-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PtqAeDg/nwJM0GW61+kcZJkDvWWXVR4l+FvjquuVKsEfNKkzia7kncCvyfbemrKI JQWFmv8REHbPxBUQxj2TQw== 0000950144-00-006546.txt : 20000515 0000950144-00-006546.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950144-00-006546 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVERWOOD HOLDING INC CENTRAL INDEX KEY: 0000886239 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD MILLS [2631] IRS NUMBER: 582205024 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11113 FILM NUMBER: 629751 BUSINESS ADDRESS: STREET 1: 3350 CUMBERLAND CIRCLE STE 1400 CITY: ATLANTA STATE: GA ZIP: 30339 BUSINESS PHONE: 4046443000 FORMER COMPANY: FORMER CONFORMED NAME: RIVERWOOD INTERNATIONAL CORP DATE OF NAME CHANGE: 19940406 FORMER COMPANY: FORMER CONFORMED NAME: RIVERWOOD INTERNATIONAL CORPORATION DATE OF NAME CHANGE: 19930328 10-Q 1 RIVERWOOD HOLDING, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _____________ Commission file number 1-11113 RIVERWOOD HOLDING, INC. (Exact name of registrant as specified in its charter) Delaware 58-2205241 - ----------------------------------- ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1105 North Market Street Suite 1300 Wilmington, Delaware 19801 (Address of principal executive offices) (Zip Code) c/o Riverwood International Corporation (770) 644-3000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. At May 2, 2000 there were 7,062,380 shares and 500,000 shares of the registrant's Class A and Class B common stock, respectively, outstanding. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS As used in this Form 10-Q, unless the context otherwise requires, "RIC" refers to the corporation formerly named Riverwood International Corporation; the "Predecessor" refers to RIC and its subsidiaries in respect of periods prior to the acquisition on March 27, 1996 by Holding, through its wholly-owned subsidiaries, of RIC (the "Merger"); the "Company" refers to the registrant, Riverwood Holding, Inc., a Delaware corporation formerly named New River Holding, Inc. ("Holding") and its subsidiaries; and "Riverwood" refers to Riverwood International Corporation, a Delaware corporation formerly named Riverwood International USA, Inc. and an indirect wholly-owned subsidiary of Holding. 2 3 RIVERWOOD HOLDING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars)
MARCH 31, DECEMBER 31, 2000 1999 ----------- ----------- (unaudited) ASSETS Current Assets: Cash and equivalents $ 16,280 $ 14,108 Receivables, net of allowances 159,992 156,734 Inventories 173,306 173,610 Prepaid expenses 12,527 10,990 ----------- ----------- Total Current Assets 362,105 355,442 Property, Plant and Equipment, net of accumulated depreciation of $485,930 in 2000 and $455,339 in 1999 1,407,927 1,429,912 Investments in Net Assets of Equity Affiliates 147,282 146,473 Goodwill, net of accumulated amortization of $31,792 in 2000 and $29,805 in 1999 286,130 288,117 Other Assets 137,955 143,198 ----------- ----------- Total Assets $ 2,341,399 $ 2,363,142 =========== =========== LIABILITIES Current Liabilities: Short-term debt $ 54,339 $ 17,339 Accounts payable and other accrued liabilities 220,435 226,336 ----------- ----------- Total Current Liabilities 274,774 243,675 Long-Term Debt, less current portion 1,706,192 1,730,898 Other Noncurrent Liabilities 100,571 101,719 ----------- ----------- Total Liabilities 2,081,537 2,076,292 ----------- ----------- Contingencies and Commitments (Note 5) Redeemable Common Stock, at current redemption value 7,177 7,202 ----------- ----------- SHAREHOLDERS' EQUITY Nonredeemable Common Stock 75 75 Capital in Excess of Par Value 749,161 749,161 (Accumulated Deficit) (475,320) (454,157) Cumulative Currency Translation Adjustment (21,231) (15,431) ----------- ----------- Total Shareholders' Equity 252,685 279,648 ----------- ----------- Total Liabilities and Shareholders' Equity $ 2,341,399 $ 2,363,142 =========== ===========
See Notes to Condensed Consolidated Financial Statements. 3 4 RIVERWOOD HOLDING, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS OF DOLLARS) (UNAUDITED)
THREE MONTHS ENDED ----------------------------- MARCH 31, MARCH 31, 2000 1999 ---------- --------- Net Sales $ 270,229 $ 255,867 Cost of Sales 211,928 207,759 Selling, General and Administrative 30,368 27,887 Research, Development and Engineering 1,097 1,086 Other Expense, net 2,740 264 --------- --------- Income from Operations 24,096 18,871 Interest Income 172 199 Interest Expense 45,771 43,156 --------- --------- (Loss) before Income Taxes and Equity in Net Earnings (Loss) of Affiliates (21,503) (24,086) Income Tax Expense 1,071 409 --------- --------- (Loss) before Equity in Net Earnings (Loss) of Affiliates (22,574) (24,495) Equity in Net Earnings (Loss) of Affiliates 1,411 (1,984) --------- --------- Net (Loss) $ (21,163) $ (26,479) --------- --------- Other comprehensive (Loss), net of tax: Foreign currency translation adjustments (5,800) (953) --------- --------- Comprehensive (Loss) $ (26,963) $ (27,432) ========= =========
See Notes to Condensed Consolidated Financial Statements. 4 5 RIVERWOOD HOLDING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2000 MARCH 31, 1999 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) $(21,163) $(26,479) Noncash Items Included in Net (Loss): Depreciation and amortization 37,500 35,251 Deferred income taxes (1,840) (328) Pension, postemployment and postretirement benefits, net of benefits paid 731 998 Net loss on disposal of assets -- 546 Equity in net (earnings) loss of affiliates, net of dividends (822) 1,984 Amortization of deferred debt issuance costs 2,558 2,544 Other, net -- 43 (Increase) Decrease in Current Assets: Receivables (5,610) (111) Inventories (2,024) (12,393) Prepaid expenses (1,651) 289 (Decrease) in Accounts payable and other accrued liabilities (2,861) (24,264) Increase (Decrease) in Other Noncurrent Liabilities 255 (1,418) -------- -------- Net Cash Provided by (Used in) Operating Activities 5,073 (23,338) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property, Plant and Equipment (14,131) (13,330) Increase in Other Assets (85) (5,220) -------- -------- Net Cash (Used in) Investing Activities (14,216) (18,550) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase in Notes Payable 14,600 45,900 (Repurchases) of Redeemable Common Stock, net (25) (1,267) Payments on Debt (1,418) (2,589) -------- -------- Net Cash Provided by Financing Activities 13,157 42,044 -------- -------- Effect of Exchange Rate Changes on Cash (1,842) (205) -------- -------- Net Increase (Decrease) in Cash and Equivalents 2,172 (49) Cash and Equivalents at Beginning of Period 14,108 13,840 -------- -------- Cash and Equivalents at End of Period $ 16,280 $ 13,791 ======== ========
See Notes to Condensed Consolidated Financial Statements. 5 6 RIVERWOOD HOLDING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION The accompanying Condensed Consolidated Financial Statements of the Company included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been made. The Condensed Consolidated Balance Sheet as of December 31, 1999 was derived from audited financial statements. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES For a summary of the Company's significant accounting policies, please refer to the Company's report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1999. The preparation of the Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. Effective December 1, 1999, the Company changed its international subsidiaries' fiscal year end to December 31. Previously, the Company's international subsidiaries were principally consolidated and reported on the basis of fiscal years ending November 30. The Company has reclassified the presentation of certain prior period information to conform with the current presentation format. NOTE 3 - INVENTORIES The major classes of inventories were as follows:
(IN THOUSANDS OF DOLLARS) MARCH 31, 2000 DECEMBER 31, 1999 -------------- ----------------- Finished goods $ 84,147 $ 80,054 Work-in-process 13,761 15,845 Raw materials 41,774 45,143 Supplies 33,624 32,568 ======== ======== Total $173,306 $173,610 ======== ========
NOTE 4 - INVESTMENTS IN NET ASSETS OF EQUITY AFFILIATES The Company has investments in affiliates that are accounted for using the equity method of accounting. The most significant investment is the Company's 50 percent investment in Igaras Papeis e Embalagens S.A. ("Igaras"). 6 7 The following represents the summarized income statement information for Igaras, of which the Company recognizes 50 percent in its results of operations:
THREE MONTHS ENDED --------------------------- MARCH 31, MARCH 31, 2000 1999 ---------- --------- (IN THOUSANDS OF DOLLARS) Net Sales $ 58,393 $ 42,295 Cost of Sales 42,582 39,061 -------- -------- Gross Profit $ 15,811 $ 3,234 ======== ======== Income (Loss) from Operations $ 10,600 $ (1,348) ======== ======== Net Income (Loss) $ 2,392 $ (4,922) ======== ========
On January 14, 1999, the Central Bank of Brazil changed the foreign exchange policy by eliminating the exchange rate band, which had been used as a means to control the fluctuation of the Real against the U.S. dollar. The exchange rate is now determined by market forces. As a consequence of such change, the Real suffered a significant devaluation related to the U.S. dollar during the beginning of 1999. Under the Igaras joint venture agreement, Igaras is required to pay dividends equal to at least 25 percent of its net profits. During the first quarter of 2000, the Company received dividends from a non-controlled affiliate other than Igaras totaling $0.5 million net of taxes of $0.1 million. NOTE 5 - CONTINGENCIES AND COMMITMENTS The Company is committed to compliance with all applicable environmental laws and regulations throughout the world. Environmental law is, however, dynamic rather than static. As a result, costs, which are unforeseeable at this time, may be incurred when new laws are enacted, and when environmental agencies promulgate or revise rules and regulations. In late 1993, the U.S. Environmental Protection Agency proposed regulations (generally referred to as the "cluster rules") that would mandate more stringent controls on air and water discharges from the United States pulp and paper mills. The cluster rules were promulgated in April 1998, and the Company estimates the capital spending that may be required to comply with the cluster rules could reach $55 million to be spent at its two U.S. paper mills over a seven-year period beginning in 2000. In late 1995, the Louisiana Department of Environmental Quality ("DEQ") notified the Predecessor of potential liability for the remediation of hazardous substances at a wood treatment site in Shreveport, Louisiana that the Predecessor or its predecessors previously operated, and at a former oil refinery site in Caddo Parish, Louisiana which is on land that the Company currently owns. In response to these notices, the Company has provided additional information concerning these sites and has commenced its own evaluation of any claims and remediation liabilities for which it may be responsible. Subsequent to receipt in May 1996 of a Special Demand Letter from DEQ to remediate the site in Shreveport, the Company entered into an agreement with DEQ to perform a soil and groundwater investigation at the site. The Company completed this investigation work in 1999 and is in ongoing discussions with the DEQ to develop an appropriate remediation plan and exit strategy. In September 1996, the Company received a Special Demand Letter from DEQ to remediate the site in Caddo Parish. The Company performed a waste inventory and treatability study at the site and subsequently met with the DEQ in October 1999. Currently, the Company is in ongoing discussions with the DEQ to develop an appropriate remediation plan and exit strategy. The Company is involved in environmental remediation projects for certain properties currently owned or operated by the Company, certain properties divested by the Company for which responsibility was retained, and waste sites where waste was shipped by predecessors of the Company or for which the Company might 7 8 have corporate successor liability. Certain of these projects are being addressed under federal and state statutes, such as the Comprehensive Environmental Response, Compensation and Liability Act and the state law counterparts. The Company's costs in some instances cannot be reliably estimated until the remediation process is substantially underway or liability at multiparty sites has been addressed. To address these contingent environmental costs, the Company has accrued reserves when such costs are probable and can be reasonably estimated. The Company believes that, based on current information and regulatory requirements, the accruals established by the Company for environmental expenditures are adequate. Based on current knowledge, to the extent that additional costs may be incurred that exceed the accrued reserves, such amounts are not expected to have a material impact on the results of operations, cash flows or financial condition of the Company, although no assurance can be given that material costs will not be incurred in connection with clean-up activities at these properties, including the Shreveport and Caddo Parish sites referred to above. The Company is a party to a number of lawsuits arising out of the ordinary conduct of its business. While there can be no assurance as to their ultimate outcome, the Company does not believe that these lawsuits will have a material impact on the results of operations, cash flows or financial condition of the Company. The Company is a plaintiff in several actions against Mead claiming infringement of the Company's patents for its packaging machines, as to which Mead has filed counterclaims asserting that the Company's patents are invalid. In the furthest advanced of these actions, on November 18, 1998, a federal court entered an order refusing to adopt a special master's recommended finding that the Company's patent in issue was invalid, and ruled that Mead had been unlawfully infringing the Company's patent. On February 16, 1999, Mead filed an appeal from that decision. An oral argument with regard to this appeal was held on February 9, 2000 before the Court of Appeals for the Federal Circuit. The Company is awaiting a decision. In connection with the Merger, the former majority owner of the Company agreed to bear the cost of a Section 338(h)(10) election for U.S. federal tax purposes and for purposes of state taxes for which the former majority owner and the Company filed returns on a combined basis. The Company agreed to bear the cost of this election for the purposes of other state taxes ("stand-alone taxes"), including Louisiana income tax. During 1997, the Company paid $27.5 million in estimated Louisiana stand-alone taxes relating to the election. The Company's calculation of its Louisiana tax was based on state law in effect at the time of the Merger, including a 1993 amendment. In May 1997, the Louisiana Supreme Court declared the 1993 amendment to be void under the Louisiana Constitution, retroactive to 1993. After consultation with Louisiana tax counsel, the Company filed its Louisiana income tax return for the period ended March 27, 1996 in reliance on the Louisiana tax law in effect at the time of the Merger, without the payment of any additional tax due to the voiding of the 1993 amendment. The State of Louisiana has completed its audit of the Company's tax return for the period ended March 27, 1996. On May 9, 2000, the Company received a Notice of Proposed Tax Due for this period in the amount of $47.6 million in tax and $27.8 million in statutory interest through June 4, 2000. The Company and its advisors are evaluating the Company's options for responding to Louisiana's challenge to the Company's filing position, which could include paying the amount at issue in order to avoid the accrual of additional statutory interest while contesting the matter before the Louisiana courts. Under Louisiana law, the Company has until June 4, 2000 to respond to the Notice of Proposed Tax Due. The Company's response options include, but are not limited to, filing a written protest requesting an administrative hearing, paying the tax and interest and filing for a refund in Louisiana District Court, and requesting an extension of time to reply. There can be no assurance that the Company will ultimately prevail in this dispute. However, management believes that the additional tax and interest ultimately paid (if any) will be substantially less than the amounts listed on the Notice of Proposed Tax Due, although no assurance can be given in this regard. Since the law is unclear and the amounts involved are significant, it may be several years before this matter is resolved. For financial reporting purposes, any tax ultimately paid related to this matter would increase the goodwill recorded in connection with the Merger and any interest ultimately paid would be recorded as interest expense. 8 9 NOTE 6 - RESTRUCTURING ACTIVITIES In connection with the global restructuring program initiated in the fourth quarter of 1998, the Company is reducing its European workforce by approximately 300 employees and is implementing other initiatives designed to improve productivity and profitability across the global organization. The initial cost of this program, scheduled to be completed during 2000, was approximately $25.6 million of which approximately $0.8 million was used in December 1998 and related to severance payments. The following table provides information that details payments on this restructuring plan since December 31, 1998:
OTHER (IN THOUSANDS OF DOLLARS) SEVERANCE EXIT COSTS TOTAL ----------------------- ---------- ---------- --------- Balance at 12/31/98 21,205 3,537 24,742 Charges against accrual in 1999 (11,527) (791) (12,318) -------- ------- -------- Balance at 12/31/99 $ 9,678 $ 2,746 $ 12,424 Charges against accrual in first quarter 2000 (609) (142) (751) -------- ------- -------- Balance at 3/31/00 $ 9,069 $ 2,604 $ 11,673 ======== ======= ========
In connection with and following the Merger, the Company decided to exit certain businesses and operating activities, including the sale or closure of the Company's last dedicated folding carton converting plant in the United States, located in Kankakee, Illinois, packaging machinery manufacturing plants in Marietta, Georgia and Koln, Germany, a beverage multiple packaging converting plant in Bakersfield, California and the trucking transportation operations in West Monroe, Louisiana, as well as the consolidation and realignment of certain operations in the United States, Australia and Europe. The cost of exiting these businesses and operating activities was approximately $38.6 million which was accrued during 1996 as a purchase accounting adjustment. The costs related principally to the severance of approximately 750 employees, relocation and other plant closure costs. During the first quarter of 2000, $1.1 million was utilized and charged against the accrual primarily related to exit costs. At March 31, 2000, $1.2 million of this total was included in Other accrued liabilities on the Consolidated Balance Sheet and is expected to be paid out through 2000. 9 10 NOTE 7 - BUSINESS SEGMENT INFORMATION Business segment information is as follows:
THREE MONTHS ENDED ----------------------------- MARCH 31, MARCH 31, (IN THOUSANDS OF DOLLARS) 2000 1999 - ------------------------- ---------- --------- NET SALES: Coated Board $ 238,392 $ 234,532 Containerboard 31,837 21,335 --------- --------- $ 270,229 $ 255,867 ========= ========= INCOME (LOSS) FROM OPERATIONS: Coated Board $ 30,102 $ 29,769 Containerboard 328 (7,448) Corporate (6,334) (3,450) --------- --------- $ 24,096 $ 18,871 ========= ========= EBITDA: Coated Board $ 61,702 $ 59,793 Containerboard 5,282 (2,430) Corporate (2,948) (1,674) --------- --------- $ 64,036 $ 55,689 ========= =========
10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW In connection with the Merger, the Company entered into a credit agreement (as amended, the "Senior Secured Credit Agreement") that currently provides for senior secured credit facilities (the "Senior Secured Credit Facilities") consisting of $635 million in outstanding term loans under a term loan facility (the "Term Loan Facility") and a $400 million revolving credit facility (the "Revolving Facility"). In addition, Riverwood International Machinery, Inc. ("RIMI"), a wholly-owned subsidiary of Riverwood, entered into a credit agreement (as amended, the "Machinery Credit Agreement", and together with the Senior Secured Credit Agreement, the "Credit Agreements") providing for a $140 million secured revolving credit facility (the "Machinery Facility," and together with the Senior Secured Credit Facilities, the "Facilities") for the purpose of financing or refinancing packaging machinery. In connection with the Merger, the Company also completed an offering of $250 million aggregate principal amount of 10 1/4% Senior Notes due 2006 (the "1996 Senior Notes") and $400 million aggregate principal amount of 10 7/8% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes" and together with the 1996 Senior Notes, the "1996 Notes"). On July 28, 1997, the Company completed an offering of $250 million principal amount of 10 5/8% Senior Notes due 2007 (the "Initial Notes"). The net proceeds of this offering were applied to prepay certain revolving credit borrowings under the Revolving Facility (without any commitment reduction) and to refinance certain Tranche A term loans and other borrowings under the Senior Secured Credit Agreement. A registration statement under the Securities Act of 1933, as amended, registering senior notes of the Company identical in all material respects to the Initial Notes (the "Exchange Notes") offered in exchange for the Initial Notes became effective October 1, 1997. On November 3, 1997, the Company completed its exchange offer of the Initial Notes for the Exchange Notes. The Initial Notes and the Exchange Notes are referred to herein as the 1997 Notes. GENERAL The Company reports its results in two business segments: Coated Board and Containerboard. The Coated Board business segment includes (i) the production and sale of coated unbleached kraft paperboard ("CUK Board") for packaging cartons from the paper mills in Macon, Georgia (the "Macon Mill") and in West Monroe, Louisiana (the "West Monroe Mill") and white lined chip board ("WLC") at its paper mill in Norrkoping, Sweden (the "Swedish Mill"); (ii) converting operations facilities in the United States and Europe; and (iii) the design, manufacture and installation of packaging machinery related to the assembly of beverage cartons. The Containerboard business segment includes the production and sale of linerboard, corrugating medium and kraft paper from paperboard mills in the United States. EBITDA is defined as consolidated net income (exclusive of non-cash charges resulting from purchase accounting during the periods subsequent to the Merger) before consolidated interest expense, consolidated income taxes, consolidated depreciation and amortization, and other non-cash charges deducted in determining consolidated net income, extraordinary items and the cumulative effect of accounting changes and earnings of, but including dividends from, non-controlled affiliates. EBITDA excludes equity earnings from non-controlled affiliates but includes dividends actually received from non-controlled affiliates. The Company believes that EBITDA provides useful information regarding the Company's debt service ability, but should not be considered in isolation. 11 12
THREE MONTHS ENDED ---------------------------- MARCH 31, MARCH 31, 2000 1999 ---------- --------- (IN THOUSANDS OF DOLLARS) ----------------------- EBITDA (Segment Data): Coated Board $ 61,702 $ 59,793 Containerboard 5,282 (2,430) Corporate (2,948) (1,674) -------- -------- EBITDA $ 64,036 $ 55,689 ======== ========
BUSINESS TRENDS AND INITIATIVES The Company's cash flow from operations and EBITDA are influenced by sales volume and selling prices for its products and raw material costs, and are affected by a number of significant business, economic and competitive factors. Many of these factors are not within the Company's control. Historically, in the Coated Board business segment, the Company has experienced stable pricing for its integrated beverage carton products, and moderate cyclical pricing for its folding cartonboard, which is principally sold in the open market. The Company's folding cartonboard sales are affected by competition from competitors' CUK Board and other substrates - solid bleached sulfate ("SBS"), recycled clay coated news ("CCN") and, internationally, WLC -- as well as by general market conditions. In the Containerboard business segment, conditions in the cyclical worldwide commodity paperboard markets have a substantial impact on the Company's Containerboard sales. The Company is continuing to benefit from its multiple price increases for linerboard, corrugated medium, and kraft paper announced during 1999, and trends are expected to continue to be positive as several major producers announced additional price increases in the beginning of the year 2000. The Company is pursuing a number of long-term initiatives designed to improve productivity and profitability while continuing to implement its Coated Board business strategy. The Company has undertaken a profit center reorganization of its operations, implemented a global restructuring program (see below), implemented a number of cost saving measures and effected several management changes. In addition, the Company is implementing a Total Quality Systems ("TQS") initiative at the Company's U.S. mills which uses statistical process control to help design and manage all types of activities including production and maintenance. The Company expects capital expenditures will range from $65 to $75 million in 2000 as the Company invests to improve its process capabilities, to comply with environmental cluster rules, and to invest in packaging machinery. The Company continues to evaluate its current operations and assets with a view to rationalizing its operations and improving profitability, in particular with respect to its international converting assets and strategy. As part of this effort, the Company initiated a $25.6 million global restructuring program in the fourth quarter of 1998 aimed at achieving annualized savings and cost avoidance of approximately $20 million when fully implemented. The global restructuring program is focused in the Company's European operations. To date, the Company has made significant progress in completing the restructuring activities and anticipates completing this program during 2000 (see "--Financial Condition, Liquidity and Capital Resources -- Financing Sources and Cash Flows"). Finally, the Company is taking an aggressive approach to reduce working capital and increase liquidity. This approach includes a goal to reduce inventory by approximately $20 million in 2000, as well as lowering receivables. To implement this goal, the Company will utilize its new information system to improve the operation of its supply chain. Packaging machinery placements during the first quarter of 2000 remained stable when compared to the first quarter of 1999. The Company has been and will continue to be more selective in future packaging machinery placements to ensure appropriate returns. The Company recently completed the successful installation of three new Marksman 1600 high speed packaging machines in Japan. As a result, the Company expects these machine placements to foster further growth. 12 13 OUTLOOK The Company expects that its 2000 full year EBITDA will significantly exceed its 1999 EBITDA, although no assurance can be given in this regard. The achievement of this expectation is dependent upon (among other things) a number of profit improvement initiatives, including increasing worldwide beverage sales volumes above 1999 levels, improving U.S. mill throughput, continued cost savings from other actions taken to date and continued selling price improvements for containerboard and folding carton products. In 2000, the Company expects that it will achieve modest sales volume increases in its worldwide beverage markets, and renewed growth in its folding carton markets, principally in North America. The Company also expects price improvements in the U.S. folding carton markets in 2000 based upon recent price increases announced for competing substrates. In response, the Company announced a $40 per ton price increase for its domestic open market grades of folding carton and beverage products effective May 1, 2000. The Company continues to be optimistic about containerboard prices as several major containerboard producers recently announced additional price increases. 13 14 RESULTS OF OPERATIONS
THREE MONTHS ENDED ----------------------------------------------- % INCREASE (DECREASE) MARCH 31, FROM PRIOR MARCH 31, (IN THOUSANDS OF DOLLARS) 2000 PERIOD 1999 --------- ---------- --------- Net Sales (Segment Data): Coated Board $ 238,392 1.6% $ 234,532 Containerboard 31,837 49.2 21,335 --------- --------- Net Sales 270,229 5.6 255,867 Cost of Sales 211,928 2.0 207,759 --------- --------- Gross Profit 58,301 21.2 48,108 Selling, General and Administrative 30,368 8.9 27,887 Research, Development and Engineering 1,097 1.0 1,086 Other Expenses, net 2,740 937.9 264 --------- --------- Income from Operations $ 24,096 27.7 $ 18,871 ========= ========= Income (Loss) from Operations (Segment Data): Coated Board $ 30,102 1.1% $ 29,769 Containerboard 328 N/A (7,448) Corporate (6,334) (83.6) (3,450) --------- --------- Income from Operations $ 24,096 27.7 $ 18,871 ========= =========
PAPERBOARD SHIPMENTS The following represents shipments of Coated Board and Containerboard to outside customers. Shipments of Coated Board represent sales to customers of beverage carrierboard, folding cartonboard and WLC (other than from the Swedish Mill). Shipments from the Swedish Mill represent sales to customers of WLC produced at this mill. Shipments of Containerboard represent sales to customers of linerboard, corrugating medium kraft paper and various other items, principally off-specification coated board. Total shipments for the three months ended March 31, 2000 and 1999 were as follows:
THREE MONTHS ENDED ------------------------------ MARCH 31, MARCH 31, 2000 1999 ------------ ------------ (IN THOUSANDS OF TONS) ---------------------- Coated Board 221.5 225.2 Swedish Mill 37.2 31.9 Containerboard 90.0 81.8 ---------- ---------- 348.7 338.9 ========== ==========
FIRST QUARTER 2000 COMPARED WITH FIRST QUARTER 1999 NET SALES As a result of the factors described below, the Company's Net Sales in the first quarter of 2000 increased by $14.4 million, or 5.6 percent, compared with the first quarter of 1999. Net Sales in the Coated Board business segment increased by $3.9 million in the first quarter of 2000, or 1.6 percent, to $238.4 million from 14 15 $234.5 million in the first quarter of 1999, due primarily to higher sales volume in international beverage markets and improved pricing in domestic beverage markets, somewhat offset by lower worldwide folding carton volumes. Net Sales in the Containerboard business segment increased $10.5 million, or 49.2 percent, to $31.8 million in the first quarter of 2000 from $21.3 million in the first quarter of 1999, due principally to higher pricing and volume. GROSS PROFIT As a result of the factors discussed below, the Company's Gross Profit for the first quarter of 2000 increased $10.2 million, or 21.2 percent, to $58.3 million from $48.1 million in the first quarter of 1999. The Company's gross profit margin increased to 21.6 percent for the first quarter of 2000 from 18.8 percent in the first quarter of 1999. Gross Profit in the Coated Board business segment increased $2.6 million, or 4.8 percent, to $57.3 million in the first quarter of 2000 as compared to $54.6 million in the first quarter of 1999, while its gross profit margin increased to 24.0 percent in the first quarter of 2000 from 23.3 percent in the first quarter of 1999. The increase in Coated Board Gross Profit is due directly to worldwide cost reductions and higher Net Sales. Gross Profit in the Containerboard business segment increased $7.1 million to a gain of $1.1 million in the first quarter of 2000 as compared to a loss of $6.0 million in the first quarter of 1999, while its gross profit margin increased to 3.5 percent in the first quarter of 2000 from (28.2) percent in the first quarter of 1999. The increase in Containerboard Gross Profit resulted principally from increased pricing and volume. SELLING, GENERAL AND ADMINISTRATIVE Selling, General and Administrative expenses increased $2.5 million, or 8.9 percent, to $30.4 million in the first quarter of 2000 as compared to $27.9 million in the first quarter of 1999, due mainly to higher depreciation expense, higher stock option compensation expense, the TQS initiative, and consulting fees related to an ongoing project within the Company's folding carton business. As a percentage of Net Sales, Selling, General and Administrative expenses increased from 10.9 percent in the first quarter of 1999 to 11.2 percent in the first quarter of 2000. RESEARCH, DEVELOPMENT AND ENGINEERING Research, Development and Engineering expenses remained constant at $1.1 million in the first quarter of 2000 and in the first quarter of 1999. OTHER EXPENSE, NET Other Expense, net, increased by approximately $2.5 million to $2.7 million in the first quarter of 2000 from $0.3 million in the first quarter of 1999 due to non-recurring credits in the first quarter of 1999 primarily related to utility recoveries. INCOME (LOSS) FROM OPERATIONS Primarily as a result of the factors discussed above, the Company's Income from Operations in the first quarter of 2000 increased by $5.2 million, or 27.7 percent, to $24.1 million from $18.9 million in the first quarter of 1999, while the Company's operating margin increased to 8.9 percent in the first quarter of 2000 from 7.4 percent in the first quarter of 1999. Income from Operations in the Coated Board business segment increased $0.3 million, or 1.1 percent, to $30.1 million in the first quarter of 2000 from $29.8 million in the first quarter of 1999, while the operating margin remained constant at 12.6 percent, primarily as a result of the factors described above. Income from Operations in the Containerboard business segment increased $7.8 million to a gain of $0.3 million in the first quarter of 2000 from a (Loss) from Operations of $7.4 million in the first quarter of 1999, while the operating margin increased to 1.0 percent in the first quarter of 2000 from (34.9) percent in the first quarter of 1999 primarily as a result of the factors described above. 15 16 FLUCTUATIONS IN U.S. CURRENCY EXCHANGE RATES The strengthening of the U.S. dollar currency exchange rates as compared to the Euro and related currencies did have a modest impact on Net Sales, Gross Profit, Income from Operations, and operating expenses during the first quarter of 2000. However, the impact was offset by the weakening of the U.S. Dollar against the Japanese Yen. INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES INTEREST INCOME Interest Income remained constant at $0.2 million for the first quarter of 2000 and 1999. INTEREST EXPENSE Interest Expense increased $2.6 million to $45.8 million in the first quarter of 2000 from $43.2 million in the first quarter of 1999 due primarily to higher average outstanding debt balances. INCOME TAX EXPENSE During the first quarter of 2000, the Company recognized an income tax expense of $1.1 million on a (Loss) before Income Taxes and Equity in Net Earnings (Loss) of Affiliates of $21.5 million. During the first quarter of 1999, the Company recognized an income tax expense of $0.4 million on a (Loss) before Income Taxes and Equity in Net Earnings (Loss) of Affiliates of $24.1 million. These expenses differed from the statutory federal income tax rate primarily because of valuation allowances established on net operating loss carryforward tax assets in the U.S. and certain international locations where the realization of such benefits is less likely than not. EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES Equity in Net Earnings (Loss) of Affiliates is comprised primarily of the Company's equity in net earnings of Igaras, which is accounted for under the equity method of accounting. Equity in Net Earnings (Loss) of Affiliates increased $3.4 million to a gain of $1.4 million in the first quarter of 2000 from a (Loss) of $(2.0) million in the first quarter of 1999 resulting from improved market conditions in Brazil. On January 14, 1999, the Central Bank of Brazil changed the foreign exchange policy by eliminating the exchange rate band, which had been used as a means to control the fluctuation of the Real against the U.S. Dollar. The exchange rate is now determined by market forces. As a consequence of such change, the Real suffered a significant devaluation related to the U.S. Dollar during the beginning of 1999. During the first quarter of 2000, the Company received dividends from a non-controlled affiliate other than Igaras totaling $0.5 million net of taxes of $0.1 million. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company broadly defines liquidity as its ability to generate sufficient cash flow from operating activities to meet its obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet existing strategic and financial objectives. Therefore, liquidity cannot be considered separately from capital resources that consist of current or potentially available funds for use in achieving long-range business objectives and meeting debt service commitments. CASH FLOWS Cash and equivalents increased by approximately $2.2 million in the first quarter of 2000 primarily as a result of $13.2 million net cash provided by financing activities and $5.1 million net cash provided by operating activities, somewhat offset by $14.2 million of net cash used in investing activities. Cash used in investing activities resulted primarily from purchases of property, plant and equipment. Cash provided by financing activities resulted primarily from net borrowings under the Revolving Facility. Depreciation and amortization 16 17 during the first quarter of 2000 totaled approximately $38 million, and is expected to be approximately $140 million to $145 million for 2000. The Company's cash flows from its operations and EBITDA are subject to moderate seasonality with demand usually increasing in the spring and summer. The Company's Coated Board business segment experiences seasonality principally due to the seasonality of the worldwide multiple packaging beverage segment. Historically, the Company's Coated Board business segment reports its strongest sales in the second and third quarters of the fiscal year driven by the seasonality of the Company's integrated beverage business. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity needs arise primarily from debt service on the substantial indebtedness incurred in connection with the Merger and from the funding of its capital expenditures. As of March 31, 2000, the Company had outstanding approximately $1,749 million of long-term debt, consisting primarily of $650 million aggregate principal amount of the 1996 Notes, $250 million of the 1997 Notes, $635 million outstanding under the Term Loan Facility and additional amounts under the Revolving Facility, the Machinery Facility and other debt issues and facilities. During the first quarter of 2000, the Company repaid approximately $1.4 million of debt. The Company had a net increase in revolving credit facilities borrowings of approximately $14.6 million due primarily to annual interest payments. DEBT SERVICE Principal and interest payments under the Term Loan Facility, the Revolving Facility and the Machinery Facility, together with interest payments on the 1997 Notes and 1996 Notes, represent significant liquidity requirements for the Company. The Company applied $105.0 million of the proceeds from the 1997 Notes in July 1997 to refinance a portion of the Tranche A term loans under the Term Loan Facility, $50 million of the proceeds of the 1997 Notes to refinance the Tranche D term loan under the Senior Secured Credit Agreement, and the remaining proceeds from the 1997 Notes to prepay outstanding revolving credit borrowings under the Revolving Facility. Scheduled term loan principal payments under the Term Loan Facility were reduced to reflect this application of proceeds. This application of proceeds did not involve any reduction in the current aggregate Revolving Facility commitment of $400 million. Annual term loan amortization requirements under the Term Loan Facility, after giving effect to the refinancing of the Term Loan Facility from a portion of the proceeds of the 1997 Notes, will be approximately $2 million, $120 million, $173 million, $184 million and $156 million for each of the years 2000 through 2004, respectively. The loans under the Facilities bear interest at floating rates based upon the interest rate option elected by the Company. The Tranche A term loans, Tranche B term loans and Tranche C term loans under the term loan Facility bore interest as of March 31, 2000 at an average rate per annum of 9.1 percent. The Senior Notes, the 1997 Notes and the Senior Subordinated Notes bear interest at rates of 10 1/4 percent, 10 5/8 percent and 10 7/8 percent, respectively. Interest expense in 2000 is expected to be approximately $180 million, including approximately $10 million of non-cash amortization of deferred debt issuance costs. During the first quarter of 2000, cash paid for interest was approximately $33 million. The Revolving Facility will mature in March 2003 and the Machinery Facility will mature in March 2001, with all amounts then outstanding becoming due. The Company expects that its working capital and business needs will require it to continue to have access to these or similar revolving credit facilities after their respective maturity dates, and that the Company accordingly will have to extend, renew, replace or otherwise refinance such facilities at or prior to such dates. No assurance can be given that it will be able to do so. The Company uses interest rate swap and cap agreements to fix or cap a portion of its variable rate Term Loan Facility to a fixed rate in order to reduce the impact of interest rate changes on future income. The difference to be paid or received under these agreements is recognized as an adjustment to interest expense related to that debt. At March 31, 2000, the Company had interest rate swap agreements with a notional amount of $175 million, under which the Company will pay fixed rates of 5.05 percent to 6.15 percent and receive three-month LIBOR. 17 18 COVENANT RESTRICTIONS The Credit Agreements impose restrictions on the Company's ability to make capital expenditures and both the Credit Agreements and the indentures governing the 1996 Notes and the 1997 Notes limit the Company's ability to incur additional indebtedness. Such restrictions, together with the highly leveraged nature of the Company, could limit the Company's ability to respond to market conditions, meet its capital spending program, provide for unanticipated capital investments or take advantage of business opportunities. The covenants contained in the Credit Agreements also, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur guarantee obligations, repay the relevant 1996 Notes or the 1997 Notes, pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, make capital expenditures or engage in certain transactions with affiliates, and otherwise restrict corporate activities. The covenants contained in such indentures also impose restrictions on the operation of the Company's business. At March 31, 2000, the Company was in compliance with the financial covenants in the Credit Agreements. CAPITAL EXPENDITURES Capital spending for the first quarter of 2000 was approximately $14.1 million, up 6.0 percent from $13.3 million in the first quarter of 1999. Capital spending during the first quarter of 2000 related primarily to increasing paper production efficiencies, increasing converting capacity and manufacturing packaging machinery. Total capital spending for 2000 is expected to be between $65 million and $75 million, and is expected to relate principally to improving the Company's process capabilities, the production of packaging machinery, and cluster rule compliance. FINANCING SOURCES AND CASH FLOWS In connection with the global restructuring program initiated in the fourth quarter of 1998, the Company is reducing its European workforce by approximately 300 employees and is implementing other initiatives designed to improve productivity and profitability across the global organization. The initial cost of this program, scheduled to be completed during 2000, was approximately $25.6 million of which approximately $0.8 million was used in December 1998 and related to severance payments. The following table provides information that details payments on this restructuring plan since December 31, 1998:
OTHER (IN THOUSANDS OF DOLLARS) SEVERANCE EXIT COSTS TOTAL - ------------------------- --------- ---------- -------- Balance at 12/31/98 21,205 3,537 24,742 Charges against accrual in 1999 (11,527) (791) (12,318) -------- ------- -------- Balance at 12/31/99 $ 9,678 $ 2,746 $ 12,424 Charges against accrual in first quarter 2000 (609) (142) (751) -------- ------- -------- Balance at 3/31/00 $ 9,069 $ 2,604 $ 11,673 ======== ======= ========
In connection with and following the Merger, the Company decided in 1996 to exit certain businesses and operating activities, including the sale or closure of the Company's last dedicated folding cartonboard converting plant in the United States, located in Kankakee, Illinois, packaging machinery manufacturing plants in Marietta, Georgia and Koln, Germany, a beverage multiple packaging converting plant in Bakersfield, California and the trucking transportation operations in West Monroe, Louisiana, as well as the consolidation and realignment of certain operations in the United States, Australia and Europe. The cost of exiting these businesses and operating activities was approximately $38.6 million which was accrued during 1996 as a purchase accounting adjustment. The costs related principally to the severance of approximately 750 employees, relocation and other plant closure costs. At March 31, 2000, $1.2 million of this total was accrued in Other accrued liabilities on the Consolidated Balance Sheets and is expected to be paid out through 2000. 18 19 At March 31, 2000, the Company and its U.S. and international subsidiaries had the following amounts of commitments, amounts outstanding and amounts available under revolving credit facilities:
TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT OF OUTSTANDING AT AVAILABLE AT COMMITMENTS MARCH 31, 2000 MARCH 31, 2000 ------------- -------------- -------------- (IN THOUSANDS OF DOLLARS) Revolving Facility $400,000 $197,900 $202,100 Machinery Facility 140,000 14,000 29,000 International Facilities 25,911 12,016 13,895 -------- -------- -------- $565,911 $223,916 $244,995 ======== ======== ========
The Machinery Facility is limited by a borrowing base. Undrawn Revolving Facility availability is expected to be used to meet future working capital and other business needs of the Company. The Company anticipates pursuing additional working capital financing for its foreign operations as necessary. The Company believes that cash generated from operations, together with amounts available under its Revolving Facility, the Machinery Facility and other available financing sources, will be adequate to permit the Company to meet its debt service obligations, capital expenditure program requirements, ongoing operating costs and working capital needs until the maturity of the Revolving Facility (assuming extension or refinancing of the Machinery Facility at its earlier maturity), although no assurance can be given in this regard. The Company's future financial and operating performance, ability to service or refinance its debt and ability to comply with the covenants and restrictions contained in its debt agreements (see "--Covenant Restrictions"), will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control and will be substantially dependent on the selling prices for the Company's products and the Company's ability to successfully implement its overall business and profitability strategies. While the Company believes that Igaras has adequate liquidity, the Company shares control of Igaras with its joint venture partner and future dividend payments from Igaras, if any, would be subject to restrictions in the joint venture agreement and would reflect only the Company's remaining interest of 50 percent. Under the Igaras joint venture agreement, Igaras is required to pay dividends equal to at least 25 percent of its net profits. Due to currency fluctuations, inflation and changes in political and economic conditions, earnings from Brazilian operations have been subject to significant volatility. There can be no assurance that such volatility will not recur in the future. ENVIRONMENTAL AND LEGAL MATTERS The Company is committed to compliance with all applicable environmental laws and regulations throughout the world. Environmental law is, however, dynamic rather than static. As a result, costs, which are unforeseeable at this time, may be incurred when new laws are enacted, and when environmental agencies promulgate or revise rules and regulations. In late 1993, the U.S. Environmental Protection Agency proposed regulations (generally referred to as the "cluster rules") that would mandate more stringent controls on air and water discharges from the United States pulp and paper mills. The cluster rules were promulgated in April 1998, and the Company estimates the capital spending that may be required to comply with the cluster rules could reach $55 million to be spent at its two U.S. paper mills over a seven-year period beginning in 2000. In late 1995, the Louisiana Department of Environmental Quality ("DEQ") notified the Predecessor of potential liability for the remediation of hazardous substances at a wood treatment site in Shreveport, Louisiana that the Predecessor or its predecessors previously operated, and at a former oil refinery site in Caddo Parish, Louisiana which is on land that the Company currently owns. In response to these notices, the Company has provided additional information concerning these sites and has commenced its own evaluation of any claims and remediation liabilities for which it may be responsible. Subsequent to receipt in May 1996 of a Special Demand Letter from DEQ to remediate the site in Shreveport, the Company entered into an agreement with DEQ to perform a soil and groundwater investigation at the site. The Company completed 19 20 this investigation work in 1999 and is in ongoing discussions with the DEQ to develop an appropriate remediation plan and exit strategy. In September 1996, the Company received a Special Demand Letter from DEQ to remediate the site in Caddo Parish. The Company performed a waste inventory and treatability study at the site and subsequently met with the DEQ in October 1999. Currently, the Company is in ongoing discussions with the DEQ to develop an appropriate remediation plan and exit strategy. The Company is involved in environmental remediation projects for certain properties currently owned or operated by the Company, certain properties divested by the Company for which responsibility was retained, and waste sites where waste was shipped by predecessors of the Company or for which the Company might have corporate successor liability. Certain of these projects are being addressed under federal and state statutes, such as the Comprehensive Environmental Response, Compensation and Liability Act and the state law counterparts. The Company's costs in some instances cannot be reliably estimated until the remediation process is substantially underway or liability at multiparty sites has been addressed. To address these contingent environmental costs, the Company has accrued reserves when such costs are probable and can be reasonably estimated. The Company believes that, based on current information and regulatory requirements, the accruals established by the Company for environmental expenditures are adequate. Based on current knowledge, to the extent that additional costs may be incurred that exceed the accrued reserves, such amounts are not expected to have a material impact on the results of operations, cash flows or financial condition of the Company, although no assurance can be given that material costs will not be incurred in connection with clean-up activities at these properties, including the Shreveport and Caddo Parish sites referred to above. The Company is a party to a number of lawsuits arising out of the ordinary conduct of its business. While there can be no assurance as to their ultimate outcome, the Company does not believe that these lawsuits will have a material impact on the results of operations, cash flows or financial condition of the Company. The Company is a plaintiff in several actions against Mead claiming infringement of the Company's patents for its packaging machines, as to which Mead has filed counterclaims asserting that the Company's patents are invalid. In the furthest advanced of these actions, on November 18, 1998, a federal court entered an order refusing to adopt a special master's recommended finding that the Company's patent in issue was invalid, and ruled that Mead had been unlawfully infringing the Company's patent. On February 16, 1999, Mead filed an appeal from that decision. An oral argument with regard to this appeal was held on February 9, 2000 before the Court of Appeals for the Federal Circuit. The Company is awaiting a decision. TAX MATTERS RELATING TO THE MERGER In connection with the Merger, the former majority owner of the Company agreed to bear the cost of a Section 338(h)(10) election for U.S. federal tax purposes and for purposes of state taxes for which the former majority owner and the Company filed returns on a combined basis. The Company agreed to bear the cost of this election for the purposes of other state taxes ("stand-alone taxes"), including Louisiana income tax. During 1997, the Company paid $27.5 million in estimated Louisiana stand-alone taxes relating to the election. The Company's calculation of its Louisiana tax was based on state law in effect at the time of the Merger, including a 1993 amendment. In May 1997, the Louisiana Supreme Court declared the 1993 amendment to be void under the Louisiana Constitution, retroactive to 1993. After consultation with Louisiana tax counsel, the Company filed its Louisiana income tax return for the period ended March 27, 1996 in reliance on the Louisiana tax law in effect at the time of the Merger, without the payment of any additional tax due to the voiding of the 1993 amendment. The State of Louisiana has completed its audit of the Company's tax return for the period ended March 27, 1996. On May 9, 2000, the Company received a Notice of Proposed Tax Due for this period in the amount of $47.6 million in tax and $27.8 million in statutory interest through June 4, 2000. The Company and its advisors are evaluating the Company's options for responding to Louisiana's challenge to the Company's filing position, which could include paying the amount at issue in order to avoid the accrual of additional statutory interest while contesting the matter before the Louisiana courts. Under Louisiana law, the Company has until June 4, 2000 to respond to the Notice of Proposed Tax Due. The Company's response options include, but are not limited to, filing a written protest requesting an administrative hearing, paying the tax and interest and filing for a refund in Louisiana District Court, and requesting an extension of time to reply. There can be no assurance that the Company will ultimately prevail in this dispute. However, management believes that the additional tax and interest ultimately paid (if any) will be substantially less than the amounts listed on the Notice of Proposed Tax Due, although no assurance can be given in this regard. Since the law is unclear and the amounts involved are significant, it may be several years before this matter is resolved. For financial reporting purposes, any tax ultimately paid related to this matter would increase the goodwill recorded in connection with the Merger and any interest ultimately paid would be recorded as interest expense. 20 21 INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report (other than the financial statements and other statements of historical fact) are forward-looking statements, including, without limitation, (i) the statements in "-- Business Trends and Initiatives" concerning (a) the Company's expectation that pricing trends for its containerboard products should continue to be positive, (b) the improvements which the Company's long-term initiatives, including, without limitation, its profit center reorganization and global restructuring program, are designed to achieve, (c) the Company's expectation that capital expenditures will range from $65 million to $75 million in 2000, (d) the Company's expectation that its global restructuring program will be completed during 2000, and (e) the Company's expectation that it will reduce inventory by approximately $20 million and lower receivables in 2000; (ii) the statements in "--Outlook" concerning (a) the Company's expectation that its 2000 EBITDA will significantly exceed its 1999 EBITDA as well as each of the factors which the Company believes support such expectation, (b) the Company's expectations that it will achieve modest sales volume increases in its worldwide beverage markets and renewed growth in its folding carton markets, principally in North America, and (c) the Company's expectation regarding pricing improvements in the U.S. folding carton markets in 2000; (iii) the statements in "Financial Condition, Liquidity and Capital Resources" concerning (a) the Company's expectation that depreciation and amortization for 2000 will be approximately $140 million to $145 million, (b) the Company's expectation that 2000 interest expense will be approximately $180 million including approximately $10 million of non-cash amortization of deferred debt issuance costs, (c) the Company's expectation that total capital spending for 2000 will range from $65 to $75 million, (d) the Company's expectations regarding a major improvement in its information systems and business processes under SAP, (e) the Company's belief that cash generated from operations, together with amounts available under available financing sources, will be adequate to permit the Company to meet its debt service obligations, capital expenditure program requirements, ongoing operating costs and working capital needs until the maturity of the Revolving Facility (assuming extension or refinancing of the Machinery Facility at its earlier maturity), (f) the Company's expectations with respect to capital spending that may be required to comply with the cluster rules and that, based on current knowledge, environmental costs are not expected to have a material impact on the results of operations, cash flows or financial condition of the Company, (g) the Company's belief and estimates in respect of certain Louisiana income tax matters relating to the Section 338(h)(10) election, including, without limitation, management's belief that additional tax and interest ultimately paid (if any) would be substantially less than the state's proposed assessment; and (iv) other statements as to management's or the Company's expectations and beliefs presented in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects upon the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management. The important factors described elsewhere in this report (including, without limitation, those discussed in "-- Financial Condition, Liquidity and Capital Resources -- Liquidity and Capital Resources -- Environmental and Legal Matters" and "-- Tax Matter Relating to the Merger"), the Company's Report on Form 10-K for the year ended December 31, 1999, or in other Securities and Exchange Commission filings, could affect (and in some cases have affected) the Company's actual results and could cause such results to differ materially from estimates or expectations reflected in such forward-looking statements. While the Company periodically reassesses material trends and uncertainties affecting the Company's results of operations and financial condition in connection with its preparation of management's discussion and analysis of results of operations and financial condition contained in its quarterly and annual reports, the Company does not intend to review or revise any particular forward-looking statement referenced in this report in light of future events. 21 22 ACCOUNTING CHANGES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes standards for the way companies account for and report on derivative instruments and hedging activities. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company has not determined the impact that SFAS No. 133 will have on its financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK For a discussion of certain market risks related to the Company, see Part II, Item 7A, "Quantitative and Qualitative Disclosure about Market Risk", in the Company's Annual Report on Form 10-K for the fiscal period ended December 31, 1999. There have been no significant developments with respect to interest rates, derivatives or exposure to market risk during the first quarter of 2000. 22 23 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not applicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable ITEM 5. OTHER INFORMATION. Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 27 Financial Data Schedule (For SEC use only) 99 Reconciliation of Income (Loss) from Operations to EBITDA. Filed as an exhibit hereto. (b) Reports on Form 8-K. Not applicable 23 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RIVERWOOD HOLDING, INC. --------------------------------------- (Registrant) Date: May 12, 2000 By: /s/ Edward W. Stroetz Jr. ------------------------------------ Edward W. Stroetz Jr. Secretary Date: May 12, 2000 By: /s/ Daniel J. Blount ------------------------------------ Daniel J. Blount Senior Vice President and Chief Financial Officer 24 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF RIVERWOOD HOLDING FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1 16,280 0 159,992 3,137 173,306 362,105 1,407,927 485,930 2,341,399 274,774 1,706,192 0 0 75 252,610 2,341,399 270,229 270,229 211,928 211,928 34,205 (363) 45,771 (21,503) 1,071 (21,163) 0 0 0 (21,163) 0 0
EX-99 3 RECONCILIATION OF INCOME (LOSS) FROM OPERATIONS 1 EXHIBIT 99 RIVERWOOD HOLDING, INC. RECONCILIATION OF INCOME (LOSS) FROM OPERATIONS TO EBITDA (IN THOUSANDS OF DOLLARS) (UNAUDITED)
COATED CONTAINER- BOARD BOARD CORPORATE TOTAL -------- ---------- --------- ------- FIRST THREE MONTHS 2000: - ------------------------ Income (Loss) from Operations $ 30,102 $ 328 $(6,334) $24,096 Add: Depreciation and amortization 30,832 4,862 1,806 37,500 Dividends from equity investments -- -- 590 590 Other non-cash charges (A) 768 92 990 1,850 -------- ------- ------- ------- EBITDA (B) $ 61,702 $ 5,282 $(2,948) $64,036 ======== ======= ======= ======= FIRST THREE MONTHS 1999: - ------------------------ Income (Loss) from Operations $ 29,769 $(7,448) $(3,450) $18,871 Add: Depreciation and amortization 30,197 4,915 139 35,251 Dividends from equity investments -- -- -- -- Other non-cash charges (A) (173) 103 1,637 1,567 -------- ------- ------- ------- EBITDA (B) $ 59,793 $(2,430) $(1,674) $55,689 ======== ======= ======= =======
Notes: (A) Other non-cash charges include non-cash charges for LIFO accounting, pension, postretirement and postemployment benefits, and amortization of premiums on hedging contracts deducted in determining net income. (B) EBITDA is defined as consolidated net income (exclusive of non-cash charges resulting from purchase accounting during the periods subsequent to the Merger) before consolidated interest expense, consolidated income taxes, consolidated depreciation and amortization, and other non-cash charges deducted in determining consolidated net income, extraordinary items and the cumulative effect of accounting changes and earnings of, but including dividends from, non-controlled affiliates. EBITDA excludes equity earnings from non-controlled affiliates but includes dividends actually received from non-controlled affiliates. The Company believes that EBITDA provides useful information regarding the Company's debt service ability, but should not be considered in isolation. -----END PRIVACY-ENHANCED MESSAGE-----