the quarter.
The Company is pursuing a number of long-term initiatives designed to improve
productivity and profitability while continuing to implement its Coated Board
business strategy. In June 1997, the Company completed the upgrade of the second
Macon Mill paperboard machine to begin CUK Board production. During the first
quarter of 1999, the Company produced approximately 44,500 tons of CUK Board on
the second Macon Mill paperboard machine. In addition, the Company produced
approximately 7,000 tons of linerboard on this paper machine during the first
quarter of 1999. The Company expects that the second Macon Mill paperboard
machine will be able to produce a full capacity tonnage of reduced caliper CUK
Board of approximately 250,000 tons annually by June 1999. The Company's
previous full capacity tonnage estimate of 275,000 tons annually was based on
higher caliper (and thus relatively heavier) CUK Board that the Company had
planned to produce on the second Macon Mill paperboard machine. The Company has
recently shifted to producing reduced caliper CUK Board principally to improve
product quality to customers.
The Company has taken actions to increase open market folding cartonboard sales
volume, 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 does expect capital expenditures to increase
approximately 50% in 1999 compared to 1998 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 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 of approximately $20 million when fully implemented. The
global restructuring program is focused in the
12
<PAGE> 13
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 continues to shift its mix of packaging machinery placements from
the U.S. to international locations. Packaging machinery placements during the
first quarter of 1999 increased slightly compared to the first quarter of 1998.
The Company has been and will continue to be more selective in future packaging
machinery placements to ensure appropriate returns. Currently, the Company is
introducing some new machines in its Marksman, Quikflex and Autoflex families.
The Company expects an increase in new packaging machinery placements during
1999. The Company expects an increase in beverage cartonboard tonnage in 1999 as
the number of packaging machines in service and the cartonboard throughput per
machine increases.
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 coated board sales volumes above
1998 levels, improvements in international converting operations, improving U.S.
mill throughput as the successful 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 continued sales
volume increases in its international beverage markets with the exception of
Brazil. The Company also expects sales volume increases in its U.S. folding
cartonboard markets and its U.S. soft drink carton markets in 1999 while its
U.S. beer carton volume is expected to be flat, consistent with the overall beer
market, though no assurance can be given that this volume growth will be
achieved. However, the Company anticipates that growth in coated board volumes
could slow and margins could be reduced due to excess global industry capacity
and recent price declines in competing substrates, particularly SBS.
RESULTS OF OPERATIONS
FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998
<TABLE>
<CAPTION>
% INCREASE
THREE MONTHS ENDED (DECREASE) THREE MONTHS ENDED
MARCH 31, FROM PRIOR MARCH 28,
(IN THOUSANDS OF DOLLARS) 1999 PERIOD 1998
--------- ---------- ---------
<S> <C> <C> <C>
Net Sales (Segment Data):
Coated Board $234,532 (3.0)% $241,889
Containerboard 21,335 (9.4) 23,546
-------- ----- --------
Net Sales 255,867 (3.6) 265,435
Cost of Sales 207,759 (8.9) 227,962
-------- ----- --------
Gross Profit 48,108 28.4 37,473
Selling, General and Administrative 27,887 3.3 26,998
Research, Development and
Engineering 1,086 (37.5) 1,737
Other Expenses, net 264 (82.3) 1,492
-------- ----- --------
Income from Operations $ 18,871 160.4 $ 7,246
======== ===== ========
Income (Loss) from Operations
(Segment Data):
Coated Board $ 29,769 79.6% $ 16,572
Containerboard (7,448) (61.2) (4,620)
Corporate (3,450) 26.7 (4,706)
-------- ----- --------
Income from Operations $ 18,871 160.4 $ 7,246
======== ===== ========
</TABLE>
13
<PAGE> 14
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 months ended March
31, 1999 and March 28, 1998 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 28,
1999 1998
--------- ---------
<S> <C> <C>
(IN THOUSANDS OF TONS)
Coated Board 225.2 231.0
Swedish Mill 31.9 32.6
Containerboard 81.8 81.9
----- -----
338.9 345.5
===== =====
</TABLE>
NET SALES
As a result of the factors described below, the Company's Net Sales in the first
quarter of 1999 decreased by $9.6 million, or 3.6 percent, compared with the
first quarter of 1998. Net Sales in the Coated Board business segment decreased
by $7.4 million in the first quarter of 1999, or 3.0 percent, to $234.5 million
from $241.9 million in the first quarter of 1998, due primarily to the sale of
the Australian folding carton business in March 1998, lower sales volume in
international folding cartonboard markets resulting principally from market
conditions in Asia and Europe, and lower sales volumes in the international
beverage markets due to a downturn in the Brazilian markets somewhat offset by
higher sales volume in U.S. beverage and U.S. folding cartonboard markets, and
slightly higher prices in U.S. beverage markets, principally soft drink markets.
Net Sales in the Containerboard business segment decreased $2.2 million, or 9.4
percent, to $21.3 million in the first quarter of 1999 from $23.5 million in the
first quarter of 1998, due principally to lower pricing in linerboard and medium
markets compared to the prior year period.
GROSS PROFIT
As a result of the factors discussed below, the Company's Gross Profit for the
first quarter of 1999 increased $10.6 million, or 28.4 percent, to $48.1 million
from $37.5 million in the first quarter of 1998. The Company's gross profit
margin increased to 18.8 percent for the first quarter of 1999 from 14.1 percent
in the first quarter of 1998. Gross Profit in the Coated Board business segment
increased by $13.5 million, or 32.7 percent, to $54.6 million in the first
quarter of 1999 as compared to $41.2 million in the first quarter of 1998, while
its gross profit margin increased to 23.3 percent in the first quarter of 1999
from 17.0 percent in the first quarter of 1998. This increase in gross profit
resulted principally from overall cost reductions and the other factors
described above. In the Containerboard business segment, Gross Profit decreased
$2.8 million to a loss of $6.0 million in the first quarter of 1999 as compared
to a loss in the first quarter of 1998 of $3.2 million due principally to lower
pricing in linerboard and medium markets compared to the prior year period.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses increased $0.9 million, or 3.3
percent, to $27.9 million in the first quarter of 1999 as compared to $27.0
million in the first quarter of 1998, and as a percentage of Net Sales,
increased from 10.2 percent in the first quarter of 1998 to 10.9 percent in the
first quarter of 1999. This increase was due primarily to the incremental
non-capitalizable costs relating to the implementation of a new computerized
information system (see "--Financial Condition, Liquidity and Capital Resources
- --Upgrade of Information Systems and Year 2000 Compliance").
14
<PAGE> 15
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses decreased by $0.7 million, or
37.5 percent, to $1.1 million in the first quarter of 1999 from $1.7 million in
the first quarter of 1998.
OTHER EXPENSE, NET
Other Expense, net, decreased by approximately $1.2 million to $0.3 million in
the first quarter of 1999.
INCOME (LOSS) FROM OPERATIONS
Primarily as a result of the factors discussed above, the Company's Income from
Operations in the first quarter of 1999 increased by $11.6 million, or 160.4
percent, to $18.9 million from $7.2 million in the first quarter of 1998, while
the Company's operating margin increased to 7.4 percent in the first quarter of
1999 from 2.7 percent in the first quarter of 1998. Income from Operations in
the Coated Board business segment increased $13.2 million, or 79.6 percent, to
$29.8 million in the first quarter of 1999 from $16.6 million in the first
quarter of 1998, while the operating margin increased to 12.7 percent in the
first quarter of 1999 from 6.9 percent in the first quarter of 1998, primarily
as a result of the factors described above. (Loss) from Operations in the
Containerboard business segment decreased $2.8 million to a loss of $7.4 million
in the first quarter of 1999 from a (Loss) from Operations of $4.6 million in
the first 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 first quarter of 1999 as compared to the
same period of 1998.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES, EQUITY IN NET EARNINGS OF
AFFILIATES, DISCONTINUED OPERATIONS, EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT AND CHANGE IN ACCOUNTING PRINCIPLE.
INTEREST INCOME
Interest Income decreased $0.3 million to $0.2 million in the first quarter of
1999 from $0.5 million in the first quarter of 1998.
INTEREST EXPENSE
Interest Expense decreased $0.8 million to $43.2 million in the first quarter of
1999 from $44.0 million in the first quarter of 1998.
INCOME TAX EXPENSE
During the first quarter of 1999, the Company recognized an income tax expense
of $0.4 million on a (Loss) before Income Taxes and Equity in Net Earnings of
Affiliates of $24.1 million. During the first quarter of 1998, the Company
recognized an income tax expense of $0.9 million on a (Loss) before Income Taxes
and Equity in Net Earnings of Affiliates of $36.3 million. 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 (LOSS) EARNINGS OF AFFILIATES
Equity in Net (Loss) Earnings 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 (Loss) Earnings of Affiliates
decreased $4.7 million to a (Loss) of $2.0 million in the first quarter of 1999
from Earnings of $2.7
15
<PAGE> 16
million in the first quarter of 1998 resulting from an overall downturn in the
Brazilian markets and the devaluation of the Real as described below.
During the first quarter of 1998, the Company received dividends from Igaras
totaling $0.6 million, net of taxes of $0.1 million. 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.
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 remained constant at $13.8 million in the first quarter of
1999 compared to year end 1998. Cash used in operating activities primarily
related to a decrease in Accounts payable and other accrued liabilities. Cash
used in financing activities resulted primarily from an increase in the
Revolving Facility. Depreciation and amortization during the first quarter of
1999 totaled approximately $35.3 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 March 31, 1999, the Company had
outstanding approximately $1,736 million of long-term debt, consisting primarily
of $650 million aggregate principal amount of the 1996 Notes, $250 million of
the 1997 Notes, $639 million outstanding under the Term Loan Facility and
additional amounts under the Revolving Facility, the Machinery Facility and
other debt issues and facilities. During the first quarter of 1999, the Company
repaid approximately $2.6 million of term debt. The Company had a net increase
in revolving credit facilities borrowings of approximately $45.9 million due
primarily to seasonal inventory build-up, increased capital spending and cash
payments relating to the restructuring charge taken in the fourth quarter of
1998. In the first three months of 1998, a similar operational increase in the
revolving credit facilities was partially offset by proceeds from the sale of
the Australian folding carton business in March 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
16
<PAGE> 17
requirements for the Company. Scheduled term loan principal payments under the
Term Loan Facility will be approximately $4 million, $4 million, $120 million,
$173 million, $184 million and $156 million for each of the years 1999 through
2004, respectively.
The Revolving Facility will mature in March 2003 and the Machinery Facility will
mature in March 2001, with all amounts then outstanding becoming due. The
Company expects that its working capital and business needs will require it to
continue to have access to these or similar revolving credit facilities after
their respective maturity dates, and that the Company accordingly will have to
extend, renew, replace or otherwise refinance such facilities at or prior to
such dates. No assurance can be given that it will be able to do so. The loans
under the Facilities bear interest at floating rates based upon the interest
rate option elected by the Company. The Tranche A term loans, Tranche B term
loans and Tranche C term loans under the term loan Facility bore interest as of
March 31, 1999 at an average rate per annum of 7.4 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 quarter of 1999, cash paid for interest was approximately $30.2 million.
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 March 31, 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 March 31,
1999, the Company was in compliance with the financial covenants in the Credit
Agreements.
CAPITAL EXPENDITURES
Capital spending for the first quarter of 1999 was approximately $13.3 million,
up 67.9% from $7.9 million in the first quarter of 1998. Capital spending during
the first quarter 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 $70 million and $85 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. 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. The
cost of this program was approximately $25.6 million and is expected to be
completed by the end of 1999. At March 31, 1999, $19.8 million of this total was
accrued in Accounts payable and other accrued liabilities on the Condensed
Consolidated Condensed Balance Sheets.
17
<PAGE> 18
During the first quarter of 1999, $4.9 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 March 31, 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:
<TABLE>
<CAPTION>
TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
OF OUTSTANDING AT AVAILABLE AT
COMMITMENTS MARCH 31, 1999 MARCH 31, 1999
----------- -------------- --------------
(IN THOUSANDS OF DOLLARS)
- -------------------------
<S> <C> <C> <C>
Revolving Facility $400,000 $159,300 $240,700
Machinery Facility 140,000 23,000 22,000
International Facilities 19,413 6,189 13,224
-------- -------- --------
$559,413 $188,489 $275,924
======== ======== ========
</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, and anticipates no
significant net additional borrowings under the revolving credit facilities in
1999. 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.
18
<PAGE> 19
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 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.
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 of its officers (the "Individual Defendants," and together with the
Company, the "Defendants"). In his complaint, Clay generally alleged that the
Defendants violated the federal securities laws by disseminating misleading
statements and by omissions concerning the strategic alternatives that the
Predecessor was considering, including its potential sale to a third-party
investor. The complaint also alleged that the Individual Defendants, through
their exercise of stock appreciation rights ("SARs"), violated the federal
securities laws by trading in the Predecessor's securities while in possession
of material, non-public information. The complaint generally sought 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 facts that (i) none of the
statements attributable to the Company concerning its review of strategic
alternatives was false and (ii) there is no causal relationship between
plaintiff's purchase of Riverwood common stock and the Individual Defendants'
exercise of SARs. On October 14, 1998, the U.S. Court of Appeals for the
Eleventh Circuit affirmed the dismissal. The Court of
19
<PAGE> 20
Appeals ruled that (i) none of the statements attributable to the Company
concerning its review of strategic alternatives was false and (ii) the SARs were
not securities. On November 5, 1998, Clay filed a motion seeking rehearing en
banc. The court has not yet ruled on that motion.
On August 21, 1998 William D. Tatum, C. Steven Clark, Thomas W. Brabston, Sr.,
and Joe O. Harper, Jr. ("Plaintiffs"), all former employees of the Company,
commenced a purported class action lawsuit in the Superior Court of Fulton
County, Georgia, against the Company and certain current and former officers of
the Company. In the complaint, Plaintiffs alleged generally that the Company and
such officers (1) breached the terms of the contracts between Plaintiffs and the
Predecessor governing Premium Stock Appreciation Rights ("PSARs") as a result of
a suspension requested on August 23, 1995, (2) breached an implied covenant of
good faith and fair dealing in connection with both the suspension and the
lifting of that suspension and (3) engaged in fraud and negligent
misrepresentation in connection with the lifting of the suspension by (a)
failing to tell Plaintiffs that certain officers of the Predecessor were
planning to exercise PSARs on September 21, 1995 and (b) failing to inform
Plaintiffs of the status of the Predecessor's review of strategic alternatives
as of September 21, 1995. Plaintiffs sought (i) an order granting class
certification, (ii) an award of compensatory damages, (iii) pre-judgment
interest, (iv) punitive damages in an amount to be determined by the jury and
(v) litigation expenses, including attorneys' fees. The defendants have answered
the complaint. In addition, on October 16, 1998, the defendants moved to strike
the class allegations in the complaint, and, on October 30, 1998, moved to
dismiss the complaint. On January 6, 1999, the court granted the motion to
strike the class allegations and denied the motion to dismiss the complaint. One
additional plaintiff has been added. The parties are now engaged in discovery.
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 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 will utilize both internal
and external resources. Total spending on this project during the first quarter
of 1999 totaled approximately $6.7 million all of which was capitalized. Total
project spending to date was $26.9 million, of which $20.0 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 is in the process of
replacing 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 includes an analysis of all
manufacturing systems in the Company's plants and mills to determine Year 2000
compliance. This process consists of three phases, namely review of all
manufacturing systems, determination of which systems (if any) need to be
replaced or remediated, and replacement or remediation, as necessary, of
non-compliant systems. The Company has completed the second phase of the process
and is currently conducting the third phase. To the extent that material
manufacturing systems need to be replaced or remediated in any material respect,
additional material costs could be incurred, although the Company does not
currently believe that any such costs would be material to its financial
condition or results of operations (other than the investment in information
systems of up to approximately $35 million, of which $26.9 million has been
spent to date).
20
<PAGE> 21
The Company expects that it will achieve Year 2000 compliance by June 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 is communicating with its significant suppliers and customers 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 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 recently announced global restructuring, 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 reduced
caliper CUK Board by June 1999 and (c) the Company's expectation that new
packaging machinery placements will slightly increase in 1999 and that beverage
cartonboard tonnage will increase in 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 international beverage markets with the
exception of Brazil, (c) the Company's expectations that it will achieve sales
volume
21
<PAGE> 22
increases in its U.S. folding cartonboard markets and its U.S. soft drink carton
markets in 1999, while its U.S. beer carton volume will remain relatively flat,
(d) the Company's expectations regarding the effects of excess global industry
capacity and price declines of competing substrates; (iii) the statements in
"Financial Condition, Liquidity and Capital Resources" concerning (a) the
Company's expectation that 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 $70
to $85 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 June 1999 and its other statements
and beliefs in "--Upgrade of Information Systems and Year 2000 Compliance"), (d)
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), (e) 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 (f) the Company's belief and estimates in respect
of certain Louisiana income tax matters relating to the Section 338(h)(10)
election, including, without limitation, management's belief that additional tax
ultimately paid (if any) would be substantially less than $47 million and (iv)
other statements as to 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.
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 fiscal years beginning after June 15,
1999. 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 quarter of 1999.
22
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule (for SEC use only)
99 Reconciliation of Income (Loss) from Operations to EBITDA. Filed as an
exhibit hereto.
(b) Reports on Form 8-K.
Not applicable
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVERWOOD HOLDING, INC.
--------------------------------------------
(Registrant)
Date: May 14, 1999 By: /s/ Edward W. Stroetz Jr.
------------------ -----------------------------------------
Edward W. Stroetz Jr.
Secretary
Date: May 14, 1999 By: /s/ Daniel J. Blount
------------------ -----------------------------------------
Daniel J. Blount
Vice President and
Chief Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RIVERWOOD HOLDING INC. FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000886239
<NAME> RIVERWOOD HOLDING INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 13,791
<SECURITIES> 0
<RECEIVABLES> 141,294
<ALLOWANCES> 2,214
<INVENTORY> 177,005
<CURRENT-ASSETS> 340,654
<PP&E> 1,478,012
<DEPRECIATION> 337,399
<TOTAL-ASSETS> 2,405,053
<CURRENT-LIABILITIES> 251,169
<BONDS> 1,726,034
0
0
<COMMON> 75
<OTHER-SE> 309,527
<TOTAL-LIABILITY-AND-EQUITY> 2,405,053
<SALES> 255,867
<TOTAL-REVENUES> 255,867
<CGS> 207,759
<TOTAL-COSTS> 207,759
<OTHER-EXPENSES> 29,237
<LOSS-PROVISION> 43
<INTEREST-EXPENSE> 43,156
<INCOME-PRETAX> (24,086)
<INCOME-TAX> 409
<INCOME-CONTINUING> (26,479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,479)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
RIVERWOOD HOLDING, INC.
RECONCILIATION OF INCOME (LOSS) FROM OPERATIONS TO EBITDA
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Coated Container-
Board board Corporate Total
----- ----- --------- -----
<S> <C> <C> <C> <C>
FIRST QUARTER 1999:
- -------------------
Income (Loss) from Operations $29,769 $(7,448) $(3,450) $18,871
Add: Depreciation and amortization 30,197 4,915 139 35,251
Dividends from equity investments -- -- -- --
Other non-cash charges (A) (173) 103 1,637 1,567
------- ------- ------- -------
EBITDA (B) $59,793 $(2,430) $(1,674) $55,689
======= ======= ======= =======
FIRST QUARTER 1998:
- -------------------
Income (Loss) from Operations $16,572 $(4,620) $(4,706) $ 7,246
Add: Depreciation and amortization 30,111 4,789 286 35,186
Dividends from equity investments -- -- 618 618
Other non-cash charges (A) 1,328 286 1,624 3,238
------- ------- ------- -------
EBITDA (B) $48,011 $ 455 $(2,178) $46,288
======= ======= ======= =======
</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.
