<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 19801
(Address of principal executive offices)
(Zip Code)
c/o Riverwood International Corporation
(770) 644-3000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At August 3, 2000 there were 7,063,180 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.
2
<PAGE> 3
RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 15,009 $ 14,108
Receivables, net of allowances 155,463 156,734
Inventories 167,824 173,610
Prepaid expenses 17,142 10,990
------------ ------------
Total Current Assets 355,438 355,442
Property, Plant and Equipment, net of accumulated
depreciation of $516,126 in 2000 and $455,339 in 1999 1,380,462 1,429,912
Investments in Net Assets of Equity Affiliates 146,817 146,473
Goodwill, net of accumulated amortization of $33,779 in 2000
and $29,805 in 1999 284,143 288,117
Other Assets 135,615 143,198
------------ ------------
Total Assets $ 2,302,475 $ 2,363,142
============ ============
LIABILITIES
Current Liabilities:
Short-term debt $ 59,307 $ 17,339
Accounts payable and other accrued liabilities 206,742 226,336
------------ ------------
Total Current Liabilities 266,049 243,675
Long-Term Debt, less current portion 1,684,450 1,730,898
Other Noncurrent Liabilities 100,961 101,719
------------ ------------
Total Liabilities 2,051,460 2,076,292
------------ ------------
Contingencies and Commitments(Note 5)
Redeemable Common Stock, at current redemption value 7,173 7,202
------------ ------------
SHAREHOLDERS' EQUITY
Nonredeemable Common Stock 75 75
Capital in Excess of Par Value 749,141 749,161
(Accumulated Deficit) (478,975) (454,157)
Cumulative Currency Translation Adjustment (26,399) (15,431)
------------ ------------
Total Shareholders' Equity 243,842 279,648
------------ ------------
Total Liabilities and Shareholders' Equity $ 2,302,475 $ 2,363,142
============ ============
</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 SIX MONTHS ENDED
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 304,522 $ 299,497 $ 574,751 $ 555,364
Cost of Sales 231,589 233,417 443,517 441,176
Selling, General and Administrative 29,348 29,219 59,716 57,106
Research, Development and Engineering 1,003 900 2,100 1,986
Other (Income) Expense, net (767) 707 1,973 971
---------- ---------- ---------- ----------
Income from Operations 43,349 35,254 67,445 54,125
Interest Income 221 438 393 637
Interest Expense 46,735 45,023 92,505 88,179
---------- ---------- ---------- ----------
(Loss) before Income Taxes and Equity in
Net Earnings (Loss) of Affiliates (3,165) (9,331) (24,667) (33,417)
Income Tax Expense 1,365 495 2,437 904
---------- ---------- ---------- ----------
(Loss) before Equity in Net Earnings (Loss)
of Affiliates (4,530) (9,826) (27,104) (34,321)
Equity in Net Earnings (Loss) of Affiliates 875 (107) 2,286 (2,091)
---------- ---------- ---------- ----------
Net (Loss) $ (3,655) $ (9,933) $ (24,818) $ (36,412)
---------- ---------- ---------- ----------
Other comprehensive (Loss), net of tax:
Foreign currency translation adjustments (5,168) (3,885) (10,968) (4,838)
---------- ---------- ---------- ----------
Comprehensive (Loss) $ (8,823) $ (13,818) $ (35,786) $ (41,250)
========== ========== ========== ==========
</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>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $ (24,818) $ (36,412)
Noncash Items Included in Net (Loss):
Depreciation and amortization 75,127 70,679
Deferred income taxes (1,682) (250)
Pension, postemployment and postretirement benefits,
net of benefits paid 1,963 1,949
Net gain on disposal of assets (745) --
Equity in net (earnings) loss of affiliates, net of dividends (185) 2,976
Amortization of deferred debt issuance costs 5,115 5,106
Other, net -- 2,832
(Increase) Decrease in Current Assets:
Receivables (2,357) (24,708)
Inventories 3,451 (15,624)
Prepaid expenses (6,408) 38
(Decrease) in Accounts payable and other accrued liabilities (16,442) (8,380)
(Decrease) in Other Noncurrent Liabilities (70) (4,209)
---------- ----------
Net Cash Provided by (Used in) Operating Activities 32,949 (6,003)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (27,972) (31,479)
Proceeds from Sale of Assets 5,502 --
(Increase) Decrease in Other Assets 761 (4,984)
---------- ----------
Net Cash (Used in) Investing Activities (21,709) (36,463)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Decrease) Increase in Notes Payable (3,731) 50,600
Repurchases of Redeemable Common Stock, net (49) (383)
Payments on Debt (2,654) (8,491)
---------- ----------
Net Cash (Used in) Provided by Financing Activities (6,434) 41,726
---------- ----------
Effect of Exchange Rate Changes on Cash (3,905) (1,252)
---------- ----------
Net Increase (Decrease) in Cash and Equivalents 901 (1,992)
Cash and Equivalents at Beginning of Period 14,108 13,840
---------- ----------
Cash and Equivalents at End of Period $ 15,009 $ 11,848
========== ==========
</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, 1999 was derived
from audited financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a summary of the Company's significant accounting policies, please refer to
the Company's report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1999.
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.
Effective December 1, 1999, the Company changed its international subsidiaries'
fiscal year end to December 31. Previously, the Company's international
subsidiaries were principally consolidated and reported on the basis of fiscal
years ending November 30.
The Company has reclassified the presentation of certain prior period
information to conform with the current presentation format.
NOTE 3 - INVENTORIES
The major classes of inventories were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS) JUNE 30, 2000 DECEMBER 31, 1999
------------------------- ------------- -----------------
<S> <C> <C>
Finished goods $ 77,936 $ 80,054
Work-in-process 14,521 15,845
Raw materials 41,668 45,143
Supplies 33,699 32,568
---------- ----------
Total $ 167,824 $ 173,610
========== ==========
</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"). On July 24,
2000, the Company announced it has entered into a definitive agreement to sell
its 50 percent investment in Igaras (see Note 9).
6
<PAGE> 7
The following represents the summarized income statement information for Igaras,
of which the Company recognizes 50 percent in its results of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
-------------------------
<S> <C> <C> <C> <C>
Net Sales $ 54,902 $ 48,163 $113,295 $ 90,458
Cost of Sales 42,603 40,902 85,185 79,963
-------- -------- -------- --------
Gross Profit $ 12,299 $ 7,261 $ 28,110 $ 10,495
======== ======== ======== ========
Income from Operations $ 6,080 $ 2,807 $ 16,680 $ 1,459
======== ======== ======== ========
Net Income (Loss) $ 1,397 $ (1,136) $ 3,789 $ (6,058)
======== ======== ======== ========
</TABLE>
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.
Under the Igaras joint venture agreement, Igaras is required to pay dividends
equal to at least 25 percent of its net profits. During the first six months of
2000 and 1999, the Company received dividends from Igaras totaling $1.3 million
and $0.8 million, respectively, net of taxes of $0.2 million and $0.1 million,
respectively. During the first six months of 2000, the Company received
dividends from a non-controlled affiliate other than Igaras totaling $0.5
million, net of taxes of $0.1 million.
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 2000.
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 completed this investigation work in 1999 and is in ongoing discussions
with DEQ to develop an appropriate remediation plan and exit strategy. 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 subsequently met with DEQ in October 1999. On
July 6, 2000, the Company and DEQ entered into a Settlement Agreement that
describes in detail the remedial actions necessary for the Company to
7
<PAGE> 8
obtain full release of all future liability at this site. Currently, the Company
is in ongoing discussions with potential vendors to perform the agreed upon
remediation plan.
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. An oral argument with regard to this appeal was held on February
9, 2000 before the Court of Appeals for the Federal Circuit. A decision of the
court was issued on May 17, 2000 reversing the decision of the lower federal
court and thereby reinstating the decision of the special master.
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. 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.
The State of Louisiana has completed its audit of the Company's tax return for
the period ended March 27, 1996. On May 9, 2000, the Company received a Notice
of Proposed Tax Due for this period in the amount of $47.6 million in tax and
$27.8 million in statutory interest through June 4, 2000. The Company requested
and received an extension to July 15, 2000 to respond to the Notice of Proposed
Tax Due. On July 14, 2000, the Company filed a letter protesting the tax and
interest due, and requested an informal conference with the Louisiana Department
of Revenue. This action does not preclude the Company from paying the amount at
issue in order to avoid the accrual of additional interest should the Company
decide to pay and contest the matter before the Louisiana courts. There can be
no assurance that the Company will ultimately prevail in this dispute. However,
management believes that the additional tax and interest ultimately paid (if
any) will be substantially less than the amounts listed on the Notice of
Proposed Tax Due, although no assurance can be given in this regard. Since the
law is unclear and the amounts involved are significant, it may be several years
before this matter is resolved. For financial reporting purposes, any tax
ultimately paid related to this matter would increase the goodwill recorded in
connection with the Merger and any interest ultimately paid would be recorded as
interest expense.
8
<PAGE> 9
NOTE 6 - RESTRUCTURING ACTIVITIES
In connection with the global restructuring program initiated in the fourth
quarter of 1998, the Company is reducing its European workforce by approximately
300 employees and is implementing other initiatives designed to improve
productivity and profitability across the global organization. The initial cost
of this program, scheduled to be completed during 2000, was approximately $25.6
million of which approximately $0.8 million was used in December 1998 and
related to severance payments. The following table provides information that
details payments on this restructuring plan since December 31, 1998:
<TABLE>
<CAPTION>
Other
Severance Exit Costs Total
---------- ---------- ----------
(In thousands of dollars)
-------------------------
<S> <C> <C> <C>
Balance at 12/31/98 21,205 3,537 24,742
Charges against accrual in 1999 (11,527) (791) (12,318)
---------- ---------- ----------
Balance at 12/31/99 $ 9,678 $ 2,746 $ 12,424
Charges against accrual in first six months of 2000 (2,652) (142) (2,794)
---------- ---------- ----------
Balance at 6/30/00 $ 7,026 $ 2,604 $ 9,630
========== ========== ==========
</TABLE>
As of June 30, 2000, the Company has reduced its European workforce related to
the 1998 restructuring by approximately 240 employees.
In connection with and following 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 United States,
located in Kankakee, Illinois, packaging machinery manufacturing plants in
Marietta, Georgia and Koln, Germany, a beverage multiple packaging converting
plant in Bakersfield, California and the trucking transportation operations in
West Monroe, Louisiana, as well as the consolidation and realignment of certain
operations in the United States, Australia and Europe. The cost of exiting these
businesses and operating activities was approximately $38.6 million which was
accrued during 1996 as a purchase accounting adjustment. The costs related
principally to the severance of approximately 750 employees, relocation and
other plant closure costs. During the first six months of 2000, $0.1 million was
utilized and charged against the accrual primarily related to exit costs. At
June 30, 2000, $1.1 million of this total was included in Other accrued
liabilities on the Consolidated Balance Sheet and is expected to be paid out
through 2000.
9
<PAGE> 10
NOTE 7 - BUSINESS SEGMENT INFORMATION
Business segment information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
-------------------------
<S> <C> <C> <C> <C>
NET SALES:
Coated Board $ 278,936 $ 276,149 $ 517,328 $ 510,681
Containerboard 25,586 23,348 57,423 44,683
---------- ---------- ---------- ----------
$ 304,522 $ 299,497 $ 574,751 $ 555,364
========== ========== ========== ==========
INCOME (LOSS) FROM OPERATIONS:
Coated Board $ 47,237 $ 43,537 $ 77,339 $ 73,306
Containerboard 1,551 (3,886) 1,879 (11,334)
Corporate (5,439) (4,397) (11,773) (7,847)
---------- ---------- ---------- ----------
$ 43,349 $ 35,254 $ 67,445 $ 54,125
========== ========== ========== ==========
EBITDA:
Coated Board $ 80,074 $ 75,472 $ 141,776 $ 135,265
Containerboard 5,283 (316) 10,565 (2,746)
Corporate (432) (1,641) (3,380) (3,315)
---------- ---------- ---------- ----------
$ 84,925 $ 73,515 $ 148,961 $ 129,204
========== ========== ========== ==========
</TABLE>
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2000, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133" ("SFAS No. 138"). SFAS No. 138 establishes additional
guidance for the way companies account for and report on derivative instruments
and hedging activities. In June 1999, the FASB issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities; Deferral of
Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137 defers
for one year the effective date of FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 137
now will apply to all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS No. 133 establishes standards for the way companies account for
and report on derivative instruments and hedging activities. The Company has not
determined the impact that SFAS No. 133 and SFAS No. 138 will have on its
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements. SAB 101 is effective no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company has not
determined the impact that SAB 101 will have on its financial statements.
NOTE 9 - SUBSEQUENT EVENT
On July 24, 2000, the Company and its joint venture partner announced they have
entered into a definitive agreement to sell their investment in Igaras, of which
the Company owns 50 percent, for $510 million, including the assumption of $112
million of debt. The sale is contingent upon, among other things, completion of
the spin-off of Igaras' multiple packaging business. There can be no assurance
that all of these conditions will be met and that the transaction will be
completed. The Company expects its share of the net proceeds to be approximately
$190 million. The Company anticipates the transaction to be complete by the end
of 2000. The Company and its joint venture partner will continue to operate a
global beverage multiple packaging business in Brazil.
10
<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 $635 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 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 from non-controlled
affiliates but includes dividends actually received from non-controlled
affiliates. The Company believes that EBITDA provides useful information
regarding the Company's debt service ability, but should not be considered in
isolation.
11
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands of dollars)
-------------------------
<S> <C> <C> <C> <C>
EBITDA (Segment Data):
Coated Board $ 80,074 $ 75,472 $ 141,776 $ 135,265
Containerboard 5,283 (316) 10,565 (2,746)
Corporate (432) (1,641) (3,380) (3,315)
---------- ---------- ---------- ----------
EBITDA $ 84,925 $ 73,515 $ 148,961 $ 129,204
========== ========== ========== ==========
</TABLE>
BUSINESS TRENDS AND INITIATIVES
The Company's cash flow from operations and EBITDA are influenced by sales
volume and selling prices for its products and raw material costs, and are
affected by a number of significant business, economic and competitive factors.
Many of these factors are not within the Company's control. Historically, in the
Coated Board business segment, the Company has experienced stable pricing for
its integrated beverage carton products, and moderate cyclical pricing for its
folding cartonboard, which is principally sold in the open market. The Company's
folding cartonboard sales are affected by competition from competitors' CUK
Board and other substrates - solid bleached sulfate ("SBS"), recycled clay
coated news ("CCN") and, internationally, WLC -- as well as by general market
conditions.
In the Containerboard business segment, conditions in the cyclical worldwide
commodity paperboard markets have a substantial impact on the Company's
Containerboard sales. During the second quarter of 2000, the Company took six
days market related downtime on the first West Monroe Mill paperboard machine
primarily due to a downturn in the medium markets. In July and through the
beginning of August 2000, the Company took an additional 14 days of medium
market related downtime. Additional downtime may be taken depending on the
medium market through the remainder of the year. The Company is continuing to
benefit from its multiple price increases for linerboard, corrugated medium, and
kraft paper announced during 1999 and those announced during the six months
ended June 30, 2000. Trends are expected to continue to be positive throughout
the remainder of 2000.
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. 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. In addition, the Company is implementing a Total Quality Systems
("TQS") initiative at the Company's U.S. mills which uses statistical process
control to help design and manage all types of activities including production
and maintenance. The Company expects capital expenditures will range from $65 to
$75 million in 2000 as the Company invests to improve its process capabilities,
to invest in packaging machinery, and to comply with environmental cluster
rules. 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. To date,
the Company has made significant progress in completing the restructuring
activities and anticipates completing this program during 2000 (see "--Financial
Condition, Liquidity and Capital Resources --Financing Sources and Cash Flows").
Finally, the Company is continuing to focus on reducing working capital and
increasing liquidity by reducing inventory and lowering receivables.
Packaging machinery placements during the first six months of 2000 remained
constant when compared to the first six months of 1999. The Company has been and
will continue to be selective in future packaging machinery placements to ensure
appropriate returns.
12
<PAGE> 13
OUTLOOK
The Company expects that its 2000 full year EBITDA will significantly exceed its
1999 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 1999 levels, improving U.S. mill throughput, continued cost savings from
other actions taken to date and continued selling price improvements for
containerboard and folding carton products. In 2000, the Company expects that it
will achieve slight sales volume increases in its worldwide beverage markets,
and renewed growth in its domestic folding carton markets. The Company also
expects price improvements in the U.S. folding carton markets in 2000 as a
result of recent price increases announced for competing substrates and the $40
per ton price increase for its domestic open market grades of folding carton and
beverage products effective May 1, 2000. The Company expects to realize this
price increase during the second half of the year. The Company continues to be
optimistic about containerboard prices. The Company does not expect to recover
the North American beverage volume shortfall experienced in the second quarter
of 2000.
13
<PAGE> 14
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- ----------------------------------------
% INCREASE % INCREASE
(DECREASE) (DECREASE)
JUNE 30, FROM PRIOR JUNE 30, JUNE 30, FROM PRIOR JUNE 30,
2000 PERIOD 1999 2000 PERIOD 1999
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Net Sales (Segment Data):
Coated Board $ 278,936 1.0% $ 276,149 $ 517,328 1.3% $ 510,681
Containerboard 25,586 9.6 23,348 57,423 28.5 44,683
---------- ---------- ---------- ----------
Net Sales 304,522 1.7 299,497 574,751 3.5 555,364
Cost of Sales 231,589 (0.8) 233,417 443,517 0.5 441,176
---------- ---------- ---------- ----------
Gross Profit 72,933 10.4 66,080 131,234 14.9 114,188
Selling, General and Administrative 29,348 0.4 29,219 59,716 4.6 57,106
Research, Development and
Engineering 1,003 11.4 900 2,100 5.7 1,986
Other (Income) Expense, net (767) (100.0) 707 1,973 103.2 971
---------- ---------- ---------- ----------
Income from Operations $ 43,349 23.0 $ 35,254 $ 67,445 24.6 $ 54,125
========== ========== ========== ==========
Income (Loss) from Operations
(Segment Data):
Coated Board $ 47,237 8.5% $ 43,537 $ 77,339 5.5% $ 73,306
Containerboard 1,551 N/A (3,886) 1,879 N/A (11,334)
Corporate (5,439) (23.7) (4,397) (11,773) (50.0) (7,847)
---------- ---------- ---------- ----------
Income from Operations $ 43,349 23.0 $ 35,254 $ 67,445 24.6 $ 54,125
========== ========== ========== ==========
</TABLE>
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 six months
ended June 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS OF TONS)
----------------------
<S> <C> <C> <C> <C>
Coated Board 266.7 261.0 488.2 486.2
Swedish Mill 36.8 34.3 74.0 66.2
Containerboard 66.9 79.7 156.9 161.5
------ ------ ------ ------
370.4 375.0 719.1 713.9
====== ====== ====== ======
</TABLE>
SECOND QUARTER 2000 COMPARED WITH SECOND QUARTER 1999
NET SALES
As a result of the factors described below, the Company's Net Sales in the
second quarter of 2000 increased by $5.0 million, or 1.7 percent, compared with
the second quarter of 1999. Net Sales in the Coated Board
14
<PAGE> 15
business segment increased by $2.8 million in the second quarter of 2000, or 1.0
percent, to $278.9 million from $276.1 million in the second quarter of 1999,
due primarily to higher sales volume in international beverage markets due
principally to continued market penetration and strong demand in Japan, higher
sales volume in North American folding carton markets due principally to the
result of the general market recovery as well as selected switching from
competing substrates to the Company's substrate, and improved pricing in North
American beverage markets. These increases were somewhat offset by lower North
American beverage volumes due primarily to lower demand and lower international
folding carton volumes due principally to the effect of exiting certain low
margin business in the U.K. and that the folding carton markets in Europe are
just beginning to recover. Net Sales in the Containerboard business segment
increased by $2.3 million, or 9.6 percent, to $25.6 million in the second
quarter of 2000 from $23.3 million in the second quarter of 1999, due
principally to higher pricing, somewhat offset by lower sales volume primarily
in the medium markets.
GROSS PROFIT
As a result of the factors discussed below, the Company's Gross Profit for the
second quarter of 2000 increased by $6.8 million, or 10.4 percent, to $72.9
million from $66.1 million in the second quarter of 1999. The Company's gross
profit margin increased to 23.9 percent in the second quarter of 2000 from 22.1
percent in the second quarter of 1999. Gross Profit in the Coated Board business
segment increased by $2.2 million, or 3.2 percent, to $70.4 million in the
second quarter of 2000 from $68.2 million in the second quarter of 1999,
while its gross profit margin increased to 25.2 percent in the second quarter of
2000 from 24.7 percent in the second quarter of 1999. The increase in Coated
Board Gross Profit is due directly to worldwide cost reductions and higher Net
Sales. Gross Profit in the Containerboard business segment increased by $4.9
million to a gain of $2.5 million in the second quarter of 2000 from a loss of
$2.4 million in the second quarter of 1999, while its gross profit margin
increased to 9.6 percent in the second quarter of 2000 from (10.2) percent in
the second quarter of 1999. The increase in Containerboard Gross Profit resulted
principally from improved pricing.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses remained relatively constant at
$29.3 million in the second quarter of 2000 compared to the second quarter of
1999. As a percentage of Net Sales, Selling, General and Administrative expenses
decreased from 9.8 percent in the second quarter of 1999 to 9.6 percent in the
second quarter of 2000.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses of $1.0 million in the second
quarter of 2000 remained relatively constant compared to the second quarter of
1999.
OTHER (INCOME) EXPENSE, NET
Other (Income) Expense, net, was $(0.8) million in the second quarter of 2000
and $0.7 million in the second quarter of 1999. This change was primarily due to
non-recurring operating credits recorded in the second quarter of 2000.
INCOME (LOSS) FROM OPERATIONS
Primarily as a result of the factors discussed above, the Company's Income from
Operations in the second quarter of 2000 increased by $8.0 million, or 23.0
percent, to $43.3 million from $35.3 million in the second quarter of 1999,
while the Company's operating margin increased to 14.2 percent in the second
quarter of 2000 from 11.8 percent in the second quarter of 1999. Income from
Operations in the Coated Board business segment increased by $3.7 million, or
8.5 percent, to $47.2 million in the second quarter of 2000 from $43.5 million
in the second quarter of 1999, while the operating margin increased to 16.9
percent in the second quarter of 2000 from 15.8 percent in the second quarter of
1999, primarily as a result of the factors described above. Income from
Operations in the Containerboard business segment increased by $5.5 million to a
gain of $1.6 million in the second quarter of 2000 from a (Loss) from Operations
of $3.9 million in the second quarter of 1999, while the operating margin
increased to 6.1 percent in the second quarter of 2000 from (16.6) percent in
the second quarter of 1999 primarily as a result of the factors described above.
15
<PAGE> 16
FLUCTUATIONS IN U.S. CURRENCY EXCHANGE RATES
The strengthening of the U.S. dollar currency exchange rates as compared to the
Euro and related currencies did have a modest impact on Net Sales, Gross Profit,
Income from Operations, and operating expenses during the second quarter of
2000. However, the impact was somewhat offset by the weakening of the U.S.
Dollar against the Japanese Yen.
FIRST SIX MONTHS 2000 COMPARED WITH FIRST SIX MONTHS 1999
NET SALES
As a result of the factors described below, the Company's Net Sales in the first
six months of 2000 increased by $19.4 million, or 3.5 percent, compared with
the first six months of 1999. Net Sales in the Coated Board business segment
increased by $6.6 million in the first six months of 2000, or 1.3 percent, to
$517.3 million from $510.7 million in the first six months of 1999, due
primarily to higher sales volume in international beverage markets due
principally to continued market penetration and strong demand in Japan, higher
sales volume in North American folding carton markets due principally to the
result of the general market recovery as well as selected switching from
competing substrates to the Company's substrate, and improved pricing in North
American beverage markets. These increases were somewhat offset by lower North
American beverage volumes due primarily to lower demand and lower international
folding carton volumes due principally to the effect of exiting certain low
margin business in the U.K. and that the folding carton markets in Europe are
just beginning to recover. Net Sales in the Containerboard business segment
increased $12.7 million, or 28.5 percent, to $57.4 million in the first six
months of 2000 from $44.7 million in the first six months of 1999, due
principally to higher pricing, somewhat offset by lower sales volume primarily
in the medium markets.
GROSS PROFIT
As a result of the factors discussed below, the Company's Gross Profit for the
first six months of 2000 increased by $17.0 million, or 14.9 percent, to $131.2
million from $114.2 million in the first six months of 1999. The Company's gross
profit margin increased to 22.8 percent in the first six months of 2000 from
20.6 percent in the first six months of 1999. Gross Profit in the Coated Board
business segment increased by $4.9 million, or 3.9 percent, to $127.7 million in
the first six months of 2000 from $122.8 million in the first six months of
1999, while its gross profit margin increased to 24.7 percent in the first six
months of 2000 from 24.1 percent in the first six months of 1999. The increase
in Coated Board Gross Profit is due directly to worldwide cost reductions and
higher Net Sales. Gross Profit in the Containerboard business segment increased
by $12.0 million to a gain of $3.6 million in the first six months of 2000 from
a loss of $8.4 million in the first six months of 1999, while its gross profit
margin increased to 6.2 percent in the first six months of 2000 from (18.8)
percent in the first six months of 1999. The increase in Containerboard Gross
Profit resulted principally from improved pricing.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses increased by $2.6 million, or 4.6
percent, to $59.7 million in the first six months of 2000 from $57.1 million in
the first six months of 1999, due mainly to higher depreciation expense, higher
stock option compensation expense, the TQS initiative, and consulting fees
related to a project within the Company's folding carton business. As a
percentage of Net Sales, Selling, General and Administrative expenses increased
from 10.3 percent in the first six months of 1999 to 10.4 percent in the first
six months of 2000.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses of $2.1 million in the first six
months of 2000 remained relatively constant compared to the first six months of
1999.
OTHER (INCOME) EXPENSE, NET
Other (Income) Expense, net, was $2.0 million in the first six months of 2000
and $1.0 million in the first six months of 1999. This increase was primarily
due to non-recurring credits recorded in the first six months of 1999 primarily
related to utility recoveries somewhat offset by non-recurring operating credits
recorded in the first six months of 2000.
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 six months of 2000 increased by $13.3 million, or 24.6
percent, to $67.4 million from $54.1 million in the first six months of 1999,
while the Company's operating margin increased to 11.7 percent in the first six
months of 2000 from 9.7 percent in the first six months of 1999. Income from
Operations in the Coated Board business segment increased by $4.0 million, or
5.5 percent, to $77.3 million in the first six months of 2000 from $73.3 million
in the first six months of 1999, while the operating margin increased to 14.9
percent in the first six months of 2000 from 14.4 percent in the first six
months of 1999, primarily as a result of the factors described above. Income
from Operations in the Containerboard business segment increased $13.2 million
to a gain of $1.9 million in the first six months of 2000 from a (Loss) from
Operations of $11.3 million in the first six months of 1999, while the operating
margin increased to 3.3 percent in the first six months of 2000 from (25.4)
percent in the first six months of 1999, primarily as a result of the factors
described above.
FLUCTUATIONS IN U.S. CURRENCY EXCHANGE RATES
The strengthening of the U.S. dollar currency exchange rates as compared to the
Euro and related currencies did have a modest impact on Net Sales, Gross Profit,
Income from Operations, and operating expenses during the first six months of
2000. However, the impact was somewhat offset by the weakening of the U.S.
Dollar against the Japanese Yen.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, EQUITY IN NET EARNINGS
(LOSS) OF AFFILIATES
INTEREST INCOME
Interest Income decreased by $0.2 million to $0.4 million in the first six
months of 2000 from $0.6 million in the first six months of 1999.
INTEREST EXPENSE
Interest Expense increased by $4.3 million to $92.5 million in the first six
months of 2000 from $88.2 million in the first six months of 1999 due primarily
to higher average interest rates but also impacted by higher average debt
balances.
INCOME TAX EXPENSE
During the first six months of 2000, the Company recognized an income tax
expense of $2.4 million on a (Loss) before Income Taxes and Equity in Net
Earnings (Loss) of Affiliates of $24.7 million. During the first six months of
1999, the Company recognized an income tax expense of $0.9 million on a (Loss)
before Income Taxes and Equity in Net Earnings (Loss) of Affiliates of $33.4
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 not more 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
increased $4.4 million to a gain of $2.3 million in the first six months of 2000
from a (Loss) of $2.1 million in the first six months of 1999 resulting from
improved market conditions in Brazil.
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.
17
<PAGE> 18
During the first six months of 2000 and 1999, the Company received dividends
from Igaras totaling $1.3 million and $0.8 million, respectively, net of taxes
of $0.2 million and $0.1 million, respectively. During the first six months of
2000, the Company received dividends from a non-controlled affiliate other than
Igaras totaling $0.5 million net of taxes of $0.1 million.
On July 24, 2000, the Company and its joint venture partner announced they have
entered into a definitive agreement to sell their investment in Igaras, of which
the Company owns 50 percent, for $510 million, including the assumption of $112
million of debt. The sale is contingent upon, among other things, completion of
the spin-off of Igaras' multiple packaging business. There can be no assurance
that all of these conditions will be met and that the transaction will be
completed. The Company expects its share of the net proceeds to be approximately
$190 million. The Company anticipates the transaction to be complete by the end
of 2000. The Company and its joint venture partner will continue to operate a
global beverage multiple packaging business in Brazil.
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 increased by approximately $0.9 million in the first six
months of 2000 primarily as a result of $32.9 million net cash provided by
operating activities somewhat offset by $21.7 million net cash used in investing
activities and $6.4 million net cash used in financing activities. Cash used in
investing activities resulted primarily from purchases of property, plant and
equipment. Cash used in financing activities resulted primarily from net debt
reductions. Depreciation and amortization during the first six months of 2000
totaled approximately $75 million, and is expected to be approximately $145
million to $150 million for 2000.
The Company's cash flows from its operations and EBITDA are subject to moderate
seasonality with demand usually increasing in the spring and summer. The
Company's Coated Board business segment experiences seasonality principally due
to the seasonality of the worldwide multiple packaging beverage segment.
Historically, the Company's Coated Board business segment reports its strongest
sales in the second and third quarters of the fiscal year driven by the
seasonality of the Company's integrated beverage business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the Merger and from the
funding of its capital expenditures. As of June 30, 2000, the Company had
outstanding approximately $1,726 million of long-term debt, consisting primarily
of $650 million aggregate principal amount of the 1996 Notes, $250 million of
the 1997 Notes, $635 million outstanding under the Term Loan Facility and
additional amounts under the Revolving Facility, the Machinery Facility and
other debt issues and facilities. During the first six months of 2000, the
Company repaid approximately $2.7 million of debt. The Company had a net
decrease in revolving credit facilities borrowings of approximately $3.7
million.
DEBT SERVICE
Principal and interest payments under the Term Loan Facility, the Revolving
Facility and the Machinery Facility, together with interest payments on the 1997
Notes and 1996 Notes, represent significant liquidity requirements for the
Company. The Company applied $105.0 million of the proceeds from the 1997 Notes
in July 1997 to refinance a portion of the Tranche A term loans under the Term
Loan Facility, $50 million of the proceeds of the 1997 Notes to refinance the
Tranche D term loan under the Senior Secured Credit Agreement, and the remaining
proceeds from the 1997 Notes to prepay outstanding revolving credit borrowings
under the Revolving Facility. Scheduled term loan principal payments under the
Term Loan Facility were reduced to reflect this application of proceeds. This
application of proceeds did not involve any
18
<PAGE> 19
reduction in the current aggregate Revolving Facility commitment of $400
million. Annual term loan amortization requirements under the Term Loan
Facility, after giving effect to the refinancing of the Term Loan Facility from
a portion of the proceeds of the 1997 Notes, will be approximately $2 million,
$120 million, $173 million, $184 million and $156 million for each of the years
2000 through 2004, respectively.
The loans under the Facilities bear interest at floating rates based upon the
interest rate option elected by the Company. The Tranche A term loans, Tranche B
term loans and Tranche C term loans under the term loan Facility bore interest
as of June 30, 2000 at an average rate per annum of 9.6 percent. The Senior
Notes, the 1997 Notes and the Senior Subordinated Notes bear interest at rates
of 10 1/4 percent, 10 5/8 percent and 10 7/8 percent, respectively. Interest
expense in 2000 is expected to be approximately $190 million, including
approximately $10 million of non-cash amortization of deferred debt issuance
costs. During the first six months of 2000, cash paid for interest was
approximately $88 million.
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 Company uses interest rate swap and cap agreements to fix or cap a portion
of its variable rate Term Loan Facility to a fixed rate in order to reduce the
impact of interest rate changes on future income. The difference to be paid or
received under these agreements is recognized as an adjustment to interest
expense related to that debt. At June 30, 2000, the Company had interest rate
swap agreements with a notional amount of $200 million, under which the Company
will pay fixed rates of 6.15 percent to 6.92 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 June 30,
2000, the Company was in compliance with the financial covenants in the Credit
Agreements.
CAPITAL EXPENDITURES
Capital spending for the first six months of 2000 was approximately $28.0
million, down 11.1 percent from $31.5 million in the first six months of 1999.
Capital spending during the first six months of 2000 related primarily to
increasing paper production efficiencies, increasing converting capacity and
manufacturing packaging machinery. Total capital spending for 2000 is expected
to be between $65 million and $75 million, and is expected to relate principally
to improving the Company's process capabilities, the production of packaging
machinery, and cluster rule compliance.
FINANCING SOURCES AND CASH FLOWS
In connection with the global restructuring program initiated in the fourth
quarter of 1998, the Company is reducing its European workforce by approximately
300 employees and is implementing other initiatives designed to improve
productivity and profitability across the global organization. The initial cost
of this program, scheduled to be completed during 2000, was approximately $25.6
million of which approximately $0.8 million was used in December 1998 and
related to severance payments. The following table provides information that
details payments on this restructuring plan since December 31, 1998:
19
<PAGE> 20
<TABLE>
<CAPTION>
Other
Severance Exit Costs Total
---------- ---------- --------
(In thousands of dollars)
-------------------------
<S> <C> <C> <C>
Balance at 12/31/98 21,205 3,537 24,742
Charges against accrual in 1999 (11,527) (791) (12,318)
---------- ------- --------
Balance at 12/31/99 $ 9,678 $ 2,746 $ 12,424
Charges against accrual in first six months of 2000 (2,652) (142) (2,794)
---------- ------- --------
Balance at 6/30/00 $ 7,026 $ 2,604 $ 9,630
========== ======= ========
</TABLE>
As of June 30, 2000, the Company has reduced its European workforce related to
the 1998 restructuring by approximately 240 employees.
In connection with and following the Merger, the Company decided in 1996 to exit
certain businesses and operating activities, including the sale or closure of
the Company's last dedicated folding cartonboard converting plant in the United
States, located in Kankakee, Illinois, packaging machinery manufacturing plants
in Marietta, Georgia and Koln, Germany, a beverage multiple packaging converting
plant in Bakersfield, California and the trucking transportation operations in
West Monroe, Louisiana, as well as the consolidation and realignment of certain
operations in the United States, Australia and Europe. The cost of exiting these
businesses and operating activities was approximately $38.6 million which was
accrued during 1996 as a purchase accounting adjustment. The costs related
principally to the severance of approximately 750 employees, relocation and
other plant closure costs. At June 30, 2000, $1.1 million of this total was
accrued in Other accrued liabilities on the Consolidated Balance Sheets and is
expected to be paid out through 2000.
At June 30, 2000, 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 JUNE 30, 2000 JUNE 30, 2000
------------ -------------- -------------
(IN THOUSANDS OF DOLLARS)
-------------------------
<S> <C> <C> <C>
Revolving Facility $400,000 $169,400 $230,600
Machinery Facility 140,000 21,000 21,000
International Facilities 25,215 17,540 7,675
-------- -------- --------
$565,215 $207,940 $259,275
======== ======== ========
</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.
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 (see "--Equity in Net
Earnings (Loss) of Affiliates"). 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
20
<PAGE> 21
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 2000.
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 completed this investigation work in 1999 and is in ongoing discussions
with DEQ to develop an appropriate remediation plan and exit strategy. 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 subsequently met with the DEQ in October
1999. On July 6, 2000, the Company and DEQ entered into a Settlement Agreement
that describes in detail the remedial actions necessary for the Company to
obtain full release of all future liability at this site. Currently, the Company
is in ongoing discussions with potential vendors to perform the agreed upon
remediation plan.
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,
21
<PAGE> 22
Mead filed an appeal from that decision. An oral argument with regard to this
appeal was held on February 9, 2000 before the Court of Appeals for the Federal
Circuit. A decision of the court was issued on May 17, 2000 reversing the
decision of the lower federal court and thereby reinstating the decision of the
special master.
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. 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.
The State of Louisiana has completed its audit of the Company's tax return for
the period ended March 27, 1996. On May 9, 2000, the Company received a Notice
of Proposed Tax Due for this period in the amount of $47.6 million in tax and
$27.8 million in statutory interest through June 4, 2000. The Company requested
and received an extension to July 15, 2000 to respond to the Notice of Proposed
Tax Due. On July 14, 2000, the Company filed a letter protesting the tax and
interest due, and requested an informal conference with the Louisiana Department
of Revenue. This action does not preclude the Company from paying the amount at
issue in order to avoid the accrual of additional interest should the Company
decide to pay and contest the matter before the Louisiana courts. There can be
no assurance that the Company will ultimately prevail in this dispute. However,
management believes that the additional tax and interest ultimately paid (if
any) will be substantially less than the amounts listed on the Notice of
Proposed Tax Due, although no assurance can be given in this regard. Since the
law is unclear and the amounts involved are significant, it may be several years
before this matter is resolved. For financial reporting purposes, any tax
ultimately paid related to this matter would increase the goodwill recorded in
connection with the Merger and any interest ultimately paid would be recorded as
interest expense.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report (other than the financial
statements and other statements of historical fact) are forward-looking
statements, including, without limitation, (i) the statements in "-Business
Trends and Initiatives" concerning (a) the Company's expectation that pricing
trends for its containerboard products should continue to be positive, (b) the
improvements which the Company's long-term initiatives, including, without
limitation, its profit center reorganization and global restructuring program,
are designed to achieve, (c) the Company's expectation that capital expenditures
will range from $65 million to $75 million in 2000, (d) the Company's
expectation that its global restructuring program will be completed during 2000,
and (e) the Company's expectation that it will reduce inventory and lower
receivables; (ii) the statements in "-Outlook" concerning (a) the Company's
expectation that its 2000 EBITDA will significantly exceed its 1999 EBITDA as
well as each of the factors which the Company believes support such expectation,
(b) the Company's expectations that it will achieve slight sales volume
increases in its worldwide beverage markets and renewed growth in its domestic
folding carton markets, (c) the Company's expectation regarding pricing
improvements in the U.S. folding carton markets in 2000, (d) the Company's
expectations regarding the realization of the $40 per ton price increase for its
domestic open market grades of folding carton and beverage products during the
second half of 2000, and (e) the Company's expectation that it does not expect
to recover the North American beverage volume shortfall experienced in the
second quarter of 2000; (iii) the statements in "Financial Condition, Liquidity
and Capital Resources" concerning (a) the Company's expectation that
depreciation and amortization for 2000 will be approximately $145 million to
$150 million, (b) the Company's expectation that 2000 interest expense will be
approximately $190 million including approximately $10 million of non-cash
amortization of deferred debt issuance costs, (c) the Company's expectation that
total capital spending for 2000 will range from $65 to $75 million, (d) the
Company's expectations regarding a major improvement in its information systems
and business processes under SAP, (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 and interest ultimately paid (if any) would be
substantially less than the amounts listed on the Notice of Proposed Tax Due;
(iv) the statements in "-Equity in Net Earnings (Loss) of Affiliates" concerning
(a) Company's expectations that its share of the net proceeds from the sale of
Igaras will be approximately $190 million and (b) the Company's expectation that
the sale of its investment in Igaras to be complete by the end of 2000; and (v)
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."
22
<PAGE> 23
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, 1999, 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 2000, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133" ("SFAS No. 138"). SFAS No. 138 establishes additional
guidance for the way companies account for and report on derivative instruments
and hedging activities. In June 1999, the FASB issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities; Deferral of
Effective Date of FASB Statement No.133" ("SFAS No.137"). SFAS No. 137 defers
for one year the effective date of FASB Statement No.133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 137
now will apply to all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS No.133 establishes standards for the way companies account for
and report on derivative instruments and hedging activities. The Company has not
determined the impact that SFAS No. 133 and SFAS No. 138 will have on its
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements. SAB 101 is effective no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company has not
determined the impact that SAB 101 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
23
<PAGE> 24
period ended December 31, 1999. There have been no significant developments
with respect to derivatives or exposure to market risk during the first six
months of 2000.
24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 2, 2000, a Written Consent in Lieu of Annual Meeting was executed by the
stockholders of Riverwood Holding, Inc. and the following items were approved by
the stockholders:
1. The following Directors were elected by the stockholders:
B. Charles Ames Hubbard C. Howe
G. Andrea Botta Stephen M. Humphrey
Kevin J. Conway Samuel M. Mencoff
Gianluigi Gabetti Brian J. Richmand
Leon J. Hendrix, Jr. Lawrence C. Tucker
2. Appointment of Deloitte & Touche LLP as independent public
accountants of the Company for the year 2000.
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
99 Reconciliation of Income (Loss) from Operations to EBITDA. Filed as an
exhibit hereto.
27 Financial Data Schedule (for SEC use only)
(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: August 10, 2000 By:
/s/ Edward W. Stroetz Jr.
------------------------------------
Edward W. Stroetz Jr.
Secretary
Date: August 10, 2000 By:
/s/ Daniel J. Blount
------------------------------------
Daniel J. Blount
Senior Vice President and
Chief Financial Officer
26
