<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 2, 2000 there were 7,062,380 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>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 16,280 $ 14,108
Receivables, net of allowances 159,992 156,734
Inventories 173,306 173,610
Prepaid expenses 12,527 10,990
----------- -----------
Total Current Assets 362,105 355,442
Property, Plant and Equipment, net of accumulated
depreciation of $485,930 in 2000 and $455,339 in 1999 1,407,927 1,429,912
Investments in Net Assets of Equity Affiliates 147,282 146,473
Goodwill, net of accumulated amortization of $31,792 in 2000
and $29,805 in 1999 286,130 288,117
Other Assets 137,955 143,198
----------- -----------
Total Assets $ 2,341,399 $ 2,363,142
=========== ===========
LIABILITIES
Current Liabilities:
Short-term debt $ 54,339 $ 17,339
Accounts payable and other accrued liabilities 220,435 226,336
----------- -----------
Total Current Liabilities 274,774 243,675
Long-Term Debt, less current portion 1,706,192 1,730,898
Other Noncurrent Liabilities 100,571 101,719
----------- -----------
Total Liabilities 2,081,537 2,076,292
----------- -----------
Contingencies and Commitments (Note 5)
Redeemable Common Stock, at current redemption value 7,177 7,202
----------- -----------
SHAREHOLDERS' EQUITY
Nonredeemable Common Stock 75 75
Capital in Excess of Par Value 749,161 749,161
(Accumulated Deficit) (475,320) (454,157)
Cumulative Currency Translation Adjustment (21,231) (15,431)
----------- -----------
Total Shareholders' Equity 252,685 279,648
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,341,399 $ 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
-----------------------------
MARCH 31, MARCH 31,
2000 1999
---------- ---------
<S> <C> <C>
Net Sales $ 270,229 $ 255,867
Cost of Sales 211,928 207,759
Selling, General and Administrative 30,368 27,887
Research, Development and Engineering 1,097 1,086
Other Expense, net 2,740 264
--------- ---------
Income from Operations 24,096 18,871
Interest Income 172 199
Interest Expense 45,771 43,156
--------- ---------
(Loss) before Income Taxes and Equity in
Net Earnings (Loss) of Affiliates (21,503) (24,086)
Income Tax Expense 1,071 409
--------- ---------
(Loss) before Equity in Net Earnings (Loss)
of Affiliates (22,574) (24,495)
Equity in Net Earnings (Loss) of Affiliates 1,411 (1,984)
--------- ---------
Net (Loss) $ (21,163) $ (26,479)
--------- ---------
Other comprehensive (Loss), net of tax:
Foreign currency translation adjustments (5,800) (953)
--------- ---------
Comprehensive (Loss) $ (26,963) $ (27,432)
========= =========
</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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $(21,163) $(26,479)
Noncash Items Included in Net (Loss):
Depreciation and amortization 37,500 35,251
Deferred income taxes (1,840) (328)
Pension, postemployment and postretirement benefits,
net of benefits paid 731 998
Net loss on disposal of assets -- 546
Equity in net (earnings) loss of affiliates, net of dividends (822) 1,984
Amortization of deferred debt issuance costs 2,558 2,544
Other, net -- 43
(Increase) Decrease in Current Assets:
Receivables (5,610) (111)
Inventories (2,024) (12,393)
Prepaid expenses (1,651) 289
(Decrease) in Accounts payable and other accrued liabilities (2,861) (24,264)
Increase (Decrease) in Other Noncurrent Liabilities 255 (1,418)
-------- --------
Net Cash Provided by (Used in) Operating Activities 5,073 (23,338)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (14,131) (13,330)
Increase in Other Assets (85) (5,220)
-------- --------
Net Cash (Used in) Investing Activities (14,216) (18,550)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Notes Payable 14,600 45,900
(Repurchases) of Redeemable Common Stock, net (25) (1,267)
Payments on Debt (1,418) (2,589)
-------- --------
Net Cash Provided by Financing Activities 13,157 42,044
-------- --------
Effect of Exchange Rate Changes on Cash (1,842) (205)
-------- --------
Net Increase (Decrease) in Cash and Equivalents 2,172 (49)
Cash and Equivalents at Beginning of Period 14,108 13,840
-------- --------
Cash and Equivalents at End of Period $ 16,280 $ 13,791
======== ========
</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) MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Finished goods $ 84,147 $ 80,054
Work-in-process 13,761 15,845
Raw materials 41,774 45,143
Supplies 33,624 32,568
======== ========
Total $173,306 $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").
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
---------------------------
MARCH 31, MARCH 31,
2000 1999
---------- ---------
<S> <C> <C>
(IN THOUSANDS OF DOLLARS)
Net Sales $ 58,393 $ 42,295
Cost of Sales 42,582 39,061
-------- --------
Gross Profit $ 15,811 $ 3,234
======== ========
Income (Loss) from Operations $ 10,600 $ (1,348)
======== ========
Net Income (Loss) $ 2,392 $ (4,922)
======== ========
</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 quarter 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 the 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. Currently, the Company is in ongoing discussions with the DEQ to develop
an appropriate remediation plan and exit strategy.
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
7
<PAGE> 8
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. The Company is
awaiting a decision.
In connection with the Merger, the former majority owner of the Company agreed
to bear the cost of a Section 338(h)(10) election for U.S. federal tax purposes
and for purposes of state taxes for which the former majority owner and the
Company filed returns on a combined basis. The Company agreed to bear the cost
of this election for the purposes of other state taxes ("stand-alone taxes"),
including Louisiana income tax. During 1997, the Company paid $27.5 million in
estimated Louisiana stand-alone taxes relating to the election. The Company's
calculation of its Louisiana tax was based on state law in effect at the time
of the Merger, including a 1993 amendment. In May 1997, the Louisiana Supreme
Court declared the 1993 amendment to be void under the Louisiana Constitution,
retroactive to 1993. 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 and its
advisors are evaluating the Company's options for responding to Louisiana's
challenge to the Company's filing position, which could include paying the
amount at issue in order to avoid the accrual of additional statutory interest
while contesting the matter before the Louisiana courts. Under Louisiana law,
the Company has until June 4, 2000 to respond to the Notice of Proposed Tax
Due. The Company's response options include, but are not limited to, filing a
written protest requesting an administrative hearing, paying the tax and
interest and filing for a refund in Louisiana District Court, and requesting an
extension of time to reply. 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
(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 quarter 2000 (609) (142) (751)
-------- ------- --------
Balance at 3/31/00 $ 9,069 $ 2,604 $ 11,673
======== ======= ========
</TABLE>
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 quarter of 2000, $1.1 million was
utilized and charged against the accrual primarily related to exit costs. At
March 31, 2000, $1.2 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
-----------------------------
MARCH 31, MARCH 31,
(IN THOUSANDS OF DOLLARS) 2000 1999
- ------------------------- ---------- ---------
<S> <C> <C>
NET SALES:
Coated Board $ 238,392 $ 234,532
Containerboard 31,837 21,335
--------- ---------
$ 270,229 $ 255,867
========= =========
INCOME (LOSS) FROM OPERATIONS:
Coated Board $ 30,102 $ 29,769
Containerboard 328 (7,448)
Corporate (6,334) (3,450)
--------- ---------
$ 24,096 $ 18,871
========= =========
EBITDA:
Coated Board $ 61,702 $ 59,793
Containerboard 5,282 (2,430)
Corporate (2,948) (1,674)
--------- ---------
$ 64,036 $ 55,689
========= =========
</TABLE>
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.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
2000 1999
---------- ---------
<S> <C> <C>
(IN THOUSANDS OF DOLLARS)
-----------------------
EBITDA (Segment Data):
Coated Board $ 61,702 $ 59,793
Containerboard 5,282 (2,430)
Corporate (2,948) (1,674)
-------- --------
EBITDA $ 64,036 $ 55,689
======== ========
</TABLE>
BUSINESS TRENDS AND INITIATIVES
The Company's cash flow from operations and EBITDA are influenced by sales
volume and selling prices for its products and raw material costs, and are
affected by a number of significant business, economic and competitive factors.
Many of these factors are not within the Company's control. Historically, in the
Coated Board business segment, the Company has experienced stable pricing for
its integrated beverage carton products, and moderate cyclical pricing for its
folding cartonboard, which is principally sold in the open market. The Company's
folding cartonboard sales are affected by competition from competitors' CUK
Board and other substrates - solid bleached sulfate ("SBS"), recycled clay
coated news ("CCN") and, internationally, WLC -- as well as by general market
conditions.
In the Containerboard business segment, conditions in the cyclical worldwide
commodity paperboard markets have a substantial impact on the Company's
Containerboard sales. The Company is continuing to benefit from its multiple
price increases for linerboard, corrugated medium, and kraft paper announced
during 1999, and trends are expected to continue to be positive as several major
producers announced additional price increases in the beginning of the year
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 comply with environmental cluster rules, and to invest in packaging
machinery. 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 taking an aggressive approach to reduce working
capital and increase liquidity. This approach includes a goal to reduce
inventory by approximately $20 million in 2000, as well as lowering receivables.
To implement this goal, the Company will utilize its new information system to
improve the operation of its supply chain.
Packaging machinery placements during the first quarter of 2000 remained stable
when compared to the first quarter of 1999. The Company has been and will
continue to be more selective in future packaging machinery placements to ensure
appropriate returns. The Company recently completed the successful installation
of three new Marksman 1600 high speed packaging machines in Japan. As a result,
the Company expects these machine placements to foster further growth.
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 modest sales volume increases in its worldwide beverage markets,
and renewed growth in its folding carton markets, principally in North America.
The Company also expects price improvements in the U.S. folding carton markets
in 2000 based upon recent price increases announced for competing substrates. In
response, the Company announced a $40 per ton price increase for its domestic
open market grades of folding carton and beverage products effective May 1,
2000. The Company continues to be optimistic about containerboard prices as
several major containerboard producers recently announced additional price
increases.
13
<PAGE> 14
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
% INCREASE
(DECREASE)
MARCH 31, FROM PRIOR MARCH 31,
(IN THOUSANDS OF DOLLARS) 2000 PERIOD 1999
--------- ---------- ---------
<S> <C> <C> <C>
Net Sales (Segment Data):
Coated Board $ 238,392 1.6% $ 234,532
Containerboard 31,837 49.2 21,335
--------- ---------
Net Sales 270,229 5.6 255,867
Cost of Sales 211,928 2.0 207,759
--------- ---------
Gross Profit 58,301 21.2 48,108
Selling, General and Administrative 30,368 8.9 27,887
Research, Development and
Engineering 1,097 1.0 1,086
Other Expenses, net 2,740 937.9 264
--------- ---------
Income from Operations $ 24,096 27.7 $ 18,871
========= =========
Income (Loss) from Operations
(Segment Data):
Coated Board $ 30,102 1.1% $ 29,769
Containerboard 328 N/A (7,448)
Corporate (6,334) (83.6) (3,450)
--------- ---------
Income from Operations $ 24,096 27.7 $ 18,871
========= =========
</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 months ended March
31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
(IN THOUSANDS OF TONS)
----------------------
Coated Board 221.5 225.2
Swedish Mill 37.2 31.9
Containerboard 90.0 81.8
---------- ----------
348.7 338.9
========== ==========
</TABLE>
FIRST QUARTER 2000 COMPARED WITH FIRST QUARTER 1999
NET SALES
As a result of the factors described below, the Company's Net Sales in the first
quarter of 2000 increased by $14.4 million, or 5.6 percent, compared with the
first quarter of 1999. Net Sales in the Coated Board business segment increased
by $3.9 million in the first quarter of 2000, or 1.6 percent, to $238.4 million
from
14
<PAGE> 15
$234.5 million in the first quarter of 1999, due primarily to higher sales
volume in international beverage markets and improved pricing in domestic
beverage markets, somewhat offset by lower worldwide folding carton volumes. Net
Sales in the Containerboard business segment increased $10.5 million, or 49.2
percent, to $31.8 million in the first quarter of 2000 from $21.3 million in the
first quarter of 1999, due principally to higher pricing and volume.
GROSS PROFIT
As a result of the factors discussed below, the Company's Gross Profit for the
first quarter of 2000 increased $10.2 million, or 21.2 percent, to $58.3 million
from $48.1 million in the first quarter of 1999. The Company's gross profit
margin increased to 21.6 percent for the first quarter of 2000 from 18.8 percent
in the first quarter of 1999. Gross Profit in the Coated Board business segment
increased $2.6 million, or 4.8 percent, to $57.3 million in the first quarter of
2000 as compared to $54.6 million in the first quarter of 1999, while its gross
profit margin increased to 24.0 percent in the first quarter of 2000 from 23.3
percent in the first 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 $7.1 million to a gain of $1.1
million in the first quarter of 2000 as compared to a loss of $6.0 million in
the first quarter of 1999, while its gross profit margin increased to 3.5
percent in the first quarter of 2000 from (28.2) percent in the first quarter of
1999. The increase in Containerboard Gross Profit resulted principally from
increased pricing and volume.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses increased $2.5 million, or 8.9
percent, to $30.4 million in the first quarter of 2000 as compared to $27.9
million in the first quarter of 1999, due mainly to higher depreciation expense,
higher stock option compensation expense, the TQS initiative, and consulting
fees related to an ongoing project within the Company's folding carton business.
As a percentage of Net Sales, Selling, General and Administrative expenses
increased from 10.9 percent in the first quarter of 1999 to 11.2 percent in the
first quarter of 2000.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, Development and Engineering expenses remained constant at $1.1 million
in the first quarter of 2000 and in the first quarter of 1999.
OTHER EXPENSE, NET
Other Expense, net, increased by approximately $2.5 million to $2.7 million in
the first quarter of 2000 from $0.3 million in the first quarter of 1999 due to
non-recurring credits in the first quarter of 1999 primarily related to utility
recoveries.
INCOME (LOSS) FROM OPERATIONS
Primarily as a result of the factors discussed above, the Company's Income from
Operations in the first quarter of 2000 increased by $5.2 million, or 27.7
percent, to $24.1 million from $18.9 million in the first quarter of 1999, while
the Company's operating margin increased to 8.9 percent in the first quarter of
2000 from 7.4 percent in the first quarter of 1999. Income from Operations in
the Coated Board business segment increased $0.3 million, or 1.1 percent, to
$30.1 million in the first quarter of 2000 from $29.8 million in the first
quarter of 1999, while the operating margin remained constant at 12.6 percent,
primarily as a result of the factors described above. Income from Operations in
the Containerboard business segment increased $7.8 million to a gain of $0.3
million in the first quarter of 2000 from a (Loss) from Operations of $7.4
million in the first quarter of 1999, while the operating margin increased to
1.0 percent in the first quarter of 2000 from (34.9) percent in the first
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 first quarter
of 2000. However, the impact was 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 remained constant at $0.2 million for the first quarter of 2000
and 1999.
INTEREST EXPENSE
Interest Expense increased $2.6 million to $45.8 million in the first quarter of
2000 from $43.2 million in the first quarter of 1999 due primarily to higher
average outstanding debt balances.
INCOME TAX EXPENSE
During the first quarter of 2000, the Company recognized an income tax expense
of $1.1 million on a (Loss) before Income Taxes and Equity in Net Earnings
(Loss) of Affiliates of $21.5 million. During the first quarter of 1999, the
Company recognized an income tax expense of $0.4 million on a (Loss) before
Income Taxes and Equity in Net Earnings (Loss) of Affiliates of $24.1 million.
These expenses differed from the statutory federal income tax rate primarily
because of valuation allowances established on net operating loss carryforward
tax assets in the U.S. and certain international locations where the realization
of such benefits is less likely than not.
EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES
Equity in Net Earnings (Loss) of Affiliates is comprised primarily of the
Company's equity in net earnings of Igaras, which is accounted for under the
equity method of accounting. Equity in Net Earnings (Loss) of Affiliates
increased $3.4 million to a gain of $1.4 million in the first quarter of 2000
from a (Loss) of $(2.0) million in the first quarter 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 quarter 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.
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 $2.2 million in the first
quarter of 2000 primarily as a result of $13.2 million net cash provided by
financing activities and $5.1 million net cash provided by operating activities,
somewhat offset by $14.2 million of net cash used in investing activities. Cash
used in investing activities resulted primarily from purchases of property,
plant and equipment. Cash provided by financing activities resulted primarily
from net borrowings under the Revolving Facility. Depreciation and amortization
16
<PAGE> 17
during the first quarter of 2000 totaled approximately $38 million, and is
expected to be approximately $140 million to $145 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 March 31, 2000, the Company had
outstanding approximately $1,749 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 quarter of 2000, the Company
repaid approximately $1.4 million of debt. The Company had a net increase in
revolving credit facilities borrowings of approximately $14.6 million due
primarily to annual interest payments.
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 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 March 31, 2000 at an average rate per annum of 9.1 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 $180 million, including
approximately $10 million of non-cash amortization of deferred debt issuance
costs. During the first quarter of 2000, cash paid for interest was
approximately $33 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 March 31, 2000, the Company had interest rate
swap agreements with a notional amount of $175 million, under which the Company
will pay fixed rates of 5.05 percent to 6.15 percent and receive three-month
LIBOR.
17
<PAGE> 18
COVENANT RESTRICTIONS
The Credit Agreements impose restrictions on the Company's ability to make
capital expenditures and both the Credit Agreements and the indentures governing
the 1996 Notes and the 1997 Notes limit the Company's ability to incur
additional indebtedness. Such restrictions, together with the highly leveraged
nature of the Company, could limit the Company's ability to respond to market
conditions, meet its capital spending program, provide for unanticipated capital
investments or take advantage of business opportunities. The covenants contained
in the Credit Agreements also, among other things, restrict the ability of the
Company and its subsidiaries to dispose of assets, incur guarantee obligations,
repay the relevant 1996 Notes or the 1997 Notes, pay dividends, create liens on
assets, enter into sale and leaseback transactions, make investments, loans or
advances, make acquisitions, engage in mergers or consolidations, make capital
expenditures or engage in certain transactions with affiliates, and otherwise
restrict corporate activities. The covenants contained in such indentures also
impose restrictions on the operation of the Company's business. At March 31,
2000, the Company was in compliance with the financial covenants in the Credit
Agreements.
CAPITAL EXPENDITURES
Capital spending for the first quarter of 2000 was approximately $14.1 million,
up 6.0 percent from $13.3 million in the first quarter of 1999. Capital spending
during the first quarter 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:
<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 quarter 2000 (609) (142) (751)
-------- ------- --------
Balance at 3/31/00 $ 9,069 $ 2,604 $ 11,673
======== ======= ========
</TABLE>
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 March 31, 2000, $1.2 million of this total was
accrued in Other accrued liabilities on the Consolidated Balance Sheets and is
expected to be paid out through 2000.
18
<PAGE> 19
At March 31, 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 MARCH 31, 2000 MARCH 31, 2000
------------- -------------- --------------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Revolving Facility $400,000 $197,900 $202,100
Machinery Facility 140,000 14,000 29,000
International Facilities 25,911 12,016 13,895
-------- -------- --------
$565,911 $223,916 $244,995
======== ======== ========
</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 and future dividend
payments from Igaras, if any, would be subject to restrictions in the joint
venture agreement and would reflect only the Company's remaining interest of 50
percent. Under the Igaras joint venture agreement, Igaras is required to pay
dividends equal to at least 25 percent of its net profits. Due to currency
fluctuations, inflation and changes in political and economic conditions,
earnings from Brazilian operations have been subject to significant volatility.
There can be no assurance that such volatility will not recur in the future.
ENVIRONMENTAL AND LEGAL MATTERS
The Company is committed to compliance with all applicable environmental laws
and regulations throughout the world. Environmental law is, however, dynamic
rather than static. As a result, costs, which are unforeseeable at this time,
may be incurred when new laws are enacted, and when environmental agencies
promulgate or revise rules and regulations.
In late 1993, the U.S. Environmental Protection Agency proposed regulations
(generally referred to as the "cluster rules") that would mandate more stringent
controls on air and water discharges from the United States pulp and paper
mills. The cluster rules were promulgated in April 1998, and the Company
estimates the capital spending that may be required to comply with the cluster
rules could reach $55 million to be spent at its two U.S. paper mills over a
seven-year period beginning in 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
19
<PAGE> 20
this investigation work in 1999 and is in ongoing discussions with the 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. Currently, the
Company is in ongoing discussions with the DEQ to develop an appropriate
remediation plan and exit strategy.
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. The Company is
awaiting a decision.
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 and its
advisors are evaluating the Company's options for responding to Louisiana's
challenge to the Company's filing position, which could include paying the
amount at issue in order to avoid the accrual of additional statutory interest
while contesting the matter before the Louisiana courts. Under Louisiana law,
the Company has until June 4, 2000 to respond to the Notice of Proposed Tax
Due. The Company's response options include, but are not limited to, filing a
written protest requesting an administrative hearing, paying the tax and
interest and filing for a refund in Louisiana District Court, and requesting an
extension of time to reply. 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.
20
<PAGE> 21
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 by approximately
$20 million and lower receivables in 2000; (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
modest sales volume increases in its worldwide beverage markets and renewed
growth in its folding carton markets, principally in North America, and (c) the
Company's expectation regarding pricing improvements in the U.S. folding carton
markets in 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 $140 million to $145 million,
(b) the Company's expectation that 2000 interest expense will be approximately
$180 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 state's proposed assessment; and (iv) other
statements as to management's or the Company's expectations and beliefs
presented in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
Company. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on the Company will be those anticipated by management. The
important factors described elsewhere in this report (including, without
limitation, those discussed in "-- Financial Condition, Liquidity and Capital
Resources -- Liquidity and Capital Resources -- Environmental and Legal Matters"
and "-- Tax Matter Relating to the Merger"), the Company's Report on Form 10-K
for the year ended December 31, 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.
21
<PAGE> 22
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes standards for
the way companies account for and report on derivative instruments and hedging
activities. SFAS No. 133 is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company has not determined the impact
that SFAS No. 133 will have on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For a discussion of certain market risks related to the Company, see Part II,
Item 7A, "Quantitative and Qualitative Disclosure about Market Risk", in the
Company's Annual Report on Form 10-K for the fiscal period ended December 31,
1999. There have been no significant developments with respect to interest
rates, derivatives or exposure to market risk during the first quarter of 2000.
22
<PAGE> 23
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.
Not applicable
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVERWOOD HOLDING, INC.
---------------------------------------
(Registrant)
Date: May 12, 2000 By:
/s/ Edward W. Stroetz Jr.
------------------------------------
Edward W. Stroetz Jr.
Secretary
Date: May 12, 2000 By:
/s/ Daniel J. Blount
------------------------------------
Daniel J. Blount
Senior Vice President and
Chief Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RIVERWOOD HOLDING FOR THE THREE MONTHS ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 16,280
<SECURITIES> 0
<RECEIVABLES> 159,992
<ALLOWANCES> 3,137
<INVENTORY> 173,306
<CURRENT-ASSETS> 362,105
<PP&E> 1,407,927
<DEPRECIATION> 485,930
<TOTAL-ASSETS> 2,341,399
<CURRENT-LIABILITIES> 274,774
<BONDS> 1,706,192
0
0
<COMMON> 75
<OTHER-SE> 252,610
<TOTAL-LIABILITY-AND-EQUITY> 2,341,399
<SALES> 270,229
<TOTAL-REVENUES> 270,229
<CGS> 211,928
<TOTAL-COSTS> 211,928
<OTHER-EXPENSES> 34,205
<LOSS-PROVISION> (363)
<INTEREST-EXPENSE> 45,771
<INCOME-PRETAX> (21,503)
<INCOME-TAX> 1,071
<INCOME-CONTINUING> (21,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,163)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
RIVERWOOD HOLDING, INC.
RECONCILIATION OF INCOME (LOSS) FROM OPERATIONS TO EBITDA
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
COATED CONTAINER-
BOARD BOARD CORPORATE TOTAL
-------- ---------- --------- -------
<S> <C> <C> <C> <C>
FIRST THREE MONTHS 2000:
- ------------------------
Income (Loss) from Operations $ 30,102 $ 328 $(6,334) $24,096
Add: Depreciation and amortization 30,832 4,862 1,806 37,500
Dividends from equity investments -- -- 590 590
Other non-cash charges (A) 768 92 990 1,850
-------- ------- ------- -------
EBITDA (B) $ 61,702 $ 5,282 $(2,948) $64,036
======== ======= ======= =======
FIRST THREE MONTHS 1999:
- ------------------------
Income (Loss) from Operations $ 29,769 $(7,448) $(3,450) $18,871
Add: Depreciation and amortization 30,197 4,915 139 35,251
Dividends from equity investments -- -- -- --
Other non-cash charges (A) (173) 103 1,637 1,567
-------- ------- ------- -------
EBITDA (B) $ 59,793 $(2,430) $(1,674) $55,689
======== ======= ======= =======
</TABLE>
Notes:
(A) Other non-cash charges include non-cash charges for LIFO accounting,
pension, postretirement and postemployment benefits, and amortization
of premiums on hedging contracts deducted in determining net income.
(B) EBITDA is defined as consolidated net income (exclusive of non-cash
charges resulting from purchase accounting during the periods
subsequent to the Merger) before consolidated interest expense,
consolidated income taxes, consolidated depreciation and amortization,
and other non-cash charges deducted in determining consolidated net
income, extraordinary items and the cumulative effect of accounting
changes and earnings of, but including dividends from, non-controlled
affiliates. EBITDA excludes equity earnings 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.
