-----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, EbdFtMLB3RtncVBYVUZYv8c0XkeQvTNkdZv9mkIvbYicdKQEgLJuKmPT4Vme1zme zGZtJYA8ngqHb2Hh5GlHBw== 0000931763-97-000730.txt : 19970512 0000931763-97-000730.hdr.sgml : 19970512 ACCESSION NUMBER: 0000931763-97-000730 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970329 FILED AS OF DATE: 19970509 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVERWOOD HOLDING INC CENTRAL INDEX KEY: 0000886239 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD MILLS [2631] IRS NUMBER: 841133430 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11113 FILM NUMBER: 97598556 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 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 29, 1997 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 May 7, 1997 there were 7,111,900 shares and 500,000 shares of the registrant's Class A and Class B common stock, respectively, outstanding. PART I. FINANCIAL INFORMATION* * As used in this Form 10-Q, unless the context otherwise requires, "RIC" refers to the corporation formerly named Riverwood International Corporation, the "Predecessor" or the "Predecessor Company" refers to RIC and its subsidiaries in respect of periods prior to the Merger (as defined herein), the "Company" refers to the registrant, Riverwood Holding, Inc., a Delaware corporation formerly named New River Holding, Inc. ("Holding") and its subsidiaries, "RIC Holding" refers to RIC Holding, Inc., a Delaware corporation, successor by merger to RIC and a wholly owned subsidiary of Holding, and "Riverwood" refers to Riverwood International Corporation, a Delaware corporation formerly named Riverwood International USA, Inc. and a wholly owned subsidiary of RIC Holding. I-1 RIVERWOOD HOLDING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS)
COMPANY - ----------------------------------------------------------------------------------------------- March 29, December 31, ASSETS 1997 1996 - ----------------------------------------------------------------------------------------------- (UNAUDITED) Current Assets Cash and equivalents $ 9,354 $ 16,499 Marketable securities, at cost (approximates market) 838 858 Receivables, net of allowances 150,339 153,864 Inventories 202,890 211,965 Prepaid expenses 8,603 8,113 Deferred tax assets 2,135 2,897 - ----------------------------------------------------------------------------------------------- Total Current Assets 374,159 394,196 Property, Plant and Equipment, net of accumulated depreciation of $107,599 in 1997 and $85,768 in 1996 1,673,840 1,675,217 Investments in Net Assets of Equity Affiliates 127,531 125,030 Goodwill, net of accumulated amortization of $8,117 in 1997 and $5,900 in 1996 316,136 318,543 Other Assets 169,381 158,501 - ----------------------------------------------------------------------------------------------- Total Assets $2,661,047 $2,671,487 =============================================================================================== LIABILITIES - ----------------------------------------------------------------------------------------------- Current Liabilities Short-term debt $ 25,783 $ 18,173 Accounts payable 116,590 125,014 Compensation and employee benefits 38,702 38,017 Income taxes 38,697 42,031 Other accrued liabilities 122,425 112,205 - ----------------------------------------------------------------------------------------------- Total Current Liabilities 342,197 335,440 Long-Term Debt, less current portion 1,600,721 1,567,259 Deferred Income Taxes 23,188 19,722 Other Noncurrent Liabilities 84,229 85,467 - ----------------------------------------------------------------------------------------------- Total Liabilities 2,050,335 2,007,888 - ----------------------------------------------------------------------------------------------- Contingencies and Commitments (Note 5) Redeemable Common Stock, at current redemption value 9,390 9,390 SHAREHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------- Nonredeemable Common Stock 75 75 Capital in Excess of Par Value 751,153 751,153 (Accumulated Deficit) (142,980) (105,136) Cumulative Currency Translation Adjustment (6,926) 8,117 - ----------------------------------------------------------------------------------------------- Total Shareholders' Equity 601,322 654,209 - ----------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $2,661,047 $2,671,487 ===============================================================================================
See Notes to Condensed Consolidated Financial Statements. I-2 RIVERWOOD HOLDING, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS) (UNAUDITED) ON MARCH 27, 1996, HOLDING, THROUGH ITS WHOLLY OWNED SUBSIDIARIES, ACQUIRED ALL OF THE OUTSTANDING SHARES OF COMMON STOCK OF RIC. THE PURCHASE METHOD OF ACCOUNTING WAS USED TO RECORD ASSETS ACQUIRED AND LIABILITIES ASSUMED BY HOLDING. AS A RESULT OF THE MERGER, PURCHASE ACCOUNTING AND THE EFFECT OF THE DISPOSITION OF SUBSTANTIALLY ALL OF THE ASSETS OF THE U.S. TIMBERLANDS/WOOD PRODUCTS BUSINESS SEGMENT (SEE NOTE 8), THE ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND THE COMPANY ARE NOT COMPARABLE IN ALL MATERIAL RESPECTS SINCE THE FINANCIAL STATEMENTS REPORT RESULTS OF OPERATIONS AND CASH FLOWS OF THESE TWO SEPARATE ENTITIES.
COMPANY PREDECESSOR - ------------------------------------------------------------------------------------------------------------- Three Months Three Months Ended Ended March 29, 1997 March 27, 1996 - ------------------------------------------------------------------------------------------------------------- Net Sales $267,188 $293,649 Cost of Sales 235,209 232,701 Selling, General and Administrative 29,207 30,936 Research, Development and Engineering 1,689 2,031 Other Costs - 11,114 Other Expenses, net 2,822 1,217 - ------------------------------------------------------------------------------------------------------------- (Loss) Income from Operations (1,739) 15,650 Interest Income 142 329 Interest Expense 38,901 26,392 - ------------------------------------------------------------------------------------------------------------- (Loss) before Income Taxes and Equity in Net Earnings of Affiliates (40,498) (10,413) Income Tax Expense (Benefit) 901 (3,436) - ------------------------------------------------------------------------------------------------------------- (Loss) before Equity in Net Earnings of Affiliates (41,399) (6,977) Equity in Net Earnings of Affiliates 3,555 4,927 - ------------------------------------------------------------------------------------------------------------- Net (Loss) $(37,844) $ (2,050) =============================================================================================================
See Notes to Condensed Consolidated Financial Statements. I-3 RIVERWOOD HOLDING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) (UNAUDITED) ON MARCH 27, 1996, HOLDING, THROUGH ITS WHOLLY OWNED SUBSIDIARIES, ACQUIRED ALL OF THE OUTSTANDING SHARES OF COMMON STOCK OF RIC. THE PURCHASE METHOD OF ACCOUNTING WAS USED TO RECORD ASSETS ACQUIRED AND LIABILITIES ASSUMED BY HOLDING. AS A RESULT OF THE MERGER, PURCHASE ACCOUNTING AND THE EFFECT OF THE DISPOSITION OF SUBSTANTIALLY ALL OF THE ASSETS OF THE U.S. TIMBERLANDS/WOOD PRODUCTS BUSINESS SEGMENT (SEE NOTE 8), THE ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND THE COMPANY ARE NOT COMPARABLE IN ALL MATERIAL RESPECTS SINCE THE FINANCIAL STATEMENTS REPORT RESULTS OF OPERATIONS AND CASH FLOWS OF THESE TWO SEPARATE ENTITIES.
COMPANY PREDECESSOR - ------------------------------------------------------------------------------------------------------------- Three Months Three Months Ended Ended March 29, 1997 March 27, 1996 - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) $ (37,844) $ (2,050) Noncash Items Included in Net (Loss): Depreciation, amortization and cost of timber harvested 32,104 24,438 Deferred income taxes 1,040 (3,574) Pension, postemployment and postretirement expense, net of benefits paid 1,430 1,861 Equity in net earnings of affiliates, net of dividends (2,805) (4,927) Amortization of debt issuance costs 2,891 619 Other, net 197 (2,350) Decrease (Increase) in Current Assets: Receivables 1,873 14,737 Inventories 3,685 (14,659) Prepaid expenses (742) 8,298 (Decrease) Increase in Current Liabilities: Accounts payable (5,192) 18,182 Compensation and employee benefits 1,513 (10,248) Income taxes (260) (3,343) Other accrued liabilities 8,015 12,360 Decrease in Other Noncurrent Liabilities (2,522) (2,569) - ------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 3,383 36,775 - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property, Plant and Equipment (44,738) (44,074) Payment of Merger costs (3,389) - Proceeds from Maturity of Marketable Securities - 439 Proceeds from Sales of Assets 388 623 Increase in Other Assets (4,031) (8,004) - ------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (51,770) (51,016) - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Debt - 12,669 Net Increase (Decrease) in Revolving Credit Facilities 43,280 (3,000) Proceeds from Issuance of Common Stock - 838 Payments on Debt (1,177) (2,833) Dividends - (2,630) - ------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 42,103 5,044 - ------------------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash (861) (638) - ------------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Equivalents (7,145) (9,835) Cash and Equivalents at Beginning of Period 16,499 35,870 - ------------------------------------------------------------------------------------------------------------- Cash and Equivalents at End of Period $ 9,354 $ 26,035 =============================================================================================================
See Notes to Condensed Consolidated Financial Statements. I-4 RIVERWOOD HOLDING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION Holding, its wholly owned subsidiaries RIC Holding and the corporation formerly named CDRO Acquisition Corporation ("Acquisition Corp.") were incorporated in 1995 to acquire the stock of RIC. On March 27, 1996, Holding, through its wholly owned subsidiaries, acquired all of the outstanding shares of common stock of RIC. On such date, Acquisition Corp. was merged (the "Merger") into RIC. RIC, as the surviving corporation in the Merger, became a wholly owned subsidiary of RIC Holding. On March 28, 1996, RIC transferred substantially all of its properties and assets to Riverwood, other than the capital stock of Riverwood, and RIC was merged (the "Subsequent Merger") into RIC Holding. Thereupon, Riverwood was renamed "Riverwood International Corporation." Upon consummation of the Subsequent Merger, RIC Holding, as the surviving corporation in the Subsequent Merger, became the parent company of Riverwood. Holding and its subsidiaries conducted no significant business other than in connection with the Merger and related transactions through March 27, 1996. The condensed consolidated financial statements 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. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that the interim condensed financial statements be read in conjunction with the Company's and Predecessor's most recent audited financial statements and notes thereto. 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, 1996 was derived from audited financial statements. In connection with the Merger, the purchase method of accounting was used to establish and record a new cost basis for the assets acquired and liabilities assumed. The difference between the purchase price and the fair market values of the assets acquired and liabilities assumed was recorded as goodwill. The condensed consolidated financial statements presented herein for the periods prior to March 28, 1996, represent the Predecessor's results of operations and cash flows prior to the Merger and, consequently, are stated on the Predecessor's historical cost basis. The condensed consolidated financial statements as of March 29, 1997, and for the three months then ended, reflect the adjustments which were made to record the Merger and represent the Company's new cost basis. On October 18, 1996, the Company sold substantially all of the assets of the U.S. Timberlands/Wood Products business segment (see Note 8). The operating results for the U.S. Timberlands/Wood Products business segment were classified as discontinued operations for periods beginning March 28, 1996 and ending October 18, 1996 (the date of the sale). The operating results for the U.S. Timberlands/Wood Products business segment have not been reclassified as discontinued operations in the Predecessor's Condensed Consolidated Statement of Operations or Condensed Consolidated Statement of Cash Flows for the three months ended March 27, 1996. Accordingly, the financial statements of the Predecessor for periods prior to March 28, 1996 are not comparable in all material respects with the financial statements subsequent to the Merger date. The most significant differences relate to amounts recorded for inventory, property, plant and equipment, intangibles and debt which resulted in increased cost of sales, amortization, depreciation and interest expense in the three months ended March 29, 1997 and will continue to do so in future periods. I-5 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 nine month period ended December 31, 1996. For a summary of RIC's significant accounting policies, please refer to the financial statements incorporated by reference in RIC's annual report filed with the Securities and Exchange Commission under Form 10-K for the year ended December 31, 1995. The Company has reclassified the presentation of certain prior period information to conform with the current presentation format. The preparation of the 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 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) March 29, 1997 December 31, 1996 ------------------------------------------------------------------- Finished goods $ 90,257 $ 89,412 Work-in-process 17,473 12,496 Raw materials 61,776 71,075 Supplies 33,384 38,982 ------------------------------------------------------------------- Total $202,890 $211,965 ===================================================================
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"). The following represents the summarized income statement information for Igaras, of which the Company recognizes 50 percent in its results of operations:
(In thousands of dollars) COMPANY PREDECESSOR -------------------------------------------------------------- Three Months Three Months Ended Ended March 29, 1997 March 27, 1996 -------------------------------------------------------------- Net Sales $ 56,402 $ 59,582 Cost of Sales 40,286 38,962 -------------------------------------------------------------- Gross Profit $ 16,116 $ 20,620 ============================================================== Income from Operations $ 9,702 $ 14,521 ============================================================== Net Income $ 6,808 $ 10,113 ==============================================================
During the first quarters of 1997 and 1996, the Company did not receive a dividend from Igaras. The Company received net dividends from its investments in affiliates, other than Igaras, that are accounted for using the equity method of accounting totaling $0.8 million and nil for the three months ended March 29, 1997 and March 27, 1996, respectively. I-6 NOTE 5 - CONTINGENCIES AND COMMITMENTS The Company is committed to compliance with all applicable laws and regulations. Environmental law is, however, dynamic rather than static. As a result, costs, which are unforeseeable at this time, may be incurred when new laws are enacted, and when environmental agencies 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. In 1996, the EPA released additional clarification of the proposed cluster rules. Based on this information, the Company expects that the cluster rules may be finally promulgated in 1997 and 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 1997. The Company anticipates that the majority of this spending to comply with the cluster rules will occur later in the eight-year period. The Company had no capital spending during the first quarter of 1997 related to compliance with the cluster rules. The Louisiana Department of Environmental Quality ("DEQ") notified the Predecessor by letters, dated December 19, 1995, that the Predecessor may be liable for the remediation of the release or threat of release of hazardous substances at a wood treatment site in Shreveport, Louisiana, that the Predecessor or its predecessor previously operated, and 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 to the DEQ 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 Company first met with the DEQ on July 18, 1996, and then submitted a soil sampling plan to the DEQ. The Company expects approval of this sampling plan in the first half of 1997. On September 6, 1996, the Company received from the DEQ a letter requesting remediation of the former oil refinery site in Caddo Parish, Louisiana. The Company met with the DEQ on February 17, 1997 to discuss these matters. The DEQ has requested that the Company enter into a cooperative agreement to perform a phased-in approach for evaluating soil and groundwater conditions at the Shreveport site. The Company is in discussions with the DEQ 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. The Company's costs in some instances cannot be estimated until the remediation process is substantially underway. To address these contingent environmental costs, the Company has accrued reserves where 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 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 law suit in the United States District Court for the Northern District of Georgia, against the Company and certain officers of the Company (the "Individual Defendants," and together with the Company, the "Defendants"). In his complaint, Clay alleges 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 January 29, 1996, Defendants filed a motion to dismiss the complaint for failure to state a claim and failure to plead fraud with particularity. On March 29, 1996, the Court denied Defendants' motion to dismiss and allowed limited discovery to proceed with regard to statements attributable to the Company and the nature of the SARs. That discovery is now complete, and plaintiff has twice amended his complaint (each time putting forward the same claims made in the initial complaint but amending certain of the factual allegations). On November 1, 1996, the Defendants moved to dismiss the amended complaint, noting (i) none of the statements attributable to the Company concerning its review of strategic alternatives was false and (ii) that there was no causal relationship between plaintiff's purchase of Riverwood common stock and the Individual Defendants' exercise of SARs. That motion has been fully briefed and is currently before the Court. I-7 NOTE 6 - OTHER COSTS Other Costs incurred by the Predecessor in 1996 included expenses associated with stock based compensation plans, expenses related to RIC's review of strategic alternatives and provision for environmental reserves. NOTE 7 - INCOME TAXES During the three months ended March 29, 1997, the Company recognized an income tax expense of $0.9 million on a (Loss) before Income Taxes and Equity in Net Earnings of Affiliates of $40.5 million. This 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. In the first quarter of 1996, the Predecessor recognized an income tax benefit of $3.4 million on a (Loss) before Income Taxes and Equity in Net Earnings of Affiliates of $10.4 million. NOTE 8 - DISPOSITION OF BUSINESSES AND OPERATING ACTIVITIES On October 18, 1996, the Company sold substantially all of the assets of the U.S. Timberlands/Wood Products business segment for cash of approximately $550 million. In addition, the buyer assumed certain specified preclosing liabilities. Under the terms of the agreement for such sale, the Company and the buyer, Plum Creek Timber Company, L.P., entered into a twenty-year supply agreement with a ten-year renewal option for the purchase by the Company, at market-based prices, of a majority of the Company's requirements for pine pulpwood and residual chips at its paper mill in West Monroe, Louisiana (the "West Monroe Mill"), as well as a portion of the Company's needs for hardwood pulpwood at the West Monroe Mill. The Company did not realize any gain or loss on the sale. The operating results for the U.S. Timberlands/Wood Products business segment were classified as discontinued operations for periods beginning March 28, 1996 and ending October 18, 1996 (the date of the sale). The operating results of the U.S. Timberlands/Wood Products business segment have not been reclassified as discontinued operations in the Predecessor's Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows. 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 $40.9 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. At December 31, 1996, $32.6 million of this total was unspent and accrued in Other accrued liabilities on the Condensed Consolidated Balance Sheets. During the first quarter of 1997, $7.0 million was paid out and charged against the accrual and related primarily to severance costs. NOTE 9 - PRO FORMA DATA The following unaudited pro forma financial data has been prepared assuming that the Merger and related financings were consummated on January 1, 1996 and excluding the results of operations of the U.S. Timberlands/Wood Products business segment from the period presented. This pro forma financial data is presented for informational purposes and is not necessarily indicative of the operating results that would have occurred had the Merger been consummated on January 1, 1996, nor is it necessarily indicative of future operations.
Three Months Ended March 27, 1996 (In thousands of dollars) --------------------------------------------- Net Sales $ 258,706 Net Loss $ (31,696)
I-8 INDEPENDENT ACCOUNTANTS' REPORT To the Shareholders and Directors of Riverwood Holding, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Riverwood Holding, Inc. and its subsidiaries as of March 29, 1997, and the related condensed consolidated statements of operations and cash flows for the three-month period ended March 29, 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Riverwood Holding, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for the nine-month period ended December 31, 1996 and the three-month period ended March 27, 1996 (Predecessor). The consolidated statements of operations, shareholders' equity and cash flows for the nine month period ended December 31, 1996 and the consolidated statement of shareholders' equity for the three-month period ended March 27, 1996 (Predecessor) are not presented herein. In our report dated March 17, 1997, we expressed an unqualified opinion on those consolidated financial statements, based on our audit and the report of other auditors. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1996 and consolidated statements of operations and cash flows for the three-month period ended March 27, 1996, are fairly stated, in all material respects, in relation to the consolidated financial statements from which they have been derived. DELOITTE & TOUCHE LLP Atlanta, Georgia April 25, 1997 I-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW On March 27, 1996, Holding, through its wholly-owned subsidiaries, acquired all of the outstanding shares of common stock of RIC. On such date, Acquisition Corp. was merged in the Merger into RIC. RIC, as the surviving corporation of the Merger, became a wholly owned subsidiary of RIC Holding. On March 28, 1996, RIC transferred substantially all of its properties and assets to Riverwood, other than the capital stock of Riverwood, and RIC was merged in the Subsequent Merger into RIC Holding. Thereupon, Riverwood was renamed "Riverwood International Corporation." Upon consummation of the Subsequent Merger, RIC Holding, as the surviving corporation in the Subsequent Merger, became the parent company of Riverwood. The Merger was accounted for as a purchase in accordance with APB Opinion No. 16, "Business Combinations" ("APB 16"). Purchase accounting results in increased cost of sales, amortization and depreciation. Additionally, the new capital structure has resulted and will continue to result in higher reported interest expense. The condensed consolidated financial statements for periods prior to March 28, 1996 have been prepared on the historical cost basis using accounting principles that had been adopted by RIC. As a result of the Merger, purchase accounting and the effect of the disposition of substantially all of the U.S. Timberlands/Wood Products business segment (see Note 8 to the Condensed Consolidated Financial Statements), operating results subsequent to the Merger are not comparable in all material respects to the operating results prior to the Merger. On October 18, 1996, the Company sold substantially all of the assets of the U.S. Timberlands/Wood Products business segment for cash of approximately $550 million. In addition, the buyer assumed certain specified preclosing liabilities. Under the terms of the agreement for such sale, the Company and the buyer, Plum Creek Timber Company, L.P., entered into a twenty-year supply agreement with a ten-year renewal option for the purchase by the Company, at market-based prices, of a majority of the West Monroe Mill's requirements for pine pulpwood and residual chips, as well as a portion of the Company's needs for hardwood pulpwood at the West Monroe Mill. The Company did not realize any gain or loss on the sale. The operating results for the U.S. Timberlands/Wood Products business segment were classified as discontinued operations for periods beginning March 28, 1996 and ending October 18, 1996 (the date of the sale). The operating results of the U.S. Timberlands/Wood Products business segment have not been reclassified as discontinued operations in the Predecessor's Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows. Under the terms and definitions of the Company's senior secured credit agreement (the "Senior Secured Credit Agreement") and the indentures (the "Indentures") for the Company's $250 million aggregate principal amount of 10 1/4% Senior Notes due 2006 (the "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 Senior Notes, the "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 16 and APB Opinion No. 17, "Intangible Assets", collectively referred to as the "Purchased Asset Costs." During the three months ended March 29, 1997, the Company's (Loss) from Operations included Purchased Asset Costs as follows:
Three months ended March 29, 1997 (In thousands of dollars) ------------------------ COATED BOARD DESCRIPTION SYSTEM CONTAINERBOARD TOTAL - ------------------------------------------------------------------------------------------------ Cost of sales (excluding depreciation) $ 136 $ - $ 136 Depreciation expense 4,828 911 5,739 Amortization of intangible assets 1,255 - 1,255 - ------------------------------------------------------------------------------------------------ Net impact on (Loss) Income from Operations $6,219 $ 911 $7,130 ================================================================================================
I-10 GENERAL The Company reports its results in two business segments: Coated Board System and Containerboard. The Coated Board System business segment includes the production and sale of coated board for packaging cartons from the paper mills in West Monroe, Louisiana; Macon, Georgia (the "Macon Mill") and Norrkoping, Sweden; converting operations at facilities in the United States, Australia 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. The former U.S. Timberlands/Wood Products business segment included timberlands and operations engaged in the supply of pulpwood to the West Monroe Mill from the Company's former U.S. timberlands, as well as the manufacture and sale of lumber and plywood. The table below sets forth Net Sales, (Loss) Income from Operations and 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, cost of timber harvested 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"), calculated in accordance with definitions in the Senior Secured Credit Agreement and the Indentures and on a pro forma basis to exclude Other Costs of the Predecessor ("Pro Forma EBITDA"). 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.
(In thousand of dollars) - ------------------------ Company Predecessor -------------------------------- Three Months Three Months Ended Ended March 29, 1997 March 27, 1996 --------------------------------- Net Sales (Segment Data): Coated Board System $240,110 $234,608 Containerboard 27,078 25,496 U.S. Timberlands/Wood Products - 37,336 Intersegment Eliminations - (3,791) -------- -------- Net Sales $267,188 $293,649 ======== ======== (Loss) Income from Operations (Segment Data): Coated Board System $ 15,779 $ 24,638 Containerboard (13,006) (5,955) U.S. Timberlands/Wood Products - 13,868 Corporate and Eliminations (4,512) (16,901) -------- -------- (Loss) Income from Operations $ (1,739) $ 15,650 ======== ======== Pro Forma EBITDA (Segment Data): Coated Board System $ 44,485 $ 47,174 Containerboard (8,038) (1,242) U.S. Timberlands/Wood Products - 16,766 Corporate and Eliminations (3,294) (6,565) -------- -------- Pro Forma EBITDA $ 33,153 $ 56,133 ======== ========
Prior to March 28, 1996, the Predecessor Company incurred expenses associated with stock based compensation plans, expenses related to RIC's review of strategic alternatives and provision for environmental reserves. These expenses were classified as Other Costs on the Condensed Consolidated Statements of Operations. Stock based compensation expense was allocated to each of the business segments based upon the responsibility of the individuals holding or exercising the stock incentive benefits. During the three months ended March 27, 1996, $1.2 million, $0.1 million, $0.2 million and $0.8 million of stock- based compensation expense were allocated to the Coated Board System, Containerboard and U.S. Timberlands/Wood Products business segments and Corporate and Eliminations, respectively. Expenses related to RIC's review of strategic alternatives and environmental reserves were included in Corporate and Eliminations for business segment reporting purposes. 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 I-11 within the Company's control. Historically, in the Coated Board System business segment, the Company has experienced stable pricing for its integrated beverage carton products, and cyclical pricing for its folding carton and open market coated board products. The Company's open market coated board sales are affected by competition from competitors' coated board and other substrates - solid bleached sulfate (SBS), recycled clay coated news (CCN) and, internationally, white lined chip (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 pursuing a number of long-term initiatives designed to improve productivity and profitability while continuing to implement its Coated Board System business strategy. First, the Company has taken actions to increase open market coated board sales above 1996 levels. The Company has established key account relationships with a number of major independent converters, involving multi-year commitments by the Company to supply a significant portion of these customers' requirements for coated board. The Company is also undertaking a comprehensive, long-term marketing initiative aimed at potential new folding carton applications for coated board. Second, the Company has undertaken a profit-center oriented reorganization of its operations, designed to focus on profitability and to reevaluate its commitment of assets to business sectors with low profitability, and to provide greater control over costs and revenues, as well as managerial autonomy and accountability. A major initial project was the reorganization of the Company's North American beverage operations into three business units, each of which is a separate profit center serving a different customer segment. Third, the Company is implementing a number of cost saving measures, including reorganizing operations to remove duplication and excess overhead, and streamlining and consolidating international and other operations. These measures include the sale or closure of the Company's last dedicated folding carton converting plant in the Unites States, located in Kankakee, Illinois, packaging machinery manufacturing plants in Marietta, Georgia, and Koln, Germany, a beverage multiple packaging converting plant in Bakersfield, California, and the trucking transportation operations in West Monroe, Louisiana, as well as the consolidation and realignment of certain operations in the United States, Australia and Europe. Finally, the Company has reevaluated and reduced its planned capital expenditures, and is reducing its inventory levels without impacting seasonal inventory requirements, as well as considering the sale of surplus assets. There can be no assurance, however, that any of these business alternatives can be successfully implemented or will result in improved cash flows from operations and EBITDA. I-12 RESULTS OF OPERATIONS FIRST QUARTER 1997 COMPARED WITH FIRST QUARTER 1996 The following is a discussion of the Company's results of operations on a pro forma basis. The discussion is based upon the three month period ended March 29, 1997, exclusive of the net effect of Purchased Asset Costs made in this period, in comparison to the three month period ended March 27, 1996, exclusive of Other Costs and the U.S. Timberlands/Wood Products business segment results of operations, as follows:
(In thousands of dollars) - ------------------------- Three Months Ended ------------------------------------------------------------- Pro forma % Increase (Decrease) Pro forma March 29, 1997 From Prior Period March 27, 1996 --------------------------------------------------------------- Net Sales (Segment Data): Coated Board System $240,110 2.3 $234,608 Containerboard 27,078 6.2 25,496 -------- -------- Net Sales 267,188 2.7 260,104 Cost of Sales 229,334 7.4 213,588 -------- -------- Gross Profit 37,854 (18.6) 46,516 Selling, General and Administrative 29,205 (2.1) 29,830 Research, Development and Engineering 1,689 (15.9) 2,009 Other Expenses, net 1,569 (21.5) 1,999 -------- -------- Income from Operations $ 5,391 (57.5) $ 12,678 ======== ======== Income (Loss) from Operations (Segment Data): Coated Board System $ 21,998 (15.0) $ 25,881 Containerboard (12,095) (107.3) (5,835) Corporate (4,512) 38.8 (7,368) -------- -------- Income from Operations $ 5,391 (57.5) $ 12,678 ======== ========
PAPERBOARD PRODUCTION Total tons of paperboard produced at the Company's paper mills for the first quarters of 1997 and 1996 were as follows:
Three Months Ended (In thousands of tons) ---------------------------------------- March 29, 1997 March 27, 1996 ---------------------------------------- Carrierboard 158.5 170.7 Folding cartonboard 65.7 62.5 White Lined Chip board 27.0 29.1 ------ ----- Total Coated Board 251.2 262.3 Containerboard 85.6 95.3 ------ ----- 336.8 357.6 ====== =====
I-13 This tonnage represents production at the Company's paper mills and does not represent shipments or sales of paperboard to customers. Containerboard production included 5,600 tons and 8,200 tons of saleable off-specification coated board for the first quarter of 1997 and 1996, respectively, produced on dedicated coated board paper machines and sold in the Containerboard business segment. The Company's U.S. mill production of containerboard decreased by approximately 9,700 tons in the first quarter of 1997 compared to the same period of 1996, while its production of coated board decreased by approximately 11,100 tons in the first quarter of 1997 as compared to the first quarter of 1996. The decrease in production is due principally to lower daily production rates for both containerboard and coated board to produce quality paperboard, and to higher maintenance-related down time on one of four U.S. coated board paper machines. During the first three months of 1997 and 1996, the Company took 30 machine days and 49 machine days, respectively, of unscheduled corrugating medium paper machine outages to balance inventory levels. The Company's coated board capacity can also be used for linerboard production when market conditions warrant. During the first quarters of 1997 and 1996, the Company produced approximately 2,900 and 1,000 tons, respectively, of linerboard on U.S. coated board paper machines. The Company anticipates an insignificant amount of linerboard production on its dedicated coated board paper machines during the second quarter of 1997 and will review the need for producing linerboard on coated board paper machines in the second half of 1997 based on existing market conditions and the start-up of the second coated board paper machine at the Macon Mill. The second paper machine at the Macon Mill is expected to produce approximately 110,000 tons of linerboard in 1997, and, during the start-up of the conversion to coated board production in the second half of 1997, is expected to produce approximately 50,000 tons of coated board. NET SALES As a result of the factors described below, the Company's Net Sales in the first quarter of 1997 increased by $7.1 million, or 2.7 percent, compared with the first quarter of 1996. Net Sales in the Coated Board System business segment increased $5.5 million, or 2.3 percent, in the first quarter of 1997 to $240.1 million from $234.6 million in the first quarter of 1996, due primarily to increased sales volume of approximately 26,000 tons, substantially offset by lower average selling prices, in worldwide coated board open markets. In addition, the Company's domestic integrated beverage business benefited from increased sales volumes, slight selling price improvement, lower distribution costs and favorable product mix. Net Sales in the Containerboard business segment increased $1.6 million, or 6.2 percent, to $27.1 million in the first quarter of 1997 from $25.5 million in the first quarter of 1996, due to an increase in containerboard sales volume, offset somewhat by a decrease in selling prices as a result of the significant decline in containerboard markets worldwide that began in the latter part of 1995 and has continued into the first quarter of 1997. GROSS PROFIT As a result of the factors discussed below, the Company's Gross Profit for the first quarter of 1997 decreased $8.6 million, or 18.6 percent, to $37.9 million from $46.5 million in the first quarter of 1996. The Company's gross profit margin decreased to 14.2 percent for the first quarter of 1997 from 17.9 percent in the first quarter of 1996. In the Containerboard business segment, Gross Profit decreased $6.1 million to a loss of $10.5 million in the first quarter of 1997 as compared to a loss of $4.4 million in the first quarter of 1996. This decrease was due principally to sales volume increases combined with declining selling prices of containerboard which were below related production costs. Gross Profit in the Coated Board System business segment decreased by $2.2 million, or 4.3 percent, to $48.9 million in the first quarter of 1997 as compared to $51.2 million in the first quarter of 1996, while that segment's gross profit margin decreased to 20.4 percent in the first quarter of 1997 from 21.8 percent in the first quarter of 1996. This decrease in the gross profit margin resulted principally from lower selling prices in worldwide coated board open markets. SELLING, GENERAL AND ADMINISTRATIVE Selling, General and Administrative expenses decreased $0.6 million, or 2.1 percent, to $29.2 million in the first quarter of 1997 as compared to $29.8 million in the first quarter of 1996 and as a percentage of Net Sales, Selling, General and Administrative expenses decreased to 10.9 percent in the first quarter of 1997 from 11.5 percent in the same period of 1996. This decrease was primarily a result of lower operating expenses in international operations, particularly in Europe, resulting from efforts to reduce inefficiencies and streamline operations. RESEARCH, DEVELOPMENT AND ENGINEERING Research, Development and Engineering expenses decreased by $0.3 million to $1.7 million. OTHER EXPENSES, NET Other Expenses, net, decreased by approximately $0.4 million to $1.6 million. I-14 INCOME FROM OPERATIONS As a result of the above factors, the Company's Income from Operations in the first quarter of 1997 decreased by $7.3 million, or 57.5 percent, to $5.4 million from $12.7 million in the first quarter of 1996, while the operating margin as a percent of Net Sales decreased to 2.0 percent from 4.9 percent. (Loss) from Operations in the Containerboard business segment increased $6.3 million to a loss of $12.1 million in the first quarter of 1997 from a (Loss) from Operations of $5.8 million in the first quarter of 1996, primarily as a result of the factors described above. Income from Operations in the Coated Board System business segment decreased $3.9 million, or 15.0 percent, to $22.0 million in the first quarter of 1997 from $25.9 million in the first quarter of 1996, while the operating margin as a percent of Net Sales decreased to 9.2 percent from 11.0 percent for the same periods, primarily as a result of the factors described above. U.S. DOLLAR CURRENCY EXCHANGE RATES Fluctuations in U.S. dollar currency exchange rates did not have a significant impact on Net Sales, Gross Profit, operating expenses or Income from Operations of the Company during the first quarter of 1997 as compared to the same period of 1996. INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES AND EQUITY IN NET EARNINGS OF AFFILIATES INTEREST INCOME Interest Income decreased $0.2 million to $0.1 million in the first quarter of 1997 from $0.3 million in the first quarter of 1996 primarily as a result of lower average balances of cash and equivalents and marketable securities in 1997 as compared to 1996. INTEREST EXPENSE Interest Expense increased $12.5 million to $38.9 million in the first quarter 1997 from the first quarter of 1996 primarily as a result of the incremental indebtedness incurred in connection with the Merger, offset somewhat by an increase of $1.3 million in 1997 of capitalized interest related to the pulp mill modification at the Macon Mill and conversion of the linerboard paper machine at the Macon Mill to coated board production. INCOME TAX EXPENSE (BENEFIT) During the first quarter of 1997, the Company recognized an income tax expense of $0.9 million on a (Loss) before Income Taxes and Equity in Net Earnings of Affiliates of $40.5 million. This 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. Cash paid for income taxes during the first quarter of 1997 was $4.3 million. In the first quarter of 1996, the Predecessor Company recognized an income tax benefit of $3.4 million on a (Loss) from Operations before Income Taxes and Equity in Net Earnings of Affiliates of $10.4 million. 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 and corrugated boxes, which is accounted for under the equity method of accounting. Equity in Net Earnings of Affiliates decreased $1.3 million to $3.6 million in the first quarter 1997 from $4.9 million in the first quarter of 1996, primarily as a result of the significant decline in containerboard markets worldwide. During the first quarters of 1997 and 1996, the Company did not receive a dividend from Igaras. The Company received net dividends from its investments in affiliates, other than Igaras, that are accounted for using the equity method of accounting totaling $0.8 million and nil for the three months ended March 29, 1997 and March 27, 1996, 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-15 CASH FLOWS Cash and equivalents decreased by approximately $7.1 million in the first quarter of 1997 primarily as a result of $51.8 million of net cash used in investing activities, offset in part by $42.1 million and $3.4 million of net cash provided by financing and operating activities, respectively. Cash used in investing activities related principally to the purchases of property, plant and equipment (see "-Liquidity and Capital Resources - Capital Expenditures"). Depreciation, amortization and cost of timber harvested during the first quarter of 1997 totaled approximately $32.1 million, and is expected to be approximately $125 million to $130 million for fiscal 1997. 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 System business segment experiences seasonality principally due to the seasonality of the worldwide multiple packaging beverage segment. Historically, the Company's Coated Board System 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 GENERALLY 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. In connection with the Merger, the Company entered into the Senior Secured Credit Agreement with certain lenders providing for senior secured credit facilities with aggregate commitments not to exceed $1,550 million (the "Senior Secured Credit Facilities"), including a $1,150 million term loan facility (the "Term Loan Facility") and a $400 million revolving credit facility (the "Revolving Facility"). In addition, Riverwood International Machinery, Inc., a wholly owned subsidiary of Riverwood, entered into a credit agreement (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") with certain lenders for the purpose of financing or refinancing packaging machinery. Also in connection with the Merger, the Company completed an offering of the Notes. As of March 29, 1997, the Company had outstanding approximately $1,627 million of indebtedness, consisting primarily of $650 million aggregate principal amount of the Notes payable, $750 million in term loan borrowings under the Term Loan Facility and additional amounts under the Revolving Facility, the Machinery Facility and other debt issues and facilities. During the first quarter of 1997, the Company had a net increase in revolving credit facilities of approximately $43.3 million and repaid approximately $1.2 million of debt. DEBT SERVICE Principal and interest payments under the Facilities and interest payments on the Notes represent significant liquidity requirements for the Company. Annual term loan amortization requirements under the Term Loan Facility will be approximately $1.0 million, $3.0 million, $28.0 million, $80.2 million, $124.7 million, $173.0 million, $184.1 million and $156.0 million for each of the years 1997 through 2004, respectively. The Revolving Facility will mature in March 2003 and the $140 million Machinery Facility will mature in March 2001, with all amounts then outstanding becoming due. The loans under the Facilities bear interest at floating rates based upon the interest rate option elected by the Company. The Senior Notes and the Senior Subordinated Notes bear interest at rates of 10 1/4 percent and 10 7/8 percent, respectively. Interest expense in 1997 is expected to be approximately $170 million to $175 million, including approximately $10 million of non-cash amortization of deferred debt issuance costs. During the first quarter of 1997, cash paid for interest was approximately $19.7 million, and during April 1997, the Company paid an additional $36.2 million of interest. CAPITAL EXPENDITURES Capital spending for the first quarter of 1997 was approximately $45 million. During the first quarter of 1997, the Company completed a project to modify the pulp mill at the Macon Mill and is in the process of converting the second linerboard paper machine at the Macon Mill to coated board production. The cost of the pulp mill modification was approximately $32 million and was completed in early 1997 while the paper machine conversion is expected to cost approximately $85 million and is expected to be completed in mid-1997. For the first quarter of 1997, capital spending on these two projects totaled approximately $26 million while cumulative capital spending through March 29, 1997 on these two projects totaled approximately $72 million. The pulp mill modification project was completed on budget and on schedule, and to date, the conversion of the second linerboard paper machine is on budget and on schedule. Other capital spending during this period related primarily to increasing paper production efficiencies, increasing converting capacity, and manufacturing packaging machinery. Total capital spending for fiscal 1997 is expected to be approximately $155 million and is expected to relate principally to the pulp mill modification, the conversion of the second paper machine at the Macon Mill and the production of packaging machinery. I-16 FINANCING SOURCES AND CASH FLOWS At March 29, 1997, the Company and its U.S. and international subsidiaries had the following amounts undrawn under revolving credit facilities:
Total Amount Total Amount Total Amount of Outstanding at Available at (In thousands of dollars) Commitments March 29, 1997 March 29, 1997 - ------------------------- --------------- -------------- -------------- Revolving Facility $400,000 $132,000 $268,000 Machinery Facility 140,000 35,000 19,000 International facilities 54,933 38,438 16,495 -------- -------- -------- $594,933 $205,438 $303,495 ======== ======== ========
The Machinery Facility is limited by a borrowing base. During December 1996, the commitment for the Australian revolving facility was reduced from approximately $37 million to approximately $32 million. Undrawn Revolving Facility availability is expected to be used to pay taxes and other remaining costs of the Merger of approximately $43 million and 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, and possibly implementing a receivables securitization program. During the first quarter of 1997, the Company paid approximately $3 million of accrued costs related to the Merger. During April 1997, the Company made payments of $29 million for taxes relating to the Merger. As described above, the Company has substantial liquidity, but anticipates material incremental borrowings throughout 1997. 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, although no assurance can be given in this regard. The Company's future financial and operating performance, ability to service or refinance the senior and senior subordinated notes payable and to repay, extend or refinance the revolving credit facilities 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 its ability to successfully implement its overall business and profitability strategies. See "-Business Trends and Initiatives." 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 operations in the United States, Australia and Europe. The cost of exiting these businesses and operating activities was approximately $40.9 million which was accrued during 1996 as a purchase accounting adjustment. The costs relate principally to the severance of approximately 750 employees, relocation and other plant closure costs. At December 31, 1996, $32.6 million of this total was accrued in Other accrued liabilities on the Condensed Consolidated Balance Sheets. During the first quarter of 1997, $7.0 million was paid out and charged against the accrual and related primarily to severance costs. 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%. Under the Igaras joint venture agreement, Igaras is required to pay dividends equal to at least 25% 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. 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 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, to meet its capital spending program, to provide for unanticipated capital investments or to 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 Notes, pay dividends, create liens on assets, enter into sale and leaseback transactions, I-17 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 governing the Notes also impose restrictions on the operation of the Company's businesses. At March 29, 1997, the Company was in compliance with the covenants in its debt agreements. 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 EPA proposed regulations (generally referred to as the "cluster rules") that would mandate more stringent controls on air and water discharges from United States pulp and paper mills. In 1996, the EPA released additional clarification of the proposed cluster rules. Based on this information, the Company expects that the cluster rules may be finally promulgated in 1997 and 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 1997. The Company anticipates that the majority of this spending for compliance with the cluster rules will occur later in the eight-year period. The Company had no capital spending during the first quarter of 1997 related to compliance with the cluster rules. The DEQ has notified the Company by letters, dated December 19, 1995, that the Predecessor may be liable for the remediation of the release or threat of release 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 to the DEQ 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 Company first met with the DEQ on July 18, 1996, and then submitted a soil sampling plan to the DEQ. The Company expects approval of this sampling plan in the first half of 1997. On September 6, 1996, the Company received from the DEQ a letter requesting remediation of the former oil refinery site in Caddo Parish, Louisiana. The Company met with the DEQ on February 17, 1997 to discuss these matters. The DEQ requested that the Company enter into a cooperative agreement to perform a phased-in approach for evaluating soil and groundwater conditions at the Shreveport site. The Company is in discussions with the DEQ 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. 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 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. 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 alleges that the Defendants violated the federal securities laws by disseminating misleading statements and by omission 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 January 29, 1996, Defendants filed a motion to dismiss the complaint for failure to state a claim and failure to plead fraud with particularity. On March 29, 1996, the Court denied Defendants' motion to dismiss and allowed limited discovery to proceed with regard to statements attributable to the Company and the nature of the SARs. That discovery is now complete, and plaintiff has twice amended his complaint (each time putting forward the same claims made in the initial complaint but amending certain of the factual allegations). On November 1, 1996, the Defendants moved to dismiss the amended complaint, noting (i) none of the statements attributable to the Company concerning its review of strategic alternatives was false and (ii) that there is no causal relationship between plaintiff's purchase of Riverwood common stock and the Individual Defendants' exercise of SARs. That motion has been fully briefed and is currently before the Court. I-18 INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report (other than the financial statements and other statements of historical fact), including, without limitation, statements as to management's expectations and belief presented in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements. Forward-looking statements are made based upon management's expectations and belief concerning future developments and their potential effect 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. There are certain important factors that could cause actual results to differ materially from estimates reflected in such forward-looking statements, including changes in the level of sales volume of coated board for beverage cartons and folding cartons, as well as for containerboard, in the United States and abroad, changes in selling prices of the products of the Company or its competitors, the Company's ability to realize cost savings from productivity improvements and changes in the market for raw materials which could impact the Company's production costs. 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 herein in light of future events. I-19 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. Effective March 31, 1997, Stephen M. Humphrey was appointed as President and Chief Executive Officer of the Company. He is also a member of the Company's board of directors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 10.1 Employment Agreement between Riverwood Holding, Inc., Riverwood International Corporation and Stephen Humphrey. Filed as an exhibit hereto. 10.2 Management Stock Option Agreement between Riverwood Holding Inc. and Stephen Humphrey. Filed as an exhibit hereto. 99 Reconciliation of (Loss) Income from Operations to EBITDA. Filed as an exhibit hereto. (b) Reports on Form 8-K. Not applicable. II-1 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RIVERWOOD HOLDING, INC. --------------------------------------------- (Registrant) Date: May 9, 1997 By: /s/ B. H. Chastain --------------------------------------- B. H. Chastain Secretary Date: May 9, 1997 By: /s/ J. O. Egan --------------------------------------- J. O. Egan Senior Vice President and Chief Financial Officer II-2 EX-10.1 2 STEPHEN HUMPHREY EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT -------------------- This EMPLOYMENT AGREEMENT is entered into as of this 26th day of March, 1997 by and among Riverwood International Corporation, a Delaware corporation ("Employer"), Riverwood Holding, Inc., a Delaware corporation ("Holding"), and Stephen Humphrey ("Executive"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, Employer desires to employ Executive as its President and Chief Executive Officer and to enter into this Agreement setting forth the terms and conditions of such employment; WHEREAS, Executive desires to accept such employment on the terms and conditions set forth herein and to enter into this Agreement; WHEREAS, Employer, the Company and Executive each agree that Executive will have a prominent role in the management of the business, and the development of the goodwill, of the Company and its subsidiaries and will establish and develop relations and contacts with the principal customers and suppliers of the Company and its subsidiaries in the United States and the rest of the world, all of which constitute valuable goodwill of, and could be used by Executive to compete unfairly with, the Company and its subsidiaries; WHEREAS, (i) in the course of his employment with Employer, Executive - will obtain confidential information and trade secrets concerning the worldwide business and operations of the Company and the Subsidiaries that could be used to compete unfairly with the Company and the Subsidiaries; (ii) the covenants -- and restrictions contained in Sections 8 through 13, inclusive, are intended to protect the legitimate interests of Employer and the Company to protect their respective goodwill, trade secrets and other confidential information and (iii) --- Executive desires to agree to be bound by such covenants and restrictions and to enter into the Agreement; NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, Employer and Executive hereby agree as follows: 1. Agreement to Employ. Upon the terms and subject to the ------------------- conditions of this Agreement, Employer hereby employs Executive and Executive hereby accepts employment by Employer. 2. Term; Position and Responsibilities. ----------------------------------- (a) Term of Employment. Unless Executive's employment shall sooner ------------------ terminate pursuant to Section 7, Employer shall employ Executive for a term commencing on the 31st day of March, 1997 and ending on the fifth anniversary thereof (the "Initial Term"). Effective upon the expiration of the Initial Term, Executive's employment hereunder shall be deemed to be automatically extended, upon the same terms and conditions, for additional periods of one year (each, an "Additional Term"), in each such case, commencing upon the expiration of the Initial Term or the then current Additional Term, as the case may be, unless Employer, at least 180 days prior to the expiration of the Initial Term or any Additional Term, shall give written notice (a "Nonrenewal Notice") to Executive of its intention not to renew the Employment Period (as defined below) hereunder, provided that a Non-Renewal Notice shall not constitute a notice to Executive of his termination of employment by Employer unless such notice specifically provides for such termination of employment and the specific date thereof. The period during which Executive is employed pursuant to this Agreement, including any extension thereof in accordance with the preceding sentence, shall be referred to as the "Employment Period". (b) Position and Responsibilities. During the Employment Period, ----------------------------- Executive shall serve as President and Chief Executive Officer of Employer and have such duties and responsibilities as are customarily assigned to individuals serving in such position and such other duties consistent with Executive's position as the Board of Directors of Employer ("Employer's Board") specifies from time to time. Executive will devote all of his skill, knowledge and working time (except for (i) vacation time as set forth in Section 6(c) hereof and - absence for sickness or similar disability and (ii) to the extent that it does -- not interfere with the performance of Executive's duties hereunder, (A) such - reasonable time as may be devoted to service on boards of directors and the fulfillment of civic responsibilities and (B) reasonable time as may be - necessary from time to time for personal financial matters) to the conscientious performance of the duties of such position or positions. Executive shall serve as a member of the respective Boards 2 of Directors of Employer and Holding during the Employment Period. 3. Base Salary. As compensation for the services to be performed by ----------- Executive during the Employment Period, Employer will pay Executive an annual base salary of $500,000 and, in the event that employment hereunder is terminated by death, for the remainder of the pay period in which death occurs and for one month thereafter. Employer's Board will review Executive's base salary annually during the period of his employment hereunder and, in the discretion of Employer's Board, may increase (but may not decrease) such base salary from time to time based upon the performance of Executive, the financial condition of Employer, prevailing industry salary levels and such other factors as Employer's Board shall consider relevant. (The annual base salary payable to Executive under this Section 3, as the same may be increased from time to time and without regard to any reduction therefrom in accordance with the next sentence, shall hereinafter be referred to as the "Base Salary".) The Base Salary payable under this Section 3 shall be reduced to the extent that Executive elects to defer such Base Salary under the terms of any deferred compensation, savings plan or other voluntary deferral that arrangement may be maintained or established by Employer. Employer shall pay Executive the Base Salary in monthly installments, or in such other installments as may be mutually agreed upon by Employer and Executive. 4. Incentive Compensation Arrangements. ----------------------------------- (a) Incentive Compensation. During the Employment Period, Executive ---------------------- shall participate in Employer's incentive compensation programs for its executive officers existing from time to time, at a level commensurate with his position and duties with Employer, which programs shall provide an aggregate annual target bonus of 100% of Base Salary, based on such performance targets as may be established from time to time by Employer's Board or a committee thereof. Notwithstanding the foregoing, Executive shall receive an annual bonus for 1997 at least equal to $250,000. (b) Options. Executive shall be granted non-qualified stock options ------- (the "Service Options") to purchase up to 112,500 shares of the Class A Common Stock of Holding, par value $.01 per share (the "Common Stock"), and non- qualified stock options (the "Performance Options," and together with the Service Options, the "Options") to 3 purchase up to an additional 112,500 shares of Common Stock. Each Option shall be granted to Executive pursuant to and in accordance with the terms of the Riverwood Holding, Inc. Stock Incentive Plan, have a ten year term and otherwise be subject to the terms and conditions (which shall include those described in this Section 4(b)) set forth in a separate Management Stock Option Agreement, substantially in the form attached hereto as Exhibit A, to be entered into by Executive and Holding (the "Option Agreement"). The per share exercise price for the Common Stock covered by the Service Options and the Performance Options shall be:
Number of Shares Number of Shares Covered By Per Share Covered By Service Performance Exercise Options Options Price 37,500 shares 37,500 shares $100 37,500 shares 37,500 shares $ 75 37,500 shares 37,500 shares $ 50
All other terms of the Options shall be contained in the Option Agreement. 5. Employee Benefits. During the Employment Period, employee ----------------- benefits, including life, medical, dental, accidental death and dismemberment, business travel accident, prescription drug and disability insurance, will be provided to Executive in accordance with the programs of Employer then available to senior executive employees, as the same may be amended and in effect from time to time. Executive shall also be entitled to participate in all of Employer's profit sharing, pension, retirement, deferred compensation and savings plans, as the same may be amended and in effect from time to time, applicable to senior executives of Employer. The benefits referred to this Section 5 shall be provided to Executive on a basis that is commensurate with Executive's position and duties with the Company hereunder and that is no less favorable than that of similarly situated employees of Employer. 4 6. Perquisites and Expenses. ------------------------ (a) General. During the Employment Period, Executive shall be ------- entitled to participate in all special benefit or perquisite programs generally available from time to time to senior executive officers of Employer, on the terms and conditions then prevailing under each such program. (b) Business Travel, Lodging, etc. Employer shall reimburse ----------------------------- Executive for reasonable travel, lodging, meal and other reasonable expenses incurred by him in connection with his performance of services hereunder upon submission of evidence, satisfactory to Employer, of the incurrence and purpose of each such expense and otherwise in accordance with Employer's business travel reimbursement policy applicable to senior executives as in effect from time to time. (c) Vacation. Executive shall be entitled to such vacation as is -------- available under the prevailing policies of Employer but not less than the greater of five weeks of paid vacation or the number of weeks of paid vacation per year calculated in accordance with Employer's vacation policy applicable to senior executives, without carry-over accumulation. 7. Termination of Employment. ------------------------- (a) Termination Due to Death or Disability. In the event that -------------------------------------- Executive's employment hereunder terminates due to death or is terminated by Employer due to Executive's Disability (as defined below), no termination benefits shall be payable to or in respect of Executive except as provided in Section 7(f)(ii). For purposes of this Agreement, "Disability" shall mean a physical or mental disability that prevents the performance by Executive of his duties hereunder lasting for a continuous period of six months or longer. The determination of Executive's Disability shall be made by an independent physician who is reasonably acceptable to Employer and Executive and shall be final and binding and shall be based on such competent medical evidence as shall be presented to it by Executive or by any physician or group of physicians or other competent medical experts employed by Executive and/or Employer to advise such independent physician. (b) Termination by Employer for Cause. Executive may be terminated --------------------------------- for "Cause" by Employer; provided, 5 however, that Executive shall be permitted to attend a meeting of Employer's Board within thirty days after delivery to him of a Notice of Termination pursuant to this Section 7(b) to explain why he should not be terminated for Cause and, if following any such explanation by Executive, Employer's Board determines that Employer does not have Cause to terminate Executive's employment, any such prior Notice of Termination delivered to Executive shall thereupon be withdrawn and of no further force or effect. "Cause" shall mean (i) the willful failure of Executive substantially to perform his duties - hereunder (other than any such failure due to physical or mental illness) or other willful and material breach by Executive of any of his obligations hereunder or under the Option Agreement, after a demand for substantial performance is delivered, and a reasonable opportunity to cure is given, to Executive by Employer's Board, which demand identifies the manner in which Employer's Board believes that Executive has not substantially performed his duties or breached his obligations, (ii) Executive's engaging in willful and -- serious misconduct that has caused or would reasonably be expected to result in material injury to Employer or any of its affiliates or (iii) Executive's --- conviction of, or entering a plea of nolo contendere to, a crime that --------------- constitutes a felony. (c) Termination Without Cause. A termination "Without Cause" shall ------------------------- mean a termination of employment by Employer other than due to Disability as described in Section 7(a) or for Cause as defined in Section 7(b). (d) Termination by Executive. Executive may terminate his employment ------------------------ for any reason. A termination of employment by Executive for "Good Reason" shall mean a termination of employment by Executive within 30 days following the occurrence of any of the following events without Executive's consent: (i) the - assignment to Executive of duties that are significantly different from and that result in a substantial diminution of the duties that he is to assume on the date hereof, (ii) the failure of Employer to obtain the assumption of this -- Agreement by any successor as contemplated by Section 14, (iii) a reduction of --- Executive's Base Salary, (iv) a material breach by Employer of any of its -- obligations hereunder or by Holding under the Option Agreement or (v) delivery - to Executive of a Nonrenewal Notice, provided in the case of any of clauses (i), (iii) or (iv), Executive has delivered written notice of his intention to terminate his employment for "Good Reason", specifying the provisions hereof on which Executive 6 will rely, and Employer or Holding, as the case may be, shall have had a reasonable opportunity to cure. (e) Notice of Termination. Any termination by Employer pursuant to --------------------- Section 7(a), 7(b) or 7(c), or by Executive pursuant to Section 7(d), shall be communicated by a written "Notice of Termination" addressed to the other parties to this Agreement. A "Notice of Termination" shall mean a notice stating that Executive's employment with Employer has been or will be terminated. (f) Payments Upon Certain Terminations. ---------------------------------- (i) In the event of a termination of Executive's employment by Employer Without Cause or a termination by Executive of his employment for Good Reason during the Employment Period, Employer shall pay to Executive (or, following his death, to Executive's beneficiary) (A) his Base Salary, - payable in installments based on Employer's regular payroll practices, for the period beginning on the Date of Termination and ending on the earlier of (x) the last day of the Initial Term or, if applicable, the then current - Additional Term and (y) the third anniversary of the Date of Termination - (the "Severance Period") and (B) if, as of the Date of Termination, the - Company has achieved the performance objectives established under the Company's annual incentive compensation plan for the calendar year that includes the Date of Termination, pro rated on the basis of the fraction described in the immediately following clause (B)(2) hereof, an amount, payable in one lump sum as soon as reasonably practicable following receipt by Employer of Employer's or Holding's financial statements for such calendar year (accompanied by an audit report of its accountants) through the Date of Termination, equal to the product of (1) the amount of - incentive compensation that would have been payable to Executive for such calendar year under the annual incentive compensation plan had he remained employed for the entire calendar year, multiplied by (2) a fraction, the - numerator of which is equal to the number of days in such calendar year that precede the Date of Termination and the denominator of which is equal to 365 (such product, the "Pro Rata Bonus"), less (C) any amount paid or - payable to Executive under the terms of any severance plan or program of Holding, Employer or any of their respective subsidiaries as in effect on the Date of Termination; provided that Employer may, at any time, pay to -------- 7 Executive in a single lump sum and in satisfaction of Employer's obligations under clauses (A) and (B) of this Section 7(f)(i), an amount equal to (x) the installments of the Base Salary then remaining to be paid - to Executive pursuant to clause (A) above, and the amount, if any, then remaining to be paid to Executive pursuant to clause (B) above, less (y) - the amount, if any, remaining to be paid to Executive pursuant to any plan or program identified under clause (C) above. If Executive's employment shall terminate and he is entitled to receive continued payments of his Base Salary under clause (A) of this Section 7(f)(i), Employer shall (x) - continue to provide to Executive during the Severance Period the life, medical, dental, accidental death and dismemberment and prescription drug benefits referred to in Section 5 (the "Continued Benefits") and (y) - reimburse Executive for expenses incurred by him for outplacement and career counseling services provided to Executive for an aggregate amount not in excess of the lesser of (i) $25,000 and (ii) 20% of Executive's Base - -- Salary. Executive shall not have a duty to mitigate the costs to Employer under this Section 7(f)(i), except that payments of Base Salary and Continued Benefits shall be reduced or canceled to the extent of any compensation, fees or comparable benefit coverage earned by (whether or not paid currently) or offered to Executive during the Severance Period by a subsequent employer or other entity for whom Executive performs services including consulting services. (ii) If Executive's employment shall terminate upon his death or Disability or if Employer shall terminate Executive's employment for Cause or Executive shall terminate his employment without Good Reason during the Employment Period, Employer shall pay Executive his full Base Salary through the Date of Termination, plus, in the case of termination upon Executive's death or Disability, if the Company has achieved the pro rated performance target for such calendar year (determined as provided in Section 7(e)(ii)), the Pro Rata Bonus for the portion of the calendar year preceding Executive's Date of Termination (exclusive of any time between the onset of a physical or mental disability that prevents the performance by Executive of his duties hereunder and the resulting Date of Termination), plus in the case of termination upon Executive's death, his full Base Salary for the remainder of the pay period in which death occurs 8 and for one month thereafter, as provided in Section 3 hereof. (iii) Any benefits payable to Executive under any otherwise applicable plans, policies and practices of Employer shall not be limited by this Section 7(e), other than any such severance plan. (g) Date of Termination. As used in this Agreement, the term "Date ------------------- of Termination" shall mean (i) if Executive's employment is terminated by his - death, the date of his death, (ii) if Executive's employment is terminated by -- Employer for Cause, the date on which Notice of Termination is given or, if later, the date of termination specified in such Notice, as contemplated by Section 7(e), and (iii) if Executive's employment is terminated by Employer --- Without Cause, due to Executive's Disability or by Executive for any reason, 30 days after the date on which Notice of Termination is given as contemplated by Section 7(e) or, if no such Notice is given, 30 days after the date of termination of employment. (h) Resignation from Board Memberships. Effective as of any Date of ---------------------------------- Termination under this Section 7 or otherwise as of the date of Executive's termination of employment with Employer, Executive shall resign, in writing, from all Board memberships then held by him on the Boards of Holding, Employer or any of their respective subsidiaries. 8. Unauthorized Disclosure. During the period of Executive's ----------------------- employment with Employer and the ten year period following any termination of such employment, without the prior written consent of Employer's Board or its authorized representative, except to the extent required by an order of a court having apparent jurisdiction or under subpoena from an appropriate government agency, in which event, Executive will use his best efforts to consult with Employer's Board prior to responding to any such order or subpoena, and except as required in the performance of his duties hereunder, Executive shall not disclose any confidential or proprietary trade secrets, customer lists, drawings, designs, information regarding product development, marketing plans, sales plans, manufacturing plans, management organization information (including data and other information relating to members of Employer's Board, the Board of Directors of Holding and management of Employer or Holding), operating policies or manuals, business plans, financial records, packaging design or other financial, 9 commercial, business or technical information relating to Holding, Employer or any of their respective subsidiaries or affiliates that Holding, Employer or any of their respective subsidiaries or affiliates may receive belonging to suppliers, customers or others who do business with Holding, Employer or any of their respective subsidiaries or affiliates (collectively, "Confidential Information") to any third person unless such Confidential Information has been previously disclosed to the public or is in the public domain (other than by reason of Executive's breach of this Section 8). 9. Non-Competition. During the period of Executive's employment and, --------------- following any termination thereof, the period ending on the later of (i) the - first anniversary of the Date of Termination and (ii) the last day of the -- Severance Period, Executive shall not, directly or indirectly, engage in business with, serve as an agent or consultant to, become a partner, member, principal or stockholder (other than a holder of less than 1% of the outstanding voting shares of any publicly held company) of or become employed in an executive capacity by, any person, firm or other entity that competes or has a reasonable potential for competing anywhere in the United States or Europe with any part of the business of Holding, Employer or any of their respective subsidiaries that relates to producing, marketing, manufacturing, designing or installing packaging or paper products, machines or related materials. Whether any such person, firm or entity so competes or so has a reasonable potential for competing shall be determined in good faith by Employer's Board. For purposes of this Section 9, the phrase employment "in an executive capacity" shall mean employment in any position in connection with which Executive has or reasonably would be viewed as having powers and authorities with respect to any other person, firm or other entity or any part of the business thereof that are substantially similar, with respect thereto, to the powers and authorities assigned to the President and Chief Executive Officer of Employer in the By-Laws of Employer as in effect on the date hereof, a copy of the relevant portions of which has been delivered to and reviewed by Executive on the date hereof. 10. Non-Solicitation of Employees. During the period of Executive's ----------------------------- employment and, following any termination thereof, the period ending on the third anniversary of the Date of Termination (such periods collectively, the "Restriction Period"), Executive shall not, directly or indirectly, for his own account or for the 10 account of any other person or entity with which he is or shall become associated in any capacity, (a) solicit for employment, employ or otherwise - interfere with the relationship of Holding, Employer or any of their respective subsidiaries with, any person who at any time during the six months preceding such solicitation, employment or interference is or was employed by or otherwise engaged to perform services for Holding, Employer or any of their respective subsidiaries, other than any such solicitation or employment during Executive's employment with Holding and Employer on behalf of Holding, Employer or any of their respective subsidiaries, or (b) induce any employee of Holding, Employer - or any of their respective subsidiaries who is a member of management to engage in any activity which Executive is prohibited from engaging in under any of Sections 8, 9, 10 or 11 hereof or to terminate his employment with Employer. 11. Non-Solicitation of Customers. During the Restriction Period, ----------------------------- Executive shall not, directly or indirectly, solicit or otherwise attempt to establish for himself or any other person, firm or entity anywhere in the United States or Europe any business relationship of a nature that is competitive with the business or relationship of Holding, Employer or any of their respective subsidiaries with any person, firm or corporation which was a customer, client or distributor of Holding, Employer or any of their respective subsidiaries at any time during the Employment Period (in the case of any such activity during the Employment Period) or during the twelve-month period preceding the date of Executive's termination of employment with Holding, Employer and their respective subsidiaries, other than any such solicitation during Executive's employment with Holding or Employer on behalf of Holding, Employer or any of their respective subsidiaries. 12. Return of Documents. In the event of the termination of ------------------- Executive's employment for any reason, Executive will deliver to Employer all of Holding's, Employer's or any of their respective subsidiaries' property and Holding's, Employer's or any of their respective, subsidiaries' non-personal documents and data of any nature and in whatever medium pertaining to Executive's employment with Holding, Employer or any of their respective subsidiaries, and he will not take with him any such property, documents or data of any description or any reproduction thereof, or any documents containing or pertaining to any Confidential Information. Whether documents or data are "personal" or "non-personal" shall be 11 determined as follows: Executive shall present any documents or data that he wishes to take with him to the chief legal officer of Employer for his review. The chief legal officer shall make an initial determination whether any such documents or data are personal or non-personal, and with respect to such documents or data that he determines to be non-personal, shall notify Executive either that such documents or data must be retained by Employer or that Employer must make and retain a copy thereof before Executive takes such documents or data with him. Any disputes as to the personal or non-personal nature of any such documents or data shall first be presented to the Chairman of Employer's Board or to another representative designated by Employer's Board (such Chairman or representative, the "Chairman"), and if such disputes are not promptly resolved by Executive and the Chairman, such disputes shall be resolved through arbitration pursuant to Section 17(b). 13. Injunctive Relief with Respect to Covenants. Executive ------------------------------------------- acknowledges and agrees that the covenants, obligations and agreements of Executive with respect to noncompetition, nonsolicitation, confidentiality and Employer property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants, obligations or agreements will cause Employer irreparable injury for which adequate remedies are not available at law. Therefore, Executive agrees that Employer shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) as a court of competent jurisdiction may deem necessary or appropriate to restrain Executive from committing any violation of the covenants, obligations or agreements referred to in this Section 13. These injunctive remedies are cumulative and in addition to any other rights and remedies Employer may have. If Employer does not substantially prevail in obtaining the injunctive relief it seeks, Employer shall reimburse the Executive for any legal expenses incurred by him in defending against the imposition of such injunctive relief. Employer, Holding and Executive hereby irrevocably submit to the exclusive jurisdiction of the courts of the State of New York and the Federal courts of the United States of America, in each case located in New York City, in respect of the injunctive remedies set forth in this Section 13 and the interpretation and enforcement of Sections 8, 9, 10, 11, 12 and 13 insofar as such interpretation and enforcement 12 relate to any request or application for injunctive relief in accordance with the provisions of this Section 13, and the parties hereto hereby irrevocably agree that (i) the sole and exclusive appropriate venue for any suit or - proceeding relating solely to such injunctive relief shall be in such a court, (ii) all claims with respect to any request or application for such injunctive -- relief shall be heard and determined exclusively in such a court, (iii) any such --- court shall have exclusive jurisdiction over the person of such parties and over the subject matter of any dispute relating to any request or application for such injunctive relief and (iv) each hereby waives any and all objections and -- defenses based on forum, venue or personal or subject matter jurisdiction as they may relate to an application for such injunctive relief in a suit or proceeding brought before such a court in accordance with the provisions of this Section 13. All disputes not relating to any request or application for injunctive relief in accordance with this Section 13 shall be resolved by arbitration as contemplated by Section 17(b). 14. Assumption of Agreement. Employer will require any successor (by ----------------------- purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Employer, by agreement in form and substance reasonably satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession had taken place. Failure of Employer to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from Employer in the same amount and on the same terms as Executive would be entitled hereunder if Employer terminated his employment Without Cause as contemplated by Section 7, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 15. Entire Agreement. This Agreement (including the Exhibit hereto) ---------------- constitutes the entire agreement among the parties hereto with respect to the subject matter hereof, and all promises, representations, understandings, arrangements. All prior correspondence and proposals (including summaries of proposed terms) and all prior promises, representations, understandings, arrangements and 13 agreements relating to such subject matter (including but not limited to those made to or with Executive by any other person or entity) are merged herein and superseded hereby. 16. Indemnification. Employer agrees that it shall indemnify and --------------- hold harmless Executive to the fullest extent permitted by Delaware law from and against any and all liabilities, costs, claims and expenses including without limitation all costs and expenses incurred in defense of litigation, including attorneys' fees, arising out of the employment of Executive hereunder, except to the extent arising out of or based upon the gross negligence or willful misconduct of Executive. Costs and expenses incurred by Executive in defense of litigation, including attorneys' fees, shall be paid by Employer in advance of the final disposition of such litigation upon receipt of an undertaking adequate under Delaware law made by or on behalf of Executive to repay such amount if it shall ultimately be determined that Executive is not entitled to be indemnified by Employer under this Agreement. 17. Miscellaneous. ------------- (a) Binding Effect; Assignment. This Agreement shall be binding on -------------------------- and inure to the benefit of Employer and its successors and permitted assigns. This Agreement shall also be binding on and inure to the benefit of Executive and his heirs, executors, administrators and legal representatives. This Agreement shall not be assignable by any party hereto without the prior written consent of the other parties hereto, except pursuant to this Section 17(a) as hereinafter provided. Each of Holding and Employer may effect such an assignment without prior written approval of Executive upon the transfer of all or substantially all of its business and/or assets (whether by purchase, merger, consolidation or otherwise), provided that the successor to such business and/or -------- assets shall expressly assume and agree to perform this Agreement in accordance with the provisions of Section 14. (b) Arbitration. Any dispute or controversy arising under or in ----------- connection with this Agreement (except in connection with any request or application for injunctive relief in accordance with Section 13) shall be resolved by binding arbitration. The arbitration shall be held in the city of Atlanta, Georgia and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Commercial Arbitration Rules of the 14 American Arbitration Association then in effect at the time of the arbitration, and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both Employer and Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by Employer, one appointed by Executive, and the third appointed by the other two arbitrators. All expenses of arbitration shall be borne by the party who incurs the expense, or, in the case of joint expenses, by both parties in equal portions, except that, in the event Executive prevails on the principal issues of such dispute or controversy, all such expenses shall be borne by the Employer. (c) Governing Law. This Agreement shall be governed by and ------------- constructed in accordance with the laws of the State of New York without reference to principles of conflict of laws. (d) Taxes. Employer may withhold from any payments made under this ----- Agreement all federal, state, city or other applicable taxes as shall be required by law. (e) Amendments. No provision of this Agreement may be modified, ---------- waived or discharged unless such modification, waiver or discharge is approved by Employer's Board or a person authorized thereby and is agreed to in writing by Executive and, in the case of any such modification, waiver or discharge effecting the rights or obligations of Holding, is approved by the Board of Directors of Holding or such officer of Holding as may be specifically designated for such purpose by such Board of Directors. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No waiver of any provision of this Agreement shall be implied from any course of dealing between or among the parties hereto or from any failure by any party hereto to assert its rights hereunder on any occasion or series of occasions. (f) Severability. In the event that any one or more of the provisions ------------ of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. 15 (g) Notices. Any notice or other communication required or permitted ------- to be delivered under this Agreement shall be (i) in writing, (ii) delivered - -- personally, by courier service or by certified or registered mail, first-class postage prepaid and return receipt requested, (iii) deemed to have been received --- on the date of delivery or on the third business day after the mailing thereof, provided that the party giving such notice or communication shall have attempted - -------- to telephone the party or parties to which notice is being given during regular business hours on or before the day such notice or communication is being sent, to advise such party or parties that such notice is being sent, and (iv) -- addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): (A) if to Employer or Holding, to it at: Riverwood International Corporation 3350 Cumberland Circle Suite 1400 Atlanta, Georgia 30339 Attention: General Counsel --------- (B) if to Executive, to him at the address listed on the signature page hereof. Copies of any notices or other communications given under this Agreement shall also be given to: Clayton, Dubilier & Rice, Inc. 375 Park Avenue New York, New York 10152 Attention: Mr. Kevin J. Conway --------- and Debevoise & Plimpton 875 Third Avenue New York, New York 10022 Attention: Franci J. Blassberg, Esq. --------- (h) Survival. Sections 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, and, if -------- Executive's employment terminates in a manner giving rise to a payment under Section 7(f), Section 7(f), shall survive the termination of the employment of Executive hereunder. 16 (i) No Conflicts. Executive, Employer and Holding each represent that ------------ they are entering into this Agreement voluntarily and that Executive's employment hereunder and each party's compliance with the terms and conditions of this Agreement will not conflict with or result in the breach by such party of any agreement to which it is a party or by which it may be bound. (j) Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original and all of which together shall constitute one and the same instrument. (k) Headings. The section and other headings contained in this -------- Agreement are for the convenience of the parties only and are not intended to be a part hereof or to affect the meaning or interpretation hereof. 17 IN WITNESS WHEREOF, Employer and Holding have duly executed this Agreement by their authorized representatives and Executive has hereunto set his hand, in each case effective as of the date first above written. RIVERWOOD INTERNATIONAL CORPORATION By: /s/ B. Charles Ames --------------------------------------- Name: B. Charles Ames Title: chief executive officer RIVERWOOD HOLDING, INC. By: /s/ B. Charles Ames -------------------------------------- Name: B. Charles Ames Title: chief executive officer Executive: /s/ Stephen Humphrey --------------------------------------- Stephen Humphrey Address: ------- 3350 Cumberland Circle Suite 1400 Atlanta, Georgia 30339 Exhibit A --------- MANAGEMENT STOCK OPTION AGREEMENT --------------------------------- MANAGEMENT STOCK OPTION AGREEMENT, dated as of March 31, 1997, between Riverwood Holding, Inc., a Delaware corporation (the "Company"), and Stephen Humphrey (the "Grantee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, to motivate key employees of the Company and the Subsidiaries by providing them an ownership interest in the Company, the Board of Directors of the Company (the "Board") has established the Riverwood Holding, Inc. Stock Incentive Plan, as the same may be amended from time to time (the "Plan"); and WHEREAS, on the date hereof, the Company, its indirect, wholly-owned subsidiary, Riverwood International Corporation, a Delaware corporation ("Riverwood"), and the Grantee have entered into an Employment Agreement (as the same may be amended from time to time, the "Employment Agreement"), providing for, among other things, the grant to the Grantee of the stock options described herein; WHEREAS, the Grantee and the Company desire to enter into an agreement to evidence and confirm the grant of such stock options on the terms and conditions set forth herein; NOW, THEREFORE, to evidence the stock options so granted, and to set forth the terms and conditions governing such stock options, the Company and the Grantee hereby agree as follows: (i) Certain Definitions. As used in this Agreement, the following ------------------- terms shall have the following meanings: (1) "Acquisition" shall mean the series of transactions resulting in ----------- the indirect acquisition of all of the issued and outstanding capital stock of Former Riverwood by the Company on March 27, 1996 pursuant to the Merger Agreement. (2) "Affiliate" shall mean, with respect to any person, any other --------- person controlled by, controlling or under common control with such person. (3) "Applicable Percentage" shall mean, with respect to an EBITDA --------------------- Target for any Fiscal Year, the portion of such EBITDA Target actually achieved by the Company and the Subsidiaries as of the end of such Fiscal Year, expressed as a percentage. (4) "Board" shall mean the Board of Directors of the Company. ----- (5) "CD&R Fund" shall mean the Clayton, Dubilier & Rice Fund V --------- Limited Partnership, a Cayman Islands exempted limited partnership, and any successor investment vehicle managed by Clayton, Dubilier & Rice, Inc. (6) "Cause" shall have the meaning assigned to such term in the ----- Employment Agreement. (7) "Change in Control" shall mean the first to occur of the ----------------- following events after the date hereof: (i) the acquisition by any person, entity or "group" (as defined in Section 13(d) of the Exchange Act), other than the Company, the Subsidiaries, any employee benefit plan of the Company or the Subsidiaries, the CD&R Fund, any Investor or any Affiliate of the CD&R Fund or of an Investor, of 50% or more of the combined voting power of the Company's or Riverwood's then out standing voting securities; (ii) the merger or consolidation of the Company or Riverwood, as a result of which persons who were stockholders of the Company or Riverwood, as the case may be, immediately prior to such merger or consolidation, do not, immediately thereafter, own, directly or indirectly, more than 50% of the combined voting power entitled to vote generally in the election of directors of the merged or consolidated company; (iii) the liquidation or dissolution of the Company or Riverwood other than a liquidation of Riverwood into the Company or into any Subsidiary; and (iv) the sale, transfer or other disposition of all or substantially all of the assets of the Company or Riverwood to one or more persons or en- 2 tities that are not, immediately prior to such sale, transfer or other disposition, Affiliates of the Company, Riverwood, the CD&R Fund or any Investor. (8) "Change in Control Price" shall mean the price per share of ----------------------- Common Stock paid in conjunction with any transaction resulting in a Change in Control (as determined in good faith by the Board if any part of such price is payable other than in cash). (9) "Common Stock" shall mean the Class A Common Stock, par value ------------ $.01 per share, of the Company. (10) "Company" shall have the meaning set forth in the introductory ------- paragraph hereto. (11) "Covered Options" shall have the meaning set forth in Section --------------- 4(b) hereof. (12) "Cumulative EBITDA Target" shall mean the sum of the EBITDA ------------------------ Targets for each of the fiscal years of the Company ending December 31, 1997, 1998, 1999, 2000 and 2001 or, in the case of a determination of the Cumulative EBITDA Target prior to December 31, 2001 pursuant to Section 3(b) or 9(b) hereof, the sum of such EBITDA Targets for each of the Fiscal Years ending prior to such date of determination and a pro rata portion of the EBITDA Target for the Fiscal Year which includes such date of determination, pro-rated through the end of the most recent calendar quarter ending on or prior to such date of determination, as the same may be adjusted from time to time in accordance with this Agreement. (13) "Delay Period" shall have the meaning set forth in Section 10(c) ------------ hereof. (14) "Disability" shall have the meaning assigned to such term in the ---------- Employment Agreement. (15) "EBITDA" shall have the meaning assigned to such term in the ------ Credit Agreement, dated as of March 21, 1996, as amended, among RIC Holding (as successor to Former Riverwood), the other borrowers party thereto, The Chase Manhattan Bank, as administrative agent, and the lenders party thereto from time to time, as such agreement may be further amended from time to time. 3 (16) "EBITDA Target" shall mean, with respect to the 1997 Fiscal Year, ------------- EBITDA of $210 million and, with respect to each subsequent Fiscal Year, the EBITDA targeted for such Fiscal Year in the business plan of the Company and the Subsidiaries for such Fiscal Year approved by the Board; provided, however, that in the event the Company or any Subsidiary consummates a significant acquisition, disposition or other corporate transaction or series of transactions that, in the judgement of the Executive Committee of the Board, would reasonably be expected to impact the consolidated earnings of the Company and its subsidiaries, the EBITDA Target for the relevant fiscal years may be appropriately adjusted by the Board to reflect such transaction or series of transactions. (17) "Employment Agreement" shall have the meaning set forth in the -------------------- recitals hereto. (18) "Exchange Act" shall mean the U.S. Securities Exchange Act of ------------ 1934, as amended. (19) "Exercise Date" shall have the meaning set forth in Section 6 ------------- hereof. (20) "Exercise Price" shall have the meaning set forth in Section 6 -------------- hereof. (21) "Exercise Shares" shall have the meaning set forth in Section 6 --------------- hereof. (22) "Extraordinary Termination" shall mean a termination of the ------------------------- Grantee's employment with the Company and the Subsidiaries by reason of the Grantee's death, Disability or Retirement. (23) "Fair Market Value" shall mean, as of any date, the fair market ----------------- value on such date of a share of Common Stock as determined in good faith by the Executive Committee of the Board. In making a determination of Fair Market Value, the Executive Committee shall give due consideration to such factors as it deems appropriate, including, without limitation, the earnings and certain other financial and operating information of the Company and the Subsidiaries in recent periods, the potential value of the Company and the Subsidiaries as a whole, the future prospects of the Company and the Subsidiaries and the industries in which they compete, the history and management of the 4 Company and the Subsidiaries, the general condition of the securities markets, the fair market value of securities of companies engaged in businesses similar to those of the Company and the Subsidiaries and a valuation of the Common Stock, which shall be performed, with respect Fiscal Year, beginning with the 1997 Fiscal Year, as promptly as practicable following the first business day of the subsequent Fiscal Year by an independent valuation firm chosen by the Executive Committee. Notwithstanding the foregoing, following a Public Offering, Fair Market Value shall mean the average of the high and low trading prices for a share of Common Stock on the primary national exchange (including NASDAQ) on which the Common Stock is then traded on the trading day immediately preceding the date as of which such Fair Market Value is determined. The determination of Fair Market Value will not give effect to any restrictions on transfer of the shares of Common Stock or the fact that such Common Stock would represent a minority interest in the Company. (24) "Fiscal Year" shall mean a fiscal year of the Company ending ----------- December 31. (25) "First Purchase Period" shall have the meaning set forth in --------------------- Section 5(c)(i) hereof. (26) "Financing Agreements" shall have the meaning set forth in -------------------- Section 10(a) hereof. (27) "Fiscal Year" shall mean a fiscal year of the Company ending ----------- December 31. (28) "Former Riverwood" shall mean the Delaware corporation known as ---------------- "Riverwood International Corporation" prior to the Acquisition, which was merged into RIC Holding in connection with the Acquisition. (29) "Good Reason" shall have the meaning assigned to such term in the ----------- Employment Agreement. (30) "Grant Date" shall mean the date hereof, which is the date on ---------- which the Options are granted to the Grantee. (31) "Grantee" shall have the meaning set forth in the introductory ------- paragraph hereto. 5 (32) "Installment" shall mean Performance Options with respect to ----------- 7,500 shares. (33) "Investors" shall mean each of the investors who purchased shares --------- of Common Stock or shares of Class B Common Stock of the Company concurrently with the consummation of the merger contemplated by the Merger Agreement, and their "specified affiliates", within the meaning of the Stockholders Agreement of the Company, as amended from time to time. (34) "Management Stock Subscription Agreement" shall mean the --------------------------------------- management stock subscription agreement to be entered into by the Company and the Grantee in connection with the Grantee's exercise of any of the Options and purchase of the Shares subject to any such Options pursuant to Section 6 hereof. (35) "Merger Agreement" shall mean the Agreement and Plan of Merger, ---------------- dated as of October 25, 1995, by and among RIC Holding, its wholly owned subsidiary, CDRO Acquisition Corporation, a Delaware corporation, and Prior Riverwood. (36) "New Employer" shall mean the Grantee's employer, or the parent ------------ or a subsidiary of such employer, immediately following a Change in Control. (37) "Normal Termination Date" shall mean the tenth anniversary of the ----------------------- date hereof. (38) "Option Price" shall mean, with respect to an Option, the ------------ exercise price under such Option determined in accordance with Section 2(b) hereof, except as provided otherwise in Section 3(b)(iii). (39) "Options" shall mean, collectively, the Performance Options and ------- the Service Options granted to the Grantee hereby. (40) "Performance Options" shall mean those Options that are subject ------------------- to the provisions of Section 3(b) hereof providing for the vesting of such Options on the basis of the financial performance of the Company and the Subsidiaries and/or the continued employment of the Grantee. Performance Options have been granted to the Grantee pursuant to this Agreement with respect to 112,500 Shares. 6 (41) "Plan" shall have the meaning set forth in the recitals hereto. ---- (42) "Public Offering" shall mean the first day as of which sales of --------------- Common Stock are made to the public in the United States pursuant to an underwritten public offering of the Common Stock led by one or more underwriters at least one of which is an underwriter of nationally recognized standing. (43) "Registration and Participation Agreement" shall have the meaning ---------------------------------------- set forth in Section 7(f) hereof. (44) "Retirement" shall mean the Grantee's retirement from employment --------- with the Company and the Subsidiaries at or after age 65. (45) "RIC Holding" shall mean RIC Holding, Inc., a Delaware ----------- corporation and wholly owned subsidiary of the Company. (46) "Riverwood" shall have the meaning set forth in the recitals --------- hereto. (47) "Rule 144" shall mean Rule 144 promulgated under the Securities -------- Act. (48) "Second Purchase Period" shall have the meaning set forth in ---------------------- Section 5(c)(i) hereof. (49) "Securities Act" shall mean the U.S. Securities Act of 1933, as -------------- amended. (50) "Service Options" shall mean those Options that are subject to --------------- the provisions of Section 3(a) hereof providing for the vesting of such Option on the basis of the Grantee's completion of service. Service Options have been granted to the Grantee pursuant to this Agreement with respect to 112,500 Shares. (51) "Shares" shall mean the shares of Common Stock subject to the ------ Options. (52) "Subsidiary" shall mean any corporation or other person, a ---------- majority of whose outstanding voting securities or other equity interests are owned, directly or indirectly, by the Company. 7 2. Grant of Options. ---------------- (a) Confirmation of Grant. The Company hereby evidences and confirms --------------------- its grant to the Grantee, effective as of the date hereof, of (i) Service - Options to purchase 112,500 Shares and (ii) Performance Options to purchase -- 112,500 Shares. The Options are not intended to be incentive stock options under the U.S. Internal Revenue Code of 1986, as amended. This Agreement is subordinate to, and the terms and conditions of the Options granted hereunder are subject to, the terms and conditions of the Plan. If there is any inconsistency between the terms hereof and the terms of the Plan, the terms of the Plan shall govern. (b) Option Price. The Service Options and the Performance Options ------------ shall each be divided into three equal tranches, each such tranche covering 37,500 Shares and, subject to section 3(b) below, having a per share exercise price for the Shares covered thereby determined in accordance with the following schedule:
Number of Shares Covered Number of Shares by Each Covered By Each Tranche of Per Share Tranche of Service Performance Exercise Options Options Price 37,500 Shares 37,500 Shares $100 37,500 Shares 37,500 Shares $ 75 37,500 Shares 37,500 Shares $ 50
3. Exercisability. -------------- (a) Service Options. Except as otherwise provided in this Agreement --------------- and subject to the continuous employment of the Grantee with the Company or one or more of the Subsidiaries until the applicable vesting date, each tranche of Service Options shall become vested and exercisable in five annual installments, on each of the first five anniversaries of the Grant Date, at the rate of 10%, 20%, 30%, 20% and 20%, respectively; provided that, if, on or prior to the fifth -------- anniversary of the Grant Date, (x) the Grantee's employment is terminated by - reason of an Extraordinary Termination or (y)(i)the CD&R Fund and, if - - 8 applicable, its Affiliates effect a sale or other disposition of all of the Common Stock then held by the CD&R Fund and its Affiliates to one or more persons other than any person who is a general or limited partner or Affiliate of the CD&R Fund and (ii) thereafter, the Grantee's employment is terminated by -- the Company other than for Cause or by the Grantee for Good Reason, all Service Options held by the Grantee as of the effective date of such Extraordinary Termination or termination under the foregoing clause (y)(ii), whichever is applicable, shall become immediately 100% vested and exercisable. (b) Performance Options. Except as otherwise provided in this ------------------- Agreement and subject to the continuous employment of the Grantee with the Company or one or more of the Subsidiaries until the applicable vesting date as follows: (i) the Applicable Percentage of an Installment of each tranche of Performance Options shall become vested and exercisable on each of the first five anniversaries of the Grant Date, provided in the case of any such Installment that the Executive Committee of the Board determines that Company has achieved at least 75% of the EBITDA Target for the Fiscal Year ending immediately prior to such anniversary date; (ii) 100% of any Performance Options that, as of the fifth anniversary of the Grant Date, have not become vested and exercisable in accordance with the preceding clause (i) shall become vested and exercisable as of the date of such fifth anniversary if the Executive Committee of the Board determines that Company has achieved 100% of the Cumulative EBITDA Target for the five Fiscal Years ending December 31, 2001; and (iii) if any Performance Options have not become vested and exercisable in accordance with either of the preceding clauses (i) or (ii) as of the fifth anniversary of the Grant Date, (x) as of the date of such fifth anniversary, and as of each anniversary of the Grant Date occurring thereafter, the Option Price for any Performance Options that have not become vested and exercisable in accordance with this clause (iii) as of such date, shall increase by 10% and (y) the lesser of (A) 100% of each - tranche of such unvested Performance Options and (B) Performance Options - covering 7,500 Shares of each tranche of such unvested 9 Performance Options shall become vested and exercisable as of each of the sixth through ninth anniversaries of the Grant Date if the Executive Committee of the Board determines that Company has achieved at least 100% of the EBITDA Target for the Fiscal Year ending immediately prior to such anniversary date; provided that if, on or prior to the fifth anniversary of the Grant Date, (x) - -------- - the Grantee's employment is terminated by reason of an Extraordinary Termination or (y)(i) the CD&R Fund and, if applicable, its Affiliates effect a sale or - - other disposition of all of the Common Stock then held by the CD&R Fund and its Affiliates to one or more persons other than any person who is a general or limited partner or Affiliate of the CD&R Fund and (ii) thereafter, the Grantee's -- employment is terminated by the Company other than for Cause or by the Grantee for Good Reason, then the excess of (x) a proportionate share of each tranche of - Performance Options, over (y) the number of Performance Options of such tranche - that have previously become vested pursuant to Section 3(b)(i) shall vest and become exercisable as of such date of termination. Such proportionate share of each tranche of Performance Options that shall become vested and exercisable shall equal the product of (i) the percentage obtained by dividing (x) the - - cumulative EBITDA actually achieved by the Company during the period commencing on January 1, 1997 and ending on the last day of the most recent calendar quarter ending on or prior to the effective date of the Extraordinary Termination or other termination, whichever is applicable, as determined by the Executive Committee of the Board, by (y) the Cumulative EBITDA Target, - multiplied by (ii) the total number of Shares initially subject to such tranche -- of Performance Options. Any Performance Options held by the Grantee as of the date of an Extraordinary Termination or other termination, whichever is applicable, that have not become vested and exercisable on or prior to such date of termination in accordance with this Section 3(b) shall terminate and be cancelled immediately on such date. Notwithstanding the foregoing provisions of this paragraph (b), 100% of the Performance Options shall become vested and exercisable nine years and six months following the Grant Date regardless of whether any EBITDA Target has been achieved, subject to the continuous employment of the Grantee with the Company or one or more of the Subsidiaries until such date. 10 (c) Conditions. The Board, in its sole discretion, may accelerate ---------- the vesting or exercisability of any Option, all Options or any class of Options, at any time and from time to time. Shares eligible for purchase may, subject to the provisions hereof, thereafter be purchased, at any time and from time to time on or after such anniversary until the date one day prior to the date on which the Options terminate, provided that any such purchase shall be effected pursuant to and subject to Sections 5 and 6 hereof and the provisions contained in the Management Stock Subscription Agreement related to the purchase of such Shares. 4. Termination of Options. ---------------------- (a) Normal Termination Date. Unless an earlier termination date ----------------------- shall occur as specified in subsection (b), the Options shall terminate and be cancelled on the Normal Termination Date. (b) Early Termination. If the Grantee's employment is voluntarily or ----------------- involuntarily terminated for any reason, any Options held by the Grantee that have not become vested and exercisable on or before the effective date of such termination shall terminate and be cancelled immediately upon such termination of employment. Subject to the provisions of Section 5(c), all Options held by the Grantee on the date of such termination that shall have become vested and exercisable on or before the effective date of such termination (such Options, the Covered Options") shall remain exercisable for whichever of the following periods is applicable, and if not exercised within such period, shall terminate and be cancelled upon the expiration of such period: (i) if the Grantee's - employment is terminated by reason of an Extraordinary Termination, the Covered Options shall remain exercisable solely until the first to occur of (A) the one - year anniversary of the Grantee's termination of employment or (B) the Normal - Termination Date and (ii) if the Grantee's employment is terminated for any -- reason other than (x) an Extraordinary Termination or (y) for Cause, the Covered - - Options shall remain exercisable for a period of 60 days after the earliest to occur of (x) the expiration of the Second Purchase Period (as defined in - Section 5(c)(i) hereof), (y) the receipt by the Grantee of written notice that - the CD&R Fund does not intend to exercise its right to purchase the Covered Options pursuant to Section 5(c)(i) and (z) the Normal Termination Date. - Notwithstanding anything else contained in this Agreement, if the Grantee's employment is 11 terminated for Cause, all Options (whether or not then exercisable) shall terminate and be cancelled immediately upon such termination. Nothing in this Agreement shall be deemed to confer on the Grantee any right to continue in the employ of the Company or any Subsidiary, or to interfere with or limit in any way the right of the Company or any Subsidiary to terminate such employment at any time. 5. Restrictions on Exercise; Non-Transferability of Options; --------------------------------------------------------- Repurchase of Options. - --------------------- (a) Restrictions on Exercise. The Options may be exercised only with ------------------------ respect to full shares of Common Stock. No fractional shares of Common Stock shall be issued. Not withstanding any other provision of this Agreement, the Options may not be exercised in whole or in part, and no certificates representing Shares shall be delivered, (i) (A) unless all requisite approvals - - and consents of any govern mental authority of any kind having jurisdiction over the exercise of the Options shall have been secured, (B) unless the - purchase of the Shares upon the exercise of the Options shall be exempt from registration under applicable U.S. federal and state securities laws, and applicable non-U.S. securities laws, or the Shares shall have been registered under such laws, and (C) unless all applicable U.S. federal, state and local and - non-U.S. tax withholding requirements shall have been satisfied or (ii) if such -- exercise would result in a violation of the terms or provisions of or a default or an event of default under any of the Financing Agreements. The Company shall use commercially reasonable efforts to obtain the consents and approvals referred to in clause (i)(A) of the preceding sentence and to obtain the consent of the parties to the Financing Agreements referred to in clause (ii) of the preceding sentence so as to permit the Options to be exercised. (b) Non-Transferability of Options. Except as contemplated by ------------------------------ Section 5(c), the Options may be exercised only by the Grantee or by the Grantee's estate. Except as contemplated by Section 5(c), the Option is not assignable or transferable, in whole or in part, and it may not, directly or indirectly, be offered, transferred, sold, pledged, assigned, alienated, hypothecated or otherwise disposed of or encumbered (including without limitation by gift, operation of law or otherwise) other than by will or by the laws of descent and distribution to the estate of the Grantee upon the Grantee's death, provided that the deceased Grantee's beneficiary or the representative of -------- the Grantee's estate shall acknowledge and agree in writing, in a form 12 reasonably acceptable to the Company, to be bound by the provisions of this Agreement and the Plan as if such beneficiary or the estate were the Grantee. (c) Purchase of Options on Termination of Employment. ------------------------------------------------ (i) Termination of Employment. If the Grantee's employment is ------------------------- terminated for any reason other than for Cause, the Company shall have an option to purchase all or any portion of the Covered Options and shall have 30 days from the date of the Grantee's termination of employment (such 30- day period being hereinafter referred to as the "First Purchase Period") during which to give notice in writing to the Grantee (or, if the Grantee's employment was terminated by the Grantee's death, the Grantee's estate) of its election to exercise or not to exercise such right to purchase the Covered Options. The Company hereby undertakes to use reasonable efforts to act as promptly as practicable following such termination to make such election. If the Company (i) fails to give notice that it intends to - exercise its right to purchase the Covered Options within the First Purchase Period, or (ii) chooses to purchase none or only a portion of the -- Covered Options, by giving such notice, the CD&R Fund shall have the right to purchase all or any portion of the Covered Options not purchased by the Company, and shall have until the expiration of the earlier of (x) 30 days - following the end of the First Purchase Period, or (y) 30 days from the - date of receipt by the CD&R Fund of written notice that the Company does not intend to exercise its right with respect to all of the Covered Options (such 30-day period being hereinafter referred to as the "Second Purchase Period"), to give notice in writing to the Grantee (or the Grantee's estate) of the CD&R Fund's exercise of its right to purchase all or any portion of such Covered Options. If the rights of the Company and the CD&R Fund to purchase all of the Covered Options granted in this sub section are not fully exercised as provided herein other than as a result of any deferral of the payment of the Purchase Price therefor pursuant to Section 10 hereof, the Grantee (or the Grantee's estate) shall be entitled to retain any Covered Options not so purchased, subject to all of the provisions of this Agreement (including, without limitation, Section 4(b)). 13 (ii) Purchase Price, etc. All purchases pursuant to this Section 5(c) ------------------- by the Company or the CD&R Fund shall be for a purchase price and effected in the manner prescribed by Sections 5(f), (g) and (h). (d) Notice of Termination. The Company shall give written notice of --------------------- any termination of the Grantee's employment to the CD&R Fund, except that if such termination (if other than as a result of death) is by the Grantee, the Grantee shall give written notice of such termination to the Company and the Company shall give written notice of such termination to the CD&R Fund. (e) Public Offering. In the event that a Public Offering has been --------------- consummated, neither the Company nor the CD&R Fund shall have any rights to purchase the Covered Options pursuant to Section 5(c). (f) Purchase Price. Subject to Section 10(c) hereof, the purchase -------------- price to be paid to the Grantee (or the Grantee's estate) for the Covered Options purchased pursuant to Section 5(c) shall be equal to the excess, if any, of (i) the Fair Market Value, as of the effective date of the termination of - employment that gives rise to the right of the Company and the CD&R Fund to, of the Shares which may be purchased upon exercise of such Covered Options over (ii) the aggregate Option Price of such Covered Options. -- (g) Payment. The completion of a purchase pursuant to this Section 5 ------- shall take place at the principal office of the Company on the tenth business day following the receipt by the Grantee (or the Grantee's estate) of the CD&R Fund's or the Company's notice of its exercise of the right to purchase the Covered Options pursuant to Section 5(c). Subject to Section 10 hereof, the purchase price shall be paid by delivery to the Grantee (or the Grantee's estate) of a check for the purchase price payable to the order of the Grantee (or the Grantee's estate), against delivery of such instruments as the Company may reasonably request, signed by the Grantee (or the Grantee's estate), free and clear of all security interests, liens, claims, encumbrances, charges, options, restrictions on transfer, proxies and voting and other agreements of whatever nature. (h) Application of the Purchase Price to Certain Loans. The Grantee -------------------------------------------------- agrees that the Company and the CD&R Fund shall be entitled to apply any amounts to be paid by the Company or the CD&R Fund, as the case may be, to pur- 14 chase the Covered Options pursuant to this Section 5 to discharge any indebtedness of the Grantee to the Company or any Subsidiary, or indebtedness that is guaranteed by the Company or any Subsidiary, including, but not limited to, any indebtedness of the Grantee incurred to purchase any shares of Common Stock. (i) Withholding. Whenever Shares are to be issued pursuant to the ----------- Options, the Company may require the recipient of the Shares to remit to the Company an amount sufficient to satisfy any applicable U.S. federal, state and local and non-U.S. tax withholding requirements as a condition to the issuance of such Shares. In the event any cash is paid to the Grantee or the Grantee's estate or beneficiary pursuant to this Section 5, the Company shall have the right to withhold an amount from such payment sufficient to satisfy any applicable U.S. federal, state and local and non-U.S. tax withholding requirements. If shares of Common Stock are traded on a national securities exchange or bid and ask prices for shares of Common Stock are quoted on the NASDAQ, the Company may, if requested by the Grantee, withhold Shares to satisfy the minimum applicable withholding requirements, subject to the provisions of the Plan and any rules adopted by the Board regarding compliance with applicable law, including, but not limited to, Section 16(b) of the Exchange Act. 6. Manner of Exercise. To the extent that any outstanding Options ------------------ shall have become and remain vested and exercisable as provided in Sections 3 and 4 and subject to such reasonable administrative regulations as the Board may have adopted, such Options may be exercised, in whole or in part, by notice to the Secretary of the Company in writing given on the date as of which the Grantee will so exercise the Options (the "Exercise Date"), specifying the number of whole Shares with respect to which the Options are being exercised (the "Exercise Shares"), subject to the execution by the Company and the Grantee of a Management Stock Subscription Agreement substantially in the form attached to the Plan as Exhibit A ("Management Stock Subscription Agreement"), or in such other form as may be agreed upon by the Company and the Grantee, such Management Stock Subscription Agreement to contain (unless a Public Offering shall have occurred prior to the Exercise Date) provisions corresponding to Section 5(c) hereof, and the delivery to the Company by the Grantee, on or within five days following the Exercise Date, in accordance with the Management Stock Subscription Agreement, full payment for the Exercise Shares in United States dollars in cash, or cash equivalents 15 satisfactory to the Company, and in an amount equal to the product of the number of Exercise Shares, multiplied by the aggregate Option Price for such Exercise Shares (such amount, the "Exercise Price"). Upon execution by the Company and the Grantee of the Management Stock Subscription Agreement and delivery to the Company by the Grantee of the Exercise Price, the Company shall deliver to the Grantee a certificate or certificates representing the Exercise Shares, registered in the name of the Grantee and bearing appropriate legends as provided in Section 7(b) hereof. If, as of the Exercise Date, shares of Common Stock are traded on a U.S. national securities exchange or bid and ask prices for shares of Common Stock are quoted over NASDAQ, the Grantee may, in lieu of tendering cash, tender shares of Common Stock that have been owned by the Grantee for at least six months, having an aggregate Fair Market Value on the Exercise Date equal to the Exercise Price or may deliver a combination of cash and such shares of Common Stock having an aggregate Fair Market Value equal to the difference between the Exercise Price and the amount of such cash as payment of the Exercise Price, subject to such rules and regulations as may be adopted by the Board to provide for the compliance of such payment procedure with applicable law, including Section 16(b) of the Exchange Act. The Company may require the Grantee to furnish or execute such other documents as the Company shall reasonably deem necessary (i) to evidence such exercise, (ii) to determine - -- whether registration is then required under the Securities Act and (iii) to --- comply with or satisfy the requirements of the Securities Act, applicable state or non-U.S. securities laws or any other law. 7. Grantee's Representations, Warranties and Covenants. --------------------------------------------------- (a) Investment Intention. The Grantee represents and warrants that -------------------- the Options have been, and any Exercise Shares will be, acquired by the Grantee solely for the Grantee's own account for investment and not with a view to or for sale in connection with any distribution thereof. The Grantee agrees that the Grantee will not, directly or indirectly, offer, transfer, sell, pledge, hypothecate or otherwise dispose of all or any of the Options or any of the Exercise Shares (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of all or any of the Options or any of the Exercise Shares), except in compliance with the Securities Act and the rules and regulations of the Commission thereunder, and in compliance with applicable state securities or "blue sky" laws and non-U.S. securities 16 laws. The Grantee further understands, acknowledges and agrees that none of the Exercise Shares may be transferred, sold, pledged, hypothecated or otherwise disposed of unless the provisions of the related Management Stock Subscription Agreement shall have been complied with or have expired. (b) Legends. The Grantee acknowledges that any certificate ------- representing the Exercise Shares shall bear an appropriate legend, which will include, without limitation, the following language: "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF A MANAGEMENT STOCK SUBSCRIPTION AGREEMENT, DATED AS OF _______, AND NEITHER THIS CERTIFICATE NOR THE SHARES REPRESENTED BY IT ARE ASSIGNABLE OR OTHERWISE TRANSFERABLE EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SUCH MANAGEMENT STOCK SUBSCRIPTION AGREEMENT, AS THE SAME MAY BE AMENDED FROM TIME TO TIME A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE ENTITLED TO CERTAIN OF THE BENEFITS OF AND ARE BOUND BY CERTAIN OF THE OBLIGATIONS SET FORTH IN A REGISTRATION AND PARTICIPATION AGREEMENT, DATED AS OF MARCH 27, 1996, AMONG THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY." "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE OR NON-U.S. SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (i) (A) SUCH DISPOSITION - - IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (B) THE HOLDER HEREOF SHALL HAVE - DELIVERED TO THE COMPANY AN OPINION OF COUNSEL, WHICH OPINION AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT SUCH DISPOSITION IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SUCH ACT OR (C) A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE - COMMISSION, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, SHALL HAVE BEEN OBTAINED WITH RESPECT TO SUCH DISPOSITION AND (ii) SUCH -- DISPOSITION IS 17 PURSUANT TO REGISTRATION UNDER ANY APPLICABLE STATE AND NON-U.S. SECURITIES LAWS OR AN EXEMPTION THEREFROM." (c) Securities Law Matters. The Grantee acknowledges receipt of ---------------------- advice from the Company that (i) the Exercise Shares have not been registered - under the Securities Act or qualified under any state securities or "blue sky" or non-U.S. securities laws, (ii) it is not anticipated that there will be any -- public market for the Exercise Shares, (iii) the Exercise Shares must be held --- indefinitely and the Grantee must continue to bear the economic risk of the investment in the Exercise Shares unless the Exercise Shares are subsequently registered under the Securities Act and such state laws or an exemption from registration is available, (iv) while the Company is currently obligated under -- its Financing Agreements to file periodic reports with the Commission and, accordingly, Rule 144 may be presently available with respect to sales of securities of the Company, the Company has made no covenant to the Grantee to continue to make Rule 144 available, (v) when and if the Exercise Shares may be - disposed of without registration in reliance upon Rule 144, such disposition can be made only in limited amounts in accordance with the terms and conditions of such Rule, (vi) the Company does not plan to file reports with the Commission or -- make public information concerning the Company available unless required to do so by law or the terms of its Financing Agreements, (vii) if the exemption --- afforded by Rule 144 is not available, sales of the Exercise Shares may be difficult to effect because of the absence of public information concerning the Company, (viii) a restrictive legend in the form heretofore set forth shall be ---- placed on the certificates representing the Exercise Shares and (ix) a notation -- shall be made in the appropriate records of the Company indicating that the Exercise Shares are subject to restrictions on transfer set forth in this Agreement and, if the Company should in the future engage the services of a stock transfer agent, appropriate stop-transfer restrictions will be issued to such transfer agent with respect to the Exercise Shares. (d) Compliance with Rule 144. If any of the Exercise Shares are to be ------------------------ disposed of in accordance with Rule 144, the Grantee shall transmit to the Company an executed copy of Form 144 (if required by Rule 144) no later than the time such form is required to be transmitted to the Commission for filing and such other documentation as the Company may reasonably require to assure compliance with Rule 144 in connection with such disposition. 18 (e) Ability to Bear Risk. The Grantee covenants that the Grantee will -------------------- not exercise all or any of the Options unless (i) the financial situation of the - Grantee is such that the Grantee can afford to bear the economic risk of holding the Exercise Shares for an indefinite period and (ii) the Grantee can afford to -- suffer the complete loss of the Grantee's investment in the Exercise Shares. (f) Registration; Restrictions on Sale upon Public Offering. The -------------------------------------------------------- Grantee acknowledges and agrees that in respect of any Exercise Shares purchased upon exercise of all or any of the Options, the Grantee shall be entitled to the rights and subject to the obligations created under the Registration and Participation Agreement, dated as of March 27, 1996, among the Company and certain stockholders of the Company, as the same may be amended, modified or supplemented from time to time (the "Registration and Participation Agreement"), to the extent set forth therein. The Grantee agrees that, in the event that the Company files a registration statement under the Securities Act with respect to an underwritten public offering of any shares of its capital stock, the Grantee will not effect any public sale or distribution of any shares of the Common Stock (other than as part of such public offering), including but not limited to, pursuant to Rule 144 or Rule 144A under the Securities Act, during the 20 days prior to and the 180 days after the effective date of such registration statement. The Grantee further understands and acknowledges that any sale, transfer or other disposition of the Exercise Shares by him following a public offering will be subject to compliance with, and may be limited under, the federal securities laws and/or state "blue sky" and/or non-U.S. securities laws. (g) Section 83(b) Election. The Grantee agrees that, within 20 days ---------------------- of any Exercise Date that occurs prior to a Public Offering, the Grantee shall give notice to the Company in the event the Grantee has made or intends to make an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, with respect to the Exercise Shares purchased on such date, and acknowledges that the Grantee will be solely responsible for any and all tax liabilities payable by the Grantee in connection with the Grantee's exercise of any Options or receipt of any Exercise Shares or attributable to the Grantee's making or failing to make such an election. 8. Representations and Warranties of the Company. The Company --------------------------------------------- represents and warrants to the Grantee 19 that (a) the Company has been duly incorporated and is an existing corporation - in good standing under the laws of the State of Delaware, (b) this Agreement has - been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding obligation of the Company enforceable against the Company in accordance with its terms and (c) the Exercise Shares, when issued, - delivered and paid for, upon exercise of the Options in accordance with the terms hereof and the Management Stock Subscription Agreement, will be duly authorized, validly issued, fully paid and nonassessable, and free and clear of any liens or encumbrances other than those created pursuant to this Agreement, the Management Stock Subscription Agreement or otherwise in connection with the transactions contemplated hereby. 9. Change in Control. ----------------- (a) Service Options and Vested Performance Options. Subject to ---------------------------------------------- Section 9(d), in the event of a Change in Control prior to the fifth anniversary of the Grant Date, (i) each then outstanding Service Option (regardless of - whether such Service Option is at such time otherwise exercisable), (ii) each -- then outstanding Performance Option that shall have become vested and exercisable in accordance with Section 3(b) hereof prior to the Change in Control, if any, and (iii) an additional one fifth of each tranche of the --- Performance Options shall be canceled in exchange for a payment in cash of an amount equal to the excess, if any, of (i) the product of the Change in Control - Price multiplied by the aggregate number of Shares covered by all such Options, (ii) over the aggregate Option Price for all such Options. -- (b) Performance Options. Subject to Section 9(d), in the event of a ------------------- Change of Control prior to the fifth anniversary of the Grant Date and prior to the date as of which any of the Performance Options shall have become vested and exercisable in accordance with Section 3(b)(i) hereof, a proportionate share (determined in accordance with the immediately succeeding sentence) of each tranche of then outstanding Performance Options shall be canceled in exchange for a payment in cash of an amount equal to the excess, if any, of (i) the - product of the Change in Control Price multiplied by the number of Shares covered by such canceled proportionate share of such tranche of Performance Options (ii) over the aggregate Option Price for such canceled proportionate -- share of such tranche of Performance Options. The proportionate share of each tranche of the Performance Options that shall be so canceled shall be equal 20 to the product of (A) the percentage obtained by dividing (x) the cumulative - - EBITDA actually achieved by the Company during the period commencing on January 1, 1997 and ending on the last date of the Fiscal Year ending immediately preceding the effective date of the Change in Control by (y) the Cumulative - EBITDA Target multiplied by (B) the total number of Shares initially subject to - such tranche of the Performance Options. (c) Timing of Option Cancellation Payments; Discretionary ----------------------------------------------------- Acceleration. Notwithstanding the provisions of the preceding paragraphs (a) - ------------ and (b), the Board (as constituted immediately prior to the Change in Control) may determine, in its discretion, to accelerate the exercisability or cause the cancellation and payment, calculated as provided in Section 9(a), in respect of all or any additional portion of the Performance Options. The cash payments described in paragraphs (a) and (b) above shall be payable in full, as soon as reasonably practicable, but in no event later than, 30 days following the Change in Control. (d) Alternative Options. Notwithstanding Sections 9(a), 9(b) and 9 ------------------- (c) hereof, no cash settlement or other payment shall be made with respect to any Option in the event that the transaction constituting the Change in Control is accounted for using the "pooling of interest" method of accounting. In such event, the portion of each Option then held by the Grantee that, but for the provisions of this paragraph (d), would have been settled for cash pursuant to paragraphs (a) or (b) of this Section 9 in connection with the Change in Control, shall become fully vested immediately prior to the consummation of such transaction and the Grantee shall have the right, subject to compliance with all applicable securities laws, to (i) exercise such portion of the Options in - connection with the Change in Control or (ii) provided such opportunity is made -- available by the New Employer, exchange such portion of the Options for fully exercisable options to purchase common stock of the New Employer having substantially equivalent economic value to the Options being exchanged therefor (determined at the time of the Change in Control). 10. Certain Restrictions on Repurchases ----------------------------------- (a) Financing Agreements, etc. Notwithstanding any other provision ------------------------- of this Agreement, the Company shall not be obligated or permitted to pay the purchase price for any Covered Options that the Company may elect to purchase from 21 the Grantee pursuant to Section 5(c) if (i) the payment of such purchase price would result in a violation of the terms or provisions of, or result in a default or an event of default under, (A) the Credit Agreement, dated as of - March 21, 1996 (the "Credit Agreement"), among Riverwood, the other borrowers ---------------- party thereto, The Chase Manhattan Bank, as administrative agent, and the lenders party thereto from time to time, (B) the Equipment Packaging Machinery - Credit Agreement, dated as of March 21, 1996 (the "PMC Agreement"), among Riverwood International Machinery, Inc., The Chase Manhattan Bank, as administrative agent, and the lenders party thereto from time to time, (C) the - Indenture, dated as of March 27, 1996, as supplemented, among Riverwood, as issuer, the Company and RIC Holding, Inc., as guarantors, and Fleet National Bank of Connecticut, as trustee (the "Senior Note Indenture"), (D) the - Indenture, dated as of March 27, 1996, as supplemented, among Riverwood, as issuer, the Company and RIC Holding, as guarantors, and Fleet National Bank of Massachusetts, as trustee (together with the Senior Note Indenture, the "Indentures"), or (E) any other guarantee, financing or security agreement or - document entered into (I) by Former Riverwood or any of its subsidiaries prior - to the Acquisition that remains outstanding in any part on or after the Acquisition, (II) by the Company or any Subsidiary in connection with the -- Acquisition, or the financing of the Acquisition, or (III) otherwise from time --- to time in connection with the operations of the Company or the Subsidiaries (the Credit Agreement, the Indentures and such other agreements and documents, as each may be amended, modified or supplemented from time to time, are referred to herein as the "Financing Agreements"), in each case as the same may be -------------------- amended, modified or supplemented from time to time, (ii) the payment of such -- purchase price would violate any of the terms or provisions of the Certificate of Incorporation of the Company or (iii) the Company has no funds legally --- available therefor under the General Corporation Law of the State of Delaware. (b) Delay of Purchase. In the event that the payment of the purchase ----------------- price for any Covered Options by the Company otherwise permitted under Section 5(c) is prevented solely by the terms of Section 10(a), (i) the payment of such - purchase price will be postponed and will be made without the application of further conditions or impediments (other than as set forth in Section 5 hereof or in this Section 10) at the first opportunity thereafter when the Company has funds legally available therefor and when the payment of such purchase price will not result in any 22 default, event of default or violation under any of the Financing Agreements or in a violation of any term or provision of the Certificate of Incorporation of the Company and (ii) the Grantee's right to receive payment of such purchase -- price shall rank against other similar rights with respect to shares of Common Stock or options in respect thereof according to priority in time of the effective date of the event giving rise to any such right, provided that any -------- such right as to which a common date determines priority shall be of equal priority and shall share pro rata in any purchase payments made pursuant to clause (i) above. (c) Purchase Price Adjustment. In the event that the payment of the ------------------------- purchase price for any Covered Options from the Grantee is delayed pursuant to this Section 10, the purchase price for such Covered Options when the purchase price is eventually paid as contemplated by Section 10(b) shall be the sum of (a) the purchase price of such Covered Options determined in accordance with - Section 5(f) at the time that the purchase would have been paid but for the operation of this Section 10, plus (b) an amount equal to interest on such - purchase price for the period from the date on which the purchase price would have been paid but for the operation of this Section 10 to the date on which such purchase price is actually paid (the "Delay Period"), at an annual rate of interest equal to the weighted average cost of the Company's bank indebtedness outstanding during the Delay Period. 11. No Rights as Stockholder. The Grantee shall have no voting or ------------------------ other rights as a stockholder of the Company with respect to any Shares covered by the Options until the exercise of the Options and the issuance of a certificate or certificates to the Grantee for such Shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of such certificate or certificates. 12. Capital Adjustments. The number and price of the Shares covered ------------------- by the Options shall be proportionately adjusted to reflect any stock dividend, stock split or share combination of the Common Stock or any recapitalization of the Company. Subject to any required action by the stockholders of the Company and Section 9 hereof, in any merger, consolidation, reorganization, exchange of shares, liquidation or dissolution, the Options shall pertain to the securities and other property, if any, that a holder of the number of shares of Common Stock covered by the Options 23 would have been entitled to receive in connection with such event. 13. Miscellaneous. ------------- (a) Notices. All notices and other communications required or ------- permitted to be given under this Agreement shall be in writing and shall be deemed to have been given if delivered personally or sent by certified or express mail, return receipt requested, postage prepaid, or by any recognized international equivalent of such delivery, to the Company, the CD&R Fund or the Grantee, as the case may be, at the following addresses or to such other address as the Company, the CD&R Fund or the Grantee, as the case may be, shall specify by notice to the others: (i) if to the Company, to it at: Riverwood Holding, Inc. Suite 1200 1105 North Market Street P.O. Box 8985 Wilmington, Delaware 19899 Attention: General Counsel --------- (ii) if to the Grantee, to the Grantee at the address set forth on the signature page hereof. (iii) if to the CD&R Fund, to: Clayton, Dubilier & Rice Fund V Limited Partnership Foulkstone Plaza, Suite 102 1403 Foulk Road Wilmington, Delaware 19803 Attention: Joseph L. Rice, III --------- All such notices and communications shall be deemed to have been received on the date of delivery if delivered personally or on the third business day after the mailing thereof, provided that the party giving such notice or communication -------- shall have attempted to telephone the party or parties to which notice is being given during regular business hours on or before the day such notice or communication is being sent, to advise such party or parties that such notice is being sent. Copies of any notice or other communication given under this Agreement shall also be given to: 24 Clayton, Dubilier & Rice, Inc. 375 Park Avenue New York, New York 10152 Attention: Kevin J. Conway --------- and Debevoise & Plimpton 875 Third Avenue New York, New York 10022 Attention: Franci J. Blassberg, Esq. --------- The CD&R Fund also shall be given a copy of any notice or other communication between the Grantee and the Company under this Agreement at its address as set forth above. (b) Binding Effect; Benefits. This Agreement shall be binding upon ------------------------ and inure to the benefit of the parties to this Agreement and their respective successors and assigns. Except as provided in Section 5, nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the parties to this Agreement or their respective successors or assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein. (c) Waiver; Amendment. ----------------- (i) Waiver. Any party hereto or beneficiary hereof may by written ------ notice to the other parties (A) extend the time for the performance of any - of the obligations or other actions of the other parties under this Agreement, (B) waive compliance with any of the conditions or covenants of - the other parties contained in this Agreement and (C) waive or modify - performance of any of the obligations of the other parties under this Agreement, provided that any waiver of the provisions of Section 5 must be -------- consented to in writing by the CD&R Fund. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party or beneficiary, shall be deemed to constitute a waiver by the party or beneficiary taking such action of compliance with any representations, warranties, covenants or agreements contained herein. The waiver by any party hereto or beneficiary hereof of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach and no failure by a 25 party or beneficiary to exercise any right or privilege hereunder shall be deemed a waiver of such party's or beneficiary's rights or privileges hereunder or shall be deemed a waiver of such party's or beneficiary's rights to exercise the same at any subsequent time or times hereunder. (ii) Amendment. This Agreement may not be amended, modified or --------- supplemented orally, but only by a written instrument executed by the Grantee and the Company, and (in the case of any amendment, modification or supplement that adversely affects the rights of the CD&R Fund hereunder) consented to by the CD&R Fund in writing. The parties hereto acknowledge that the Company's consent to an amendment or modification of this Agreement may be subject to the terms and provisions of the Financing Agreements. (d) Assignability. Neither this Agreement nor any right, remedy, ------------- obligation or liability arising hereunder or by reason hereof shall be assignable by the Company or the Grantee without the prior written consent of the other parties and the CD&R Fund. The CD&R Fund may assign from time to time all or any portion of its rights under Section 5 to one or more persons or other entities designated by it. (e) Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE CORPORATE LAW OF THE STATE OF DELAWARE SPECIFICALLY AND MANDATORILY APPLIES. (f) Section and Other Headings, etc. The section and other headings ------------------------------- contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. (g) Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. (h) Delegation by the Board. All of the powers, duties and ----------------------- responsibilities of the Board specified in this Agreement may, to the full extent permitted by applicable law, be exercised and performed by any duly constituted committee thereof to the extent authorized by the Board to 26 exercise and perform such powers, duties and responsibilities. 27 IN WITNESS WHEREOF, the Company and the Grantee have executed this Agreement as of the date first above written. RIVERWOOD HOLDING, INC. By:______________________________ Name: Title: THE GRANTEE: By:______________________________ Stephen Humphrey Address of the Grantee: EX-10.2 3 STEPHEN HUMPHREY STOCK OPTION AGREEMENT EXHIBIT 10.2 MANAGEMENT STOCK OPTION AGREEMENT --------------------------------- MANAGEMENT STOCK OPTION AGREEMENT, dated as of March 31, 1997, between Riverwood Holding, Inc., a Delaware corporation (the "Company"), and Stephen Humphrey (the "Grantee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, to motivate key employees of the Company and the Subsidiaries by providing them an ownership interest in the Company, the Board of Directors of the Company (the "Board") has established the Riverwood Holding, Inc. Stock Incentive Plan, as the same may be amended from time to time (the "Plan"); and WHEREAS, on the date hereof, the Company, its indirect, wholly-owned subsidiary, Riverwood International Corporation, a Delaware corporation ("Riverwood"), and the Grantee have entered into an Employment Agreement (as the same may be amended from time to time, the "Employment Agreement"), providing for, among other things, the grant to the Grantee of the stock options described herein; WHEREAS, the Grantee and the Company desire to enter into an agreement to evidence and confirm the grant of such stock options on the terms and conditions set forth herein; NOW, THEREFORE, to evidence the stock options so granted, and to set forth the terms and conditions governing such stock options, the Company and the Grantee hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following ------------------- terms shall have the following meanings: (a) "Acquisition" shall mean the series of transactions resulting in ----------- the indirect acquisition of all of the issued and outstanding capital stock of Former Riverwood by the Company on March 27, 1996 pursuant to the Merger Agreement. (b) "Affiliate" shall mean, with respect to any person, any other --------- person controlled by, controlling or under common control with such person. (c) "Applicable Percentage" shall mean, with respect to an EBITDA --------------------- Target for any Fiscal Year, the portion of such EBITDA Target actually achieved by the Company and the Subsidiaries as of the end of such Fiscal Year, expressed as a percentage. (d) "Board" shall mean the Board of Directors of the Company. ----- (e) "CD&R Fund" shall mean the Clayton, Dubilier & Rice Fund V --------- Limited Partnership, a Cayman Islands exempted limited partnership, and any successor investment vehicle managed by Clayton, Dubilier & Rice, Inc. (f) "Cause" shall have the meaning assigned to such term in the ----- Employment Agreement. (g) "Change in Control" shall mean the first to occur of the ----------------- following events after the date hereof: (i) the acquisition by any person, entity or "group" (as defined in Section 13(d) of the Exchange Act), other than the Company, the Subsidiaries, any employee benefit plan of the Company or the Subsidiaries, the CD&R Fund, any Investor or any Affiliate of the CD&R Fund or of an Investor, of 50% or more of the combined voting power of the Company's or Riverwood's then out standing voting securities; (ii) the merger or consolidation of the Company or Riverwood, as a result of which persons who were stockholders of the Company or Riverwood, as the case may be, immediately prior to such merger or consolidation, do not, immediately thereafter, own, directly or indirectly, more than 50% of the combined voting power entitled to vote generally in the election of directors of the merged or consolidated company; (iii) the liquidation or dissolution of the Company or Riverwood other than a liquidation of Riverwood into the Company or into any Subsidiary; and (iv) the sale, transfer or other disposition of all or substantially all of the assets of the Company or Riverwood to one or more persons or en- 2 tities that are not, immediately prior to such sale, transfer or other disposition, Affiliates of the Company, Riverwood, the CD&R Fund or any Investor. (h) "Change in Control Price" shall mean the price per share of ----------------------- Common Stock paid in conjunction with any transaction resulting in a Change in Control (as determined in good faith by the Board if any part of such price is payable other than in cash). (i) "Common Stock" shall mean the Class A Common Stock, par value ------------ $.01 per share, of the Company. (j) "Company" shall have the meaning set forth in the introductory ------- paragraph hereto. (k) "Covered Options" shall have the meaning set forth in Section --------------- 4(b) hereof. (l) "Cumulative EBITDA Target" shall mean the sum of the EBITDA ------------------------ Targets for each of the fiscal years of the Company ending December 31, 1997, 1998, 1999, 2000 and 2001 or, in the case of a determination of the Cumulative EBITDA Target prior to December 31, 2001 pursuant to Section 3(b) or 9(b) hereof, the sum of such EBITDA Targets for each of the Fiscal Years ending prior to such date of determination and a pro rata portion of the EBITDA Target for the Fiscal Year which includes such date of determination, pro-rated through the end of the most recent calendar quarter ending on or prior to such date of determination, as the same may be adjusted from time to time in accordance with this Agreement. (m) "Delay Period" shall have the meaning set forth in Section 10(c) ------------ hereof. (n) "Disability" shall have the meaning assigned to such term in the ---------- Employment Agreement. (o) "EBITDA" shall have the meaning assigned to such term in the ------ Credit Agreement, dated as of March 21, 1996, as amended, among RIC Holding (as successor to Former Riverwood), the other borrowers party thereto, The Chase Manhattan Bank, as administrative agent, and the lenders party thereto from time to time, as such agreement may be further amended from time to time. 3 (p) "EBITDA Target" shall mean, with respect to the 1997 Fiscal Year, ------------- EBITDA of $210 million and, with respect to each subsequent Fiscal Year, the EBITDA targeted for such Fiscal Year in the business plan of the Company and the Subsidiaries for such Fiscal Year approved by the Board; provided, however, that in the event the Company or any Subsidiary consummates a significant acquisition, disposition or other corporate transaction or series of transactions that, in the judgement of the Executive Committee of the Board, would reasonably be expected to impact the consolidated earnings of the Company and its subsidiaries, the EBITDA Target for the relevant fiscal years may be appropriately adjusted by the Board to reflect such transaction or series of transactions. (q) "Employment Agreement" shall have the meaning set forth in the -------------------- recitals hereto. (r) "Exchange Act" shall mean the U.S. Securities Exchange Act of ------------ 1934, as amended. (s) "Exercise Date" shall have the meaning set forth in Section 6 ------------- hereof. (t) "Exercise Price" shall have the meaning set forth in Section 6 -------------- hereof. (u) "Exercise Shares" shall have the meaning set forth in Section 6 --------------- hereof. (v) "Extraordinary Termination" shall mean a termination of the ------------------------- Grantee's employment with the Company and the Subsidiaries by reason of the Grantee's death, Disability or Retirement. (w) "Fair Market Value" shall mean, as of any date, the fair market ----------------- value on such date of a share of Common Stock as determined in good faith by the Executive Committee of the Board. In making a determination of Fair Market Value, the Executive Committee shall give due consideration to such factors as it deems appropriate, including, without limitation, the earnings and certain other financial and operating information of the Company and the Subsidiaries in recent periods, the potential value of the Company and the Subsidiaries as a whole, the future prospects of the Company and the Subsidiaries and the industries in which they compete, the history and management of the 4 Company and the Subsidiaries, the general condition of the securities markets, the fair market value of securities of companies engaged in businesses similar to those of the Company and the Subsidiaries and a valuation of the Common Stock, which shall be per formed, with respect Fiscal Year, beginning with the 1997 Fiscal Year, as promptly as practicable following the first business day of the subsequent Fiscal Year by an independent valuation firm chosen by the Executive Committee. Notwithstanding the foregoing, following a Public Offering, Fair Market Value shall mean the average of the high and low trading prices for a share of Common Stock on the primary national exchange (including NASDAQ) on which the Common Stock is then traded on the trading day immediately preceding the date as of which such Fair Market Value is determined. The determination of Fair Market Value will not give effect to any restrictions on transfer of the shares of Common Stock or the fact that such Common Stock would represent a minority interest in the Company. (x) "Fiscal Year" shall mean a fiscal year of the Company ending ----------- December 31. (y) "First Purchase Period" shall have the meaning set forth in --------------------- Section 5(c)(i) hereof. (z) "Financing Agreements" shall have the meaning set forth in -------------------- Section 10(a) hereof. (aa) "Fiscal Year" shall mean a fiscal year of the Company ending ----------- December 31. (bb) "Former Riverwood" shall mean the Delaware corporation known as ---------------- "Riverwood International Corporation" prior to the Acquisition, which was merged into RIC Holding in connection with the Acquisition. (cc) "Good Reason" shall have the meaning assigned to such term in ----------- the Employment Agreement. (dd) "Grant Date" shall mean the date hereof, which is the date on ---------- which the Options are granted to the Grantee. (ee) "Grantee" shall have the meaning set forth in the introductory ------- paragraph hereto. 5 (ff) "Installment" shall mean Performance Options with respect to ----------- 7,500 shares. (gg) "Investors" shall mean each of the investors who purchased --------- shares of Common Stock or shares of Class B Common Stock of the Company concurrently with the consummation of the merger contemplated by the Merger Agreement, and their "specified affiliates", within the meaning of the Stockholders Agreement of the Company, as amended from time to time. (hh) "Management Stock Subscription Agreement" shall mean the --------------------------------------- management stock subscription agreement to be entered into by the Company and the Grantee in connection with the Grantee's exercise of any of the Options and purchase of the Shares subject to any such Options pursuant to Section 6 hereof. (ii) "Merger Agreement" shall mean the Agreement and Plan of Merger, ---------------- dated as of October 25, 1995, by and among RIC Holding, its wholly owned subsidiary, CDRO Acquisition Corporation, a Delaware corporation, and Prior Riverwood. (jj) "New Employer" shall mean the Grantee's employer, or the parent ------------ or a subsidiary of such employer, immediately following a Change in Control. (kk) "Normal Termination Date" shall mean the tenth anniversary of ----------------------- the date hereof. (ll) "Option Price" shall mean, with respect to an Option, the ------------ exercise price under such Option determined in accordance with Section 2(b) hereof, except as provided otherwise in Section 3(b)(iii). (mm) "Options" shall mean, collectively, the Performance Options and ------- the Service Options granted to the Grantee hereby. (nn) "Performance Options" shall mean those Options that are subject ------------------- to the provisions of Section 3(b) hereof providing for the vesting of such Options on the basis of the financial performance of the Company and the Subsidiaries and/or the continued employment of the Grantee. Performance Options have been granted to the Grantee pursuant to this Agreement with respect to 112,500 Shares. 6 (oo) "Plan" shall have the meaning set forth in the recitals hereto. ---- (pp) "Public Offering" shall mean the first day as of which sales of --------------- Common Stock are made to the public in the United States pursuant to an underwritten public offering of the Common Stock led by one or more underwriters at least one of which is an underwriter of nationally recognized standing. (qq) "Registration and Participation Agreement" shall have the ---------------------------------------- meaning set forth in Section 7(f) hereof. (rr) "Retirement" shall mean the Grantee's retirement from employment --------- with the Company and the Subsidiaries at or after age 65. (ss) "RIC Holding" shall mean RIC Holding, Inc., a Delaware ----------- corporation and wholly owned subsidiary of the Company. (tt) "Riverwood" shall have the meaning set forth in the recitals --------- hereto. (uu) "Rule 144" shall mean Rule 144 promulgated under the Securities -------- Act. (vv) "Second Purchase Period" shall have the meaning set forth in ---------------------- Section 5(c)(i) hereof. (ww) "Securities Act" shall mean the U.S. Securities Act of 1933, as -------------- amended. (xx) "Service Options" shall mean those Options that are subject to --------------- the provisions of Section 3(a) hereof providing for the vesting of such Option on the basis of the Grantee's completion of service. Service Options have been granted to the Grantee pursuant to this Agreement with respect to 112,500 Shares. (yy) "Shares" shall mean the shares of Common Stock subject to the ------ Options. (zz) "Subsidiary" shall mean any corporation or other person, a ---------- majority of whose outstanding voting securities or other equity interests are owned, directly or indirectly, by the Company. 7 2. Grant of Options. ---------------- (a) Confirmation of Grant. The Company hereby evidences and confirms --------------------- its grant to the Grantee, effective as of the date hereof, of (i) Service - Options to purchase 112,500 Shares and (ii) Performance Options to purchase -- 112,500 Shares. The Options are not intended to be incentive stock options under the U.S. Internal Revenue Code of 1986, as amended. This Agreement is subordinate to, and the terms and conditions of the Options granted hereunder are subject to, the terms and conditions of the Plan. If there is any inconsistency between the terms hereof and the terms of the Plan, the terms of the Plan shall govern. (b) Option Price. The Service Options and the Performance Options ------------ shall each be divided into three equal tranches, each such tranche covering 37,500 Shares and, subject to section 3(b) below, having a per share exercise price for the Shares covered thereby determined in accordance with the following schedule:
Number of Shares Covered Number of Shares by Each Per Covered By Each Tranche of Share Tranche of Service Performance Exercise Options Options Price 37,500 Shares 37,500 Shares $100 37,500 Shares 37,500 Shares $ 75 37,500 Shares 37,500 Shares $ 50
3. Exercisability. -------------- (a) Service Options. Except as otherwise provided in this Agreement --------------- and subject to the continuous employment of the Grantee with the Company or one or more of the Subsidiaries until the applicable vesting date, each tranche of Service Options shall become vested and exercisable in five annual installments, on each of the first five anniversaries of the Grant Date, at the rate of 10%, 20%, 30%, 20% and 20%, respectively; provided that, if, on or prior to the fifth -------- anniversary of the Grant Date, (x) the Grantee's employment is terminated by - reason of an Extraordinary Termination or (y)(i)the CD&R Fund and, if - - 8 applicable, its Affiliates effect a sale or other disposition of all of the Common Stock then held by the CD&R Fund and its Affiliates to one or more persons other than any person who is a general or limited partner or Affiliate of the CD&R Fund and (ii) thereafter, the Grantee's employment is terminated by -- the Company other than for Cause or by the Grantee for Good Reason, all Service Options held by the Grantee as of the effective date of such Extraordinary Termination or termination under the foregoing clause (y)(ii), whichever is applicable, shall become immediately 100% vested and exercisable. (b) Performance Options. Except as otherwise provided in this ------------------- Agreement and subject to the continuous employment of the Grantee with the Company or one or more of the Subsidiaries until the applicable vesting date as follows: (i) the Applicable Percentage of an Installment of each tranche of Performance Options shall become vested and exercisable on each of the first five anniversaries of the Grant Date, provided in the case of any such Installment that the Executive Committee of the Board determines that Company has achieved at least 75% of the EBITDA Target for the Fiscal Year ending immediately prior to such anniversary date; (ii) 100% of any Performance Options that, as of the fifth anniversary of the Grant Date, have not become vested and exercisable in accordance with the preceding clause (i) shall become vested and exercisable as of the date of such fifth anniversary if the Executive Committee of the Board determines that Company has achieved 100% of the Cumulative EBITDA Target for the five Fiscal Years ending December 31, 2001; and (iii) if any Performance Options have not become vested and exercisable in accordance with either of the preceding clauses (i) or (ii) as of the fifth anniversary of the Grant Date, (x) as of the date of such fifth anniversary, and as of each anniversary of the Grant Date occurring thereafter, the Option Price for any Performance Options that have not become vested and exercisable in accordance with this clause (iii) as of such date, shall increase by 10% and (y) the lesser of (A) 100% of each - tranche of such unvested Performance Options and (B) Performance Options - covering 7,500 Shares of each tranche of such unvested 9 Performance Options shall become vested and exercisable as of each of the sixth through ninth anniversaries of the Grant Date if the Executive Committee of the Board determines that Company has achieved at least 100% of the EBITDA Target for the Fiscal Year ending immediately prior to such anniversary date; provided that if, on or prior to the fifth anniversary of the Grant Date, (x) - -------- - the Grantee's employment is terminated by reason of an Extraordinary Termination or (y)(i) the CD&R Fund and, if applicable, its Affiliates effect a sale or - - other disposition of all of the Common Stock then held by the CD&R Fund and its Affiliates to one or more persons other than any person who is a general or limited partner or Affiliate of the CD&R Fund and (ii) thereafter, the Grantee's -- employment is terminated by the Company other than for Cause or by the Grantee for Good Reason, then the excess of (x) a proportionate share of each tranche of - Performance Options, over (y) the number of Performance Options of such tranche - that have previously become vested pursuant to Section 3(b)(i) shall vest and become exercisable as of such date of termination. Such proportionate share of each tranche of Performance Options that shall become vested and exercisable shall equal the product of (i) the percentage obtained by dividing (x) the - - cumulative EBITDA actually achieved by the Company during the period commencing on January 1, 1997 and ending on the last day of the most recent calendar quarter ending on or prior to the effective date of the Extraordinary Termination or other termination, whichever is applicable, as determined by the Executive Committee of the Board, by (y) the Cumulative EBITDA Target, - multiplied by (ii) the total number of Shares initially subject to such tranche -- of Performance Options. Any Performance Options held by the Grantee as of the date of an Extraordinary Termination or other termination, whichever is applicable, that have not become vested and exercisable on or prior to such date of termination in accordance with this Section 3(b) shall terminate and be cancelled immediately on such date. Notwithstanding the foregoing provisions of this paragraph (b), 100% of the Performance Options shall become vested and exercisable nine years and six months following the Grant Date regardless of whether any EBITDA Target has been achieved, subject to the continuous employment of the Grantee with the Company or one or more of the Subsidiaries until such date. 10 (c) Conditions. The Board, in its sole discretion, may accelerate ---------- the vesting or exercisability of any Option, all Options or any class of Options, at any time and from time to time. Shares eligible for purchase may, subject to the provisions hereof, thereafter be purchased, at any time and from time to time on or after such anniversary until the date one day prior to the date on which the Options terminate, provided that any such purchase shall be effected pursuant to and subject to Sections 5 and 6 hereof and the provisions contained in the Management Stock Subscription Agreement related to the purchase of such Shares. 4. Termination of Options. ---------------------- (a) Normal Termination Date. Unless an earlier termination date ----------------------- shall occur as specified in subsection (b), the Options shall terminate and be cancelled on the Normal Termination Date. (b) Early Termination. If the Grantee's employment is voluntarily or ----------------- involuntarily terminated for any reason, any Options held by the Grantee that have not become vested and exercisable on or before the effective date of such termination shall terminate and be cancelled immediately upon such termination of employment. Subject to the provisions of Section 5(c), all Options held by the Grantee on the date of such termination that shall have become vested and exercisable on or before the effective date of such termination (such Options, the Covered Options") shall remain exercisable for whichever of the following periods is applicable, and if not exercised within such period, shall terminate and be cancelled upon the expiration of such period: (i) if the Grantee's - employment is terminated by reason of an Extraordinary Termination, the Covered Options shall remain exercisable solely until the first to occur of (A) the one - year anniversary of the Grantee's termination of employment or (B) the Normal - Termination Date and (ii) if the Grantee's employment is terminated for any -- reason other than (x) an Extraordinary Termination or (y) for Cause, the Covered - - Options shall remain exercisable for a period of 60 days after the earliest to occur of (x) the expiration of the Second Purchase Period (as defined in - Section 5(c)(i) hereof), (y) the receipt by the Grantee of written notice that - the CD&R Fund does not intend to exercise its right to purchase the Covered Options pursuant to Section 5(c)(i) and (z) the Normal Termination Date. - Notwithstanding anything else contained in this Agreement, if the Grantee's employment is 11 terminated for Cause, all Options (whether or not then exercisable) shall terminate and be cancelled immediately upon such termination. Nothing in this Agreement shall be deemed to confer on the Grantee any right to continue in the employ of the Company or any Subsidiary, or to interfere with or limit in any way the right of the Company or any Subsidiary to terminate such employment at any time. 5. Restrictions on Exercise; Non-Transferability of Options; --------------------------------------------------------- Repurchase of Options. - --------------------- (a) Restrictions on Exercise. The Options may be exercised only with ------------------------ respect to full shares of Common Stock. No fractional shares of Common Stock shall be issued. Notwithstanding any other provision of this Agreement, the Options may not be exercised in whole or in part, and no certificates representing Shares shall be delivered, (i) (A) unless all requisite approvals - - and consents of any govern mental authority of any kind having jurisdiction over the exercise of the Options shall have been secured, (B) unless the - purchase of the Shares upon the exercise of the Options shall be exempt from registration under applicable U.S. federal and state securities laws, and applicable non-U.S. securities laws, or the Shares shall have been registered under such laws, and (C) unless all applicable U.S. federal, state and local and - non-U.S. tax withholding requirements shall have been satisfied or (ii) if such -- exercise would result in a violation of the terms or provisions of or a default or an event of default under any of the Financing Agreements. The Company shall use commercially reasonable efforts to obtain the consents and approvals referred to in clause (i)(A) of the preceding sentence and to obtain the consent of the parties to the Financing Agreements referred to in clause (ii) of the preceding sentence so as to permit the Options to be exercised. (b) Non-Transferability of Options. Except as contemplated by ------------------------------ Section 5(c), the Options may be exercised only by the Grantee or by the Grantee's estate. Except as contemplated by Section 5(c), the Option is not assignable or transferable, in whole or in part, and it may not, directly or indirectly, be offered, transferred, sold, pledged, assigned, alienated, hypothecated or otherwise disposed of or encumbered (including without limitation by gift, operation of law or otherwise) other than by will or by the laws of descent and distribution to the estate of the Grantee upon the Grantee's death, provided that the deceased Grantee's beneficiary or the representative of -------- the Grantee's estate shall acknowledge and agree in writing, in a form 12 reasonably acceptable to the Company, to be bound by the provisions of this Agreement and the Plan as if such beneficiary or the estate were the Grantee. (c) Purchase of Options on Termination of Employment. ------------------------------------------------ (i) Termination of Employment. If the Grantee's employment is ------------------------- terminated for any reason other than for Cause, the Company shall have an option to purchase all or any portion of the Covered Options and shall have 30 days from the date of the Grantee's termination of employment (such 30- day period being hereinafter referred to as the "First Purchase Period") during which to give notice in writing to the Grantee (or, if the Grantee's employment was terminated by the Grantee's death, the Grantee's estate) of its election to exercise or not to exercise such right to purchase the Covered Options. The Company hereby undertakes to use reasonable efforts to act as promptly as practicable following such termination to make such election. If the Company (i) fails to give notice that it intends to - exercise its right to purchase the Covered Options within the First Purchase Period, or (ii) chooses to purchase none or only a portion of the -- Covered Options, by giving such notice, the CD&R Fund shall have the right to purchase all or any portion of the Covered Options not purchased by the Company, and shall have until the expiration of the earlier of (x) 30 days - following the end of the First Purchase Period, or (y) 30 days from the - date of receipt by the CD&R Fund of written notice that the Company does not intend to exercise its right with respect to all of the Covered Options (such 30-day period being hereinafter referred to as the "Second Purchase Period"), to give notice in writing to the Grantee (or the Grantee's estate) of the CD&R Fund's exercise of its right to purchase all or any portion of such Covered Options. If the rights of the Company and the CD&R Fund to purchase all of the Covered Options granted in this subsection are not fully exercised as provided herein other than as a result of any deferral of the payment of the Purchase Price therefor pursuant to Section 10 hereof, the Grantee (or the Grantee's estate) shall be entitled to retain any Covered Options not so purchased, subject to all of the provisions of this Agreement (including, without limitation, Sec tion 4(b)). 13 (ii) Purchase Price, etc. All purchases pursuant to this Section 5(c) ------------------- by the Company or the CD&R Fund shall be for a purchase price and effected in the manner prescribed by Sections 5(f), (g) and (h). (d) Notice of Termination. The Company shall give written notice of --------------------- any termination of the Grantee's employment to the CD&R Fund, except that if such termination (if other than as a result of death) is by the Grantee, the Grantee shall give written notice of such termination to the Company and the Company shall give written notice of such termination to the CD&R Fund. (e) Public Offering. In the event that a Public Offering has been --------------- consummated, neither the Company nor the CD&R Fund shall have any rights to purchase the Covered Options pursuant to Section 5(c). (f) Purchase Price. Subject to Section 10(c) hereof, the purchase -------------- price to be paid to the Grantee (or the Grantee's estate) for the Covered Options purchased pursuant to Section 5(c) shall be equal to the excess, if any, of (i) the Fair Market Value, as of the effective date of the termination of - employment that gives rise to the right of the Company and the CD&R Fund to, of the Shares which may be purchased upon exercise of such Covered Options over (ii) the aggregate Option Price of such Covered Options. -- (g) Payment. The completion of a purchase pursuant to this Section 5 ------- shall take place at the principal office of the Company on the tenth business day following the receipt by the Grantee (or the Grantee's estate) of the CD&R Fund's or the Company's notice of its exercise of the right to purchase the Covered Options pur suant to Section 5(c). Subject to Section 10 hereof, the purchase price shall be paid by delivery to the Grantee (or the Grantee's estate) of a check for the purchase price payable to the order of the Grantee (or the Grantee's estate), against delivery of such instruments as the Company may reasonably request, signed by the Grantee (or the Grantee's estate), free and clear of all security interests, liens, claims, encumbrances, charges, options, restrictions on transfer, proxies and voting and other agreements of whatever nature. (h) Application of the Purchase Price to Certain Loans. The Grantee -------------------------------------------------- agrees that the Company and the CD&R Fund shall be entitled to apply any amounts to be paid by the Company or the CD&R Fund, as the case may be, to pur- 14 chase the Covered Options pursuant to this Section 5 to discharge any indebtedness of the Grantee to the Company or any Subsidiary, or indebtedness that is guaranteed by the Company or any Subsidiary, including, but not limited to, any indebtedness of the Grantee incurred to purchase any shares of Common Stock. (i) Withholding. Whenever Shares are to be issued pursuant to the ----------- Options, the Company may require the recipient of the Shares to remit to the Company an amount sufficient to satisfy any applicable U.S. federal, state and local and non-U.S. tax withholding requirements as a condition to the issuance of such Shares. In the event any cash is paid to the Grantee or the Grantee's estate or beneficiary pursuant to this Section 5, the Company shall have the right to withhold an amount from such payment sufficient to satisfy any applicable U.S. federal, state and local and non-U.S. tax withholding requirements. If shares of Common Stock are traded on a national securities exchange or bid and ask prices for shares of Common Stock are quoted on the NASDAQ, the Company may, if requested by the Grantee, withhold Shares to satisfy the minimum applicable withholding requirements, subject to the provisions of the Plan and any rules adopted by the Board regarding compliance with applicable law, including, but not limited to, Section 16(b) of the Exchange Act. 6. Manner of Exercise. To the extent that any outstanding Options ------------------ shall have become and remain vested and exercisable as provided in Sections 3 and 4 and subject to such reasonable administrative regulations as the Board may have adopted, such Options may be exercised, in whole or in part, by notice to the Secretary of the Company in writing given on the date as of which the Grantee will so exercise the Options (the "Exercise Date"), specifying the number of whole Shares with respect to which the Options are being exercised (the "Exercise Shares"), subject to the execution by the Company and the Grantee of a Management Stock Subscription Agreement substantially in the form attached to the Plan as Exhibit A ("Management Stock Subscription Agreement"), or in such other form as may be agreed upon by the Company and the Grantee, such Management Stock Subscription Agreement to contain (unless a Public Offering shall have occurred prior to the Exercise Date) provisions corresponding to Section 5(c) hereof, and the delivery to the Company by the Grantee, on or within five days following the Exercise Date, in accordance with the Management Stock Subscription Agreement, full payment for the Exercise Shares in United States dollars in cash, or cash equivalents 15 satisfactory to the Company, and in an amount equal to the product of the number of Exercise Shares, multiplied by the aggregate Option Price for such Exercise Shares (such amount, the "Exercise Price"). Upon execution by the Company and the Grantee of the Management Stock Subscription Agreement and delivery to the Company by the Grantee of the Exercise Price, the Company shall deliver to the Grantee a certificate or certificates representing the Exercise Shares, registered in the name of the Grantee and bearing appropriate legends as provided in Section 7(b) hereof. If, as of the Exercise Date, shares of Common Stock are traded on a U.S. national securities exchange or bid and ask prices for shares of Common Stock are quoted over NASDAQ, the Grantee may, in lieu of tendering cash, tender shares of Common Stock that have been owned by the Grantee for at least six months, having an aggregate Fair Market Value on the Exercise Date equal to the Exercise Price or may deliver a combination of cash and such shares of Common Stock having an aggregate Fair Market Value equal to the difference between the Exercise Price and the amount of such cash as payment of the Exercise Price, subject to such rules and regulations as may be adopted by the Board to provide for the compliance of such payment procedure with applicable law, including Section 16(b) of the Exchange Act. The Company may require the Grantee to furnish or execute such other documents as the Company shall reasonably deem necessary (i) to evidence such exercise, (ii) to determine - -- whether registration is then required under the Securities Act and (iii) to --- comply with or satisfy the requirements of the Securities Act, applicable state or non-U.S. securities laws or any other law. 7. Grantee's Representations, Warranties and Covenants. --------------------------------------------------- (a) Investment Intention. The Grantee represents and warrants that -------------------- the Options have been, and any Exercise Shares will be, acquired by the Grantee solely for the Grantee's own account for investment and not with a view to or for sale in connection with any distribution thereof. The Grantee agrees that the Grantee will not, directly or indirectly, offer, transfer, sell, pledge, hypothecate or otherwise dispose of all or any of the Options or any of the Exercise Shares (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of all or any of the Options or any of the Exercise Shares), except in compliance with the Securities Act and the rules and regulations of the Commission thereunder, and in compliance with applicable state securities or "blue sky" laws and non-U.S. securities 16 laws. The Grantee further understands, acknowledges and agrees that none of the Exercise Shares may be transferred, sold, pledged, hypothecated or otherwise disposed of unless the provisions of the related Management Stock Subscription Agreement shall have been complied with or have expired. (b) Legends. The Grantee acknowledges that any certificate ------- representing the Exercise Shares shall bear an appropriate legend, which will include, without limitation, the following language: "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF A MANAGEMENT STOCK SUBSCRIPTION AGREEMENT, DATED AS OF _______, AND NEITHER THIS CERTIFICATE NOR THE SHARES REPRESENTED BY IT ARE ASSIGNABLE OR OTHERWISE TRANSFERABLE EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SUCH MANAGEMENT STOCK SUBSCRIPTION AGREEMENT, AS THE SAME MAY BE AMENDED FROM TIME TO TIME A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE ENTITLED TO CERTAIN OF THE BENEFITS OF AND ARE BOUND BY CERTAIN OF THE OBLIGATIONS SET FORTH IN A REGISTRATION AND PARTICIPATION AGREEMENT, DATED AS OF MARCH 27, 1996, AMONG THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY." "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE OR NON-U.S. SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (i) (A) SUCH DISPOSITION - - IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (B) THE HOLDER HEREOF SHALL HAVE - DELIVERED TO THE COMPANY AN OPINION OF COUNSEL, WHICH OPINION AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT SUCH DISPOSITION IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SUCH ACT OR (C) A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE - COMMISSION, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, SHALL HAVE BEEN OBTAINED WITH RESPECT TO SUCH DISPOSITION AND (ii) SUCH -- DISPOSITION IS 17 PURSUANT TO REGISTRATION UNDER ANY APPLICABLE STATE AND NON-U.S. SECURITIES LAWS OR AN EXEMPTION THEREFROM." (c) Securities Law Matters. The Grantee acknowledges receipt of ---------------------- advice from the Company that (i) the Exercise Shares have not been registered - under the Securities Act or qualified under any state securities or "blue sky" or non-U.S. securities laws, (ii) it is not anticipated that there will be any -- public market for the Exercise Shares, (iii) the Exercise Shares must be held --- indefinitely and the Grantee must continue to bear the economic risk of the investment in the Exercise Shares unless the Exercise Shares are subsequently registered under the Securities Act and such state laws or an exemption from registration is available, (iv) while the Company is currently obligated under -- its Financing Agreements to file periodic reports with the Commission and, accordingly, Rule 144 may be presently available with respect to sales of securities of the Company, the Company has made no covenant to the Grantee to continue to make Rule 144 available, (v) when and if the Exercise Shares may be - disposed of without registration in reliance upon Rule 144, such disposition can be made only in limited amounts in accordance with the terms and conditions of such Rule, (vi) the Company does not plan to file reports with the Commission or -- make public information concerning the Company available unless required to do so by law or the terms of its Financing Agreements, (vii) if the exemption --- afforded by Rule 144 is not available, sales of the Exercise Shares may be difficult to effect because of the absence of public information concerning the Company, (viii) a restrictive legend in the form heretofore set forth shall be ---- placed on the certificates representing the Exercise Shares and (ix) a notation -- shall be made in the appropriate records of the Company indicating that the Exercise Shares are subject to restrictions on transfer set forth in this Agreement and, if the Company should in the future engage the services of a stock transfer agent, appropriate stop-transfer restrictions will be issued to such transfer agent with respect to the Exercise Shares. (d) Compliance with Rule 144. If any of the Exercise Shares are to ------------------------ be disposed of in accordance with Rule 144, the Grantee shall transmit to the Company an executed copy of Form 144 (if required by Rule 144) no later than the time such form is required to be transmitted to the Commission for filing and such other documentation as the Company may reasonably require to assure compliance with Rule 144 in connection with such disposition. 18 (e) Ability to Bear Risk. The Grantee covenants that the Grantee -------------------- will not exercise all or any of the Options unless (i) the financial situation - of the Grantee is such that the Grantee can afford to bear the economic risk of holding the Exercise Shares for an indefinite period and (ii) the Grantee can -- afford to suffer the complete loss of the Grantee's investment in the Exercise Shares. (f) Registration; Restrictions on Sale upon Public Offering. The -------------------------------------------------------- Grantee acknowledges and agrees that in respect of any Exercise Shares purchased upon exercise of all or any of the Options, the Grantee shall be entitled to the rights and subject to the obligations created under the Registration and Participation Agreement, dated as of March 27, 1996, among the Company and certain stockholders of the Company, as the same may be amended, modified or supplemented from time to time (the "Registration and Participation Agreement"), to the extent set forth therein. The Grantee agrees that, in the event that the Company files a registration statement under the Securities Act with respect to an underwritten public offering of any shares of its capital stock, the Grantee will not effect any public sale or distribution of any shares of the Common Stock (other than as part of such public offering), including but not limited to, pursuant to Rule 144 or Rule 144A under the Securities Act, during the 20 days prior to and the 180 days after the effective date of such registration statement. The Grantee further understands and acknowledges that any sale, transfer or other disposition of the Exercise Shares by him following a public offering will be subject to compliance with, and may be limited under, the federal securities laws and/or state "blue sky" and/or non-U.S. securities laws. (g) Section 83(b) Election. The Grantee agrees that, within 20 days ---------------------- of any Exercise Date that occurs prior to a Public Offering, the Grantee shall give notice to the Company in the event the Grantee has made or intends to make an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, with respect to the Exercise Shares purchased on such date, and acknowledges that the Grantee will be solely responsible for any and all tax liabilities payable by the Grantee in connection with the Grantee's exercise of any Options or receipt of any Exercise Shares or attributable to the Grantee's making or failing to make such an election. 8. Representations and Warranties of the Company. The Company --------------------------------------------- represents and warrants to the Grantee 19 that (a) the Company has been duly incorporated and is an existing corporation - in good standing under the laws of the State of Delaware, (b) this Agreement has - been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding obligation of the Company enforceable against the Company in accordance with its terms and (c) the Exercise Shares, when issued, - delivered and paid for, upon exercise of the Options in accordance with the terms hereof and the Management Stock Subscription Agreement, will be duly authorized, validly issued, fully paid and nonassessable, and free and clear of any liens or encumbrances other than those created pursuant to this Agreement, the Management Stock Subscription Agreement or otherwise in connection with the transactions contemplated hereby. 9. Change in Control. ----------------- (a) Service Options and Vested Performance Options. Subject to ---------------------------------------------- Section 9(d), in the event of a Change in Control prior to the fifth anniversary of the Grant Date, (i) each then outstanding Service Option (regardless of - whether such Service Option is at such time otherwise exercisable), (ii) each -- then outstanding Performance Option that shall have become vested and exercisable in accordance with Section 3(b) hereof prior to the Change in Control, if any, and (iii) an additional one fifth of each tranche of the --- Performance Options shall be canceled in exchange for a payment in cash of an amount equal to the excess, if any, of (i) the product of the Change in Control - Price multiplied by the aggregate number of Shares covered by all such Options, (ii) over the aggregate Option Price for all such Options. -- (b) Performance Options. Subject to Section 9(d), in the event of a ------------------- Change of Control prior to the fifth anniversary of the Grant Date and prior to the date as of which any of the Performance Options shall have become vested and exercisable in accordance with Section 3(b)(i) hereof, a proportionate share (determined in accordance with the immediately succeeding sentence) of each tranche of then outstanding Performance Options shall be canceled in exchange for a payment in cash of an amount equal to the excess, if any, of (i) the - product of the Change in Control Price multiplied by the number of Shares covered by such canceled proportionate share of such tranche of Performance Options (ii) over the aggregate Option Price for such canceled proportionate -- share of such tranche of Performance Options. The proportionate share of each tranche of the Performance Options that shall be so canceled shall be equal 20 to the product of (A) the percentage obtained by dividing (x) the cumulative - - EBITDA actually achieved by the Company during the period commencing on January 1, 1997 and ending on the last date of the Fiscal Year ending immediately preceding the effective date of the Change in Control by (y) the Cumulative - EBITDA Target multiplied by (B) the total number of Shares initially subject to - such tranche of the Performance Options. (c) Timing of Option Cancellation Payments; Discretionary ----------------------------------------------------- Acceleration. Notwithstanding the provisions of the preceding paragraphs (a) - ------------ and (b), the Board (as constituted immediately prior to the Change in Control) may determine, in its discretion, to accelerate the exercisability or cause the cancellation and payment, calculated as provided in Section 9(a), in respect of all or any additional portion of the Performance Options. The cash payments described in paragraphs (a) and (b) above shall be payable in full, as soon as reasonably practicable, but in no event later than, 30 days following the Change in Control. (d) Alternative Options. Notwithstanding Sections 9(a), 9(b) and 9 ------------------- (c) hereof, no cash settlement or other payment shall be made with respect to any Option in the event that the transaction constituting the Change in Control is accounted for using the "pooling of interest" method of accounting. In such event, the portion of each Option then held by the Grantee that, but for the provisions of this paragraph (d), would have been settled for cash pursuant to paragraphs (a) or (b) of this Section 9 in connection with the Change in Control, shall become fully vested immediately prior to the consummation of such transaction and the Grantee shall have the right, subject to compliance with all applicable securities laws, to (i) exercise such portion of the Options in - connection with the Change in Control or (ii) provided such opportunity is made -- available by the New Employer, exchange such portion of the Options for fully exercisable options to purchase common stock of the New Employer having substantially equivalent economic value to the Options being exchanged therefor (determined at the time of the Change in Control). 10. Certain Restrictions on Repurchases ----------------------------------- (a) Financing Agreements, etc. Notwithstanding any other provision ------------------------- of this Agreement, the Company shall not be obligated or permitted to pay the purchase price for any Covered Options that the Company may elect to purchase from 21 the Grantee pursuant to Section 5(c) if (i) the payment of such purchase price - would result in a violation of the terms or provisions of, or result in a default or an event of default under, (A) the Credit Agreement, dated as of - March 21, 1996 (the "Credit Agreement"), among Riverwood, the other borrowers ---------------- party thereto, The Chase Manhattan Bank, as administrative agent, and the lenders party thereto from time to time, (B) the Equipment Packaging Machinery - Credit Agreement, dated as of March 21, 1996 (the "PMC Agreement"), among Riverwood International Machinery, Inc., The Chase Manhattan Bank, as administrative agent, and the lenders party thereto from time to time, (C) the - Indenture, dated as of March 27, 1996, as supplemented, among Riverwood, as issuer, the Company and RIC Holding, Inc., as guarantors, and Fleet National Bank of Connecticut, as trustee (the "Senior Note Indenture"), (D) the - Indenture, dated as of March 27, 1996, as supplemented, among Riverwood, as issuer, the Company and RIC Holding, as guarantors, and Fleet National Bank of Massachusetts, as trustee (together with the Senior Note Indenture, the "Indentures"), or (E) any other guarantee, financing or security agreement or - document entered into (I) by Former Riverwood or any of its subsidiaries prior - to the Acquisition that remains outstanding in any part on or after the Acquisition, (II) by the Company or any Subsidiary in connection with the -- Acquisition, or the financing of the Acquisition, or (III) otherwise from time --- to time in connection with the operations of the Company or the Subsidiaries (the Credit Agreement, the Indentures and such other agreements and documents, as each may be amended, modified or supplemented from time to time, are referred to herein as the "Financing Agreements"), in each case as the same may be -------------------- amended,modified or supplemented from time to time, (ii) the payment of such -- purchase price would violate any of the terms or provisions of the Certificate of Incorporation of the Company or (iii) the Company has no funds legally --- available therefor under the General Corporation Law of the State of Delaware. (b) Delay of Purchase. In the event that the payment of the purchase ----------------- price for any Covered Options by the Company otherwise permitted under Section 5(c) is prevented solely by the terms of Section 10(a), (i) the payment of such - purchase price will be postponed and will be made without the application of further conditions or impediments (other than as set forth in Section 5 hereof or in this Section 10) at the first opportunity thereafter when the Company has funds legally available therefor and when the payment of such purchase price will not result in any 22 default, event of default or violation under any of the Financing Agreements or in a violation of any term or provision of the Certificate of Incorporation of the Company and (ii) the Grantee's right to receive payment of such purchase -- price shall rank against other similar rights with respect to shares of Common Stock or options in respect thereof according to priority in time of the effective date of the event giving rise to any such right, provided that any -------- such right as to which a common date determines priority shall be of equal priority and shall share pro rata in any purchase payments made pursuant to clause (i) above. (c) Purchase Price Adjustment. In the event that the payment of the ------------------------- purchase price for any Covered Options from the Grantee is delayed pursuant to this Section 10, the purchase price for such Covered Options when the purchase price is eventually paid as contemplated by Section 10(b) shall be the sum of (a) the purchase price of such Covered Options determined in accordance with - Section 5(f) at the time that the purchase would have been paid but for the operation of this Section 10, plus (b) an amount equal to interest on such - purchase price for the period from the date on which the purchase price would have been paid but for the operation of this Section 10 to the date on which such purchase price is actually paid (the "Delay Period"), at an annual rate of interest equal to the weighted average cost of the Company's bank indebtedness outstanding during the Delay Period. 11. No Rights as Stockholder. The Grantee shall have no voting or ------------------------ other rights as a stockholder of the Company with respect to any Shares covered by the Options until the exercise of the Options and the issuance of a certificate or certificates to the Grantee for such Shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of such certificate or certificates. 12. Capital Adjustments. The number and price of the Shares covered ------------------- by the Options shall be proportionately adjusted to reflect any stock dividend, stock split or share combination of the Common Stock or any recapitalization of the Company. Subject to any required action by the stock holders of the Company and Section 9 hereof, in any merger, consolidation, reorganization, exchange of shares, liquidation or dissolution, the Options shall pertain to the securities and other property, if any, that a holder of the number of shares of Common Stock covered by the Options 23 would have been entitled to receive in connection with such event. 13. Miscellaneous. ------------- (a) Notices. All notices and other communications required or ------- permitted to be given under this Agreement shall be in writing and shall be deemed to have been given if delivered personally or sent by certified or express mail, return receipt requested, postage prepaid, or by any recognized international equivalent of such delivery, to the Company, the CD&R Fund or the Grantee, as the case may be, at the following addresses or to such other address as the Company, the CD&R Fund or the Grantee, as the case may be, shall specify by notice to the others: (i) if to the Company, to it at: Riverwood Holding, Inc. Suite 1200 1105 North Market Street P.O. Box 8985 Wilmington, Delaware 19899 Attention: General Counsel --------- (ii) if to the Grantee, to the Grantee at the address set forth on the signature page hereof. (iii) if to the CD&R Fund, to: Clayton, Dubilier & Rice Fund V Limited Partnership Foulkstone Plaza, Suite 102 1403 Foulk Road Wilmington, Delaware 19803 Attention: Joseph L. Rice, III --------- All such notices and communications shall be deemed to have been received on the date of delivery if delivered personally or on the third business day after the mailing thereof, provided that the party giving such notice or communication -------- shall have attempted to telephone the party or parties to which notice is being given during regular business hours on or before the day such notice or communication is being sent, to advise such party or parties that such notice is being sent. Copies of any notice or other communication given under this Agreement shall also be given to: 24 Clayton, Dubilier & Rice, Inc. 375 Park Avenue New York, New York 10152 Attention: Kevin J. Conway --------- and Debevoise & Plimpton 875 Third Avenue New York, New York 10022 Attention: Franci J. Blassberg, Esq. --------- The CD&R Fund also shall be given a copy of any notice or other communication between the Grantee and the Company under this Agreement at its address as set forth above. (b) Binding Effect; Benefits. This Agreement shall be binding upon ------------------------ and inure to the benefit of the parties to this Agreement and their respective successors and assigns. Except as provided in Section 5, nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the parties to this Agreement or their respective successors or assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein. (c) Waiver; Amendment. ----------------- (i) Waiver. Any party hereto or beneficiary hereof may by written ------ notice to the other parties (A) extend the time for the performance of any - of the obligations or other actions of the other parties under this Agreement, (B) waive compliance with any of the conditions or covenants of - the other parties contained in this Agreement and (C) waive or modify - performance of any of the obligations of the other parties under this Agreement, provided that any waiver of the provisions of Section 5 must be -------- consented to in writing by the CD&R Fund. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party or beneficiary, shall be deemed to constitute a waiver by the party or beneficiary taking such action of compliance with any representations, warranties, covenants or agreements contained herein. The waiver by any party hereto or beneficiary hereof of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach and no failure by a 25 party or beneficiary to exercise any right or privilege hereunder shall be deemed a waiver of such party's or beneficiary's rights or privileges hereunder or shall be deemed a waiver of such party's or beneficiary's rights to exercise the same at any subsequent time or times hereunder. (ii) Amendment. This Agreement may not be amended, modified or --------- supplemented orally, but only by a written instrument executed by the Grantee and the Company, and (in the case of any amendment, modification or supplement that adversely affects the rights of the CD&R Fund hereunder) consented to by the CD&R Fund in writing. The parties hereto acknowledge that the Company's consent to an amendment or modification of this Agreement may be subject to the terms and provisions of the Financing Agreements. (d) Assignability. Neither this Agreement nor any right, remedy, ------------- obligation or liability arising hereunder or by reason hereof shall be assignable by the Company or the Grantee without the prior written consent of the other parties and the CD&R Fund. The CD&R Fund may assign from time to time all or any portion of its rights under Section 5 to one or more persons or other entities designated by it. (e) Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND -------------- CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE CORPORATE LAW OF THE STATE OF DELAWARE SPECIFICALLY AND MANDATORILY APPLIES. (f) Section and Other Headings, etc. The section and other headings ------------------------------- contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. (g) Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. (h) Delegation by the Board. All of the powers, duties and ----------------------- responsibilities of the Board specified in this Agreement may, to the full extent permitted by applicable law, be exercised and performed by any duly constituted committee thereof to the extent authorized by the Board to 26 exercise and perform such powers, duties and responsibilities. 27 IN WITNESS WHEREOF, the Company and the Grantee have executed this Agreement as of the date first above written. RIVERWOOD HOLDING, INC. By: /s/ B. Charles Ames ------------------------------ Name: B. Charles Ames Title: chief executive officer THE GRANTEE: By: /s/ Stephen Humphrey ------------------------------ Stephen Humphrey Address of the Grantee: 3350 Cumberland Circle Suite 1400 Atlanta, Georgia 30339 28 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RIVERWOOD HOLDING, INC.'S CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-29-1997 9,354 838 151,262 923 202,890 374,159 1,781,439 107,599 2,661,047 342,197 1,600,721 0 0 75 601,247 2,661,047 267,188 267,188 235,209 235,209 0 197 38,901 (40,498) 901 (41,399) 0 0 0 (37,844) 0 0
EX-99 5 RECONCILIATION OF (LOSS) INCOME FROM OPERATIONS EXHIBIT 99 RIVERWOOD HOLDING, INC. RECONCILIATION OF (LOSS) INCOME FROM OPERATIONS TO EBITDA (IN THOUSANDS OF DOLLARS)
U.S. Coated Timberlands/ Board Container- Wood COMPANY System board Products Corporate Total - ---------------------------------------------------------------------------------------------------- FIRST QUARTER 1997: (Loss) Income from Operations $15,779 $(13,006) - $ (4,512) $(1,739) Depreciation and amortization 20,949 3,803 - 358 25,110 Purchased asset costs (A) 6,219 911 - - 7,130 Other non-cash charges (B) 1,538 254 - 110 1,902 Dividends from equity investments - - - 750 750 - --------------------------------------------------------------------------------------------------- Pro Forma EBITDA (C) $44,485 $ (8,038) - $ (3,294) $33,153 =================================================================================================== ===================================================================================================
PREDECESSOR FIRST QUARTER 1996: (Loss) Income from Operations $24,638 $ (5,955) $13,868 $(16,901) $15,650 Depreciation and amortization 17,800 4,332 1,735 571 24,438 Other non-cash charges (B) 1,265 261 945 232 2,703 Dividends from equity investments - - - - - Pro forma adjustments 3,471 120 218 9,533 13,342 - --------------------------------------------------------------------------------------------------- Pro Forma EBITDA (C) $47,174 $ (1,242) $16,766 $ (6,565) $56,133 ===================================================================================================
Notes: - ------ (A) Under the terms and definitions of the Company's debt agreements, certain expenses and costs are excluded from the Company's (Loss) Income 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 APB Opinion No. 17, "Intangible Assets", collectively referred to as the "Purchased asset costs." (B) Other non-cash charges include non-cash charges deducted for pension, postretirement and postemployment benefits, depletion of prepaid timber and amortization of premiums on hedging contracts in determining net income other than Purchased asset costs (see above). (C) Pro Forma EBITDA is defined as consolidated net income (exclusive of non- cash charges resulting from purchase accounting during the first quarter of 1997) before consolidated interest expense, consolidated income taxes, consolidated depreciation and amortization, cost of timber harvested 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 calculated in accordance with definitions in the Company's debt agreements and on a pro forma basis to exclude Other Costs (see Note 6 in Notes to Condensed Consolidated Financial Statements) of the Predecessor. 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. -----END PRIVACY-ENHANCED MESSAGE-----