-----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, LbMMx7QpLzhqTsOWFxY0sRzaK8b3EO1qSH0b1EvMDeU0XAmyy6VXf/RpSKZcclZW O0uVobvxYVr9gJmQMAahBA== 0000950144-99-012868.txt : 19991115 0000950144-99-012868.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950144-99-012868 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748436 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 September 30, 1999 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 19805 (Address of principal executive offices) (Zip Code) c/o Riverwood International Corporation (770) 644-3000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]. At November 9, 1999 there were 7,062,880 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)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------- (UNAUDITED) ASSETS Current Assets: Cash and equivalents $ 9,496 $ 13,840 Receivables, net of allowances 167,523 142,221 Inventories 176,062 167,388 Prepaid expenses 10,749 8,579 Deferred tax assets 273 298 ------------- ------------- Total Current Assets 364,103 332,326 Property, Plant and Equipment, net of accumulated depreciation of $398,256 in 1999 and $310,008 in 1998 1,446,657 1,495,490 Investments in Net Assets of Equity Affiliates 139,328 143,611 Goodwill, net of accumulated amortization of $27,818 in 1999 and $21,857 in 1998 290,104 296,065 Other Assets 142,611 150,109 ------------- ------------- Total Assets $ 2,382,803 $ 2,417,601 ============= ============= LIABILITIES Current Liabilities: Short-term debt $ 9,032 $ 17,613 Accounts payable and other accrued liabilities 252,309 261,164 ------------- ------------- Total Current Liabilities 261,341 278,777 Long-Term Debt, less current portion 1,727,406 1,680,415 Other Noncurrent Liabilities 103,364 115,435 ------------- ------------- Total Liabilities 2,092,111 2,074,627 ------------- ------------- Contingencies and Commitments (Note 5) Redeemable Common Stock, at current redemption value 6,307 6,205 ------------- ------------- SHAREHOLDERS' EQUITY Nonredeemable Common Stock 75 75 Capital in Excess of Par Value 750,365 750,100 (Accumulated Deficit) (448,038) (397,913) Cumulative Currency Translation Adjustment (18,017) (15,493) ------------- ------------- Total Shareholders' Equity 284,385 336,769 ------------- ------------- Total Liabilities and Shareholders' Equity $ 2,382,803 $ 2,417,601 ============= =============
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 NINE MONTHS ENDED ----------------------------------- -------------------------------- September 30, September 26, September 30, September 26, 1999 1998 1999 1998 --------------- ---------------- -------------- -------------- Net Sales $ 268,694 $ 292,766 $ 824,058 $ 864,176 Cost of Sales 211,217 236,390 652,393 714,074 Selling, General and Administrative 25,935 28,913 83,041 83,294 Research, Development and Engineering 1,028 980 3,014 4,170 Impairment Loss -- -- -- 13,342 Other (Income) Expense, net (1,219) (92) (248) 5,168 --------- --------- --------- --------- Income from Operations 31,733 26,575 85,858 44,128 Interest Income 119 291 756 958 Interest Expense 45,313 43,554 133,492 132,509 --------- --------- --------- --------- (Loss) before Income Taxes and Equity in Net Earnings (Loss) of Affiliates (13,461) (16,688) (46,878) (87,423) Income Tax Expense (Benefit) 770 (1,864) 1,674 167 --------- --------- --------- --------- (Loss) before Equity in Net Earnings (Loss) of Affiliates (14,231) (14,824) (48,552) (87,590) Equity in Net Earnings (Loss) of Affiliates 518 3,699 (1,573) 8,712 --------- --------- --------- --------- Net (Loss) $ (13,713) $ (11,125) $ (50,125) $ (78,878) --------- --------- --------- --------- Other comprehensive Income (Loss), net of tax: Foreign currency translation adjustments 2,314 (1,259) (2,524) (3,268) --------- --------- --------- --------- Comprehensive (Loss) $ (11,399) $ (12,384) $ (52,649) $ (82,146) ========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements. 4 5 RIVERWOOD HOLDING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) (UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1999 SEPTEMBER 26, 1998 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) $ (50,125) $ (78,878) Noncash Items Included in Net (Loss): Depreciation and amortization 106,972 105,346 Deferred income taxes (656) (29) Impairment loss -- 13,342 Pension, postemployment and postretirement benefits, net of benefits paid 3,304 1,773 Equity in net loss (earnings) of affiliates, net of dividends 4,331 (6,185) Amortization of deferred debt issuance costs 7,688 7,600 Other, net 1,660 97 (Increase) Decrease in Current Assets: Receivables (24,835) (21,801) Inventories (18,256) 8,343 Prepaid expenses (2,012) 2,437 (Decrease) Increase in Accounts payable and other accrued liabilities (9,490) 1,770 (Decrease) Increase in Other Noncurrent Liabilities (11,311) 5,200 --------- --------- Net Cash Provided by Operating Activities 7,270 39,015 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property, Plant and Equipment (47,689) (21,980) Proceeds from Sale of Assets -- 50,755 (Increase) Decrease in Other Assets (1,428) 648 --------- --------- Net Cash (Used in) Provided by Investing Activities (49,117) 29,423 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Notes Payable 51,600 (57,189) Proceeds from Issuance (Repurchases) of Redeemable Common Stock, net 367 (893) Payments on Debt (13,283) (11,729) --------- --------- Net Cash Provided by (Used in) Financing Activities 38,684 (69,811) --------- --------- Effect of Exchange Rate Changes on Cash (1,181) 849 --------- --------- Net (Decrease) in Cash and Equivalents (4,344) (524) Cash and Equivalents at Beginning of Period 13,840 15,751 --------- --------- Cash and Equivalents at End of Period $ 9,496 $ 15,227 ========= =========
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, 1998 was derived from audited financial statements. Effective January 1, 1999, the Company changed its fiscal quarter end dates to correspond to the calendar quarter end dates. Previously, the Company's interim periods were based on a thirteen week per quarter cycle. This change did not materially impact the consistency of interim period reporting. 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, 1998. 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. NOTE 3 - INVENTORIES The major classes of inventories were as follows:
(IN THOUSANDS OF DOLLARS) SEPTEMBER 30, 1999 DECEMBER 31, 1998 - ------------------------- ------------------ ----------------- Finished goods $ 87,279 $ 72,120 Work-in-process 14,633 7,157 Raw materials 42,651 52,669 Supplies 31,499 35,442 -------------- -------------- Total $ 176,062 $ 167,388 ============== ==============
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 NINE MONTHS ENDED --------------------------------- ----------------------------------- SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- (IN THOUSANDS OF DOLLARS) Net Sales $52,055 $63,494 $ 142,513 $190,715 Cost of Sales 40,814 50,722 120,777 148,526 ------- ------- --------- -------- Gross Profit $11,241 $12,772 $ 21,736 $ 42,189 ======= ======= ========= ======== Income from Operations $ 5,070 $ 5,854 $ 6,529 $ 20,900 ======= ======= ========= ======== Net (Loss) Income $ 1,055 $ 3,964 $ (5,003) $ 12,726 ======= ======= ========= ========
During the first nine months of 1999 and 1998, the Company received dividends from Igaras totaling $1.4 million and $2.5 million, respectively, net of taxes of $0.3 million and $0.4 million respectively. Under the Igaras joint venture agreement, Igaras is required to pay dividends equal to at least 25 percent of its net profits. 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. At this time, it is not practicable to determine whether or at what level the exchange rate will stabilize as well as the effect of such exchange rate fluctuations on Igaras' long term operations or the Company's investment in the net assets of Igaras. During the third quarter of 1999, the Company sold an investment other than Igaras, resulting in a receipt of a final dividend of $0.8 million. No significant gain or loss was recognized in accordance with the sale. NOTE 5 - CONTINGENCIES AND COMMITMENTS The Company is committed to compliance with all applicable environmental laws and regulations throughout the world. Environmental law is, however, dynamic rather than static. As a result, costs, which are unforeseeable at this time, may be incurred when new laws are enacted, and when environmental agencies promulgate or revise rules and regulations. In late 1993, the U.S. Environmental Protection Agency proposed regulations (generally referred to as the "cluster rules") that would mandate more stringent controls on air and water discharges from the United States pulp and paper mills. The cluster rules were promulgated in April 1998, and the Company 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 1999. 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 expects this investigation to be completed during 1999. 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 7 8 treatability study at the site and is discussing with DEQ its responsibility and the participation of other potentially responsible parties at the site, as well as remediation options at the site. 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. 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. It is possible that the voiding of the 1993 amendment could result in the Company being required to pay significant additional Louisiana income tax relating to the election (plus potential penalties and statutory interest on the additional taxes). 8 9 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. There can be no assurance, however, that the Company would ultimately prevail on this issue if Louisiana were to challenge such filing position. If the Company were not to prevail in such a challenge, significant additional Louisiana income tax relating to the election could be payable. Management estimates that the maximum amount of such additional tax is approximately $47 million (plus potential penalties and statutory interest on any additional tax). The tax period ended March 27, 1996, is currently under audit by the State of Louisiana. If the Company receives an assessment from the State, the Company will consider paying the assessed amount to avoid further interest accruals as it contests the assessment. Management believes that the additional tax ultimately paid (if any) will be substantially less than the estimated maximum amount, although no assurance can be given in this regard. The Company and its advisors are continuing to study this situation. Since the law is unclear and the amounts involved could be significant, it may be several years before this matter is resolved. NOTE 6 - IMPAIRMENT LOSS The Company recorded an impairment loss of $13.3 million in the second quarter of 1998 due to a write-down of packaging machines in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The fair value of the machines was determined based on discounted expected future lease revenues and estimated disposition proceeds. NOTE 7 - DISPOSITION OF BUSINESS In connection with the global restructuring program initiated in the fourth quarter of 1998, the Company plans to reduce its European workforce by approximately 300 employees in 1999 and to implement other initiatives designed to improve productivity and profitability across the global organization. This program will cost approximately $25.6 million and is on target and expected to be completed in 1999. At September 30, 1999, $15.4 million of this total was accrued in Accounts payable and other accrued liabilities on the Condensed Consolidated Balance Sheets. During the first nine months of 1999, $9.3 million was utilized and charged against the accrual and related primarily to severance costs. On March 12, 1998, the Company entered into an agreement with Carter Holt Harvey ("Carter Holt") for the sale of the Company's folding carton business in Australia. Proceeds from the sale totaling $46.7 million were received on March 30, 1998. Under the terms of the agreement for such sale, the Company sold to Carter Holt substantially all of the Company's Australian folding carton assets, and Carter Holt assumed certain specified liabilities. The Company retained substantially all of its beverage multiple packaging business in Australia. Under the agreement, Carter Holt agreed to purchase from the Company a portion of its coated board requirements in Australia and to supply beverage cartons to meet the Company's needs for its Australian beverage business. In connection with 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 U.S., located in Kankakee, Illinois, a packaging machinery manufacturing plant in Marietta, Georgia, 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 U.S., Australia and Europe. The cost of exiting these businesses and operating activities was recorded as an adjustment to the market value of assets acquired in the Merger and totaled approximately $38.6 million and related to the severance of approximately 750 employees, relocation and other plant closure costs. During the first nine months of 1999, $1.5 million was utilized and charged against the accrual and primarily related to severance costs. At September 30, 1999, $3.3 million of this total was included in Accounts payable and other accrued liabilities in the Condensed Consolidated Balance Sheets and is expected to be paid out through 1999. 9 10 NOTE 8 - BUSINESS SEGMENT INFORMATION Business segment information is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------------ ------------------------------------ SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26, (In thousands of dollars) 1999 1998 1999 1998 ------------- ------------- ------------- ------------- NET SALES: Coated Board $ 245,005 $ 272,806 $ 755,686 $ 804,035 Containerboard 23,689 19,960 68,372 60,141 --------- --------- --------- --------- $ 268,694 $ 292,766 $ 824,058 $ 864,176 ========= ========= ========= ========= INCOME (LOSS) FROM OPERATIONS: Coated Board* $ 36,977 $ 35,169 $ 110,283 $ 69,139 Containerboard (1,009) (4,482) (12,343) (11,813) Corporate (4,235) (4,112) (12,082) (13,198) --------- --------- --------- --------- $ 31,733 $ 26,575 $ 85,858 $ 44,128 ========= ========= ========= ========= EBITDA: Coated Board $ 67,048 $ 68,620 $ 202,313 $ 181,814 Containerboard 3,425 (233) 679 663 Corporate 124 (1,801) (3,191) (5,977) --------- --------- --------- --------- $ 70,597 $ 66,586 $ 199,801 $ 176,500 ========= ========= ========= =========
* Included in Income from Operations for Coated Board is an impairment loss of $13.3 million taken during the three months ended June 27, 1998. 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 $637 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, Australia (up to the date of sale) 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 of Igaras from the Company's investment in Igaras but includes dividends actually received from Igaras. The Company believes that EBITDA provides useful information regarding the Company's debt service ability, but should not be considered in isolation or as a substitute for the Condensed Consolidated Statements of Operations or cash flow data. 11 12
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------------- ------------------------------------ SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- (IN THOUSANDS OF DOLLARS) EBITDA (Segment Data): Coated Board $67,048 $ 68,620 $ 202,313 $ 181,814 Containerboard 3,425 (233) 679 663 Corporate 124 (1,801) (3,191) (5,977) ------- -------- --------- --------- EBITDA $70,597 $ 66,586 $ 199,801 $ 176,500 ======= ======== ========= =========
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 the first nine months of 1999. 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. In June 1997, the Company completed the upgrade of the second Macon Mill paperboard machine to begin CUK Board production. During the first nine months of 1999, the Company produced approximately 135,500 tons of CUK Board on the second Macon Mill paperboard machine. In addition, the Company produced approximately 29,000 tons of linerboard on this paper machine during the first nine months of 1999. The Company had expected that the second Macon Mill paperboard machine would be able to produce a full range of calipers of CUK Board of approximately 250,000 tons annually by June 1999. However, as a result of the Company's decision to produce mainly lower caliper CUK Board on that machine, the Company now expects that the second Macon Mill paperboard machine will be at full capacity by the end of 1999. During the third quarter of 1999, total shipments decreased by approximately 31,000 tons when compared to the third quarter of 1998. This decrease is not the result of reduced production capability or a significant inventory change. Approximately two-thirds of the decrease is due to the rescheduling to the third quarter of a routine maintenance outage at the West Monroe Mill that is typically taken in the fourth quarter and the reduction of non-Riverwood produced folding cartonboard sold in Europe. The maintenance outage negatively impacted EBITDA by approximately $2 million in the third quarter and the Company expects to have a corresponding increase in EBITDA in the fourth quarter. The remainder of the decrease is due to an accounting change due to the implementation of the Company's SAP information system that caused the Company to treat certain low grade coated tons as by-products and not coated board shipments and other miscellaneous adjustments resulting from the Company's SAP conversion. 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 and, as part of its ongoing reevaluation of current operations and assets, has lowered planned capital expenditures. However, the Company expects capital expenditures will range from $65 to $75 million in 1999 as the Company invests to improve its process capabilities and implements SAP R3 software (see "-Financial Condition, Liquidity and Capital Resources - Upgrade of Information Systems and 12 13 Year 2000 Compliance"). 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, and is expected to be completed by the end of 1999 (see "--Financial Condition, Liquidity and Capital Resources--Financing Sources and Cash Flows"). The Company is continuing its inventory reduction initiative. Packaging machinery placements during the first nine months of 1999 decreased approximately 13% compared to the first nine months of 1998. The Company has been and will continue to be more selective in future packaging machinery placements to ensure appropriate returns. The Company has introduced some new machines in its Quikflex and Autoflex families and has experienced positive results. OUTLOOK The Company expects that its 1999 full year EBITDA will significantly exceed its 1998 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 1998 levels, improvements in international converting operations, improving U.S. mill throughput as the start-up of the second Macon Mill paper machine continues, the global restructuring program, continued cost savings from other actions taken to date and selling price improvements for containerboard products. In 1999, the Company expects that it will achieve modest sales volume increases in its worldwide beverage markets with the exception of Brazil. The Company also expects sales volume increases in 1999 for its U.S. soft drink markets and, to a lesser extent, its U.S. beer markets, though no assurance can be given that this volume growth will be achieved. The Company is optimistic about containerboard prices as several major containerboard producers recently announced additional price increases. The Company's worldwide folding cartonboard volumes and margins were reduced in the third quarter due to market conditions in Asia and price declines in competing substrates. During the first nine months of 1999, although international folding cartonboard volumes are down, domestic folding cartonboard volumes are consistent with the first nine months of 1998. In response to pressures from competing substrates, the Company selectively reduced folding cartonboard prices to maintain sales volumes. However, based on recent price increases announced for competing substrates, the Company expects its domestic folding cartonboard volumes and pricing to increase in the near term. In response to these announcements, the Company rescinded the selective price reductions and announced a $40 per ton price increase for its domestic folding carton and beverage products effective December 1, 1999. 13 14 RESULTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------------------- -------------------------------------- % INCREASE % INCREASE (DECREASE) (DECREASE) SEPT. 30, FROM PRIOR SEPT. 26, SEPT. 30, FROM PRIOR SEPT. 26, (IN THOUSANDS OF DOLLARS) 1999 PERIOD 1998 1999 PERIOD 1998 --------- ---------- --------- --------- ---------- --------- Net Sales (Segment Data): Coated Board $ 245,005 (10.2)% $ 272,806 $ 755,686 (6.0)% $ 804,035 Containerboard 23,689 18.7 19,960 68,372 13.7 60,141 --------- --------- --------- --------- Net Sales 268,694 (8.2) 292,766 824,058 (4.6) 864,176 Cost of Sales 211,217 (10.6) 236,390 652,393 (8.6) 714,074 --------- --------- --------- --------- Gross Profit 57,477 2.0 56,376 171,665 14.4 150,102 Selling, General and Administrative 25,935 (10.3) 28,913 83,041 (0.3) 83,294 Research, Development and Engineering 1,028 4.9 980 3,014 (27.7) 4,170 Impairment Loss -- N/A -- -- (100.0) 13,342 Other Expenses (Income), net (1,219) (1,225.0) (92) (248) (100.0) 5,168 --------- --------- --------- --------- Income from Operations $ 31,733 19.4 $ 26,575 $ 85,858 94.6 $ 44,128 ========= ========= ========= ========= Income (Loss) from Operations (Segment Data): Coated Board* $ 36,977 5.1% $ 35,169 $ 110,283 59.5% $ 69,139 Containerboard (1,009) 77.5 (4,482) (12,343) (4.5) (11,813) Corporate (4,235) (3.0) (4,112) (12,082) 8.5 (13,198) --------- --------- --------- --------- Income from Operations $ 31,733 19.4 $ 26,575 $ 85,858 94.6 $ 44,128 ========= ========= ========= =========
* Included in Income from Operations for Coated Board is an impairment loss of $13.3 million taken in the three months ended June 27, 1998. PAPERBOARD SHIPMENTS The following represents shipments of Coated Board and Containerboard to outside customers. Shipments of Coated Board represent sales to customers of beverage carrierboard, folding cartonboard and WLC (other than from the Swedish Mill). Shipments from the Swedish Mill represent sales to customers of WLC produced at this mill. Shipments of Containerboard represent sales to customers of linerboard, corrugating medium kraft paper and various other items, principally off-specification coated board. Total shipments for the three and nine months ended September 30, 1999 and September 26, 1998 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------- ---------------------------------- SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26, 1999 1998 1999 1998 ------------ ------------- ------------- ------------- (IN THOUSANDS OF TONS) Coated Board 240.9 269.9 727.1 781.3 Swedish Mill 32.3 34.6 98.5 104.2 Containerboard 68.6 68.4 230.1 205.3 ----- ----- ------- ------- 341.8 372.9 1,055.7 1,090.8 ===== ===== ======= =======
THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998 NET SALES As a result of the factors described below, the Company's Net Sales in the third quarter of 1999 decreased by $24.1 million, or 8.2 percent, compared with the third quarter of 1998. Net Sales in the Coated Board 14 15 business segment decreased by $27.8 million in the third quarter of 1999, or 10.2 percent, to $245.0 million from $272.8 million in the third quarter of 1998, due primarily to lower sales volume in international folding cartonboard markets resulting principally from lower demand in Asia, exiting certain low margin business in the U.K., and lower sales volumes and slightly lower pricing in the U.S. folding cartonboard markets due primarily to pressures from competing substrates. These decreases were somewhat offset by higher worldwide beverage volumes due principally to increased market penetration and strong demand in Japan. Net Sales in the Containerboard business segment increased $3.7 million, or 18.7 percent, to $23.7 million in the third quarter of 1999 from $20.0 million in the third quarter of 1998, due principally to higher pricing. GROSS PROFIT As a result of the factors discussed below, the Company's Gross Profit for the third quarter of 1999 increased $1.1 million, or 2.0 percent, to $57.5 million from $56.4 million in the third quarter of 1998. The Company's gross profit margin increased to 21.4 percent for the third quarter of 1999 from 19.3 percent in the third quarter of 1998. Gross Profit in the Coated Board business segment decreased by $1.8 million, or 3.0 percent, to $57.3 million in the third quarter of 1999 as compared to $59.1 million in the third quarter of 1998, while its gross profit margin increased to 23.4 percent in the third quarter of 1999 from 21.6 percent in the third quarter of 1998. While the decrease in Coated Board Gross Profit is due directly to lower Net Sales, the increase in gross profit margin resulted principally from a shift in mix towards more profitable beverage sales and worldwide cost reductions. In the Containerboard business segment, Gross Profit increased $3.0 million to a gain of $0.3 million in the third quarter of 1999 as compared to a loss in the third quarter of 1998 of $2.7 million due principally to increased pricing. SELLING, GENERAL AND ADMINISTRATIVE Selling, General and Administrative expenses decreased $3.0 million, or 10.3 percent, to $25.9 million in the third quarter of 1999 as compared to $28.9 million in the third quarter of 1998, due mainly to lower expenses related to the implementation and start-up of SAP. As a percentage of Net Sales, Selling, General and Administrative expenses decreased from 9.9 percent in the third quarter of 1998 to 9.7 percent in the third quarter of 1999. RESEARCH, DEVELOPMENT AND ENGINEERING Research, Development and Engineering expenses remained stable at $1.0 million in the third quarter of 1999 and in the third quarter of 1998. OTHER (INCOME) EXPENSE, NET Other (Income) Expense, net, increased by approximately $1.1 million to $(1.2) million in the third quarter of 1999 due primarily to a net gain resulting from certain foreign currency hedging activities. INCOME (LOSS) FROM OPERATIONS Primarily as a result of the factors discussed above, the Company's Income from Operations in the third quarter of 1999 increased by $5.2 million, or 19.4 percent, to $31.7 million from $26.6 million in the third quarter of 1998, while the Company's operating margin increased to 11.8 percent in the third quarter of 1999 from 9.1 percent in the third quarter of 1998. Income from Operations in the Coated Board business segment increased $1.8 million, or 5.1 percent, to $37.0 million in the third quarter of 1999 from $35.2 million in the third quarter of 1998, while the operating margin increased to 15.1 percent in the third quarter of 1999 from 12.9 percent in the third quarter of 1998, primarily as a result of the factors described above. (Loss) from Operations in the Containerboard business segment increased $3.5 million to a loss of $1.0 million in the third quarter of 1999 from a (Loss) from Operations of $4.5 million in the third quarter of 1998, primarily as a result of the factors described above. FLUCTUATIONS IN U.S. CURRENCY EXCHANGE RATES Fluctuations in U.S. dollar currency exchange rates did not significantly impact the Company's operations during the third quarter of 1999 as compared to the same period of 1998. 15 16 FIRST NINE MONTHS 1999 COMPARED WITH FIRST NINE MONTHS 1998 NET SALES As a result of the factors described below, the Company's Net Sales in the first nine months of 1999 decreased by $40.1 million, or 4.6 percent, compared with the first nine months of 1998. Net Sales in the Coated Board business segment decreased by $48.3 million in the first nine months of 1999, or 6.0 percent, to $755.7 million from $804.0 million in the first nine months of 1998, due primarily to lower sales volume in international folding cartonboard markets resulting principally from lower demand in Asia, exiting certain low margin business in the U.K., the sale of the Australian folding carton business in March 1998, as well as a substantial decrease in sales volume in Brazil. This decrease was somewhat offset by higher sales volume in U.S. beverage markets principally in the soft drink market segment and higher sales volumes in the international beverage markets due principally to increased market penetration and strong demand in Japan. Net Sales in the Containerboard business segment increased $8.2 million, or 13.7 percent, to $68.4 million in the first nine months of 1999 from $60.1 million in the first nine months of 1998, due principally to higher linerboard sales volumes compared to the prior year period as a result of producing linerboard to cover demand shortages in the folding cartonboard markets and higher pricing. GROSS PROFIT As a result of the factors discussed below, the Company's Gross Profit for the first nine months of 1999 increased $21.6 million, or 14.4 percent, to $171.7 million from $150.1 million in the first nine months of 1998. The Company's gross profit margin increased to 20.8 percent for the first nine months of 1999 from 17.4 percent in the first nine months of 1998. Gross Profit in the Coated Board business segment increased by $21.9 million, or 13.8 percent, to $180.1 million in the first nine months of 1999 as compared to $158.2 million in the first nine months of 1998, while its gross profit margin increased to 23.8 percent in the first nine months of 1999 from 19.7 percent in the first nine months of 1998. This increase in gross profit, despite lower sales, resulted principally from a shift in mix towards more profitable beverage sales and worldwide cost reductions. In the Containerboard business segment, Gross Profit decreased $0.9 million to a loss of $8.1 million in the first nine months of 1999 as compared to a loss in the first nine months of 1998 of $7.2 million. SELLING, GENERAL AND ADMINISTRATIVE Selling, General and Administrative expenses decreased $0.3 million, or 0.3 percent, to $83.0 million in the first nine months of 1999 as compared to $83.3 million in the first nine months of 1998, and as a percentage of Net Sales, increased from 9.6 percent in the first nine months of 1998 to 10.1 percent in the first nine months of 1999. RESEARCH, DEVELOPMENT AND ENGINEERING Research, Development and Engineering expenses decreased by $1.2 million, or 27.7 percent, to $3.0 million in the first nine months of 1999 from $4.2 million in the first nine months of 1998. IMPAIRMENT LOSS The Company recorded an impairment loss of $13.3 million in the first nine months of 1998 due to a write-down of packaging machines in accordance with SFAS 121. The fair value of the machines was determined based on expected future lease revenues and potential disposition. OTHER (INCOME) EXPENSE, NET Other (Income) Expense, net, decreased by approximately $5.4 million to $(0.2) million in the first nine months of 1999 from $5.2 million in the first nine months of 1998 due primarily to non-recurring credits in the first nine months of 1999 relating to utility recoveries and a reversal of a litigation reserve, and a net gain resulting from certain foreign currency hedging activities. 16 17 INCOME (LOSS) FROM OPERATIONS Primarily as a result of the factors discussed above, the Company's Income from Operations in the first nine months of 1999 increased by $41.7 million, or 94.6 percent, to $85.9 million from $44.1 million in the first nine months of 1998, while the Company's operating margin increased to 10.4 percent in the first nine months of 1999 from 5.1 percent in the first nine months of 1998. Income from Operations in the Coated Board business segment increased $41.1 million, or 59.5 percent, to $110.3 million in the first nine months of 1999 from $69.1 million in the first nine months of 1998, while the operating margin increased to 14.6 percent in the first nine months of 1999 from 8.6 percent in the first nine months of 1998, primarily as a result of the factors described above. (Loss) from Operations in the Containerboard business segment decreased $0.5 million to a loss of $12.3 million in the first nine months of 1999 from a (Loss) from Operations of $11.8 million in the first nine months of 1998, primarily as a result of the factors described above. FLUCTUATIONS IN U.S. CURRENCY EXCHANGE RATES Fluctuations in U.S. dollar currency exchange rates did not significantly impact the Company's operations during the first nine months of 1999 as compared to the same period of 1998. INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES INTEREST INCOME Interest Income decreased to $0.8 million in the first nine months of 1999 from $1.0 million in the first nine months of 1998. INTEREST EXPENSE Interest Expense increased $1.0 million to $133.5 million in the first nine months of 1999 from $132.5 million in the first nine months of 1998. INCOME TAX EXPENSE During the first nine months of 1999, the Company recognized an income tax expense of $1.7 million on a (Loss) before Income Taxes and Equity in Net Earnings (Loss) of Affiliates of $46.9 million. During the first nine months of 1998, the Company recognized an income tax expense of $0.2 million on a (Loss) before Income Taxes and Equity in Net Earnings (Loss) of Affiliates of $87.4 million. These expenses differed from the statutory federal income tax rate primarily because of valuation allowances established on net operating loss carryforward tax assets in the U.S. and certain international locations where the realization of such benefits is 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 decreased $10.3 million to a (Loss) of $(1.6) million in the first nine months of 1999 from Earnings of $8.7 million in the first nine months of 1998 resulting from an overall downturn in the Brazilian markets and the devaluation of the Real as described below. 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. At this time, it is not practicable to determine whether or at what level the exchange rate will stabilize as well as the effect of such exchange rate fluctuations on Igaras' long term operations. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES 17 18 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 decreased by approximately $4.3 million in the first nine months of 1999 primarily as a result of $49.1 million net cash used in investing activities somewhat offset by $7.3 million of net cash provided by operating activities and by $38.7 million of net cash provided by financing 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 during the first nine months of 1999 totaled approximately $107 million, and is expected to be approximately $145 million to $155 million for 1999. The Company's cash flows from its operations and EBITDA are subject to moderate seasonality with demand usually increasing in the spring and summer. The Company's Coated Board business segment experiences seasonality principally due to the seasonality of the worldwide multiple packaging beverage segment. Historically, the Company's Coated Board business segment reports its strongest sales in the second and third quarters of the fiscal year driven by the seasonality of the Company's integrated beverage business. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity needs arise primarily from debt service on the substantial indebtedness incurred in connection with the Merger and from the funding of its capital expenditures. As of September 30, 1999, the Company had outstanding approximately $1,732 million of long-term debt, consisting primarily of $650 million aggregate principal amount of the 1996 Notes, $250 million of the 1997 Notes, $637 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 nine months of 1999, the Company repaid approximately $13.3 million of debt. The Company had a net increase in revolving credit facilities borrowings of approximately $51.6 million due primarily to increased capital spending and cash payments relating to the restructuring charge taken in the fourth quarter of 1998. 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. Scheduled remaining term loan principal payments under the Term Loan Facility will be approximately $4 million, $120 million, $173 million, $184 million and $156 million for each of the years 2000 through 2004, respectively. 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 loans under the Facilities bear interest at floating rates based upon the interest rate option elected by the Company. The Tranche A term loans, Tranche B term loans and Tranche C term loans under the term loan Facility bore interest as of September 30, 1999 at an average rate per annum of 7.9 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 1999 is expected to be approximately $175 million, including approximately $10 million of non-cash amortization of deferred debt issuance costs. During the first nine months of 1999, cash paid for interest was approximately $115.9 million. 18 19 The Company uses interest rate swaps 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 difference to be paid or received under these agreements is recognized as an adjustment to interest expense related to that debt. At September 30, 1999, the Company had interest rate swap agreements with a notional amount of $300 million, under which the Company will pay fixed rates of 5.05 percent to 5.945 percent and receive three-month LIBOR. COVENANT RESTRICTIONS The Credit Agreements impose restrictions on the Company's ability to make capital expenditures and both the Credit Agreements and the indentures governing the 1996 Notes and the 1997 Notes limit the Company's ability to incur additional indebtedness. Such restrictions, together with the highly leveraged nature of the Company, could limit the Company's ability to respond to market conditions, meet its capital spending program, provide for unanticipated capital investments or take advantage of business opportunities. The covenants contained in the Credit Agreements also, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur guarantee obligations, repay the relevant 1996 Notes or the 1997 Notes, pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, make capital expenditures or engage in certain transactions with affiliates, and otherwise restrict corporate activities. The covenants contained in such indentures also impose restrictions on the operation of the Company's business. At September 30, 1999, the Company was in compliance with the financial covenants in the Credit Agreements. CAPITAL EXPENDITURES Capital spending for the first nine months of 1999 was approximately $47.7 million, up 117.0% from $22.0 million in the first nine months of 1998. Capital spending during the first nine months of 1999 related primarily to upgrading the Company's information systems, increasing paper production efficiencies, increasing converting capacity and manufacturing packaging machinery. Total capital spending for 1999 is expected to be between $65 million and $75 million, and is expected to relate principally to the implementation of SAP, improving the Company's process capabilities, the production of packaging machinery, and cluster rule compliance. The Company expects that capital expenditures for 2000 will be at similar levels. See "--Upgrade of Information Systems and Year 2000 Compliance". FINANCING SOURCES AND CASH FLOWS In connection with the global restructuring program initiated in the fourth quarter of 1998, the Company plans to reduce its European workforce by approximately 300 employees in 1999 and to implement other initiatives designed to improve productivity and profitability across the global organization. This program will cost approximately $25.6 million and is on target and expected to be completed by the end of 1999. At September 30, 1999, $15.4 million of this total was accrued in Accounts payable and other accrued liabilities on the Condensed Consolidated Balance Sheets. During the first nine months of 1999, $9.3 million was utilized and charged against the accrual and related primarily to severance costs. On March 12, 1998, the Company entered into an agreement with Carter Holt Harvey ("Carter Holt") for the sale of the Company's folding carton business in Australia. Proceeds from the sale totaling $46.7 million were received on March 30, 1998. Under the terms of the agreement for such sale, the Company sold to Carter Holt substantially all of the Company's Australian folding carton assets, and Carter Holt assumed certain specified liabilities. The Company retained substantially all of its beverage multiple packaging business in Australia. Under the agreement, Carter Holt agreed to purchase from the Company a portion of its coated board requirements in Australia and to supply beverage cartons to meet the Company's needs for its Australian beverage business. At September 30, 1999, the Company and its U.S. and international subsidiaries had the following amounts of commitments, amounts outstanding and amounts available under revolving credit facilities: 19 20
TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT OF OUTSTANDING AT AVAILABLE AT COMMITMENTS SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 ------------- ------------------ ------------------ (IN THOUSANDS OF DOLLARS) Revolving Facility $400,000 $167,000 $233,000 Machinery Facility 140,000 21,000 24,000 International Facilities 18,116 4,892 13,224 -------- -------- -------- $558,116 $192,892 $270,224 ======== ======== ========
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. As described above, the Company has substantial liquidity. However, the Company does anticipate that its liquidity position at December 31, 1999 will be modestly lower than year-end 1998 levels, due mainly to the effect of restructuring payments as well as a temporary increase in accounts receivable as a result of the increased linerboard sales, which typically have longer payment terms. 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 1999. In late 1995, the Louisiana Department of Environmental Quality 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 20 21 DEQ to perform a soil and groundwater investigation at the site. The Company expects this investigation to be completed during 1999. 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 is discussing with DEQ its responsibility and the participation of other potentially responsible parties at the site, as well as remediation options at the site. 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. UPGRADE OF INFORMATION SYSTEMS AND YEAR 2000 COMPLIANCE On April 1, 1999, the Company successfully implemented a new information system, based on the SAP R3 software, in all its domestic locations as part of a project designed to upgrade its worldwide information systems that is expected to cost up to approximately $35 million to be spent through 1999. This amount includes expenditures for the new enterprise-wide information system, replacement of computer hardware and related machinery and equipment, training, third party consultants and some additional costs designed to 21 22 greater improve the business operational systems not initially budgeted at the beginning of the project. Under SAP, the Company expects a major improvement in its information systems and business processes, as well as achievement of Year 2000 compliance with regards to its information systems. This initiative utilized both internal and external resources. Total spending on all SAP related projects during the first nine months of 1999 was $15.8 million, all of which was capitalized. Total spending on all SAP related projects to date was $36.0 million, of which $29.1 million was capitalized. Future expenditures will be funded by cash from operations and current credit facilities. As part of the information systems upgrade, the Company has replaced its computer software applications and substantially all information technology ("IT") and non-IT systems to accommodate the Year 2000 dating changes necessary to permit correct recording of yearly dates for 2000 and later years. To date, the Company has replaced all domestic desktops, laptops, and network hardware. The Year 2000 compliance program also includes an analysis of all manufacturing systems in the Company's plants and mills to determine Year 2000 compliance. At this time, the Company believes that substantially all of the Company's Year 2000 compliance projects relating to its information and manufacturing systems are completed. As a result, all such systems are in compliance with vendor specifications. During the fourth quarter of 1999, the Company expects to perform final tests designed to ensure that all of its systems will be unaffected by the year 2000 date issue. The Company expects that it will achieve Year 2000 compliance by the end of 1999, but would anticipate a material disruption in its operations as the result of any failure in a critical manufacturing, operations or information system. However, the effect on the Company's business, financial condition or results of operations cannot be determined at this time. The Company believes that it will implement Year 2000 compliant systems far enough in advance of January 1, 2000 to correct all anticipated issues. Accordingly, the Company does not currently have a contingency plan relating to the Year 2000 issue (although the Company will evaluate appropriate courses of action if circumstances change). The Company has been communicating with all of its significant suppliers and customers over the past 18 months about compliance of their own systems and, based on information received to date from such suppliers and customers, expects that they will achieve Year 2000 compliance, although no assurance can be given in this regard. If the Company or any of its significant suppliers, utilities or customers fails to achieve Year 2000 compliance on a timely basis, the possible material consequences could include, among other things, temporary plant closings, delays in delivery of products, delays in receipt of supplies, and invoice and collection errors. 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. It is possible that the voiding of the 1993 amendment could result in the Company being required to pay significant additional Louisiana income tax relating to the election (plus potential penalties and statutory interest on the additional taxes). 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. There can be no assurance, however, that the Company would ultimately prevail on this issue if Louisiana were to challenge such filing position. If the Company were not to prevail in such a challenge, significant additional Louisiana income tax relating to the election could be payable. Management estimates that the maximum amount of such additional tax is approximately $47 million (plus potential penalties and statutory interest on any additional tax). The tax period ended March 27, 1996, is currently under audit by the State of Louisiana. If the Company receives an assessment from the State, the Company will consider paying the assessed amount to avoid further interest accruals as it contests the assessment. Management believes that the additional tax ultimately paid (if any) will be substantially less than the estimated maximum amount, although no assurance can be given in this regard. The Company and its advisors are continuing to study this situation. Since the 22 23 law is unclear and the amounts involved could be significant, it may be several years before this matter is resolved. 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 "- General - Business Trends and Initiatives" concerning (a) the improvements which the Company's long-term initiatives, including, without limitation, its profit center reorganization and global restructuring program, are designed to achieve, (b) the Company's expectation that the second Macon Mill paper machine will be able produce approximately 250,000 tons annually of a full range of caliper CUK Board by the end of 1999, and (c) the Company's expectation of an increase in the fourth quarter resulting from the maintenance outage being taken in the third quarter, (d) the Company's expectation that capital expenditures will range from $65 million to $75 million in 1999 and (e) the Company's expectation that its global restructuring program will be completed by the end of 1999; (ii) the statements in "-Outlook" concerning (a) the Company's expectation that its 1999 EBITDA will significantly exceed its 1998 EBITDA as well as each of the factors which the Company believes support such expectation, (b) the Company's expectations that it will achieve continued sales volume increases in its worldwide beverage markets with the exception of Brazil, (c) the Company's expectations that it will achieve sales volume increases in 1999 for its U.S. soft drink markets and its U.S. beer markets, and (d) the Company's expectations regarding increased volumes and pricing in its domestic folding cartonboard markets in the near term as a result of recent price increases in competing substrates; (iii) the statements in "Financial Condition, Liquidity and Capital Resources" concerning (a) the Company's expectation that depreciation and amortization for 1999 will be approximately $145 million to $155 million, (b) the Company's expectation that 1999 interest expense will be approximately $175 million including approximately $10 million of non-cash amortization of deferred debt issuance costs, (c) the Company's expectation that total capital spending for 1999 will range from $65 to $75 million and that the planned upgrading of the Company's information systems will cost up to $35 million through 1999 (and its belief that the Company will achieve Year 2000 compliance by the end of 1999 and its other statements and beliefs in "- Upgrade of Information Systems and Year 2000 Compliance"), (d) the Company's anticipation that its liquidity position at year-end 1999 will be modestly lower than at year-end 1998, (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 ultimately paid (if any) would be substantially less than $47 million and (h) the Company's expectation that capital expenditures for 2000 will be at similar levels as 1999 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, 1998, 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. 23 24 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, 1998. There have been no significant developments with respect to interest rates, derivatives or exposure to market risk during the first nine months of 1999. 24 25 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not applicable ITEM 2. CHANGES IN SECURITIES. Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The stockholders of Riverwood Holding, Inc. and the sole stockholder of RIC Holding, Inc. and Riverwood International Corporation, acting by written consent in lieu of a special meeting effective September 20, 1999, accepted the resignation of Joseph E. Parzick as one of the Exor Group S. A. Nominated Directors and accepted the nomination of Exor Group, S. A. to appoint Gianluigi Gabetti as Mr. Parzick's replacement, effective September 20, 1999, to hold office until the next annual meeting of the Stockholders or until his successor shall have been elected and qualified, or until his earlier death, resignation or removal, as provided in the By-Laws. 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 25 26 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RIVERWOOD HOLDING, INC. ------------------------------------------- (Registrant) Date: November 12, 1999 By: /s/ Edward W. Stroetz Jr. ------------------------------------------- Edward W. Stroetz Jr. Secretary Date: November 12, 1999 By: /s/ Daniel J. Blount ------------------------------------------- Daniel J. Blount Vice President and Chief Financial Officer 26 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF RIVERWOOD HOLDING, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 US DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 9,496 0 167,523 1,250 176,062 364,103 1,446,657 398,256 2,382,803 261,341 1,727,406 0 0 75 284,310 2,382,803 824,058 824,058 652,393 652,393 85,807 (1,038) 133,492 (46,878) 1,674 (50,125) 0 0 0 (50,125) 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 --------- ---------- --------- -------- THIRD QUARTER 1999: Income (Loss) from Operations $ 36,977 $ (1,009) $ (4,235) $ 31,733 Add: Depreciation and amortization 30,907 4,336 1,050 36,293 Dividends from equity investments -- -- 1,873 1,873 Other non-cash charges (A) (836) 98 1,436 698 --------- -------- -------- -------- EBITDA (B) $ 67,048 $ 3,425 $ 124 $ 70,597 ========= ======== ======== ======== THIRD QUARTER 1998: Income (Loss) from Operations $ 35,169 $ (4,482) $ (4,112) $ 26,575 Add: Depreciation and amortization 31,557 3,874 (925) 34,506 Dividends from equity investments -- -- 915 915 Other non-cash charges (A) 1,894 375 2,321 4,590 --------- -------- -------- -------- EBITDA (B) $ 68,620 $ (233) $ (1,801) $ 66,586 ========= ======== ======== ======== FIRST NINE MONTHS 1999: Income (Loss) from Operations $ 110,283 $(12,343) $(12,082) $ 85,858 Add: Depreciation and amortization 92,014 12,718 2,240 106,972 Dividends from equity investments -- -- 2,758 2,758 Other non-cash charges (A) 16 304 3,893 4,213 --------- -------- -------- -------- EBITDA (B) $ 202,313 $ 679 $ (3,191) $199,801 ========= ======== ======== ======== FIRST NINE MONTHS 1998: Income (Loss) from Operations $ 69,139 $(11,813) $(13,198) $ 44,128 Add: Depreciation and amortization 94,391 11,350 (395) 105,346 Dividends from equity investments -- -- 2,527 2,527 Other non-cash charges (A) 18,284 1,126 5,089 24,499 --------- -------- -------- -------- EBITDA (B) $ 181,814 $ 663 $ (5,977) $176,500 ========= ======== ======== ========
Notes: (A) Other non-cash charges include non-cash charges for LIFO accounting, pension, postretirement and postemployment benefits, expenses associated with the write-up of inventory, depletion of prepaid timber 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 of Igaras from the Company's investment in Igaras but includes dividends actually received from Igaras. The Company believes that EBITDA provides useful information regarding the Company's debt service ability, but should not be considered in isolation or as a substitute for the Condensed Consolidated Statements of Operations or cash flow data. 27 -----END PRIVACY-ENHANCED MESSAGE-----