-----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, KZBaSphZrafmhSku6d58TUAt6ZltX9eZZ/rXiVJGdjl5MEiXqkUp42XKBfBfMAR2 YB5FxxUqVn3p0uNRZXXpyA== 0000950144-98-012080.txt : 19981109 0000950144-98-012080.hdr.sgml : 19981109 ACCESSION NUMBER: 0000950144-98-012080 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981106 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: 98739710 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 26, 1998 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.) 1013 Centre Road Suite 350 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 7, 1998 there were 7,062,050 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. I-2 3 RIVERWOOD HOLDING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars)
SEPTEMBER 26, DECEMBER 31, 1998 1997 ------------- ------------ (UNAUDITED) ASSETS Current Assets: Cash and equivalents $ 15,227 $ 15,751 Receivables, net of allowances 162,067 151,554 Inventories 154,752 174,498 Prepaid expenses 7,753 10,451 ----------- ----------- Total Current Assets 339,799 352,254 Property, Plant and Equipment, net of accumulated depreciation of $276,238 in 1998 and $205,527 in 1997 1,511,486 1,644,835 Investments in Net Assets of Equity Affiliates 148,173 141,690 Goodwill, net of accumulated amortization of $19,758 in 1998 and $13,475 in 1997 298,165 304,448 Other Assets 157,325 162,958 ----------- ----------- Total Assets $ 2,454,948 $ 2,606,185 =========== =========== LIABILITIES Current Liabilities: Short-term debt $ 17,090 $ 44,330 Accounts payable and other accrued liabilities 266,655 269,987 ----------- ----------- Total Current Liabilities 283,745 314,317 Long-Term Debt, less current portion 1,670,933 1,712,944 Other Noncurrent Liabilities 97,830 93,445 ----------- ----------- Total Liabilities 2,052,508 2,120,706 ----------- ----------- Contingencies and Commitments (Note 5) Redeemable Common Stock, at current redemption value 5,152 6,045 ----------- ----------- SHAREHOLDERS' EQUITY Nonredeemable Common Stock 75 75 Capital in Excess of Par Value 751,153 751,153 (Accumulated Deficit) (336,487) (257,609) Cumulative Currency Translation Adjustment (17,453) (14,185) ----------- ----------- Total Shareholders' Equity 397,288 479,434 ----------- ----------- Total Liabilities and Shareholders' Equity $ 2,454,948 $ 2,606,185 =========== ===========
See Notes to Condensed Consolidated Financial Statements. I-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 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Net Sales $ 292,766 $ 284,875 $ 864,176 $ 846,097 Cost of Sales 236,390 245,611 714,074 739,545 Selling, General and Administrative 28,913 29,154 83,294 90,417 Research, Development and Engineering 980 1,062 4,170 3,590 Impairment Loss - - 13,342 - Other (Income) Expenses, net (92) 1,533 5,168 6,523 --------- --------- --------- --------- Income from Operations 26,575 7,515 44,128 6,022 Interest Income 291 598 958 816 Interest Expense 43,554 43,812 132,509 124,743 --------- --------- --------- --------- (Loss) before Income Taxes and Equity in Net Earnings of Affiliates (16,688) (35,699) (87,423) (117,905) Income Tax (Benefit) Expense (1,864) 1,612 167 4,341 --------- --------- --------- --------- (Loss) before Equity in Net Earnings of Affiliates (14,824) (37,311) (87,590) (122,246) Equity in Net Earnings of Affiliates 3,699 5,230 8,712 13,695 --------- --------- --------- --------- (Loss) before Extraordinary Item (11,125) (32,081) (78,878) (108,551) Extraordinary Loss on Early Extinguishment of Debt, net of tax of $0 - 2,463 - 2,463 --------- --------- --------- --------- Net (Loss) $ (11,125) $ (34,544) $ (78,878) $(111,014) --------- --------- --------- --------- Other comprehensive income, net of tax: Foreign currency translation adjustments (1,259) (3,145) (3,268) (21,017) --------- --------- --------- --------- Comprehensive (Loss) $ (12,384) $ (37,689) $ (82,146) $(132,031) ========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements. I-4 5 RIVERWOOD HOLDING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) (unaudited)
NINE MONTHS ENDED ------------------------------- SEPTEMBER 26, SEPTEMBER 27, 1998 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) $ (78,878) $ (111,014) Noncash Items Included in Net (Loss): Depreciation and amortization 105,346 100,219 Deferred income taxes (29) 4,206 Impairment loss 13,342 - Pension, postemployment and postretirement benefits, net of benefits paid 1,773 3,723 Equity in net earnings of affiliates, net of dividends (6,185) (10,978) Extraordinary loss on early extinguishment of debt, net - 2,463 Amortization of deferred debt issuance costs 7,600 9,111 Other, net 97 589 (Increase) Decrease in Current Assets: Receivables (21,801) 9,984 Inventories 8,343 9,769 Prepaid expenses 2,437 (2,095) Increase in Current Liabilities: Accounts payable and other accrued liabilities 1,770 20,450 Increase (Decrease) in Other Noncurrent Liabilities 5,200 (7,635) ----------- ----------- Net Cash Provided by Operating Activities 39,015 28,792 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property, Plant and Equipment (21,980) (126,893) Payment of Merger Costs - (34,410) Proceeds from Sale of Assets 50,755 7,478 Proceeds from Tax Matters Settlement - 16,800 Decrease (Increase) in Other Assets 648 (9,304) ----------- ----------- Net Cash Provided By (Used in) Investing Activities 29,423 (146,329) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases of Redeemable Common Stock (893) (510) Issuance of Debt - 250,000 Increase in Debt Issuance Costs - (7,746) Net Decrease in Revolving Credit Facilities (57,189) (18,718) Payments on Debt (11,729) (108,227) ----------- ----------- Net Cash (Used in) Provided by Financing Activities (69,811) 114,799 ----------- ----------- Effect of Exchange Rate Changes on Cash 849 (2,066) ----------- ----------- Net (Decrease) in Cash and Equivalents (524) (4,804) Cash and Equivalents at Beginning of Period 15,751 17,357 ----------- ----------- Cash and Equivalents at End of Period $ 15,227 $ 12,553 =========== ===========
See Notes to Condensed Consolidated Financial Statements. I-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, 1997 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, 1997. 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 26, 1998 DECEMBER 31, 1997 ------------------ ----------------- Finished goods $ 63,219 $ 66,559 Work in-process 14,370 11,173 Raw materials 46,166 65,030 Supplies 30,997 31,736 -------- -------- Total $154,752 $174,498 ======== ========
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"). I-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 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- (In thousands of dollars) Net Sales $63,494 $60,579 $190,715 $175,667 Cost of Sales 50,722 42,062 148,526 122,427 ------- ------- -------- -------- Gross Profit $12,772 $18,517 $ 42,189 $ 53,240 ======= ======= ======== ======== Income from Operations $ 5,854 $12,589 $ 20,900 $ 35,334 ======= ======= ======== ======== Net Income $ 3,964 $ 9,765 $ 12,726 $ 25,847 ======= ======= ======== ========
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 (the "EPA") 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 an eight-year period beginning in 1998. In late 1995, the Louisiana Department of Environmental Quality ("DEQ") notified the Company that the Predecessor may be liable for the remediation of hazardous substances at a wood treatment site in Shreveport, Louisiana, that the Predecessor or its predecessor previously operated, and at a former oil refinery site in Caddo Parish, Louisiana that the Company currently owns. Neither the Company nor the Predecessor ever operated the oil refinery. In response to the DEQ, 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. The Company received a letter from the DEQ dated May 20, 1996, requesting a plan for soil and groundwater sampling of the wood treatment site. The soil and groundwater sampling will be completed in late 1998. On September 6, 1996, the Company received from the DEQ a letter requesting remediation of the former oil refinery site in Caddo Parish, Louisiana. Ongoing discussions with the DEQ continue regarding the participation of other responsible parties in any clean-up of hazardous substances at both of these sites. The Company is engaged in environmental remediation projects for certain properties currently owned or operated by the Company and certain properties divested by the Company for which responsibility was retained for pre-existing conditions. Certain of these projects are being carried out under federal and state statutes, such as the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"). The Company's costs in some instances cannot be reliably estimated until the remediation process is substantially underway. 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 I-7 8 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. On December 6, 1995, Forrest Kelly Clay, a former shareholder of the Predecessor, commenced a purported class action lawsuit in the United States District Court for the Northern District of Georgia, against the Company and certain officials of the Company (the "Individual Defendants," and together with the Company, the "Defendants"). In his complaint, Clay alleged that the Defendants violated the federal securities laws by disseminating misleading statements and by omissions concerning the strategic alternatives that the Predecessor was considering, including its potential sale to a third-party investor. The complaint also alleged that the Individual Defendants, through their exercise of stock appreciation rights ("SARs"), violated the federal securities laws by trading in the Predecessor's securities while in possession of material, non-public information. The complaint generally seeks damages in an unspecified amount, as well as other relief. On June 2, 1997, the court granted Defendants' Motion for Summary Judgment and dismissed the action in its entirety. The court based its ruling on the fact that (i) none of the statements attributable to the Company concerning its review of strategic alternatives was false and (ii) there is no causal relationship between plaintiff's purchase of Riverwood common stock and the Individual Defendants' exercise of SARs. On October 14, 1998, the U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal. The Court of Appeals ruled that (i) none of the statements attributable to the Company concerning its review of strategic alternatives was false and (ii) the SARs were not securities. On August 21, 1998, William D. Tatum, C. Steven Clark, Thomas W. Brabston, Sr., Joe O. Harper, Jr. ("Plaintiffs"), all former employees of the Company, commenced a purported class action lawsuit in the Superior Court of Fulton County, Georgia, against the Company and certain current and former officers of the Company. In the complaint, Plaintiffs allege generally that the Company and such officers (1) breached the terms of the contracts between Plaintiffs and the Predecessor governing Premium Stock Appreciation Rights ("PSARs") as a result of a suspension requested on August 23, 1995, (2) breached an implied covenant of good faith and fair dealing in connection with both the suspension and the lifting of that suspension, and (3) engaged in fraud and negligent misrepresentation in connection with the lifting of the suspension by (a) failing to tell Plaintiffs that certain officers of the Predecessor were planning to exercise PSARs on September 21, 1995 and (b) failing to inform Plaintiffs of the status of the Predecessor's review of strategic alternatives as of September 21, 1995. Plaintiffs seek (a) an order granting class certification, (b) an award of compensatory damages, (c) pre-judgment interest, (d) punitive damages in an amount to be determined by the jury and (e) litigation expenses, including attorney's fees. The defendants have answered the complaint. In addition on October 16, 1998, the defendants moved to strike the class allegations in the complaint, and, on October 30, 1998, moved to dismiss the complaint. Plaintiffs have not yet responded to either motion. The Company is a plaintiff in several actions against Mead Corporation ("Mead") claiming infringement of Riverwood patents for its packaging machines. In the furthest advanced of these actions, a federal court announced on October 27, 1998 that it would enter an order refusing to adopt a special master's recommended finding that the Riverwood patent in issue was invalid. As a result of this finding, the court indicated that it would enter an order concluding that Mead has been unlawfully infringing Riverwood's patent. The court indicated that it will permit Mead to pursue an immediate appeal from this ruling. 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 I-8 9 law is unclear and the amounts involved could be significant, it may be several years before this matter is resolved. NOTE 6 - IMPAIRMENT LOSS During the second quarter of 1998, the Company recorded an impairment loss in accordance with FAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" totaling $13.3 million relating to the revaluation of packaging machinery. The fair value of the machines was determined based on expected future lease revenues and potential disposition. NOTE 7 - DISPOSITION OF BUSINESS 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 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 other 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. These costs related principally to the severance of approximately 750 employees, relocation and other plant closure costs. During the first nine months of 1998, $3.5 million was paid out 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 Riverwood'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 Riverwood'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. Net sales applicable to the Australian folding carton business were approximately $65 million for the year ended December 31, 1997. Total net assets applicable to the Australian folding carton business as of December 31, 1997 were approximately $24 million. The Australian folding carton business remained substantially unchanged in 1998 through the date of sale. The Company did not recognize any significant gain or loss on this sale. I-9 10 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 $641 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. Certain expenses and costs are excluded from the Company's Income (Loss) from Operations in determining EBITDA (as defined below), including amortization, depreciation or expenses associated with the write-up of inventory, fixed assets and intangible assets in accordance with APB Opinion No. 16, "Business Combinations" ("APB16") and APB Opinion No. 17, "Intangible Assets," collectively referred to as the "Purchased Asset Costs." The Merger was accounted for as a purchase in accordance with APB 16. I-10 11 During the three months ended September 26, 1998 and September 27, 1997, the Company's Income from Operations included Purchased Asset Costs as follows:
THREE MONTHS ENDED SEPT. 26, 1998 THREE MONTHS ENDED SEPT. 27, 1997 --------------------------------- --------------------------------- Coated Container- Coated Container- Board board Total Board board Total ------ ---------- ------ ------ ----------- ------ (IN THOUSANDS OF DOLLARS) Cost of sales (excluding depreciation expense) $ 303 $ - $ 303 $ 717 $ - $ 717 Depreciation expense 4,558 911 5,469 4,827 911 5,738 Amortization of intangible assets 1,138 - 1,138 1,180 - 1,180 ------ ------ ------ ------ ------- ------ Net Impact on Income from Operations $5,999 $ 911 $6,910 $6,724 $ 911 $7,635 ====== ====== ====== ====== ======= ======
During the nine months ended September 26, 1998 and September 27, 1997, the Company's Income from Operations included Purchased Asset Costs as follows:
NINE MONTHS ENDED SEPT. 26, 1998 NINE MONTHS ENDED SEPT. 27, 1997 -------------------------------- -------------------------------- Coated Container- Coated Container- Board board Total Board board Total ------- ---------- ------- ------- ---------- ------- (IN THOUSANDS OF DOLLARS) Cost of sales (excluding depreciation expense) $ 911 $ - $ 911 $ 1,229 $ - $ 1,229 Depreciation expense 13,674 2,733 16,407 14,483 2,733 17,216 Amortization of intangible assets 3,373 - 3,373 3,098 - 3,098 ------- ------ ------- ------- ------ ------- Net Impact on Income from Operations $17,958 $2,733 $20,691 $18,810 $2,733 $21,543 ======= ====== ======= ======= ====== =======
GENERAL The Company reports its results in two business segments: Coated Board and Containerboard. The Coated Board business segment includes 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"); converting operations at facilities in the United States and Europe; and the design, manufacture and installation of packaging machinery related to the assembly of beverage cartons. The Containerboard business segment includes the production and sale of linerboard, corrugating medium and kraft paper from paperboard mills in the United States. 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 (i) equity earnings from the Company's investment in Igaras but includes dividends actually received from Igaras and (ii) Purchased Asset Costs resulting from purchase accounting for periods subsequent to the Merger. 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. I-11 12
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------- ---------------------------- SEPTEMBER 26, SEPTEMBER, 27 SEPTEMBER 26, SEPTEMBER, 27 1998 1997 1998 1997 ------------- ------------- ------------- ------------- (IN THOUSANDS OF DOLLARS) EBITDA (Segment Data): Coated Board $ 68,620 $ 49,188 $ 181,814 $ 141,519 Containerboard (233) (2,002) 663 (14,751) Corporate (1,801) (1,823) (5,977) (8,672) -------- -------- --------- --------- EBITDA $ 66,586 $ 45,363 $ 176,500 $ 118,096 ======== ======== ========= =========
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. Recently, SBS prices have declined sharply due to excess industry capacity. In the Containerboard business segment, conditions in the cyclical worldwide commodity paperboard markets have a substantial impact on the Company's containerboard sales. During the second half of 1997 and the first quarter of 1998, the Company realized improvement in its containerboard selling prices consistent with industry trends. However, the second and third quarters of 1998 showed a downturn in containerboard selling prices. As a result, the Company has taken 31 days of market-related downtime on containerboard machines at the West Monroe Mill, including 17 days on the medium machine and 14 days on the bag machine, through the end of the third quarter. 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 CUK Board production. During the first nine months of 1998, the Company produced approximately 137,000 tons of CUK Board and 15,000 tons of linerboard on the second Macon Mill paperboard machine. The Company expects that the second Macon Mill paperboard machine will be able to produce approximately 275,000 tons of CUK Board annually by June 1999. In addition, the Company has taken actions to increase open market folding cartonboard sales volume, completed a profit center reorganization of its operations, implemented a number of cost saving measures and effected several management changes; and as part of this ongoing re-evaluation of current operations and assets, has reduced U.S. staffing in the packaging machinery division by 20%, and reduced planned capital expenditures, while continuing its Company-wide inventory reduction initiative. As a result of the inventory reduction initiative, inventory decreased by approximately $45.5 million at September 26, 1998 as compared to September 27, 1997. 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 folding carton businesses, converting assets and strategy (see "-General - Outlook"). On March 12, 1998, the Company entered into an agreement with Carter Holt for the sale of its folding carton business in Australia. The proceeds from the sale were received on March 30, 1998. Under the terms of the agreement for such sale, the Company sold to Carter Holt substantially all of its 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 I-12 13 meet the Company's needs for its Australian beverage business. After applying the proceeds of the transaction to repay all outstanding borrowings under its Australian revolving credit facility and to pay transaction-related expenses, the Company reinvested in its business the remaining estimated net proceeds of approximately $27 million (subject to certain post-closing adjustments). The Company does not expect the sale of its Australian folding carton business to significantly impact its 1998 results of operations or EBITDA. Packaging machinery placements during the first nine months of 1998 decreased when compared to the number of packaging machines placed during the first nine months of 1997 as the Company continues to shift its mix of packaging machinery placements from the U.S. to international locations. The Company will continue to be more selective in future packaging machinery placements to ensure appropriate returns and, accordingly, expects a reduction of approximately 20% in new packaging machinery placements for the year ended December 31, 1998. Despite the expected reduction in the rate of new packaging machinery placements, the Company expects an increase in beverage cartonboard tonnage in 1998 as the number of packaging machines in service and the cartonboard throughput per machine increases. In the second quarter of 1998, the Company and the three unions at its Macon Mill signed a new six-year collective bargaining agreement. The new contract is retroactive to January 1, 1998 and runs through December 31, 2003. Work had continued at the Macon Mill under the prior contract that expired on January 1, 1998. The new contract includes industry-average economic increases over six years. This contract also retains language that allows the Company to outsource work and sell mill assets. OUTLOOK The Company expects that its 1998 EBITDA will significantly exceed its 1997 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 significantly increasing open market folding cartonboard sales volumes above 1997 levels, selling price improvements for containerboard products, improvements in international converting operations, improving U.S. mill throughput as the successful start-up of the second Macon Mill paperboard machine continues, and continued cost savings from actions taken to date. The Company anticipates that the most significant improvement in EBITDA in 1998 will result from cost savings from actions taken to date that have reduced expenditures. The Company expects additional restructuring in the next six months, principally at its facilities in England and Spain. In connection with such restructuring, the Company anticipates recording a charge in the amount of $10 to $20 million. The Company expects that it will achieve continued sales volume increases in its international beverage and U.S. soft drink carton markets in 1998, while its U.S. beer carton volume will remain relatively flat, consistent with U.S. brewers trading market share, though no assurance can be given that this volume growth will be achieved. The Company also expects to increase global open market folding cartonboard sales volume above 1997 levels. However, the Company anticipates that growth in coated board volumes could slow and margins could be reduced due to excess global industry capacity and recent price declines in competing substrates, particularly SBS. In the fourth quarter, the Macon Mill will take 7 days of maintenance downtime on the first Macon Mill paperboard machine that was originally scheduled in the second quarter, and 33 days of maintenance downtime on the second Macon Mill paperboard machine to perform repairs. Looking forward, pricing pressures on corrugating medium and linerboard are expected to continue through the remainder of 1998. The Company will also take market-related downtime on medium and linerboard machines in the fourth quarter. I-13 14 RESULTS OF OPERATIONS The discussion of the Company's results of operations is based on the three months and nine months ended September 26, 1998 compared to the three months and nine months ended September 27, 1997, respectively, including the net effects of Purchased Asset Costs in each period. In all previous reports filed subsequent to the Merger and prior to the first quarter of 1998, results of operations were provided on a pro forma basis exclusive of the net effects of Purchased Asset Costs in order to present the Company's results of operations on a basis comparable to those of the Predecessor. Accordingly, the three and nine months ended September 27, 1997 have been restated to include Purchased Asset Costs.
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------------- --------------------------------------- % INCREASE % INCREASE (DECREASE) (DECREASE) SEPT. 26, FROM PRIOR SEPT. 27, SEPT. 26, FROM PRIOR SEPT. 27, (IN THOUSANDS OF DOLLARS) 1998 PERIOD 1997 1998 PERIOD 1997 ------------- ---------- --------- --------- ---------- --------- Net Sales (Segment Data): Coated Board $ 272,806 3.7% $ 262,986 $ 804,035 3.7% $ 775,114 Containerboard 19,960 (8.8) 21,889 60,141 (15.3) 70,983 --------- --------- --------- --------- Net Sales 292,766 2.8 284,875 864,176 2.1 846,097 Cost of Sales 236,390 (3.8) 245,611 714,074 (3.4) 739,545 --------- --------- --------- --------- Gross Profit 56,376 43.6 39,264 150,102 40.9 106,552 Selling, General and Administrative 28,913 (0.8) 29,154 83,294 (7.9) 90,417 Research, Development and Engineering 980 (7.7) 1,062 4,170 16.2 3,590 Impairment Loss - N/A - 13,342 N/A - Other (Income) Expenses, net (92) (106.0) 1,533 5,168 (20.8) 6,523 --------- --------- --------- --------- Income from Operations $ 26,575 253.6 $ 7,515 $ 44,128 632.8 $ 6,022 ========= ========= ========= ========= Income (Loss) from Operations (Segment Data): Coated Board* $ 35,169 95.4% $ 17,996 $ 69,139 30.2% $ 53,082 Containerboard (4,482) 29.8 (6,385) (11,813) 63.0 (31,923) Corporate (4,112) (0.4) (4,096) (13,198) 12.8 (15,137) --------- --------- --------- --------- Income from Operations $ 26,575 253.6 $ 7,515 $ 44,128 632.8 $ 6,022 ========= ========= ========= =========
*Included in Income from Operations for Coated Board is an impairment loss of $13.3 million taken in the second quarter of 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 the Swedish Mill. Shipments of containerboard represent sales to customers of linerboard, corrugating medium and kraft paper. Total shipments for the three and nine months ended September 26, 1998 and September 27, 1997 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------- --------------------------- SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- (IN THOUSANDS OF TONS) Coated Board 269.9 237.4 781.3 700.3 Swedish Mill 34.6 32.6 104.2 101.5 Containerboard 68.4 87.7 205.3 293.0 ----- ----- ------- ------- 372.9 357.7 1,090.8 1,094.8 ===== ===== ======= =======
I-14 15 THIRD QUARTER 1998 COMPARED WITH THIRD QUARTER 1997 NET SALES Principally as a result of the factors described below, the Company's Net Sales in the third quarter of 1998 increased by $7.9 million, or 2.8 percent, compared with the third quarter of 1997. Net Sales in the Coated Board business segment increased $9.8 million, or 3.7 percent, in the third quarter of 1998 to $272.8 million from $263.0 million in the third quarter of 1997, due primarily to increased sales volumes in U.S. and international beverage and U.S. folding cartonboard markets, as well as slightly improved pricing in U.S. beverage and U.S. folding cartonboard markets, substantially offset by the negative impact of the strengthening of the U.S. dollar on net sales in its international beverage and international folding cartonboard markets, as well as an unfavorable shift in product mix in U.S beverage and international folding cartonboard markets. Net Sales in the Containerboard business segment decreased $1.9 million, or 8.8 percent, in the third quarter of 1998, to $20.0 million from $21.9 million in the third quarter of 1997, due principally to a continued reduction in linerboard production in favor of coated board production offset somewhat by improved selling prices in the linerboard and medium markets as compared to the third quarter of 1997. GROSS PROFIT Primarily as a result of the factors discussed below, the Company's Gross Profit for the third quarter of 1998 increased $17.1 million, or 43.6 percent, to $56.4 million from $39.3 million in the third quarter of 1997. The Company's gross profit margin increased to 19.3 percent for the third quarter of 1998 from 13.8 percent in the third quarter of 1997. Gross profit in the Coated Board business segment increased by $13.9 million, or 30.9 percent, to $59.1 million in the third quarter of 1998 as compared to $45.1 million in the third quarter of 1997, while the segment's gross profit margin increased to 21.6 percent in the third quarter of 1998 from 17.2 percent in the third quarter of 1997. These increases in the Coated Board business segment gross profit and gross profit margin resulted principally from slightly improved selling prices in U.S. beverage and U.S. folding cartonboard markets and overall cost reductions partially offset by the negative impact of the strengthening of the U.S. dollar on the Company's international beverage and international folding cartonboard markets. In the Containerboard business segment, Gross Profit increased $2.6 million to a loss of $2.7 million in the third quarter of 1998 as compared to a loss of $5.3 million in the third quarter of 1997, due principally to improved selling prices of linerboard and medium compared to the third quarter of 1997, and overall cost reductions. SELLING, GENERAL AND ADMINISTRATIVE Selling, General and Administrative expenses decreased $0.2 million, or 0.8 percent, to $28.9 million in the third quarter of 1998 as compared to $29.2 million in the third quarter of 1997. This decrease was due primarily to the Company's cost reduction initiatives that began in early 1997, offset by increasing incremental costs relating to the implementation of a new computerized information system as the Company approaches implementation (see "-Financial Condition, Liquidity and Capital Resources - Upgrade of Information Systems and Year 2000 Compliance"). As a percentage of Net Sales, Selling, General and Administrative expenses decreased to 9.9 percent in the third quarter of 1998 from 10.2 percent in the same period of 1997. RESEARCH, DEVELOPMENT AND ENGINEERING Research, Development and Engineering expenses decreased $0.1 million to $1.0 million in the third quarter of 1998 from $1.1 million in the third quarter of 1997. I-15 16 OTHER (INCOME) EXPENSES, NET Other (Income) Expenses, net, decreased by $1.6 million to $(0.1) million in the third quarter of 1998 due primarily to increased royalty income from Igaras. INCOME (LOSS) FROM OPERATIONS Primarily as a result of the above factors, the Company's Income from Operations in the third quarter of 1998 increased by $19.1 million, to $26.6 million from $7.5 million in the third quarter of 1997, while operating margin increased to 9.1 percent from 2.6 percent. Income from Operations in the Coated Board business segment increased $17.2 million, or 95.4 percent, to $35.2 million in the third quarter of 1998 from $18.0 million in the third quarter of 1997, while operating margin increased to 12.9 percent from 6.8 percent for the same periods, primarily as a result of the factors described above. (Loss) from Operations in the Containerboard business segment decreased $1.9 million to a loss of $4.5 million in the third quarter of 1998 from a (Loss) from Operations of $6.4 million in the third quarter of 1997, primarily as a result of the factors described above. U.S. DOLLAR CURRENCY EXCHANGE RATES Fluctuations in U.S. dollar currency exchange rates did impact Net Sales, Gross Profit, and Income from Operations as described above. However, these fluctuations did not have a significant impact on operating expenses of the Company during the third quarter of 1998 as compared to the same period of 1997. FIRST NINE MONTHS 1998 COMPARED WITH FIRST NINE MONTHS 1997 NET SALES Principally as a result of the factors described below, the Company's Net Sales in the first nine months of 1998 increased by $18.1 million, or 2.1 percent, compared with the first nine months of 1997. Net Sales in the Coated Board business segment increased $28.9 million, or 3.7 percent, in the first nine months of 1998 to $804.0 million from $775.1 million in the first nine months of 1997, due primarily to increased sales volumes in U.S. and international beverage and U.S. folding cartonboard markets, as well as slightly improved pricing in U.S. beverage and U.S. folding cartonboard markets, substantially offset by the negative impact of the strengthening of the U.S. dollar on net sales in its international beverage and international folding cartonboard markets, as well as an unfavorable shift in product mix in U.S. beverage and international folding cartonboard markets. Net Sales in the Containerboard business segment decreased $10.8 million, or 15.3 percent, in the first nine months of 1998, to $60.1 million from $71.0 million in the first nine months of 1997, due principally to a continued reduction in linerboard production in favor of coated board production offset somewhat by slightly higher shipments of corrugating medium and improved selling prices in the medium and linerboard markets as compared to the first nine months of 1997. GROSS PROFIT Primarily as a result of the factors discussed below, the Company's Gross Profit for the first nine months of 1998 increased $43.6 million, or 40.9 percent, to $150.1 million from $106.6 million in the first nine months of 1997. The Company's gross profit margin increased to 17.4 percent for the first nine months of 1998 from 12.6 percent in the first nine months of 1997. Gross profit in the Coated Board business segment increased by $22.1 million, or 16.2 percent, to $158.2 million in the first nine months of 1998 as compared to $136.2 million in the first nine months of 1997, while the segment's gross profit margin increased to 19.7 percent in the first nine months of 1998 from 17.6 percent in the first nine months of 1997. These increases in the Coated Board business segment gross profit and gross profit margin resulted principally from slightly improved selling prices in U.S. beverage and U.S. folding cartonboard markets and overall cost reductions partially offset by the negative impact of the strenghthening of the U.S. dollar on the Company's international I-16 17 beverage and international folding cartonboard markets. In the Containerboard business segment, Gross Profit increased $20.7 million to a loss of $7.2 million in the first nine months of 1998 as compared to a loss of $27.9 million in the first nine months of 1997, due principally to improved selling prices of linerboard and medium compared to the first nine months of 1997, and overall cost reductions. SELLING, GENERAL AND ADMINISTRATIVE Selling, General and Administrative expenses decreased $7.1 million, or 7.9 percent, to $83.3 million in the first nine months of 1998 as compared to $90.4 million in the first nine months of 1997. This decrease was due primarily to the Company's cost reduction initiatives that began in early 1997, offset somewhat by incremental costs relating to the implementation of a new computerized information system (see "- Financial Condition, Liquidity and Capital Resources - - Upgrade of Information Systems and Year 2000 Compliance"). As a percentage of Net Sales, Selling, General and Administrative expenses decreased to 9.6 percent in the first nine months of 1998 from 10.7 percent in the same period of 1997. RESEARCH, DEVELOPMENT AND ENGINEERING Research, Development and Engineering expenses increased $0.6 million to $4.2 million for 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 recorded in accordance with FAS 121. The fair value of the machines was determined based on expected future lease revenues and potential disposition. OTHER (INCOME) EXPENSES, NET Other (Income) Expenses, net, decreased by $1.4 million to $5.2 million for the first nine months of 1998, due to an increase in royalty income. INCOME (LOSS) FROM OPERATIONS Primarily as a result of the above factors, the Company's Income from Operations in the first nine months of 1998 increased by $38.1 million to $44.1 million from $6.0 million in the first nine months of 1997, while operating margin was 5.1 percent. Income from Operations in the Coated Board business segment increased $16.1 million, or 30.2 percent, to $69.1 million in the first nine months of 1998 from $53.1 million in the first nine months of 1997, while operating margin increased to 8.6 percent from 6.8 percent for the same periods, primarily as a result of the write-down of packaging machines as well as the factors described above. (Loss) from Operations in the Containerboard business segment decreased $20.1 million to a loss of $11.8 million in the first nine months of 1998 from a (Loss) from Operations of $31.9 million in the first nine months of 1997, primarily as a result of the factors described above. U.S. DOLLAR CURRENCY EXCHANGE RATES Fluctuations in U.S. dollar currency exchange rates did impact Net Sales, Gross Profit, and Income from Operations as described above. However, these fluctuations did not have a significant impact on operating expenses of the Company during the first nine months of 1998 as compared to the same period of 1997. I-17 18 INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES AND EQUITY IN NET EARNINGS OF AFFILIATES INTEREST INCOME Interest Income increased $0.1 million from the first nine months of 1997 to $1.0 million in the first nine months of 1998, primarily as a result of higher average balances of cash and equivalents in 1998 as compared to 1997. INTEREST EXPENSE Interest Expense increased $7.8 million to $132.5 million in the first nine months of 1998 from $124.7 million in the first nine months of 1997. The increase relates principally to an increase of debt levels resulting from capital expenditure funding throughout 1997 as well as a shift in existing debt toward higher coupon debt. INCOME TAX (BENEFIT) EXPENSE 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 of Affiliates of $87.4 million. During the first nine months of 1997, the Company recognized an income tax expense of $4.3 million on a (Loss) before Income Taxes and Equity in Net Earnings of Affiliates of $117.9 million. The 1998 and 1997 expense differed from the statutory federal income tax rate because of valuation allowances established on net operating loss carryforward tax assets in the U.S. and certain international locations where the realization of benefits is uncertain. Net cash refunds from income taxes during the first nine months of 1998 were $3.1 million relating principally to the Merger. EQUITY IN NET EARNINGS OF AFFILIATES Equity in Net Earnings of Affiliates is comprised primarily of the Company's equity in net earnings of Igaras, an integrated containerboard producer located in Brazil, which produces linerboard, corrugating medium, corrugated boxes and beverage cartons, and is accounted for using the equity method of accounting. Equity in Net Earnings of Affiliates decreased $5.0 million to $8.7 million in the first nine months of 1998 from $13.7 million in the first nine months of 1997, resulting primarily from an overall downturn in the Brazilian markets, as well as additional expenses incurred by Igaras relating to the purchase of three additional facilities during the first quarter. During the first nine months of 1998 and the first nine months of 1997, the Company received dividends from Igaras of $2.5 million and $1.9 million, respectively, net of taxes of $0.4 million and $0.3 million, respectively. The Company received net dividends from its affiliates other than Igaras that are accounted for using the equity method of accounting, totaling nil and $0.8 million in the first nine months of 1998 and 1997, respectively. 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. I-18 19 CASH FLOWS Cash and equivalents decreased by approximately $0.5 million in the first nine months of 1998 primarily as a result of $69.8 million of net cash used in financing activities offset by $29.4 million of net cash provided by investing activities and $39.0 million of net cash provided by operating activities, respectively. Cash used in financing activities primarily relates to a decrease in revolving credit facilities. Cash provided by investing activities related principally to proceeds of $46.7 million from the sale of the Australian folding carton business, partially offset by capital expenditures. Depreciation and amortization during the first nine months of 1998 totaled approximately $105.3 million, and is expected to be approximately $145.0 million for fiscal 1998. 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 26, 1998, the Company had outstanding approximately $1,683 million of long-term debt, consisting primarily of $650 million aggregate principal amount of the 1996 Notes, $250 million of the 1997 Notes, $641 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 1998, the Company had a net decrease in borrowings of approximately $69.2 million. Approximately $21.8 million of the net reduction related to a permanent reduction of the Australian facility. 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 term loan principal payments under the Term Loan Facility will be approximately $4 million, $4 million, $120 million, $173 million, $184 million and $156 million for each of the years 1999 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 26, 1998 at an average rate per annum of 8.6 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 1998 is expected to be approximately $180 to $185 million, including approximately $10 million of non-cash amortization of deferred debt issuance costs. During the first nine months of 1998, cash paid for interest was approximately $112.6 million. The Company uses interest rate swap agreements to fix or cap a portion of its variable rate Term Loan Facility to a fixed rate in order to reduce the impact of interest rate changes on future income. The difference to be paid or received under these agreements is recognized as an adjustment to interest expense related to that debt. At September 26, 1998, the Company had interest rate swap agreements (with a I-19 20 notional amount of $200 million) under which the Company will pay fixed rates of 5.9000 percent to 6.3750 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 the Indentures also impose restrictions on the operation of the Company's business. At September 26, 1998, the Company was in compliance with the financial covenants in the Credit Agreements. CAPITAL EXPENDITURES Capital spending for the first nine months of 1998 was approximately $22.0 million. Capital spending during this period related primarily to increasing paper production efficiencies, manufacturing packaging machinery and upgrading the Company's information systems. Total capital spending for fiscal 1998 is expected to be $50 to $60 million; and is expected to relate principally to maintenance, environmental and productivity improvement projects, the production of packaging machinery and the planned upgrading of the Company's information systems (which is expected to cost up to approximately $30 million through 1999). See "- Financial Condition, Liquidity and Capital Resources - Upgrade of Information Systems and Year 2000 Compliance". FINANCING SOURCES AND CASH FLOWS At September 26, 1998, 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 SEPTEMBER 26, 1998 SEPTEMBER 26, 1998 ------------ ------------------ ------------------ (IN THOUSANDS OF DOLLARS) - ------------------------- Revolving Facility $400,000 $102,650 $297,350 Machinery Facility 140,000 24,000 25,000 International Facilities 20,954 7,269 13,685 -------- -------- -------- $560,954 $133,919 $336,035 ======== ======== ========
The Company applied $21.8 million of the proceeds from the sale of the Australian folding carton business to repay all outstanding borrowings under its Australian facility during the second quarter. Availability under 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. I-20 21 As described above, the Company has substantial liquidity, but anticipates additional borrowings under the Revolving Facility in the fourth quarter of 1998. 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 "- Financial Condition, Liquidity and Capital Resources - 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. See "-General- Business Trends and Initiatives" and "- Outlook." 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 (the "EPA") 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 an eight-year period beginning in 1998. In late 1995, the Louisiana Department of Environmental Quality ("DEQ") notified the Company that the Predecessor may be liable for the remediation of hazardous substances at a wood treatment site in Shreveport, Louisiana, that the Predecessor or its predecessor previously operated, and at a former oil refinery site in Caddo Parish, Louisiana that the Company currently owns. Neither the Company nor the Predecessor ever operated the oil refinery. In response to the DEQ, 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. The Company received a letter from the DEQ dated May 20, 1996, requesting a plan for soil and groundwater sampling of the wood treatment site. The soil and groundwater sampling will be completed in late 1998. On September 6, 1996, the Company received from the DEQ a letter requesting remediation of the former oil refinery site in Caddo Parish, Louisiana. Ongoing discussions with the DEQ continue regarding the participation of other responsible parties in any clean-up of hazardous substances at both of these sites. The Company is engaged in environmental remediation projects for certain properties currently owned or operated by the Company and certain properties divested by the Company for which responsibility was retained for pre-existing conditions. Certain of these projects are being carried out under federal and state statutes, such as the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"). The Company's costs in some instances cannot be reliably estimated until the remediation process is substantially underway. 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, I-21 22 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. On December 6, 1995, Forrest Kelly Clay, a former shareholder of the Predecessor, commenced a purported class action lawsuit in the United States District Court for the Northern District of Georgia, against the Company and certain officials of the Company (the "Individual Defendants," and together with the Company, the "Defendants"). In his complaint, Clay alleged that the Defendants violated the federal securities laws by disseminating misleading statements and by omissions concerning the strategic alternatives that the Predecessor was considering, including its potential sale to a third-party investor. The complaint also alleged that the Individual Defendants, through their exercise of stock appreciation rights ("SARs"), violated the federal securities laws by trading in the Predecessor's securities while in possession of material, non-public information. The complaint generally seeks damages in an unspecified amount, as well as other relief. On June 2, 1997, the court granted Defendants' Motion for Summary Judgment and dismissed the action in its entirety. The court based its ruling on the fact that (i) none of the statements attributable to the Company concerning its review of strategic alternatives was false and (ii) there is no causal relationship between plaintiff's purchase of Riverwood common stock and the Individual Defendants' exercise of SARs. On October 14, 1998, the U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal. The Court of Appeals ruled that (i) none of the statements attributable to the Company concerning its review of strategic alternatives was false and (ii) the SARs were not securities. On August 21, 1998, William D. Tatum, C. Steven Clark, Thomas W. Brabston, Sr., Joe O. Harper, Jr. ("Plaintiffs"), all former employees of the Company, commenced a purported class action lawsuit in the Superior Court of Fulton County, Georgia, against the Company and certain current and former officers of the Company. In the complaint, Plaintiffs allege generally that the Company and such officers (1) breached the terms of the contracts between Plaintiffs and the Predecessor governing Premium Stock Appreciation Rights ("PSARs") as a result of a suspension requested on August 23, 1995, (2) breached an implied covenant of good faith and fair dealing in connection with both the suspension and the lifting of that suspension, and (3) engaged in fraud and negligent misrepresentation in connection with the lifting of the suspension by (a) failing to tell Plaintiffs that certain officers of the Predecessor were planning to exercise PSARs on September 21, 1995 and (b) failing to inform Plaintiffs of the status of the Predecessor's review of strategic alternatives as of September 21, 1995. Plaintiffs seek (a) an order granting class certification, (b) an award of compensatory damages, (c) pre-judgment interest, (d) punitive damages in an amount to be determined by the jury and (e) litigation expenses, including attorney's fees. The defendants have answered the Complaint. In addition on October 16, 1998, the defendants moved to strike the class allegations in the complaint, and, on October 30, 1998, moved to dismiss the complaint. Plaintiffs have not yet responded to either motion. The Company is a plaintiff in several actions against Mead Corporation ("Mead") claiming infringement of Riverwood patents for its packaging machines. In the furthest advanced of these actions, a federal court announced on October 27, 1998 that it would enter an order refusing to adopt a special master's recommended finding that the Riverwood patent in issue was invalid. As a result of this finding, the court indicated that it would enter an order concluding that Mead has been unlawfully infringing Riverwood's patent. The court indicated that it will permit Mead to pursue an immediate appeal from this ruling. UPGRADE OF INFORMATION SYSTEMS AND YEAR 2000 COMPLIANCE The Company is currently upgrading its information systems through an initiative expected to cost up to approximately $30 million to be spent through 1999. When the upgrade is complete, the Company expects a major improvement in its information systems and business processes. This initiative will utilize both internal and external resources. Total spending on this project during the first nine months of 1998 totaled approximately $7.8 million of which $5.5 million was capitalized. Total project spending to date was $17.8 million, of which $11.2 million was capitalized. Future expenditures will be funded by cash from operations and current credit facilities. In conjunction with the information systems upgrade, the Company is also in the process of replacing its computer software applications and 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. This includes the analyzing of all manufacturing systems in the Company's plants and mills to determine Year 2000 compliance. To the extent that material manufacturing systems need to be replaced, additional material costs could be incurred. The Company has also replaced all desktops, laptops, and network hardware. The Company does not expect that other costs of its Year 2000 compliance program will be material to its financial condition or results of operations (other than the investment in information systems of up to approximately $30 million, of which $17.8 million has been spent to date, and any material costs needed to replace material manufacturing systems, as to which no determination has yet been made). At the end of the third quarter, the Company was finalizing the testing of the new system, as performed by both internal resources I-22 23 and independent firms, and was commencing the end-user training process. The total project cost and the project's progress is in line with the initial budget and established time-line. The Company expects that it will achieve compliance by June 1999, but would anticipate a material disruption in its operations as the result of any failure in a critical operation or information system. However, the effect on the Company's business, financial condition or results of operations can not be determined at this time. The Company believes that it will implement Year 2000 compliant systems far enough in advance to correct all anticipated issues by January 1, 2000. 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). In the event that any of the Company's significant suppliers or customers do not successfully and timely achieve their Year 2000 compliance, the Company's business or operations could be adversely affected. The Company has had contact with several significant suppliers and customers and expects that they will achieve year 2000 compliance, although no assurance can be given in this regard. TAX MATTER 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 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, are designed to achieve, (b) the Company's expectation that the second Macon Mill paper machine will be able produce approximately 275,000 tons of CUK Board annually by June 1999 and (c) the Company's expectation that beverage cartonboard tonnage will increase in 1998 despite expected reduction in new packaging machinery placements; (ii) the statements in "- General -Outlook" concerning (a) the Company's expectation that its 1998 EBITDA will significantly exceed its 1997 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 I-23 24 volume increases in its international beverage and U.S. soft drink carton markets in 1998, while its U.S. beer carton volume will remain relatively flat, (c) the Company's expectation that global open market folding cartonboard sales volumes will increase above 1997 levels, (d) the Company's expectations regarding anticipated restructuring and (e) the Company's expectations regarding the effects of excess global, industry capacity and price declines of competing substrates; (iii) the statements in "Financial Condition, Liquidity and Capital Resources" concerning (a) the Company's expectation that total capital spending for 1998 will range from $50 to $60 million and that the planned upgrading of the Company's information systems will cost up to $30 million (and its other statements and beliefs relating to Year 2000 compliance in "- Upgrade of Information Systems and Year 2000 Compliance"), (b) the Company's belief that cash generated from operations, together with amounts available under 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), (c) the Company's expectations with respect to capital spending that may be required to comply with the cluster rules and that, based on current knowledge, environmental costs are not expected to have a material impact on the results of operations, cash flows or financial condition of the Company and (d) 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 (iv) other statements as to the Company's expectation 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, 1997, 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. 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 established accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not determined the impact that SFAS No. 133 will have on its financial statements. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 revises disclosure requirements about employers' pension and other postretirement benefit plans. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. The Company has not determined the impact that SFAS No. 132 will have on its pension and other postretirement benefit disclosures. I-24 25 In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. The Company does not believe that the impact of SOP 98-5 will have a material impact on its financial statements. I-25 26 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. 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 II-1 27 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 6, 1998 By: /s/ Steve McLary ---------------------------------------- Steve McLary Assistant Secretary Date: November 6, 1998 By: /s/ Daniel J. Blount ---------------------------------------- Daniel J. Blount Vice President and Chief Financial Officer II-2 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 26, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-26-1998 1 15,227 0 162,067 1,042 154,752 339,799 1,511,486 276,238 2,454,948 283,745 1,670,933 0 0 75 397,213 2,454,948 864,176 864,176 714,074 714,074 105,974 322 132,509 (87,423) 167 (78,878) 0 0 0 (78,878) 0 0
EX-99 3 RECONCILIATION OF INCOME(LOSS) 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 1998: Income (Loss) from Operations $ 35,169 $ (4,482) $ (4,112) $ 26,575 Depreciation and amortization 25,861 2,963 (925) 27,899 Purchased asset costs (A) 5,999 911 - 6,910 Other non-cash charges (B) 1,591 375 2,321 4,287 Dividends from equity investments - - 915 915 -------- -------- -------- -------- EBITDA (C) $ 68,620 $ (233) $ (1,801) $ 66,586 ======== ======== ======== ======== THIRD QUARTER 1997: Income (Loss) from Operations $ 17,996 $ (6,385) $ (4,096) $ 7,515 Depreciation and amortization 23,969 3,397 265 27,631 Purchased asset costs (A) 6,724 911 - 7,635 Other non-cash charges (B) 499 75 986 1,560 Dividends from equity investments - - 1,022 1,022 -------- -------- -------- -------- EBITDA (C) $ 49,188 $ (2,002) $ (1,823) $ 45,363 ======== ======== ======== ======== FIRST NINE MONTHS 1998: Income (Loss) from Operations $ 69,139 $(11,813) $(13,198) $ 44,128 Depreciation and amortization 77,344 8,617 (395) 85,566 Purchased asset costs (A) 17,958 2,733 - 20,691 Other non-cash charges (B) 17,373 1,126 5,089 23,588 Dividends from equity investments - - 2,527 2,527 -------- -------- -------- -------- EBITDA (C) $181,814 $ 663 $ (5,977) $176,500 ======== ======== ======== ======== FIRST NINE MONTHS 1997: Income (Loss) from Operations $ 53,082 $(31,923) $(15,137) $ 6,022 Depreciation and amortization 67,850 11,144 912 79,906 Purchased asset costs (A) 18,810 2,733 - 21,543 Other non-cash charges (B) 1,777 3,295 2,836 7,908 Dividends from equity investments - - 2,717 2,717 -------- -------- -------- -------- EBITDA (C) $141,519 $(14,751) $ (8,672) $118,096 ======== ======== ======== ========
Notes: - ------ (A) Certain expenses and costs are excluded from the Company's Income (Loss) from Operations in determining EBITDA (as defined below), including amortization, depreciation or expenses associated with the write-up of inventory, fixed assets and intangible assets in accordance with APB 16 and 17, collectively referred to as the "Purchased Asset Costs." (B) Other non-cash charges include non-cash charges deducted for write-downs of packaging machines, LIFO inventory reserves, pension, postretirement and postemployment benefits, and amortization of premiums on hedging contracts in determining net income other than Purchased Asset Costs (see above). II-3 2 (C) 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 and extraordinary items and the cumulative effect of accounting changes and earnings of, but including dividends from, non-controlled affiliates. EBITDA excludes (i) equity earnings from the Company's investment in Igaras but includes dividends actually received from Igaras and (ii) Purchased Asset Costs resulting from purchase accounting for periods subsequent to the Merger. 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. II-4 -----END PRIVACY-ENHANCED MESSAGE-----