<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 1, 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
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RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 19,883 $ 14,108
Receivables, net of allowances 137,484 156,734
Inventories 168,508 173,610
Prepaid expenses 14,951 10,990
------------ ------------
Total Current Assets 340,826 355,442
Property, Plant and Equipment, net of accumulated
depreciation of $543,745 in 2000 and $455,339 in 1999 1,354,825 1,429,912
Investments in Net Assets of Equity Affiliates 147,340 146,473
Goodwill, net of accumulated amortization of $35,766 in 2000
and $29,805 in 1999 282,156 288,117
Other Assets 130,781 143,198
------------ ------------
Total Assets $ 2,255,928 $ 2,363,142
============ ============
LIABILITIES
Current Liabilities:
Short-term debt $ 140,336 $ 17,339
Accounts payable and other accrued liabilities 203,904 226,336
------------ ------------
Total Current Liabilities 344,240 243,675
Long-Term Debt, less current portion 1,575,544 1,730,898
Other Noncurrent Liabilities 99,705 101,719
------------ ------------
Total Liabilities 2,019,489 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 (488,272) (454,157)
Cumulative Currency Translation Adjustment (31,678) (15,431)
------------ ------------
Total Shareholders' Equity 229,266 279,648
------------ ------------
Total Liabilities and Shareholders' Equity $ 2,255,928 $ 2,363,142
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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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 NINE MONTHS ENDED
------------------------------ ------------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 278,501 $ 268,694 $ 853,252 $ 824,058
Cost of Sales 212,354 211,217 655,871 652,393
Selling, General and Administrative 23,620 25,935 83,336 83,041
Research, Development and Engineering 1,467 1,028 3,567 3,014
Other Expense (Income), net 3,517 (1,219) 5,490 (248)
---------- ---------- ---------- ----------
Income from Operations 37,543 31,733 104,988 85,858
Interest Income 210 119 603 756
Interest Expense 47,045 45,313 139,550 133,492
---------- ---------- ---------- ----------
Loss before Income Taxes and Equity in
Net Earnings (Loss) of Affiliates (9,292) (13,461) (33,959) (46,878)
Income Tax Expense 1,419 770 3,856 1,674
---------- ---------- ---------- ----------
Loss before Equity in Net Earnings (Loss)
of Affiliates (10,711) (14,231) (37,815) (48,552)
Equity in Net Earnings (Loss) of Affiliates 1,414 518 3,700 (1,573)
---------- ---------- ---------- ----------
Net (Loss) $ (9,297) $ (13,713) $ (34,115) $ (50,125)
---------- ---------- ---------- ----------
Other comprehensive (Loss) Income, net of tax:
Foreign currency translation adjustments (5,279) 2,314 (16,247) (2,524)
---------- ---------- ---------- ----------
Comprehensive (Loss) $ (14,576) $ (11,399) $ (50,362) $ (52,649)
========== ========== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $ (34,115) $ (50,125)
Noncash Items Included in Net Loss:
Depreciation and amortization 113,045 106,972
Deferred income taxes 179 (656)
Pension, postemployment and postretirement benefits,
net of benefits paid 3,140 3,304
Net gain on disposal of assets (745) --
Equity in net (earnings) loss of affiliates, net of dividends (901) 4,331
Amortization of deferred debt issuance costs 8,226 7,688
Other, net 1,495 1,660
Decrease (Increase) in Current Assets:
Receivables 12,607 (24,835)
Inventories (1,130) (18,256)
Prepaid expenses (4,429) (2,012)
Decrease in Accounts payable and other accrued liabilities (19,249) (9,490)
Decrease in Other Noncurrent Liabilities (193) (11,311)
---------- ----------
Net Cash Provided by Operating Activities 77,930 7,270
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (41,428) (47,689)
Proceeds from Sale of Assets 5,670 --
Increase in Other Assets (1,450) (1,428)
---------- ----------
Net Cash Used in Investing Activities (37,208) (49,117)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Decrease) Increase in Notes Payable (28,417) 51,600
(Repurchases) Issuance of Redeemable Common Stock, net (49) 367
Payments on Debt (5,126) (13,283)
---------- ----------
Net Cash (Used in) Provided by Financing Activities (33,592) 38,684
---------- ----------
Effect of Exchange Rate Changes on Cash (1,355) (1,181)
---------- ----------
Net Increase (Decrease) in Cash and Equivalents 5,775 (4,344)
Cash and Equivalents at Beginning of Period 14,108 13,840
---------- ----------
Cash and Equivalents at End of Period $ 19,883 $ 9,496
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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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 an 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.
Holding and RIC Holding, Inc, a wholly-owned subsidiary, conducted no
significant business and have no independent assets or operations other than in
connection with the Merger and related transactions through March 27, 1996.
Holding and RIC Holding, Inc. fully and unconditionally guarantees substantially
all of the debt of Riverwood.
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) SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------- ------------------ -----------------
<S> <C> <C>
Finished goods $ 81,334 $ 80,054
Work-in-process 11,996 15,845
Raw materials 41,646 45,143
Supplies 33,532 32,568
-------- --------
Total $168,508 $173,610
======== ========
</TABLE>
6
<PAGE> 7
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. As of September 30, 2000, the most significant
investment was the Company's 50 percent investment in Igaras Papeis e Embalagens
S.A. ("Igaras"). On July 1, 2000, Igaras spun off the multiple packaging portion
of its business into a newly formed company, of which the Company owned 50
percent. On October 3, 2000, the Company announced the completion of the sale of
its 50 percent investment in Igaras (see Note 9). On October 12, 2000, the
Company purchased the remaining 50 percent of the newly formed company for $12.5
million.
The following represents the summarized income statement information for Igaras,
of which the Company recognized 50 percent in its results of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ----------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Net Sales $ 49,649 $ 52,055 $ 162,944 $ 142,513
Cost of Sales 36,030 40,814 121,215 120,777
-------- -------- ---------- ----------
Gross Profit $ 13,619 $ 11,241 $ 41,729 $ 21,736
======== ======== ========== ==========
Income from Operations $ 6,002 $ 5,070 $ 22,682 $ 6,529
======== ======== ========== ==========
Net Income (Loss) $ 864 $ 1,055 $ 4,653 $ (5,003)
======== ======== ========== ==========
</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 was required to pay dividends
equal to at least 25 percent of its net profits. During the first nine months of
2000 and 1999, the Company received dividends from Igaras totaling $1.9 million
and $1.4 million, respectively, net of taxes of $0.3 million and $0.3 million,
respectively. During the first nine 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.
During the third quarter of 1999, the Company sold an investment other than
Igaras, resulting in a receipt of a final dividend of $0.8 million. No
significant gain or loss was recognized in accordance with the sale.
NOTE 5 - CONTINGENCIES AND COMMITMENTS
The Company is committed to compliance with all applicable environmental laws
and regulations throughout the world. Environmental law is, however, dynamic
rather than static. As a result, costs, which are unforeseeable at this time,
may be incurred when new laws are enacted, and when environmental agencies
promulgate or revise rules and regulations.
In late 1993, the U.S. Environmental Protection Agency proposed regulations
(generally referred to as the "cluster rules") that would mandate more stringent
controls on air and water discharges from the United States pulp and paper
mills. The cluster rules were promulgated in April 1998, and the Company
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<PAGE> 8
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
previously owned. 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 obtain
full release of all future liability at this site. The Company has contracted
with a vendor to perform the remedial actions as outlined in the Settlement
Agreement and the work is currently proceeding. The Company no longer owns the
site since transferring the property to another entity on October 22, 2000. The
Company anticipates the remedial actions outlined in the Settlement Agreement
will be completed during the first quarter of 2001 and, at that time, expects to
be relieved of any future liability.
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.
8
<PAGE> 9
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.
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 the first six months of 2001,
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
(In thousands of dollars) Severance Exit Costs Total
------------------------- --------- ---------- --------
<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 nine months of 2000 (4,349) (826) (5,175)
-------- -------- --------
Balance at 9/30/00 $ 5,329 $ 1,920 $ 7,249
======== ======== ========
</TABLE>
As of September 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
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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 nine months of 2000, $0.1 million
was utilized and charged against the accrual primarily related to exit costs. At
September 30, 2000, $1.1 million of this total was included in Other accrued
liabilities on the Consolidated Balance Sheet.
NOTE 7 - BUSINESS SEGMENT INFORMATION
Business segment information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(In thousands of dollars) 2000 1999 2000 1999
------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES:
Coated Board $ 250,607 $ 245,005 $ 767,935 $ 755,686
Containerboard 27,894 23,689 85,317 68,372
---------- ---------- ---------- ----------
$ 278,501 $ 268,694 $ 853,252 $ 824,058
========== ========== ========== ==========
INCOME (LOSS) FROM OPERATIONS:
Coated Board $ 41,584 $ 36,977 $ 118,923 $ 110,283
Containerboard 1,495 (1,009) 3,374 (12,343)
Corporate (5,536) (4,235) (17,309) (12,082)
---------- ---------- ---------- ----------
$ 37,543 $ 31,733 $ 104,988 $ 85,858
========== ========== ========== ==========
EBITDA:
Coated Board $ 76,618 $ 67,048 $ 218,394 $ 202,313
Containerboard 5,990 3,425 16,555 679
Corporate (2,032) 124 (5,412) (3,191)
---------- ---------- ---------- ----------
$ 80,576 $ 70,597 $ 229,537 $ 199,801
========== ========== ========== ==========
</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. Based on analysis
to date, the Company expects the most significant impact of this standard will
be the cumulative as well as ongoing mark-to-market adjustment through the
income statement of the options used to hedge certain anticipated foreign
currency transactions to the extent a portion of the mark-to
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market value of those options may be deemed ineffective in offsetting the change
in value of the underlying hedged item. The foreign currency forward contracts
used to hedge exposure associated with the foreign currency denominated
receivables are presently being marked-to-market through the income statement
and will continue to be marked-to-market through the income statement under SFAS
No. 133 as amended by SFAS No. 138. The interest rate swap contracts used to
effectively fix the LIBOR rate on a portion of the Company's variable rate
borrowings are expected to remain 100% effective and therefore are expected to
have no impact related to the change in the market value of these instruments on
the Company's income statement. In summary, although the Company will be
recognizing the fair value of these financial instruments on its balance sheet,
the Company expects that the implementation of SFAS No. 133 as amended by SFAS
No. 138 will not have a material impact on its income statement.
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 does not
anticipate that SAB 101 will have a material impact on its financial statements.
NOTE 9 - SUBSEQUENT EVENT
On July 1, 2000, Igaras spun off the multiple packaging portion of its business
into a newly formed company, of which the Company owned 50 percent. On October
3, 2000, the Company, along with its joint venture partner, Cia Suzano de Papel
e Celulose, completed the sale of the jointly-held subsidiary Igaras for
approximately $510 million, including the assumption of $112 million of debt.
The Company expects to recognize a gain between $65 million and $70 million, net
of tax, in accordance with the sale. On October 12, 2000, the Company purchased
the remaining 50 percent of the newly formed company for $12.5 million.
In connection with the sale of Igaras on October 3, 2000, the Company entered
into Amendment No. 5 dated September 12, 2000, effective October 3, 2000, to its
Credit Agreement. Pursuant to the amendment, the Company applied $120 million
and $25 million of the sale proceeds to its 2001 and 2002 term loan maturities
under its term loan facility, respectively; the Company will recognize a loss on
the early extinguishment of debt of approximately $2.1 million in the fourth
quarter of 2000. The Company applied the remaining portion of the proceeds
(approximately $48 million) to the Company's $400 million revolving credit
facility ("Revolving Facility"). In connection with Amendment No. 5, the
Company canceled its $140 million revolving credit facility ("Machinery
Facility"). The effect of applying the proceeds to the Revolving Facility and
canceling the Machinery Facility did not have a material impact to the Company's
overall liquidity. This application of proceeds did not involve any reduction in
the current aggregate Revolving Facility commitment of $400 million.
In connection with the sale of Igaras, certain financial and other covenants in
the Credit Agreement were amended to reflect recent financial results and market
and operating conditions, as well as the sale of Igaras and the prepayment of
term loans and other borrowings. Covenant modifications specify, among other
things, the following amended minimum EBITDA requirements for each four quarter
period ended during the following test periods:
<TABLE>
<CAPTION>
Test Period EBITDA
---------------------------------------- ------------
<S> <C>
December 31, 1999 - December 30, 2000 $265 million
December 31, 2000 - December 30, 2001 $290 million
December 31, 2001 - December 30, 2002 $300 million
December 31, 2002 - December 30, 2003 $315 million
Thereafter $340 million
</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 "Credit Agreement") that currently provides for senior secured
credit facilities (the "Facilities") consisting of $633 million ($488 million
after the effect of the Igaras sale) 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., a wholly-owned subsidiary of Riverwood, entered into a credit agreement
providing for a $140 million secured revolving credit facility (the "Machinery
Facility") 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 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.
In connection with the sale of Igaras Papeis e Embalagens S.A. ("Igaras") on
October 3, 2000, the Company entered into Amendment No. 5 dated September 12,
2000, effective October 3, 2000, to the Credit Agreement. Pursuant to the
amendment, the Company applied $120 million and $25 million of the sale proceeds
to its 2001 and 2002 term loan maturities under the Term Loan Facility,
respectively; the Company will recognize a loss on the early extinguishment of
debt of approximately $2.1 million in the fourth quarter of 2000. The Company
applied the remaining portion of the proceeds (approximately $48 million) to the
Revolving Facility (without any commitment reduction). In connection with
Amendment No. 5, the Company canceled its Machinery Facility. The effect of
applying the proceeds to the Revolving Facility and canceling the Machinery
Facility did not have a material impact to the Company's overall liquidity. In
addition, certain of the financial covenants included in the Credit Agreement
were amended (see "Financial Condition, Liquidity and Capital Resources -
Covenant Restrictions.")
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
12
<PAGE> 13
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. The Company believes that EBITDA provides
useful information regarding the Company's debt service ability, but should not
be considered in isolation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ------------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
EBITDA (Segment Data):
Coated Board $ 76,618 $ 67,048 $ 218,394 $ 202,313
Containerboard 5,990 3,425 16,555 679
Corporate (2,032) 124 (5,412) (3,191)
-------- -------- ---------- ----------
EBITDA $ 80,576 $ 70,597 $ 229,537 $ 199,801
======== ======== ========== ==========
</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 nine months of 2000, the Company has
taken 35 days or approximately 11,900 tons of medium and bag market related
downtime at the U.S. mills that resulted in approximately $2.7 million of
underabsorped fixed costs.
The Company expects to take an additional 23 days, or 9,500 tons, of downtime in
the fourth quarter of 2000. The downtime results primarily from a number of
factors, principally production above planned rates at the U.S. mills, slow
recovery of soft drink demand and a weak containerboard market. As a result of
the downtime in fourth quarter, the Company expects the impact on earnings at
the U.S. mills to be approximately $2.0 million related to the underabsorption
of fixed costs.
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. The Company is continuing to implement a global Total Quality Systems
("TQS") initiative which uses statistical process control to help design and
manage all types of activities including production and maintenance.
In addition, the Company recently established a management team in an effort to
expand into the high-growth segments of the global consumer packaged goods
sector. The Company will also offer a broad portfolio of new and enhanced
products to generate additional growth in the global consumer packaged goods
sector. Historically, the Company reported its Coated Board results in the
beverage and folding carton markets in addition to the results from its Swedish
Mill. As a result of the new strategy, the Company will report the results of
the folding carton markets and results of the Swedish Mill under
13
<PAGE> 14
the title of consumer product packaging markets. The Company expects to see the
benefits of the new global consumer packaged goods strategy beginning in the
first quarter of 2001.
The Company expects capital expenditures will range from $65 million to $75
million in 2000 and $70 million to $80 million in 2001 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 the first six months of 2001 (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 nine months of 2000 increased
approximately 13 percent when compared to the first nine months of 1999. The
Company has been and will continue to be selective in future packaging machinery
placements to ensure appropriate returns.
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 and North
American consumer product sales volumes above 1999 levels, improving U.S. mill
throughput, continued cost savings from other actions taken to date and stable
pricing for the Company's products. In 2000, the Company expects stable sales
volumes in its worldwide beverage markets, and renewed growth in its domestic
consumer product markets. The Company does not expect to recover the volume
shortfall it suffered during the 2000 North American soft drink beverage season.
The Company expects containerboard market prices to be stable through the end of
2000.
14
<PAGE> 15
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------- ---------------------------------------
% INCREASE % INCREASE
(DECREASE) (DECREASE)
SEPT. 30, FROM PRIOR SEPT. 30, SEPT. 30, FROM PRIOR SEPT. 30,
(IN THOUSANDS OF DOLLARS) 2000 PERIOD 1999 2000 PERIOD 1999
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales (Segment Data):
Coated Board $ 250,607 2.3% $ 245,005 $ 767,935 1.6% $ 755,686
Containerboard 27,894 17.8 23,689 85,317 24.8 68,372
--------- --------- --------- ---------
Net Sales 278,501 3.6 268,694 853,252 3.5 824,058
Cost of Sales 212,354 0.5 211,217 655,871 0.5 652,393
--------- --------- --------- ---------
Gross Profit 66,147 15.1 57,477 197,381 15.0 171,665
Selling, General and Administrative 23,620 (8.9) 25,935 83,336 0.4 83,041
Research, Development and
Engineering 1,467 42.7 1,028 3,567 18.3 3,014
Other Expense (Income), net 3,517 N/A (1,219) 5,490 N/A (248)
--------- --------- --------- ---------
Income from Operations $ 37,543 18.3 $ 31,733 $ 104,988 22.3 $ 85,858
========= ========= ========= =========
Income (Loss) from Operations
(Segment Data):
Coated Board $ 41,584 12.5% $ 36,977 $ 118,923 7.8% $ 110,283
Containerboard 1,495 N/A (1,009) 3,374 N/A (12,343)
Corporate (5,536) (30.7) (4,235) (17,309) (43.3) (12,082)
--------- --------- --------- ---------
Income from Operations $ 37,543 18.3 $ 31,733 $ 104,988 22.3 $ 85,858
========= ========= ========= =========
</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 nine months
ended September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- --------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS OF TONS)
Coated Board 245.2 240.9 733.4 727.1
Swedish Mill 37.8 32.3 111.8 98.5
Containerboard 73.7 68.6 230.6 230.1
----- ------- ------- -------
356.7 341.8 1,075.8 1,055.7
===== ======= ======= =======
</TABLE>
15
<PAGE> 16
THIRD QUARTER 2000 COMPARED WITH THIRD QUARTER 1999
NET SALES
As a result of the factors described below, the Company's Net Sales in the third
quarter of 2000 increased by $9.8 million, or 3.6 percent, compared with the
third quarter of 1999. Net Sales in the Coated Board business segment increased
by $5.6 million in the third quarter of 2000, or 2.3 percent, to $250.6 million
from $245.0 million in the third quarter of 1999, due primarily to higher sales
volume in North American consumer product 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 slightly improved pricing in North
American beverage markets. These increases were somewhat offset by lower
worldwide beverage volumes and the negative impact of foreign currency exchange
rates, primarily in Europe. Net Sales in the Containerboard business segment
increased by $4.2 million, or 17.8 percent, to $27.9 million in the third
quarter of 2000 from $23.7 million in the third quarter of 1999, due principally
to higher pricing and higher linerboard sales volume, somewhat offset by lower
medium sales volume.
GROSS PROFIT
As a result of the factors discussed below, the Company's Gross Profit for the
third quarter of 2000 increased by $8.6 million, or 15.1 percent, to $66.1
million from $57.5 million in the third quarter of 1999. The Company's gross
profit margin increased to 23.8 percent in the third quarter of 2000 from 21.4
percent in the third quarter of 1999. Gross Profit in the Coated Board business
segment increased by $7.0 million, or 12.3 percent, to $64.3 million in the
third quarter of 2000 from $57.3 million in the third quarter of 1999, while its
gross profit margin increased to 25.7 percent in the third quarter of 2000 from
23.4 percent in the third 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 $1.6 million to $1.9
million in the third quarter of 2000 from $0.3 million in the third quarter of
1999, while its gross profit margin increased to 6.8 percent in the third
quarter of 2000 from 1.4 percent in the third quarter of 1999. The increase in
Containerboard Gross Profit resulted principally from improved pricing.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses decreased $2.3 million, or 8.9
percent, to $23.6 million in the third quarter of 2000 from $25.9 million in the
third quarter of 1999, due primarily to lower administrative expenses somewhat
offset by higher depreciation expense and certain non-recurring operating
credits recorded in the third quarter of 1999. As a percentage of Net Sales,
Selling, General and Administrative expenses decreased from 9.6 percent in the
third quarter of 1999 to 8.5 percent in the third quarter of 2000.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses increased $0.5 million, or 42.7
percent, to $1.5 million in the third quarter of 2000 from $1.0 million in the
third quarter of 1999, due primarily to higher research and development
investing relating to packaging machinery.
OTHER EXPENSE (INCOME), NET
Other Expense (Income), net, was $3.5 million in the third quarter of 2000 and
$(1.2) million in the third quarter of 1999. This change was primarily due to
losses on foreign currency transactions and non-recurring operating charges
recorded in the third quarter 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 third quarter of 2000 increased by $5.8 million, or 18.3
percent, to $37.5 million from $31.7 million in the third quarter of 1999, while
the Company's operating margin increased to 13.5 percent in the third quarter of
2000 from 11.8 percent in the third quarter of 1999. Income from Operations in
the Coated Board business segment increased by $4.6 million, or 12.5 percent, to
$41.6 million in the third quarter of 2000 from $37.0 million in the third
quarter of 1999, while the operating margin increased to 16.6 percent in the
third quarter of 2000 from 15.1 percent in the third quarter of 1999, primarily
as a result of the factors described above. Income from Operations in the
Containerboard business segment increased by $2.5 million to a gain of $1.5
million in the third quarter of 2000 from a (Loss) from Operations of $(1.0)
million in the third quarter of 1999, while the operating margin increased to
5.4 percent in the third quarter of 2000 from (4.3) percent in the third quarter
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 third quarter of 2000.
FIRST NINE MONTHS 2000 COMPARED WITH FIRST NINE MONTHS 1999
NET SALES
As a result of the factors described below, the Company's Net Sales in the first
nine months of 2000 increased by $29.2 million, or 3.5 percent, compared with
the first nine months of 1999. Net Sales in the Coated Board business segment
increased by $12.2 million in the first nine months of 2000, or 1.6 percent, to
$767.9 million from $755.7 million in the first nine 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 consumer product 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 slightly improved pricing
in North American beverage markets. These increases were somewhat offset by
lower North American beverage volumes due primarily to lower soft drink demand
and the negative impact of foreign currency exchange rates, primarily in Europe.
Net Sales in the Containerboard business segment increased $16.9 million, or
24.8 percent, to $85.3 million in the first nine months of 2000 from $68.4
million in the first nine 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 nine months of 2000 increased by $25.7 million, or 15.0 percent, to $197.4
million from $171.7 million in the first nine months of 1999. The Company's
gross profit margin increased to 23.1 percent in the first nine months of 2000
from 20.8 percent in the first nine months of 1999. Gross Profit in the Coated
Board business segment increased by $11.9 million, or 6.6 percent, to $192.0
million in the first nine months of 2000 from $180.1 million in the first nine
months of 1999, while its gross profit margin increased to 25.0 percent in the
first nine months of 2000 from 23.8 percent in the first nine 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 $13.5 million to a gain of $5.4 million in the first nine
months of 2000 from a loss of $8.1 million in the first nine months of 1999,
while its gross profit margin increased to 6.4 percent in the first nine months
of 2000 from (11.8) percent in the first nine months of 1999. The increase in
Containerboard Gross Profit resulted principally from improved pricing.
17
<PAGE> 18
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expense increased by $0.3 million, or 0.4
percent, to $83.3 million in the first nine months of 2000 from $83.0 million in
the first nine 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 somewhat
offset by lower administrative expenses. As a percentage of Net Sales, Selling,
General and Administrative expenses decreased from 10.1 percent in the first
nine months of 1999 to 9.7 percent in the first nine months of 2000.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses increased by $0.6 million, or
18.3 percent, to $3.6 million in the first nine months of 2000 from $3.0 million
in the first nine months of 1999, due primarily to higher research and
development investing relating to packaging machinery.
OTHER EXPENSE (INCOME), NET
Other Expense (Income), net, was $5.5 million in the first nine months of 2000
and $(0.2) million in the first nine months of 1999. This change was primarily
due to non-recurring credits recorded in the first nine months of 1999 primarily
related to utility recoveries and losses on foreign currency transactions
recorded in the first nine months of 2000 somewhat offset by non-recurring
operating credits recorded in the first nine months of 2000.
INCOME (LOSS) FROM OPERATIONS
Primarily as a result of the factors discussed above, the Company's Income from
Operations in the first nine months of 2000 increased by $19.1 million, or 22.3
percent, to $105.0 million from $85.9 million in the first nine months of 1999,
while the Company's operating margin increased to 12.3 percent in the first nine
months of 2000 from 10.4 percent in the first nine months of 1999. Income from
Operations in the Coated Board business segment increased by $8.6 million, or
7.8 percent, to $118.9 million in the first nine months of 2000 from $110.3
million in the first nine months of 1999, while the operating margin increased
to 15.5 percent in the first nine months of 2000 from 14.6 percent in the first
nine months of 1999, primarily as a result of the factors described above.
Income from Operations in the Containerboard business segment increased $15.7
million to a gain of $3.4 million in the first nine months of 2000 from a (Loss)
from Operations of $(12.3) million in the first nine months of 1999, while the
operating margin increased to 4.0 percent in the first nine months of 2000 from
(18.1) percent in the first nine 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 nine 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 $0.6 million in the first nine
months of 2000 from $0.8 million in the first nine months of 1999.
18
<PAGE> 19
INTEREST EXPENSE
Interest Expense increased by $6.1 million to $139.6 million in the first nine
months of 2000 from $133.5 million in the first nine months of 1999 due
primarily to higher average interest rates but also impacted by higher average
debt balances.
INCOME TAX EXPENSE
During the first nine months of 2000, the Company recognized an income tax
expense of $3.9 million on a (Loss) before Income Taxes and Equity in Net
Earnings (Loss) of Affiliates of $(34.0) million. During the first nine months
of 1999, the Company recognized an income tax expense of $1.7 million on a
(Loss) before Income Taxes and Equity in Net Earnings (Loss) of Affiliates of
$(46.9) million. 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 was accounted for under the
equity method of accounting. Equity in Net Earnings (Loss) of Affiliates
increased $5.3 million to $3.7 million in the first nine months of 2000 from
$(1.6) million in the first nine 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.
During the first nine months of 2000 and 1999, the Company received dividends
from Igaras totaling $1.9 million and $1.4 million, respectively, net of taxes
of $0.3 million and $0.3 million, respectively. During the first nine 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.
During the third quarter of 1999, the Company sold an investment other than
Igaras, resulting in a receipt of a final dividend of $0.8 million. No
significant gain or loss was recognized in accordance with the sale.
On October 3, 2000, the Company completed the sale of the jointly-held
subsidiary Igaras for approximately $510 million, including the assumption of
$112 million of debt (see "Overview"). The Company expects to recognize a gain
between $65 million and $70 million, net of tax, in accordance with the sale.
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
19
<PAGE> 20
Cash and equivalents increased by approximately $5.8 million in the first nine
months of 2000 primarily as a result of $77.9 million net cash provided by
operating activities somewhat offset by $37.2 million net cash used in investing
activities and $33.6 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 nine months of 2000
totaled approximately $113 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 September 30, 2000, the Company had
outstanding approximately $1,696 million of long-term debt, consisting primarily
of $650 million aggregate principal amount of the 1996 Notes, $250 million of
the 1997 Notes, $633 million outstanding under the Term Loan Facility and
additional amounts under the Revolving Facility and other debt issues and
facilities. During the first nine months of 2000, the Company repaid
approximately $5.1 million of debt. The Company had a net decrease in revolving
credit facilities borrowings of approximately $28.4 million.
After giving effect to the Igaras sale (see "Overview"), as of September 30,
2000, the Company had outstanding approximately $1,503 million of long-term
debt, consisting primarily of $650 million aggregate principal amount of the
1996 Notes, $250 million of the 1997 Notes, $488 million outstanding under the
Term Loan Facility and additional amounts under the Revolving Facility and other
debt issues and facilities.
DEBT SERVICE
Principal and interest payments under the Term Loan Facility and the Revolving
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 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 $120 million (nil after the effect of the Igaras sale), $173
million ($148 million after the effect of the Igaras sale), $184 million and
$156 million for each of the years 2001 through 2004, respectively. In
connection with the sale of Igaras, the Company applied $120 million and $25
million of the sale proceeds to its 2001 and 2002 term loan maturities,
respectively (see "Overview").
The loans under the Facilities bear interest at floating rates based upon the
interest rate option elected by the Company. The Tranche A term loans, Tranche B
term loans and Tranche C term loans under the Term Loan Facility bore interest
as of September 30, 2000 at an average rate per annum of 9.6 percent.
20
<PAGE> 21
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 $185 million, including
approximately $10 million of non-cash amortization of deferred debt issuance
costs. The Company will recognize approximately a $2.1 million loss on early
extinguishment of debt in conjunction with the application of the proceeds from
the Igaras sale (see "Overview"). During the first nine months of 2000, cash
paid for interest was approximately $122 million.
The Revolving Facility will mature in March 2003 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 this or a similar
revolving credit facility after the maturity date, and that the Company
accordingly will have to extend, renew, replace or otherwise refinance such
facility at or prior to such date. No assurance can be given that it will be
able to do so.
The 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 September 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 Agreement imposes restrictions on the Company's ability to make
capital expenditures and both the Credit Agreement 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 Agreement also, among other things, restrict the ability of the
Company and its subsidiaries to dispose of assets, incur guarantee obligations,
repay the relevant 1996 Notes or the 1997 Notes, pay dividends, create liens on
assets, enter into sale and leaseback transactions, make investments, loans or
advances, make acquisitions, engage in mergers or consolidations, make capital
expenditures or engage in certain transactions with affiliates, and otherwise
restrict corporate activities. The covenants contained in such indentures also
impose restrictions on the operation of the Company's business. At September 30,
2000, the Company was in compliance with the financial covenants in the Credit
Agreement.
In connection with the sale of Igaras (see "Overview"), certain financial and
other covenants in the Credit Agreement were amended to reflect recent financial
results and market and operating conditions, as well as the sale of Igaras and
the prepayment of term loans and other borrowings. Covenant modifications
specify, among other things, the following amended minimum EBITDA requirements
for each four quarter period ended during the following test periods:
<TABLE>
<CAPTION>
Test Period EBITDA
---------------------------------------- ------------
<S> <C>
December 31, 1999 - December 30, 2000 $265 million
December 31, 2000 - December 30, 2001 $290 million
December 31, 2001 - December 30, 2002 $300 million
December 31, 2002 - December 30, 2003 $315 million
Thereafter $340 million
</TABLE>
21
<PAGE> 22
CAPITAL EXPENDITURES
Capital spending for the first nine months of 2000 was approximately $41.4
million, down 13.1 percent from $47.7 million in the first nine months of 1999.
Capital spending during the first nine months of 2000 related primarily to
increasing paper production efficiencies, increasing converting capacity and
manufacturing packaging machinery. The Company expects total capital spending
will range from $65 million to $75 million in 2000 and will range from $70
million to $80 million in 2001, and is expected to relate principally to
improving the Company's process capabilities, the production of packaging
machinery, and cluster rule compliance.
22
<PAGE> 23
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 the first six months of 2001,
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
(In thousands of dollars) Severance Exit Costs Total
-------------------------
---------- ----------- ---------
<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 nine months of 2000 (4,349) (826) (5,175)
-------- ------- --------
Balance at 9/30/00 $ 5,329 $ 1,920 $ 7,249
======== ======= ========
</TABLE>
As of September 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. During the first nine months of 2000, $0.1 million
was utilized and charged against the accrual primarily related to exit costs. At
September 30, 2000, $1.1 million of this total was accrued in Other accrued
liabilities on the Consolidated Balance Sheet.
At September 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 OUTSTANDING AT AVAILABLE AT
OF SEPTEMBER 30, SEPTEMBER 30,
COMMITMENTS 2000 2000
------------- -------------- -------------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
-------------------------
Revolving Facility $400,000 $163,000 $237,000
Machinery Facility 140,000 -- 42,000
International Facilities 27,873 19,535 8,338
-------- -------- --------
$567,873 $182,535 $287,338
======== ======== ========
</TABLE>
In connection with the sale of Igaras (see "Overview"), the Company applied the
remaining portion of the proceeds (approximately $48 million) to the Revolving
Facility. In connection with Amendment No. 5 to the Credit Agreement, the
Company canceled the Machinery Facility.
Had the sale of Igaras occurred on September 30, 2000, the following amounts of
commitments, amounts outstanding and amounts available under revolving credit
facilities would have been:
<TABLE>
<CAPTION>
Total Amount
of Total Amount Total Amount
Commitments Outstanding Available
------------ ------------ ------------
<S> <C> <C> <C>
(in thousands of dollars)
-------------------------
Revolving Facility $400,000 $115,000 $285,000
International Facilities 27,873 19,535 8,338
-------- -------- --------
$427,873 $134,535 $293,338
======== ======== ========
</TABLE>
The effect of applying the proceeds to the Revolving Facility and canceling the
23
<PAGE> 24
Machinery Facility did not have a material impact to the Company's overall
liquidity and did not involve any reduction in the current aggregate Revolving
Facility commitment of $400 million. Undrawn Revolving Facility availability is
expected to be used to meet future working capital and other business needs of
the Company. The Company anticipates pursuing additional working capital
financing for its foreign operations as necessary.
The Company believes that cash generated from operations, together with amounts
available under its Revolving 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, 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.
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
previously owned. 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. The Company has
contracted with a vendor to perform the remedial actions as outlined in the
Settlement Agreement and the work is currently proceeding. The Company no longer
owns the site since transferring the property to another entity on October 22,
2000. The Company anticipates the remedial actions outlined in the Settlement
Agreement will be completed during the first quarter of 2001 and expects, at
that time, to be relieved of any future liability.
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
24
<PAGE> 25
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.
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
25
<PAGE> 26
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 regarding
downtime in the fourth quarter of 2000, (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 regarding the realization of the benefits of the new
global consumer packaged goods strategy beginning in the first quarter of 2001,
(d) the Company's expectation that capital expenditures will range from $65
million to $75 million in 2000 and $70 million to $80 million in 2001, (e) the
Company's expectation that its global restructuring program will be completed
during the first six months of 2001, and (f) 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 regarding stable sales
volumes in its worldwide beverage markets and renewed growth in its domestic
consumer product markets, (c) the Company's expectation that it will recover the
volume shortfall it suffered during the 2000 North American soft drink beverage
season, and (d) the Company's expectation that containerboard market prices will
be stable through the end 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 $185 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 million to $75 million and
$70 million to $80 million in 2001, (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, (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, (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 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
the Company's expectation regarding the expected gain on the sale of Igaras to
be between $65 million and $70 million, net of tax 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."
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
Company. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on the Company will be those anticipated by management. The
important factors described elsewhere in this report (including, without
limitation, those discussed in "- Financial Condition, Liquidity and Capital
Resources - Liquidity and Capital Resources - Environmental and Legal Matters"
and "- Tax Matters Relating to the Merger"), the Company's Report on Form 10-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
26
<PAGE> 27
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. Based on analysis
to date, the Company expects the most significant impact of this standard will
be the cumulative as well as ongoing mark-to-market adjustment through the
income statement of the options used to hedge certain anticipated foreign
currency transactions to the extent a portion of the mark-to-market value of
those options may be deemed ineffective in offsetting the change in value of the
underlying hedged item. The foreign currency forward contracts used to hedge
exposure associated with the foreign currency denominated receivables are
presently being marked-to-market through the income statement and will continue
to be marked-to-market through the income statement under SFAS No. 133 as
amended by SFAS No. 138. The interest rate swap contracts used to effectively
fix the LIBOR rate on a portion of the Company's variable rate borrowings are
expected to remain 100% effective and therefore are expected to have no impact
related to the change in the market value of these instruments on the Company's
income statement. In summary, although the Company will be recognizing the fair
value of these financial instruments on its balance sheet, the Company expects
that the implementation of SFAS No. 133 as amended by SFAS No. 138 will not have
a material impact on its income statement.
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 does not
anticipate that SAB 101 will have a material impact 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,
1999. There have been no significant developments with respect to derivatives or
exposure to market risk during the first nine months of 2000.
27
<PAGE> 28
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.
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.
October 3, 2000 Igaras sale and credit agreement amendment
28
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVERWOOD HOLDING, INC.
----------------------------------------
(Registrant)
Date: November 9, 2000 By: /s/ Edward W. Stroetz Jr.
----------------------------------------
Edward W. Stroetz Jr.
Secretary
Date: November 9, 2000 By: /s/ Daniel J. Blount
----------------------------------------
Daniel J. Blount
Senior Vice President and
Chief Financial Officer
29
