RIVERWOOD HOLDING, INC.

10-Q 1 g77674e10vq.htm RIVERWOOD HOLDING, INC. RIVERWOOD HOLDING, INC.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

o 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 (State or other jurisdiction of incorporation or organization)		58-2205241 (I.R.S. Employer Identification No.)

3350 Riverwood Parkway, S.E.
Suite 1400
Atlanta, Georgia 30339
(Address of principal executive offices)
(Zip Code)

(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 o No x

At August 2, 2002 there were 7,063,680 shares and 500,000 shares of the registrant’s Class A and Class B common stock, respectively, outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
SIGNATURE
RECONCILIATION OF INCOME FROM OPERATIONS TO EBITDA

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.

RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(unaudited)


		June 30,			December 31,
		2002			2001

ASSETS
Current Assets:
	Cash and Equivalents	$	31,433		$	27,983
	Receivables, Net of Allowances		176,157			140,099
	Inventories		184,152			181,305
	Prepaid Expenses		11,229			6,770

Total Current Assets			402,971			356,157
Property, Plant and Equipment, Net of Accumulated Depreciation of $713,548 in 2002 and $659,945 in 2001			1,262,106			1,289,915
Goodwill			276,482			276,482
Other Assets			129,836			136,914

Total Assets		$	2,071,395		$	2,059,468

LIABILITIES
Current Liabilities:
	Short-Term Debt	$	60,810		$	19,958
	Accounts Payable and Other Accrued Liabilities		222,188			218,764

Total Current Liabilities			282,998			238,722
Long-Term Debt, Less Current Portion			1,499,772			1,523,082
Other Noncurrent Liabilities			71,870			73,738

Total Liabilities			1,854,640			1,835,542

Contingencies and Commitments (Note 4)
Class A Redeemable Common Stock $120/share redemption value; 63,680 and 67,180 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively			7,641			8,061

SHAREHOLDERS’ EQUITY
Common Stock par value $.01 per Share;
	Class A Common Stock, 9,000,000 shares authorized; 7,063,680 and 7,067,180 shares designated at June 30, 2002 and December 31, 2001, respectively; 7,000,000 shares of non-redeemable Common Stock issued and outstanding at June 30, 2002 and December 31, 2001		70			70
	Class B Common Stock, 3,000,000 shares authorized; 500,000 shares of non-redeemable Common Stock issued and outstanding at June 30, 2002 and at December 31, 2001		5			5
Capital in Excess of Par Value			748,753			748,753
Accumulated Deficit			(511,171	)		(493,771	)
Accumulated Derivative Instruments Loss			(4,032	)		(4,570	)
Cumulative Currency Translation Adjustment			(24,511	)		(34,622	)

Total Shareholders’ Equity			209,114			215,865

Total Liabilities and Shareholders’ Equity		$	2,071,395		$	2,059,468

See Notes to Condensed Consolidated Financial Statements.

RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands of dollars)
(unaudited)


		Three Months Ended						Six Months Ended

		June 30,			June 30,			June 30,			June 30,
		2002			2001			2002			2001

Net Sales		$	348,046		$	340,873		$	648,158		$	629,473
Cost of Sales			269,975			267,701			510,564			505,582
Selling, General and Administrative			32,656			29,977			61,263			60,753
Research, Development and Engineering			1,146			1,165			2,461			2,335
Other Expense, Net			3,118			5,112			1,538			13,068

Income from Operations			41,151			36,918			72,332			47,735
Interest Income			613			350			1,068			556
Interest Expense			38,369			39,989			77,429			80,203

Income (Loss) before Income Taxes			3,395			(2,721	)		(4,029	)		(31,912	)
Income Tax Expense			1,571			1,951			1,862			2,425

Income (Loss) before Extraordinary Item and Cumulative Effect of a Change in Accounting Principle			1,824			(4,672	)		(5,891	)		(34,337	)
Extraordinary Loss on Early Extinguishment of Debt, Net of Tax of $0			(11,509	)		(2,770	)		(11,509	)		(2,770	)

(Loss) before Cumulative Effect of a Change in Accounting Principle			(9,685	)		(7,442	)		(17,400	)		(37,107	)
Cumulative Effect of a Change in Accounting Principle Net of Tax of $0			—			—			—			(499	)

Net (Loss)			(9,685	)		(7,442	)		(17,400	)		(37,606	)

Other Comprehensive Income (Loss), Net of Tax:
	Derivative Instruments (Loss) Gain		(612	)		(1,388	)		538			(2,447	)
	Foreign Currency Translation Adjustments		10,949			(2,094	)		10,111			(7,232	)

Comprehensive Income (Loss)		$	652		$	(10,924	)	$	(6,751	)	$	(47,285	)

See Notes to Condensed Consolidated Financial Statements.

RIVERWOOD HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(unaudited)


		Six Months Ended

		June 30, 2002			June 30, 2001

Cash Flows from Operating Activities:
Net (Loss)		$	(17,400	)	$	(37,606	)
Noncash Items Included in Net (Loss):
	Depreciation and Amortization		64,772			72,341
	Cumulative Effect of a Change in Accounting Principle		—			499
	Extraordinary Loss on Early Extinguishment of Debt, Net of Tax of $0		2,967			2,770
	Deferred Income Taxes		609			(1,638	)
	Pension, Postemployment and Postretirement Benefits Expense, Net of Contributions		5,155			2,635
	Equity in Net Earnings of Affiliates, Net of Dividends		—			710
	Amortization of Deferred Debt Issuance Costs		3,313			3,938
	Other		(527	)		5,549
Changes in Operating Assets & Liabilities, Net of Subsidiary Consolidated:
Receivables			(29,500	)		(19,132	)
Inventories			(561	)		(9,698	)
Prepaid Expenses			(5,374	)		(141	)
Accounts Payable and Other Accrued Liabilities			(7,445	)		(1,870	)
Other Noncurrent Liabilities			(1,315	)		(2,864	)

Net Cash Provided by Operating Activities			14,694			15,493

Cash Flows from Investing Activities:
Purchases of Property, Plant and Equipment			(23,182	)		(25,316	)
Cash Acquired of Subsidiary Consolidated			—			17,985
Increase in Other Assets			(2,126	)		(846	)

Net Cash Used in Investing Activities			(25,308	)		(8,177	)

Cash Flows from Financing Activities:
Borrowings under Revolving Credit Facilities			164,150			256,135
Payments on Revolving Credit Facilities			(137,920	)		(247,282	)
Proceeds from Issuance of Debt			250,000			257,500
Increase in Debt Issuance Costs			(3,336	)		(6,004	)
Premium Paid on Early Extinguishment of Debt			(8,542	)		—
Payments on Debt			(250,938	)		(251,781	)
Repurchases of Redeemable Common Stock			(420	)		—
Issuance of Redeemable Common Stock			—			300

Net Cash Provided by Financing Activities			12,994			8,868
Effect of Exchange Rate Changes on Cash			1,070			667

Net Increase in Cash and Equivalents			3,450			16,851
Cash and Equivalents at Beginning of Period			27,983			18,417

Cash and Equivalents at End of Period		$	31,433		$	35,268

See Notes to Condensed Consolidated Financial Statements.

RIVERWOOD HOLDING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

Riverwood Holding, Inc. (“Riverwood Holding”) and its wholly-owned subsidiary RIC Holding, Inc. (“RIC Holding”) and the corporation formerly named CDRO Acquisition Corporation were incorporated in 1995 to acquire the stock of our predecessor, the corporation formerly named Riverwood International Corporation (the “Predecessor”).

On March 27, 1996, Riverwood Holding, through its wholly-owned subsidiaries, acquired all of the outstanding shares of common stock of the Predecessor. On such date, CDRO Acquisition Corporation was merged into the Predecessor. The Predecessor, as the surviving corporation in the Merger, became a wholly-owned subsidiary of RIC Holding. On March 28, 1996, the Predecessor transferred substantially all of its properties and assets to the corporation formerly named Riverwood International USA, Inc., other than the capital stock of Riverwood International USA, Inc, and the Predecessor was merged into RIC Holding. Thereupon, Riverwood International USA, Inc. was renamed “Riverwood International Corporation.” Upon consummation of the Subsequent Merger, RIC Holding, as the surviving corporation in the Subsequent Merger, became the parent company of Riverwood International Corporation (“Riverwood International”).

Riverwood Holding and RIC Holding, 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. Riverwood Holding and RIC Holding fully and unconditionally guarantee substantially all of the debt of Riverwood International.

In connection with the Merger, the purchase method of accounting was used to establish and record a new cost basis for the assets acquired and liabilities assumed. The difference between the purchase price and the fair market values of the assets acquired and liabilities assumed was recorded as goodwill.

References to the “Company” are to Riverwood Holding and its subsidiaries.

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, 2001 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, 2001.

The preparation of the Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America 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.

The Company’s Condensed Consolidated Financial Statements include all significant subsidiaries in which the Company has the ability to exercise direct or indirect control over operating and financial policies. Intercompany transactions and balances are eliminated in consolidation.

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:


(In thousands of dollars)	June 30, 2002		December 31, 2001

Finished goods	$	81,506	$	87,728
Work-in-process		13,989		12,194
Raw materials		52,704		45,656
Supplies		35,953		35,727

Total	$	184,152	$	181,305

NOTE 4 — CONTINGENCIES AND COMMITMENTS

The Company is committed to compliance with all applicable foreign, federal, state and local environmental laws and regulations. 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 adopt or revise rules and regulations.

In general, the environmental laws that the Company is subject to regulate discharges and emissions of constituents to the air, soil and water, prescribe procedures for the use, reuse, reclamation, recycling and disposal of designated waste materials and impose liability and requirements relating to the cleanup of contamination. In certain instances, state environmental laws may be stricter than their federal counterparts.

The federal Clean Air Act imposes stringent limits on air emissions, establishes a federal permit program (Title V) and provides for civil and criminal enforcement sanctions. In response to these requirements, in the early 1990’s the Company switched from solvent-based to water-based inks and varnishes at our converting operations in order to reduce and meet requirements with respect to emissions of volatile organic compounds. Where necessary, our plants have received or submitted an application to the appropriate permitting authority for a Title V permit.

The federal Clean Water Act establishes a system of minimum national effluent standards for each industry, water quality standards for the nation’s waterways and a permit program that provides discharge limitations. It also regulates releases and spills of oil and toxic chemicals and wastewater and stormwater discharges. The Company’s mill in West Monroe, Louisiana is the only one of the Company’s facilities that is a direct discharger to a water body and a permit currently covers its discharges to the Ouachita River. The Company’s other operations discharge to publicly owned treatment works and are subject to pretreatment requirements and limitations.

The federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) establishes liability for waste generators, current and former site owners and operators and others in connection with releases of hazardous materials. The Company has been, and in the future may again be, identified as a potentially responsible party at sites under CERCLA and similar state laws.

In 1998, the U.S. Environmental Protection Agency adopted regulations (generally referred to as the “cluster rules”) that mandate more stringent controls on air and water discharges from the United States pulp and paper mills. The Company estimates that 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 that began in 2000. As of June 30, 2002, the Company estimates that it has spent approximately one-third of that amount for such compliance.

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 performed a soil and groundwater investigation at the site pursuant to an agreement with DEQ. In August 2001, the Company entered into a Cooperative Agreement for Remedial Action with DEQ and the landowners of the site, as well as a Mutual Release and Settlement Agreement with the landowners. Under the Cooperative Agreement, the Company developed a remedial design which included, among other things, removing contaminated soils, capping a portion of the site and future operations and maintenance, or O&M. If the Company fails to comply with the requirements of the cooperative agreement, including the prescribed time periods, the DEQ can impose stipulated penalties as specified in the cooperative agreement ranging from $250 to $1,000 per day of non-compliance. The Company has engaged a qualified contractor and expects completion of the work by the end of 2002. Total costs for the Shreveport remedial action are approximately $1.3 million. The Company has reached a settlement agreement with another responsible party that has already reimbursed the Company for certain past costs and will reimburse the Company for 50% of future costs incurred in connection with the remediation plan. To date, the Company has paid approximately $50,000 to the contractor. Costs could increase if, for example, there is an increase in the amount of contaminated soils found on site. In addition, for the initial five years, O&M costs are estimated to be approximately $0.1 million and groundwater monitoring costs are estimated to be approximately $0.1 million. The Company has not estimated O&M or groundwater monitoring costs beyond this initial five-year period because the extent of any such O&M or groundwater monitoring obligation is unknown. The Company has accrued $0.8 million for its approximate 50 percent share of the Shreveport remedial action.

In September 1996, the Company received a Special Demand Letter from DEQ to remediate the site in Caddo Parish. 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 contracted with a vendor to perform the remedial actions as outlined in the Settlement Agreement. The remedial action required, among other things, the neutralization, stabilization and consolidation of sludges and soils at the site, the capping of the consolidated materials, the establishment of a vegetative cover and five years of post-closure care of the capped area. The lump sum contract price with the contractor is approximately $1.6 million, of which the Company has already paid approximately $1.3 million. The Company no longer owns the site since transferring the property to another entity on October 22, 2000. The remedial actions outlined in the Settlement Agreement have been completed and the Company expects to obtain the appropriate release from DEQ in the fourth quarter of 2002.

The Company is involved in environmental remediation projects for certain properties currently or formerly owned or operated by the Company, certain properties divested by the Company for which responsibility was retained, and waste disposal sites where waste was shipped by the Predecessor or its predecessors or for which the Company might have corporate successor liability. Some of these projects are being addressed under federal and state statutes, such as the CERCLA and analogous state laws. The Company’s costs in certain instances cannot be reliably estimated until the remediation process is substantially underway or liability 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 although the Company may incur significant costs in excess of accrued reserves 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 has been a plaintiff in actions against The MeadWestvaco Corporation (“MeadWestvaco”), successor by merger to The Mead Corporation, and R.A. Jones Co. Inc. (“R.A. Jones”) claiming infringement of the Company’s patents for its packaging machines. The patents in suit were found infringed but invalid by a jury in a trial against R.A. Jones in August 2001. This finding of invalidity has been appealed to the Court of Appeals for the Federal Circuit. The suit against MeadWestvaco was dismissed by mutual agreement pending the outcome of the appeal of the decision in the case against R.A. Jones. If the finding of invalidity is upheld on appeal, the Company anticipates it will be required to take an approximate $11 million charge associated with writing off the unamortized carrying cost of the patents in suit.

NOTE 5 – BUSINESS SEGMENT INFORMATION

The Company reports its results in two business segments: Coated Board and Containerboard. These segments are evaluated by the chief operating decision maker based primarily on income from operations and EBITDA. The Company’s reportable segments are strategic business units that offer different products. The Coated Board business segment includes the production and sale of coated board for cartons from its West Monroe, Louisiana and Macon, Georgia mills and white lined chip board from its mill in Sweden; carton converting facilities in the United States, the United Kingdom, Spain, France and Brazil; and 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.

Business segment information is as follows:


	Three Months Ended						Six Months Ended

	June 30,			June 30,			June 30,			June 30,
(In thousands of dollars)	2002			2001			2002			2001

NET SALES:
Coated Board	$	329,371		$	317,596		$	610,325		$	578,590
Containerboard		18,675			23,277			37,833			50,883

	$	348,046		$	340,873		$	648,158		$	629,473

INCOME FROM OPERATIONS:
Coated Board	$	51,862		$	43,018		$	96,312		$	69,327
Containerboard		(4,888	)		(3,025	)		(13,164	)		(6,501	)
Corporate And Eliminations		(5,823	)		(3,075	)		(10,816	)		(15,091	)

	$	41,151		$	36,918		$	72,332		$	47,735

Credit Agreement EBITDA(A):
Coated Board	$	82,796		$	72,303		$	152,431		$	136,576
Containerboard		(1,251	)		692			(6,300	)		1,286
Corporate And Eliminations		(1,740	)		(873	)		(3,620	)		(6,556	)

	$	79,805		$	72,122		$	142,511		$	131,306

The following represents a reconciliation of Income from Operations to Credit Agreement EBITDA:


		Three Months Ended				Six Months Ended

		June 30,		June 30,		June 30,		June 30,
(In thousands of dollars)		2002		2001		2002		2001

Income from Operations		$	41,151	$	36,918	$	72,332	$	47,735
Add: Depreciation and amortization			32,638		31,073		64,772		72,341
	Dividends		—		710		—		710
	Other non-cash charges(B)		6,016		3,421		5,407		10,520

Credit Agreement EBITDA(A)		$	79,805	$	72,122	$	142,511	$	131,306

Notes:

a substitute for the Condensed Consolidated Statements of Operations or cash flow data. The Company’s definition of EBITDA may not be comparable to other companies’ definitions of EBITDA.

(B) 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.

NOTE 6 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to fluctuations in interest rates on its variable rate debt and fluctuations in foreign currency transaction cash flows. The Company actively monitors these fluctuations and uses derivative instruments from time to time to manage its exposure. In accordance with its risk management strategy, the Company uses derivative instruments only for the purpose of managing risk associated with fluctuations in the cash flow of the underlying exposures identified by management. The Company does not trade or use derivative instruments with the objective of earning financial gains on interest or currency rates, nor does it use leveraged instruments or instruments where there are no underlying exposures identified. The Company’s use of derivative instruments may result in short-term gains or losses and may increase volatility in its earnings.

On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (“SFAS No. 133”), which requires all derivative instruments to be measured at fair value and recognized on the balance sheet as either assets or liabilities. In addition, all derivative instruments used in hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. Upon adoption of SFAS No. 133, the Company recognized a one-time after-tax transition adjustment to decrease earnings by approximately $0.5 million and decrease other comprehensive income by approximately $1.1 million. These amounts have been presented as a cumulative effect of change in accounting principle in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the six months ended June 30, 2001.

The following is a summary of the Company’s derivative instruments as of June 30, 2002 and the accounting policies it employs:

Hedges of Anticipated Cash Flows

The following is a reconciliation of current period changes in the fair value of the interest rate swap agreements and foreign currency forward and option contracts which have been recorded as Accumulated Derivative Instruments Loss in the accompanying Condensed Consolidated Balance Sheet at June 30, 2002 and as Derivative Instruments (Loss) Gain in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the Six Months Ended June 30, 2002.


(In thousands of dollars)

SFAS No. 133 transition adjustment	$	(1,094	)
Reclassification to earnings		3,898
Current period decrease in fair value		(7,374	)

Balance at December 31, 2001		(4,570	)
Reclassification to earnings		2,986
Current period decrease in fair value		(2,448	)

Balance at June 30, 2002	$	(4,032	)

During the first six months ended June 30, 2002, there was no material ineffective portion related to the changes in fair value of the interest rate swap agreements or foreign currency forward and option contracts and there were no amounts excluded from the measure of effectiveness. During the second quarter of 2002, the Company de-designated certain of its foreign currency forward and option contracts due to such contracts no longer meeting the Company’s established effectiveness test. As a result, during the second quarter of 2002, the Company recognized a mark-to-market loss of approximately $1.8 million dollars in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Income (Loss); had the foreign currency forward and option contracts not been de-designated, this approximate $1.8 million mark-to-market loss would have been deferred into Other Comprehensive Income (Loss) and would have been recognized in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) at the time the underlying hedged transaction was recognized. Included in Accumulated Derivative Instruments Loss in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2002, is a balance of approximately $0.2 million related to the foreign currency forward and option contracts that were de-designated in the second quarter of 2002 that will be recognized as income in its statement of operations at the time the underlying hedged transaction occurs.

The balance of $4.0 million recorded in Accumulated Derivative Instruments Loss at June 30, 2002 is expected to be reclassified into future earnings, contemporaneously with and offsetting changes in the related hedged exposure. The estimated amount to be reclassified into future earnings as interest expense over the next twelve months through June 30, 2003 is approximately $3.3 million. The actual amount that will be reclassified to future earnings over the next twelve months will vary from this amount as a result of changes in market conditions. No amounts were reclassified to earnings during the first six months of 2002 in connection with forecasted transactions that were no longer considered probable of occurring.

The Company uses interest rate swap agreements to fix a portion of its variable rate Term Loan Facility to a fixed rate in order to reduce the impact of interest rate changes on future income. The differential to be paid or received under these agreements is recognized as an adjustment to interest expense related to the debt. At June 30, 2002, the Company had interest rate swap agreements with a notional amount of $310 million, which expire on various dates through the year 2003, under which the Company will pay fixed rates of 2.96 percent to 5.36 percent and receive three-month LIBOR.

Derivatives not Designated as Hedges

The Company has foreign currency forward contracts used to hedge the exposure associated with foreign currency denominated receivables. These contracts are presently being marked-to-market through the income statement and will continue to be marked-to-market through the income statement.

The Company enters into fixed price natural gas contracts designed to effectively hedge prices for a substantial portion of its natural gas requirements at its two U.S. mills. The purpose of the fixed price natural gas contracts is to eliminate or reduce price risk with a focus on making cash flows more predictable. As of June 30, 2002, the Company had entered into contracts to hedge substantially all of its natural gas requirements for its two U.S. mills through June 30, 2003. The contract price and fair value of these natural gas contracts was approximately $21.4 million and $20.1 million, respectively. These contracts are not accounted for as derivative instruments under SFAS No. 133, as they qualify for the normal purchase exemption.

NOTE 7 – NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (“SFAS No. 141”), “Business Combinations”, which was effective as of January 1, 2002. SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company adopted SFAS No. 141 on January 1, 2002 and the adoption did not have a significant impact on its financial position and results of operations.

In June 2001, the FASB issued SFAS No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets”, which was effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The adoption of SFAS No. 142 resulted in the discontinuation of amortization of goodwill recorded at December 31, 2001 of approximately $8 million annually. Intangible assets with a determinable life will continue to be amortized over that period. The Company adopted SFAS No. 142 on January 1, 2002 and upon implementation recorded a write-off of approximately $0.8 million related to patents to which no value was associated at June 30, 2002 which is reflected in Other Expense, Net in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the Six Months Ended June 30, 2002. The following table shows Net (Loss) for the first six months of 2002 and adjusted Net (Loss) for the first six months of 2001 exclusive of goodwill amortization.


	Three Months Ended						Six Months Ended

	June 30,			June 30,			June 30,			June 30,
(In thousands of dollars)	2002			2001			2002			2001

Net (Loss)	$	(9,685	)	$	(7,442	)	$	(17,400	)	$	(37,606	)
Plus: Amortization of Goodwill		—			1,935			—			3,870

Adjusted Net (Loss)	$	(9,685	)	$	(5,507	)	$	(17,400	)	$	(33,736	)

The following table shows Income (Loss) before Extraordinary Item and Cumulative Effect of a Change in Accounting Principle for the first six months of 2002 and adjusted Income (Loss) before Extraordinary Item and Cumulative Effect of a Change in Accounting Principle for the first six months of 2001 exclusive of goodwill amortization.


	Three Months Ended					Six Months Ended

	June 30,		June 30,			June 30,			June 30,
(In thousands of dollars)	2002		2001			2002			2001

Income (Loss) before Extraordinary Item and Cumulative Effect of a Change in Accounting Principle	$	1,824	$	(4,672	)	$	(5,891	)	$	(34,337	)
Plus: Amortization of Goodwill		—		1,935			—			3,870

Adjusted Income (Loss) before Extraordinary Item and Cumulative Effect of a Change in Accounting Principle	$	1,824	$	(2,737	)	$	(5,891	)	$	(30,467	)

The following table displays the intangible assets that continue to be subject to amortization and aggregate amortization expense as well as intangible assets not subject to amortization as of June 30, 2002 and December 31, 2001:


		As of June 30, 2002

		Gross Carrying		Accumulated		Net Carrying
		Amount		Amortization		Amount

Amortized intangible assets:
	Patents	$	23,276	$	8,703	$	14,573
	Licenses		3,598		1,102		2,496
	Trademarks		39,638		12,360		27,278

		$	66,512	$	22,165	$	44,347

Unamortized intangible assets:
	Goodwill	$	276,482		—	$	276,482


		As of December 31, 2001

		Gross Carrying		Accumulated		Net Carrying
		Amount		Amortization		Amount

Amortized intangible assets:
	Patents	$	23,926	$	7,986	$	15,940
	Licenses		3,598		997		2,601
	Trademarks		39,624		11,370		28,254

		$	67,148	$	20,353	$	46,795

Unamortized intangible assets:
	Goodwill	$	321,976	$	45,494	$	276,482

Amortization expense for intangible assets subject to amortization was approximately $1.9 million for the first six months of 2002, and is expected to be approximately $4 million annually for the next five fiscal years.

In August 2001, the FASB issued SFAS No. 144 (“SFAS No. 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”, which was effective January 1, 2002. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets, as well as eliminating the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company adopted SFAS No. 144 on January 1, 2002 and the adoption did not have a significant impact on its financial position and results of operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Riverwood Holding, its wholly-owned subsidiary RIC Holding and the corporation formerly named CDRO Acquisition Corporation were organized to acquire our predecessor, the corporation formerly named Riverwood International Corporation. Riverwood Holding, RIC Holding and CDRO Acquisition Corporation were incorporated in 1995 under the laws of the State of Delaware. On March 27, 1996, Riverwood Holding, through its wholly-owned subsidiaries, acquired all of the outstanding shares of common stock of the corporation formerly named Riverwood International Corporation, which we refer to as the predecessor. On such date, CDRO Acquisition Corporation was merged into the predecessor. The predecessor, as the surviving corporation in the merger, became a wholly-owned subsidiary of RIC Holding.

On March 28, 1996, the predecessor transferred substantially all of its properties and assets to the corporation formerly named Riverwood International USA, Inc., other than the capital stock of Riverwood International USA, Inc., and the predecessor was merged into RIC Holding. Thereupon, Riverwood International USA, Inc. was renamed Riverwood International Corporation.

In connection with the Merger, the Company entered into a credit agreement that provided for senior secured credit facilities consisting of a term loan facility and a $400 million revolving credit facility. Such credit agreement, term loan facility and revolving facility, as in effect prior to the August 10, 2001 amendment and restatement discussed below, are referred to herein as the “Prior Credit Agreement”, the “Prior Term Loan Facility” and the “Prior Revolving Facility”, respectively. 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 percent Senior Notes due 2006 (the “1996 Senior Notes”) and $400 million aggregate principal amount of 10 7/8 percent Senior Subordinated Notes due 2008 (the “1996 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 percent Senior Notes due 2007 (the “Initial Notes”). The net proceeds of this offering were applied to prepay certain revolving credit borrowings under the Prior Revolving Facility (without any commitment reduction) and to refinance certain tranche A term loans and other borrowings under the Prior 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 on October 3, 2000, the Company entered into Amendment No. 5 dated September 12, 2000, effective October 3, 2000, to the Prior Credit Agreement. Pursuant to the amendment, the Company applied $145 million of the sale proceeds to term loan maturities under the Prior Term Loan Facility. The Company recognized 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 Prior Revolving Facility (without any commitment reduction). In connection with Amendment No. 5, the Company canceled its Machinery Facility.

On June 21, 2001, the Company completed an offering of $250 million principal amount of 10 5/8 percent Senior Notes due 2007 (the “Initial 2001 Notes”). The Initial 2001 Notes were sold at a price of 103 percent of par. The proceeds from this offering of approximately $251.5 million, net of approximately $6 million of transaction fees and expenses, were applied to prepay a portion of the outstanding borrowings under the Prior Term Loan Facility. During the second quarter of 2001, the Company recorded a non-cash, extraordinary charge to earnings of approximately $2.8 million, net of tax of nil, related to the write-off of the applicable portion of deferred debt issuance costs on the term loans. In connection with this offering, on June 6, 2001, the Company entered into Amendment No. 6 to the Prior Credit Agreement. The amendment modified certain financial and other covenants, including minimum EBITDA requirements, in the Prior Credit Agreement to reflect recent financial results and market and operating conditions. A registration statement under the Securities Act registering senior notes of the Company identical in all material respects to the Initial 2001 Notes (the “Exchange 2001 Notes”) offered in exchange for the Initial 2001 Notes became effective on August 27, 2001. On October 5, 2001, the Company completed its exchange offer of the Initial 2001 Notes for the Exchange 2001 Notes. The Initial 2001 Notes and the Exchange 2001 Notes are referred to herein as the 2001 Notes.

On August 10, 2001, the Company entered into an amendment and restatement of the Prior Credit Agreement (the “Senior Secured Credit Agreement”) with certain lenders providing for senior secured credit facilities with aggregate commitments not to exceed $635 million (together with the 2002 Term Loan Facility referred to below, the “Facilities”), including a $335 million term loan facility (the “2001 Term Loan Facility”) and a $300 million revolving credit facility (the “Revolving Facility”). The proceeds of the initial borrowings under the Facilities of approximately $386 million, including $51 million under the revolving facility, were applied to repay in full the outstanding borrowings under the Prior Term Loan Facility and the Prior Revolving Facility and to pay approximately $12 million of the $14 million of fees and expenses incurred in connection with the amendment and restatement of the Prior Credit Agreement. During the third quarter of 2001, the Company recorded a non-cash, extraordinary charge to earnings of approximately $6.0 million, net of tax of nil, related to the write-off of the applicable remaining deferred debt issuance costs on the Prior Term Loan Facility and the Prior Revolving Facility.

In April 2002, the Company entered into an amendment of the Senior Secured Credit Agreement which provided for a new, tranche B, term loan facility of $250 million (“2002 Term Loan Facility”). The 2002 Term Loan Facility was drawn on April 23, 2002 and the proceeds, together with borrowings under the Revolving Facility of approximately $12.0 million, were used to redeem the 1996 Senior Notes which occurred on May 23, 2002 and to pay related fees, costs and expenses. In the second quarter of 2002, the Company recorded a non-cash extraordinary charge to earnings of approximately $3.0 million, net of tax, related to the write-off of the remaining deferred debt issuance costs on the 1996 Senior Notes and an extraordinary charge of approximately $8.6 million, net of tax, related to the call premium paid upon redemption of the 1996 Senior Notes.

On May 3, 2002, Riverwood Holding filed a Form S-1 registration statement with the Securities and Exchange Commission for the registration under the Securities Act of 1933 of $350 million of its common stock in a proposed initial public offering. Concurrently with the proposed initial public offering, the Company anticipates borrowing additional amounts under the Senior Secured Credit Agreement through an add-on term loan and selling senior notes. The Company intends to use the net proceeds from these proposed financings to purchase all of the 1997 Notes, the 2001 Notes and the 1996 Senior Subordinated Notes and to repay a portion of the amounts outstanding under the Revolving Facility.

On May 30, 2002, Riverwood International commenced tender offers to purchase all of the outstanding 1997 Notes, 2001 Notes and 1996 Senior Subordinated Notes and made related consent solicitations for proposed amendments to eliminate substantially all of the restrictive covenants and a number of events of default and related provisions in the indentures for these notes. On July 1, 2002, Riverwood International and the trustee for each issue of notes signed supplemental indentures with respect to the proposed amendments, which will become effective upon the consummation of the tender offers. On July 30, 2002, Riverwood International amended the terms of the consideration for the tender offers and granted tendering holders of notes withdrawal rights. As of August 8, 2002, approximately $201 million in principal amount of 1997 Notes, approximately $204 million in principal amount of 2001 Notes and approximately $301 million in principal amount of 1996 Senior Subordinated Notes had been tendered. The consummation of each of the tender offers and related consent solicitations is conditioned upon the consummation of the proposed initial public offering and each of the related financing transactions.

If the Company does not complete the related financing transactions, the Company intends to use the net proceeds of the proposed initial public offering to repay a portion of its indebtedness. There can be no assurance that the proposed initial public offering or any of the related financing transactions will be completed on the terms anticipated, or at all. The Company continues to work towards the completion of the initial public offering and related financing transactions, subject to market conditions.

General

The Company reports its results in two business segments: Coated Board (relating to the Company’s coated unbleached kraft paperboard (“CUK Board”) used in its beverage multiple packaging and consumer products packaging businesses) and Containerboard. The Coated Board business segment includes (1) the production and sale of CUK Board for cartons from the Company’s West Monroe, Louisiana and Macon, Georgia mills and white lined chip board (“WLC”) from its paper mill in Norrköping, Sweden; (2) carton converting plants in the United States, Europe and Brazil; and (3) 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. The Company intends to stop producing linerboard as it continues to shift production capacity to higher margin CUK Board.

The table below sets forth Net Sales, Income from Operations, and EBITDA. The Company believes that EBITDA provides useful information regarding the Company’s ability to service debt, but should not be considered in isolation or as a substitute for the Condensed Consolidated Statements of Operations or cash flow data. The Company’s definition of EBITDA may not be comparable to other companies’ definitions of EBITDA and is not a defined term under U.S. generally accepted accounting principles.


		Three Months Ended						Six Months Ended

		June 30,			June 30,			June 30,			June 30,
(In thousands of dollars)		2002			2001			2002			2001

Net Sales:
	Coated Board	$	329,371		$	317,596		$	610,325		$	578,590
	Containerboard		18,675			23,277			37,833			50,883

Net Sales		$	348,046		$	340,873		$	648,158		$	629,473

Income from Operations:
	Coated Board	$	51,862		$	43,018		$	96,312		$	69,327
	Containerboard		(4,888	)		(3,025	)		(13,164	)		(6,501	)
	Corporate and Eliminations		(5,823	)		(3,075	)		(10,816	)		(15,091	)

Income from Operations		$	41,151		$	36,918		$	72,332		$	47,735

Credit Agreement EBITDA (A):
	Coated Board	$	82,796		$	72,303		$	152,431		$	136,576
	Containerboard		(1,251	)		692			(6,300	)		1,286
	Corporate And Eliminations		(1,740	)		(873	)		(3,620	)		(6,556	)

Credit Agreement EBITDA (A)			79,805			72,122			142,511			131,306
Less: Certain non-cash charges (B)			(4,566	)		(909	)		(5,470	)		(4,307	)

EBITDA, as adjusted (B)		$	75,239		$	71,213		$	137,041		$	126,999

Notes:

(A) Credit Agreement EBITDA is calculated based on the definitions of EBITDA and GAAP contained in the Company’s Senior Secured Credit Agreement. Credit Agreement 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.

(B) For purposes of Credit Agreement EBITDA, as reported above, the Company adds back to income from operations non-cash charges for pension, post-retirement and post-employment benefits, and expenses (credits) relating to changes in GAAP subsequent to March 1996, which are excluded from Credit Agreement EBITDA, as reported above. EBITDA, as adjusted, is defined as income (loss) from operations before depreciation and amortization expense, loss (gain) on asset write-downs/unusual asset disposals, loss on impairment of assets and LIFO related expenses (credits) plus dividends from equity investments recorded in the relevant period. This definition of EBITDA, as adjusted, conforms to the presentation in the Form S-1 registration statement for Riverwood Holding’s proposed initial public offering.

A reconciliation of Income from Operations to EBITDA, as adjusted, is set forth in Exhibit 99 of this Form 10-Q.

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 and energy 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 cartonboard, which historically has been principally sold in the open market. The Company’s 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 six months of 2002, the Company elected to take 14 days, or approximately 5,000 tons, of medium market related downtime at its U.S. mills that resulted in approximately $1.0 million of under-absorbed fixed costs. The Company expects to take an additional 7 days, or approximately 3,000 tons, of medium market related downtime throughout the remainder of 2002 on its medium machine, but the amount of downtime could change depending upon market conditions. The downtime results from a number of factors, but principally a weak containerboard market. As a result of the expected downtime during 2002, the Company estimates the impact on earnings at its U.S. mills for the remainder of 2002 to be approximately $0.5 million related to the under-absorption of fixed costs.

Energy, including natural gas, fuel oil and electricity, represents a significant portion of the Company’s manufacturing costs. During the first six months of 2002, the Company’s financial results were not negatively affected by energy costs when compared to the first six months of 2001. Until the latter part of 2000, the Company’s results had not been significantly affected by the volatility of energy costs. The Company entered into fixed price contracts designed to mitigate the impact of future energy cost increases through June 30, 2003, and will continue to evaluate its hedge position.

The Company is pursuing a number of long-term initiatives designed to improve productivity and profitability. The Company realigned its business into commercially-focused operating units, implemented a global restructuring program described 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 is continuing to implement a strategy focused on the expansion into the high-growth segments of the consumer products packaging market. The Company is targeting segments of the non-beverage consumer products packaging market where it intends to capitalize on its expertise in beverage multiple packaging.

The Company expects capital expenditures will range from $65 million to $80 million in 2002 as the Company invests to improve its process capabilities, in packaging machinery, and to comply with environmental cluster rules. See “Environmental and Legal Matters.” 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, focused on the Company’s European operations, in the fourth quarter of 1998 aimed at achieving annualized savings and cost avoidance of approximately $20 million. The Company completed the restructuring activities during 2001. Finally, the Company is continuing to focus on reducing working capital and increasing liquidity.

Packaging machinery placements during the first six months of 2002 increased approximately 65 percent when compared to the first six months of 2001, which was partially due to the timing of shipments. The Company expects packaging machinery placements for 2002 to be higher when compared to 2001 and be comparable to 2000 as a result of a 16 percent increase in packaging machinery orders in 2001 when compared to 2000. 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 2002 full year EBITDA will exceed its 2001 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 products sales volumes above 2001 levels, improving U.S. mill throughput, continued cost savings from other actions taken to date and stable pricing for the Company’s products. In 2002, the Company expects sales volume increases in its worldwide beverage markets, and continued growth in its North American consumer products markets. The Company expects containerboard sales and margins to be negatively affected in 2002 due to the negative market pressures on containerboard pricing and sales volumes. The Company believes that energy costs will continue to negatively impact its results for 2002 but the negative impact is expected to be lower than in 2001.

Significant Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company 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 financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

The Company believes the following accounting policies are the most critical since these policies require significant judgment or involve complex estimations that are important to the portrayal of the Company’s financial conditions and operating results:

• The Company recognizes revenue when pervasive evidence of a sales arrangement exists, delivery has occurred, the price to the buyer is fixed and determinable, and the collectibility of the sales price is reasonably assured, which is primarily when goods are shipped to customers. Revenues received in advance from packaging machinery use agreements are recognized on a straight-line basis over the term of the agreements. Customer returns and allowances are provided for based on estimates.

• The Company’s inventories are stated at the lower of cost or market. Cost of inventories is determined principally on the last-in, first-out (“LIFO”) basis. Average cost basis is used to determine the cost of supplies inventories. Inventories are stated net of an allowance for slow-moving and obsolete inventory, which is based on estimates. If the condition of the inventories or the state of the Company’s business would deteriorate, additional allowances may be required which would reduce income.

• The Company reviews long-lived assets, including goodwill and certain identifiable intangibles for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. Upon determination that the carrying value of the assets is impaired, the Company would record an impairment charge or loss.

• The Company faces uncertainties relating to pending litigation and environmental remediation obligations. The Company records accruals for such items based on estimates developed in consultation with legal counsel and environmental consultants at the time when the liability is probable and reasonably estimated. While there can be no assurance as to the ultimate outcome of any current lawsuits, claims or investigations relating to such uncertainties, the Company does not believe that such uncertainties will have a material adverse impact on the results of operations, cash flows or financial condition of the Company. However, future uncertainties may have a material adverse impact on the results of operations, cash flows or financial condition of the Company.

RESULTS OF OPERATIONS


			Three Months Ended									Six Months Ended

						% Increase									% Increase
						(Decrease)									(Decrease)
			June 30,			From Prior			June 30,			June 30,			From Prior			June 30,
(In thousands of dollars)			2002			Period			2001			2002			Period			2001

Net Sales (Segment Data):
		Coated Board	$	329,371			3.7	%	$	317,596		$	610,325			5.5	%	$	578,590
		Containerboard		18,675			(19.8	)		23,277			37,833			(25.6	)		50,883

Net Sales				348,046			2.1			340,873			648,158			3.0			629,473
Cost of Sales				269,975			0.8			267,701			510,564			1.0			505,582

Gross Profit				78,071			6.7			73,172			137,594			11.1			123,891
Selling, General and Administrative				32,656			8.9			29,977			61,263			0.8			60,753
Research, Development and Engineering				1,146			(1.6	)		1,165			2,461			5.4			2,335
Other Expense, Net				3,118			(39.0	)		5,112			1,538			(88.2	)		13,068

Income from Operations			$	41,151			11.5		$	36,918		$	72,332			51.5		$	47,735

Income (Loss) from Operations
	(Segment Data):
		Coated Board	$	51,862			20.6	%	$	43,018		$	96,312			38.9	%	$	69,327
		Containerboard		(4,888	)		(61.6	)		(3,025	)		(13,164	)		(102.5	)		(6,501	)
		Corporate And Eliminations		(5,823	)		(89.4	)		(3,075	)		(10,816	)		28.3			(15,091	)

Income from Operations			$	41,151			11.5		$	36,918		$	72,332			51.5		$	47,735

Other Financial Data:
Net Sales:
		Carrierboard	$	241,838			4.2	%	$	232,183		$	438,874			7.2	%	$	409,588
		Cartonboard		59,898			2.8			58,256			116,062			3.2			112,421
		White lined chip board		19,208			7.3			17,907			38,243			1.0			37,879
		Containerboard		18,675			(19.8	)		23,277			37,833			(25.6	)		50,883
		Other (A)		8,427			(8.9	)		9,250			17,146			(8.3	)		18,702

Note:

(A) Other primarily represents revenue recognized from packaging machinery service and use agreements and sales of certain by-products.

Paperboard Shipments

The following represents shipments of Coated Board and Containerboard to outside customers. Shipments of Coated Board represent sales to customers of carrierboard and cartonboard. 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. Other primarily represents shipments of certain by-products. Total shipments for the three and six months ended June 30, 2002 and 2001 were as follows:


	Three Months Ended							Six Months Ended

			% Increase							% Increase
			(Decrease)							(Decrease)
	June 30,		From Prior			June 30,		June 30,		From Prior			June 30,
	2002		Period			2001		2002		Period			2001

(In thousands of tons)
Coated Board
Carrierboard		187.5		5.4	%		177.9		341.8		10.7	%		308.9
Cartonboard		96.4		4.2			92.5		186.9		5.8			176.6
White Lined Chip Board		38.8		3.2			37.6		78.1		1.2			77.2
Containerboard		55.5		(12.0	)		63.1		113.0		(17.3	)		136.6
Other		4.9		(30.0	)		7.0		11.4		(13.6	)		13.2

		383.1		1.3			378.1		731.2		2.6			712.5

SECOND QUARTER 2002 COMPARED WITH SECOND QUARTER 2001

Net Sales

As a result of the factors described below, the Company’s Net Sales in the second quarter of 2002 increased by $7.2 million, or 2.1 percent, compared with the second quarter of 2001. Net Sales in the Coated Board business segment increased by $11.8 million in the second quarter of 2002, or 3.7 percent, to $329.4 million from $317.6 million in the second quarter of 2001, due primarily to higher sales volume in North American beverage carton markets (resulting, in large part, from increased volumes under a multi-year agreement with a beer producer customer) and, to a lesser extent, higher sales volumes in international beverage markets and worldwide consumer products markets. Net Sales in the Containerboard business segment decreased by $4.6 million, or 19.8 percent, to $18.7 million in the second quarter of 2002 from $23.3 million in the second quarter of 2001, due to lower linerboard volumes resulting from the continued shift from linerboard production to value-added CUK Board production and lower containerboard pricing.

Gross Profit

As a result of the factors discussed below, the Company’s Gross Profit for the second quarter of 2002 increased by $4.9 million, or 6.7 percent, to $78.1 million from $73.2 million in the second quarter of 2001. The Company’s gross profit margin increased to 22.4 percent in the second quarter of 2002 from 21.5 percent in the second quarter of 2001. Gross Profit in the Coated Board business segment increased by $8.5 million, or 11.6 percent, to $81.6 million in the second quarter of 2002 from $73.1 million in the second quarter of 2001, while its gross profit margin increased to 24.8 percent in the second quarter of 2002 from 23.0 percent in the second quarter of 2001. The increase in Coated Board Gross Profit was due primarily to worldwide cost reductions as a result of savings gained from the Company’s TQS initiative and higher Net Sales. Gross Profit in the Containerboard business segment decreased by $1.4 million to a loss of $3.5 million in the second quarter of 2002 from a loss of $2.1 million in the second quarter of 2001, while its gross profit margin decreased to (18.8) percent in the second quarter of 2002 from (9.2) percent in the second quarter of 2001. The decrease in Containerboard Gross Profit resulted principally from lower containerboard pricing.

Selling, General and Administrative

Selling, General and Administrative expenses increased $2.7 million, or 8.9 percent, to $32.7 million in the second quarter of 2002 from $30.0 million in the second quarter of 2001, due primarily to higher incentive expenses and pension costs somewhat offset by lower warehousing, rent and consulting expenses. As a percentage of Net Sales, Selling, General and Administrative expenses increased from 8.8 percent in the second quarter of 2001 to 9.4 percent in the second quarter of 2002.

Research, Development and Engineering

Research, Development and Engineering expenses decreased $0.1 million, or 1.6 percent, to $1.1 million in the second quarter of 2002 from $1.2 million in the second quarter of 2001.

Other Expense, Net

Other Expense, Net, was $3.1 million in the second quarter of 2002 as compared to $5.1 million in the second quarter of 2001. This change was principally due to the cessation of goodwill amortization in 2002.

Income from Operations

Primarily as a result of the factors discussed above, the Company’s Income from Operations in the second quarter of 2002 increased by $4.3 million, or 11.5 percent, to $41.2 million from $36.9 million in the second quarter of 2001, while the Company’s operating margin increased to 11.8 percent in the second quarter of 2002 from 10.8 percent in the second quarter of 2001. Income from Operations in the Coated Board business segment increased by $8.9 million, or 20.6 percent, to $51.9 million in the second quarter of 2002 from $43.0 million in the second quarter of 2001, while the operating margin increased to 15.8 percent in the second quarter of 2002 from 13.5 percent in the second quarter of 2001, primarily as a result of the factors described above. Income from Operations in the Containerboard business segment decreased by $1.9 million to a loss of $4.9 million in the second quarter of 2002 from a loss of $3.0 million in the second quarter of 2001, while the operating margin decreased to (26.2) percent in the second quarter of 2002 from (13.0) percent in the second quarter of 2001, primarily as a result of the factors described above.

Fluctuations in U.S. Currency Exchange Rates

The weakening of the U.S. dollar currency exchange rates as compared to the Euro and other European currencies had a modest impact on Net Sales, Gross Profit, Income from Operations, and operating expenses during the second quarter of 2002. However, the impact was somewhat offset by the strengthening of the U.S. Dollar against the Japanese Yen.

FIRST SIX MONTHS 2002 COMPARED WITH FIRST SIX MONTHS 2001

Net Sales

As a result of the factors described below, the Company’s Net Sales in the first six months of 2002 increased by $18.7 million, or 3.0 percent, compared with the first six months of 2001. Net Sales in the Coated Board business segment increased by $31.7 million in the first six months of 2002, or 5.5 percent, to $610.3 million from $578.6 million in the first six months of 2001, due primarily to higher sales volume in North American beverage carton markets (resulting, in large part, from increased volumes under a multi-year agreement with a beer producer customer) and, to a lesser extent, higher sales volumes in international beverage markets and worldwide consumer products markets. These increases were somewhat offset by the negative impact of foreign currency exchange rates on sales in international markets. Net Sales in the Containerboard business segment decreased by $13.1 million, or 25.6 percent, to $37.8 million in the first six months of 2002 from $50.9 million in the first six months of 2001, due to lower linerboard volumes resulting from the continued shift from linerboard production to value-added CUK Board production and lower containerboard pricing.

Gross Profit

As a result of the factors discussed below, the Company’s Gross Profit for the first six months of 2002 increased by $13.7 million, or 11.1 percent, to $137.6 million from $123.9 million in the first six months of 2001. The Company’s gross profit margin increased to 21.2 percent in the first six months of 2002 from 19.7 percent in the first six months of 2001. Gross Profit in the Coated Board business segment increased by $20.2 million, or 15.8 percent, to $148.3 million in the first six months of 2002 from $128.1 million in the first six months of 2001, while its gross profit margin increased to 24.3 percent in the first six months of 2002 from 22.1 percent in the first six months of 2001. The increase in Coated Board Gross Profit was due primarily to worldwide cost reductions as a result of savings gained from the Company’s TQS initiative, higher Net Sales and lower depreciation expense. Gross Profit in the Containerboard business segment decreased by $5.9 million to a loss of $10.7 million in the first six months of 2002 from a loss of $4.8 million in the first six months of 2001, while its gross profit margin decreased to (28.4) percent in the first six months of 2002 from (9.5) percent in the first six months of 2001. The decrease in Containerboard Gross Profit resulted principally from lower containerboard pricing.

Selling, General and Administrative

Selling, General and Administrative expenses increased $0.5 million, or 0.8 percent, to $61.3 million in the first six months of 2002 from $60.8 million in the first six months of 2001. As a percentage of Net Sales, Selling, General and Administrative expenses decreased from 9.7 percent in the first six months of 2001 to 9.5 percent in the first six months of 2002.

Research, Development and Engineering

Research, Development and Engineering expenses increased $0.2 million, or 5.4 percent, to $2.5 million in the first six months of 2002 from $2.3 million in the first six months of 2001, due primarily to higher research and development investing at the Swedish Mill.

Other Expense, Net

Other Expense, Net, was $1.5 million in the first six months of 2002 as compared to $13.1 million in the first six months of 2001. This change was principally due to the cessation of goodwill amortization and a non-cash pension adjustment recorded in the first six months of 2002 as well as non-recurring operating charges that were recorded in the first six months of 2001 primarily relating to non-cash asset retirements and a litigation reserve.

Income from Operations

Primarily as a result of the factors discussed above, the Company’s Income from Operations in the first six months of 2002 increased by $24.6 million, or 51.5 percent, to $72.3 million from $47.7 million in the first six months of 2001, while the Company’s operating margin increased to 11.2 percent in the first six months of 2002 from 7.6 percent in the first six months of 2001. Income from Operations in the Coated Board business segment increased by $27.0 million, or 38.9 percent, to $96.3 million in the first six months of 2002 from $69.3 million in the first six months of 2001, while the operating margin increased to 15.8 percent in the first six months of 2002 from 12.0 percent in the first six months of 2001, primarily as a result of the factors described above. Income from Operations in the Containerboard business segment decreased by $6.7 million to a loss of $13.2 million in the first six months of 2002 from a loss of $6.5 million in the first six months of 2001, while the operating margin decreased to (34.8) percent in the first six months of 2002 from (12.8) percent in the first six months of 2001, 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 Japanese Yen had a modest impact on Net Sales, Gross Profit, Income from Operations, and operating expenses during the first six months of 2002.

INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE.

Interest Income

Interest Income increased by $0.5 million to $1.1 million in the first six months of 2002 from $0.6 million in the first six months of 2001 due primarily to interest earned on the temporary investment of the proceeds associated with the 2002 Term Loan Facility pursuant to a 30-day call notice period required under the indentures governing the 1996 Senior Notes.

Interest Expense

Interest Expense decreased by $2.8 million to $77.4 million in the first six months of 2002 from $80.2 million in the first six months of 2001 due primarily to lower average interest rates somewhat offset by the additional interest expense incurred on the 1996 Senior Notes during the 30-day call notice period required under such indentures.

Income Tax Expense

During the first six months of 2002, the Company recognized an income tax expense of $1.9 million on a (Loss) before Income Taxes of $(4.0) million. During the first six months of 2001, the Company recognized an income tax expense of $2.4 million on a (Loss) before Income Taxes of $(31.9) 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.

Extraordinary Loss on Early Extinguishment of Debt

On April 23, 2002, the Company borrowed $250 million pursuant to an amendment to its senior secured credit agreement. The proceeds were applied to redeem in full the 1996 Senior Notes. In addition, the Company borrowed approximately $12 million under its revolving credit facility to pay fees, costs and expenses related to the refinancing transaction.

On June 21, 2001, the Company completed an offering of $250 million principal amount of the 2001 Notes, bearing interest at 10 5/8 percent. The net proceeds of this offering were applied to prepay a portion of the Term Loan Facility resulting in a non-cash, extraordinary charge to earnings of approximately $2.8 million, net of tax of nil, related to the write-off of the applicable portion of deferred debt issuance costs on the term loans.

Cumulative Effect of a Change in Accounting Principle

On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (''SFAS’’) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (''SFAS No. 133’’), which requires all derivative instruments to be measured at fair value and recognized on the balance sheet as either assets or liabilities. In addition, all derivative instruments used in hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. Upon adoption of SFAS No. 133, the Company recognized a one-time after-tax transition adjustment to decrease earnings by approximately $0.5 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 $3.5 million in the first six months of 2002 primarily as a result of the net cash provided by operating activities ($14.7 million) and the net cash provided by financing activities ($13.0 million), somewhat offset by purchases of property, plant and equipment ($23.2 million). Depreciation and amortization during the first six months of 2002 totaled approximately $65 million, and is expected to be approximately $125 million to $135 million for the full year 2002.

The Company’s cash flows from its operations and EBITDA are subject to moderate seasonality with demand usually increasing in the spring and summer due to the seasonality of the worldwide beverage multiple packaging markets.

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, ongoing operating costs and working capital.

In April 2002, the Company entered into an amendment of the Senior Secured Credit Agreement which provided for the 2002 Term B Loan Facility. The 2002 Term B Loan Facility was drawn on April 23, 2002 and the proceeds, together with borrowings under the Revolving Facility of approximately $12.0 million, were used to redeem the 1996 Senior Notes on May 23, 2002 and to pay related fees, costs and expenses.

As of June 30, 2002, the Company had outstanding approximately $1,541 million of long-term debt, consisting primarily of $400 million of the 1996 Senior Subordinated Notes, $250 million of the 1997 Notes, $250 million of the 2001 Notes, $585 million outstanding under the Term Loan Facility and $52 million under the Revolving Facility, and other debt issues and facilities.

On May 3, 2002, Riverwood Holding filed a Form S-1 registration statement with the Securities and Exchange Commission for the registration under the Securities Act of 1933 of $350 million of its common stock in a proposed initial public offering. Concurrently with the proposed initial public offering, the Company anticipates borrowing additional amounts under the Senior Secured Credit Agreement through an add-on term loan and selling senior notes. The Company intends to use the net proceeds from these proposed financings to purchase all of the 1997 Notes, the 2001 Notes and the 1996 Senior Subordinated Notes through tender offers, or otherwise to redeem or repay these notes in full, and to repay a portion of the amounts outstanding under the Revolving Facility.

Debt Service

The following discussion of the Company’s debt service requirements, covenant restrictions and financing sources and cash flows does not give effect to any of the proposed financing transactions.

Principal and interest payments under the 2001 Term Loan Facility, the Revolving Facility and the 2002 Term Loan Facility, together with interest payments on the 2001 Notes, 1997 Notes and 1996 Senior Subordinated Notes, represent significant liquidity requirements for the Company. The 2001 Term Loan Facility matures on December 31, 2006 and amortizes in semi-annual installments of $37.5 million beginning June 30, 2003 and of $46.25 million beginning June 30, 2005, amounting to principal payments of $75.0 million, $75.0 million, $92.5 million and $92.5 million in 2003, 2004, 2005 and 2006 respectively. The 2002 Term Loan Facility amortizes in semi-annual installments of $1.25 million in 2002 and $2.5 million annually in each of 2003, 2004, 2005 and 2006 with the remaining principal due at maturity on March 31, 2007. The Revolving Facility matures on December 31, 2006.

The loans under the Facilities bear interest at floating rates based upon the interest rate option elected by the Company. The term loans under the Senior Secured Credit Agreement bore interest as of June 30, 2002 at an average rate per annum of 4.62 percent. The 1997 Notes, the 2001 Notes and the 1996 Senior Subordinated Notes bear interest at rates of 10 5/8 percent, 10 5/8 percent and 10 7/8 percent, respectively. The loans under the Revolving Facility bore interest as of June 30, 2002 at an average rate per annum of 4.89 percent.

Interest expense in 2002 is expected to be approximately $146 million, including approximately $7 million of non-cash amortization of deferred debt issuance costs. During the first six months of 2002, cash paid for interest was approximately $78.8 million.

The Company expects that its working capital and business needs will require it to continue to have access to the Revolving Facility 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 has in the past refinanced and in the future may seek to refinance its debt prior to the respective maturities of such debt.

The Company uses interest rate swap agreements to fix a portion of its variable rate term loans to a fixed rate in order to reduce the impact of interest rate changes on future income. The difference to be paid or received under these agreements is recognized as an adjustment to interest expense related to that debt. At June 30, 2002, the Company had interest rate swap agreements with a notional amount of $310 million, under which the Company will pay fixed rates of 2.96 percent to 5.36 percent and receive three-month LIBOR.

Covenant Restrictions

The Senior Secured Credit Agreement, which governs the Facilities, imposes restrictions on the Company’s ability to make capital expenditures and both the Senior Secured Credit Agreement and the indentures governing the 1996 Senior Subordinated Notes, the 1997 Notes and the 2001 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 Senior Secured Credit Agreement, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness or amend other debt instruments, pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted by Riverwood and its subsidiaries, make capital expenditures and engage in certain transactions with affiliates. The covenants contained in the indentures governing the 1996 Senior Subordinated Notes, the 1997 Notes and the 2001 Notes also impose restrictions on the operation of the Company’s business.

The financial covenants in the Senior Secured Credit Agreement specify, among other things, the following requirements for each four quarter period ended during the following test periods:


	Consolidated
	Debt to Credit Agreement	Consolidated
	EBITDA	Interest Expense
Test Period	Leverage Ratio	Ratio

September 30, 2001 - December 30, 2002	5.85 to 1.00	1.75 to 1.00
December 31, 2002 - December 30, 2003	5.50 to 1.00	2.00 to 1.00
December 31, 2003 - December 30, 2004	5.00 to 1.00	2.10 to 1.00
December 31, 2004 - December 30, 2005	4.70 to 1.00	2.25 to 1.00
December 31, 2005 - December 30, 2006	4.40 to 1.00	2.25 to 1.00
December 31, 2006 - March 31, 2007	4.40 to 1.00	2.25 to 1.00

At June 30, 2002, the Company was in compliance with the financial covenants in the Senior Secured Credit Agreement. The Company’s ability to comply in future periods with the financial covenants in the Senior Secured Credit Agreement will depend on its ongoing financial and operating performance, which in turn will be subject to 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, raw material and energy costs, and the Company’s ability to successfully implement its overall business and profitability strategies (see “—Outlook”). If a violation of any of the covenants occurred, the Company would attempt to get a waiver or an amendment from its lenders, although no assurance can be given that the Company would be successful in this regard. The Senior Secured Credit Agreement and the indentures governing the 1996 Senior Subordinated Notes, 1997 Notes and 2001 Notes have covenants as well as certain cross-default or cross-acceleration provisions; failure to comply with these covenants in any agreement could result in a violation of such agreement which could, in turn, lead to violations of other agreements pursuant to such cross-default or cross-acceleration provisions.

The Senior Secured Credit Agreement is secured by substantially all of the Company’s assets.

Capital Expenditures

Capital spending for the first six months of 2002 was approximately $23.2 million, down 8.4 percent from $25.3 million in the first six months of 2001. Capital spending during the first six months of 2002 related primarily to improving the Company’s process capabilities, manufacturing packaging machinery and environmental cluster rules compliance. During the first six months of 2002, the Company had capital spending of approximately $17.8 million for improving process capabilities, approximately $5.0 million for packaging machinery manufacturing and approximately $0.4 million for compliance with the cluster rules. Total capital spending for 2002 is expected to be between $65 million and $80 million, and is expected to relate principally to improving the Company’s process capabilities, the production of packaging machinery and environmental cluster rules compliance. The Company estimates that 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 that began in 2000 (see “Environmental and Legal Matters”). As of June 30, 2002, the Company estimates that it has spent approximately one-third of that amount for such compliance.

Financing Sources and Cash Flows

The Revolving Facility matures on December 31, 2006. At June 30, 2002, the Company and its U.S. and international subsidiaries had the following amounts of commitments, amounts outstanding and amounts available under revolving credit facilities:


	Total Amount of		Total Amount		Total Amount
	Commitments		Outstanding		Available

(In thousands of dollars)
Revolving Facility	$	300,000	$	51,950	$	247,408
International Facilities		16,105		11,901		4,204

	$	316,105	$	63,851	$	251,612

In accordance with its debt agreements, the Company’s availability under its Revolving Facility as of June 30, 2002 has been reduced by the amount of standby letter of credits issued of approximately $0.6 million. 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 and demand for the Company’s products, raw material and energy costs, and the Company’s ability to successfully implement its overall business and profitability strategies.

Derivative Instruments and Hedging Activities

On January 1, 2001, the Company adopted SFAS No. 133 which requires all derivative instruments to be measured at fair value and recognized on the balance sheet as either assets or liabilities. In addition, all derivative instruments used in hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. Upon adoption of SFAS No. 133, the Company recognized a one-time after-tax transition adjustment to decrease earnings by approximately $0.5 million and decrease other comprehensive income by approximately $1.1 million. These amounts have been presented as a cumulative effect of change in accounting principle in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the six months ended June 30, 2001.

The following is a summary of the Company’s derivative instruments as of June 30, 2002 and the accounting policies it employs:

Hedges of Anticipated Cash Flows

The following is a reconciliation of current period changes in the fair value of the interest rate swap agreements, and foreign currency forward and option contracts which have been recorded as Accumulated Derivative Instruments Loss in the accompanying Condensed Consolidated Balance Sheet at June 30, 2002 and as Derivative Instruments (Loss) Gain in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the Six Months Ended June 30, 2002.


(In thousands of dollars)

SFAS No. 133 transition adjustment	$	(1,094	)
Reclassification to earnings		3,898
Current period decrease in fair value		(7,374	)

Balance at December 31, 2001		(4,570	)
Reclassification to earnings		2,986
Current period decrease in fair value		(2,448	)

Balance at June 30, 2002	$	(4,032	)

During the six months ended June 30, 2002, there was no material ineffective portion related to the changes in fair value of the interest rate swap agreements, or foreign currency forward and option contracts and there were no amounts excluded from the measure of effectiveness. During the second quarter of 2002, the Company de-designated certain of its foreign currency forward and option contracts due to such contracts no longer meeting the Company’s established effectiveness test. As a result, during the second quarter of 2002, the Company recognized a mark-to-market loss of approximately $1.8 million dollars in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Income (Loss); had the foreign currency forward and option contracts not been de-designated, this approximate $1.8 million mark-to-market loss would have been deferred into Other Comprehensive Income (Loss) and would have been recognized in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) at the time the underlying hedged transaction was recognized. Included in Accumulated Derivative Instruments Loss in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2002, is a balance of approximately $0.2 million related to foreign currency forward and option contracts that were de-designated in the second quarter of 2002 that will be recognized as income in its statement of operations at the time the underlying hedged transaction occurs.

Derivatives not Designated as Hedges

Environmental and Legal Matters

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 during 2002, (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 $80 million in 2002, and (d) the Company’s expectation regarding packaging machinery placements; (ii) the statements in “–Outlook” concerning (a) the Company’s expectation that its 2002 EBITDA will exceed its 2001 EBITDA as well as each of the factors which the Company believes support such expectation, (b) the Company’s expectations regarding sales volumes in its worldwide beverage multiple packaging markets and continued growth in its North American consumer products packaging markets, (c) the Company’s expectation regarding containerboard sales and margins, and (d) the Company’s expectations regarding increased energy costs; (iii) the statements in “Financial Condition, Liquidity and Capital Resources” concerning (a) the Company’s expectation that depreciation and amortization for 2002 will be approximately $125 million to $135 million, (b) the Company’s expectation that 2002 interest expense will be approximately $146 million including approximately $7 million of non-cash amortization of deferred debt issuance costs, (c) the Company’s expectation that total capital spending for 2002 will range from $65 million to $80 million, (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, and (e) the Company’s expectations with respect to capital spending that may be required to comply with the cluster rules and that, based on current knowledge, environmental costs are not expected to have a material impact on the results of operations, cash flows or financial condition of the Company, and (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”), the Company’s Report on Form 10-K for the year ended December 31, 2001, 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.

Review of Form S-1 Registration Statement

The Form S-1 registration statement for the Company’s proposed initial public offering is being reviewed by the Staff of the SEC. Comments made by the Staff of the SEC on the S-1, including with respect to the three accounting matters described below, may require the Company to amend this quarterly report and reports previously filed with the SEC.

As previously disclosed, effective January 1, 2001, the Company consolidated into its financial statements the accounts of Rengo Riverwood Packaging, Ltd., the Company’s 50%-owned Japanese joint venture. The Staff of the SEC has asked for a supplemental explanation for such consolidation. The Company determined that consolidation was appropriate by considering a number of factors, including the importance of the Company’s contribution to Rengo’s business strategy, operational direction and operational results.

As previously disclosed, on October 12, 2001, the Company agreed to pay $29.5 million to the State of Louisiana to settle all Louisiana state income tax issues related to the period ended March 27, 1996 and the nine month period ended December 31, 1996. The Staff of the SEC has asked for a supplemental explanation of the accounting treatment for any interest component of the settlement. The Company recorded the full amount of the settlement as an adjustment to goodwill and did not account for interest separately since interest was not separately allocated as part of the settlement and there was no substantive basis for allocation of interest.

The Company reports its results in two business segments: Coated Board and Containerboard. The Coated Board business segment includes the production and sale of CUK Board for the beverage multiple packaging business and the consumer products packaging business. The Staff of the SEC has asked for a supplemental explanation of the Company’s Coated Board business segment disclosure.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (“SFAS No. 141”), “Business Combinations”, which was effective as of January 1, 2002. SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company adopted SFAS No. 141 on January 1, 2002 and the adoption did not have a significant impact on its financial position and results of operations.


	Three Months Ended						Six Months Ended

	June 30,			June 30,			June 30,			June 30,
(In thousands of dollars)	2002			2001			2002			2001

Net (Loss)	$	(9,685	)	$	(7,442	)	$	(17,400	)	$	(37,606	)
Plus: Amortization of Goodwill		—			1,935			—			3,870

Adjusted Net (Loss)	$	(9,685	)	$	(5,507	)	$	(17,400	)	$	(33,736	)


	Three Months Ended					Six Months Ended

	June 30,		June 30,			June 30,			June 30,
(In thousands of dollars)	2002		2001			2002			2001

Income (Loss) before Extraordinary Item and Cumulative Effect of a Change in Accounting Principle	$	1,824	$	(4,672	)	$	(5,891	)	$	(34,337	)
Plus: Amortization of Goodwill		—		1,935			—			3,870

Adjusted Income (Loss) before Extraordinary Item and Cumulative Effect of a Change in Accounting Principle	$	1,824	$	(2,737	)	$	(5,891	)	$	(30,467	)


		As of June 30, 2002

		Gross Carrying		Accumulated		Net Carrying
		Amount		Amortization		Amount

Amortized intangible assets:
	Patents	$	23,276	$	8,703	$	14,573
	Licenses		3,598		1,102		2,496
	Trademarks		39,638		12,360		27,278

		$	66,512	$	22,165	$	44,347

Unamortized intangible assets:
	Goodwill	$	276,482		—	$	276,482


		As of December 31, 2001

		Gross Carrying		Accumulated		Net Carrying
		Amount		Amortization		Amount

Amortized intangible assets:
	Patents	$	23,926	$	7,986	$	15,940
	Licenses		3,598		997		2,601
	Trademarks		39,624		11,370		28,254

		$	67,148	$	20,353	$	46,795

Unamortized intangible assets:
	Goodwill	$	321,976	$	45,494	$	276,482

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, 2001. There have been no significant developments with respect to derivatives or exposure to market risk during the first six months of 2002.

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings.

Not applicable

ITEM 2. Changes in Securities and Use of Proceeds.

Not applicable

ITEM 3. Defaults Upon Senior Securities.

Not applicable

ITEM 4. Submission of Matters to a Vote of Security Holders.

On May 7, 2002, a Written Consent in Lieu of Annual Meeting was executed by the stockholders of Riverwood Holding, Inc. and the following Directors were elected by the stockholders:


B. Charles Ames		Hubbard C. Howe
G. Andrea Botta		Stephen M. Humphrey
Kevin J. Conway		Samuel M. Mencoff
Alberto Cribiore		Brian J. Richmand
Gianluigi Gabetti		Lawrence C. Tucker
Leon J. Hendrix, Jr.

ITEM 5. Other Information.

Not applicable

ITEM 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.

99 Reconciliation of Income from Operations to EBITDA. Filed as an exhibit hereto.

(b) Reports on Form 8-K.

Filed on May 3, 2002 reporting intention for proposed initial public offering of $350 million of common stock.

Filed on June 11, 2002 reporting changes in registrant’s certifying accountant.

Filed on July 30, 2002 reporting extensions and amendments of tender offers for senior subordinated notes and senior notes.

Filed on July 31, 2002 reporting extensions and amendments of tender offers for senior subordinated notes and senior notes.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	RIVERWOOD HOLDING, INC.

	(Registrant)

Date: August 14, 2002	By:
		/s/	Edward W. Stroetz Jr.

			Edward W. Stroetz Jr. Secretary

Date: August 14, 2002	By:
		/s/	Daniel J. Blount

			Daniel J. Blount Senior Vice President and Chief Financial Officer

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	(A)		Credit Agreement EBITDA is calculated based on the definitions of EBITDA and GAAP contained in the Company’s Senior Secured Credit Agreement. Credit Agreement 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.

	(B)		For purposes of Credit Agreement EBITDA, as reported above, the Company adds back to income from operations non-cash charges for pension, post-retirement and post-employment benefits, and expenses (credits) relating to changes in GAAP subsequent to March 1996, which are excluded from Credit Agreement EBITDA, as reported above. EBITDA, as adjusted, is defined as income (loss) from operations before depreciation and amortization expense, loss (gain) on asset write-downs/unusual asset disposals, loss on impairment of assets and LIFO related expenses (credits) plus dividends from equity investments recorded in the relevant period. This definition of EBITDA, as adjusted, conforms to the presentation in the Form S-1 registration statement for Riverwood Holding’s proposed initial public offering.

•		The Company recognizes revenue when pervasive evidence of a sales arrangement exists, delivery has occurred, the price to the buyer is fixed and determinable, and the collectibility of the sales price is reasonably assured, which is primarily when goods are shipped to customers. Revenues received in advance from packaging machinery use agreements are recognized on a straight-line basis over the term of the agreements. Customer returns and allowances are provided for based on estimates.

•		The Company’s inventories are stated at the lower of cost or market. Cost of inventories is determined principally on the last-in, first-out (“LIFO”) basis. Average cost basis is used to determine the cost of supplies inventories. Inventories are stated net of an allowance for slow-moving and obsolete inventory, which is based on estimates. If the condition of the inventories or the state of the Company’s business would deteriorate, additional allowances may be required which would reduce income.

•		The Company reviews long-lived assets, including goodwill and certain identifiable intangibles for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. Upon determination that the carrying value of the assets is impaired, the Company would record an impairment charge or loss.

(a)		Exhibits.

		99 Reconciliation of Income from Operations to EBITDA. Filed as an exhibit hereto.

(b)		Reports on Form 8-K.

		Filed on May 3, 2002 reporting intention for proposed initial public offering of $350 million of common stock.

		Filed on June 11, 2002 reporting changes in registrant’s certifying accountant.

		Filed on July 30, 2002 reporting extensions and amendments of tender offers for senior subordinated notes and senior notes.

		Filed on July 31, 2002 reporting extensions and amendments of tender offers for senior subordinated notes and senior notes.