As filed with the Securities and Exchange Commission on May 3, 2002
Registration No. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RIVERWOOD HOLDING, INC.
(Exact name of registrant as specified in its charter)
Delaware 2631 58-2205241
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
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1105 North Market Street
Suite 1300
Wilmington, Delaware 19801
c/o Riverwood International Corporation
(770) 644-3000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------------
Edward W. Stroetz, Jr.
Secretary
Riverwood Holding, Inc.
3350 Riverwood Parkway
Suite 1400
Atlanta, Georgia 30339
(770) 644-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Peter J. Loughran, Esq. William V. Fogg, Esq.
Debevoise & Plimpton Cravath, Swaine & Moore
919 Third Avenue 825 Eighth Avenue
New York, New York 10022 New York, New York 10019
(212) 909-6000 (212) 474-1000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
Proposed Maximum Aggregate
Title of Each Class of Securities to Be Registered Offering Price(1) Amount of Registration Fee
Common Stock, $.01 par value(2)............... $350,000,000 $32,200
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) promulgated under the Securities Act of 1933, as
amended.
(2) Includes the Series A Junior Participating Preferred Stock purchase rights
associated with the common stock. No separate consideration will be received
for such rights.
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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[Description of Artwork: to come]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion. Dated May 3, 2002.
Shares
[LOGO]
Riverwood Holding, Inc.
Common Stock
-----------
This is an initial public offering of shares of common stock of Riverwood
Holding, Inc. Riverwood Holding is offering all of the shares to be sold in the
offering.
Prior to this offering, there has been no public market for the common
stock. We currently estimate that the initial public offering price per share
will be between $ and $ . We intend to list the common stock on the New
York Stock Exchange under the symbol "RVW."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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Per Share Total
--------- -----
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Riverwood Holding............. $ $
To the extent that the underwriters sell more than shares of common stock,
the underwriters have the option to purchase up to an additional shares from
Riverwood Holding at the initial public offering price less the underwriting
discount.
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The underwriters expect to deliver the shares against payment in New York,
New York on , 2002.
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JOINT BOOK-RUNNING MANAGERS
Goldman, Sachs & Co. Morgan Stanley
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Deutsche Bank Securities
JPMorgan
Salomon Smith Barney
---------
Prospectus dated , 2002.
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, ESPECIALLY THE RISKS OF INVESTING IN THE COMMON STOCK DISCLOSED UNDER
"RISK FACTORS."
Our Business
Overview
We are a focused, integrated provider of paperboard packaging solutions to
multinational beverage and consumer products companies. We focus on attractive
segments of the paperboard packaging market where we provide companies with
paperboard packaging solutions designed to deliver significant marketing and
performance benefits at a competitive cost. In doing this, we capitalize on our
high quality low-cost paper mills, innovative carton designs, efficient
converting plants, proprietary packaging machines and our commitment to superior
customer service. We believe that providing value-added packaging products to
our customers has enabled us to profitably grow our coated board business and
establish and maintain long-term relationships with blue-chip customers,
including Anheuser-Busch Companies, Inc., Miller Brewing Company, numerous
Coca-Cola and Pepsi bottling companies, Interbrew, Asahi Breweries, Unilever and
Master Foods. In 2001, we had net sales of $1.2 billion and EBITDA, as we define
below, of $260.8 million, or 20.9% of net sales.
We are the larger of two worldwide producers of coated unbleached kraft
paperboard, or CUK board, the grade of paperboard that we use for our packaging
products. CUK board is a specialized high-quality grade of paperboard with
excellent strength characteristics and printability for high-resolution graphics
that make it particularly well suited for a variety of packaging applications.
We refer to the CUK board we produce for use in beverage multiple packaging as
carrierboard and in consumer products packaging as cartonboard.
BEVERAGE MULTIPLE PACKAGING. In our beverage multiple packaging business,
we provide a range of packaging solutions to leading multinational beverage
companies, offering them carrierboard, beverage cartons and packaging machines
either as an integrated solution or separately. We produce carrierboard at our
mills, print and cut, or convert, the carrierboard into beverage cartons at our
converting plants and manufacture packaging machines designed to package bottles
and cans using our beverage cartons. We supply beverage cartons in a variety of
designs and formats, including 6, 12 and 24 multi-packs. We design our products
to meet our customers' needs for beverage multi-packs. We provide packaging
solutions that (1) are cost-effective, (2) provide convenience through ease of
carrying and storage for consumers, (3) provide a smooth surface printed with
high-resolution, multi-color graphics images that help our customers improve
brand awareness and visibility of their products on store shelves and
(4) provide durability, stiffness and wet-tear strength to ensure package
integrity under conditions that are often damp or wet. Our proprietary beverage
packaging machines package cans, bottles and other beverage containers into our
beverage cartons at high speeds. We install these machines at customer plants
under long-term leases and provide value-added support, service and advanced
performance monitoring of the machines. Our packaging machines are designed to
create direct pull-through demand for our CUK board.
We seek to increase the use by customers of our integrated packaging
solutions which, we believe, maximizes our revenue opportunities, enhances
customer relationships, provides customers with greater packaging line
efficiencies and overall cost benefits, and expands opportunities for us to
provide value-added support and service. We converted almost 90% of our
carrierboard production into beverage cartons
1
during 2001, and are seeking to increase the already significant customer use of
our packaging machines. We enter into annual or multi-year carton supply
contracts with our customers. This generally results in stable pricing and
revenues in our beverage multiple packaging business. In 2001, we shipped
approximately 637,000 tons of carrierboard and had net sales in our beverage
multiple packaging business of $827.8 million.
CONSUMER PRODUCTS PACKAGING. In our consumer products packaging business,
we have historically sold cartonboard to independent converters which convert
the cartonboard and sell cartons to consumer products companies, such as Kraft
Foods, Nestle, Unilever and Mattel. In January 2000, we organized this business
as a stand-alone operating unit to target previously untapped opportunities in
the non-beverage consumer products packaging market and to improve our product
mix and margins. Our strategy is to capitalize on the capabilities and business
model that we have developed in our beverage multiple packaging business by
developing integrated packaging solutions and innovative carton designs for
targeted consumer products applications and building relationships directly with
consumer products companies. At the same time, we intend to maintain our
relationships with independent converters of our cartonboard. We believe that
the performance characteristics of our CUK board, specifically its tear
strength, wet strength and stiffness, make it appropriate for applications in
attractive segments of the consumer products packaging market. For example, we
have developed our innovative Z-Flute-Registered Trademark- carton technology to
further penetrate the frozen and dry foods and candy segments of this market, as
well as other segments. In 2001, we shipped approximately 351,000 tons of
cartonboard and had net sales in our consumer products packaging business of
$219.5 million.
CONTAINERBOARD. In our containerboard business, we manufacture linerboard,
corrugating medium and kraft paper for sale in the open market. We have
historically produced linerboard on paperboard machines also capable of
producing CUK board. We intend to stop producing linerboard as we continue to
shift production capacity to higher margin CUK board. We also produce
corrugating medium and kraft paper on our two machines dedicated to these
products, with combined capacity of approximately 180,000 tons annually, and
will continue to do so as long as this production is economically attractive. In
2001, we shipped approximately 255,000 tons of containerboard and had net sales
in our containerboard business of $93.7 million.
HIGH QUALITY OPERATIONS. We produce CUK board on five machines located at
our two U.S. mills, with a combined production capacity of approximately
1.2 million gross tons of CUK board annually. We operate 11 carton converting
plants worldwide with a total converting capacity of approximately 660,000 gross
tons annually. We also produce white lined chip board at our Swedish mill. From
1991 through 1997, we invested approximately $1.2 billion in our CUK
board-related facilities, principally to convert our paper machines to CUK board
production, upgrade our CUK board machines and increase converting capacity. As
a result of these substantial capital investments, we have low-cost, modern,
high quality production and converting plants with sufficient CUK board and
converting capacity to meet our anticipated growth without having to make
significant additional capital expenditures for the next few years.
Our Strategies
GROW OUR BEVERAGE MULTIPLE PACKAGING BUSINESS BY EXPANDING MARKET SHARE IN
OUR TRADITIONAL MARKETS AND BY IDENTIFYING AND PENETRATING NEW MARKETS. We will
seek to continue expanding our market share in our traditional beer and
carbonated soft drink multiple packaging markets, where we have increased our
global market share from approximately 43% in 1996 to approximately 48% in 2001,
based on tons shipped. In addition, we are seeking to use new product innovation
to increase the use of CUK board for packaging beverage containers and liquids
that have not historically been packaged
2
using CUK board. For example, we have developed a packaging carton for bottled
water based on our Fridge Vendor-TM- design, which one of our customers will
begin to test market in May 2002. We have also designed a CUK board product for
juice pouches using our new Z-Flute-Registered Trademark- product, which is
being tested by a number of beverage companies. We believe that by expanding
market share in our traditional markets and penetrating large and growing
markets for our CUK board we will be able to accelerate growth of our net sales.
CAPITALIZE ON GROWTH OPPORTUNITIES FOR CUK BOARD IN CONSUMER PRODUCTS
PACKAGING. In our consumer products packaging business, we are moving from
being primarily a provider of cartonboard to independent converters to also
being a provider of integrated packaging solutions directly to consumer products
companies. We are developing innovative packaging solutions for segments of the
non-beverage consumer products packaging market that are large and fast growing
and where we intend to capitalize on our expertise in beverage multiple
packaging to provide value-added packaging solutions and carton innovation to
customers. Our historical lack of focus on this market, which accounted for
paperboard shipments of approximately 4.7 million tons in 2001 in the U.S., has
resulted in low penetration by CUK board generally and particularly by us. We
believe that CUK board is appropriate for applications that represent
approximately 35% of this market compared with CUK board's share of
approximately 12% in 2001. We estimate that our share of this market was only
approximately 6% in 2001. In addition, we are targeting our innovative
Z-Flute-Registered Trademark- carton technology at selected non-beverage
segments of the market for mini- and micro-flute corrugated products. We
estimate that these segments generated U.S. shipments of approximately 550,000
tons in 2000.
CONTINUE TO REDUCE COSTS BY FOCUSING ON OPERATIONAL EXCELLENCE. We plan to
continue to reduce our operating costs by continuously improving our processes
and systems. Since 1996, we have installed an experienced and dynamic management
team, restructured our asset base, realigned our business into
commercially-focused operating units and committed the organization to a program
designed to drive continuous improvement in our processes and systems which has
developed into our total quality systems, or TQS, initiative. We have reduced
the annual cost of operating our business by approximately $180 million in 2001
relative to 1996 as a result of our cost-reduction initiatives implemented
during the period from 1996 through 2001. While we have made significant
progress, we believe that there are still significant opportunities to apply our
TQS initiative to improve productivity and efficiency and realize additional
cost savings.
DRIVE PROFITABILITY BY CONTINUING TO SHIFT OUR PRODUCT MIX TO HIGHER MARGIN
CUK BOARD PACKAGING APPLICATIONS. We will continue to focus on profitable
growth by shifting to higher margin CUK board packaging applications and
providing value-added packaging solutions to our customers. First, we are
completing the shift of a significant amount of production capacity from low
margin linerboard sales to higher margin CUK board applications. Second, we are
continuing to exit lower margin areas of our CUK board business for higher
margin CUK board packaging applications. Third, we intend to shift a portion of
our consumer products packaging business to an integrated packaging model where
we believe we can achieve higher margins by providing consumer products
companies with value-added, integrated packaging solutions and carton
innovation.
USE ANTICIPATED FUTURE CASH FLOWS TO REDUCE OUR DEBT AND DRIVE EARNINGS
GROWTH. We intend to use the net proceeds of this offering and a significant
portion of our anticipated future cash flows to reduce our outstanding debt. We
will continue to benefit from the significant investments that we have made in
our mills and converting plants and do not anticipate having to make significant
additional capital expenditures over the next several years. In addition, we
will continue to employ effective working capital
3
controls to manage the cash requirements of our operations. Finally, we expect
to apply existing net operating loss carryforwards to reduce future cash income
tax expenses.
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Our principal executive offices are located at 3350 Riverwood Parkway, Suite
1400, Atlanta, Georgia 30339 and our telephone number at that address is
(770) 644-3000. In this prospectus, when we refer to "Riverwood Holding," we are
referring to Riverwood Holding, Inc., the issuer of the common stock. When we
refer to ourselves generally, we are referring to Riverwood Holding, Inc. and
its subsidiaries, unless the context otherwise requires. When we refer to "RIC
Holding" and "Riverwood International," we are referring to our subsidiaries RIC
Holding, Inc. and Riverwood International Corporation, respectively.
4
Related Financing Transactions
Concurrently with this offering, we anticipate borrowing an additional
$ million under our senior secured credit agreement through an add-on
term loan and selling $ million in principal amount of senior notes,
which we refer to collectively as the related financing transactions. We intend
to use the net proceeds from this offering, together with the net proceeds from
the related financing transactions, to repay in full our outstanding senior
notes and senior subordinated notes and to repay a portion of the amounts
outstanding under our revolving credit facility. We cannot assure you that
either of the related financing transactions will be completed on the terms
anticipated, or at all.
This offering is not conditioned upon the completion of either of the
related financing transactions. If we do not complete the related financing
transactions, we intend to use the net proceeds of this offering to repay a
portion of our outstanding debt.
The following table illustrates the estimated sources and uses of funds from
this offering and the anticipated related financing transactions.
Amounts
Sources -------------
(in millions)
Common stock offered hereby................................. $
Add-on senior secured term loan.............................
Sale of senior notes........................................
--------
Total sources........................................... $
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Uses
Repay senior notes and senior subordinated notes............ $
Repay revolving credit facility borrowings..................
Estimated fees and expenses.................................
--------
Total uses.............................................. $
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5
The Offering
Shares of common stock..........................
Shares of common stock outstanding after the
offering......................................
Use of proceeds................................. Our net proceeds from this offering, after
deducting underwriting discounts and estimated
offering expenses, will be approximately $
million. We intend to use the net proceeds of this
offering to repay a portion of our outstanding
debt.
Dividends....................................... The holders of common stock will share
proportionately on a per share basis in all
dividends and other distributions declared by our
board of directors. We currently intend to pay
regular dividends on our common stock, depending on
our financial results and approval by our board of
directors. See "Dividend Policy."
Proposed New York Stock Exchange symbol......... "RVW"
Unless we specifically state otherwise, all information in this prospectus:
- gives effect to the reclassification prior to the closing of this offering
of all outstanding shares of our Class A common stock and our non-voting
Class B common stock into shares of common stock on a one-for-one basis;
- gives effect to a for one stock split by way of reclassification of
our common stock to be completed prior to the closing of this offering;
- assumes no exercise of the over-allotment option granted to the
underwriters; and
- excludes shares of common stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of
$ per share with exercise price ranging from $ to
$ per share; of these shares, shares are subject to
currently vested stock options at a weighted average exercise price of
$ per share with exercise price ranging from $ to
$ per share.
If the underwriters exercise their over-allotment option in full,
shares of common stock will be outstanding after this offering.
Risk Factors
You should carefully consider all the information set forth in this
prospectus and, in particular, should evaluate the specific factors set forth
under "Risk Factors" beginning on page 10 for risks involved with an investment
in shares of our common stock.
6
Summary Consolidated Financial Data
You should read the summary consolidated financial data below in conjunction
with "Capitalization," "Selected Consolidated Financial and Other Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the accompanying
notes. Share and per share data set forth below do not yet give effect to the
anticipated stock split.
Year Ended December 31,
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1997 1998 1999 2000 2001(a)
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Statement Of Operations Data:
Net sales(b)...................................... $1,207,615 $1,196,221 $1,174,665 $1,192,362 $1,249,886
Cost of sales(b).................................. 1,069,152 997,609 933,924 923,851 1,002,059
Gross profit...................................... 138,463 198,612 240,741 268,511 247,827
Selling, general and administrative............... 116,581 112,117 114,402 112,200 120,629
Research, development and engineering............. 5,171 5,570 4,078 4,554 5,111
Impairment loss................................... -- 15,694 -- -- --
Restructuring charge (credit)..................... -- 25,580 -- (2,600) --
Other expense (income), net....................... 9,799 11,973 1,798 (66,132) 24,035
Income from operations............................ 6,912 27,678 120,463 220,489 98,052
Net interest expense.............................. 172,230 178,030 179,197 181,285 158,910
Net (loss) income(c).............................. (152,473) (140,304) (54,671) 38,282 (77,896)
Net (loss) income per share
Basic........................................... (20.05) (18.55) (7.23) 5.06 (10.29)
Diluted......................................... (20.05) (18.55) (7.23) 4.98 (10.29)
Weighted average shares outstanding
Basic........................................... 7,604,817 7,562,596 7,556,842 7,563,717 7,568,177
Diluted......................................... 7,604,817 7,562,596 7,556,842 7,684,664 7,568,177
Other Financial Data:
Shipments (in tons)
Carrierboard.................................... 544.1 640.1 639.8 611.7 637.3
Cartonboard..................................... 389.1 380.6 324.9 340.4 351.4
White lined chip board.......................... 143.0 138.2 141.0 150.4 150.4
Containerboard.................................. 421.6 278.5 327.8 319.4 255.3
Net sales
Carrierboard.................................... $ 649,703 $ 750,226 $ 777,396 $ 743,569 $ 827,782
Cartonboard..................................... 346,474 281,009 211,032 209,395 219,543
White lined chip board.......................... 78,512 69,567 65,082 77,273 73,336
Containerboard.................................. 116,510 84,910 103,868 126,549 93,677
Additions to property, plant and equipment (d).... 142,314 48,551 66,018 62,062 57,670
EBITDA(e)......................................... 160,315 197,625 266,933 296,352 260,820
EBITDA margin(f).................................. 13.3% 16.5% 22.7% 24.9% 20.9%
Cash flow provided by (used in) operating
activities...................................... (4,196) 48,039 16,641 98,854 89,599
Cash flow provided by (used in) investing
activities...................................... (160,354) 8,939 (67,756) 127,303 (72,490)
Cash flow provided by (used in) financing
activities...................................... 166,015 (60,200) 49,668 (223,247) (8,642)
7
As of December 31, 2001
---------------------------
Pro Forma
Actual As Adjusted(g)
---------- --------------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents................................... $ 26,107
Total assets................................................ 2,057,592
Long-term debt, less current portion........................ 1,523,082
Redeemable common stock..................................... 8,061
Shareholders' equity........................................ 215,865
--------------------------
(a) Effective January 1, 2001, we consolidated into our financial statements
the accounts of Rengo Riverwood Packaging, Ltd., our Japanese joint venture,
since we have the ability to exercise control over Rengo's operating and
financial policies. The consolidation contributed approximately $47 million
in net sales and approximately $4 million in EBITDA in 2001.
(b) We have reclassified the presentation of net sales and cost of sales
information to conform with the current presentation format and Emerging
Issues Task Force 00-10, "Accounting for Shipping and Handling Fees and
Costs." Shipping and handling costs totaled $68.8 million in 1997,
$60.7 million in 1998, $62.0 million in 1999, $63.7 million in 2000 and
$64.9 million in 2001.
(c) On October 3, 2000, we, along with our joint venture partner, completed the
sale of the jointly-held Igaras Papeis e Embalagens S.A. for approximately
$510 million, including the assumption of $112 million of debt by the
purchaser. We recognized a gain of approximately $70.9 million, net of tax,
in connection with the sale.
Net (loss) income for the year ended December 31, 2001 included a charge of
$0.5 million, net of tax, for the cumulative effect of a change in
accounting principle for derivatives.
Net (loss) income for the years ended December 31, 1997, 2000 and 2001
included an extraordinary loss on early extinguishment of debt of
$2.5 million, $2.1 million and $8.7 million, respectively, net of applicable
tax.
Net (loss) income for the year ended December 31, 1997 included a charge of
$3.1 million, net of tax, for the cumulative effect of a change in
accounting principle for computer systems development project costs.
Net (loss) income for the years ended December 31, 1998 and 2000 included a
charge (credit) for the global restructuring program, which is focused in
our European operations, of $25.6 million and of $(2.6) million,
respectively.
(d) Includes amounts invested in packaging machinery and capitalized interest.
(e) EBITDA represents income (loss) from operations before depreciation and
amortization expense, loss (gain) on asset write-downs/unusual asset
disposals, loss on impairment of assets and LIFO related expenses (credits)
plus dividends from equity investments recorded in the period. We believe
that EBITDA provides useful information regarding our ability to service
debt, but should not be considered in isolation or as a substitute for our
consolidated statement of operations or cash flow data. This definition of
EBITDA may not be comparable to other companies' definitions of EBITDA and
is not a defined term under U.S. generally accepted accounting principles.
The table below sets forth a reconciliation of income from operations to
EBITDA.
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(in thousands)
Income from operations..................... $ 6,912 $ 27,678 $120,463 $220,489 $ 98,052
Add: Depreciation and amortization......... 137,384 146,515 142,597 143,541 137,258
Dividends from equity investments...... 5,228 6,963 4,515 5,083 710
Other non-cash charges (1)............. 10,791 16,469 (642) (72,761) 24,800
-------- -------- -------- -------- --------
EBITDA..................................... 160,315 197,625 266,933 296,352 260,820
======== ======== ======== ======== ========
Add: Additional non-cash charges (2)....... 5,612 5,833 6,542 3,682 7,414
-------- -------- -------- -------- --------
Reported credit agreement EBITDA (2)....... $165,927 $203,458 $273,475 $300,034 $268,234
======== ======== ======== ======== ========
8
(1) Other non-cash charges include non-cash loss (gain) on asset
write-downs/unusual asset disposals, loss on impairment of assets and
LIFO related expenses (credits) deducted in determining net income.
(2) We previously reported EBITDA based on the definitions of EBITDA and
U.S. generally accepted accounting principles contained in our senior
secured credit agreement. For purposes of EBITDA as previously reported,
we also added back to income from operations non-cash charges for
pension, post-retirement and post-employment benefits, and expenses
(credits) relating to changes in U.S. generally accepted accounting
principles subsequent to March 1996, when we entered into the credit
agreement.
(f) EBITDA margin represents EBITDA as a percentage of net sales.
(g) Gives effect to the borrowings of our tranche B term loan on April 23,
2002, this offering, the related financing transactions and the application
of the proceeds from each of the foregoing. See "Capitalization."
9
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK ENTAILS THE FOLLOWING RISKS. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING INFORMATION ABOUT THESE RISKS, TOGETHER WITH
OTHER INFORMATION IN THIS PROSPECTUS, BEFORE BUYING SHARES OF THE COMMON STOCK.
IF ANY OF THE FOLLOWING RISKS OR UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS COULD BE MATERIALLY AND ADVERSELY
AFFECTED. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE
ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK. SOME OF THE
STATEMENTS IN "RISK FACTORS" ARE FORWARD-LOOKING STATEMENTS. SEE
"FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA."
We have substantial existing debt and may incur substantial additional debt,
which could adversely affect our financial health and our ability to obtain
financing in the future and react to changes in our business.
As of December 31, 2001, we had an aggregate principal amount of
$1,534.9 million of outstanding debt and redeemable common stock and
shareholders' equity of $223.9 million. As of December 31, 2001, on a pro forma
as adjusted basis after giving effect to the April 2002 tranche B term loan and
this offering and the application of proceeds therefrom, we would have had an
aggregate principal amount of $ million of outstanding debt and
shareholders' equity of $ million.
Our high degree of leverage could have important consequences to our
stockholders, including but not limited to the following:
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes
may be impaired in the future;
- a substantial portion of our cash flow from operations must be dedicated
to the payment of principal and interest on our indebtedness, thereby
reducing the funds available to us for other purposes;
- certain of our borrowings will be at variable rates of interest, which
will expose us to the risk of increased interest rates; and
- our flexibility to adjust to changing market conditions and ability to
withstand competitive pressures could be limited, and we may be more
vulnerable to a downturn in general economic conditions or our business or
be unable to carry out capital spending that is important to our growth
strategy and productivity improvement programs.
The indentures for our senior notes and the senior subordinated notes permit
Riverwood International to incur or guarantee additional indebtedness, including
indebtedness under our senior secured credit facilities, subject to certain
limitations. Riverwood International has additional borrowing capacity on a
revolving credit basis under our senior secured credit facilities.
The agreements and instruments governing our debt contain restrictions and
limitations that could significantly impact our ability to operate our business
and adversely affect our stockholders.
Our senior secured credit facilities contain a number of significant
covenants that, among other things, restrict our ability to:
- dispose of assets;
- incur additional indebtedness;
- incur guarantee obligations;
- prepay other indebtedness or amend other debt instruments;
- pay dividends;
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- create liens on assets;
- enter into sale and leaseback transactions;
- make investments, loans or advances;
- make acquisitions;
- engage in mergers or consolidations;
- change the business conducted by us;
- make capital expenditures; and
- engage in certain transactions with affiliates.
In addition, under our senior secured credit facilities, we are required to
comply with specified financial ratios and tests, including consolidated debt to
EBITDA ratio and interest coverage ratio requirements. Compliance with these
covenants for subsequent periods may be difficult given current market and other
economic conditions. Our ability to comply in future periods will depend on our
ongoing financial and operating performance, which in turn will be subject to
economic conditions and to financial, business and other factors, many of which
are beyond our control, and will be substantially dependent on the selling
prices for our products, raw material and energy costs, and our ability to
successfully implement our overall business strategy.
The indentures governing our senior notes and senior subordinated notes also
contain certain restrictive covenants.
Our ability to comply with the covenants and restrictions contained in our
senior secured credit facilities or our various indentures may be affected by
events beyond our control, including prevailing economic, financial and industry
conditions. The breach of any such covenants or restrictions could result in a
default under either our secured credit facilities or the relevant indenture
that would permit the applicable lenders or noteholders, as the case may be, to
declare all amounts outstanding thereunder to be due and payable, together with
accrued and unpaid interest, and the commitments of our senior secured lenders
to make further extensions of credit under the credit facilities could be
terminated. If we were unable to repay our indebtedness to our senior secured
lenders, these lenders could proceed against the collateral securing such
indebtedness.
Our ability to generate the significant amount of cash needed to pay interest
and principal amounts on our debt depends on many factors beyond our control.
Our ability to make scheduled payments or to refinance our obligations with
respect to our debt will depend on our financial and operating performance
which, in turn, is subject to prevailing economic and competitive conditions and
to certain financial, business and other factors beyond our control, including:
- operating difficulties;
- increased operating costs;
- increased raw material and energy costs;
- market cyclicality;
- product prices;
- the response of competitors;
- regulatory developments; and
- delays in implementing strategic projects.
11
If our cash flow and capital resources are insufficient to fund our debt
service obligations, we may be forced to further reduce or delay capital
expenditures, sell assets or seek to obtain additional equity capital, or to
restructure our debt. We cannot assure you that our cash flow and capital
resources will be sufficient for payment of interest on and principal of our
debt in the future, or that any such alternative measures would be successful or
would permit us to meet our scheduled debt service obligations. In the absence
of such operating results and resources, we could face substantial liquidity
problems and might be required to dispose of material assets or operations to
meet our debt service and other obligations, and we cannot assure you as to the
timing of such sales or the proceeds that we could realize therefrom.
If we are unable to implement our business strategies, particularly our strategy
to develop and deliver new products, our business and financial condition could
be adversely affected.
Our future results of operations will depend in significant part on the
extent to which we can implement successfully our business strategies. We cannot
assure you that we will be able to fully implement our strategies or that the
anticipated results of our strategies will be realized. Our strategies are
subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond our control.
A key element of our business strategy is to develop and deliver new
products to targeted segments of the beverage multiple packaging market, such as
the bottled water and juice pouch segments, and of the consumer products
packaging market, such as introducing our Z-Flute-Registered Trademark- carton
technology into the mini- and micro-flute corrugated packaging market. We have
not historically competed in these businesses. The successful development of new
products is highly uncertain and is dependent on numerous factors. For example,
the product may not be economically viable because of manufacturing costs or
other factors, the product may not gain acceptance by beverage or consumer
products companies or in the marketplace generally, or the product may not be
effective when compared with products made of competing substrates. We expect
that a substantial portion of our anticipated future growth will be achieved
through sales of new products. We may not be able to offer new products
successfully to our customers, and these new products may not generate adequate
revenues.
Markets may not be able to absorb our entire CUK board production, which may
negatively impact our financial condition and results of operations.
Our West Monroe and Macon mills have a current combined annual production
capacity of approximately 1.2 million gross tons of CUK board. We expect to sell
a significant portion of our additional CUK board production in open markets. We
cannot assure you that additional CUK board output can be sold in these markets
or that such additional CUK board can be sold without experiencing price
reductions.
A significant portion of our revenue is concentrated among a few large customers
and the loss of any of these customers could adversely affect our business.
Our 10 largest customers, accounted for approximately 51% of our net sales
in 2001. During 2001, we had two customers, Anheuser-Busch Companies, Inc. and
Miller Brewing Company, which represented approximately 13% and 11%,
respectively, of our net sales. We believe that net sales derived from our 10
largest customers will continue to represent a significant portion of our total
net sales. The loss of, or a significant reduction of orders from, any of our 10
largest customers could have a material adverse effect on our business,
financial condition or results of operations.
Our reliance on only two mills for the entire CUK board production could
adversely affect our operating results and financial condition.
All of our CUK board is produced at our West Monroe and Macon mills. Any
prolonged disruption in either facility's production due to labor difficulties,
equipment failure, destruction of or material damage to
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such facility, or other reasons, could have a material adverse effect on our
results of operations. While we maintain property and business interruption
insurance other than for labor-related disruptions, we cannot assure you that
the proceeds of such insurance would be adequate to repair or rebuild our
facilities in such event or to compensate us for losses incurred during the
period of any such disruption.
If we experience work stoppages or labor difficulties in the future, our
revenues and profitability could be adversely affected.
We employ approximately 4,100 people worldwide, approximately 3,000 of whom
are members of unions and covered by union contracts. We have a total of four
unions representing our U.S. employees. Four of our union contracts expire by
the end of 2003. We cannot assure you that we will be able to successfully
negotiate new union contracts covering the employees at our various sites
without work stoppages or labor difficulties, or that such events will not occur
as a result of other factors. A prolonged disruption at any of our facilities
due to work stoppages or labor difficulties could have a material adverse effect
on our revenues and profitability. In addition, if new union contracts contain
significant increases in wages or other benefits, our margins would be adversely
impacted.
Competition could diminish our sales volume and revenue.
There are only two major producers in the United States of CUK board,
MeadWestvaco Corporation and us. We face significant competition in our CUK
board business segment from MeadWestvaco, as well as from other manufacturers of
packaging machines. Like us, MeadWestvaco is an integrated provider of CUK board
that manufactures and converts CUK board, designs and places packaging machines
with customers, and sells CUK board in the open market. Our highly leveraged
nature could limit our ability to respond to market conditions or to make
necessary or desirable capital expenditures as effectively as our competitors.
In addition, we cannot assure you that there will not be new entrants in the CUK
board market segment.
In the beverage multiple packaging industry, cartons made from CUK board
compete with plastics and corrugated packaging for packaging glass or plastic
bottles, cans and other primary containers. Plastics and corrugated packaging
generally provide lower cost packaging solutions. In addition to price, CUK
board competes with these materials on the basis of distribution, quality of
graphics, carton designs, package performance, environmental friendliness and
design flexibility.
In the consumer products industry, our cartonboard sales are affected by
competition from MeadWestvaco's CUK board and from other substrates: solid
bleached sulfate and recycled clay-coated news and, internationally, white lined
chip board and folding boxboard. Folding cartonboard grades compete based on
price, strength and printability. CUK board has generally been priced in a range
that is higher than recycled clay-coated news and lower than solid bleached
sulphate board. There are a large number of suppliers of paperboard for folding
carton applications, which are subject to significant competitive and other
business pressures. Suppliers of paperboard in these markets compete primarily
on the basis of quality, service and price.
We cannot assure you that we will be able to continue to compete
successfully in the paperboard packaging markets.
We have a history of net losses. We cannot assure you that we will not continue
to report net losses.
We reported net losses of $77.9 million and $54.7 million in 2001 and 1999,
respectively. In 2000, we reported net income of $38.3 million; however, this
included other income of $66.1 million which was due primarily to the gain
recognized from the sale of Igaras in 2000. We cannot assure you that we will
not report net losses in future periods. We cannot predict what impact continued
net losses might have on our ability to finance our operations in the future or
on the market value of our common stock.
13
Our ability to generate cash flows is subject to price weaknesses and
variability.
Our financial performance will depend in significant part on the selling
prices that we realize for our carrierboard, cartonboard and containerboard
products.
Our cash flow is influenced by sales volume and selling prices for our
products. In our coated board business segment, we historically have experienced
moderate cyclical pricing for our cartonboard, which is principally sold in the
open market to independent converters. Depressed selling prices for our open
market cartonboard have had, and in the future could have, a significant
negative impact on our cash flow. Also, under agreements we have with a number
of major converters, we are restricted in our ability to raise the selling
prices of our cartonboard. This could negatively impact our margins if we were
to experience increases in our costs due to inflation or otherwise. In addition,
although prices for our carrierboard have been relatively stable, we cannot
assure you that competitive factors will not adversely affect such prices in the
future.
Our containerboard business segment operates in markets that historically
have experienced significant fluctuations in sales. We elected to take
corrugating medium and kraft paper market-related downtime at our U.S. mills of
59 days, or approximately 21,400 tons, during 2001. The downtime resulted in
underabsorbed fixed costs of approximately $3.7 million for 2001. We expect to
take 46 days, or approximately 18,000 tons, of medium market-related downtime
during 2002, but the amount of downtime could increase or decrease depending
upon market conditions. The downtime results from a number of factors, but
principally a weak containerboard market. As a result of the expected downtime
during 2002, we estimate the impact on earnings at our U.S. mills to be
approximately $3.3 million related to the under absorbtion of fixed costs.
Depressed selling prices for our open market containerboard products have had,
and in the future could have, a significant negative impact on our cash flow. In
addition, we cannot assure you that competitive factors will not adversely
affect containerboard prices in the future.
Our loss of key management personnel could adversely affect our business.
Our future success depends, in significant part, upon the continued service
of our management personnel. The loss of the services of one or more of our key
senior management personnel could adversely affect our future operating results
and financial condition.
Our results from operations and financial condition is dependent upon our costs,
including the cost of energy and raw materials.
Energy, including natural gas, fuel oil and electricity, represents a
significant portion of our manufacturing costs. Our energy costs increased
significantly in 2001 as compared to 2000 by approximately $16 million,
principally at our U.S. mills. Until recently, our results had not been
significantly affected by the volatility of energy costs. We have entered into
fixed price contracts designed to mitigate the impact of future energy cost
increases through 2002, and will continue to evaluate our hedge position. We
believe that increased energy costs will continue to significantly impact our
results for 2002 but the negative impact is expected to be lower than in 2001.
Since negotiated contracts and the market largely determine our pricing, we are
limited in our ability to pass through to our customers any energy or other cost
increases that we may incur in the future. As such, we cannot assure you that
our operating margins and profitability will not be adversely affected by rising
energy or other costs, or that energy costs will not continue to increase.
Amounts paid by us for pine pulpwood, hardwood and recycled fibers,
including old corrugated containers, used in the manufacture of paperboard, and
various chemicals used in the coating of CUK board, represent the largest
components of our variable costs of CUK board and containerboard production. The
cost of these materials is subject to market fluctuations caused by factors
beyond our control. Old corrugated container pricing tends to be very volatile.
With the October 1996 sale of our timberlands, we
14
now rely on private land owners and the open market for all of our pine
pulpwood, hardwood and recycled fiber requirements, except for CUK board
clippings from our converting operations. Under the terms of the sale of those
timberlands, we and the buyer, Plum Creek Timber Company, L.P., entered into a
20-year supply agreement in 1996, with a 10-year renewal option, for the
purchase by us, at market-based prices, of a majority of our West Monroe mill's
requirements for pine pulpwood and residual chips, as well as a portion of our
needs for hardwood pulpwood at our West Monroe mill. An assignee of Plum Creek
supplies residual chips to us pursuant to the supply agreement. We cannot assure
you that, if the supply agreement were terminated, we would be able to find an
alternative, comparable supplier or suppliers capable of providing our pine
pulpwood and hardwood needs on terms or in amounts satisfactory to us. While we
have not experienced any significant difficulty in obtaining adequate supplies
of pine pulpwood, hardwood or recycled fiber for our West Monroe mill or Macon
mill, we cannot assure you that this will continue to be the case for either
such mill. Moreover, significant increases in the cost of these materials, to
the extent not reflected in prices for our products, could have a material
adverse effect on our results of operations.
Our operations outside the United States are subject to the risks of doing
business in foreign countries.
We have operating facilities in six foreign countries and sell products
worldwide. For 2001, prior to intercompany eliminations, net sales of our
products outside the United States totaled approximately $409 million,
representing approximately 33% of our net sales, for such period. As a result,
we are subject to risks associated with operating in foreign countries,
including:
- devaluations and fluctuations in currency exchange rates;
- imposition of limitations on conversion of foreign currencies into U.S.
dollars or remittance of dividends and other payments by foreign
subsidiaries;
- imposition or increase of withholding and other taxes on remittances and
other payments by foreign subsidiaries;
- hyperinflation in certain foreign countries; and
- imposition or increase of investment and other restrictions by foreign
governments.
We cannot assure you that any of the above events will not have a material
adverse effect on us in the future.
Foreign currency risks and exchange rate fluctuations could hinder the results
of our international operations, and the strength of the U.S. dollar could
continue to disadvantage us relative to our foreign competitors.
At December 31, 2001, approximately 12% of our total net assets were
denominated in currencies other than the U.S. dollar. We have significant
operations in Sweden, Great Britain, Japan, Spain and France. The effect of a
generally stronger U.S. dollar against the currencies of Sweden, Great Britain,
Japan, Germany, Spain and France produced a net currency translation adjustment
loss of approximately $5.6 million, which was recorded as an adjustment to
shareholders' equity for the year ended December 31, 2001. The magnitude and
direction of this adjustment in the future depends on the relationship of the
U.S. dollar to other currencies. We cannot predict major currency fluctuations.
Our revenues from export sales fluctuate with changes in foreign currency
exchange rates. We pursue a currency hedging program that utilizes derivatives
to limit the impact of foreign currency exchange fluctuations on our
consolidated financial results. Under this program, we have entered into forward
exchange and option contracts in the
15
normal course of business to hedge certain foreign currency denominated
transactions. Nonetheless, our financial performance is directly affected by
exchange rates as a result of:
- translations into U.S. dollars for financial reporting purposes of the
assets and liabilities of our foreign operations conducted in local
currencies;
- gains or losses from foreign operations translated into U.S. dollars; and
- a strong U.S. dollar relative to the currencies of the foreign countries
we sell in, which has the effect of reducing our margins.
Environmental compliance may impose substantial cost on us.
We are committed to complying with all applicable foreign, federal, state
and local environmental laws and regulations. Environmental law is, however,
dynamic rather than static. As a result, costs that are unforeseeable at this
time may be incurred in the future when new laws are enacted and when
environmental agencies adopt or revise rules and regulations.
In 1998, the United States Environmental Protection Agency adopted
regulations, generally referred to as the cluster rules, that mandate more
stringent controls on air and water discharges from United States pulp and paper
mills. We estimate the capital spending that may be required to comply with the
cluster rules could reach $55 million to be spent at our two U.S. paper mills
over a seven-year period that began in 2000. As of December 31, 2001, we
estimate that we had spent approximately one-third of that amount for such
compliance.
We are involved in environmental remediation projects at certain properties
currently or formerly owned or operated by us, and at certain waste disposal
sites. Some of these projects are being addressed under federal and state
statutes, such as the federal Comprehensive Environmental Response, Compensation
and Liability Act and analogous state laws. Our costs in certain instances
cannot be reliably estimated until the remediation process is substantially
underway or liability has been addressed. To address these contingent
environmental costs, we have accrued reserves when such costs are probable and
can be reasonably estimated. We believe that, based on current information and
regulatory requirements, the accruals established by us for environmental
expenditures are adequate. Based on our current understanding, 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 our results of operations,
cash flows, or financial condition, although we cannot assure you that
significant costs will not be incurred in connection with clean-up activities.
We may be limited in the future in the amount of NOLs that we can use to offset
income.
As of December 31, 2001, we had approximately $1.1 billion of U.S. federal
income tax net operating loss carryforwards, or NOLs, from prior taxable years.
These NOLs generally can be used by us to offset income earned in subsequent
taxable years, but will expire between 2012 and 2021 if we do not use them
before that time.
Section 382 of the Internal Revenue Code generally provides that a
corporation that undergoes an ownership change will be limited in the amount of
NOLs that it can use to offset income it earns after the ownership change. If a
corporation undergoes an ownership change, the amount of NOLs that it can use in
each taxable year after the ownership change will be limited to the product of
(i) the fair market value of the corporation immediately before the ownership
change (generally ignoring for this purpose capital contributions, including the
proceeds from this offering, received by the corporation during the 2-year
period ending on the date of the ownership change) and (ii) the long-term
tax-exempt rate for the month in which the ownership change occurs (5.01% for
May 2002). Any unused section 382 limitation for a taxable year will be carried
forward to the subsequent taxable year.
16
Generally, a corporation undergoes an ownership change if the percentage of
stock of the corporation owned by one or more 5% shareholders increases by more
than 50 percentage points as compared to the lowest percentage of stock owned by
those 5% shareholders at any time during the testing period (generally, the past
three years). A 5% shareholder is generally an individual who owns, directly or
indirectly, at least 5% of the stock of the corporation, and all stock owned by
shareholders who are not 5% shareholders is generally treated as owned by one 5%
shareholder.
Imposition of a section 382 limitation on our NOLs could have an adverse
effect on our anticipated future cash flow. We do not expect to undergo an
ownership change as a result of the completion of this offering. However,
subsequent direct or indirect transfers of our common stock by certain of our 5%
shareholders, or issuances by us of our common stock, particularly when combined
with this offering, could result in an ownership change that would trigger a
section 382 limitation.
Terrorist attacks and other acts of violence or war may affect the financial
markets and our business, financial condition and results of operations.
As a result of the September 11, 2001 terrorist attacks and subsequent
events, there has been considerable uncertainty in world financial markets. The
full effect of these events, as well as concerns about future terrorist attacks,
on the financial markets is not yet known, but could adversely affect our
ability to obtain financing on terms acceptable to us, or at all, to finance our
capital expenditures or working capital.
Terrorist attacks may negatively affect our operations and financial
condition. We cannot assure you that there will not be further terrorist attacks
against the United States of America or U.S. businesses. These attacks or armed
conflicts may directly impact our physical facilities or those of our customers
and vendors. These events could cause consumer confidence and spending to
decrease or result in increased volatility in the U.S. and world financial
markets and economy. They could result in an economic recession in the United
States or abroad. Any of these occurrences could have a material adverse impact
on our business, financial condition and results of operations.
We are a holding company with no significant independent operations and no
significant assets except capital stock of our subsidiaries. As a result, we
would be unable to pay dividends or distributions to shareholders or meet our
other obligations if our subsidiaries fail to make funds available to us.
We are a holding company with no significant independent operations and no
significant assets other than the capital stock of RIC Holding. We, therefore,
will be dependent upon the receipt of dividends or other distributions from RIC
Holding to pay dividends or distributions to shareholders or meet our other
obligations that we incur. RIC Holding is also a holding company with no
significant independent operations and no significant assets other than the
capital stock of Riverwood International. RIC Holding will, therefore, be
dependent upon the receipt of dividends or other distributions from Riverwood
International to fund any obligations that it incurs, including the payment of
dividends or other distribution to us. These operating subsidiaries may not be
able to make funds available to us. This could adversely affect our ability to
meet our obligations and to make dividend payments and other distributions to
holders of our common stock. Our senior secured credit facilities and the
indentures governing our senior notes and senior subordinated notes contain
restrictions on distributions from Riverwood International to us or RIC Holding,
other than for certain specified purposes.
The declaration of dividends by us will be subject to the discretion of our
board of directors, and will depend on a number of factors, including our
results of operations, financial condition, liquidity requirements and
restrictions imposed by applicable law and our indebtedness.
17
Our certificate of incorporation, by-laws, stockholder rights plan and Delaware
law may discourage takeovers and business combinations that our stockholders
might consider in their best interests.
Provisions in our amended and restated certificate of incorporation and
amended and restated by-laws may delay, defer, prevent or render more difficult
a takeover attempt that our stockholders might consider in their best interests.
These provisions include:
- authorization of the issuance of preferred stock, the terms of which may
be determined at the sole discretion of the board of directors;
- establishment of a classified board of directors with staggered, three
year terms;
- provisions giving the board of directors sole power to set the number of
directors;
- limitation on the ability of stockholders to remove directors;
- prohibition on stockholders from calling special meetings of stockholders;
- establishment of advance notice requirements for stockholder proposals and
nominations for election to the board of directors at stockholder
meetings; and
- requirement of the approval by the holders of at least 75% of our
outstanding common stock for the amendment of our by-laws and provisions
of our certificate of incorporation governing:
- the classified board,
- the liability of directors, and
- the elimination of stockholder actions by written consent.
These provisions may prevent our stockholders from receiving the benefit
from any premium to the market price of our common stock offered by a bidder in
a takeover context. Even in the absence of a takeover attempt, the existence of
these provisions may adversely affect the prevailing market price of our common
stock if they are viewed as discouraging takeover attempts in the future.
Our amended and restated certificate of incorporation and amended and
restated by-laws may also make it difficult for stockholders to replace or
remove our management. These provisions may facilitate management entrenchment
that may delay, defer or prevent a change in our control, which may not be in
the best interests of our stockholders.
Our anticipated stockholder rights plan may also have anti-takeover effects.
The stockholder rights plan will be designed to protect our stockholders in the
event of unsolicited offers to acquire us and other coercive takeover tactics
that, in the opinion of our board of directors, could impair the board's ability
to represent stockholder interests. Our stockholder rights plan might render an
unsolicited takeover more difficult or less likely to occur, even though such a
takeover might offer our stockholders the opportunity to sell their stock at a
price above the prevailing market price and may be favored by our stockholders.
In addition, Section 203 of the General Corporation Law of the State of
Delaware may limit the ability of an interested stockholder to engage in
business combinations with us. An interested stockholder is defined to include
persons owning 15% or more of our outstanding voting stock.
See "Description of Capital Stock" for additional information on the
anti-takeover measures applicable to us.
18
A few significant stockholders may influence or control the direction of our
business. If the ownership of our common stock continues to be highly
concentrated, it may prevent you and other stockholders from influencing
significant corporate decisions.
Following the completion of this offering, Clayton, Dubilier & Rice Fund V
Limited Partnership and EXOR Group S.A. will beneficially own approximately %
and %, respectively, of the outstanding shares of our common stock. As a
result, Clayton, Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A.
will exercise significant influence over matters requiring stockholder approval.
Prior to the closing of this offering, we anticipate entering into a new
stockholders agreement pursuant to which Clayton, Dubilier & Rice Fund V Limited
Partnership and EXOR Group S.A. will have the right to designate, in the
aggregate, at least a majority of our board of directors. We expect that the
designation rights will be subject to reduction based on specified reductions in
share ownership percentages. The concentrated holdings of Clayton, Dubilier &
Rice Fund V Limited Partnership and EXOR Group S.A. and the presence of their
designees on our board of directors may result in a delay or the deterrence of
possible changes in control of our company, which may reduce the market price of
our common stock. The interests of our existing stockholders may conflict with
the interests of our other stockholders. We have not instituted any formal plans
to address conflicts of interest that may arise.
There currently exists no market for the common stock. We cannot assure you that
an active trading market will develop for the common stock. If our stock price
fluctuates after this offering, you could lose a significant part of your
investment.
Prior to this offering, there has been no public market for shares of our
common stock. An active market may not develop following completion of this
offering or, if developed, may not be maintained. We negotiated the initial
public offering price with the underwriters. The initial public offering price
may not be indicative of the price at which our common stock will trade
following completion of this offering. The market price of our common stock may
also be influenced by many factors, some of which are beyond our control,
including:
- the failure of securities analysts to cover our common stock after this
offering or changes in financial estimates by analysts;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- variations in quarterly operating results;
- loss of a large customer or supplier;
- general economic conditions;
- terrorist acts;
- future sales of our common stock; and
- investor perceptions of us and the paperboard packaging industry.
As a result of these factors, investors in our common stock many not be able
to resell their shares at or above the initial offering price. In addition, the
stock market in general, and the New York Stock Exchange in particular, have
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of companies like us. These
broad market and industry factors may materially reduce the market price of our
common stock, regardless of our operating performance.
19
Our share price may decline due to the large number of shares eligible for
future sale.
Sales of substantial amounts of common stock, or the possibility of such
sales, may adversely affect the price of the common stock and impede our ability
to raise capital through the issuance of equity securities.
Upon consummation of the offerings, there will be shares of common
stock outstanding. Of these shares, the shares of common stock sold in the
offering will be freely transferable without restriction or further registration
under the Securities Act of 1933, except for shares held by persons considered
to be affiliates of us, including Clayton, Dubilier & Rice Fund V Limited
Partnership and EXOR Group S.A., or acting as underwriters, as those terms are
defined in the Securities Act and related rules. The remaining shares of common
stock outstanding, including the shares owned by Clayton, Dubilier & Rice Fund V
Limited Partnership and EXOR Group S.A., will be restricted securities within
the meaning of Rule 144 under the Securities Act and will be eligible for resale
subject to the volume, manner of sale, holding period and other limitations of
Rule 144. Stockholders currently representing substantially all of the shares of
our common stock have certain registration rights. See "Shares Eligible for
Future Sale" for a discussion of the shares of common stock that may be sold
into the public market in the future.
Purchasers of our common stock will experience immediate and substantial
dilution resulting in their shares being worth less on a net tangible book value
basis than the amount they invested.
The initial public offering price may be higher than the net tangible book
value per share of our common stock. Purchasers of the common stock in this
offering will experience an immediate dilution in net tangible book value of
$ per share of common stock purchased. In the past, we issued options to
acquire shares of common stock at prices that may be significantly below the
initial public offering price. To the extent that these outstanding options are
exercised, there may be further dilution to investors. Accordingly, in the event
we are liquidated, investors may not receive the full amount of their
investment. See "Dilution."
20
FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus includes "forward-looking statements," including, in
particular, the statements about our plans, strategies, and prospects. Words
such as "expects", "anticipates", "intends", "plans", "believes", "seeks",
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions which are
difficult to predict. We can give no assurance that our plans, intentions and
expectations reflected in or suggested by such forward-looking statements will
be achieved. Investors should note that many factors, as more fully described in
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this prospectus and in reports or
documents that we file from time to time with the SEC could affect our future
financial results and could cause our actual results to differ materially from
those expressed in forward-looking statements contained in this prospectus.
Important factors that could cause our actual results to differ materially from
the expectations reflected in the forward-looking statements in this prospectus
include, among others:
- our substantial amount of debt, which could adversely affect our financial
health and our ability to obtain additional financing in the future and to
react to changes in our industry;
- our future financial results will depend in significant part on the
selling prices that we realize for our products and the extent to which we
can implement our business strategies, which are subject to significant
business, economic and competitive uncertainties and contingencies;
- prolonged disruptions in our facilities' production due to labor
difficulties, including strikes or work stoppages, equipment failures,
destruction of or material damage to such facility;
- our ability to continue to compete successfully;
- the volatility of energy and other raw material costs;
- our ability to obtain adequate supplies of pine pulpwood, hardwood or
recycled fiber for our mills;
- loss of our key executive officers;
- risks associated with operating in foreign countries;
- the cost of environmental compliance; and
- the use of U.S. federal net operating loss carry forwards could be
limited.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements
included in this prospectus. We do not undertake any obligation to update our
forward-looking statements after the date of this prospectus for any reason,
even if new information becomes available or other events occur in the future.
Information in this prospectus about the paperboard packaging industry and
its segments, including our general expectations concerning that industry and
its segments and our market position and market share within that industry or
its segments, are based on estimates prepared by us using data from various
sources and on assumptions made by us. We believe data regarding the paperboard
packaging industry and its segments and our market position and market share
within the industry and its segments are inherently imprecise, but generally
indicate their size and position and market share within that industry or its
segments. Although we believe that the information provided by third parties is
generally accurate, we have not independently verified any of that information.
While we are not aware of any misstatements regarding any industry data
presented herein, our estimates, in particular as they relate to our general
expectations concerning the paperboard package industry, involve risks and
uncertainties and are subject to change based on various factors, including
those discussed under the caption "Risk Factors."
All market share information in this prospectus is based on tons shipped,
unless specified otherwise.
21
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of common
stock being offered hereby, after deducting underwriting discounts and estimated
offering expenses, will be approximately $ million. If the underwriters
exercise their over-allotment option in full, the net proceeds from the sale of
shares of common stock will be approximately $ million.
We intend to use the net proceeds from this offering, together with the net
proceeds from the anticipated borrowings under our senior secured credit
agreement through an add-on term loan and the sale of senior notes, to repay in
full our outstanding 10 5/8% senior notes due 2007 and 10 7/8% senior
subordinated notes due 2008 and to repay a portion of the amounts outstanding
under our revolving credit facility. We cannot assure you that either the
anticipated add-on term loan borrowing or the anticipated sale of senior notes
will be completed on the terms anticipated, or at all.
This offering is not conditioned upon the completion of either of these
related financing transactions. If we do not complete these related financing
transactions, we intend to use the net proceeds of this offering to repay a
portion of our outstanding debt.
The following table illustrates the estimated sources and uses of funds from
this offering and the anticipated related financing transactions.
Amounts
Sources -------------
(in millions)
Common stock offered hereby................................. $
Add-on senior secured term loan.............................
Sale of senior notes........................................
--------
Total sources........................................... $
========
Uses
Repay senior notes and senior subordinated notes............ $
Repay revolving credit facility borrowings..................
Estimated fees and expenses.................................
--------
Total uses.............................................. $
========
DIVIDEND POLICY
The holders of common stock will share proportionately on a per share basis
in all dividends and other distributions declared by our board of directors. Our
board of directors currently intends to pay regular dividends on our common
stock, at an annual rate to be determined by our board of directors from time to
time. The declaration of dividends is subject to the discretion of our board of
directors and will depend upon various factors, including our results of
operations, financial condition, liquidity requirements, restrictions imposed by
applicable law, and other factors deemed relevant by our board of directors. Our
existing indebtedness limits the ability of our subsidiaries to make
distributions to us, thereby limiting our ability to pay dividends to our
stockholders.
22
CAPITALIZATION
The following table sets forth as of December 31, 2001 on a consolidated
basis:
- our actual capitalization;
- our pro forma capitalization that reflects the borrowing on April 23, 2002
of a $250.0 million tranche B term loan pursuant to an amendment to our
senior secured credit agreement and the application of the proceeds
therefrom to redeem in full our 1996 senior notes, which is expected to
occur on May 23, 2002, and additional borrowings of approximately
$12.0 million under our revolving credit facility to pay related fees and
expenses; and
- our pro forma as adjusted capitalization that reflects the sale by us of
shares of common stock in this offering at an assumed initial public
offering price of $ per share and the application of the net
proceeds therefrom to repay a portion of our outstanding debt.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Description of
Certain Indebtedness" and our consolidated financial statements and related
notes thereto included elsewhere in this prospectus.
As of December 31, 2001
---------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- ------------- -----------
(in millions)
Senior secured revolving credit facility.................... $ 35.2 $ 47.2 $
Senior secured term loan facilities......................... 335.0 585.0
10 1/4% senior notes due 2006............................... 250.0 --
10 5/8% senior notes due 2007............................... 500.0 500.0
New senior notes............................................ -- --
10 7/8% senior subordinated notes due 2008.................. 400.0 400.0
International facilities.................................... 12.7 12.7
Other debt.................................................. 2.0 2.0
--------- -------- --------
Total debt................................................ 1,534.9 1,546.9
Redeemable common stock..................................... 8.1 8.1
Shareholders' equity:
Nonredeemable common stock, $.01 par value; 12,000,000
shares authorized; 7,500,000 and 7,500,000 shares issued
and outstanding, respectively........................... 0.1 0.1
Preferred stock, $.01 par value; million shares
authorized; no shares issued and outstanding............ -- --
Capital in excess of par value............................ 748.8 748.8
Accumulated deficit(a).................................... (493.8) (505.7)
Accumulated derivative instruments loss................... (4.6) (4.6)
Cumulative currency translation adjustment................ (34.6) (34.6)
--------- -------- --------
Total shareholders' equity................................ 215.9 204.0
--------- -------- --------
Total capitalization...................................... $ 1,758.9 $1,759.0 $
========= ======== ========
------------------------
(a) Pro forma December 31, 2001 reflects (1) a non-cash, extraordinary charge
from early extinguishment of debt of approximately $3.3 million, net of tax,
related to the redemption of our 1996 senior notes and (2) an extraordinary
charge of approximately $8.6 million, net of tax, related to the call
premium paid upon redemption of our 1996 senior notes.
23
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the net tangible book value per share of our common stock
after this offering.
Net tangible book value per share represents the amount of total tangible
assets less total liabilities, divided by the number of shares of common stock
then outstanding. Our net tangible book value at December 31, 2001 was $(102.2)
million, or $(13.51) per share of common stock. After giving effect to the sale
of the shares of common stock in this offering at the assumed initial
public offering price of $ per share, and after deducting estimated
underwriting discounts and estimated offering expenses, our net tangible book
value at December 31, 2001 would have been $ million, or $ per share.
This represents an immediate increase in the net tangible book value of $
per share to existing stockholders and immediate and substantial dilution of
$ per share to new investors purchasing common stock in this offering. The
following table illustrates this per share dilution:
Assumed initial public offering price per share............. $
Net tangible book value per share at December 31,
2001.................................................. $
Increase per share attributable to new investors........
-----
Net tangible book value per share after this offering.......
-----
Dilution in net tangible book value per share to new
investors(1).............................................. $
=====
------------------------
(1) If the underwriters' overallotment option is exercised in full, dilution per
share to new investors will be $ .
The following table summarizes as of December 31, 2001 the total number of
shares of common stock purchased from us, the total consideration paid to us,
and the average price per share paid by existing stockholders and by new
investors purchasing shares of common stock from us in this offering at our
assumed initial public offering price of $ per share and before deducting
underwriting discounts and estimated offering expenses:
Shares Purchased Total Consideration Average
------------------- ---------------------- Price Per
Number Percent Amount Percent Share
-------- -------- -------- -------- ---------
(in thousands, except per share amounts)
Existing stockholders.......................... % $ % $
New investors(1)...............................
----- ----- ------ ------
Total...................................... 100.0% 100.0% $100.0%
===== ===== ====== ======
------------------------
(1) If the underwriters' overallotment option is exercised in full, we will sell
an additional shares.
The foregoing discussion and tables assume no exercise of outstanding stock
options. As of March 31, 2002, there were options outstanding to purchase a
total of shares of our common stock at a weighted average exercise price
of $ per share.
To the extent that any of these stock options are exercised, there may be
further dilution to new investors. See "Capitalization," "Management" and
note 13 to our consolidated financial statements included elsewhere in this
prospectus.
24
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected historical consolidated financial
data with respect to Riverwood Holding, as of and for the periods ended on the
dates indicated. The selected historical consolidated financial data for the
years ended December 31, 1997 and 1998 and as of December 31, 1997, 1998 and
1999 are derived from our audited consolidated financial statements, which are
not included in this prospectus. The selected historical consolidated financial
data for the years ended December 31, 1999, December 31, 2000 and December 31,
2001 and as of December 31, 2000 and 2001 are derived from our audited
consolidated financial statements that are included in this prospectus that have
been audited by Deloitte & Touche LLP and are qualified by reference to those
financial statements. The information given below should be read in conjunction
with our consolidated financial statements, including the notes thereto, and the
other information included in this prospectus. Share and per share data set
forth below do not yet give effect to the anticipated stock split.
Year Ended December 31,
--------------------------------------------------------------
1997 1998 1999 2000 2001(a)
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Statement Of Operations Data:
Net sales(b)...................................... $1,207,615 $1,196,221 $1,174,665 $1,192,362 $1,249,886
Cost of sales(b).................................. 1,069,152 997,609 933,924 923,851 1,002,059
Gross profit...................................... 138,463 198,612 240,741 268,511 247,827
Selling, general and administrative............... 116,581 112,117 114,402 112,200 120,629
Research, development and engineering............. 5,171 5,570 4,078 4,554 5,111
Impairment loss................................... -- 15,694 -- -- --
Restructuring charge (credit)..................... -- 25,580 -- (2,600) --
Other expense (income), net....................... 9,799 11,973 1,798 (66,132) 24,035
Income from operations............................ 6,912 27,678 120,463 220,489 98,052
Net interest expense.............................. 172,230 178,030 179,197 181,285 158,910
Net (loss) income (c)............................. (152,473) (140,304) (54,671) 38,282 (77,896)
Net income (loss) per share
Basic........................................... (20.05) (18.55) (7.23) 5.06 (10.29)
Diluted......................................... (20.05) (18.55) (7.23) 4.98 (10.29)
Weighted average shares outstanding
Basic........................................... 7,604,817 7,562,596 7,556,842 7,563,717 7,568,177
Diluted......................................... 7,604,817 7,562,596 7,556,842 7,684,664 7,568,177
Other Financial Data:
Shipments (in tons)
Carrierboard.................................... 544.1 640.1 639.8 611.7 637.3
Cartonboard..................................... 389.1 380.6 324.9 340.4 351.4
White lined chip board.......................... 143.0 138.2 141.0 150.4 150.4
Containerboard.................................. 421.6 278.5 327.8 319.4 255.3
Net sales
Carrierboard.................................... $ 649,703 $ 750,226 $ 777,396 $ 743,569 $ 827,782
Cartonboard..................................... 346,474 281,009 211,032 209,395 219,543
White lined chip board.......................... 78,512 69,567 65,082 77,273 73,336
Containerboard.................................. 116,510 84,910 103,868 126,549 93,677
Additions to property, plant and equipment (d).... 142,314 48,551 66,018 62,062 57,670
EBITDA (e)........................................ 160,315 197,625 266,933 296,352 260,820
EBITDA margin (f)................................. 13.3% 16.5% 22.7% 24.9% 20.9%
Cash flow provided by (used in) operating
activities...................................... (4,196) 48,039 16,641 98,854 89,599
Cash flow provided by (used in) investing
activities...................................... (160,354) 8,939 (67,756) 127,303 (72,490)
Cash flow provided by (used in) financing
activities...................................... 166,015 (60,200) 49,668 (223,247) (8,642)
25
As of December 31,
--------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
(in thousands)
Balance Sheet Data (As of period end):
Cash and cash equivalents......................... $ 15,751 $ 13,840 $ 14,108 $ 18,417 $ 26,107
Total assets (f).................................. 2,606,185 2,417,601 2,363,142 2,121,357 2,057,592
Long-term debt, less current portion (f).......... 1,712,944 1,680,415 1,730,898 1,516,881 1,523,082
Redeemable common stock........................... 6,045 6,205 7,202 8,061 8,061
Shareholders' equity.............................. 479,434 336,769 279,648 303,962 215,865
--------------------------
(a) Effective January 1, 2001, we consolidated into our financial statements
the accounts of Rengo Riverwood Packaging, Ltd., our Japanese joint venture,
since we have the ability to exercise control over Rengo's operating and
financial policies. The consolidation contributed approximately $47 million
in net sales and approximately $4 million in EBITDA in 2001.
(b) We have reclassified the presentation of net sales and cost of sales
information to conform with the current presentation format and Emerging
Issues Task Force 00-10, "Accounting for Shipping and Handling Fees and
Costs." Shipping and handling costs totaled $68.8 million in 1997,
$60.7 million in 1998, $62.0 million in 1999, $63.7 million in 2000 and
$64.9 million in 2001.
(c) On October 3, 2000, we, along with our joint venture partner, completed the
sale of the jointly-held Igaras Papeis e Embalagens S.A. for approximately
$510 million, including the assumption of $112 million of debt by the
purchaser. We recognized a gain of approximately $70.9 million, net of tax,
in connection with the sale.
Net (loss) income for the year ended December 31, 2001 included a charge of
$0.5 million, net of tax, for the cumulative effect of a change in
accounting principle for derivatives.
Net (loss) income for the years ended December 31, 1997, 2000 and 2001
included an extraordinary loss on early extinguishment of debt of
$2.5 million, $2.1 million and $8.7 million, respectively, net of applicable
tax.
Net (loss) income for the year ended December 31, 1997 included a charge of
$3.1 million, net of tax, for the cumulative effect of a change in
accounting principle for computer systems development project costs.
Net (loss) income for the years ended December 31, 1998 and 2000 included a
charge (credit) for the global restructuring program, which is focused in
our European operations, of $25.6 million and of $(2.6) million,
respectively.
(d) Includes amounts invested in packaging machinery and capitalized interest.
(e) EBITDA represents income (loss) from operations before depreciation and
amortization expense, loss (gain) on asset write-downs/unusual asset
disposals, loss on impairment of assets and LIFO related expenses (credits)
plus dividends from equity investments recorded in the period. We believe
that EBITDA provides useful information regarding our ability to service
debt, but should not be considered in isolation or as a substitute for our
consolidated statement of operations or cash flow data. This definition of
EBITDA may not be comparable to other companies' definitions of EBITDA and
is not a defined term under U.S. generally accepted accounting principles.
The table below sets forth a reconciliation of income from operations to
EBITDA.
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(in thousands)
Income from operations..................... $ 6,912 $ 27,678 $120,463 $220,489 $ 98,052
Add: Depreciation and amortization......... 137,384 146,515 142,597 143,541 137,258
Dividends from equity investments...... 5,228 6,963 4,515 5,083 710
Other non-cash charges (1)............. 10,791 16,469 (642) (72,761) 24,800
-------- -------- -------- -------- --------
EBITDA..................................... 160,315 197,625 266,933 296,352 260,820
======== ======== ======== ======== ========
Add: Additional non-cash charges (2)....... 5,612 5,833 6,542 3,682 7,414
-------- -------- -------- -------- --------
Reported credit agreement EBITDA (2)....... $165,927 $203,458 $273,475 $300,034 $268,234
======== ======== ======== ======== ========
26
(1) Other non-cash charges include non-cash loss (gain) on asset
write-downs/unusual asset disposals, loss on impairment of assets and
LIFO related expenses (credits) deducted in determining net income.
(2) We previously reported EBITDA based on the definitions of EBITDA and
U.S. generally accepted accounting principles contained in our senior
secured credit agreement. For purposes of EBITDA as previously reported,
we also added back to income from operations non-cash charges for
pension, post-retirement and post-employment benefits, and expenses
(credits) relating to changes in U.S. generally accepted accounting
principles subsequent to March 1996, when we entered into the credit
agreement.
(f) EBITDA margin represents EBITDA or a percentage of net sales.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Consolidated
Financial and Other Data" and the consolidated financial statements and related
notes included elsewhere in this prospectus.
Overview
Riverwood Holding, its wholly-owned subsidiary RIC Holding and the
corporation formerly named CDRO Acquisition Corporation were organized to
acquire our predecessor, the corporation formerly named Riverwood International
Corporation. Riverwood Holding, RIC Holding and CDRO Acquisition Corporation
were incorporated in 1995 under the laws of the State of Delaware. On March 27,
1996, Riverwood Holding, through its wholly-owned subsidiaries, acquired all of
the outstanding shares of common stock of the corporation formerly named
Riverwood International Corporation, which we refer to as the predecessor. On
such date, CDRO Acquisition Corporation was merged into the predecessor. The
predecessor, as the surviving corporation in the merger, became a wholly-owned
subsidiary of RIC Holding. On March 28, 1996, the predecessor transferred
substantially all of its properties and assets to the corporation formerly named
Riverwood International USA, Inc., other than the capital stock of Riverwood
International USA, Inc., and the predecessor was merged into RIC Holding.
Thereupon, Riverwood International USA, Inc. was renamed Riverwood International
Corporation.
In connection with the transaction in March 1996, we entered into a credit
agreement that provided for senior secured credit facilities consisting of a
term loan facility and a $400 million revolving credit facility. Such credit
agreement, term loan facility and revolving facility, as in effect prior to the
August 10, 2001 amendment and restatement discussed below, are referred to
herein as the credit agreement, the term loan facility and the revolving
facility, respectively. In addition, Riverwood International Machinery, Inc., a
wholly-owned subsidiary of Riverwood International, entered into a credit
agreement providing for a $140 million secured revolving credit facility, or the
machinery facility, for the purpose of financing or refinancing packaging
machinery. In connection with the merger, we also completed an offering of
$250 million aggregate principal amount of 10 1/4% senior notes due 2006 and
$400 million aggregate principal amount of 10 7/8% senior subordinated notes due
2008.
On July 28, 1997, we completed an offering of $250 million principal amount
of 10 5/8% senior notes due 2007. The net proceeds of this offering were applied
to prepay certain revolving credit borrowings under the revolving facility,
without any commitment reduction, and to refinance certain tranche A term loans
and other borrowings under the credit agreement. A registration statement under
the Securities Act registering senior notes identical in all material respects
to the 1997 initial notes offered in exchange for the 1997 initial notes became
effective October 1, 1997. On November 3, 1997, we completed our exchange offer
of the 1997 initial notes for the 1997 exchange notes.
In connection with the sale of Igaras on October 3, 2000, we entered into
amendment no. 5 dated September 12, 2000, effective October 3, 2000, to the
credit agreement. Pursuant to the amendment, we applied $120 million and
$25 million of the sale proceeds to our 2001 and 2002 term loan maturities under
the term loan facility, respectively. We recognized a loss on the early
extinguishment of debt of approximately $2.1 million in the fourth quarter of
2000. We applied the remaining portion of the proceeds, approximately
$48 million, to the revolving facility, without any commitment reduction. In
connection with amendment no. 5, we canceled our machinery facility. In
addition, certain of the financial covenants included in the credit agreement
were amended.
28
On June 21, 2001, we completed an offering of $250 million principal amount
of 10 5/8% senior notes due 2007. The notes were sold at a price of 103% of par.
The proceeds from this offering of approximately $251.5 million, net of
approximately $6 million of transaction fees and expenses, were applied to
prepay a portion of the outstanding borrowings under the term loan facility.
During the second quarter of 2001, we recorded a non-cash, extraordinary charge
to earnings of approximately $2.8 million, net of tax of nil, related to the
write-off of the applicable portion of deferred debt issuance costs on the term
loans. In connection with this offering, on June 6, 2001, we entered into
amendment no. 6 to the credit agreement. The amendment modified certain
financial and other covenants, including minimum EBITDA requirements, in the
credit agreement to reflect recent financial results and market and operating
conditions. A registration statement under the Securities Act registering senior
notes identical in all material respects to the 2001 initial notes offered in
exchange for the 2001 initial notes became effective on August 27, 2001. On
October 5, 2001, we completed our exchange offer of the 2001 initial notes for
the 2001 exchange notes.
On August 10, 2001, we entered into an amendment and restatement of the
credit agreement, or the senior secured credit agreement, with certain lenders
providing for senior secured credit facilities with aggregate commitments not to
exceed $635 million, or the facilities, including a $335.0 million term loan
facility, or the term loan facility, and a $300 million revolving credit
facility, or the revolving facility. The proceeds of the initial borrowings
under the facilities of $386.0 million, including $51.0 million under the
revolving facility, were applied to repay in full the outstanding borrowings
under the term loan facility and the revolving facility and to pay $12 million
of the $14 million of fees and expenses incurred in connection with the
amendment and restatement of the credit agreement. During the third quarter of
2001, we recorded a non-cash, extraordinary charge to earnings of approximately
$6.0 million, net of tax of nil, related to the write-off of the applicable
remaining deferred debt issuance costs on the term loan facility and the
revolving facility.
In April 2002, we entered into an amendment of the senior secured credit
agreement which provided for a new, tranche B, term loan facility of
$250.0 million, or the 2002 term loan. The 2002 term loan was drawn on
April 23, 2002 and the proceeds, together with borrowings under our senior
secured revolving facility of approximately $12.0 million, are to be used to
redeem the 1996 senior notes on May 23, 2002 and to pay related fees, costs and
expenses. In the second quarter of 2002, we expect to record a non-cash
extraordinary charge to earnings of $3.3 million, net of tax, related to the
write-off of the remaining deferred debt issuance costs on the 1996 senior notes
and an extraordinary charge of approximately $8.6 million, net of tax, related
to the call premium paid upon redemption of the 1996 senior notes.
Concurrently with this offering, we anticipate effecting the related
financing transactions. See "Prospectus Summary--Related Financing
Transactions."
General
We report our results in two business segments: coated board (relating to
our CUK board used in our beverage multiple packaging and consumer products
packaging businesses) and containerboard. The coated board business segment
includes (1) the production and sale of CUK board for cartons from the Macon and
West Monroe paper mills and white lined chip board at our paper mill in
Norrkoping, Sweden; (2) converting plants in the United States, Europe and
Brazil; and (3) the design, manufacture and installation of packaging machinery
related to the assembly of beverage cartons. The containerboard business segment
includes the production and sale of linerboard, corrugating medium and kraft
paper from paperboard mills in the United States.
29
The table below presents summary consolidated financial information for the
periods indicated. EBITDA represents income (loss) from operations before
depreciation and amortization expense, loss (gain) on asset write-downs/unusual
asset disposals, loss on impairment of assets and LIFO related expenses
(credits) plus dividends from equity investments recorded in the period. We
believe that EBITDA provides useful information regarding our ability to service
debt, but should not be considered in isolation or as a substitute for our
consolidated statement of operations or cash flow data. This definition of
EBITDA may not be comparable to other companies' definitions of EBITDA and is
not a defined term under U.S. generally accepted accounting principles.
We previously reported EBITDA based on the definitions of EBITDA and U.S.
generally accepted accounting principles contained in our senior secured credit
agreement. For purposes of EBITDA as previously reported, we also added back to
income from operations non-cash charges for pension, post-retirement and
post-employment benefits, and expenses (credits) relating to changes in U.S.
generally accepted accounting principles subsequent to March 1996, when we
entered into the credit agreement.
Year Ended December 31,
---------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
(in thousands)
Net Sales:
Coated Board.......................... $1,156,210 $1,065,813 $1,062,671
Containerboard........................ 93,676 126,549 111,994
---------- ---------- ----------
Net Sales............................... $1,249,886 $1,192,362 $1,174,665
========== ========== ==========
Income from Operations:
Coated Board.......................... $ 142,929 $ 161,372 $ 151,453
Containerboard........................ (19,366) 5,183 (10,235)
Corporate and Eliminations............ (25,511) 53,934 (20,755)
---------- ---------- ----------
Income from Operations.................. $ 98,052 $ 220,489 $ 120,463
========== ========== ==========
EBITDA:
Coated Board.......................... $ 277,463 $ 284,718 $ 276,500
Containerboard........................ (1,393) 20,237 6,590
Corporate and Eliminations............ (15,250) (8,603) (16,157)
---------- ---------- ----------
EBITDA.................................. $ 260,820 $ 296,352 $ 266,933
========== ========== ==========
The table below sets forth a reconciliation of income from operations to
EBITDA and to our reported credit agreement EBITDA.
2001 2000 1999
-------- -------- --------
(in thousands)
Reconciliation of Income from Operations to EBITDA
Income from operations...................................... $ 98,052 $220,489 $120,463
Add: Depreciation and amortization.......................... 137,258 143,541 142,597
Dividends from equity investments....................... 710 5,083 4,515
Other non-cash charges.................................. 24,800 (72,761) (642)
-------- -------- --------
EBITDA...................................................... 260,820 296,352 266,933
======== ======== ========
Add: Additional non-cash charges............................ 7,414 3,682 6,542
-------- -------- --------
Reported credit agreement EBITDA............................ $268,234 $300,034 $273,475
======== ======== ========
30
Business Trends and Initiatives
Our cash flow from operations and EBITDA are influenced by sales volume and
selling prices for our products and raw material and energy costs, and are
affected by a number of significant business, economic and competitive factors.
Many of these factors are not within our control. Historically, in the coated
board business segment, we have experienced stable pricing for our integrated
beverage carton products, and moderate cyclical pricing for our cartonboard,
which historically has principally been sold in the open market. Our cartonboard
sales are affected by competition from our principal competitor's CUK Board and
other substrates--solid bleached sulfate, recycled clay coated news and,
internationally, white lined chip board--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 our containerboard
sales. During 2001, we elected to take 59 days, or approximately 21,400 tons, of
medium and kraft paper market related downtime at our U.S. mills that resulted
in approximately $3.7 million of under-absorbed fixed costs. We expect to take
46 days, or approximately 18,000 tons, of medium market related downtime during
2002 on our medium machine, but the amount of downtime could change depending
upon market conditions. The downtime results from a number of factors, but
principally a weak containerboard market. As a result of the expected downtime
during 2002, we estimate the impact on earnings at our U.S. mills to be
approximately $3.3 million related to the under-absorption of fixed costs.
Energy, including natural gas, fuel oil and electricity, represents a
significant portion of our manufacturing costs. During 2001, we experienced a
significant increase in our energy costs compared to 2000, principally at our
U.S. mills, equal to approximately $16 million. Until recently, our results had
not been significantly affected by the volatility of energy costs. We entered
into fixed price contracts designed to mitigate the impact of future energy cost
increases through 2002, and will continue to evaluate our hedge position.
We are pursuing a number of long-term initiatives designed to improve
productivity and profitability. We completed a profit center reorganization of
our operations, implemented a global restructuring program described below,
implemented a number of cost saving measures and effected several management
changes. We are continuing to implement a global total quality systems, or TQS,
initiative which uses statistical process control to help design and manage all
types of activities, including production and maintenance. See
"Business--Overview."
In addition, we are continuing to implement a strategy focused on the
expansion into the high-growth segments of the consumer packaging market. We
have identified a number of new end-use markets and strategic alliance partners
to position us to provide a broad portfolio of new and enhanced products to
generate additional growth in the consumer packaging market. See "Business--Our
Strategies."
Effective January 1, 2001, we consolidated into our financial statements the
accounts of Rengo Riverwood Packaging, Ltd., our Japanese joint venture, since
we have the ability to exercise control over Rengo's operating and financial
policies. The consolidation of Rengo contributed approximately $47 million in
net sales and $4 million in EBITDA in 2001.
We expect capital expenditures will range from $65 million to $80 million in
2002 as we invest to improve our process capabilities, in packaging machinery,
and to comply with environmental cluster rules. We continue to evaluate our
current operations and assets with a view to rationalizing our operations and
improving profitability, in particular with respect to our international
converting assets and strategy. As part of this effort, we initiated a
$25.6 million global restructuring program in the fourth quarter of 1998 aimed
at achieving annualized savings and cost avoidance of approximately
$20 million. The global restructuring
31
program is focused in our European operations. We completed the restructuring
activities during 2001. See "--Financial Condition, Liquidity and Capital
Resources--Restructuring Activities." Finally, we are continuing to focus on
reducing working capital and increasing liquidity.
Packaging machinery placements during 2001 decreased approximately 24% when
compared to 2000. We expect packaging machinery placements for 2002 to be higher
when compared to 2001 and be comparable to 2000 as a result of a 16% increase in
packaging machinery orders in 2001 when compared to 2000. We have been and will
continue to be selective in future packaging machinery placements to ensure
appropriate returns.
Outlook
We expect that our 2002 full year EBITDA will exceed our 2001 EBITDA,
although no assurance can be given in this regard. The achievement of this
expectation is dependent upon, among other things, a number of profit
improvement initiatives, including increasing worldwide beverage and North
American consumer product sales volumes above 2001 levels, improving U.S. mill
throughput, continued cost savings from other actions taken to date and stable
pricing for our products. In 2002, we expect sales volume increases in our
worldwide beverage markets, and continued growth in our North American consumer
product markets. We expect containerboard sales and margins to be negatively
affected in 2002 due to the negative market pressures on containerboard pricing
and sales volumes. We believe that energy costs will continue to negatively
impact our results for 2002 but the negative impact is expected to be lower than
in 2001.
Significant Accounting Policies
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates and assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
We believe the following accounting policies are the most critical since
these policies require significant judgment or involve complex estimations that
are important to the portrayal of our financial conditions and operating
results:
- We recognize revenue when pervasive evidence of a sales arrangement
exists, delivery has occurred, the price to the buyer is fixed and
determinable, and the collectibility of the sales price is reasonably
assured, which is primarily when goods are shipped to customers. Revenues
received in advance from packaging machinery use agreements are recognized
on a straight-line basis over the term of the agreements. Customer returns
and allowances are provided for based on estimates.
- Our inventories are stated at the lower of cost or market. Cost of
inventories is determined principally on the last-in, first-out, or LIFO
basis. Average cost basis is used to determine the cost of supplies
inventories. Inventories are stated net of an allowance for slow-moving
and obsolete inventory, which is based on estimates. If the condition of
the inventories or the state of our business would deteriorate, additional
allowances may be required which would reduce income.
- We review long-lived assets, including goodwill and certain identifiable
intangibles for impairment whenever events or circumstances indicate that
the carrying value of an asset may not be
32
recoverable. Upon determination that the carrying value of the assets is
impaired, we would record an impairment charge or loss.
- We face uncertainties relating to pending litigation and environmental
remediation obligations. We record accruals for such items based on
estimates developed in consultation with legal counsel and environmental
consultants at the time when the liability is probable and reasonably
estimated. While we cannot assure you as to the ultimate outcome of any
current lawsuits, claims or investigations relating to such uncertainties,
we do not believe that such uncertainties will have a material adverse
impact on the results of operations, cash flows or financial condition.
However, future uncertainties may have a material adverse impact on our
results of operations, cash flows or financial condition.
2001 Compared with 2000
RESULTS OF OPERATIONS
The following discussion of our results of operations is based upon the
years ended December 31, 2001 and 2000. We have reclassified the presentation of
net sales and cost of sales information to conform with the current presentation
format and Emerging Issues Task Force 00-10, "ACCOUNTING FOR SHIPPING AND
HANDLING FEES AND COSTS." Shipping and handling costs totaled $64.9 million in
2001 and $63.7 million in 2000.
% Increase
Year Ended (Decrease) From Year Ended
December 31, 2001 Prior Period December 31, 2000
----------------- --------------- -----------------
(dollars in thousands)
Net Sales (Segment Data):
Coated Board............................. $1,156,210 8.5% $1,065,813
Containerboard........................... 93,676 (26.0) 126,549
---------- ----------
Net Sales.................................. 1,249,886 4.8 1,192,362
Cost of Sales.............................. 1,002,059 8.5 923,851
---------- ----------
Gross Profit............................... 247,827 (7.7) 268,511
Selling, General and Administrative........ 120,629 7.5 112,200
Research, Development and Engineering...... 5,111 12.2 4,554
Restructuring Credit....................... -- NM (2,600)
Other Expense (Income), Net................ 24,035 NM (66,132)
---------- ----------
Income from Operations..................... $ 98,052 (55.5)% $ 220,489
========== ==========
Income from Operations (Segment Data):
Coated Board............................. $ 142,929 (11.4)% $ 161,372
Containerboard........................... (19,366) (100.0) 5,183
Corporate and Eliminations............... (25,511) (100.0) 53,934
---------- ----------
Income from Operations..................... $ 98,052 (55.5)% $ 220,489
========== ==========
PAPERBOARD SHIPMENTS. The following represents shipments of coated board
and containerboard to outside customers. Shipments of coated board represent
sales to customers of carrierboard and cartonboard. Shipments from the Swedish
mill represent sales to customers of white lined chip board produced at this
mill. Shipments of containerboard represent sales to customers of linerboard,
corrugating medium, kraft
33
paper and various other items. Total shipments for the years ended December 31,
2001 and 2000 were as follows:
2001 2000
-------- --------
(in thousands of tons)
Coated board................................................ 1,008.3 965.4
Swedish mill................................................ 150.4 150.4
Containerboard.............................................. 255.3 319.4
-------- -------
1,414.0 1,435.2
======== =======
NET SALES. As a result of the factors described below, our net sales in
2001 increased by $57.5 million, or 4.8%, compared with 2000. Net sales in the
coated board business segment increased by $90.4 million in 2001, or 8.5%, to
$1,156.2 million from $1,065.8 million in 2000, due primarily to higher sales
volume in North American beverage carton markets, North American consumer
product markets and the consolidation of Rengo. These increases were somewhat
offset by lower sales volumes in international consumer product markets, lower
sales volumes in Brazil and the negative impact of foreign currency exchange
rates. Net sales in the containerboard business segment decreased
$32.8 million, or 26.0%, to $93.7 million in 2001 from $126.5 million in 2000,
due principally to lower volumes and pricing.
GROSS PROFIT. As a result of the factors described below, our gross profit
for 2001 decreased by $20.7 million, or 7.7%, to $247.8 million from
$268.5 million in 2000. Our gross profit margin decreased to 19.8% in 2001 from
22.5% in 2000. Gross profit in the coated board business segment increased by
$7.3 million, or 2.8%, to $262.5 million in 2001 from $255.2 million in 2000,
while our gross profit margin decreased to 22.7% in 2001 from 23.9% in 2000. The
increase in coated board gross profit was due primarily to worldwide cost
reductions, higher net sales and lower depreciation expense somewhat offset by
increased energy costs and last-in, first-out inventory valuation adjustments.
Gross profit in the containerboard business segment decreased by $23.8 million
to a loss of $15.7 million in 2001 from a profit of $8.1 million in 2000, while
our gross profit margin decreased to (16.8)% in 2001 from 6.4% in 2000. The
decrease in containerboard gross profit resulted principally from lower volumes
and pricing.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $8.4 million, or 7.5%, to $120.6 million in 2001 from
$112.2 million in 2000, due primarily to the consolidation of Rengo and, to a
lesser extent, certain non-recurring operating charges recorded in 2001. As a
percentage of net sales, selling, general and administrative expenses increased
from 9.4% in 2000 to 9.7% in 2001.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses increased by $0.5 million, or 12.2%, to $5.1 million in
2001 from $4.6 million in 2000, due primarily to higher research and development
investing relating to our new product Z-Flute-Registered Trademark-, packaging
machinery and the Swedish mill.
RESTRUCTURING CREDIT. During 2000, we substantially completed the 1998
restructuring plan that related primarily to the restructuring of our European
operations, primarily the ongoing rationalization of our international folding
carton converting operations. See "--Restructuring Activities." We reduced the
restructuring reserve by $4.8 million. In addition, $2.2 million of new
restructuring activities aligned with the overall objectives of the initial plan
were recorded and completed during 2000. We completed the 1998 restructuring
plan during 2001.
34
OTHER EXPENSE (INCOME), NET. Other expense (income), net, was
$24.0 million in 2001 and $(66.1) million in 2000. This change was primarily due
to the gain recognized from the sale of Igaras during 2000, see "--Equity in Net
Earnings of Affiliates," and to a lesser extent, to non-recurring operating
charges recorded in 2001 primarily relating to a litigation reserve and non-cash
asset retirements, and certain non-recurring operating credits recorded in 2000.
INCOME FROM OPERATIONS. Primarily as a result of the factors discussed
above, our income from operations in 2001 decreased by $122.4 million, or 55.5%,
to $98.1 million from $220.5 million in 2000, while our operating margin
decreased to 7.8% in 2001 from 18.5% in 2000. Income from operations in the
coated board business segment decreased by $18.5 million, or 11.4%, to
$142.9 million in 2001 from $161.4 million in 2000, while the operating margin
decreased to 12.4% in 2001 from 15.1% in 2000, primarily as a result of the
factors described above. Income from operations in the containerboard business
segment decreased $24.6 million to a loss of $19.4 million in 2001 from a profit
of $5.2 million in 2000, while the operating margin decreased to (20.7)% in 2001
from 4.1% in 2000, primarily as a result of the factors described above. Income
from operations in the corporate business segment decreased $79.4 million to a
loss of $25.5 million in 2001 from a profit of $53.9 million in 2000 due
primarily to the sale of Igaras during 2000.
FLUCTUATIONS IN U.S. CURRENCY EXCHANGE RATES. The strengthening of the U.S.
dollar against the Japanese yen, the euro and other European currencies had a
modest negative impact on net sales, gross profit, income from operations and
operating expenses during 2001.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES, EQUITY IN NET EARNINGS OF
AFFILIATES, EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
INTEREST INCOME. Interest income increased by $0.1 million to $0.9 million
in 2001 from $0.8 million in 2000.
INTEREST EXPENSE. Interest expense decreased by $22.4 million to
$158.9 million in 2001 from $181.3 million in 2000 due primarily to lower
average debt balances and, to a lesser extent, lower average interest rates.
INCOME TAX EXPENSE. During 2001, we recognized an income tax expense of
$8.8 million on a (loss) before income taxes and equity in net earnings of
affiliates of $(59.9) million. During 2000, we recognized an income tax expense
of $3.0 million on income before income taxes and equity in net earnings of
affiliates of $40.1 million. The income tax expense, in both 2001 and 2000, was
due primarily to international operating income. The increase in income tax
expense from 2000 to 2001 was due primarily to a 90% increase in international
operating income and the consolidation of Rengo. These income tax expenses
differed from the statutory federal income tax rate primarily because of
valuation allowances established on net operating loss carryforward tax assets
in the U.S. and certain international locations where the realization of such
benefits is not more likely than not.
EQUITY IN NET EARNINGS OF AFFILIATES. Equity in net earnings of affiliates
was comprised primarily of our equity in net earnings of Igaras. On October 3,
2000, we, along with our joint venture partner, completed the sale of the
jointly-held subsidiary Igaras for approximately $510 million, including the
assumption of $112 million of debt. We recognized a gain of approximately
$70.9 million in accordance with the sale. Through the date of the sale, Igaras
was accounted for under the equity method of accounting. Equity in net earnings
of affiliates decreased $3.4 million to nil in 2001 from $3.4 million in 2000
primarily as a result of the sale of Igaras and the consolidation of Rengo.
35
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. On June 21, 2001, we
completed an offering of $250 million principal amount of the initial 2001
notes, bearing interest at 10 5/8%. The net proceeds of this offering were
applied to prepay a portion of the outstanding borrowings under the term loan
facility resulting in a non-cash, extraordinary charge to earnings of
approximately $2.8 million, net of tax of nil, related to the write-off of the
applicable portion of deferred debt issuance costs on the term loans.
On August 10, 2001, we entered into the senior secured credit agreement. The
proceeds of the initial borrowings under the facilities of approximately
$386.0 million, including $51.0 million in revolving credit borrowings, were
applied to repay in full the outstanding borrowings under the term loan facility
and the revolving facility and to pay approximately $12 million of the
$14 million of fees and expenses incurred in connection with the amendment and
restatement of the credit agreement. During the third quarter of 2001, we
recorded a non-cash, extraordinary charge to earnings of approximately
$6.0 million, net of tax of nil, related to the write-off of the applicable
remaining deferred debt issuance costs on the term loan facility and the
revolving facility.
On October 3, 2000, we completed the sale of our 50% investment in Igaras.
We applied $120 million and $25 million of the sale proceeds to our 2001 and
2002 term loan maturities under the term loan facility, respectively. We
recognized a loss on the early extinguishment of debt of approximately
$2.1 million in the fourth quarter of 2000.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. We are exposed to
fluctuations in interest rates on our variable rate debt and fluctuations in
foreign currency transaction cash flows. We actively monitor these fluctuations
and use derivative instruments from time to time to manage our exposure. In
accordance with our risk management strategy, we use derivative instruments only
for the purpose of managing risk associated with fluctuations in the cash flow
of the underlying exposures identified by management. We do not trade or use
derivative instruments with the objective of earning financial gains on interest
or currency rates, nor do we use leveraged instruments or instruments where
there are no underlying exposures identified. Our use of derivative instruments
may result in short-term gains or losses and may increase volatility in our
earnings.
On January 1, 2001, we adopted Statement of Financial Accounting Standard,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, AS AMENDED BY
SFAS NO. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, AND SFAS
NO. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING
ACTIVITIES," or SFAS No. 133. SFAS No. 133 requires all derivative instruments
to be measured at fair value and recognized on the balance sheet as either
assets or liabilities. In addition, all derivative instruments used in hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. Upon adoption of SFAS No. 133, we recognized a
one-time after-tax transition adjustment to decrease earnings by approximately
$0.5 million and decrease other comprehensive income by approximately
$1.1 million. These amounts have been presented as a cumulative effect of change
in accounting principle in the accompanying consolidated statement of operations
and comprehensive (loss) income for the year ended December 31, 2001.
The following is a summary of our derivative instruments as of December 31,
2001 and the accounting policies we employ:
HEDGES OF ANTICIPATED CASH FLOWS
The following is a reconciliation of current period changes in the fair
value of the interest rate swap agreements, foreign currency forward and option
contracts which have been recorded as accumulated
36
derivative instruments loss in the accompanying consolidated balance sheet at
December 31, 2001 and as derivative instruments loss in the accompanying
consolidated statement of operations and comprehensive (loss) income for the
year ended December 31, 2001.
(dollars in
thousands)
-----------
SFAS No. 133 transition adjustment.......................... $(1,094)
Reclass to earnings......................................... 331
Current period decrease in fair value....................... (3,807)
-------
Balance at December 31, 2001................................ $(4,570)
=======
During the year ended December 31, 2001, there was no ineffective portion
related to the changes in fair value of the interest rate swap agreements,
foreign currency forward and option contracts and there were no amounts excluded
from the measure of effectiveness. The balance of $4.6 million recorded in
accumulated derivative instruments loss at December 31, 2001 is expected to be
reclassified into future earnings, contemporaneously with and offsetting changes
in the related hedged exposure. The estimated amount to be reclassified into
future earnings as interest expense and other income over the next twelve months
through December 31, 2002 is approximately $5.4 million and $0.8 million,
respectively. The actual amount that will be reclassified to future earnings
over the next twelve months will vary from this amount as a result of changes in
market conditions. No amounts were reclassified to earnings during the fourth
quarter of 2001 in connection with forecasted transactions that were no longer
considered probable of occurring.
DERIVATIVES NOT DESIGNATED AS HEDGES
We have foreign currency forward contracts used to hedge the exposure
associated with foreign currency denominated receivables. These contracts are
presently being marked-to-market through the income statement and will continue
to be marked-to-market through the income statement.
2000 Compared with 1999
RESULTS OF OPERATIONS
The following discussion of our results of operations is based upon the
years ended December 31, 2000 and 1999. We have reclassified the presentation of
net sales and cost of sales information to conform with the current presentation
format and Emerging Issues Task Force 00-10, "ACCOUNTING FOR SHIPPING AND
HANDLING FEES AND COSTS." Shipping and handling costs totaled $63.7 million in
2000 and $62.0 million in 1999.
37
% Increase
Year Ended (Decrease) Year Ended
December 31, 2000 From Prior Period December 31, 1999
----------------- ----------------- -----------------
(dollars in thousands)
Net Sales (Segment Data):
Coated Board........................... $1,065,813 0.3% $1,062,671
Containerboard......................... 126,549 13.0 111,994
---------- ----------
Net Sales................................ 1,192,362 1.5 1,174,665
Cost of Sales............................ 923,851 (1.1) 933,924
---------- ----------
Gross Profit............................. 268,511 11.5 240,741
Selling, General and Administrative...... 112,200 (1.9) 114,402
Research, Development and Engineering.... 4,554 11.7 4,078
Restructuring Credit..................... (2,600) NM --
Other (Income) Expense, Net.............. (66,132) (100.0) 1,798
---------- ----------
Income from Operations................... $ 220,489 83.0% $ 120,463
========== ==========
Income from Operations (Segment Data):
Coated Board........................... $ 161,372 6.5% $ 151,453
Containerboard......................... 5,183 NM (10,235)
Corporate and Eliminations............. 53,934 NM (20,755)
========== ==========
Income from Operations................... $ 220,489 83.0% $ 120,463
========== ==========
PAPERBOARD SHIPMENTS. The following represents shipments of coated board
and containerboard to outside customers. Shipments of coated board represent
sales to customers of carrierboard and cartonboard. Shipments from the Swedish
mill represent sales to customers of white lined chip board produced at this
mill. Shipments of containerboard represent sales to customers of linerboard,
corrugating medium, kraft paper and various other items. Total shipments for the
years ended December 31, 2000 and 1999 were as follows:
2000 1999
-------- --------
(in thousands of tons)
Coated board............................................ 965.4 965.6
Swedish mill............................................ 150.4 141.0
Containerboard.......................................... 319.4 327.8
------- -------
1,435.2 1,434.4
======= =======
NET SALES. As a result of the factors described below, our net sales in
2000 increased by $17.7 million, or 1.5%, compared with 1999. Net sales in the
coated board business segment increased by $3.1 million in 2000, or 0.3%, to
$1,065.8 million from $1,062.7 million in 1999, due primarily to higher sales
volume in North American consumer product markets due principally to selected
switching from competing substrates to our substrate, higher sales volume in
international beverage markets due principally to continued market penetration
and strong demand in Japan, and slightly improved pricing in North American
beverage and North American consumer product markets. These increases were
somewhat offset by lower sales volumes in Brazil, by lower North American
beverage volumes due primarily to lower soft drink demand and the negative
impact of foreign currency exchange rates, primarily in Europe. Net sales in the
containerboard business segment increased $14.5 million, or 13.0%, to
$126.5 million in 2000 from $112.0 million in 1999, due principally to higher
pricing, somewhat offset by lower sales volume primarily in the medium markets.
38
GROSS PROFIT. As a result of the factors described below, our gross profit
for 2000 increased by $27.8 million, or 11.5%, to $268.5 million from
$240.7 million in 1999. Our gross profit margin increased to 22.5% in 2000 from
20.5% in 1999. Gross profit in the coated board business segment increased by
$9.9 million, or 4.0%, to $255.2 million in 2000 from $245.3 million in 1999,
while our gross profit margin increased to 23.9% in 2000 from 23.1% in 1999. The
increase in coated board gross profit was due directly to worldwide cost
reductions and higher net sales somewhat offset by higher energy costs. Gross
profit in the containerboard business segment increased by $12.4 million to a
profit of $8.1 million in 2000 from a loss of $4.3 million in 1999, while our
gross profit margin increased to 6.4% in 2000 from (3.8)% in 1999. The increase
in containerboard gross profit resulted principally from improved pricing.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased by $2.2 million, or 1.9%, to $112.2 million in 2000 from
$114.4 million in 1999, due mainly to lower incentive compensation expense
somewhat offset by higher depreciation expense, higher stock option compensation
expense, expenses related to the total quality systems initiative, and
consulting fees related to a project within our consumer products business. As a
percentage of net sales, selling, general and administrative expenses decreased
from 9.7% in 1999 to 9.4% in 2000.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses increased by $0.5 million, or 11.7%, to $4.6 million in
2000 from $4.1 million in 1999, due primarily to higher research and development
investing relating to packaging machinery.
RESTRUCTURING CREDIT. During 2000, we substantially completed the 1998
restructuring plan that related primarily to the restructuring of our European
operations, primarily the ongoing rationalization of our international folding
carton converting operations. See "--Restructuring Activities." We reduced the
restructuring reserve by $4.8 million. In addition, $2.2 million of new
restructuring activities aligned with the overall objectives of the initial plan
were recorded and completed during 2000.
OTHER (INCOME) EXPENSE, NET. Other (income) expense, net, was $(66.1)
million in 2000 and $1.8 million in 1999. This change was primarily due to the
gain recognized from the sale of Igaras. See "--Equity in net earnings of
affiliates."
INCOME FROM OPERATIONS. Primarily as a result of the factors discussed
above, our income from operations in 2000 increased by $100.0 million, or 83.0%,
to $220.5 million from $120.5 million in 1999, while our operating margin
increased to 18.5% in 2000 from 10.3% in 1999. Income from operations in the
coated board business segment increased by $9.9 million, or 6.5%, to
$161.4 million in 2000 from $151.5 million in 1999, while the operating margin
increased to 15.1% in 2000 from 14.3% in 1999, primarily as a result of the
factors described above. Income from operations in the containerboard business
segment increased $15.4 million to a profit of $5.2 million in 2000 from a loss
of $10.2 million in 1999, while the operating margin increased to 4.1% in 2000
from (9.1)% in 1999, primarily as a result of the factors described above.
Income from operations in the corporate business segment increased
$74.7 million to a profit of $53.9 million in 2000 from a loss of $20.8 million
in 1999 due primarily to the sale of Igaras.
FLUCTUATIONS IN U.S. CURRENCY EXCHANGE RATES. The strengthening of the U.S.
dollar against the Euro and other European currencies did have a modest negative
impact on net sales, gross profit, income from operations and operating expenses
during 2000. However, the impact was somewhat offset by the weakening of the
U.S. dollar against the Japanese yen.
39
INTEREST INCOME, INTEREST EXPENSE, INCOME TAXES, EQUITY IN NET EARNINGS OF
AFFILIATES AND EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT.
INTEREST INCOME. Interest income decreased by $0.1 million to $0.8 million
in 2000 from $0.9 million in 1999.
INTEREST EXPENSE. Interest expense increased by $2.1 million to
$181.3 million in 2000 from $179.2 million in 1999 due primarily to higher
average interest rates.
INCOME TAX EXPENSE. During 2000, we recognized an income tax expense of
$3.0 million on income before income taxes and equity in net earnings of
affiliates of $40.1 million. During 1999, we recognized an income tax expense of
$3.9 million on a (loss) before income taxes and equity in net earnings of
affiliates of $(57.8) million. These income tax expenses differed from the
statutory federal income tax rate primarily because of valuation allowances
established on net operating loss carryforward tax assets in the U.S. and
certain international locations where the realization of such benefits is not
more likely than not.
EQUITY IN NET EARNINGS OF AFFILIATES. Equity in net earnings of affiliates
was comprised primarily of our equity in net earnings of Igaras. On October 3,
2000, we, along with our joint venture partner, completed the sale of the
jointly-held subsidiary Igaras for approximately $510 million, including the
assumption of $112 million of debt. We recognized a gain of approximately
$70.9 million in accordance with the sale. Through the date of the sale, Igaras
was accounted for under the equity method of accounting. Equity in net earnings
of affiliates decreased $3.7 million to $3.4 million in 2000 from $7.1 million
in 1999 primarily as a result of the sale.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. On October 3, 2000, we
completed the sale of our 50% investment in Igaras. We applied $120 million and
$25 million of the sale proceeds to our 2001 and 2002 term loan maturities under
the term loan facility, respectively. We recognized a loss on the early
extinguishment of debt of approximately $2.1 million in the fourth quarter of
2000.
Financial Condition, Liquidity and Capital Resources
We broadly define liquidity as our ability to generate sufficient cash flow
from operating activities to meet our obligations and commitments. In addition,
liquidity includes the ability to obtain appropriate debt and equity financing
and to convert into cash those assets that are no longer required to meet
existing strategic and financial objectives. Therefore, liquidity cannot be
considered separately from capital resources that consist of current or
potentially available funds for use in achieving long-range business objectives
and meeting debt service commitments.
CASH FLOWS. Cash and equivalents increased by approximately $7.7 million in
2001 primarily as a result of the net cash provided by operating activities
($89.6 million) and the consolidation of Rengo ($18.0 million), somewhat offset
by the purchases of property, plant and equipment ($57.7 million), the payment
for settlement of all Louisiana state income tax issues (tax and interest)
related to the period ended March 27, 1996 and the nine month period ended
December 31, 1996 ($29.5 million) and net cash used in financing activities
($8.6 million). Depreciation and amortization during 2001 totaled $137 million,
and is expected to be approximately $130 million to $140 million for 2002.
Our cash flows from our operations and EBITDA are subject to moderate
seasonality with demand usually increasing in the spring and summer due to the
seasonality of the worldwide multiple packaging beverage segment.
40
LIQUIDITY AND CAPITAL RESOURCES. Our liquidity needs arise primarily from
debt service on our substantial indebtedness, and from the funding of our
capital expenditures, ongoing operating costs, and working capital.
On June 21, 2001, we completed the offering of the 2001 initial notes. The
proceeds of the offering of $251.5 million, net of approximately $6 million of
transaction fees and expenses, were applied to prepay a portion of the
outstanding borrowings under the term loan facility.
On August 10, 2001, we entered into a senior secured credit agreement with
certain lenders providing for senior secured credit facilities with aggregate
commitments not to exceed $635 million, including the $335 million 2001 term
loan facility and the $300 million revolving facility. The proceeds of the
initial borrowings under the facilities of approximately $386.0 million,
including $51.0 million in revolving credit borrowings, were applied to repay in
full the outstanding borrowings under the term loan facility and the revolving
facility and to pay approximately $12 million of the $14 million of fees and
expenses incurred in connection with the amendment and restatement of the credit
agreement.
As of December 31, 2001, we had outstanding approximately $1,525 million of
long-term debt, consisting primarily of $650 million aggregate principal amount
of the 1996 notes ($250.0 million of which are to be redeemed with the proceeds
of the 2002 term loan), $250 million of the 1997 notes, $250 million of the 2001
notes, $335 million outstanding under the 2001 term loan facility and
$35 million under the revolving facility, and other debt issues and facilities.
In April 2002, we entered into an amendment of the senior secured credit
agreement which provided for the $250.0 million 2002 term loan. The 2002 term
loan was drawn on April 23, 2002, and the proceeds, together with borrowings
under our senior secured revolving facility of approximately $12.0 million, are
to be used to redeem the 1996 senior notes on May 23, 2002 and to pay related
fees, costs and expenses.
As of December 31, 2001, on a pro forma basis after giving effect to the
April 23, 2002 term loan and the use of borrowings therefrom and the sale of
common stock in this offering and the application of net proceeds therefrom, we
would have had outstanding approximately $ million of long-term debt.
Debt Service
Principal and interest payments under the 2001 term loan facility, the
revolving facility and the 2002 term loan facility, together with interest
payments on the 2001 notes, 1997 notes and 1996 notes, represent significant
liquidity requirements for us. The 2001 term loan facility matures on
December 31, 2006 and amortizes in semi-annual installments of $37.5 million
beginning June 30, 2003 and of $46.25 million beginning June 30, 2005, amounting
to principal payments of $75.0 million, $75.0 million, $92.5 million and
$92.5 million in 2003, 2004, 2005 and 2006, respectively. The 2002 term loan
amortizes in semi-annual installments of $1.25 million beginning September 30,
2002, amounting to principal payments of $1.25 million in 2002 and $2.5 million
annually in each of 2003, 2004, 2005 and 2006, with the remaining principal due
at maturity on March 31, 2007. The revolving facility matures on December 31,
2006.
The loans under the facilities and the 2002 term loan bear interest at
floating rates based upon the interest rate option elected by us. The term loans
under the 2001 term loan facility bore interest as of December 31, 2001 at an
average rate per annum of 4.85%. The 1996 senior notes, the 1997 notes, the 2001
notes and the 1996 senior subordinated notes bear interest at rates of 10 1/4%,
10 5/8%, 10 5/8% and 10 7/8%, respectively.
41
Interest expense in 2001 totaled $159 million, including approximately
$8 million of non-cash amortization of deferred debt issuance costs. During
2001, cash paid for interest was approximately $146 million. Interest expense in
2002 is expected to be approximately $159 million, including approximately
$7 million of non-cash amortization of deferred debt issuance costs (prior to
giving effect to the borrowing on April 23, 2002 of $250 million and the
redemption in full of our 1996 senior notes and the borrowing of approximately
$12 million under our revolving credit facility to pay related costs and
expenses, the effect of this offering and the anticipated borrowings under our
senior secured credit agreement and the sale of senior notes and the repayment
in full of our outstanding senior notes and senior subordinated notes).
We expect that our working capital and business needs will require us to
continue to have access to the revolving facility or a similar revolving credit
facility after the maturity date, and that we accordingly will have to extend,
renew, replace or otherwise refinance such facility at or prior to such date. We
cannot assure you that we will be able to do so. We have in the past refinanced
and in the future may seek to refinance our debt prior to the maturities of such
debt.
We use interest rate swap agreements to fix a portion of our variable rate
term loans to a fixed rate in order to reduce the impact of interest rate
changes on future income. The difference to be paid or received under these
agreements is recognized as an adjustment to interest expense related to that
debt. At December 31, 2001, we had interest rate swap agreements with a notional
amount of $225 million, under which we will pay fixed rates of 4.75% to 6.53%
and receive three-month LIBOR.
Covenant Restrictions
The senior secured credit agreement, which governs the 2002 term loan as
well as the facilities, imposes restrictions on our ability to make capital
expenditures and both the senior secured credit agreement and the indentures
governing the 1996 notes, the 1997 notes and the 2001 notes limit our ability to
incur additional indebtedness. Such restrictions, together with our highly
leveraged nature, could limit our ability to respond to market conditions, meet
our capital spending program, provide for unanticipated capital investments or
take advantage of business opportunities. The covenants contained in the senior
secured credit agreement, among other things, restrict our ability to dispose of
assets, incur additional indebtedness, incur guarantee obligations, prepay other
indebtedness or amend other debt instruments, pay dividends, create liens on
assets, enter into sale and leaseback transactions, make investments, loans or
advances, make acquisitions, engage in mergers or consolidations, change the
business conducted by Riverwood International and its subsidiaries, make capital
expenditures and engage in certain transactions with affiliates. The covenants
contained in the indentures governing the 1996 notes, the 1997 notes and the
2001 notes also impose restrictions on the operation of our business.
The financial covenants in the senior secured credit agreement specify,
among other things, the following requirements for each four quarter period
ended during the following test periods:
Consolidated Debt Consolidated
to EBITDA Leverage Interest Expense
Test Period Ratio Ratio
----------- ------------------ ----------------
September 30, 2001--December 30, 2002............... 5.85 to 1.00 1.75 to 1.00
December 31, 2002--December 30, 2003................ 5.50 to 1.00 2.00 to 1.00
December 31, 2003--December 30, 2004................ 5.00 to 1.00 2.10 to 1.00
December 31, 2004--December 30, 2005................ 4.70 to 1.00 2.25 to 1.00
December 31, 2005--December 30, 2006................ 4.40 to 1.00 2.25 to 1.00
December 31, 2006--March 31, 2007................... 4.40 to 1.00 2.25 to 1.00
42
At December 31, 2001, we were in compliance with the financial covenants in
the senior secured credit agreement. Our ability to comply in future periods
with the financial covenants in the 2001 senior secured credit agreement will
depend on our ongoing financial and operating performance, which in turn will be
subject to economic conditions and to financial, business and other factors,
many of which are beyond our control and will be substantially dependent on the
selling prices for our products, raw material and energy costs, and our ability
to successfully implement our overall business and profitability strategies. See
"--Outlook." If a violation of any of the covenants occurred, we would attempt
to get a waiver or an amendment from our lenders, although we cannot assure you
that we would be successful in this regard. The senior secured credit agreement
and the indentures governing the 1996 notes, 1997 notes and 2001 notes have
covenants as well as certain cross-default or cross-acceleration provisions;
failure to comply with these covenants in any agreement could result in a
violation of such agreement which could, in turn, lead to violations of other
agreements pursuant to such cross-default or cross-acceleration provisions.
Capital Expenditures
Capital spending for 2001 was $57.7 million, down 7.1% from $62.1 million in
2000. Capital spending during 2001 related primarily to improving our process
capabilities, manufacturing packaging machinery and environmental cluster rules
compliance. Total capital spending for 2002 is expected to be between
$65 million and $80 million, and is expected to relate principally to improving
our process capabilities, the production of packaging machinery and
environmental cluster rules compliance. We estimate that the capital spending
that may be required to comply with the cluster rules could reach $55 million to
be spent at our two U.S. paper mills over a seven-year period that began in
2000. See "--Environmental and Legal Matters." We estimate that we have spent
approximately one-third of that amount for such compliance.
Restructuring Activities
In connection with the global restructuring program initiated in the fourth
quarter of 1998, we began reducing our European workforce by approximately 300
employees and implemented other initiatives designed to improve productivity and
profitability across the global organization. The initial cost of this program
was approximately $25.6 million of which approximately $0.8 million was used in
December 1998 and related to severance payments. The following table provides
information that details payments on this restructuring plan since December 31,
1998:
Other Exit
Severance Costs Total
--------- ---------- --------
(dollars in thousands)
Balance at 12/31/98.................................... $21,205 $3,537 $24,742
Charges against accrual in 1999........................ (11,527) (791) (12,318)
------- ------ -------
Balance at 12/31/99.................................... 9,678 2,746 12,424
Net charges against accrual in 2000.................... (6,669) (2,499) (9,168)
------- ------ -------
Balance at 12/31/00.................................... 3,009 247 3,256
Net charges against accrual in 2001.................... (3,009) (247) (3,256)
------- ------ -------
Balance at 12/31/01.................................... $ -- $ -- $ --
======= ====== =======
During 2000, we substantially completed the restructuring plan and reduced
the reserve by $4.8 million. In addition, $2.2 million of new restructuring
activities aligned with the overall objectives of the initial plan were
completed in 2000. We completed this program during 2001 resulting in the
reduction of our European workforce related to the 1998 restructuring by
approximately 250 employees.
43
Financing Sources and Cash Flows
The revolving facility matures on December 31, 2006. At December 31, 2001,
we, together with our U.S. and international subsidiaries, had the following
amounts of commitments, amounts outstanding and amounts available under
revolving credit facilities:
Total Amount
of Total Amount Total Amount
Commitments Outstanding Available
------------ ------------ ------------
(dollars in thousands)
Revolving Facility............................. $300,000 $ 35,429 $264,571
International Facilities....................... 14,581 10,015 4,566
-------- -------- --------
$314,581 $ 45,444 $269,137
======== ======== ========
We anticipate pursuing additional working capital financing for our foreign
operations as necessary. We believe that cash generated from operations,
together with amounts available under our revolving facility and other available
financing sources, will be adequate to permit us to meet our debt service
obligations, capital expenditure program requirements, ongoing operating costs
and working capital needs until the maturity of the revolving facility, although
we cannot give any assurance in this regard. Our future financial and operating
performance, ability to service or refinance our debt and ability to comply with
the covenants and restrictions contained in our debt agreements (see "--Covenant
Restrictions"), will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond our control, and will be
substantially dependent on the selling prices and demand for our products, raw
material and energy costs, and our ability to successfully implement our overall
business and profitability strategies.
Commitments
At December 31, 2001, our total commitments under long-term, non-cancelable
contracts were as follows:
Payment Due by Period
----------------------------------------------------------------
Less than 1
Contractual Obligations year 1-3 years 4-5 years After 5 years Total
----------------------- ----------- --------- --------- ------------- ----------
(dollars in thousands)
Long-term debt........................ $ 1,742 $151,548 $470,506 $901,028 $1,524,824
Operating leases...................... 13,821 17,975 2,588 946 35,330
Unconditional purchase obligations.... 31,345 16,373 14,693 69,556 131,967
------- -------- -------- -------- ----------
Total contractual cash obligations.... $46,908 $185,896 $487,787 $971,530 $1,692,121
======= ======== ======== ======== ==========
Environmental and Legal Matters
We are committed to compliance with all applicable foreign, federal, state
and local environmental laws and regulations. Environmental law is, however,
dynamic rather than static. As a result, costs, which are unforeseeable at this
time, may be incurred when new laws are enacted, and when environmental agencies
adopt or revise rules and regulations.
In 1998, the U.S. Environmental Protection Agency adopted regulations,
generally referred to as the cluster rules, that mandate more stringent controls
on air and water discharges from the United States pulp and paper mills. We
estimate that the capital spending that may be required to comply with the
cluster rules could reach $55 million to be spent at our two U.S. paper mills
over a seven-year period that began in 2000.
44
As of December 31, 2001, we estimate that we have spent approximately one-third
of that amount for such compliance.
In late 1995, the Louisiana Department of Environmental Quality, or DEQ,
notified our predecessor of potential liability for the remediation of hazardous
substances at a wood treatment site in Shreveport, Louisiana that our
predecessor or its predecessors previously operated, and at a former oil
refinery site in Caddo Parish, Louisiana which is on land that we previously
owned. In response to these notices, we have provided additional information
concerning these sites and have commenced our own evaluation of any claims and
remediation liabilities for which we may be responsible. Subsequent to receipt
in May 1996 of a Special Demand Letter from DEQ to remediate the site in
Shreveport, we performed a soil and groundwater investigation at the site
pursuant to an agreement with DEQ. In August 2001, we entered into a cooperative
agreement for remedial action with DEQ and the landowners of the site, as well
as a mutual release and settlement agreement with the landowners. Under the
cooperative agreement, we will develop the remedial design and carry out the
specified remediation at the site. We have engaged a qualified contractor and
expect completion of the work by the end of 2002. In September 1996, we received
a special demand letter from DEQ to remediate the site in Caddo Parish. We
performed a waste inventory and treatability study at the site and subsequently
met with DEQ in October 1999. On July 6, 2000, we entered into a settlement
agreement with DEQ that describes in detail the remedial actions necessary for
us to obtain full release of all future liability at this site. We have
contracted with a vendor to perform the remedial actions as outlined in the
settlement agreement and the work is currently proceeding. We no longer own the
site since transferring the property to another entity on October 22, 2000. We
anticipate the remedial actions outlined in the settlement agreement will be
completed during the second quarter of 2002 and, at that time, expect to be
relieved of any future liability.
We are involved in environmental remediation projects for certain properties
currently or formerly owned or operated by us, and at certain waste disposal
sites. Some of these projects are being addressed under federal and state
statutes, such as the Comprehensive Environmental Response, Compensation and
Liability Act and analogous state laws. Our costs in certain instances cannot be
reliably estimated until the remediation process is substantially underway or
liability has been addressed. To address these contingent environmental costs,
we have accrued reserves when such costs are probable and can be reasonably
estimated. We believe that, based on current information and regulatory
requirements, the accruals established by us 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 our results of operations, cash flows or financial
condition, although we cannot assure you that significant costs will not be
incurred in connection with clean-up activities at these properties, including
the Shreveport and Caddo Parish sites referred to above.
We are a party to a number of lawsuits arising out of the ordinary conduct
of our business. While we cannot assure you as to their ultimate outcome, we do
not believe that these lawsuits will have a material impact on our results of
operations, cash flows or financial condition.
We have been a plaintiff in actions against MeadWestvaco, successor by
merger to Mead, and R. A. Jones claiming infringement of our patents for our
packaging machines. The patents in suit were found infringed but invalid by a
jury in a trial against R. A. Jones in August 2001. This finding of invalidity
has been appealed to the Court of Appeals for The Federal Circuit. The suit
against MeadWestvaco was dismissed by mutual agreement pending the outcome of
the appeal of the decision in the case against R. A. Jones.
45
Tax Matters Relating to the Merger
In connection with the merger, our former majority owner agreed to bear the
cost of a Section 338(h)(10) election for U.S. federal tax purposes and for
purposes of state taxes for which we, together with the former majority owner,
filed returns on a combined basis. We agreed to bear the cost of this election
for the purposes of other state taxes, or stand-alone taxes, including Louisiana
income tax. During 1997, we paid $27.5 million in estimated Louisiana
stand-alone taxes relating to the election. Our calculation of our Louisiana tax
was based on state law in effect at the time of the merger, including a 1993
amendment. In May 1997, the Louisiana Supreme Court declared the 1993 amendment
to be void under the Louisiana Constitution, retroactive to 1993. After
consultation with Louisiana tax counsel, we filed our Louisiana income tax
return for the period ended March 27, 1996 in reliance on the Louisiana tax law
in effect at the time of the merger, without the payment of any additional tax
due to the voiding of the 1993 amendment.
The State of Louisiana completed its audit of our tax return for the period
ended March 27, 1996 and on May 9, 2000, we received a notice of proposed tax
due for this period in the amount of $47.6 million in tax plus statutory
interest. On October 12, 2001, we entered into a settlement agreement with the
Louisiana Department of Revenue to pay $29.5 million to the State of Louisiana
to settle all Louisiana state income tax issues (tax and interest) related to
the period ended March 27, 1996 and the nine month period ended December 31,
1996. We made this payment on October 25, 2001 using funds borrowed under the
revolving facility.
International Operations
At December 31, 2001, approximately 12% of our total net assets were
denominated in currencies other than the U.S. dollar. We have significant
operations in Sweden, Great Britain, Japan, Spain and France. The effect of a
generally stronger U.S. dollar against the currencies of Sweden, Great Britain,
Japan, Germany, Spain and France produced a net currency translation adjustment
loss of approximately $5.6 million, which was recorded as an adjustment to
shareholders' equity for the year ended December 31, 2001. The magnitude and
direction of this adjustment in the future depends on the relationship of the
U.S. dollar to other currencies. We cannot predict major currency fluctuations.
Our revenues from export sales fluctuate with changes in foreign currency
exchange rates. We pursue a currency hedging program in order to limit the
impact of foreign currency exchange fluctuations on financial results. See
"--Financial Instruments."
Within Europe, eleven of the fifteen member countries of the European Union
participated in the European Economic and Monetary Union, or the EMU, pursuant
to which a new currency, the euro, was introduced on January 1, 1999. The new
currency is in response to the EMU's policy of economic convergence to harmonize
trade policy, eliminate business costs associated with currency exchange and to
promote the free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the euro as their
local currency, initially available for currency trading on currency exchanges
for use in noncash (banking) transactions. Beginning on January 1, 2002,
euro-denominated bills and coins were issued for cash transactions. In the first
quarter of 2002, the participating countries withdrew all local currencies and
use exclusively the euro.
Currently, we operate in five of the participating countries in the EMU.
Non-participating European Union countries, such as Great Britain, where we also
have operations, may eventually join the EMU.
Although we will continue to review our pricing strategy throughout Europe
due to the increased price transparency created by the euro, we do not
anticipate that any resulting change would have a material
46
effect on our operations. We also do not believe that EMU will have a material
effect with respect to our derivative and other financial transactions.
Financial Instruments
The functional currency for most of our international subsidiaries is the
local currency for the country in which the subsidiaries own their primary
assets. The translation of the applicable currencies into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. Any related translation adjustments are
recorded directly to shareholders' equity. Gains and losses on foreign currency
transactions are included in other expense (income), net for the period in which
the exchange rate changes.
We pursue a currency hedging program which utilizes derivatives to limit the
impact of foreign currency exchange fluctuations on our consolidated financial
results. Under this program, we have entered into forward exchange and option
contracts in the normal course of business to hedge certain foreign currency
denominated transactions. Realized and unrealized gains and losses on these
forward contracts are included in the measurement of the basis of the related
foreign currency transaction when recorded. The premium on an option contract is
reflected in other expense (income), net, during the period in which the
contract expires. These instruments involve, to varying degrees, elements of
market and credit risk in excess of the amounts recognized in the consolidated
balance sheets. We do not hold or issue financial instruments for trading
purposes. See "--Quantitative and Qualitative Disclosure About Market Risk."
Impact of Inflation
In the U.S., the inflation rate was approximately 2.8% for 2001. In Europe,
where we have manufacturing facilities, the inflation rate for 2001 was
approximately 2.7%. Net sales from international operations during the period
amounted to approximately $409 million, or 33% of our combined net sales in
2001.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 141, or SFAS No. 141, BUSINESS
COMBINATIONS, which was effective as of January 1, 2002. SFAS No. 141 requires
the purchase method of accounting for business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interests method. We adopted SFAS
No. 141 on January 1, 2002 and do not believe that the adoption will have a
significant impact on our financial position and results of operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, or SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, which was
effective as of January 1, 2002. SFAS No. 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 also requires us to
complete a transitional goodwill impairment test six months from the date of
adoption. The adoption of SFAS No. 142 will result in the discontinuation of
amortization of goodwill recorded at December 31, 2001 of approximately
$8 million annually. Intangible assets with a determinable life will continue to
be amortized over that period. We
47
adopted SFAS No. 142 on January 1, 2002 and do not believe that any impairment
charges will result from the adoption.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, or SFAS No. 144 ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, which was effective as of January 1, 2002. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets, as well as eliminating the exception to consolidation for a subsidiary
for which control is likely to be temporary. We adopted SFAS No. 144 on
January 1, 2002 and the adoption did not have a significant impact on our
financial position and results of operations.
Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risk from changes in interest rates, foreign
currency and commodity prices. To minimize these risks, we enter into various
hedging transactions.
Interest Rates
We are exposed to changes in interest rates, primarily as a result of our
short-term and long-term debt with both fixed and floating interest rates. We
use interest rate swap agreements effectively to fix the LIBOR rate on
$225,000,000 of variable rate borrowings.
Interest Rate Sensitivity--Principal (Notional) Amount by Expected
Maturity--Average Interest (Swap) Rate
December 31,
-----------------------------------------------------------------------------------------
Fair
2002 2003 2004 2005 2006 Thereafter Total Value
-------- -------- -------- -------- -------- ---------- --------- ---------
(dollars in thousands)
Liabilities:
Long-term debt, including
current portion:
Fixed Rate................... 1,742 769 779 356 250,000 901,028 1,154,674 1,182,100
Average Interest Rate........ 8.7 6.5 6.5 6.5 10.3 10.7
Variable Rate................ -- 75,000 75,000 220,150 -- -- 370,150 373,945
Average Interest Rate, spread LIBOR + LIBOR + LIBOR + LIBOR + LIBOR + LIBOR +
range is 2.75%............. spread spread spread spread spread spread
Interest Rate Derivative
Financial Instruments
Related to Debt:
Interest rate swap:
Pay fixed/receive variable... 225,000 225,000 (5,389)
Average pay rate............. 5.55%
Three-
Month
Average receive rate......... LIBOR
Foreign Exchange Rates
We enter into forward exchange contracts to effectively hedge substantially
all accounts receivable and certain accounts payable resulting from transactions
denominated in foreign currencies. The purpose of these forward exchange
contracts is to protect us from the risk that the eventual functional currency
cash flows resulting from the collection of the hedged accounts receivable or
payment of the hedged accounts payable will be adversely affected by changes in
exchange rates. We also enter into foreign currency options and forward exchange
contracts to hedge certain anticipated foreign currency transactions. The
purpose of
48
these contracts is to protect us from the risk that the eventual functional
currency cash flows resulting from anticipated foreign currency transactions
will be adversely affected by changes in exchange rates.
Foreign Exchange Rates Sensitivity--Contractual Amount by Expected
Maturity--Average Contractual Exchange Rate
December 31, Fair
2001 Value
------------ --------
(dollars in thousands)
Forward Exchange Agreements:
Functional Currency:
Yen
Receive $US/Pay Yen................................... 7,282 244
Weighted average contractual exchange rate............ 127.25
Pay $US/Receive Yen................................... 3,608 (89)
Weighted average contractual exchange rate............ 128.40
Euro
Receive $US/Pay Euro.................................. 9,539 52
Weighted average contractual exchange rate............ 0.90
Pay $US/Receive Euro.................................. 4,398 (40)
Weighted average contractual exchange rate............ 0.90
British Pound
Receive $US/Pay GBP................................... 5,800 (52)
Weighted average contractual exchange rate............ 1.44
Pay $US/Receive GBP................................... 2,010 36
Weighted average contractual exchange rate............ 1.43
Australian Dollar
Receive $US/Pay AUD................................... 2,856 (3)
Weighted average contractual exchange rate............ 0.51
Pay $US/Receive AUD................................... 1,693 (10)
Weighted average contractual exchange rate............ 0.51
Other
Net Receive various/Pay various....................... 6,249 74
Weighted average contractual exchange rate............ Various
The remaining forward exchange agreements (other than the yen, Australian
dollar, British pound and euro) listed above represent contracts in several
other countries' currencies, including the euro, British pound, Norwegian kroner
and the Danish kroner. In each instance, the fair value of the net position of
our forward exchange agreements in the respective currencies is not material at
December 31, 2001.
Natural Gas Hedging Contracts
We enter into fixed price natural gas contracts designed to effectively
hedge prices for a substantial portion of our natural gas requirements at our
two U.S. mills. The purpose of the fixed price natural gas contracts is to
eliminate or reduce price risk with a focus on making cash flows more
predictable. As of December 31, 2001, we entered into contracts to hedge
substantially all of our natural gas requirements for our two U.S. mills through
December 31, 2002. The contract price and fair value of these natural gas
contracts was approximately $22.3 million and $14.9 million, respectively. These
contracts are not accounted for as derivative instruments under SFAS No. 133
because they qualify for the normal purchase exemption.
49
BUSINESS
Overview
We are a focused, integrated provider of paperboard packaging solutions to
multinational beverage and consumer products companies. We focus on attractive
segments of the paperboard packaging market where we provide companies with
paperboard packaging solutions designed to deliver significant marketing and
performance benefits at a competitive cost. In doing this, we capitalize on our
high quality low-cost paper mills, innovative carton designs, efficient
converting plants, proprietary packaging machines and our commitment to superior
customer service. We believe that providing value-added packaging products to
our customers has enabled us to profitably grow our coated board business and
establish and maintain long-term relationships with blue-chip customers.
Customers in our beverage packaging business include Anheuser-Busch
Companies, Inc., Miller Brewing Company, numerous Coca-Cola and Pepsi bottling
companies, Interbrew, Asahi Breweries, Unilever and Master Foods. In our
consumer products packaging business, we provide cartonboard, through
independent converters, to consumer products companies such as Kraft Foods,
Nestle, Unilever and Mattel. In 2001, we had net sales of $1.2 billion and
EBITDA of $260.8 million, or 20.9%, of net sales.
We are the larger of two worldwide producers of coated unbleached kraft
paperboard, or CUK board, the grade of paperboard that we use for our packaging
products. CUK board is a specialized high-quality grade of paperboard with
excellent strength characteristics and printability for high-resolution graphics
that make it particularly well suited for a variety of packaging applications.
We refer to the CUK board we produce for use in beverage multiple packaging as
carrierboard and in consumer products packaging as cartonboard.
We produce CUK board on five machines located at our West Monroe, Louisiana
and Macon, Georgia mills, with a combined production capacity of approximately
1.2 million gross tons. We also operate a white lined chip recycled board mill
in Fiskeby, Sweden. In our converting operations, we use a combination of eleven
high-quality carton converting plants operated by us as well as through
converting plants associated with our two joint ventures and numerous licensees,
in the United States, Europe, Japan, Australia and Brazil. In addition, we
design, test and produce packaging machinery at two U.S. facilities and one
European facility. We also manufacture containerboard--linerboard, corrugating
medium and kraft paper--for sale in the open market. We intend to stop producing
linerboard as we continue to shift production capacity to higher margin CUK
board.
From 1991 through 1997, we invested approximately $1.2 billion in our CUK
board mills and converting plants, principally to convert our two Macon Mill
paperboard machines to CUK board production, upgrade our West Monroe CUK
paperboard machines, build our converting plant in Perry, Georgia and upgrade
our U.S. converting plants with new printing presses and cutting lines. As a
result of these substantial capital investments, we have low-cost, modern, high
quality manufacturing assets with sufficient CUK board production and converting
plant capacity to meet our anticipated growth without having to make significant
additional capital expenditures.
Productivity and Profitability Initiatives
Beginning in 1996, we have implemented a number of long-term initiatives
designed to improve productivity and financial performance. Our experienced and
dynamic management team led by Stephen M. Humphrey has (1) restructured our
asset base, established key contracts with North American converters and
realigned our business into commercially-focused operating units and
(2) implemented new business processes and systems which have driven us towards
our goal of world-class operational
50
excellence. We have reduced the annual cost of operating our business by
approximately $180 million in 2001 relative to 1996 as a result of our
cost-reduction initiatives implemented during the period from 1996 through 2001.
We intend to continue to focus each of our businesses on continuous improvement
initiatives to further improve our financial performance and achieve cost
reductions.
Since 1996, we have restructured our asset base to lower our cost structure.
We have divested non-core assets and closed or shut down underperforming
facilities and equipment. We have sold our U.S. timberlands/wood products
business and closed packaging machinery manufacturing facilities in Marietta,
Georgia, as well as in Australia, Brazil, France and Germany. We have made
disciplined investments in our business, such as acquiring the remaining 50%
interest in our Brazilian multiple packaging equity investment, opening a new,
state-of-the-art beverage multiple packaging converting facility at Perry,
Georgia, and converting the second paper machine at our U.S. mill in Macon,
Georgia from linerboard to CUK board production. We have also driven revenue and
margin growth by identifying and pursuing new growth opportunities both in our
beverage multiple packaging business--such as our Japanese joint venture with
Rengo--and in our consumer products packaging business through key converting
relationships. Further, we have strengthened key blue-chip customer
relationships.
Our total quality systems, or TQS, initiative is the foundation of our
continuous improvement program. TQS is designed to reengineer our processes and
systems to enhance the value delivered to our customers while simultaneously
reducing our costs of operating our businesses. We began implementing TQS
methodologies at individual operations in 1997 and, in the third quarter of
1999, created a dedicated internal TQS team that conducted detailed site audits
at each of our North American and European manufacturing facilities. The team
analyzed our manufacturing processes by interviewing employees, reviewing
customer complaints and using statistical data and first-hand observations to
understand our existing manufacturing systems and their supporting processes.
The team then calculated each site's overall equipment effectiveness and
manufacturing waste to identify deviations from standard quality and establish
performance standards to measure our progress towards achieving higher product
quality and equipment reliability. Project teams at each of our sites were
formed to bring the site up to specified quality standards utilizing our TQS
methodologies. The TQS program has systematically driven our manufacturing
operations to world-class excellence, and is now being implemented across our
entire company to drive continuous improvement in all of our processes and
systems.
Paperboard Packaging Industry Overview
In 2001, the U.S. paperboard packaging market generated paperboard shipments
of approximately 5.9 million tons. This paperboard, which is produced from both
wood pulp and recycled fibers, is utilized for both beverage cartons and
non-beverage cartons. The major paperboard grade used to make beverage cartons
is CUK board. The major paperboard grades used to make non-beverage cartons are
solid bleached sulphate, or SBS, recycled clay-coated news, or CCN, and CUK
board. White lined chip board is also used for a variety of folding carton
applications principally throughout Europe.
BEVERAGE MULTIPLE PACKAGING
Beverage multiple packaging is a stable, steadily growing market that has
traditionally focused on packaging of containers for beer and carbonated soft
drinks. U.S. shipments of CUK board for beer and carbonated soft drinks totaled
approximately 1.1 million tons in 2001. The U.S. beer and carbonated soft drink
multiple packaging markets have been characterized by steady volume growth,
having a compound annual growth rate of 1.3% and 2.2%, respectively, from 1995
to 2000, which is expected to be 1.2% and 1.8%, respectively, from 2000 to 2005.
Beverage cartons made from CUK board compete in the beverage
51
multiple packaging market with plastics and corrugated packaging. Within the
U.S. beer and soft drink packaging markets, we estimate that CUK board accounted
for approximately 79% and 53%, respectively, of total packaged volume in 2001.
The share of the beer and carbonated soft drink market held by CUK board has
been, and is expected to remain, relatively steady and is driven by the
perceived marketing advantages of paperboard when compared to plastic and
corrugated packaging. The U.S. markets for bottled water and fruit juice account
for a combined 17% of the market for take-home drinks relative to the combined
40% represented by beer and carbonated soft drinks. These segments have
historically not used paperboard packaging, but have become a focus of our
market expansion strategy.
CONSUMER PRODUCTS PACKAGING
The U.S. non-beverage consumer products paperboard packaging market
generated paperboard shipments of approximately 4.7 million tons in 2001. U.S.
demand for non-beverage paperboard packaging has grown at an average rate of 1%
per year from 1996 to 2001. We believe that our growth opportunity is not as
much in the growth of the overall market as it is in the market share
opportunity for our CUK board. We estimate that, given its superior strength,
printability and cost characteristics, CUK is the most appropriate substrate for
approximately 35% of the non-beverage paperboard packaging market, compared with
its share of approximately 12% in 2001. We estimate that our share of this
market in 2001 was only approximately 6%. We have reorganized our business to
take advantage of growth opportunities for our CUK board in this market.
PAPERBOARD SUBSTRATE COMPARISON
Traditionally, SBS has occupied the high-end of the non-beverage carton
market due to real and perceived advantages with respect to carton appearance
relative to both CUK board and CCN and structural integrity relative to CCN.
Given its higher cost of production and perceived advantages, SBS has generally
been sold at a premium price relative to CUK board and has generally been used
to package cosmetics, pharmaceuticals, software/media, toiletries and tobacco
products.
CCN is generally positioned at the lower end of the non-beverage carton
market, offering lower quality graphics and appearance characteristics due to
the lack of bleaching and virgin fiber along with less structural integrity
given the absence of virgin fiber in the substrate. Given its lower cost of
production and its less advantageous product characteristics, CCN has generally
been sold at a price lower than that of CUK board. Recycled grades are typically
used in packaging for dry foods (cereals, crackers and pasta), soaps,
detergents, tissue products and other consumer goods packaging.
CUK board is a specialized high-quality grade of paperboard with superior
strength characteristics (virgin fiber, not weakened by bleaching) and
printability for high-resolution graphics that make it particularly well suited
for a variety of packaging applications. CUK board has traditionally occupied
the large segment between SBS and CCN in the non-beverage carton market,
offering very good structural integrity due to its composition from virgin
fiber, as well as very competitive appearance characteristics, especially in
applications where a bleached back is not a critical consideration. While CUK
board continues to sell at a discount relative to SBS, the improving
printability performance of CUK board, along with its superior strength
characteristics, have resulted in a narrowing of this price differential.
Our Strategies
Our objective is to expand our position as a leading provider of paperboard
packaging solutions. To achieve this objective, we are implementing the
following strategies.
52
GROW OUR BEVERAGE MULTIPLE PACKAGING BUSINESS BY EXPANDING MARKET SHARE IN OUR
TRADITIONAL MARKETS AND BY IDENTIFYING AND PENETRATING NEW MARKETS
In our beverage multiple packaging business, our traditional focus has been
on packaging solutions for beer and carbonated soft drink cans and bottles. We
plan to continue this focus, while seeking to identify and penetrate other large
and growing beverage packaging markets, such as the markets for bottled water
and fruit juices. To execute this strategy, we will seek to continue expanding
our market share in the beer and carbonated soft drink multiple packaging
markets, which generated total shipments of CUK board of approximately
1.1 million tons in 2001 in the U.S. We have increased our global share of this
market from approximately 43% in 1996 to approximately 48% in 2001, based on
tons shipped. In addition, we are seeking to use new product innovation to
increase the use of CUK board for packaging beverage containers and liquids that
have not historically been packaged using CUK board, where we believe CUK board
can provide distinct advantages to beverage companies in terms of both marketing
impact and distribution cost savings. As we pursue this growth initiative, we
plan to offer customers value-added, integrated beverage packaging solutions
that include our CUK board, converted cartons, packaging machines and customer
service. Our targeted segments include bottled water and fruit juices, which
accounted for approximately 9% and 8%, respectively, of the U.S. market for
take-home drinks in 2000 by volume. The U.S. markets for take-home bottled water
and fruit juices are expected to grow at compound annual rates of 7.2% and 1.1%,
respectively, from 2000 through 2005. We have developed a packaging carton for
bottled water based on our Fridge Vendor-TM- design, which one of our customers
will begin to test market in May 2002. We have also designed a CUK board product
for juice pouches using our new Z-Flute-Registered Trademark- product, which is
being tested by a number of beverage companies. We believe that by expanding
market share in our traditional markets and penetrating new markets for our CUK
board we will be able to accelerate growth of our net sales.
CAPITALIZE ON GROWTH OPPORTUNITIES FOR CUK BOARD IN CONSUMER PRODUCTS
PACKAGING
In our consumer products packaging business, we are moving from being
primarily a provider of cartonboard to independent converters to also being a
provider of integrated packaging solutions directly to consumer products
companies. We are developing innovative packaging solutions for segments of the
non-beverage consumer products packaging market that are large and fast growing
and where we intend to capitalize on our expertise in beverage multiple
packaging to provide value-added packaging solutions and carton innovation to
customers. We believe that there are significant opportunities to grow revenues
and gain share in this market because our historical lack of focus on this
market has resulted in low penetration by CUK board generally and by us in
particular. The U.S. non-beverage consumer products paperboard packaging market
generated paperboard shipments of approximately 4.7 million tons in 2001. We
believe that CUK board is appropriate for applications that represent
approximately 35% of this market compared with CUK board's share of
approximately 12% in 2001. We estimate that our share of this market in 2001 was
only approximately 6%. In addition, we are targeting our innovative
Z-Flute-Registered Trademark- carton technology at selected non-beverage
segments of the market for mini- and micro-flute corrugated products. We
estimate that these segments generated U.S. shipments of approximately 550,000
tons in 2000. These applications include cartons for candy and frozen and dry
foods, where we believe the performance characteristics of our CUK board compare
favorably with corrugated packaging.
CONTINUE TO REDUCE COSTS BY FOCUSING ON OPERATIONAL EXCELLENCE
We plan to continue to reduce our operating costs by continuously improving
our processes and systems. Since 1996, we have implemented a number of long-term
initiatives designed to improve productivity and financial performance. We
installed an experienced and dynamic management team, restructured our asset
base and realigned our business into commercially-focused operating units.
During
53
this period, we implemented a company-wide program designed to change and
reengineer our processes and systems to achieve operational excellence and
reduce our operating costs. This program has developed into our total quality
systems, or TQS, initiative which is designed to drive continuous improvement in
our processes and systems throughout our company. We have reduced the annual
cost of operating our business by approximately $180 million in 2001 relative to
1996 as a result of our cost-reduction initiatives implemented during the period
from 1996 through 2001. While we have made significant progress on these
efforts, we believe that there are still significant opportunities to improve
productivity and efficiency throughout our company. We will continue to apply
our TQS initiative to realize additional cost savings.
DRIVE PROFITABILITY BY CONTINUING TO SHIFT OUR PRODUCT MIX TO HIGHER MARGIN
CUK BOARD PACKAGING APPLICATIONS
We will continue to focus on profitable growth by shifting to higher margin
CUK board packaging applications and providing value-added packaging solutions
to customers. We are pursuing this strategy to improve product mix in three
principal ways. First, we are shifting a significant amount of production
capacity from low margin linerboard sales to higher margin CUK board
applications, a process that we have significantly completed. Second, we are
continuing to exit lower margin areas of our CUK board business for higher
margin CUK board packaging applications. Third, we intend to shift a portion of
our consumer products packaging business to an integrated packaging model where
we believe we can achieve higher margins by providing consumer products
companies with value-added, integrated packaging solutions and carton
innovation. We expect that our future financial performance and cash flows will
be positively impacted by this strategy.
USE ANTICIPATED FUTURE CASH FLOWS TO REDUCE OUR DEBT AND DRIVE EARNINGS GROWTH
We intend to continue to be disciplined in how we use anticipated future
cash flows. We plan to use a significant portion of our anticipated future cash
flows to reduce our outstanding debt. We will continue to benefit from the
significant investments that we have made in our mills and converting plants as
we pursue our strategy to shift our product mix to higher margin CUK board
packaging applications, and do not anticipate having to make significant
additional capital expenditures over the next several years compared to the last
three years. In addition, we will continue to employ effective working capital
controls to manage the cash requirements of our operations. We also expect that
the repayment of approximately $ million in debt using the net proceeds of this
offering will result in significantly lower cash interest expenses in the
future. Finally, we expect to apply existing net operating loss carryforwards to
reduce future cash income tax expenses.
Coated Board
BEVERAGE MULTIPLE PACKAGING
In our beverage multiple packaging business, we provide a range of packaging
solutions to leading multinational beverage companies, offering them
carrierboard, beverage cartons and packaging machines either as an integrated
solution or separately. We produce carrierboard at our mills, print and cut, or
convert, the carrierboard into beverage cartons at our converting plants and
manufacture packaging machines designed to package bottles and cans using our
beverage cartons. We supply beverage cartons in a variety of designs and
formats, including 6, 12 and 24 multi-packs. We design our products to meet our
customers' needs for beverage multi-packs. We provide packaging solutions that
(1) are cost-effective, (2) provide convenience through ease of carrying and
storage for consumers, (3) provide a smooth surface printed with
high-resolution, multi-color graphics images that help our customers improve
brand awareness
54
and visibility of their products on store shelves and (4) provide durability,
stiffness and wet-tear strength to ensure package integrity under conditions
that are often damp or wet.
Our proprietary beverage packaging machines package cans, bottles and other
beverage containers into our beverage cartons at high speeds. We install these
machines at customer plants under long-term leases and provide value-added
support, service and advanced performance monitoring of the machines. Our
packaging machines are designed to create direct pull-through demand for our CUK
board. We seek to increase the use by customers of our integrated packaging
solutions which, we believe, maximizes our revenue opportunities, enhances
customer relationships, provides customers with greater packaging line
efficiencies and overall cash benefits, and expands opportunities for us to
provide value-added support and service. We converted almost 90% of our
carrierboard production into beverage cartons during 2001, and are seeking to
increase the already significant customer use of our packaging machines. We
enter into annual or multi-year carton supply contracts with our customers.
We sell the approximately 10% of our carrierboard production not utilized in
our integrated beverage packaging business in the open market to independent
converters. Particularly in our international operations, our carrierboard may
be sold to and converted by joint ventures and licensees of our beverage carton
who, in turn, sell converted beverage cartons to end-users for use on our
proprietary packaging machines. Our beverage multiple packaging business also
includes sales of carrierboard, which we have produced and converted, to
customers for use on third-party packaging machines.
We are focused on growing our presence in beverage categories beyond our
traditional beer and carbonated soft drink segments. To this end, we have
designed a CUK board product for juice pouches using our new
Z-Flute-Registered Trademark- proprietary technology. A number of beverage
companies are currently testing this product. In addition, we have designed a
new carton, based on our Fridge Vendor-TM- design, to target the market for
take-home water bottle multiple packaging. One of our major customers will begin
to test market this product in May 2002.
In 2001, carrierboard accounted for approximately 65% of our total CUK board
shipments. In 2001, we shipped approximately 637,000 tons of carrierboard and
had net sales in our beverage multiple packaging business of $827.8 million.
CONSUMER PRODUCTS PACKAGING
In our consumer products packaging business, we have historically sold
cartonboard to independent converters which convert the cartonboard and sell
cartons to consumer products companies, such as Kraft Foods, Nestle, Unilever
and Mattel, for consumer products packaging for confectionary, frozen and dry
foods, toys and other consumer products. We serve these customers through
relationships with converters and work with both the end-user and the converter
to design packaging solutions.
Historically, the consumer products packaging business has been of secondary
importance to us, serving primarily as an outlet for excess CUK board
production. In January 2000, we adopted a new strategy for our consumer products
packaging business and, as a first step, organized this business as a
stand-alone operating unit to target previously untapped opportunities in the
non-beverage consumer products packaging market and to improve our product mix
and margins. Our strategy is to capitalize on the capabilities and business
model that we have developed in our beverage multiple packaging business by
developing integrated packaging solutions and innovative carton designs for
targeted consumer products applications and building relationships directly with
consumer products companies. At the same time, we intend to maintain our
relationships with independent converters of our cartonboard.
55
We believe that the performance characteristics of our CUK board,
specifically its tear strength, wet strength and stiffness, make it appropriate
for applications in attractive segments of the consumer products packaging
market. As such, we believe that the growth opportunity for us in these segments
will largely be driven by our ability to introduce CUK board to packaging
applications currently served by other substrates. We have had success
penetrating several non-beverage paperboard applications in which we believe CUK
board has a competitive advantage. For example, we estimate that our CUK board
had an approximate 75% share of the frozen pizza market in 2001. We are seeking
to further penetrate the frozen dinner market, in which we estimate that we had
a market share of approximately 13% in 2001. We are also targeting other frozen
and dry food segments.
For example, we have developed our innovative Z-Flute-Registered Trademark-
carton technology to further penetrate non-beverage segments of the large and
growing market for mini- and micro-flute corrugated products. We estimate that
the non-beverage segments of this market that we are targeting generated U.S.
paperboard shipments of approximately 550,000 tons in 2000. We have designed
Z-Flute-Registered Trademark- to capitalize on the strength and marketing
capabilities of CUK board needed in these markets while providing the structural
reinforcement and additional anti-crush strength required for the shipping,
stacking and storage needs of retailers and consumers alike. Specific
non-beverage applications for micro-flute products include cartons for frozen
food and dry foods and candy.
In 2001, cartonboard accounted for approximately 35% of our total CUK board
shipments. In 2001, we shipped approximately 351,000 tons of cartonboard and had
net sales in our consumer products packaging business of $219.5 million. We sell
cartonboard under the brand names Pearl-Kote-Registered Trademark-,
Omni-Kote-Registered Trademark-, Z-Flute-Registered Trademark- and
Multiboard-TM-.
CUK BOARD PRODUCTION
We produce CUK board at our West Monroe, Louisiana mill and our Macon,
Georgia mill. We have three paperboard machines at our West Monroe mill and two
paperboard machines at our Macon mill. These mills have a current total combined
annual production capacity of approximately 1.2 million gross tons of CUK board.
Our CUK board production at our West Monroe and Macon mills was
approximately 657,000 tons and 454,000 tons, respectively, for 2001. CUK board
is manufactured from pine and hardwood fibers and, in some cases, recycled
fibers, such as old corrugated containers and clippings from our converting
operations. Virgin fiber is obtained in the form of wood chips or pulp wood
acquired through open market purchases or our long-term purchase contract with
Plum Creek Timber Company, L.P. See "--Energy and Raw Materials." These chips
are chemically treated to form softwood and hardwood pulp, which are then
blended (together, in some cases, with recycled fibers). In the case of
carrierboard, a chemical is added to increase moisture resistance. The pulp is
then processed through the mill's paper machines, which consist of a
paper-forming section, a press section (where water is removed by pressing the
wet paperboard between rolls), a drying section and the coating section. Coating
on CUK board, principally a mixture of pigments, binding agents and water,
provides a white, smooth finish, and is applied in multiple steps to achieve
desired levels of brightness, smoothness and shade. After the CUK board is
coated, it is wound into rolls, which are then shipped to our converting plants
or to outside converters.
In 2001, carrierboard and cartonboard accounted for approximately 65% and
35% of our total CUK board shipments, respectively.
56
WHITE LINED CHIP BOARD PRODUCTION
We produce white lined chip board at our Swedish mill, which shipped
approximately 150,000 tons of such board during 2001. White lined chip board is
used for a variety of folding carton applications principally throughout Europe.
Our white lined chip board incorporates recycled fibers to meet the demands of
the European marketplace.
CONVERTING OPERATIONS
We convert CUK board as well as other grades of paperboard into cartons at
11 carton converting plants at 10 sites that we operate in the United States,
the United Kingdom, Spain, France and Brazil, as well as through converting
plants associated with our joint ventures in Japan and Denmark and licensees in
other markets outside the United States. The converting plants print, cut and
glue paperboard into cartons designed to meet customer specifications. These
plants primarily utilize roll-fed printing presses with in-line cutters to print
and cut CUK board. Printed and cut cartons are in turn glued and shipped to our
customers.
Our U.S. converting plants are dedicated to converting carrierboard produced
by us into beverage cartons. These presses have substantially higher cutting and
printing speeds, resulting in fewer labor hours per ton of CUK board carton
produced. We realized significant productivity gains when we completed our new
converting plant in Perry, Georgia in 1996, which resulted in improved logistics
by reducing transportation distances between our Macon mill and our converting
plants. We intend to continue to invest in our domestic converting plant to
improve their process capabilities.
Our international converting plants convert carrierboard and cartonboard
produced by us, as well as paperboard supplied by outside producers, into
cartons. Our converting plants outside of the United States are designed to meet
the smaller volume orders of these markets.
The total current capacity of our converting plants is approximately 660,000
gross tons annually. We estimate that almost 90% of our carrierboard production
was converted into cartons at our converting plants in 2001.
PROPRIETARY PACKAGING MACHINERY AND CARTON DESIGNS
We design cartons and design, test and manufacture prototype packaging
machines at our product development center in Marietta, Georgia. At the
production development center, we integrate carton and packaging machinery
designs to create packaging solutions to meet customer needs. We manufacture and
also design packaging machines at our principal U.S. manufacturing facility in
Crosby, Minnesota and at a facility near Barcelona, Spain. By manufacturing
packaging machines in one U.S. and one European location, we expect to improve
customer service, simplify our work processes and reduce costs.
We employ a "pull through" marketing strategy in our beverage multiple
packaging business, the key elements of which are (i) the design and manufacture
of proprietary packaging machines capable of packaging plastic and glass
bottles, cans and other primary containers, (ii) the installation of the
machines at beverage customer locations under multi-year machinery use
arrangements and (iii) the development of proprietary beverage cartons with
high-resolution graphics for use on those machines. We lease substantially all
of our packaging machines to customers, typically under machinery use agreements
with original terms of three to six years. Packaging machinery placements during
2001 decreased approximately 24% when compared to 2000. We expect packaging
machinery placements for 2002 to be higher when compared to 2001 and be
comparable to 2000 as a result of a 16% increase in packaging machinery orders
57
in 2001 when compared to 2000. We have been and intend to continue to be
selective in future packaging machinery placements to ensure appropriate
returns.
Our packaging machines are designed to package polyethylene terephthalate,
or PET bottles and glass bottles, cans and other primary containers, using
beverage cartons designed by us, made from our CUK board and converted into
beverage cartons by us, our joint venture partners or our licensees. In order to
meet customer requirements, we have developed an extensive portfolio of
packaging machines consisting of 3 principal machinery lines, including over 8
different models of packaging machines. Our machines package cans and PET or
glass bottles in a number of formats including, baskets, clips, trays, wraps and
fully enclosed cartons. These machines have packaging ranges from 2 to 36 cans
per package and have the ability to package cans at speeds of up to 3,000 cans
per minute. We also manufacture ancillary equipment, such as machines for taping
cartons and placing coupons in cartons.
Our product development efforts have resulted in the introduction of a
number of new and successful packaging concepts over the last several years. We
have introduced innovative beverage packaging machines such as our
Twin-Stack-Registered Trademark- and Quickflex-TM- in 1993 and 1992,
respectively. The double-layer multiple packaging design of
Twin-Stack-Registered Trademark- cartons provides better portability and a more
visible billboard compared with conventional large-volume multipacks. Double
layer packaging allows for cans to be stacked vertically in a double layer in
the same paperboard carton.
Our other lines of packaging machines include the Quikflex-TM-, a high speed
machine for packaging either cans or bottles, and the
Marksman-Registered Trademark-, a machine designed to package bottles, cans,
juice boxes and dairy products in a variety of wrap configurations. Since 1997,
we have shipped approximately 70 machines, primarily
Marksman-Registered Trademark-, to customers in Japan. We also introduced the
Autoflex-TM- basket machine in 1993, which is designed to package polyethylene
terephthalate, or PET, bottles in a newly designed basket format.
Our newest packaging machines incorporate an advanced performance monitoring
system. This system provides continuous monitoring and reporting in real time
over the Internet of the performance of packaging machines installed at
customers' sites.
Beyond our packaging machine innovations, we are developing new versions of
cartons and substrate technology. For example, our Fridge Vendor-TM- carton is
intended to be used by beverage companies to increase consumption of take-home
volumes. This product currently is being test-marketed by a major customer. In
addition, we have developed several carton designs based on our new
Z-Flute-Registered Trademark- technology that are targeted towards both the
beverage and consumer products segments.
58
PRODUCTS
We market our products described in the table below under the following
brand names:
Competing
Market Paperboard
Product Brand Name Segment Use of Product Characteristics Substrate
------------------ ------------ --------------------- ---------------- -------------------
Aqua-Kote-Registered Trademark- Carrierboard Packaging - Specialized, Wet strength
applications for high quality recycled
beer, soft drinks and carrierboard
water - Superior
surface
performance
- Superior
strength
- Printability
for
high-resolution
graphics
Pearl-Kote-Registered Trademark- Cartonboard Packaging - Specialized, Coated recycled
applications for high quality
hardware, automotive, carrierboard
canned foods, - Superior
detergent, strength
electronics - Superior
surface
performance
- Printability
for
high-resolution
graphics
Omni-Kote-Registered Trademark- Cartonboard Packaging - Superior Solid bleached
applications for dry strength sulfate
and frozen foods, characteristics
toys, dairy, - Comparable
electronic surface
components, office performance
supplies - Low cost
Multiboard-TM- White lined Packaging - Superior Folding boxboard
chip board applications for strength
frozen foods, dry - Superior cost
foods, toiletries, characteristics
pet foods
Z-Flute-Registered Trademark- Carrierboard Consumer products - Superior Micro- and mini-
and packaging for juice strength fluted corrugated
cartonboard pouches, frozen characteristics products
foods, dry foods, - Printable
confectionery, toys, - Converting
software, appliances, efficiency
electronic components - Superior
appearance
59
MARKETING AND DISTRIBUTION
We market our CUK board and CUK board-based products principally to
multinational brewers, soft drink bottlers, food companies and other consumer
products companies that use printed packaging for retail display, multiple
packaging and shipment of their products. We also sell CUK board in the open
market to carrierboard and cartonboard converters.
In our beverage multiple packaging business, our major customers for
beverage cartons include Anheuser-Busch Companies, Inc., Miller Brewing Company,
numerous Coca-Cola and Pepsi bottling companies, Interbrew and Asahi Breweries.
We also sell beverage carrierboard in the open market to independent converters,
including licensees of our proprietary carton designs, for the manufacture of
beverage cartons. During 2001, we had two customers, Anheuser-Busch
Companies, Inc. and Miller Brewing Company, who represented approximately 13%
and 11%, respectively, of our net sales.
In our consumer products packaging business, we have historically sold all
of our cartonboard to numerous independent converters which convert the
cartonboard into cartons for consumer products. We have entered into agreements
with a number of major independent converters. Under the terms of these
agreements, the converters agree to purchase a significant portion of their CUK
board requirements from us and to assist us in customer development efforts
designed to grow the market for CUK board. The terms of these agreements include
certain limitations on our ability to raise the selling prices of our
cartonboard.
Distribution of carrierboard and cartonboard is primarily accomplished
through direct sales offices in the United States, Argentina, Australia, Brazil,
Denmark, Germany, Hong Kong, Italy, Japan, Mexico, Singapore, Spain, Sweden and
the United Kingdom.
JOINT VENTURES
We are a party to joint ventures with Rengo Company Limited and Danapak
Holding A/S, in which we own 50% and 60%, respectively, to market
machinery-based packaging systems in Japan and Scandinavia, respectively. The
joint ventures cover CUK board supply, use of proprietary carton designs and
marketing and distribution of packaging systems. Effective January 1, 2001, we
consolidated into our financial statements the accounts of Rengo Riverwood
Packaging, Ltd., our Japanese joint venture with Rengo Company Limited, since we
have the ability to exercise control over Rengo's operating and financial
policies.
COMPETITION
There are only two major producers in the United States of CUK board, us and
MeadWestvaco Corporation. We face significant competition in our CUK board
business segment from MeadWestvaco. Like us, MeadWestvaco produces and converts
CUK board, designs and places packaging machines with customers and sells CUK
board in the open market. We also face competition from other manufacturers of
packaging machines, such as R.A. Jones Co. Inc.
In the beverage packaging industry, beverage cartons made from CUK board
compete with plastics and corrugated packaging for packaging glass or plastic
bottles, cans and other primary containers. Although plastics and corrugated
packaging are priced lower than CUK board, we believe that beverage cartons made
from CUK board offer advantages over these materials, in areas such as
distribution, high quality graphics, carton designs, package performance,
environmental friendliness and design flexibility.
In the consumer products packaging market, our CUK board competes
principally with MeadWestvaco's CUK board, CCN and SBS board and,
internationally, white lined chip board and folding
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boxboard. Cartonboard grades compete based on price, strength and printability.
CUK board has generally been priced in a range that is higher than CCN and lower
than SBS board. CUK board has slightly better tear strength characteristics than
SBS board and significantly better printability, tear strength and cross-
direction stiffness than CCN. There are a large number of producers of
paperboard for the cartonboard markets, which are subject to significant
competitive and other business pressures.
Containerboard
In the United States, we manufacture containerboard--linerboard, corrugating
medium and kraft paper--for sale in the open market. Corrugating medium is
combined with linerboard to make corrugated containers. Kraft paper is used
primarily to make grocery bags and sacks. Our principal paper machines have the
capacity to produce both linerboard and CUK board. We have in the past used
these machines to produce linerboard. We have shifted significant mill capacity
away from linerboard production on our CUK board machines to more profitable
packaging applications and intend to stop producing linerboard. We continue to
operate paper machines dedicated to the production of corrugating medium and
kraft paper at our two dedicated containerboard machines at the West Monroe
mill.
In 2001, we had net sales in our containerboard business of $93.7 million,
representing approximately 7% of our net sales. In 2001, we shipped
approximately 38,000 tons of linerboard from the Macon mill and approximately
113,000 tons of corrugating medium, 36,000 tons of kraft bag paper and 52,000
tons of linerboard from our West Monroe mill. In 2001, we also shipped
approximately 16,000 tons of various other paperboard products.
Our primary customers for our U.S. containerboard production are independent
and integrated corrugated converters. We sell corrugating medium and linerboard
through direct sales offices and agents in the United States. Outside of the
United States, linerboard is primarily distributed through independent sales
representatives.
Our containerboard business segment operates within a highly fragmented
industry. Most products within this industry are viewed as commodities;
consequently, selling prices tend to be cyclical, being affected by economic
activity and industry capacity.
In addition to our U.S. containerboard operations, we owned 50% of Igaras
Papeis e Embalagens S.A., an integrated containerboard producer located in
Brazil. On July 1, 2000, Igaras spun off the multiple packaging portion of its
business into a newly formed company, of which we owned 50 percent. On
October 3, 2000, along with our joint venture partner, Cia Suzano de Papel e
Celulose, we completed the sale of the jointly-held subsidiary Igaras for
approximately $510 million, including the assumption of $112 million of debt. We
recognized a gain of $70.9 million in connection with the sale, and applied the
sale proceeds to pay down debt. On October 12, 2000, we purchased the remaining
50% of the newly formed company for $12.5 million.
Energy and Raw Materials
Pine pulpwood, hardwood and recycled fibers, including old corrugated
containers, used in the manufacture of paperboard, and various chemicals used in
the coating of CUK board, represent the largest components of our variable costs
of CUK board and containerboard production. The cost of these materials is
subject to market fluctuations caused by factors beyond our control. Old
corrugated container pricing tends to be very volatile. With the October 1996
sale of our timberlands in Louisiana and Arkansas, we now rely on private
landowners and the open market for all of our pine pulpwood, hardwood and
recycled fiber requirements, except for CUK board clippings from our converting
operations. Under the terms of the sale
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of those timberlands, we entered into a 20-year supply agreement with the buyer,
Plum Creek Timber Company, L.P., with a 10-year renewal option, for the purchase
by us, 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 our
needs for hardwood at the West Monroe mill. An assignee of Plum Creek supplies
residual chips to us pursuant to this supply agreement. We purchase the
remainder of the wood fiber used in CUK board production at the West Monroe mill
from other private landowners in this region. We believe that adequate supplies
of open market timber currently are available to meet our fiber needs at the
West Monroe mill.
The Macon mill purchases most of its fiber requirements on the open market,
and is a significant consumer of recycled fiber, primarily in the form of
clippings from our domestic converting plants as well as old corrugated
containers and other recycled fibers. We have not experienced any significant
difficulties obtaining sufficient old corrugated containers or other recycled
fibers for our Macon mill operations, which we purchase in part from brokers
located in the eastern United States. Old corrugated containers pricing,
however, tends to be very volatile since it is based largely on the demand for
this fiber from recycled paper and containerboard mills. The Macon mill
purchases substantially all of its pine pulpwood and hardwood requirements from
private landowners in central and southern Georgia. Because of the adequate
supply and large concentration of private landowners in this area, we believe
that adequate supplies of pine pulpwood and hardwood timber currently are
available to meet our fiber needs at the Macon mill.
Energy, including natural gas, fuel, oil and electricity, represents a
significant portion of our manufacturing costs. Until recently, our results had
not been significantly affected by the volatility of energy costs. We have
entered into fixed price contracts designed to mitigate the impact of future
energy cost increases through 2002, and will continue to evaluate our hedge
position. We believe that higher energy costs will continue to negatively impact
our results for 2002, but the negative impact is expected to be lower than in
2001. Since negotiated contracts and the market largely determine the pricing
for our products, we are limited in our ability to pass through to our customers
any energy or other cost increases that we may incur in the future.
We purchase a variety of other raw materials for the manufacture of our
paperboard, primarily process chemicals and coating chemicals such as kaolin and
titanium dioxide. All such raw materials are readily available, and we are not
dependent upon any one source of such raw materials.
Patents
As of March 1, 2002, we have a large patent portfolio, presently owning,
controlling or holding rights to approximately 2,100 U.S. and foreign patents,
with approximately 1,200 patent applications currently pending. Our patents fall
into two principal categories: packaging machinery and structural carton
designs.
Employees and Labor Relations
As of December 31, 2001, we had approximately 4,100 employees worldwide
(excluding employees of joint ventures), approximately 3,000 of whom were
members of unions and covered by collective bargaining agreements.
There are four unions representing our U.S. employees, one of which, the
Paper, Allied-Industrial, Chemical & Energy Workers International
Union--AFL-CIO, CLC, is associated with the West Monroe mill and converting
facility where it represents approximately 1,300 employees, and the Macon mill
where it represents approximately 300 of the 400 union employees.
The current union contract covering the Macon mill was negotiated and
ratified by the union in the second quarter of 1998 and runs through
December 31, 2003. Also at the Macon mill, the International
62
Association of Machinists and Aerospace Workers, and the International
Brotherhood of Electrical Workers represent certain maintenance employees.
The current union contract covering the West Monroe mill was negotiated and
ratified by the union in February 1997 and covers the six-year period from
March 1, 1997 to February 28, 2003. The contract covering employees at the
adjacent converting plants was negotiated and ratified by the union in 2000 and
covers the five-year period from September 1, 2000 through August 31, 2005.
Our other U.S. converting plants, other than our converting facility in
Perry, Georgia, are represented by unions. The Clinton, Mississippi converting
plant contract was negotiated and ratified by the union in January 1997 and
covers the six-year period from February 1, 1997 through January 31, 2003. The
Cincinnati, Ohio converting plant completed negotiations for a new five year
labor agreement effective from February 1, 2001 through January 31, 2006. The
Fort Atkinson, Wisconsin converting plant four year labor agreement was
negotiated in 1998 with the Graphic Communication Workers and the International
Association of Machinists for the period of September 9, 1998 through
September 9, 2002 and September 30, 1998 through September 30, 2002,
respectively.
Our international employees are represented by unions in Brazil, France,
Spain, Sweden and the United Kingdom.
Environmental Matters
We are committed to compliance with all applicable foreign, federal, state
and local environmental laws and regulations. Environmental law is, however,
dynamic rather than static. As a result, costs that are unforeseeable at this
time, may be incurred in the future when new laws are enacted, and when
environmental agencies adopt or revise rules and regulations.
In 1998, the U.S. Environmental Protection Agency adopted regulations,
generally referred to as cluster rules, which mandate more stringent controls on
air and water discharges from the United States pulp and paper mills. We
estimate the capital spending that may be required to comply with the cluster
rules could reach $55 million to be spent at our two U.S. paper mills over a
seven-year period that began in 2000. As of December 31, 2001, we have spent
approximately one-third of that amount for such compliance.
In late 1995, the Louisiana Department of Environmental Quality, or the DEQ,
notified our predecessor of potential liability for the remediation of hazardous
substances at a wood treatment site in Shreveport, Louisiana that our
predecessor or predecessors previously operated, and at a former oil refinery
site in Caddo Parish, Louisiana which is on land that we previously owned. In
response to these notices, we have provided additional information concerning
these sites and have commenced our own evaluation of any claims and remediation
liabilities for which we may be responsible. Subsequent to receipt in May 1996
of a special demand letter from DEQ to remediate the site in Shreveport, we
performed a soil and groundwater investigation at the site pursuant to an
agreement with DEQ. In August 2001, we entered into a cooperative agreement for
remedial action with DEQ and the landowners of the site, as well as a mutual
release and settlement agreement with the landowners. Under the cooperative
agreement, we will develop the remedial design and carry out the specified
remediation at the site. We have engaged a qualified contractor and expect
completion of the work by the end of 2002. In September 1996, we received a
special demand letter from DEQ to remediate the site in Caddo Parish. We
performed a waste inventory and treatability study at the site and subsequently
met with DEQ in October 1999. On July 6, 2000, we entered into a settlement
agreement with DEQ that describes in detail the remedial actions necessary for
us to obtain full release of all future liability at this site. We have
contracted with a vendor to perform the
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remedial actions as outlined in the settlement agreement and the work is
currently proceeding. We no longer own the site since transferring the property
to another entity on October 22, 2000. We anticipate the remedial actions
outlined in the settlement agreement will be completed during the second quarter
of 2002 and, at that time, expect to be relieved of any future liability.
We are also involved in environmental remediation projects for other
properties currently owned or operated by us, certain properties divested by us
for which responsibility was retained, and waste disposal sites where waste was
shipped by our predecessors or for which we might have corporate successor
liability. Certain of these projects are being addressed under federal and state
statutes, such as the Comprehensive Environmental Response, Compensation and
Liability Act and the state law counterparts. Our costs in some instances cannot
be reliably estimated until the remediation process is substantially underway or
liability at multiparty sites has been addressed. To address these contingent
environmental costs, we have accrued reserves when such costs are probable and
can be reasonably estimated. We believe that, based on current information and
regulatory requirements, these accruals 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 our
results of operations, cash flows or financial condition, although we cannot
assure you that material costs in excess of accrued amounts will not be incurred
in connection with clean-up activities at these or other properties, including
the Shreveport and Caddo Parish sites referred to above.
Properties
HEADQUARTERS
Our principal executive offices are located in Atlanta, Georgia, where
Riverwood International currently leases approximately 70,000 square feet of
office space.
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MANUFACTURING FACILITIES
A listing of the major plants and properties owned, or leased, and operated
by us is set forth below. Our buildings are adequate and suitable for our
business. We also lease certain facilities, warehouses and office space
throughout the United States and in foreign countries.
Floor Space in
Type of Facility and Location (1) Square Feet Principal Products Manufactured or Use of Facility
--------------------------------- -------------- --------------------------------------------------
Paperboard Mills:
West Monroe, LA.................... 1,535,000 CUK board; corrugating medium; kraft paper
Macon, GA.......................... 756,000 CUK board
Norrkoping, Sweden................. 417,000 White lined chip board
Converting Plants:
West Monroe, LA (2 plants)......... 621,000 Beverage cartons
Cincinnati, OH..................... 241,800 Beverage cartons
Clinton, MS........................ 210,000 Beverage cartons
Perry, GA (2)...................... 130,000 Beverage cartons
Ft. Atkinson, WI................... 120,000 Beverage cartons
Bristol, Avon, United Kingdom...... 428,000 Beverage cartons; cartonboard
Igualada, Barcelona, Spain......... 131,000 Beverage cartons; cartonboard
Beauvois en Cambresis, France...... 70,000 Cartonboard
Le Pont de Claix, France........... 120,000 Cartonboard
Jundiai, Sao Paulo, Brazil......... 95,216 Beverage cartons; cartonboard
Packaging Machinery/Other:
Crosby, MN......................... 188,000 Packaging machinery engineering design and
manufacturing
Marietta, GA....................... 64,000 Product development center--Research and
development; packaging machinery engineering
design and carton engineering design
Igualada, Barcelona, Spain......... 22,400 Packaging machinery engineering design and
manufacturing
Kennesaw, GA....................... 62,500 Development and small scale manufacturing facility
for Z-Flute-Registered Trademark- product
------------------------
(1) We lease the facilities in Marietta, Georgia; Kennesaw, Georgia; Clinton,
Mississippi (part only); Beauvois en Cambresis, France; Le Pont de Claix,
France; and Igualada, Barcelona, Spain (packaging machinery facility). We
own all other facilities listed.
(2) The facility located in Perry, Georgia is leased from the Middle Georgia
Regional Development Authority in consideration of the issuance of
industrial development bonds by such entity.
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Legal Proceedings
We are a party to a number of lawsuits arising out of the ordinary conduct
of our business. While there can be no assurance as to their ultimate outcome,
we do not believe that these lawsuits will have a material impact on our results
of operations, cash flows or financial condition.
We have been a plaintiff in actions against MeadWestvaco, successor by
merger to The Mead Corporation, and R.A. Jones Co. Inc. claiming infringement of
our patents for our packaging machines. The patents in suit were found infringed
but invalid by a jury in a trial against R.A. Jones in August 2001. This finding
of invalidity has been appealed to the Court of Appeals for the Federal Circuit.
The suit against MeadWestvaco was dismissed by mutual agreement pending the
outcome of the appeal of the decision in the case against R.A. Jones.
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MANAGEMENT
Directors and Executive Officers
The names, ages as of March 1, 2002 and positions of our directors and
executive officers are set forth below.
Name Age Position
---- -------- --------
Stephen M. Humphrey.................... 57 President, Chief Executive Officer and Director
Thomas M. Gannon....................... 52 Chief Operating Officer
Senior Vice President and Chief Financial
Daniel J. Blount....................... 46 Officer
Wayne E. Juby.......................... 54 Senior Vice President, Human Resources
Steven D. Saucier...................... 48 Senior Vice President, Paperboard Operations
B. Charles Ames........................ 76 Chairman and Director
Kevin J. Conway........................ 43 Director
Leon J. Hendrix, Jr.................... 60 Director
Hubbard C. Howe........................ 73 Director
Alberto Cribiore....................... 56 Director
Brian J. Richmand...................... 48 Director
Lawrence C. Tucker..................... 59 Director
Samuel M. Mencoff...................... 45 Director
G. Andrea Botta........................ 48 Director
Gianluigi Gabetti...................... 77 Director
Stephen M. Humphrey joined us in March 1997. From 1994 through 1996,
Mr. Humphrey was Chairman, President and Chief Executive Officer of National
Gypsum Company, a manufacturer and supplier of building products and services.
From 1981 until 1994, Mr. Humphrey was employed by Rockwell International
Corporation, a manufacturer of electronic industrial, automotive products,
telecommunications systems and defense electronics products and systems, where
he held a number of key executive positions.
Thomas M. Gannon assumed his position in July 2001. From September 1998
until July 2001, Mr. Gannon was Executive Vice President, Commercial Operations.
From July 1997 until September 1998, Mr. Gannon was Senior Vice President and
Chief Financial Officer. From August 1995 until July 1997, Mr. Gannon was
employed by Libby-Owens-Ford Co., a manufacturer of home, commercial and
automobile flat glass products, most recently as Corporate Vice President of
Finance and Administration and Chief Financial Officer.
Daniel J. Blount is Senior Vice President and Chief Financial Officer,
positions he assumed in September 1999. From September 1998 until
September 1999, Mr. Blount was Vice President and Chief Financial Officer. Prior
to joining us, Mr. Blount spent 13 years at Montgomery Kone, Inc., an elevator,
escalator and moving ramp product manufacturer, installer and service provider,
most recently as Senior Vice President, Finance.
Wayne E. Juby is Senior Vice President, Human Resources. Mr. Juby joined us
in November 2000. From November 2000 until April 2001, Mr. Juby was Director,
Corporate Training, of Riverwood International. From 1994 until 1996, Mr. Juby
was Vice President, Human Resources, of National Gypsum Company.
Steven D. Saucier is Senior Vice President, Paperboard Operations of
Riverwood International. Mr. Saucier joined us in November 1998. From July 1998
until October 1998, Mr. Saucier was Senior Vice
67
President, Manufacturing, of JPS Packaging, a manufacturer of flexible
packaging. From April 1996 until July 1998, Mr. Saucier was Senior Vice
President, Supply Chain, of Sealright Co., Inc., a manufacturer of rigid and
flexible packaging.
B. Charles Ames has, since 1987, been a principal of Clayton, Dubilier &
Rice, Inc., a New York-based private investment firm. Mr. Ames is a director of
CD&R Investment Associates II, Inc., a Cayman Islands exempted company that is
the managing general partner of CD&R Associates V Limited Partnership, a Cayman
Islands exempted limited partnership, the general partner of Clayton,
Dubilier & Rice Fund V Limited Partnership, a Cayman Islands exempted limited
partnership. Mr. Ames is also a limited partner of CD&R Associates V Limited
Partnership and serves as a director of Remington Arms Company, Inc., a
manufacturer of sporting goods products for the hunting, shooting sports and
fishing markets, and its parent RACI Holding, Inc. He is also a director of
Kinko's, The Progressive Corporation, Lexmark International, Inc. and Schulte
GmbH & Co., KG.
Kevin J. Conway has been a principal of Clayton, Dubilier & Rice, Inc., a
director of CD&R Investment Associates II, Inc. and a limited partner of CD&R
Associates V Limited Partnership since 1994. Prior to joining Clayton,
Dubilier & Rice, Inc. in 1994, Mr. Conway was employed by Goldman, Sachs & Co.
Mr. Conway is also a director of SIRVA (formerly Allied Worldwide), a moving
services and logistics company, and Covansys, an IT services company.
Leon J. Hendrix, Jr. is the Chairman and a director of Remington and RACI
Holding, Inc. He was a principal of Clayton, Dubilier & Rice, Inc. from 1993
until 2000. Mr. Hendrix serves as a director of Keithley Instruments, Inc., a
manufacturer of electronic test and measurement instruments and systems, NACCO
Industries Inc., a manufacturer of forklift trucks and small electric
appliances, a supplier of kitchenware, and the mining and marketing of fuel for
power generation by electric utilities, and Cambrex Corporation, an
international manufacturer of a broad line of specialty and fine chemicals.
Hubbard C. Howe was a principal of Clayton, Dubilier & Rice, Inc. from 1990
until his retirement in 1998. Mr. Howe has been a director of Remington and RACI
Holdings, Inc. since 1993, and was Chairman and Chief Executive Officer of
Remington and RACI Holdings, Inc. until December 1997. Mr. Howe served as Vice
Chairman from February 1994 until November 1997, and as Chairman from prior to
1993 until February 1994, of Nu-kote International, Inc., a printing supplies
manufacturer, and its parent Nu-kote Holding, Inc.
Alberto Cribiore is currently the Managing Principal of Brera Capital
Partners, LLC, a private equity investment firm in New York. Prior to forming
Brera Capital Partners, Mr. Cribiore was co-president and partner at Clayton,
Dubilier & Rice, Inc., which he joined in 1985 as one of three principal
shareholders. He had previously been a Senior Vice President at Warner
Communications, where he was responsible for mergers, acquisitions and
divestitures. He is currently on the boards of directors of Classic Cable, Inc.
and GAB Robins, as well as several privately held companies and philanthropic
organizations.
Brian J. Richmand has served as a Special Partner of J.P. Morgan Partners
LLC (formerly Chase Capital Partners), since January 1, 2000, and as a General
Partner of J.P. Morgan Partners LLC from August 1, 1993 to December 31, 1999.
Prior to joining J.P. Morgan Partners LLC, Mr. Richmand was a partner at the law
firm of Kirkland & Ellis. Mr. Richmand is also currently a director of Reiman
Publishing, LLC, Transtar Metals, LLC, EMP Group, L.L.C. and American Media,
Inc. J.P. Morgan Partners LLC is an affiliate of J.P. Morgan Partners (BHCA),
L.P.
Lawrence C. Tucker has been a General Partner of Brown Brothers Harriman &
Co., a private banking firm, since 1979. He also serves as an advisory director
of WorldCom, Inc., an international provider of long distance voice, data and
video services, WorldCom Ventures, Inc., a venture capital fund,
68
National Healthcare Corp., an owner, operator and manager of long-term care
facilities, retirement apartments and assisted living units, VAALCO
Energy Inc., an international oil and gas exploration company, US
Unwired, Inc., a digital wireless telephone carrier, Z-tel Technologies, Inc., a
provider of voice and enhanced communications services to residential customers
and other carriers, Digex, Inc., a provider of web hosting and related services
and Xspedius, Inc., a competitive local exchange company. Brown Brothers
Harriman & Co. is the general partner of The 1818 Fund, L.P., The 1818 Fund II,
L.P., The 1818 Fund III, L.P., The 1818 Mezzanine Fund, L.P., and The 1818
Mezzanine Fund II, L.P.
Samuel M. Mencoff has been employed principally as a Managing Director of
Madison Dearborn Partners, LLC, a private equity investment firm, which he
co-founded in January, 1993. From 1987 until 1993, Mr. Mencoff served as Vice
President of First Chicago Venture Capital, a private equity investment firm.
Mr. Mencoff is a director of Buckeye Technologies Inc., a manufacturer of
specialty cellulose pulps and non-woven fiber products, Bay State Paper Holding
Company, a producer of recycled containerboard and related products and
Packaging Corporation of America, an integrated producer of containerboard and
corrugated packaging products.
G. Andrea Botta has been a managing director of Morgan Stanley since
September 1999. Previously, he was President of EXOR America, Inc. (formerly
IFINT-USA Inc.) from 1993 until June 1999. Mr. Botta is also a director of Key 3
Media.
Gianluigi Gabetti has been Vice Chairman of IFI S.p.A.--Istituto Finanziario
Industriale (the holding company of the Agnelli family) since 1993. Mr. Gabetti
is also a director of IFIL--Finanziaria di Partecipazioni, a holding company of
the Agnelli Group. Mr. Gabetti had been a director of FIAT S.p.A. from 1971 to
1999 where, upon mandatory retirement, he was appointed Director Emeritus.
Mr. Gabetti is also Vice Chairman of EXOR Group S.A., an international
investment holding company of the Agnelli Group; Chairman of FIAT U.S.A., the
U.S. arm of the Italian industrial group; and a director of Club Mediterranee
S.A., an international leisure and travel organization.
Board of Directors
Prior to the closing of this offering, our board of directors will be
divided into three classes serving staggered three-year terms. At that time, we
shall designate classes for the directors. We intend to appoint two additional
independent directors prior to the closing of this offering.
Upon the closing of this offering, our existing stockholders agreement will
terminate. We anticipate that we, Clayton, Dubilier & Rice Fund V Limited
Partnership and EXOR Group S.A. will enter into a new stockholders agreement. We
expect that this new stockholders agreement will entitle Clayton, Dubilier &
Rice Fund V Limited Partnership and EXOR Group S.A. to designate a specified
number of directors, which will be at least a majority of our board of directors
following the closing of this offering. We expect that the designation rights
will be subject to reductions based on specified reductions in share ownership
percentages.
Clayton, Dubilier & Rice, Inc. has an agreement with Brera Capital Partners,
LLC, a private equity firm of which Mr. Cribiore is Managing Principal, that for
so long as Clayton Dubilier & Rice Fund V Limited Partnership, or any other
investment fund managed by Clayton, Dubilier & Rice, Inc., is able to elect or
entitled to designate two or more members of our board of directors, Clayton,
Dubilier & Rice, Inc. will arrange for the applicable fund to elect or designate
Mr. Cribiore as a member of our board of directors, and Brera Capital Partners,
LLC has agreed that it will make Mr. Cribiore available to serve as a member of
our board of directors.
69
Committees of the Board
Our board of directors has established an audit committee, a compensation
and benefits committee, and an executive committee. Our board of directors may
from time to time establish other committees to facilitate the management of
Riverwood Holding.
AUDIT COMMITTEE
Upon the closing of this offering, the audit committee will consist of
Messrs. , and . The audit committee
reports on its activities to the board of directors and is responsible for,
among others,
- overseeing and ensuring compliance with our accounting and financial
reporting principles and policies and out internal controls and
procedures;
- monitoring the integrity of our financial statements;
- selecting, evaluating and, when deemed appropriate, replacing our
independent auditors (or nominating independent auditors to be proposed
for stockholder approval in any proxy statement); and
- evaluating the independence of our independent auditors.
COMPENSATION AND BENEFITS COMMITTEE
Upon the closing of this offering, the compensation and benefits committee
will consist of Messrs. , and . The
compensation and benefits committee will oversee the compensation and benefits
of our management and employees.
The compensation and benefits committee will establish a subcommittee
composed solely of directors who are not affiliated with us or our management.
This subcommittee will be responsible for:
- reviewing and making recommendations as to the compensation of our chief
executive officer, our four other most highly compensated executive
officers and any other individuals whose compensation the compensation and
benefits committee anticipates may become subject to Section 162(m) of the
Internal Revenue Code;
- approving any awards of stock or options to those of our directors who are
employees of Riverwood Holding and to other individuals who are "officers"
of Riverwood Holding for purposes of Section 16 of the Exchange Act; and
- administering certain elements of our annual performance incentive plan
(described below).
In the remainder of this prospectus, when we refer to the board of directors
or the compensation and benefits committee, we are referring to our board of
directors or to the subcommittee of the compensation and benefits committee
where Section 162(m) of the Internal Revenue Code or Section 16 of the Exchange
Act would require that action be taken by the full board of directors or the
subcommittee rather than the compensation and benefits committee.
EXECUTIVE COMMITTEE
Upon the closing of this offering, the executive committee will consist of
Messrs. , and . The primary functions of
the executive committee are to exercise all
70
powers and authority of the board of directors in the management of the
property, affairs and business of Riverwood Holding during the intervals between
the meetings of the board of directors.
Compensation of Directors
Our directors who are not officers or employees of Riverwood Holding and who
are not employed by or affiliated with Clayton, Dubilier & Rice, Inc. will
receive an annual retainer fee of $30,000, payable in quarterly installments,
plus $2,500 per board meeting attended. Currently, two of our directors are
employees of Clayton, Dubilier & Rice, Inc., to which we pay a fee for
management and financial consulting services. See "Certain Relationships and
Related Party Transactions." Directors who are officers or employees of
Riverwood Holding will not receive any additional compensation for serving as a
director. We will reimburse all directors for reasonable and necessary expenses
they incur in performing their duties as directors.
Clayton, Dubilier & Rice, Inc. has agreed that, for so long as Mr. Cribiore
serves as a Clayton, Dubilier & Rice, Inc.-designated member of our board of
directors, Clayton, Dubilier & Rice, Inc. will pay Brera Capital Partners, LLC,
a private equity firm of which Mr. Cribiore is Managing Principal, the amount of
the directors fees we generally pay to our unaffiliated directors, less the
amount of any fees that we pay to Brera Capital Partners LLC or Mr. Cribiore for
serving on our board of directors. Clayton, Dubilier & Rice, Inc. has also
agreed to reimburse Brera Capital Partners, LLC for any expenses that Brera
Capital Partners, LLC incurs in connection with providing Mr. Cribiore to serve
on our board of directors, to the extent we do not reimburse Brera Capital
Partners, LLC or Mr. Cribiore.
Management Compensation Summary
The following table summarizes the compensation we paid for services
rendered during the fiscal years indicated below to the chief executive officer
and the four most highly compensated executive officers, or the named executive
officers. Share information is presented before giving effect to the stock split
to be completed prior to the closing of this offering.
Annual Compensation Long-Term Compensation Award
----------------------------------------------------- -----------------------------------
Securities
Other Annual Underlying Stock All other
Name Year Salary $ Bonus $ Compensation ($) (1) Options Compensation (9)
---- -------- -------- -------- -------------------- ---------------- ----------------
Stephen M. Humphrey ..... 2001 $807,667 $ -- $282,535 (2) -- --
President and Chief 2000 766,000 350,000 284,040 (3) -- --
Executive Officer 1999 558,833 511,612 119,295 (4) 75,000 --
Thomas M. Gannon ........ 2001 $380,250 $ -- $ 6,471 -- 5,100
Chief Operating Officer 2000 343,167 200,000 6,305 -- 5,100
1999 318,167 353,782 -- 24,000 8,789
Daniel J. Blount ........ 2001 $262,583 $ -- -- -- --
Sr. Vice President and 2000 239,000 130,000 -- -- --
Chief 1999 210,000 192,255 $ -- 15,000 --
Financial Officer
Steven D. Saucier ....... 2001 $270,917 $ -- $ 67,841 (5) -- $5,100
Sr. Vice President, 2000 246,083 200,000 20,043 (6) -- 5,100
Paperboard Operations 1999 225,000 205,988 113,406 (7) 25,667 8,789
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Annual Compensation Long-Term Compensation Award
----------------------------------------------------- -----------------------------------
Securities
Other Annual Underlying Stock All other
Name Year Salary $ Bonus $ Compensation ($) (1) Options Compensation (9)
---- -------- -------- -------- -------------------- ---------------- ----------------
Wayne E. Juby ........... 2001 $188,542 $ -- $ 33,046 (8) -- 5,100
Sr. Vice President, 2000 -- -- -- -- --
Human Resources 1999 -- -- -- -- --
------------------------
(1) Except as otherwise noted, amounts consist of certain taxable perquisites,
the value of none of which exceeded 25% of the total value of the
perquisites provided.
(2) Includes $9,685 of perquisites. Also includes $272,850, which is the amount
of interest that would have been paid on a $5,000,000 non-interest bearing
loan made by Riverwood Holding to the named executive officer had such loan
borne interest at 5.49% per annum through December 18, 2001 and 3.93% per
annum from December 19, 2001, the applicable federal rates at the time such
loan was made and extended respectively.
(3) Includes $9,540 of perquisites. Also includes $274,500, which is the amount
of interest that would have been paid by the named executive officer on a
$5,000,000 non-interest bearing loan made by Riverwood Holding to the named
executive officer had such loan borne interest at 5.49% per annum, the
applicable federal rate at the time such loan was made.
(4) Includes $86,957 of perquisites of which $76,898 consisted of tax
reimbursements paid in respect of certain taxable perquisites. Also includes
$32,338, which is the amount of interest that would have been paid by the
named executive officer on a $5,000,000 non-interest bearing loan made by
Riverwood Holding to the named executive officer had such loan borne
interest at 5.49% per annum, the applicable federal rate at the time such
loan was made.
(5) Includes $7,841 of perquisites. Also, includes $60,000 of income
attributable to the purchase of shares below the estimated fair market value
of the common stock.
(6) Includes $5,043 of perquisites of which $100 consisted of tax reimbursements
paid in respect of certain taxable perquisites. Also includes $15,000 of
income attributable to the purchase of shares below the estimated fair
market value of the common stock.
(7) Includes $78,632 of tax reimbursements paid in respect of taxable
perquisites.
(8) Includes $13,555 of tax reimbursements paid in respect of taxable
perquisites.
(9) Amounts consist of our contributions on behalf of the named executive
officers to our savings plan.
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Aggregated Option Exercises and Fiscal Year-End Option Value Table
The following table sets forth information for each named executive officer
with regard to stock option exercises during 2001 and the aggregate value of
options held at December 31, 2001. Share number and price per share information
is presented before giving effect to the stock split to be completed prior to
the closing of this offering.
Number of Securities
Underlying
Unexercised Value of Unexercised
Options/SARs at in-the-Money Options/SARS
Fiscal Year-End at Fiscal Year-End ($)
-------------------- -------------------------
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable (1)
---- --------------- ------------------ -------------------- -------------------------
Stephen M. Humphrey.. -- -- 206,875/93,125 $8,458,325/$3,166,675
Thomas M. Gannon..... -- -- 20,493/26,007 $409,860/$520,140
David J. Blount...... -- -- 5,123/9,877 $102,460/$197,540
Steven D. Saucier.... -- -- 8,841/16,826 $176,820/$336,520
Wayne E. Juby........ -- -- 0/0 $--/$--
------------------------
(1) The dollar amounts set forth under this heading are calculated based on a
price per share of the common stock of $120, the estimated fair market value
of the common stock as of December 31, 2001 as determined considering a wide
variety of factors including a valuation report from an independent outside
firm and approved by the executive committee of the board of directors,
minus the exercise price for such options.
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Pension Plan
All U.S. salaried employees who satisfy the service eligibility criteria are
participants in the Riverwood International Employees Retirement Plan, or the
retirement plan. Pension benefits under the retirement plan are limited in
accordance with the provisions of the Internal Revenue Code of 1986, as amended,
governing tax qualified pension plans. We have adopted a supplemental pension
plan, together with the retirement plan, the pension plans, that provides for
payment to participants of the retirement benefits equal to the excess of the
benefits that would have been earned by each such participant had the
limitations of the Internal Revenue Code not applied to the retirement plan and
the amount actually earned by such participant under the retirement plan. Each
of the named executive officers is eligible to participate in the pension plans.
Benefits under the supplemental pension plan are not pre-funded; such benefits
are paid by us or through the Riverwood International Employees Retirement Plan
through a Qualified Supplemental Employees Retirement Plan. The pension plan
table below sets forth the estimated annual benefits payable upon retirement,
including amounts attributable to the supplemental pension plan, for specified
remuneration levels and years of service.
Pension Plan Table
YEARS OF SERVICE
----------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ -------- -------- -------- -------- --------
$125,000................................ $24,249 $32,332 $40,416 $48,499 $56,582
150,000................................ 29,499 39,332 49,166 58,999 68,832
175,000................................ 34,749 46,332 57,915 69,499 81,082
200,000................................ 39,999 53,332 66,666 79,999 93,332
225,000................................ 45,249 60,332 75,416 90,499 105,582
250,000................................ 50,499 67,332 84,165 100,999 117,832
300,000................................ 60,999 81,332 101,666 121,999 142,332
400,000................................ 81,999 109,332 136,665 163,999 191,332
450,000................................ 92,499 123,332 154,166 184,999 215,832
500,000................................ 102,999 137,332 171,666 205,999 240,332
600,000................................ 123,999 165,332 206,666 247,999 289,332
700,000................................ 144,999 193,332 241,665 289,999 338,332
800,000................................ 165,999 221,332 276,666 331,999 387,332
900,000................................ 186,999 249,332 311,666 373,999 436,332
1,000,000............................... 207,999 277,332 346,666 415,999 485,332
------------------------
(A) Had the named executive officers in the summary compensation table retired
as of December 31, 2001, their respective five-year average salaries, plus
bonuses, for purposes of the table set forth above, would have been as
follows: Mr. Blount, $342,337; Mr. Gannon, $495,354; Mr. Humphrey, $959,708;
Mr. Juby, $144,271 and Mr. Saucier, $343,247.
(B) On December 31, 2001, the named executive officers in the summary
compensation table had the following years of credited service under the
retirement plan: Mr. Blount, 4; Mr. Gannon, 4; Mr. Humphrey, 5; Mr. Juby, 1,
and Mr. Saucier, 3.
(C) Salary as defined in the retirement plan includes payment under the annual
incentive compensation plan but excludes payments under any of our equity
incentive plans or that of our predecessor
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company. Estimated benefits have been calculated on the basis of a
straight-life annuity form of payment and will be offset by social security
payments received by the participant.
Employment Agreements
We are a party to an employment agreement with Mr. Humphrey that was
originally entered into on March 27, 1997, and was amended and restated
effective as of January 1, 2002. Riverwood International is also a party to the
agreement, and is the "employer" under the agreement. Unless earlier terminated
by Riverwood International or Mr. Humphrey, the agreement will expire on
March 31, 2007. Under the agreement, Mr. Humphrey will serve until March 31,
2005 as our president and chief executive officer and shall serve as a member of
our board. During the period April 1, 2005 to March 31, 2007, Mr. Humphrey will
serve as the chairman of our board and shall cease to be our president and chief
executive officer.
During the employment period, Mr. Humphrey is entitled to annual base salary
of $812,000 for the period January 1, 2002--March 31, 2002, $900,000 for the
period April 1, 2002--March 31, 2003, $950,000 for the period April 1,
2003--March 31, 2004 and $1,000,000 for the period April 1, 2004--March 31,
2005. Also during these periods Mr. Humphrey will be eligible for an annual
bonus and other benefits. Commencing April 1, 2005, Mr. Humphrey will receive
$750,000 as compensation for his service as chairman of our board of directors.
Mr. Humphrey will generally be entitled to receive a special supplemental
retirement benefit equal to the difference between (1) his combined benefits
under our retirement pension plan and supplemental pension plan and (2) the
benefits that Mr. Humphrey would have received under such plans if he had
10 years of service with Riverwood International.
Pursuant to the agreement, on January 1, 2002, Mr. Humphrey was granted
150,000 service options and 300,000 performance options under the 2002 Stock
Incentive Plan (before giving effect to the stock split to be completed prior to
the closing of this offering). See "--2002 Stock Incentive Plan." The agreement
also provides that, if Mr. Humphrey remains employed through the term of the
agreement or if Mr. Humphrey remains employed through the date of a change in
control of Riverwood Holding or Riverwood International or if Mr. Humphrey's
employment is terminated other than for cause or for good reason (in each case
as defined in his employment agreement) within six months of a change in control
and after the sale by Clayton, Dubilier & Rice Fund V Limited Partnership and
its affiliate of all of the common stock to a non-affiliate, Mr. Humphrey will
be entitled to a special payment equal to the shortfall, if any, between
(1) the aggregate net realized or realizable value of the stock options granted
to Mr. Humphrey and (2) $10,000,000. However, Mr. Humphrey will be entitled to
such payment only if there is no credit agreement shortfall (as defined in the
employment agreement). A credit agreement shortfall will occur if Riverwood
International fails to satisfy the minimum financial covenants contained in the
senior secured credit agreement.
In the event that Mr. Humphrey's employment is terminated without cause or
by Mr. Humphrey for good reason, Mr. Humphrey is entitled to (1) severance in
the form of salary continuation and continued medical, dental, life insurance
and similar benefits for a period of three years or, if shorter, the remainder
of the employment term, (2) a pro-rata portion of any incentive bonus to which
he may be entitled in the year of his employment termination and
(3) reimbursement for the cost of outplacement and career counseling services in
an amount not to exceed $25,000. Any severance amounts payable to Mr. Humphrey
under the agreement will be reduced by any payments made to Mr. Humphrey under
the severance plans and programs of Riverwood Holding, Riverwood International
or its affiliates. The agreement also contains certain non-competition and
non-solicitation provisions.
We are also parties to employment agreements with each of Messrs. Gannon,
Blount, Saucier and Juby. The agreements with Messrs. Gannon, Blount, Saucier
and Juby, entered into as of July 14, 1997,
75
September 1, 1998, November 1, 1998 and May 1, 2001, respectively, have an
initial three year term that automatically extends for additional one-year
periods following the expiration of the initial term. The agreements provide for
minimum base salaries of at least $265,000, $200,000, $225,000 and $225,000, for
each of Messrs. Gannon, Blount, Saucier and Juby, respectively, and for bonuses
and other benefits set forth in the Summary Compensation Table. In the event of
termination of employment by us without cause or by the executive for good
reason (in each case as defined in the respective employment agreement), the
agreements provide for severance of a pro-rata incentive bonus for the year in
which termination of employment occurs, and base salary and continued welfare
benefits for the longer of the reminder of the employment term, one year or one
month for each year of service. The agreements also contain certain
non-competition and non-solicitation provisions.
Certain Change in Control Arrangements
Under our 1996 stock incentive plan, 1999 LTIP and 2002 stock incentive
plan, in the event of a change in control (as defined in the plans), we may be
obligated to make certain payments to the named executive officers and options
and incentive stock units held by those individuals may vest. A payment equal to
the option spread value will be made with respect to each vested stock option. A
payment equal to the change of control price will be made with respect to each
share of common stock underlying a vested restricted stock unit.
Our board has approved the establishment of a nonqualified supplemental
executive retirement plan, or SERP, for the benefit of approximately fifteen key
executives of Riverwood Holding. The SERP will provide these executives with an
enhanced retirement benefit in the event of a change in control (as defined in
the SERP) of Riverwood Holding. The enhanced benefit will be determined by using
the retirement formula contained in the Riverwood International Employees
Retirement Plan and will be calculated by assuming that each executive has
attained age 55 and has 10 years of service to his credit with Riverwood Holding
or Riverwood International. The benefit accrued by each executive under the SERP
will be offset by the benefit payable to such executive under the Riverwood
International Employees Retirement Plan. Benefits under the SERP will be funded
through a rabbi trust upon a change in control.
Compensation Committee Interlocks
During the fiscal year 2001, Messrs. Hendrix, Ames, Botta and Cribiore
served on the compensation and benefits committee of our board. Mr. Ames is a
principal of Clayton, Dubilier & Rice, Inc. Mr. Hendrix, one of the two Clayton,
Dubilier & Rice Fund V Limited Partnership-nominated directors, was a principal
of Clayton, Dubilier & Rice, Inc. until 2000. Clayton, Dubilier & Rice, Inc.
received an annual fee of $470,000 for advisory, management, consulting and
monitoring services from us. We have also agreed to indemnify the members of the
boards employed by Clayton, Dubilier & Rice, Inc. and Clayton, Dubilier &
Rice, Inc. against liabilities incurred under securities laws with respect to
their services for us.
Messrs. Hendrix and Cribiore are currently the Clayton, Dubilier & Rice Fund
V Limited Partnership-nominated directors on the compensation and benefits
committees.
Annual Performance Incentive Plan
Prior to the completion of this offering, we expect that our board of
directors will adopt and our shareholders will approve an annual performance
incentive plan that will provide for the award to our officers of incentive
bonuses. Each year the compensation and benefits committee will establish target
incentive bonuses for participants in the annual performance incentive plan and
will select the performance criteria for that year for a participant or group of
participants.
76
The actual bonus payable to a participant, which may equal, exceed or be
less than the target bonus, will be determined based on whether the applicable
performance targets are met, exceeded or not met, and may be decreased or
increased based on individual performance and contributions, or such other
factors as the compensation and benefits committee may deem appropriate.
The compensation and benefits committee will have the right, in its
discretion, to pay to any participant an annual bonus based on individual
performance or any other criteria that the committee deems appropriate and the
compensation and benefits committee may provide for a minimum bonus amount in
any calendar year, regardless of whether performance objectives are attained.
Bonuses will generally be payable as soon as practicable after the
compensation and benefits committee certifies that the applicable performance
criteria have been obtained, or, in the case of bonuses that are not tied to
such performance criteria, at such time as the compensation and benefits
committee determines, and will generally be payable only if the participant
remains employed with Riverwood Holding and its affiliates. If a participant in
the plan dies or becomes disabled prior to the payment of the bonus with respect
to the year in which he or she dies or becomes disabled, the compensation and
benefits committee may award to the participant (or his or her estate or legal
representative) all or such pro rata portion of the bonus that would otherwise
have been payable as it determines appropriate.
The compensation and benefits committee may require that a portion of a
participant's annual incentive bonus will be payable in shares or options
awarded under our 2002 stock plan.
The annual performance incentive plan will be administered by our board of
directors or the compensation and benefits committee, which may delegate its
authority except to the extent that it relates to the compensation of our chief
executive officer, our four other most highly compensated executive officers or
any other individual whose compensation the board of directors or the
compensation and benefits committee believes may become subject to
Section 162(m) of the Code. The determination of the compensation and benefits
committee on all matters relating to the annual performance incentive plan will
be final and binding.
The annual performance incentive plan will generally be effective for 2002
and each of calendar years 2003, 2004 and 2005. Our board of directors or the
compensation and benefits committee may at any time amend, suspend, discontinue
or terminate the annual performance incentive plan.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief description of the material U.S. federal income tax
consequences generally arising with respect to the annual performance incentive
plan.
A participant in the annual performance incentive plan will generally
recognize ordinary income equal to the cash bonus he or she receives in the year
it is paid or made available, and we will generally be entitled to a deduction
of the same amount in the year to which the bonus relates. If a portion of a
participant's annual bonus is paid in shares or options under the 2002 stock
plan, the federal income tax consequences to us and the participant will
generally be as described below under the description of the 2002 stock plan.
Section 162(m) of the Internal Revenue Code generally limits the ability of
a public corporation to deduct compensation greater than $1,000,000 paid with
respect to a particular year to an individual who is, on the last day of that
year, the corporation's chief executive officer or one of its four other most
highly compensated executive officers, other than compensation that is
"performance related" within the meaning of Section 162(m). Under a special rule
that applies to corporations that become public through an initial public
offering, this limitation generally will not apply to compensation that is paid
pursuant to the annual performance incentive plan before the first meeting of
our stockholders in 2006 at which directors will be elected.
77
2002 Stock Plan
Prior to the completion of the offering, we expect that our board of
directors will adopt and our shareholders will approve a 2002 stock plan that
will provide for the award to our officers and other employees of shares of
common stock and options to purchase common stock.
The 2002 stock plan will be administered by the compensation and benefits
committee. Initially, shares of stock will be available for award under
the 2002 stock plan.
Options granted under the 2002 stock plan to purchase shares of common stock
may be either "qualified," which includes those awards that satisfy the
requirements of Section 422 of the Internal Revenue Code for incentive stock
options, or "nonqualified," which includes those awards that are not intended to
satisfy the requirements of Section 422 of the Internal Revenue Code. The
exercise price of the stock options will, unless the compensation and benefits
committee determines otherwise, not be less than the fair market value of the
common stock at the time of grant. The stock options will generally have a term
of ten years, unless the compensation and benefits committee specifies a shorter
term. The compensation and benefits committee will have the power to determine
the vesting schedule for options granted under the 2002 stock plan. The exercise
price of a stock option is payable in cash or its equivalent or, as permitted by
the compensation and benefits committee, by exchanging shares of common stock
owned by the option holder, or by a combination of the foregoing.
The compensation and benefits committee may also award shares of common
stock that will vest and/or become delivered to the participant on such terms
and conditions as the compensation and benefits committee shall determine.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief description of the material U.S. federal income tax
consequences generally arising with respect to awards under the 2002 stock plan.
The grant of a stock option will give rise to no tax consequences for the
option holder or us. Upon exercising a stock option, other than an incentive
stock option, the option holder will generally recognize ordinary income equal
to the difference between the exercise price and the fair market value of the
shares acquired on the date of exercise, and we generally will be entitled to a
tax deduction in the same amount. A stock option holder generally will not
recognize taxable income upon exercising an incentive stock option and we will
not be entitled to any tax deduction with respect to an incentive stock option
if the option holder holds the shares for the applicable periods specified in
the Internal Revenue Code.
With respect to other awards, upon the payment of cash or the issuance of
shares or other property that is either not restricted as to transferability or
not subject to a substantial risk of forfeiture, the participant will generally
recognize ordinary income equal to the cash or the fair market value of shares
or other property delivered. Riverwood Holding will be entitled to a deduction
in an amount equal to the ordinary income recognized by the participant.
1996 Stock Incentive Plan
ESTABLISHMENT OF 1996 STOCK INCENTIVE PLAN
Effective April 8, 1996, we established the Riverwood Holding, Inc. Stock
Incentive Plan, or 1996 stock incentive plan. The 1996 stock incentive plan
provides for the granting of nonqualified stock options and rights to purchase
common stock subject to the terms and conditions thereunder. Prior to the
78
completion of this offering, the 1996 stock incentive plan will be amended to
preclude the future grant of awards.
ELIGIBILITY
Executive officers and other key management employees of Riverwood Holding
selected by the board have been granted awards under the 1996 stock incentive
plan. The number of participants in the 1996 stock incentive plan has varied
from year to year.
SHARES SUBJECT TO THE STOCK INCENTIVE PLAN
The maximum number of shares common stock authorized to be issued under the
1996 stock incentive plan is 698,000 (before giving effect to our anticipated
stock split). As of March 31, 2002, 424,890 shares of common stock (before
giving effect to our anticipated stock split) were subject to awards under the
1996 stock incentive plan. The shares that may be issued and delivered under the
1996 stock incentive plan may be treasury shares or authorized but unissued
shares of Riverwood Holding. If there is a change in the number or kind of
outstanding shares of common stock by reason of any recapitalization,
reorganization, merger, consolidation, exchange of shares or any similar change
affecting the common stock, the board will make appropriate adjustments to the
type and number of shares covered by awards then outstanding under the 1996
stock incentive plan. Adjustments will also be made to the exercise price or
purchase price in respect of such awards.
ADMINISTRATION
The 1996 stock incentive plan has been administered by the compensation and
benefits committee, which has the authority to grant awards, determine the terms
and conditions of awards, interpret the 1996 stock incentive plan and to make
all determinations necessary and advisable for purposes of administering the
1996 stock incentive plan. The determination of the compensation and benefits
committee on all matters relating to the 1996 stock incentive plan is final. The
foregoing authority has been delegated to the compensation and benefits
committee by the board pursuant to the terms of the 1996 stock incentive plan.
STOCK OPTIONS
All outstanding 1996 stock options granted under the 1996 stock incentive
plan are nonqualified options to purchase common stock. Stock options granted
under the 1996 stock incentive plan are either service options or performance
options. Some option holders have been granted only service options, while
others have been granted both performance options and service options.
Service options become vested in five equal installments on each of the
first five anniversaries of the grant date. Service options also become fully
vested (1) in the event of a change in control of Riverwood Holding (see below)
or (2) if the option holders' employment is terminated other than for cause (as
defined in the 1996 stock incentive plan) or for good reason (as defined in the
applicable award agreement) after the sale of all of the common stock held by
Clayton, Dubilier & Rice Fund V Limited Partnership and its affiliates to a
non-affiliate.
Performance options become vested upon the achievement by Riverwood Holding
of EBITDA targets determined by the board and provided that the option holder is
employed by Riverwood Holding or its subsidiaries on the date that the EBITDA
target is achieved. Additionally, performance options become fully vested
(1) upon a change in control of Riverwood Holding or (2) nine years and six
months after the grant date regardless of whether Riverwood Holding achieves the
applicable EBITDA targets, but only if the option holder is employed by
Riverwood Holding or its subsidiaries on such date.
79
The stock options generally have a term of 10 years. If an option holder
terminates employment with Riverwood Holding and its subsidiaries on account of
death, permanent disability (as defined in the 1996 stock incentive plan) or
retirement (as defined in the 1996 stock incentive plan), all service options
and a proportionate share of the performance options will become vested. This
"proportionate share" of performance options is determined by multiplying
(1) the percentage obtained by dividing (x) the cumulative EBITDA achieved by
Riverwood Holding as of the last day of the calendar quarter coinciding with or
immediately preceding the option holder's termination of employment by (y) the
EBITDA target specified by the board for the year of employment termination AND
(2) the total number of shares of common stock subject to the performance
options. Performance options that do not become vested will terminate and be
cancelled immediately upon the option holder's termination of employment. All
vested stock options will remain exercisable until the earlier of the (1) first
anniversary of such termination of employment and (2) the date the option would
otherwise expire. If option holder's employment terminates for cause all stock
options, whether or not vested, will terminate immediately. If an option
holder's employment terminates for any other reason, his vested stock options
will remain exercisable until the 60th day after the earlier of (1) period
during which the Riverwood Holding and Clayton, Dubilier & Rice Fund V Limited
Partnership may exercise successive rights to repurchase the vested stock
options and (2) the date the option would otherwise expire.
Prior to the consummation of an underwritten public offering of the shares
of common stock, Riverwood Holding and Clayton, Dubilier & Rice Fund V Limited
Partnership will have successive rights to repurchase vested stock options
following an option holder's termination of employment for any reason other than
for cause. The repurchase price will generally equal the excess of the fair
market value of the common stock underlying the vested stock option over the
aggregate exercise price of such vested stock option. Riverwood Holding and
Clayton, Dubilier & Rice Fund V Limited Partnership will have similar repurchase
rights with respect to shares of common stock received by an option holder in
connection with the exercise of a stock option granted under the 1996 stock
incentive plan, hereafter referred to as option shares. The repurchase price per
option share will generally equal the fair market value of a share of common
stock as of the date of the option holder's termination of employment. However,
if the option holder's employment is terminated for cause, the repurchase price
per option share will be the lower of (1) the fair market value of a share of
common stock as of the date of the option holder's termination of employment and
(2) the price at which the option holder purchased such option shares from
Riverwood Holding. In the event of an option holder's termination of employment
without cause or due to death, disability or retirement, the option holder will
have the right to require Riverwood Holding to repurchase any option shares held
by the option holder for at least 6 months. The per share repurchase price will
equal the fair of a share of common stock on the date of employment termination.
Riverwood Holding and Clayton, Dubilier & Rice Fund V Limited Partnership also
have rights of first refusal with respect to any option shares held by an option
holder.
Following the consummation of an underwritten public offering, an option
holder will be permitted to deliver to Riverwood Holding, in full or partial
payment of the exercise price of such stock options, shares of common stock
owned by the option holder for at least 6 months.
OFFERS TO PURCHASE COMMON STOCK
Offers to purchase common stock may be made to a Participant pursuant to a
stock subscription agreement. The purchase price per share of common stock is
determined by the compensation and benefits committee. Neither the participant
nor the participant's heirs or representatives may sell, transfer or otherwise
dispose of the shares of common stock without allowing Riverwood Holding and
Clayton,
80
Dubilier & Rice Fund V Limited Partnership to exercise their rights of first
refusal with respect to such shares.
In the event of a participant's termination of employment prior to an
initial underwritten public offering of the shares of common stock, Riverwood
Holding and Clayton, Dubilier & Rice Fund V Limited Partnership will have
successive rights to repurchase the shares of common stock purchased by a
participant. The repurchase price will generally equal the fair market value of
a share of common stock as of the date of the participant's termination of
employment. If the participant's employment is terminated for cause, the per
share repurchase price will be the lower of (1) the fair market value of a share
of common stock as of the date of the participant's termination of employment
and (2) the price at which the participant purchased the shares of common stock
from Riverwood Holding.
CHANGE OF CONTROL
In the event of a change in control (as defined in the 1996 stock incentive
plan), each unvested service option and each unvested performance options held
by an option holder will become vested. Each vested stock option will be
cancelled in exchange for a cash payment equal to the product of (1) the excess
of the price paid for a share of common stock in the transaction constituting
the change in control OVER the per share exercise price of the vested option and
(2) the number of shares of common stock underlying such vested option.
FEDERAL INCOME TAX CONSEQUENCES
For a brief summary of the federal income tax consequences of stock option
awards and awards of the right to purchase common stock, see "--2002 Stock
Plan--Federal Income Tax Consequences."
1999 LTIP
ESTABLISHMENT OF THE 1999 LTIP
Effective February 24, 1999, we established the Riverwood Holding, Inc.
Supplemental Long-Term Incentive Plan, or the 1999 LTIP. The 1999 LTIP provides
for the award of nonqualified stock options, incentive stock units and certain
payments, subject to the terms and conditions thereunder. Prior to the
completion of this offering, the 1999 LTIP will be amended to preclude the
future grant of awards.
ELIGIBILITY
Executive officers and other key management employees of Riverwood Holding
selected by the board have been granted awards under the 1999 LTIP. The number
of participants in the 1999 LTIP has varied from year to year.
SHARES SUBJECT TO THE 1999 LTIP
The maximum number of shares of common stock authorized to be issued under
the 1999 LTIP is 457,300 (before giving effect to our anticipated stock split).
As of March 31, 2002, 206,444 shares of common stock (before giving effect to
our anticipated stock split) were subject to awards under the 1999 LTIP. The
shares to be issued and delivered under the 1999 LTIP may be treasury shares or
authorized but unissued shares of Riverwood Holding. If there is a change in the
number or kind of outstanding shares of common stock by reason of any
recapitalization, reorganization, merger, consolidation, exchange of shares or
any similar change affecting the common stock, the board will make appropriate
adjustments to the type
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and number of shares covered by awards then outstanding under the plan.
Adjustments will also be made to the exercise price in respect of such awards.
ADMINISTRATION
The 1999 LTIP has been administered by the compensation and benefits
committee, which has the authority to grant awards, determine the terms and
conditions of awards, interpret the 1999 LTIP and to make all determinations
necessary and advisable for purposes of administering the 1999 LTIP. The
determination of the compensation and benefits committee on all matters relating
to the 1999 LTIP is final. The foregoing authority has been delegated to the
compensation and benefits committee by the board pursuant to the terms of the
1999 LTIP.
STOCK OPTIONS
All outstanding stock options granted under the 1999 LTIP are nonqualified
options to purchase common stock. The stock options are performance options that
become vested upon the achievement by Riverwood Holding of certain EBITDA levels
determined by the board for the fiscal years 1999, 2000 or 2001. All of the
stock options granted under the 1999 LTIP will become vested on the date that is
nine years and six months from the grant date of the stock options to the extent
they have not previously vested, but only if the option holder is employed by
Riverwood Holding or its subsidiaries on such date.
The stock options generally have a term of 10 years. If an option holder
terminates employment with Riverwood Holding and its subsidiaries on account of
death, permanent disability (as defined in the 1999 LTIP) or retirement (as
defined in the 1999 LTIP), all stock options that have become vested as of the
employment termination date will remain exercisable until the earlier of
(1) the first anniversary of the option holder's termination of employment and
(2) the date the options would otherwise expire. If an option holder's
employment terminates for cause (as defined in the 1999 LTIP), all stock
options, whether or not vested, will terminate immediately. If an option
holder's employment terminates for any other reason, his or her vested stock
options will remain exercisable until the 60th day after the earlier of (1) the
period during which Riverwood Holding and Clayton, Dubilier & Rice Fund V
Limited Partnership may exercise successive rights to repurchase the vested
stock options and (2) the date the stock options would otherwise expire. Any
stock options that have not become vested as of the date of the option holder's
termination of employment will terminate and be cancelled immediately upon such
termination of employment.
Prior to the consummation of an underwritten public offering of the shares
of common stock, Riverwood Holding and Clayton, Dubilier & Rice Fund V Limited
Partnership will have successive rights to repurchase vested stock options
following an option holder's termination of employment for any reason other than
cause. The repurchase price will generally equal the excess of the fair market
value of the common stock underlying the vested stock option on the termination
date over the aggregate exercise price of such vested stock option. Riverwood
Holding and Clayton, Dubilier & Rice Fund V Limited Partnership will have
similar rights with respect to shares of common stock held by an option holder
as a result of the exercise of a stock option granted under the 1999 LTIP,
hereafter referred to as option shares. The repurchase price per option share
will generally equal the fair market value of a share of common stock as of the
date of the option holder's termination of employment. However if the option
holder's employment is terminated for cause, the per share repurchase price of
the common stock held by the option holder will be the lower of (1) the fair
market value of a share of common stock as of the date of the option holder's
termination of employment and (2) the price at which the option holder purchased
such option shares from Riverwood Holding.
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In the event of an option holder's termination of employment without cause
or due to death, disability or retirement, the option holder will have the right
to require Riverwood Holding to repurchase option shares held by the option
holder for at least 6 months. The per share repurchase price will equal the fair
market value of a share of common stock on the date of employment termination.
Riverwood Holding and Clayton, Dubilier & Rice Fund V Limited Partnership also
have rights of first refusal with respect to any option shares held by an option
holder.
Following the consummation of an underwritten public offering, an option
holder will be permitted to deliver to Riverwood Holding, in full or partial
payment of the exercise price of such stock options, the shares of common stock
owned by such option holder for at least 6 months.
INCENTIVE STOCK UNITS AND PAYMENTS
Under the terms of the 1999 LTIP, participants were also awarded incentive
stock units in respect of which a participant would be eligible to receive cash
or common stock. Incentive stock units are payable only if there is a change in
control of Riverwood Holding, the change in control price (as defined in the
1999 LTIP) equals or exceeds a target change in control price, which ranges from
$120 to $150 (before giving effect to our anticipated stock split) and (1) the
participant remains employed by Riverwood Holding and its subsidiaries until the
date that the change in control occurs or (2) the participant's employment with
Riverwood Holding or its subsidiaries is terminated without cause (as defined in
the 1999 LTIP) or for good reason (as defined in the applicable award agreement)
after the sale of all of the common stock held by Clayton, Dubilier & Rice Fund
V Limited Partnership and its affiliates to a non-affiliate and the termination
occurs within six months of such change in control. The amount payable in
respect of the incentive stock units that become payable as a result of a change
in control transaction will equal the product of (x) the change in control price
MULTIPLIED BY (y) the number of shares of common stock covered by the incentive
stock units that become so payable. The board may determine that such payment
will be made in shares of common stock, rather than cash, of the acquiring
entity having an aggregate fair market value equal to such payment, but only if
the shares of the acquiring entity are publicly traded.
If a participant's employment is voluntarily or involuntarily terminated for
any reason, all incentive stock units held by such participant will be cancelled
on the date of such termination.
In the absence of a change in control, the incentive stock units will become
vested nine years and six months from the date of grant, but only if the
participant is employed by Riverwood Holding and its affiliates on such date.
Upon vesting of the incentive stock units, the participant will receive the
shares of common stock underlying such incentive stock units. In the event of a
participant's termination of employment prior to an initial public offering of
the common stock, Riverwood Holding and Clayton, Dubilier & Rice Fund V Limited
Partnership will have the right to repurchase the common stock delivered to a
participant in connection with the vesting of an incentive stock unit.
In the event of a participant's termination of employment without cause or
due to death, disability or retirement, the participant will have the right to
require Riverwood Holding to repurchase the shares held by the participant for
at least 6 months. The per share repurchase price will equal the fair market
value of a share of common stock on the date of employment termination.
Riverwood Holding and Clayton, Dubilier & Rice Fund V Limited Partnership also
have rights of first refusal with respect to any shares held by the participant.
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CHANGE OF CONTROL
In the event of a change in control (as defined in the 1999 LTIP), all
outstanding stock options will become vested and will be cancelled in exchange
for a payment equal to the product of (1) the excess of the change in control
price OVER the option exercise price, and (2) the number of shares of common
stock covered by such stock options. Payments will be made in respect of the
incentive stock units as described above.
FEDERAL INCOME TAX CONSEQUENCES
For a brief summary of the Federal income tax consequences of receiving the
stock option awards and stock incentive unit awards, see "--2002 Stock
Plan--Federal Income Tax Consequences."
2002 Stock Incentive Plan
ESTABLISHMENT OF THE 2002 STOCK INCENTIVE PLAN
Effective January 1, 2002, we established the Riverwood Holding, Inc. 2002
Stock Incentive Plan, or 2002 stock incentive plan. The 2002 stock incentive
plan provides for the award of nonqualified stock options or restricted stock
units, subject to the terms and conditions thereunder. Prior to the completion
of this offering, the 2002 stock incentive plan will be amended to preclude the
future grant of awards.
ELIGIBILITY
Executive officers and other key management employees of Riverwood Holding
selected by the board have been granted awards under the 2002 stock incentive
plan.
SHARES SUBJECT TO THE 2002 STOCK INCENTIVE PLAN
The maximum number of shares of common stock authorized to be issued under
the 2002 stock incentive plan is 658,353 (before giving effect to our
anticipated stock split). As of March 31, 2002, 658,353 shares of common stock
(before giving effect to our anticipated stock split) were subject to awards
under the 2002 stock incentive plan. The shares to be issued and delivered under
the 2002 stock incentive plan may be treasury shares or authorized but unissued
shares of Riverwood Holding. If there is a change in the number or kind of
outstanding shares of common stock by reason of any recapitalization,
reorganization, merger, consolidation, exchange of shares or any similar change
affecting the common stock, the board will make appropriate adjustments to the
type and number of shares covered by awards then outstanding under the plan.
ADMINISTRATION
The 2002 stock incentive plan has been administered by the compensation and
benefits committee, which has the authority to grant awards, determine the terms
and conditions of awards, interpret the 2002 stock incentive plan and to make
all determinations necessary and advisable for purposes of administering the
2002 stock incentive plan. The determination of the compensation and benefits
committee on all matters relating to the 2002 stock incentive plan is final. The
foregoing authority has been delegated to the compensation and benefits
committee by the board pursuant to the terms of the 2002 stock incentive plan.
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STOCK OPTIONS
All outstanding stock options granted under the 2002 stock incentive plan
are nonqualified options to purchase common stock. All stock options have been
granted at a per share exercise price of $120.00 (before giving effect to our
anticipated stock split), an amount that is not less than the fair market value
(as determined by the board) of a share of common stock on the grant date of
each such stock option. The stock options will become one-third vested on the
second anniversary of the grant date and two-thirds vested on the third
anniversary of the grant date. The options will also become fully vested (1) in
the event of a change in control of Riverwood Holding (see below), (2) if the
option holder's employment is terminated other than for cause (as defined in the
2002 stock incentive plan) or for good reason (as defined in the applicable
award agreement) after the sale of all of the common stock held by Clayton,
Dubilier & Rice Fund V Limited Partnership and its affiliates to a
non-affiliate, or (3) if the option holder's employment is terminated as a
result of death, permanent disability (as defined in the 2002 stock incentive
plan) or retirement (as defined in the 2002 stock incentive plan).
The stock options generally have a term of 10 years. If an option holder
terminates employment with Riverwood Holding and its subsidiaries on account of
death, permanent disability or retirement, all stock options will become vested
as of the employment termination date and will remain exercisable until the
earlier of (1) the first anniversary of the option holder's termination of
employment and (2) the date the options would otherwise expire. If an option
holder's employment terminates for cause, all stock options, whether or not
vested, will terminate immediately. If an option holder's employment terminates
for any other reason, his vested stock options will remain exercisable until the
60th day after the earlier of (1) the period during which Riverwood Holding and
Clayton, Dubilier & Rice Fund V Limited Partnership may exercise successive
rights to repurchase the vested stock options and (2) the date the stock options
would otherwise expire. Any stock options that have not become vested as of the
date of the option holder's termination of employment will terminate and be
cancelled immediately upon such termination of employment.
Prior to the consummation of an underwritten public offering of the shares
of common stock, Riverwood Holding and Clayton, Dubilier & Rice Fund V Limited
Partnership will have successive rights to repurchase vested stock options
following an option holder's termination of employment for any reason other than
cause. The repurchase price will generally equal the excess of the fair market
value of the common stock underlying the vested stock option on the termination
date OVER the aggregate exercise price of such vested stock option. Riverwood
Holding and Clayton, Dubilier & Rice Fund V Limited Partnership will have
similar rights with respect to shares of common stock held by an option holder
as a result of the exercise of a stock option granted under the 2002 stock
incentive plan (hereafter referred to as "option shares"). The repurchase price
per option share will generally equal the fair market value of a share of common
stock as of the date of the option holder's termination of employment. However
if the option holder's employment is terminated for cause, the per share
repurchase price of the common stock held by the option holder will be the lower
of (1) the fair market value of a share of common stock as of the date of the
option holder's termination of employment and (2) the price at which the option
holder purchased such option shares from Riverwood Holding.
In the event of an option holder's termination of employment without cause
or due to death, disability or retirement, the option holder will have the right
to require Riverwood Holding to repurchase option shares held by the option
holder for at least 6 months. The per share repurchase price will equal the fair
market value of a share of common stock on the date of employment termination.
Riverwood Holding and Clayton, Dubilier & Rice Fund V Limited Partnership also
have rights of first refusal with respect to any option shares held by an option
holder.
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Following the consummation of an underwritten public offering, an option
holder will be permitted to deliver to Riverwood Holding, in full or partial
payment of the exercise price of such stock options, the shares of common stock
owned by such option holder for at least 6 months.
RESTRICTED STOCK UNITS
Under the terms of the 2002 stock incentive plan, participants were also
awarded restricted stock units in respect of which a participant would be
eligible to receive cash or common stock. Subject to the continuous employment
of the participant with Riverwood Holding and its subsidiaries, the restricted
stock units will become fully vested on the second anniversary of the grant
date. The restricted stock units will also become fully vested (1) in the event
of a change in control of Riverwood Holding (see below), (2) if a participant's
employment is terminated by reason of death, disability or retirement or
(3) the participant's employment is terminated other than for cause or good
reason after the sale of all the common stock held by Clayton, Dubilier & Rice
Fund V Limited Partnership and its affiliates to a non-affiliate. If a
participant's employment with Riverwood Holding and its subsidiaries terminates
for any other reason, the restricted units held by the participant will
terminate.
Upon vesting of the restricted stock, Riverwood Holding may, in its sole
discretion, (1) deliver to the participant the shares of common stock underlying
such restricted stock units or (2) pay to the participant a cash amount equal to
the product of (x) the fair market value of a share of common stock as of the
vesting date and (y) the number of shares of common stock underlying the
restricted stock units that have become so vested. In the event of a
participant's termination of employment prior to an initial public offering of
the common stock, Riverwood Holding and Clayton, Dubilier & Rice Fund V Limited
Partnership will have the right to repurchase any common stock delivered to a
participant in connection with the vesting of an incentive stock unit. In the
event of a participant's termination of employment without cause or due to
death, disability or retirement, the participant will have the right to require
Riverwood Holding to repurchase the shares held by the participant for at least
6 months. The per share repurchase price will equal the fair market value of a
share of common stock on the date of employment termination. Riverwood Holding
and Clayton, Dubilier & Rice Fund V Limited Partnership also have rights of
first refusal with respect to any shares held by the participant.
CHANGE OF CONTROL
In the event of a change in control (as defined in the supplemental plan),
all outstanding stock options will become vested and will be cancelled in
exchange for a payment equal to the product of (1) the excess of the change in
control price OVER the option exercise price and (2) the number of shares of
common stock covered by such stock options. All restricted stock units will
become fully vested upon a change in control and each holder of such restricted
stock units will receive a payment equal to the product of (x) the change in
control price and (y) the number of shares of common stock underlying the
restricted stock units. Payments with respect to the cancelled stock options and
restricted stock units may, at the discretion of the board, be made in shares of
publicly traded common stock of the acquiring entity.
FEDERAL INCOME TAX CONSEQUENCES
For a brief summary of the Federal income tax consequences of receiving the
stock option awards and restricted stock unit awards, please see "--2002 Stock
Plan--Federal Income Tax Consequences."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of December 31, 2001,
before giving effect to the stock split to be effected prior to the closing of
the offering, regarding the beneficial ownership of our common stock immediately
prior to the consummation of this offering and as adjusted to reflect the sale
of the shares of common stock pursuant to this offering. The table includes:
- each person who is known by us to be the beneficial owner of more than 5%
of the outstanding common stock;
- each of our directors;
- each executive officer named in the "Summary Compensation Table"; and
- all directors and executive officers as a group.
Except as otherwise indicated, the persons and entities listed below have
sole voting and investment power with respect to all shares of common stock
beneficially owned by them, except to the extent such power may be shared with a
spouse.
Shares Beneficially Shares Beneficially
Owned Before this Owned After this
Offering(1) Offering(1)
-------------------- --------------------
Name Number Percent Number Percent
---- --------- -------- --------- --------
5% Stockholders:
Clayton, Dubilier & Rice Fund V Limited Partnership
(2)............................................... 2,250,000 29.7%
EXOR Group S.A...................................... 2,250,000 29.7%
The 1818 Fund II, L.P. (3).......................... 750,000 9.9%
HWH Investment Pte Ltd.............................. 700,000 9.3%
J.P. Morgan Equity Associates, L.P. (4)............. 500,000 6.6%
First Plaza Group Trust............................. 500,000 6.6%
Madison Dearborn Capital Partners, L.P. (5)......... 500,000 6.6%
Directors and Named Executive Officers:
B. Charles Ames (6)................................. 0 --
Kevin J. Conway (6)................................. 0 --
Leon J. Hendrix, Jr. (6)............................ 0 --
Hubbard C. Howe (6)................................. 0 --
Alberto Cribiore (6)................................ 0 --
Brian J. Richmand................................... 0 --
Samuel M. Mencoff (5)............................... 0 --
Lawrence C. Tucker (3).............................. 0 --
G. Andrea Botta..................................... 0 --
Gianluigi Gabetti................................... 0 --
Stephen M. Humphrey (7)............................. 216,875 (8)
Thomas M. Gannon (7)................................ 26,493 (8)
Wayne E. Juby (7)................................... 0 --
Steven D. Saucier (7)............................... 12,841 (8)
Daniel J. Blount (7)................................ 8,123 (8)
All directors and executive officers as a group
(15 persons) (3)(5)(6)(7)......................... 264,332 3.5%
------------------------
(1) For purposes of this table, information as to the shares of common stock in
the column "Shares Beneficially Owned After this Offering" assumes that the
underwriters' over-allotment option is not exercised. In addition, a person
or group of persons is deemed to have "beneficial ownership" of any shares
of common stock when such person or persons has the right to acquire them
within 60 days after the date of this
87
prospectus. For purposes of computing the percentage of outstanding shares
of common stock held by each person or group of persons named above, any
shares which such person or persons have the right to acquire within
60 days after the date of this prospectus is deemed to be outstanding but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(2) CD&R Associates V Limited Partnership, a Cayman Islands exempted limited
partnership, is the general partner of Clayton, Dubilier & Rice Fund V
Limited Partnership, a Cayman Islands exempted limited partnership, and has
the power to direct Clayton, Dubilier & Rice Fund V Limited Partnership as
to the voting and disposition of shares held by Clayton, Dubilier & Rice
Fund V Limited Partnership. CD&R Investment Associates II, Inc., a Cayman
Islands exempted company, is the managing general partner of CD&R Associates
V Limited Partnership and has the power to direct CD&R Associates V Limited
Partnership as to its direction of Clayton, Dubilier & Rice Fund V Limited
Partnership's voting and disposition of the shares held by Clayton,
Dubilier & Rice Fund V Limited Partnership. No person controls the voting
and dispositive power of CD&R Investment Associates II, Inc. with respect to
the shares owned by Clayton, Dubilier & Rice Fund V Limited Partnership.
Each of CD&R Associates V Limited Partnership and CD&R Investment Associates
II, Inc. expressly disclaims beneficial ownership of the shares owned by
Clayton, Dubilier & Rice Fund V Limited Partnership. The business address
for each of Clayton, Dubilier & Rice Fund V Limited Partnership, CD&R
Associates V Limited Partnership and CD&R Investment Associates II, Inc. is
1403 Foulk Road, Suite 106, Wilmington, Delaware 19803.
(3) Mr. Tucker may be deemed to share beneficial ownership of the shares owned
of record by The 1818 Fund II, L.P. by virtue of his affiliation with such
organization. Mr. Tucker expressly disclaims any such beneficial ownership.
(4) J.P. Morgan Equity Associates, L.P., formerly known as Chase Equity
Associates, currently owns shares of the Class B common stock of Riverwood
Holding which do not have voting rights. We expect that the Class B common
stock will be reclassified into common stock prior to completion of this
offering.
(5) Mr. Mencoff may be deemed to share beneficial ownership of the shares owned
of record by Madison Dearborn Capital L.P. by virtue of his affiliation with
such organization. Mr. Mencoff expressly disclaims any such beneficial
ownership.
(6) Excludes shares of common stock owned by Clayton, Dubilier & Rice Fund V
Limited Partnership, as to which Messrs. Ames, Conway, Hendrix, Howe and
Cribiore may be deemed to share beneficial ownership or have an economic
interest. See footnote (2).
(7) Includes options to purchase 206,875, 20,493, 0, 8,841 and 5,123 shares of
common stock which may be exercised by Messrs. Humphrey, Gannon, Juby,
Saucier and Blount, respectively.
(8) Less than 1%.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Clayton, Dubilier & Rice Fund V Limited Partnership, which is one of our
largest stockholders, is a private investment fund managed by Clayton,
Dubilier & Rice, Inc. The general partner of Clayton, Dubilier & Rice Fund V
Limited Partnership is CD&R Associates V Limited Partnership, and the general
partners of CD&R Associates V Limited Partnership are CD&R Investment Associates
II, Inc., CD&R Investment Associates, Inc., a Delaware corporation, and CD&R
Cayman Investment Associates, Inc., a Cayman Islands exempted company.
Mr. Ames, who is a principal of Clayton, Dubilier & Rice, Inc., a director of
CD&R Investment Associates II, Inc. and a limited partner of CD&R Associates V
Limited Partnership, is our chairman. Mr. Conway, who is a principal of Clayton,
Dubilier & Rice, Inc., a director of CD&R Investment Associates II, Inc. and a
limited partner of CD&R Associates V Limited Partnership, is one of our
directors. Mr. Hendrix, who was until recently a principal of Clayton,
Dubilier & Rice, Inc. and a limited partner of CD&R Associates V Limited
Partnership, is one of our directors. Mr. Howe, who was until recently a
principal of Clayton, Dubilier & Rice, Inc. and continues to be a limited
partner of CD&R Associates V Limited Partnership, is one of our directors. See
"Management--Directors and Executive Officers."
Clayton, Dubilier & Rice, Inc. is a private investment firm which is
organized as a Delaware corporation. Clayton, Dubilier & Rice, Inc. is the
manager of a series of investment funds, including Clayton, Dubilier & Rice Fund
V Limited Partnership. Clayton, Dubilier & Rice, Inc. generally assists in
structuring, arranging financing for and negotiating the transactions in which
the funds it manages invest. After the consummation of such transactions,
Clayton, Dubilier & Rice, Inc. generally provides management and financial
advisory and consulting services to the companies in which its investment funds
have invested during the period of such fund's investment. Such services include
helping the company to establish effective banking, legal and other business
relationships and assisting management in developing and implementing strategies
for improving the operational, marketing and financial performance of the
company.
Pursuant to a consulting agreement dated as of March 27, 1996, so long as
Clayton, Dubilier & Rice Fund V Limited Partnership has an investment in us,
Clayton, Dubilier & Rice, Inc. will receive an annual fee and reimbursement of
out-of-pocket expenses for providing management and financial consulting
services to us. The indentures relating to our senior notes and senior
subordinated notes allow the payment to Clayton, Dubilier & Rice, Inc. of annual
fees for management and financial consulting services of up to $1 million,
although there is no current intention to increase the amount of the annual fee
to be received by Clayton, Dubilier & Rice, Inc. above $500,000.
During 1999, 2000 and 2001, we paid Clayton, Dubilier & Rice, Inc. annual
fees in the amount of $470,000, respectively, for providing such management and
financial consulting services.
Clayton, Dubilier & Rice, Inc., Clayton, Dubilier & Rice Fund V Limited
Partnership, Riverwood Holding, Riverwood International and RIC Holding entered
into an indemnification agreement dated as of March 27, 1996, pursuant to which
Riverwood Holding, RIC Holding and Riverwood International have agreed to
indemnify Clayton, Dubilier & Rice, Inc., Clayton, Dubilier & Rice Fund V
Limited Partnership, CD&R Associates V Limited Partnership, CD&R Investment
Associates, Inc., together with any other general partner of CD&R Associates V
Limited Partnership, and their respective directors, officers, partners,
employees, agents, advisors, representatives and controlling persons against
certain liabilities arising under the federal securities laws, liabilities
arising out of the performance of the consulting agreement and certain other
claims and liabilities.
In November 1999, Riverwood Holding lent to Mr. Humphrey $5,000,000 pursuant
to a full-recourse non-interest bearing promissory note entered into by
Mr. Humphrey and Riverwood Holding, which was
89
amended in December 2001. The promissory note will generally become due and
payable on March 26, 2007; or, earlier, if Mr. Humphrey voluntarily terminates
his employment other than for "good reason" or if we terminate his employment
for "cause," in each case, as defined in Mr. Humphrey's employment agreement.
One of our directors, G. Andrea Botta, is a managing director at Morgan
Stanley & Co. Incorporated, which is an underwriter of this offering. Another of
our directors, Brian J. Richmand, is a designee of J.P. Morgan Partners LLC.
J.P. Morgan Partners LLC is an affiliate of J.P. Morgan Securities Inc., which
is an underwriter of this offering and in June 2001 was one of the initial
purchasers in the sale of our 10 5/8% senior notes due 2007, and an affiliate of
the administrative agent and a lender under our senior secured credit facility.
Registration and Participation Agreement
Each of the 5% stockholders listed under "Principal Stockholders" and
certain other holders of our common stock and options to purchase our common
stock, including certain executive officers and key employees, are entitled
under a registration rights and participation agreement with us, dated
March 27, 1996, to the following registration rights for the shares of common
stock held by them or issuable upon exercise of options to purchase our common
stock:
- holders constituting, at any time prior to our initial public offering, at
least 51% and thereafter at least 5% of the total shares of these
registrable securities may request that we use our best efforts to
register such securities for public resale, provided that up to an
aggregate of five registrations may be requested and that with respect to
the first three such requests, the aggregate number of registrable
securities shall not be less than 1,500,000 shares (before giving effect
to our anticipated stock split) and thereafter shall not be less than
750,000 shares (before giving effect to our anticipated stock split); and
- if we register any common stock at any time, either for our account or for
the account of any stockholder, the holders of registrable securities are
entitled to request us to use best efforts to include the number of their
shares of common stock, which subject to the opinion of the underwriters,
can be sold.
In most cases, we will bear all registration expenses, other than
underwriting discounts. Participation rights have terminated and registration
rights will terminate on the earlier to occur of the consent of all parties or
March 27, 2006.
Stockholders Agreement
Our current stockholders agreement, which will terminate upon the closing of
this offering, provides that Clayton, Dubilier & Rice Fund V Limited Partnership
is entitled to nominate five persons, EXOR Group S.A. is entitled to nominate
two persons, The 1818 Fund II, L.P. is entitled to nominate one person and
Madison Dearborn Capital Partners, L.P. is entitled to nominate one person to
serve on our board. There is also an understanding between J.P. Morgan Partners
LLC and Clayton, Dubilier & Rice Fund V Limited Partnership with respect to the
nomination of Clayton, Dubilier & Rice Fund V Limited Partnership's fifth
nominee to our board. Clayton, Dubilier & Rice Fund V Limited Partnership
exercised its intention to nominate a designee of J.P. Morgan Partners LLC as
its nominee to our board; however, J.P. Morgan Partners LLC does not have a
legally enforceable right to such directorship. The chairman of our board is to
be selected from one of the Clayton, Dubilier & Rice Fund V Limited Partnership
nominees (other than the J.P. Morgan Partners LLC designee).
We intend to enter into a new stockholders agreement with Clayton,
Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. upon the closing
of this offering. For a description of this stockholders agreement, see
"Description of Capital Stock--Stockholders Agreement."
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Senior Secured Credit Facilities
On August 10, 2001, we, with a syndicate of lenders, led by JPMorgan Chase
Bank as administrative agent and Bankers Trust Company as syndication agent,
amended and restated our senior secured credit agreement. On April 23, 2002, we
amended our senior secured credit agreement to provide for the 2002 term loan.
The following summary is a description of the principal terms of our senior
secured credit agreement, as so amended, and the related documents governing the
amended and restated facility, or the credit documentation, and is subject to
and qualified in its entirety by reference to the credit documentation, copies
of which will be made available by us upon request.
STRUCTURE AND AVAILABILITY. Our senior secured credit agreement provides
for senior secured credit facilities in an aggregate amount of up to
$885.0 million. The facilities consist of (1) the revolving credit facility in
an aggregate principal amount of up to $300.0 million, (2) the 2001 term loan
facility of $335.0 million and (3) the 2002 term loan facility of
$250.0 million. The 2001 term loan facility and the revolving credit facility
mature on December 31, 2006. The 2002 term loan facility matures on March 31,
2007. The 2001 term loan is payable in semi-annual installments of
$37.5 million beginning June 30, 2003 and of $46.25 million beginning June 30,
2005, amounting to principal payments of $75.0 million, $75.0 million,
$92.5 million and $92.5 million in 2003, 2004, 2005 and 2006, respectively. The
2002 term loan is payable in semi-annual installments of $1.25 million beginning
September 30, 2002, amounting to principal payments of $1.25 million in 2002 and
$2.5 million annually in each of 2003, 2004, 2005 and 2006, with the remaining
principal due at maturity on March 31, 2007.
On August 10, 2001, Riverwood International applied $335 million in
borrowings under the 2001 term loan facility and $51.0 million in borrowings
under the revolving credit facility to refinance its then existing senior
secured credit facilities. The remaining unused commitment under the revolving
credit facility will be available to Riverwood International from time to time
for general corporate purposes. The $250.0 million in borrowings under the 2002
term loan facility are to be used, together with borrowings under our senior
revolving credit facility of approximately $12.0 million, to redeem the 1996
senior notes May 23, 2002, and to pay related fees, costs and expenses.
PREPAYMENTS. Our senior secured credit agreement permits voluntary
prepayments under the 2001 term loan facility, the 2002 term loan facility and
the revolving credit facility without premium or penalty, except for breakage
costs incurred in connection with prepayment during a Euro currency interest
period. Mandatory prepayment provisions include requirements that, subject to
certain exceptions, permit such payments to be made from the net proceeds of
certain asset sales and the net cash proceeds of certain debt issuances. Such
mandatory prepayments are required to be applied first to outstanding term
loans. Mandatory prepayments are also required from the proceeds of any
receivables securitization.
SECURITY; GUARANTY. The obligations of Riverwood International under our
senior secured credit agreement are unconditionally and irrevocably guaranteed
by Riverwood Holding, RIC Holding and certain domestic subsidiaries of Riverwood
International (other than certain subsidiaries created to implement any future
receivables securitization). Our senior secured credit agreement and the
guarantees of the facilities (including the 2002 term loan facility) include
security interests in and pledges of or liens on substantially all the material
tangible and intangible assets of Riverwood International and the guarantors.
The security for our senior secured credit agreement includes pledges of all the
capital stock of, or other equity interests in, each direct or indirect domestic
subsidiary of Riverwood International and, subject to limited exceptions, 65% of
the capital stock of, or other equity interests in, each directly owned foreign
subsidiary of Riverwood International.
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INTEREST. At Riverwood International's election, the interest rates per
annum applicable to the loans under the facilities are fluctuating rates of
interest measured by reference to either LIBOR or ABR, plus a borrowing margin.
With respect to the 2001 term loan and the revolving loans, the margin for LIBOR
loans is initially 2.75% and the margin for ABR loans is initially 1.75%. With
respect to the 2002 term loan, the margin for LIBOR loans is initially 2.50% and
the margin for ABR loans is initially 1.50%. The applicable margin is subject to
certain adjustments.
FEES. Riverwood International is required to pay certain fees with respect
to the facilities, including: (1) a commitment fee equal to 1/2 of 1% on the
undrawn portion of the revolving commitments; (2) letter of credit fees on the
aggregate face amount of outstanding letters of credit equal to the then
applicable borrowing margin for LIBOR-based revolving credit borrowings plus a
1/4 of 1% per annum fronting bank fee for the letter of credit issuing bank;
(3) annual administration fees; and (4) agent, arrangement and other similar
fees.
COVENANTS. Our senior secured credit agreement contains a number of
covenants. Those covenants restrict certain of our corporate activities. Among
other things, the covenants restrict our ability to:
- dispose of assets;
- incur additional indebtedness;
- incur guarantee obligations;
- prepay other indebtedness or amend other debt instruments;
- pay dividends;
- create liens on assets;
- enter into sale and leaseback transactions;
- make investments, loans or advances;
- make acquisitions;
- engage in mergers or consolidations;
- change the business conducted by us;
- make capital expenditures; and
- engage in certain transactions with affiliates.
In addition, under our senior secured credit agreement, Riverwood
International is required to comply with certain financial covenants, including
a minimum interest coverage ratio and maximum consolidated debt to EBITDA
leverage ratio.
The financial covenants in our senior secured credit agreement specify,
among other things, the following requirements for each four quarter period
ended during the following test periods:
Consolidated Debt
to EBITDA Consolidated Interest
Test Period Leverage Ratio Expense Ratio
----------- ----------------- ---------------------
September 30, 2001--December 30, 2002................ 5.85 to 1.00 1.75 to 1.00
December 31, 2002--December 30, 2003................. 5.50 to 1.00 2.00 to 1.00
December 31, 2003--December 30, 2004................. 5.00 to 1.00 2.10 to 1.00
December 31, 2004--December 30, 2005................. 4.70 to 1.00 2.25 to 1.00
December 31, 2005--December 30, 2006................. 4.40 to 1.00 2.25 to 1.00
December 31, 2006--March 31, 2007.................... 4.40 to 1.00 2.25 to 1.00
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Our senior secured credit agreement also contains provisions that prohibit
any amendment or modification of the indentures that govern the 1996 notes, the
1997 notes and the 2001 notes that are adverse to the lenders under our senior
secured credit agreement and that limit Riverwood International's ability to
prepay or refinance the notes without the consent of such lenders.
EVENTS OF DEFAULT. Our senior secured credit agreement contain customary
events of default. Those events of default include non-payment of principal,
interest or fees, violation of covenants, inaccuracy of representations or
warranties in any material respect, cross-default and cross-acceleration to
certain other indebtedness, bankruptcy, material judgments and liabilities and
change of control.
1996 Notes
In 1996, Riverwood International completed an offering of $250.0 million
aggregate principal amount of 10 1/4% senior notes due 2006 and $400.0 million
aggregate principal amount of 10 7/8% senior subordinated notes due 2008. The
1996 senior notes and the 1996 senior subordinated notes were issued pursuant to
two separate indentures, together, the 1996 indentures. The following summary is
a description of the principal terms of the 1996 notes and the 1996 indentures
and is subject to and qualified in its entirety by reference to the 1996 notes
and the 1996 indentures, copies of which will be made available by us upon
request.
The 1996 senior notes are expected to be redeemed on May 23, 2002 at the
redemption price required by the indenture of $1,034.167 per $1,000.00 principal
amount of the 1996 senior notes. The 1996 senior subordinated notes mature in
2008. The 1996 senior notes and the 1996 senior subordinated notes bear interest
at rates of 10 1/4% and 10 7/8%, respectively. Riverwood International may
redeem the 1996 notes, in whole or in part, at certain redemption prices,
together with accrued and unpaid interest if any, to the date of redemption. The
1996 notes are not subject to any sinking fund obligations.
Upon the occurrence of a change of control, Riverwood International may be
required to make an offer to repurchase the 1996 notes. In such an event, the
repurchase price would equal 101% of the principal amount of the repurchased
notes, together with accrued and unpaid interest, if any, to the date of
repurchase. In the event of such a repurchase, the holders of 1996 senior notes,
together with the holders of 1997 notes and the 2001 notes, will have the
opportunity to have their securities repurchased prior to holders of 1996 senior
subordinated notes. The senior secured credit facilities, however, prohibit the
purchase of the 1996 notes by Riverwood International in the event of a change
of control, unless and until such time as the indebtedness under the senior
secured credit facilities is paid in full. In the event such prohibition is in
effect at the time of a change of control, Riverwood International must either
(i) repay in full all bank indebtedness or offer to repay in full all bank
indebtedness and repay the bank indebtedness of each lender who has accepted
such offer or (ii) obtain the requisite consent under the agreements governing
the bank indebtedness to permit the repurchase of the 1996 notes.
The 1996 senior notes are fully and unconditionally guaranteed on an
unsecured, senior basis by Riverwood Holding and RIC Holding. The 1996 senior
subordinated notes are fully and unconditionally guaranteed on an unsecured,
senior subordinated basis, by Riverwood Holding and RIC Holding.
The 1996 senior notes are unsecured and rank PARI PASSU in right of payment
with all existing and future senior indebtedness of Riverwood International and
rank senior to all existing and future senior subordinated indebtedness of
Riverwood International and all other subordinated indebtedness of Riverwood
International. The 1996 senior subordinated notes are subordinated to all
existing and future senior indebtedness of Riverwood International. The 1996
senior subordinated notes are unsecured and rank PARI PASSU with any future
senior subordinated indebtedness of Riverwood International and rank senior to
all other subordinated indebtedness of Riverwood International. The 1996 notes
are effectively
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subordinated to all existing and future secured indebtedness of Riverwood
International and its subsidiaries to the extent of the value of the assets
securing such indebtedness.
The 1996 indentures contain restrictive covenants. Those covenants, among
other things,
- limit the incurrence of additional indebtedness by Riverwood International
and its subsidiaries;
- limit the redemption of capital stock of Riverwood International, the
payment of dividends on capital stock of Riverwood International and the
redemption of certain subordinated obligations and certain other existing
indebtedness of Riverwood International;
- limit other restricted payments or certain investments;
- limit sales of assets and subsidiary stock;
- limit transactions with affiliates; and
- limit consolidations, mergers and transfers of all or substantially all
Riverwood International assets.
The 1996 indentures also prohibit certain restrictions on distributions from
subsidiaries. The indenture under which the 1996 senior notes were issued also
limits (1) the existence of certain liens and (2) certain sale and leaseback
transactions. The indenture under which the 1996 senior subordinated notes were
issued limits the incurrence of certain senior subordinated indebtedness and
secured indebtedness. All of these limitations and prohibitions are subject to a
number of important qualifications and exceptions.
1997 Notes
In 1997, Riverwood International completed an offering of $250.0 million
aggregate principal amount of 10 5/8% senior notes due 2007. The 1997 notes were
issued pursuant to an indenture, or the 1997 indenture. The following summary is
a description of the principal terms of the 1997 notes and the 1997 indenture
and is subject to and qualified in its entirety by reference to the 1997 notes
and the 1997 indenture, copies of which will be made available by us upon
request.
The 1997 notes mature in 2007 and bear interest at a rate of 10 5/8%. Except
as described below, Riverwood International may not redeem the 1997 notes prior
to August 1, 2002. On or after that date, Riverwood International may redeem the
1997 notes, in whole or in part, at certain redemption prices, together with
accrued and unpaid interest, if any, to the date of redemption. The 1997 notes
are not subject to any sinking fund obligations.
Upon the occurrence of a change of control prior to August 1, 2002,
Riverwood International may redeem the 1997 notes, in whole or in part, at a
redemption price equal to 100% of the principal amount of the 1997 notes
redeemed plus a premium, together with accrued and unpaid interest, if any, to
the date of redemption. If Riverwood International does not so redeem the 1997
notes, upon the occurrence of a change of control, it may be required to make an
offer to repurchase the 1997 notes. In such an event, the repurchase price would
equal 101% of the principal amount of the repurchased notes, together with
accrued and unpaid interest, if any, to the date of repurchase. In the event of
such a repurchase, the holders of 1997 notes, together with the holders of 1996
senior notes and the 2001 notes, will have the opportunity to have their
securities repurchased prior to holders of 1996 senior subordinated notes. The
senior secured credit facilities, however, prohibit the purchase of the 1997
notes by Riverwood International in the event of a change of control, unless and
until such time as the indebtedness under the senior secured credit facilities
is paid in full. In the event such prohibition is in effect at the time of a
change of control, Riverwood International must either (i) repay in full all
bank indebtedness or offer to repay in full all bank indebtedness and repay the
bank indebtedness of each lender who has accepted such offer or (ii) obtain the
requisite consent under the agreements governing the bank indebtedness to permit
the repurchase of the 1997 notes.
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The 1997 notes are fully and unconditionally guaranteed on an unsecured,
senior basis by Riverwood Holding and RIC Holding.
The 1997 notes are unsecured and rank PARI PASSU in right of payment with
all existing and future senior indebtedness of Riverwood International and rank
senior to all existing and future senior subordinated indebtedness of Riverwood
International and all other subordinated indebtedness of Riverwood
International. The 1997 notes are effectively subordinated to all existing and
future secured indebtedness of Riverwood International and its subsidiaries to
the extent of the value of the assets securing such indebtedness.
The 1997 indenture contains restrictive covenants. Those covenants, among
other things,
- limit the incurrence of additional indebtedness by Riverwood International
and its subsidiaries;
- limit the redemption of capital stock of Riverwood International, the
payment of dividends on capital stock of Riverwood International and the
redemption of certain subordinated obligations and certain other existing
indebtedness of Riverwood International;
- limit other restricted payments or certain investments;
- limit sales of assets and subsidiary stock;
- limit transactions with affiliates;
- limit consolidations, mergers and transfers of all or substantially all
Riverwood International assets;
- limit the existence of certain liens; and
- limit certain sale and leaseback transactions.
The 1997 indenture also prohibits certain restrictions on distributions from
subsidiaries. All of these limitations and prohibitions are subject to a number
of important qualifications and exceptions.
2001 Notes
In 2001, Riverwood International completed an offering of $250.0 million
aggregate principal amount of 10 5/8% senior notes due 2007. The 2001 notes have
substantially identical terms and conditions to the 1997 notes. The covenants,
ranking, redemption and guarantee provisions, and definitions contained in the
indenture governing the 1997 notes are substantially similar to those that are
contained in the indenture governing the 2001 notes.
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DESCRIPTION OF CAPITAL STOCK
Overview
Our amended and restated certificate of incorporation, which will become
effective prior to the completion of this offering, authorizes up to
shares of common stock, par value $0.01 per share and shares of preferred
stock, par value $0.01 per share. We refer to our amended and restated
certificate of incorporation in this prospectus as our "certificate of
incorporation." As of the closing of this offering, assuming:
- the reclassification of all outstanding shares of Class A common stock and
non-voting Class B common stock into shares of common stock on a
one-for-one basis as provided in our certificate of incorporation; and
- a for one stock split of our outstanding shares of common stock by
way of reclassification to be effected prior to the completion of the
offering;
shares of common stock would be issued and outstanding, held of
record by stockholders, and no shares of preferred stock would be issued
and outstanding.
The following descriptions of our capital stock and provisions of our
certificate of incorporation and amended and restated by-laws, which will become
effective prior to the completion of this offering and are referred to in this
prospectus as our "by-laws," are summaries of all of their material terms and
provisions and are qualified by reference to our certificate of incorporation
and by-laws, copies of which will be filed with the SEC as exhibits to our
registration statement of which this prospectus is a part. The descriptions
reflect changes to our capital structure, certificate of incorporation and
by-laws that will occur upon closing of this offering.
Common Stock
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends that may be declared by our board of directors,
subject to any preferential dividend rights of outstanding preferred stock. In
the event of our liquidation, dissolution or winding up, holders of common stock
will be entitled to receive proportionately any of our assets remaining after
the payment of liabilities and subject to the prior rights of any outstanding
preferred stock. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of common stock are, and
the shares of common stock offered by us in this offering, when issued, will be,
fully paid and non-assessable. The rights and privileges of holders of common
stock are subject to any series of preferred stock that we may issue in the
future, as described below.
Preferred Stock
Our certificate of incorporation will provide that our board of directors
has the authority, without further vote or action by the stockholders, to issue
up to shares of preferred stock in one or more series and to fix
the number of shares constituting any such series and the preferences,
limitations and relative rights, including dividend rights, dividend rate,
voting rights, terms of redemption, redemption price or prices, conversion
rights and liquidation preferences of the shares constituting any series. The
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issuance of preferred stock could adversely affect the rights of holders of
common stock. We have no present plans to issue any shares of preferred stock
after the completion of this offering.
We will authorize shares of Series A Junior Participating Preferred Stock in
connection with our anticipated stockholder rights plan. See "--Stockholder
Rights Plan."
Stockholders Agreement
We anticipate that upon the closing of this offering, Clayton, Dubilier &
Rice Fund V Limited Partnership, EXOR Group S.A. and we will enter into a new
stockholders agreement. We expect that this new agreement will provide for
various rights on the part of Clayton, Dubilier & Rice Fund V Limited
Partnership and EXOR Group S.A., including rights to designate a specified
number of directors, which will be at least a majority of our board of directors
following the closing of this offering. We expect that the designation rights
will be subject to reduction based on specified reductions in share ownership
percentages.
Change of Control Related Provisions of Our Certificate of Incorporation and
By-laws, and Delaware Law
A number of provisions in our certificate of incorporation and by-laws and
under the Delaware General Corporation Law may make it more difficult to acquire
control of us. These provisions may have the effect of discouraging a future
takeover attempt which is not approved by our board of directors but which
individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have an opportunity to do so. In addition, these
provisions may adversely affect the prevailing market price of the common stock.
These provisions are intended to:
- enhance the likelihood of continuity and stability in the composition of
our board of directors;
- discourage some types of transactions that may involve an actual or
threatened change in control of us;
- discourage certain tactics that may be used in proxy fights;
- ensure that our board of directors will have sufficient time to act in
what the board believes to be in the best interests of us and our
stockholders; and
- encourage persons seeking to acquire control of us to consult first with
our board to negotiate the terms of any proposed business combination or
offer.
UNISSUED SHARES OF CAPITAL STOCK
COMMON STOCK. We currently plan to issue an estimated million shares
of our authorized common stock in this offering. The remaining shares of
authorized and unissued common stock will be available for future issuance
without additional stockholder approval. While the additional shares are not
designed to deter or prevent a change of control, under some circumstances we
could use the additional shares to create voting impediments or to frustrate
persons seeking to effect a takeover or otherwise gain control by, for example,
issuing those shares in private placements to purchasers who might side with our
board of directors in opposing a hostile takeover bid.
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PREFERRED STOCK. Our certificate of incorporation will provide that our
board of directors has the authority, without any further vote or action by our
stockholders, to issue preferred stock in one or more series and to fix the
number of shares constituting any such series and the preferences, limitations
and relative rights, including dividend rights, dividend rate, voting rights,
terms of redemption, redemption price or prices, conversion rights and
liquidation preferences of the shares constituting any series. The existence of
authorized but unissued preferred stock could reduce our attractiveness as a
target for an unsolicited takeover bid since we could, for example, issue shares
of preferred stock to parties who might oppose such a takeover bid or shares
that contain terms the potential acquiror may find unattractive. This may have
the effect of delaying or preventing a change in control, may discourage bids
for the common stock at a premium over the market price of the common stock, and
may adversely affect the market price of, and the voting and other rights of the
holders of, common stock.
CLASSIFIED BOARD OF DIRECTORS, VACANCIES AND REMOVAL OF DIRECTORS
Our certificate of incorporation will provide that our board of directors
will be divided into three classes of even number or nearly even number, with
each class elected for staggered three-year terms expiring in successive years.
Any effort to obtain control of our board of directors by causing the election
of a majority of the board of directors may require more time than would be
required without a staggered election structure. Our certificate of
incorporation also provides that directors may be removed only for cause at a
meeting of stockholders by a majority of the shares then entitled to vote.
Vacancies in our board of directors may be filled only by our board of
directors. Any director elected to fill a vacancy will hold office for the
remainder of the full term of the class of directors in which the vacancy
occurred (including a vacancy created by increasing the size of the board) and
until such director's successor shall have been duly elected and qualified. No
decrease in the number of directors will shorten the term of any incumbent
director. Our by-laws will provide that the number of directors shall be fixed
and increased or decreased from time to time by resolution of the board of
directors, but the board of directors shall at no time consist of fewer than
three directors. These provisions may have the effect of slowing or impeding a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting a change in the membership of our board of directors that would
effect a change of control.
ADVANCE NOTICE REQUIREMENTS FOR NOMINATION OF DIRECTORS AND PRESENTATION OF
NEW BUSINESS AT MEETINGS OF STOCKHOLDERS; ACTION BY WRITTEN CONSENT
Our by-laws provide for advance notice requirements for stockholder
proposals and nominations for director. Generally, to be timely, notice must be
received at our principal executive offices not less than 90 days nor more than
120 days prior to the first anniversary date of the annual meeting for the
preceding year. In addition, under the provisions of both our certificate of
incorporation and by-laws, action may not be taken by written consent of
stockholders; rather, any action taken by the stockholders must be effected at a
duly called annual or special meeting. The chief executive officer or, under
some circumstances, the president and the board of directors may call a special
meeting. These provisions make it more procedurally difficult for a stockholder
to place a proposal or nomination on the meeting agenda or to take action
without a meeting, and therefore may reduce the likelihood that a stockholder
will seek to take independent action to replace directors or seek a stockholder
vote with respect to other matters that are not supported by management.
BUSINESS COMBINATION UNDER DELAWARE LAW
As a Delaware corporation, we are subject to Section 203 of the Delaware
General Corporation Law, unless we elect in our certificate of incorporation not
to be governed by the provisions of Section 203. We
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have not made that election. Subject to specified exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless:
- prior to that date, the board of directors approved the transaction in
which such stockholder became an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding shares owned by persons who are
directors and also officers; or
- on or subsequent to that date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the holders of at least
66 2/3% of our outstanding voting stock which is not owned by the
interested stockholder.
A "business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior to the determination of interested
stockholder status, did own, 15% or more of a corporation's voting stock,
subject to specified exceptions.
Clayton, Dubilier & Rice Fund V Limited Partnership, EXOR Group S.A., and
their affiliates or associates are not subject to the restrictions imposed by
Section 203 as they have each been an interested stockholder for purposes of
Section 203 for a period greater than three years.
LIMITATION OF LIABILITY OF DIRECTORS
Our certificate of incorporation provides that no director will be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent that this limitation on or
exemption from liability is not permitted by the Delaware General Corporation
Law and any amendments to that law.
The principal effect of the limitation on liability provision is that a
stockholder will be unable to prosecute an action for monetary damages against a
director unless the stockholder can demonstrate a basis for liability for which
indemnification is not available under the Delaware General Corporation Law.
This provision, however, does not eliminate or limit director liability arising
in connection with causes of action brought under the federal securities laws.
Our certificate of incorporation does not eliminate our directors' duty of care.
The inclusion of this provision in our certificate of incorporation may,
however, discourage or deter stockholders or management from bringing a lawsuit
against directors for a breach of their fiduciary duties, even though such an
action, if successful, might otherwise have benefited us and our stockholders.
This provision should not affect the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care.
Our by-laws also provide that we will indemnify our directors and officers
to the fullest extent permitted by Delaware law. We are required to indemnify
our directors and officers for all judgments, fines, settlements, legal fees and
other expenses incurred in connection with pending or threatened legal
proceedings because of the director's or officer's position with Riverwood
Holding or another entity that the director or officer serves at our request,
subject to various conditions, and to advance funds to our directors and
officers to enable them to defend against such proceedings. To receive
indemnification, the director or
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officer must have been successful in the legal proceeding or have acted in good
faith and in what was reasonably believed to be a lawful manner in the best
interest of Riverwood Holding.
SUPERMAJORITY VOTING REQUIREMENT FOR AMENDMENT OF CERTAIN PROVISIONS OF OUR
CERTIFICATE OF INCORPORATION AND BY-LAWS
The provisions of our certificate of incorporation governing, among other
things, the classified board, the liability of directors, the elimination of
stockholder actions by written consent and the prohibition on the right of
stockholders to call a special meeting, may not be amended, altered or repealed
unless the amendment is approved by the vote of holders of 75% of the shares
then entitled to vote at an election of directors. This requirement exceeds the
majority vote of the outstanding stock that would otherwise be required by the
Delaware General Corporation Law for the repeal or amendment of such provisions
of the certificate of incorporation. Our by-laws may be amended by the board of
directors or by the vote of holders of 75% of the shares then entitled to vote.
These provisions make it more difficult for any person to remove or amend any
provisions that may have an anti-takeover effect.
Stockholder Rights Plan
Our board of directors intends to adopt a stockholder rights plan under
which each outstanding share of our common stock will be coupled with a stock
purchase right. The description and terms of the rights will be found in a
rights agreement to be entered into between Riverwood Holding and , as the
rights agent. Although the material provisions of the rights agreement have been
accurately summarized, the statements below concerning the rights agreement are
not necessarily complete, and in each instance reference is made to the form of
rights agreement itself, a copy of which will be filed as an exhibit to the
registration statement of which this prospectus forms a part. Each statement is
qualified in its entirety by such reference.
Initially, the rights will be attached to the certificates representing
outstanding shares of common stock, and no separate rights certificates will be
distributed. The rights are transferable only with the common stock until they
become exercisable, are redeemed or expire. Each right will entitle the holder
to purchase one one-thousandth of a share of our Series A Junior Participating
Preferred Stock at an exercise price of $ , subject to adjustment. Each one
one-thousandth of a share of Series A Junior Participating Preferred Stock will
have economic and voting terms equivalent to one share of our common stock.
Until it is exercised, the right itself will not entitle the holder of the right
to any rights as a stockholder, including the right to receive dividends or to
vote at stockholder meetings.
Rights are not exercisable until the distribution date (as described below)
and will expire at the close of business on the tenth anniversary of the date of
the rights agreement, unless earlier redeemed or exchanged by us. As soon as
practicable after the distribution date, we would issue separate certificates
representing the rights which would trade separately from the shares of our
common stock. A distribution date would occur upon the earlier of:
- the tenth day after the first public announcement or communication to us
that a person or group of affiliated or associated persons (referred to as
an acquiring person) has acquired beneficial ownership of 15% or more of
our outstanding common stock (the date of such announcement or
communication is referred to as the stock acquisition time); or
- the tenth business day after the commencement or announcement of the
intention to commence a tender offer or exchange offer that would result
in a person or group becoming an acquiring person.
100
If any person becomes an acquiring person, each right will represent,
instead of the right to acquire Series A Junior Participating Preferred Stock,
the right to receive upon exercise an amount of common stock having a value
equal to two times the purchase price of the right, subject to certain
exceptions. All rights that are beneficially owned by an acquiring person or its
transferee will become null and void.
If at any time after a public announcement has been made or Riverwood
Holding has received notice that a person has become an acquiring person:
- Riverwood Holding is acquired in a merger or other business combination,
or
- 50% or more of Riverwood Holding's assets, cash flow or earning power is
sold or transferred,
each right, except rights that previously have been voided as described above,
will represent the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the purchase price of the
right.
At any time until the earlier of (1) the stock acquisition time or (2) the
final expiration date of the rights agreement, we may redeem all the rights at a
price of $0.001 per right. At any time after a person has become an acquiring
person and prior to the acquisition by such person of 50% or more of the
outstanding shares of our common stock, we may exchange the rights, in whole or
in part, at an exchange ratio of one share of common stock per right.
The purchase price payable, the number of thousandths of a share of
Series A Junior Participating Preferred Stock and the amount of common stock,
cash or other securities or property issuable upon exercise of, or exchange for,
rights, and the number of such rights outstanding, are subject to adjustment
from time to time to prevent dilution. Except as provided in the rights
agreement, no adjustment in the purchase price or the number of shares of
Series A Junior Participating Preferred Stock issuable upon exercise of a
stockholder right will be required until the cumulative adjustment would require
an increase or decrease of at least 1% in the purchase price or number of shares
for which a right is exercisable.
The stockholder rights plan is designed to protect stockholders in the event
of unsolicited offers to acquire Riverwood Holding and other coercive takeover
tactics which, in the opinion of the company's board of directors, could impair
its ability to represent stockholder interests. The stockholder rights will not
prevent a takeover of us. However, the provisions of the stockholder rights plan
may render an unsolicited takeover more difficult or less likely to occur, even
though such takeover may offer our stockholders the opportunity to sell their
stock at a price above the prevailing market rate and/or may be favored by a
majority of our stockholders.
Listing
We will file an application to have the common stock listed on the New York
Stock Exchange under the symbol "RVW".
Transfer Agent And Registrar
The transfer agent and registrar for our common stock and our Series A
Junior Participating Preferred Stock is .
101
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of our common stock. After this offering
is completed, the number of shares available for future sale into the public
markets is subject to legal and contractual restrictions, some of which are
described below. The lapsing of these restrictions will permit sales of
substantial amounts of our common stock in the public market or could create the
perception that these sales could occur, which could adversely affect the market
price for our common stock. These factors could also make it more difficult for
us to raise funds through future offerings of common stock.
Sale of Restricted Securities
After this offering, shares of common stock will be outstanding, or
shares if the underwriters' exercise their overallotment option in full.
Of these shares, all of the shares sold in this offering, plus any shares issued
upon exercise of the underwriters' overallotment option, will be freely
tradeable without restriction under the Securities Act, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act. The
remaining shares of common stock that will be outstanding after this offering
are "restricted securities" within the meaning of Rule 144 and Rule 701 under
the Securities Act. Restricted securities may be sold in the public market only
if they are registered under the Securities Act or are sold pursuant to an
exemption from registration under Rule 144 or Rule 701 under the Securities Act,
which are summarized below. Subject to the lockup agreements described below,
shares held by our affiliates that are not restricted securities or that have
been owned for more than one year may be sold subject to compliance with
Rule 144 of the Securities Act without regard to the prescribed one-year holding
period under Rule 144.
Stock Options
Upon completion of this offering, we intend to file one or more registration
statements under the Securities Act to register the shares of common stock to be
issued under our stock option plans and, as a result, all shares of common stock
acquired upon exercise of stock options and other equity-based awards granted
under these plans will also be freely tradable under the Securities Act unless
purchased by our affiliates. A total of shares of common stock are
reserved for issuance under our benefit plans.
Lock-Up Arrangements
We and our executive officers and directors and each of the 5% stockholders
listed under "Principal Stockholders," representing substantially all of the
shares of common stock outstanding prior to this offering, have agreed with the
underwriters, subject to exceptions, not to (1) offer, sell, contract to sell,
pledge, hypothecate, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase,
lend, make any short sale or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock, any options, rights or warrants to
purchase any shares of common stock or any securities convertible into,
exercisable or exchangeable for or that represent the right to receive shares of
common stock or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the shares of common stock or other securities described in (1), for 180 days
after the date of this prospectus, except with the prior written consent of
Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated. This lock-up
provision also applies to common stock owned now or acquired later by the person
executing the agreement or for which the person executing the agreement later
acquires the power of disposition.
102
Following the lock-up periods, substantially all of the shares of our common
stock that are restricted securities or are held by our affiliates as of the
date of this prospectus will be eligible for sale in the public market in
compliance with Rule 144 or Rule 701 under the Securities Act.
Registration Rights Agreement
Stockholders currently representing substantially all of the shares of our
common stock will have the right to require us to register shares of common
stock for resale in some circumstances. See "Certain Relationships and Related
Party Transactions--Registration and Participation Agreement."
Rule 144
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, any person or persons whose shares are aggregated,
including an affiliate, who has beneficially owned restricted securities for a
period of at least one year is entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of:
- 1% of the then outstanding shares of common stock; or
- the average weekly trading volume in the common stock on the New York
Stock Exchange during the four calendar weeks preceding the date on which
the notice of the sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to provisions relating to notice,
manner of sale, volume limitations and the availability of current public
information about us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares for at least two years, including the holding
period of any prior owner other than an "affiliate," is entitled to sell the
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 under the Securities Act may be relied upon for the
resale of our common stock originally issued by us before our initial public
offering to our employees, directors, officers, consultants or advisers under
written compensatory benefit plans, including our stock option plans, or
contracts relating to the compensation of these persons. Shares of our common
stock issued in reliance on Rule 701 are "restricted securities" and, beginning
90 days after the date of this prospectus, may be sold by non-affiliates subject
only to the manner of sale provisions of Rule 144 and by affiliates under
Rule 144 without compliance with the one-year holding period, in each case
subject to the lockup agreements.
103
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS
The following is a general discussion of certain United States federal tax
considerations relating to the purchase, ownership and disposition of our common
stock by a non-U.S. holder. This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended (the"Code"),
existing and proposed Treasury regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect or
proposed on the date hereof and all of which are subject to change, possibly
with retroactive effect or different interpretations. This discussion is for
general information only and does not address all of the tax considerations that
may be relevant to specific holders in light of their particular circumstances
or to holders subject to special treatment under U.S. federal tax laws (such as
certain financial institutions, insurance companies, tax-exempt entities,
retirement plans, partnerships, dealers in securities, brokers, expatriates,
persons who have acquired our common stock as part of a straddle, hedge,
conversion transaction or other integrated investment). This discussion does not
address the U.S. state and local or non-U.S. tax considerations relating to the
purchase, ownership and disposition of our common stock.
As used in this discussion, the term "non-U.S. holder" means a beneficial
owner of our common stock that is not a U.S. person and is not a partnership for
U.S. federal income tax purposes. A U.S. person means a person that is for U.S.
federal income tax purposes:
(i) an individual who is a citizen or resident of the United States;
(ii) a corporation or partnership created or organized in or under the
laws of the United States or of any state or political subdivision thereof
or therein, including the District of Columbia (other than a partnership
that is not treated as a U.S. person under applicable Treasury regulations);
(iii) an estate the income of which is subject to U.S. federal income
tax regardless of the source thereof; or
(iv) a trust with respect to which a court within the United States is
able to exercise primary supervision over its administration and one or more
U.S. persons have the authority to control all of its substantial decisions,
or certain electing trusts that were in existence on August 19, 1996 and
were treated as domestic trusts on that date.
An individual may, subject to certain exceptions, be deemed to be a resident
of the United States for a calendar year by reason of being present in the
United States for at least 31 days in such calendar year and for an aggregate of
at least 183 days during a three-year period ending with such current calendar
year (counting for such purposes all of the days present in such current
calendar year, one-third of the days present in the immediately preceding
calendar year, and one-sixth of the days present in the second preceding
calendar year).
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSIDERATIONS APPLICABLE TO THEM RELATING TO THE PURCHASE,
OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, INCLUDING THE APPLICABILITY OF
U.S. FEDERAL, STATE OR LOCAL TAX LAWS OR NON-U.S. TAX LAWS, ANY CHANGES IN
APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.
104
Dividends
We or a withholding agent will have to withhold U.S. federal withholding tax
from the gross amount of any dividends paid to a non-U.S. holder at a rate of
30% unless one of the following two exceptions is satisfied to reduce or
eliminate such withholding tax. The first exception is that an applicable income
tax treaty reduces or eliminates such tax, and a non-U.S. holder claiming the
benefit of such treaty provides to us or such agent proper IRS documentation.
The second exception is that the dividends are effectively connected with a
non-U.S. holder's conduct of a trade or business in the United States and the
non-U.S. holder provides to us or such agent proper IRS documentation. In the
latter case, such non-U.S. holder generally will be subject to U.S. federal
income tax with respect to such dividends in the same manner as a U.S. citizen
or corporation, as applicable, unless otherwise provided in an applicable income
tax treaty. Additionally, a non-U.S. holder that is a corporation could be
subject to a branch profits tax on effectively connected dividend income at a
rate of 30% (or at a reduced rate under an applicable income tax treaty). If a
non-U.S. holder is eligible for a reduced rate of U.S. federal withholding tax
pursuant to an income tax treaty, such non-U.S. holder may obtain a refund of
any excess amount withheld by filing an appropriate claim for refund with the
IRS.
Sale, Exchange or Other Disposition of Common Stock
Generally, a non-U.S. holder will not be subject to U.S. federal income tax
on gain realized upon the sale, exchange or other disposition of our common
stock unless (i) such non-U.S. holder is an individual present in the United
States for 183 days or more in the taxable year of the sale, exchange or other
disposition and certain other conditions are met, (ii) the gain is effectively
connected with such non-U.S. holder's conduct of a trade or business in the
United States or (iii) we are or have been a "United States real property
holding corporation" for U.S. federal income tax purposes at any time during the
shorter of the five-year period preceding such sale, exchange or disposition or
the period that such non-U.S. holder held our common stock (which we do not
believe that we have been or are currently) and certain other conditions are
met. If the first exception applies, the non-U.S. Holder generally will be
subject to U.S. federal income tax at a rate of 30% (or at a reduced rate under
an applicable income tax treaty) on the amount by which capital gains allocable
to U.S. sources (including gains from the sale, exchange or other disposition of
our common stock) exceed capital losses allocable to U.S. sources. If the second
or third exception applies, the non-U.S. holder generally will be subject to
U.S. federal income tax with respect to such gain in the same manner as a U.S.
citizen or corporation, as applicable, unless otherwise provided in an
applicable income tax treaty, and a non-U.S. holder that is a corporation could
also be subject to a branch profits tax on such gain at a rate of 30% (or at a
reduced rate under an applicable income tax treaty).
Federal Estate Tax
Common stock owned or treated as owned by an individual who is a non-U.S.
holder at the time of his or her death generally will be included in the
individual's gross estate for U.S. federal estate tax purposes and may be
subject to U.S. federal estate tax unless an applicable estate tax treaty
provides otherwise.
Current U.S. federal tax law provides for reductions in U.S. federal estate
tax through 2009 and the elimination of such estate tax entirely in 2010. Under
this law, such estate tax would be fully reinstated, as in effect prior to the
reductions, in 2011.
Information Reporting and Backup Withholding Tax
The amounts of dividends, if any, paid on or with respect to our common
stock during each calendar year and the amount of tax, if any, withheld from
such payments will be reported to each non-U.S. holder
105
and the IRS. Copies of the information returns reporting such dividends and
withholding may be made available to the tax authorities in the country in which
a non-U.S. holder is a resident under the provisions of an applicable income tax
treaty.
Additional information reporting and backup withholding (at rates equal to
30.0% in 2002 and 2003, 29.0% in 2004 and 2005, 28.0% in 2006 through 2010 and
31% after 2010) may apply to payments made by us to a non-U.S. holder on or with
respect to our common stock, unless the non-U.S. holder certifies as to its
status as a non-U.S. holder under penalties of perjury or otherwise establishes
an exemption, and certain other conditions are satisfied.
Information reporting and backup withholding will also apply with respect to
the payment of the proceeds from the disposition of our common stock by a
non-U.S. holder as follows:
(i) If the proceeds are paid to or through the U.S. office of a broker,
they generally will be subject to information reporting and backup
withholding unless the holder certifies as to its status as a non-U.S.
holder under penalties of perjury or otherwise establishes an exemption.
(ii) If the proceeds are paid to or through a non-U.S. office of a
broker that is not a U.S. person and is not a foreign person with certain
specified U.S. connections (a "U.S. related person"), they will not be
subject to information reporting or backup withholding.
(iii) If the proceeds are paid to or through a non-U.S. office of a
broker that is a U.S. person or a U.S. related person, they generally will
be subject to information reporting (but not backup withholding) unless the
holder certifies as to its status as a non-U.S. holder under penalties of
perjury or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be allowed as a refund or a credit against such non-U.S.
holder's U.S. federal income tax liability, provided that the required
procedures are followed.
106
UNDERWRITING
Riverwood Holding and the underwriters for this offering named below have
entered into an underwriting agreement with respect to the shares being offered.
Subject to certain conditions, each underwriter has severally agreed to purchase
the number of shares indicated in the following table. Goldman, Sachs & Co. and
Morgan Stanley & Co. Incorporated are the representatives of the underwriters.
Underwriters Number of Shares
------------ ----------------
Goldman, Sachs & Co..................................
Morgan Stanley & Co. Incorporated....................
Deutsche Bank Securities Inc.........................
J.P. Morgan Securities Inc...........................
Salomon Smith Barney Inc.............................
----------
Total............................................
==========
The underwriters are committed to take and pay for all of the shares being
offered, if any are taken, other than shares covered by the option described
below unless and until this option is exercised.
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from Riverwood Holding to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Riverwood Holding. Such amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares.
No Exercise Full Exercise
----------- -------------
Per Share.................................. $ $
Total...................................... $ $
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
We, our executive officers and directors, and each of the 5% stockholders
listed under "Principal Stockholders" have agreed with the underwriters, with
exceptions, not to (1) offer, sell, contract to sell, pledge, hypothecate, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend, make any short sale or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock, any options, rights or warrants to purchase any shares of common stock or
any securities convertible into, exercisable or exchangeable for or that
represent the right to receive shares of common stock or (2) enter into any swap
or other arrangement that transfers to another,
107
in whole or in part, any of the economic consequences of ownership of the shares
of common stock or other securities described in (1), for 180 days after the
date of this prospectus, except with the prior written consent of Goldman,
Sachs & Co. and Morgan Stanley & Co. Incorporated. This agreement does not apply
to any existing employee benefit plans. See "Shares Eligible for Future Sale"
for a discussion of certain transfer restrictions.
Prior to the offering, there has been no public market for the shares. The
initial public offering price was negotiated among Riverwood Holding and the
representatives. Among the factors considered in determining the initial public
offering price of the shares, in addition to prevailing market conditions, were
our historical performance, estimates of our business potential and our earnings
prospects, an assessment of our management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
We expect the common stock to be listed on the New York Stock Exchange under
the symbol "RVW." In order to meet one of the requirements for listing the
common stock on the New York Stock Exchange, the underwriters have undertaken to
sell lots of 100 or more shares to a minimum of 2,000 beneficial holders.
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from the issuer in the offering. The
underwriters may close out any covered short position by either exercising their
option to purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the overallotment option. "Naked" short sales are any
sales in excess of such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchase in this offering.
Stabilizing transactions consist of various bids for or purchases of common
stock made by the underwriters in the open market prior to the completion of
this offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
common stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the common stock. As
a result, the price of the common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on the
New York Stock Exchange, in the over-the-counter market or otherwise.
The underwriters and their affiliates have engaged in, and may in the future
engage in, investment banking and other commercial dealings in the ordinary
course of business with Riverwood Holding and its affiliates. They have received
customary fees and commissions for these transactions.
108
An affiliate of Deutsche Bank Securities Inc. is the syndication agent and a
lender, an affiliate of J.P. Morgan Securities Inc. is the administrative agent
and a lender and an affiliate of Salomon Smith Barney Inc. is a lender, under
our senior secured credit agreement.
In June 2001, Deutsche Bank Securities Inc. and J.P. Morgan Securities Inc.
were the initial purchasers in the sale of our 10 5/8% senior notes due 2007.
One of our directors, G. Andrea Botta, is a managing director at Morgan
Stanley & Co. Incorporated. Another of our directors, Brian J. Richmand, is a
designee of J.P. Morgan Partners LLC, which is an affiliate of J.P. Morgan
Securities Inc. and an affiliate of the administrative agent and a lender under
our senior secured credit facility.
A prospectus in electronic format may be made available on the websites
maintained by one or more underwriters participating in this offering. The
underwriters may agree to allocate a number of shares to underwriters for sale
to their online brokerage account holders. Internet distributions will be
allocated by Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated to
underwriters that may make Internet distributions on the same basis as other
allocations.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
We estimate that our share of the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $ million.
Riverwood Holding has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
109
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for us by Debevoise & Plimpton, New York, New
York, and for the underwriters by Cravath, Swaine & Moore, New York, New York.
Franci J. Blassberg, Esq., a member of Debevoise & Plimpton, is married to
Joseph L. Rice, III, who is a shareholder of the general partner of the general
partner of Clayton, Dubilier & Rice Fund V Limited Partnership.
EXPERTS
The financial statements included in this prospectus and the related
financial statement schedule included elsewhere in the registration statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the registration statement
(which reports express an unqualified opinion and include an explanatory
paragraph referring to a change in the method of accounting for derivative
instruments and hedging activities), and have been so included in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual and quarterly reports with the SEC. These documents contain
specific information regarding our company. These documents, including exhibits
and schedules thereto, may be inspected without charge at the SEC's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 after
payment of fees prescribed by the SEC. The SEC also maintains a World Wide Web
site which provides online access to reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC at the address http://www.sec.gov.
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act for the registration of the common stock offered by this
prospectus. This prospectus, which is a part of the registration statement, does
not contain all of the information included in the registration statement. Any
statement made in this prospectus concerning the contents of any contract,
agreement or other document is not necessarily complete. For further information
regarding our company and the common stock offered by this prospectus, please
refer to the registration statement, including its exhibits. If we have filed
any contract, agreement or other document as an exhibit to the registration
statement, you should read the exhibit for a more complete understanding of the
documents or matter involved.
110
INDEX TO FINANCIAL STATEMENTS
Page
--------
RIVERWOOD HOLDING, INC.
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 2001 and
2000...................................................... F-3
Consolidated Statements of Operations and Comprehensive
(Loss) Income for each of the three years in the period
ended December 31, 2001................................... F-4
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2001............... F-5
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 2001..... F-6
Notes to Consolidated Financial Statements.................. F-7
Selected Quarterly Financial Data (Unaudited)............... F-43
F-1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of Riverwood Holding, Inc.:
We have audited the accompanying consolidated balance sheets of Riverwood
Holding, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000,
and the related consolidated statements of operations and comprehensive (loss)
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Riverwood Holding, Inc. and
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 21 to the consolidated financial statements, effective
January 1, 2001, the Company changed its method of accounting for derivative
instruments and hedging activities.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 15, 2002
(April 23, 2002 as to Note 28)
F-2
RIVERWOOD HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31, December 31,
2001 2000
------------ ------------
ASSETS
Current Assets:
Cash and Equivalents........................................ $ 26,107 $ 18,417
Receivables, Net of Allowances.............................. 140,099 137,695
Inventories................................................. 181,305 175,972
Prepaid Expenses............................................ 6,770 13,594
---------- ----------
Total Current Assets................................ 354,281 345,678
Property, Plant and Equipment, at Cost:
Land and Improvements....................................... 38,216 38,801
Buildings................................................... 109,988 109,870
Machinery and Equipment..................................... 1,801,656 1,782,155
---------- ----------
1,949,860 1,930,826
Less, Accumulated Depreciation.............................. 659,945 562,235
---------- ----------
Property, Plant and Equipment, Net.......................... 1,289,915 1,368,591
Deferred Tax Assets......................................... 8,530 1,897
Investments in Net Assets of Equity Affiliates.............. 1,934 5,882
Goodwill, Net of Accumulated Amortization of $45,494 in 2001
and $37,753 in 2000....................................... 276,482 273,436
Other Assets................................................ 126,450 125,873
---------- ----------
Total Assets........................................ $2,057,592 $2,121,357
========== ==========
LIABILITIES
Current Liabilities:
Short-Term Debt............................................. $ 11,817 $ 15,908
Accounts Payable............................................ 123,293 100,261
Compensation and Employee Benefits.......................... 24,689 31,297
Income Taxes................................................ 4,178 1,481
Interest Payable............................................ 41,588 33,924
Other Accrued Liabilities................................... 31,281 27,096
---------- ----------
Total Current Liabilities................................... 236,846 209,967
Long-Term Debt, Less Current Portion........................ 1,523,082 1,516,881
Deferred Income Taxes....................................... 14,422 9,132
Other Noncurrent Liabilities................................ 59,316 73,354
---------- ----------
Total Liabilities................................... 1,833,666 1,809,334
---------- ----------
CONTINGENCIES AND COMMITMENTS (Note 15)
REDEEMABLE COMMON STOCK,
at Current Redemption Value............................... 8,061 8,061
---------- ----------
SHAREHOLDERS' EQUITY
Nonredeemable Common Stock.................................. 75 75
Capital in Excess of Par Value.............................. 748,753 748,813
Accumulated Deficit......................................... (493,771) (415,875)
Accumulated Derivative Instruments Loss..................... (4,570) --
Cumulative Currency Translation Adjustment.................. (34,622) (29,051)
---------- ----------
Total Shareholders' Equity.......................... 215,865 303,962
---------- ----------
Total Liabilities and Shareholders' Equity.......... $2,057,592 $2,121,357
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
RIVERWOOD HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
(In thousands of dollars)
Year ended Year ended Year ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Net Sales....................................... $1,249,886 $1,192,362 $1,174,665
Cost of Sales................................... 1,002,059 923,851 933,924
Selling, General and Administrative............. 120,629 112,200 114,402
Research, Development and Engineering........... 5,111 4,554 4,078
Restructuring Credit............................ -- (2,600) --
Other Expense (Income), Net..................... 24,035 (66,132) 1,798
---------- ---------- ----------
Income from Operations.......................... 98,052 220,489 120,463
Interest Income................................. 944 848 889
Interest Expense................................ 158,910 181,285 179,197
---------- ---------- ----------
(Loss) Income before Income Taxes and Equity in
Net Earnings of Affiliates.................... (59,914) 40,052 (57,845)
Income Tax Expense.............................. 8,759 3,009 3,936
---------- ---------- ----------
(Loss) Income before Equity in Net Earnings of
Affiliates.................................... (68,673) 37,043 (61,781)
Equity in Net Earnings of Affiliates............ -- 3,356 7,110
---------- ---------- ----------
(Loss) Income before Extraordinary Item and
Cumulative Effect of a Change in Accounting
Principle..................................... (68,673) 40,399 (54,671)
Extraordinary Loss on Early Extinguishment of
Debt, Net of Tax of $0........................ (8,724) (2,117) --
---------- ---------- ----------
(Loss) Income before Cumulative Effect of a
Change in Accounting Principle................ (77,397) 38,282 (54,671)
Cumulative Effect of a Change In Accounting
Principle Net of Tax of $0.................... (499) -- --
---------- ---------- ----------
Net (Loss) Income............................... (77,896) 38,282 (54,671)
---------- ---------- ----------
Other Comprehensive (Loss) Income, Net of Tax:
Derivative Instruments:
Transition Adjustment....................... (1,094) -- --
Derivative Loss, Net........................ (3,476) -- --
Foreign Currency Translation Adjustments...... (5,571) (13,620) 62
---------- ---------- ----------
Comprehensive (Loss) Income..................... $ (88,037) $ 24,662 $ (54,609)
========== ========== ==========
Net (Loss) Income per common share:
Basic......................................... (10.29) 5.06 (7.23)
Diluted....................................... (10.29) 4.98 (7.23)
Weighted average common shares outstanding:
Basic......................................... 7,568,177 7,563,717 7,556,842
Diluted....................................... 7,568,177 7,684,664 7,556,842
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
RIVERWOOD HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Year ended Year ended Year ended
December 31, December 31, December 31,
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income........................................... $ (77,896) $ 38,282 $ (54,671)
Noncash Items Included in Net (Loss) Income:
Depreciation and Amortization............................... 137,258 143,541 142,597
Cumulative Effect of a Change in Accounting Principle....... 499 -- --
Extraordinary Loss on Early Extinguishment of Debt.......... 8,724 2,117 --
Deferred Income Taxes....................................... (1,247) (2,538) (586)
Pension, Postemployment and Postretirement Benefits Expense,
Net of Contributions...................................... 4,908 1,822 4,761
Restructuring Credit........................................ -- (2,600) --
Net Gain on Sale of Assets.................................. -- (71,554) --
Equity in Net Earnings of Affiliates, Net of Dividends...... 710 1,727 (2,596)
Amortization of Deferred Debt Issuance Costs................ 7,564 10,261 10,268
LIFO Valuation Adjustments.................................. 12,335 (6,936) (4,876)
Other, Net.................................................. 7,280 -- 1,426
Net (Loss) of International Entities for the Month of
December 1999 (See Note 2)................................ -- -- (1,573)
Changes in Operating Assets & Liabilities, Net of Subsidiary
Consolidated:
Receivables................................................. 15,381 15,677 (16,884)
Inventories................................................. (14,394) 1,904 (12,426)
Prepaid Expenses............................................ 2,094 (3,181) (2,242)
Accounts Payable............................................ (3,852) 5,582 (13,674)
Compensation and Employee Benefits.......................... (11,614) (7,606) (10,642)
Income Taxes................................................ 2,731 1,024 (786)
Other Accrued Liabilities................................... 993 (28,815) (8,903)
Other Noncurrent Liabilities................................ (1,875) 147 (12,552)
---------- ---------- ----------
Net Cash Provided by Operating Activities........... 89,599 98,854 16,641
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment.................. (57,670) (62,062) (66,018)
Payment for Acquisitions.................................... -- (12,500) --
Payment for Settlement of Tax Matters Relating to the
Merger.................................................... (29,500) -- --
Cash Acquired of Subsidiary Consolidated.................... 17,985 -- --
Proceeds from Sales of Assets, Net of Selling Costs......... -- 205,714 5,324
Increase in Other Assets.................................... (3,305) (3,849) (7,062)
---------- ---------- ----------
Net Cash (Used in) Provided by Investing
Activities........................................ (72,490) 127,303 (67,756)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Decrease) Increase in Notes Payable.................... (93,727) (72,290) 55,900
Payments on Debt............................................ (488,372) (151,469) (6,290)
Proceeds from Issuance of Debt.............................. 592,500 -- --
Increase in Debt Issuance Costs............................. (18,983) -- --
(Repurchases) Issuance of Redeemable Common Stock, Net...... (60) 512 58
---------- ---------- ----------
Net Cash (Used in) Provided by Financing
Activities........................................ (8,642) (223,247) 49,668
---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (777) 1,399 1,715
---------- ---------- ----------
Net Increase in Cash and Equivalents........................ 7,690 4,309 268
Cash and Equivalents at Beginning of Period................. 18,417 14,108 13,840
---------- ---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD....................... $ 26,107 $ 18,417 $ 14,108
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
RIVERWOOD HOLDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars)
Capital in Retained Cumulative Accumulated
Nonredeemable Excess of Earnings Currency Derivative Total
Common Par (Accumulated Translation Instruments Shareholders'
Stock Value Deficit) Adjustment Loss Equity
-------------- ---------- ------------ ----------- ----------- -------------
BALANCES AT DECEMBER 31,
1998.................... $75 $750,100 $(397,913) $(15,493) $ -- $336,769
Net (Loss).............. -- -- (54,671) -- -- (54,671)
Net (Loss) of
International Entities
for the Month of
December 1999 (See
Note 2)............... -- -- (1,573) -- -- (1,573)
Currency Translation
Adjustment............ -- -- -- 62 -- 62
Adjustment to Redemption
Value of Redeemable
Common Stock, Net of
(Repurchases)
Issuance.............. -- (939) -- -- -- (939)
--- -------- --------- -------- ------- --------
BALANCES AT DECEMBER 31,
1999.................... 75 749,161 (454,157) (15,431) -- 279,648
Net Income.............. -- -- 38,282 -- -- 38,282
Currency Translation
Adjustment............ -- -- -- (13,620) -- (13,620)
Adjustment to Redemption
Value of Redeemable
Common Stock, Net of
(Repurchases)
Issuance.............. -- (348) -- -- -- (348)
--- -------- --------- -------- ------- --------
BALANCES AT DECEMBER 31,
2000.................... 75 748,813 (415,875) (29,051) -- 303,962
Net (Loss).............. -- -- (77,896) -- -- (77,896)
Accumulated Derivative
Instruments Loss...... -- -- -- -- (4,570) (4,570)
Currency Translation
Adjustment............ -- -- -- (5,571) -- (5,571)
(Repurchases) Issuance
of Redeemable Common
Stock, Net............ -- (60) -- -- -- (60)
--- -------- --------- -------- ------- --------
BALANCES AT DECEMBER 31,
2001.................... $75 $748,753 $(493,771) $(34,622) $(4,570) $215,865
=== ======== ========= ======== ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
Holding and its wholly-owned subsidiaries RIC Holding and 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 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 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 RIC Holding, Inc., a wholly-owned subsidiary, conducted no
significant business and have no independent assets or operations other than in
connection with the Merger and related transactions through March 27, 1996.
Holding and RIC Holding, Inc. fully and unconditionally guarantee substantially
all of the debt of Riverwood.
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.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies of the
Company.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include all of the
accounts of Riverwood Holding, Inc. and its majority-owned and controlled
subsidiaries. The accompanying consolidated financial statements include the
worldwide operations of the Coated Board segment which includes the paperboard,
packaging, and packaging machinery businesses and the Containerboard segment.
All significant transactions and balances between the consolidated operations
have been eliminated.
Effective December 1, 1999, the Company changed its international
subsidiaries fiscal year end to December 31. Previously, the Company's
international subsidiaries were principally consolidated and reported on the
basis of fiscal years ending November 30. Accordingly, the net activity for the
month of December 1999 for the international entities is shown as an adjustment
to retained earnings in the accompanying financial statements. The following
represents summarized international results for the month of December 1999:
Month Ended
December 31,
1999
-------------
(In thousands
of dollars)
Net Sales................................................... $22,370
=======
Net (Loss).................................................. $(1,573)
=======
F-7
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(B) CASH AND EQUIVALENTS
Cash and equivalents include time deposits, certificates of deposit and
other marketable securities with original maturities of three months or less.
(C) INVENTORIES
Inventories are stated at the lower of cost or market. Cost of inventories
is determined principally on the last-in, first-out ("LIFO") basis. Average cost
basis is used to determine the cost of supplies inventories. Inventories are
stated net of an allowance for slow-moving and obsolete inventory.
(D) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Betterments, renewals
and extraordinary repairs that extend the life of the asset are capitalized;
other repairs and maintenance charges are expensed as incurred. The Company's
cost and related accumulated depreciation applicable to assets retired or sold
are removed from the accounts and the gain or loss on disposition is recognized
in income.
Costs directly associated with the development and testing of computer
information systems for internal use are deferred and included in property,
plant and equipment. Such costs are amortized on a straight-line basis over the
expected useful life of 5 years. Costs indirectly associated with such projects
and ongoing maintenance costs are expensed as incurred. A total of $1.4 million
and $1.8 million in costs relating to software development were capitalized in
2001 and 2000, respectively, and were included in property, plant and equipment
at December 31, 2001 and December 31, 2000.
Interest is capitalized on major projects. The capitalized interest is
recorded as part of the asset to which it relates and is amortized over the
asset's estimated useful life. Capitalized interest was approximately $2.1
million, $1.3 million, and $1.4 million in the years ended December 31, 2001,
2000, and 1999, respectively.
(E) DEPRECIATION AND AMORTIZATION
Depreciation and amortization are principally computed using the
straight-line method based on the following estimated useful lives of the
related assets:
Buildings................................................... 10 to 40 years
Land improvements........................................... 3 to 20 years
Machinery and equipment..................................... 2 to 40 years
Furniture and fixtures...................................... 1 to 12 years
Automobiles and light trucks................................ 2 to 5 years
For certain major capital additions, the Company computes depreciation on
the units-of-production method until the asset's designed level of production is
achieved and sustained.
The Company assesses its long-lived assets other than goodwill for
impairment whenever facts and circumstances indicate that the carrying amount
may not be fully recoverable. To analyze recoverability, the Company projects
future cash flows, undiscounted and before interest, over the remaining life of
such
F-8
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets. Depreciation expense was approximately $125.8 million, $132.2 million
and $131.3 million in the years ended December 31, 2001, 2000 and 1999,
respectively. If these projected cash flows are less than the carrying amount,
an impairment would be recognized, resulting in a write-down of assets with a
corresponding charge to earnings. The impairment loss is measured based upon the
difference between the carrying amount and the fair value of the assets. The
Company assesses the appropriateness of the useful life of its long-lived assets
periodically.
Goodwill is amortized on a straight-line basis over 40 years. The cost of
patents, licenses and trademarks is amortized on a straight-line basis over 15
to 20 years. The related amortization expense is included in Other Expense
(Income), Net. The Company assesses goodwill for impairment whenever facts and
circumstances indicate that the carrying amount may not be fully recoverable. To
analyze recoverability, the Company projects future cash flows, undiscounted and
before interest, over the remaining life of the goodwill. If these projected
cash flows are less than the carrying amount of the goodwill, an impairment
would be recognized, resulting in a write down of goodwill with a corresponding
charge to earnings. The impairment loss is measured based upon the difference
between the carrying amount of the goodwill and the undiscounted future cash
flows before interest (see Note 26).
(F) INTERNATIONAL CURRENCY
The functional currency for most of the international subsidiaries is the
local currency for the country in which the subsidiaries own their primary
assets. The translation of the applicable currencies into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. Any related translation adjustments are
recorded directly to Shareholders' Equity. Gains and losses on foreign currency
transactions are included in Other Expense (Income), Net for the period in which
the exchange rate changes.
The Company enters into forward exchange contracts to hedge certain foreign
currency denominated exposures and option contracts to hedge anticipated
transactions denominated in foreign currency. Realized and unrealized gains and
losses on these contracts are included in Other Expense (Income), Net. The
discount or premium on an option or forward exchange contract is included in the
measurement of the basis of the related foreign currency transaction when
recorded.
(G) INCOME TAXES
The Company accounts for income taxes under the liability method whereby the
effect of changes in corporate tax rates on deferred income taxes is recognized
currently as an adjustment to income tax expense. The liability method also
requires that deferred tax assets or liabilities be recorded based on the
difference between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes. A valuation allowance is established
for deferred tax assets when it is more likely than not that the benefits of
such assets will not be realized.
F-9
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(H) REVENUE RECOGNITION
The Company recognizes revenue when pervasive evidence of a sales
arrangement exists, delivery has occurred, the price to the buyer is fixed and
determinable, and the collectibility of the sales price is reasonably assured
which is primarily when goods are shipped to customers. Revenues from packaging
machinery use agreements received in advance are recognized on a straight-line
basis over the term of the agreements. Customer returns and allowances have been
provided for based on estimates.
(I) SHIPPING AND HANDLING COSTS
During 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs." Previously, the Company
recognized shipping and handling costs as a reduction to Net Sales. EITF 00-10
requires shipping and handling costs to be included in Cost of Sales.
Accordingly, shipping and handling costs have been reclassified to Cost of Sales
for all periods presented. Such costs totaled approximately $64.9 million in
2001, $63.7 million in 2000 and $62.0 million in 1999.
(J) INSURANCE RESERVES
It is the Company's policy to self-insure or fund a portion of certain
expected losses related to group health benefits. Provisions for losses expected
are recorded based on the Company's estimates, on an undiscounted basis, of the
aggregate liabilities for known claims and estimated claims incurred but not
reported.
(K) ENVIRONMENTAL REMEDIATION RESERVES
The Company records accruals for environmental obligations based on
estimates developed in consultation with environmental consultants and legal
counsel. Accruals for environmental liabilities are established in accordance
with the American Institute of Certified Public Accountants Statement of
Position 96-1, "Environmental Remediation Liabilities." The Company records a
liability at the time when it is probable and can be reasonably estimated. Such
liabilities are not reduced for potential recoveries from insurance carriers.
Costs of future expenditures are not discounted to their present value.
(L) RECLASSIFICATION
The Company has reclassified the presentation of certain prior period
information to conform with the current presentation format.
(M) USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
amounts could differ from those estimates.
F-10
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(N) (LOSS) EARNINGS PER SHARE
Basic (loss) earnings per common share is computed by dividing Net (Loss)
Income by the weighted average number of common shares outstanding for the year.
Diluted (loss) earnings per common share reflects the potential dilution that
could occur if all outstanding employee stock options are exercised. For the
years ended December 31, 2001 and 1999, employee stock options have not been
considered in diluted (loss) earnings per common share calculations because they
are anti-dilutive.
NOTE 3 RECEIVABLES
The components of receivables at December 31 were as follows:
2001 2000
----------- -----------
(In thousands of dollars)
Trade....................................................... $137,462 $136,192
Less, allowance............................................. 3,416 2,769
-------- --------
134,046 133,423
Other....................................................... 6,053 4,272
-------- --------
$140,099 $137,695
======== ========
NOTE 4 FINANCIAL INSTRUMENTS
The Company has financial instruments which include foreign currency option
and forward exchange contracts and interest rate swap agreements. These
instruments involve, to varying degrees, elements of market and credit risk in
excess of the amounts recognized in the Consolidated Balance Sheets. The Company
does not hold or issue such financial instruments for trading purposes.
The Company enters into forward exchange contracts to effectively hedge
substantially all accounts receivable and certain accounts payable resulting
from transactions denominated in foreign currencies. The purpose of the forward
exchange contracts is to protect the Company from the risk that the eventual
functional currency cash flows resulting from the collection of the hedged
accounts receivable or payment of the hedged accounts payable will be adversely
affected by changes in exchange rates. At December 31, 2001 and 2000, the
Company had various foreign currency forward exchange contracts, with maturities
ranging up to one year. When aggregated and measured in U.S. dollars at year-end
exchange rates, the notional amount of these forward currency exchange contracts
totaled approximately $20.0 million and $29.7 million at December 31, 2001 and
2000, respectively. Generally, unrealized gains and losses resulting from these
contracts are recognized currently in operations and approximately offset
corresponding unrealized gains and losses recognized on the hedged accounts
receivable or accounts payable.
During 2001 and 2000, the Company entered into option contracts and forward
exchange contracts to hedge certain anticipated foreign currency transactions.
The purpose of the option contracts and forward exchange contracts is to protect
the Company from the risk that the eventual functional currency cash flows
resulting from anticipated foreign currency transactions will be adversely
affected by changes in exchange rates. At December 31, 2001, no option contracts
existed. At December 31, 2000, various option contracts existed, which expired
on various dates through the year 2001. When measured in U.S. dollars at
year-end
F-11
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exchange rates, the year 2000 notional amount of the purchased option contracts
totaled approximately $37.1 million. Gains and losses, if any, related to these
contracts are recognized in income when the anticipated transaction affects
income. As of December 31, 2001 and 2000, when aggregated and measured in U.S.
dollars at year-end exchange rates, the notional amount of these forward
exchange contracts totaled approximately nil and $33.4 million, respectively.
The Company uses interest rate swap agreements to fix a portion of its
variable rate Term Loan Facility to a fixed rate in order to reduce the impact
of interest rate changes on future income. The differential to be paid or
received under these agreements is recognized as an adjustment to interest
expense related to the debt. At December 31, 2001, the Company had interest rate
swap agreements with a notional amount of $225 million, which expire on various
dates through the year 2002, under which the Company will pay fixed rates of
4.75 percent to 6.53 percent and receive three-month LIBOR. At December 31,
2000, the Company had interest rate swap agreements with a notional amount of
$200 million, which expire on various dates through the year 2002, under which
the Company paid fixed rates of 6.53 percent to 6.92 percent and receive
three-month LIBOR.
The Company's customers are not concentrated in any specific geographic
region, but are concentrated in certain industries. Customers of the Coated
Board business segment include the beverage and packaged foods industries.
Customers of the Containerboard business segment include integrated and
non-integrated containerboard converters. During 2001, the Company had one
customer who accounted for approximately 13 percent of the Company's net sales
and another customer who accounted for approximately 11 percent of the Company's
net sales. During 2000, the Company had two customers who each accounted for
approximately 11 percent of the Company's net sales. During 1999, one customer
accounted for approximately 11 percent of the Company's net sales. There were no
significant accounts receivable from a single customer at December 31, 2001 or
2000. The Company reviews a customer's credit history before extending credit.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends, and other
information.
The Company enters into fixed price natural gas contracts designed to
effectively hedge prices for a substantial portion of its natural gas
requirements at its two U.S. mills. The purpose of the fixed price natural gas
contracts is to eliminate or reduce price risk with a focus on making cash flows
more predictable. As of December 31, 2001, the Company had entered into
contracts to hedge substantially all of its natural gas requirements for its two
U.S. mills through December 31, 2002. The contract price and fair value of these
natural gas contracts was approximately $22.3 million and $14.9 million,
respectively. These contracts are not accounted for as derivative instruments
under Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, AS AMENDED BY SFAS NO. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133, AND SFAS NO. 138, ACCOUNTING FOR
CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES ("SFAS No. 133"),
as they qualify for the normal purchase exemption.
The following methods and assumptions were used to estimate the fair value
of each category of financial instrument for which it is practicable to estimate
that value:
NONTRADE RECEIVABLES AND SHORT TERM BORROWINGS
The carrying amount of these instruments approximates fair value due to
their short-term nature.
F-12
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
LONG-TERM DEBT
The fair value of long-term debt is based on quoted market prices.
FORWARD EXCHANGE AND OPTION CONTRACTS
The fair value of forward and option contracts is based on quoted market
prices.
F-13
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
INTEREST RATE SWAP AGREEMENTS
The fair value of interest rate swap agreements is based on quoted market
prices by counter parties.
The carrying amounts and estimated fair value of the Company's financial
instruments as of December 31 were as follows:
2001 2000
----------------------- -----------------------
Carrying Fair Carrying Fair
Amounts Value Amounts Value
---------- ---------- ---------- ----------
(In thousands of dollars)
Nontrade receivables................... $ 6,053 $ 6,053 $ 4,272 $ 4,272
Short-term borrowings.................. $ 10,075 $ 10,075 $ 15,192 $ 15,192
Long-term debt......................... $1,524,824 $1,556,045 $1,517,597 $1,473,433
Currency forward exchange contracts.... $ 212 $ 212 $ 686 $ 686
Currency option contracts.............. $ -- $ -- $ 1,027 $ 528
Interest rate swap contracts........... $ (5,389) $ (5,389) $ -- $ (1,094)
NOTE 5 INVENTORIES
The major classes of inventories at December 31 were as follows:
2001 2000
----------- -----------
(In thousands of dollars)
Finished goods.................................. $ 87,728 $ 88,101
Work-in progress................................ 12,194 9,967
Raw materials................................... 45,656 40,374
Supplies........................................ 35,727 37,530
-------- --------
$181,305 $175,972
======== ========
Inventories in the amount of $38.9 million and $37.7 million at December 31,
2001 and 2000, respectively, were valued using the first-in, first-out ("FIFO")
or average cost method. The balance of the inventories was valued using the LIFO
method. The shortage of FIFO values over amounts for financial reporting
purposes (LIFO) was $5.9 million and $14.8 million at December 31, 2001 and
2000, respectively. During the years ended December 31, 2001, 2000 and 1999, the
Company recognized a charge (credit) relating to LIFO valuation of
$12.3 million, $(6.9) million, and $(4.9) million, respectively.
In connection with the Merger, the Company adjusted its inventory balances
to its estimated fair value which resulted in a write-up to inventory of
approximately $13.6 million and is being charged to cost of sales when the
March 27, 1996 LIFO base inventory layers are liquidated. There was no write-up
of inventories charged to cost of sales during the three years in the period
ended December 31, 2001. At December 31, 2001 and 2000, $11.5 million of the
write-up remained in Inventory on the Consolidated Balance Sheets.
F-14
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6 INVESTMENTS IN NET ASSETS OF EQUITY AFFILIATES
Investments are accounted for using the equity method of accounting. The
most significant of these investments was Igaras, an integrated containerboard
producer located in Brazil of which the Company owned 50 percent. On July 1,
2000, Igaras spun off the multiple packaging portion of its business into a
newly formed company, of which the Company owned 50 percent. On October 3, 2000,
the Company, along with its joint venture partner, Cia Suzano de Papel e
Celulose, completed the sale of the jointly-held subsidiary Igaras for
approximately $510 million, including the assumption of $112 million of debt.
The Company recognized a gain of $70.9 million, in connection with the sale. On
October 12, 2000, the Company purchased the remaining 50 percent of the newly
formed company for $12.5 million.
During 2001 and 2000, the Company received dividends from its equity
investments other than Igaras totaling $0.6 million and $0.5 million,
respectively, net of taxes of $0.1 million and $0.1 million, respectively.
Effective January 1, 2001, the Company consolidated into its financial
statements the accounts of Rengo Riverwood Packaging, Ltd. ("Rengo"), the
Company's Japanese joint venture, since the Company has the ability to exercise
control over Rengo's operating and financial policies. The consolidation of
Rengo contributed approximately $47 million in Net Sales.
NOTE 7 ASSETS
Other Assets included intangible assets at December 31, and consisted of the
following:
2001 2000
----------- -----------
(In thousands of dollars)
Patents, licenses and trademarks................ $ 67,148 $ 66,314
Less, accumulated amortization.................. (20,353) (16,628)
-------- --------
46,795 49,686
Deferred debt issuance costs, net............... 32,385 29,713
Pension assets.................................. 13,594 14,431
Capitalized spare parts......................... 23,303 21,717
Deferred design costs........................... 1,985 3,025
Other........................................... 8,388 7,301
-------- --------
$126,450 $125,873
======== ========
F-15
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8 SHORT-TERM DEBT
Short-Term Debt at December 31, consisted of the following:
2001 2000
-------- --------
(In thousands of
dollars)
Short-term borrowings............................. $10,075 $15,192
Current portion of long-term debt................. 1,742 716
------- -------
$11,817 $15,908
======= =======
Short-term borrowings are principally at the Company's international
subsidiaries. The weighted average interest rate on Short-term borrowings as of
December 31, 2001 and 2000 was 3.4 percent and 2.6 percent, respectively.
In connection with the Merger, the Company called $125 million of
Convertible Subordinated Notes, of which $0.2 million was not redeemed at
December 31, 2001 and 2000, and is included in Current portion of long-term
debt.
NOTE 9 COMPENSATION AND EMPLOYEE BENEFITS
Accruals for future compensated employee absences, principally vacation,
were $12.1 million and $11.4 million at December 31, 2001 and 2000,
respectively, and were included in Compensation and Employee Benefits on the
Consolidated Balance Sheets.
NOTE 10 LONG-TERM DEBT
In connection with the Merger, the Company entered into a credit agreement
that provided for senior secured credit facilities consisting of a term loan
facility and a $400 million revolving credit facility. Such credit agreement,
term loan facility and revolving facility, as in effect prior to the August 10,
2001 amendment and restatement discussed below, are referred to herein as the
"Credit Agreement", the "Term Loan Facility" and the "Revolving Facility",
respectively. In addition, Riverwood International Machinery, Inc., a
wholly-owned subsidiary of Riverwood, entered into a credit agreement providing
for a $140 million secured revolving credit facility (the "Machinery Facility")
for the purpose of financing or refinancing packaging machinery. In connection
with the Merger, the Company also completed an offering of $250 million
aggregate principal amount of 10 1/4 percent Senior Notes due 2006 (the "1996
Senior Notes") and $400 million aggregate principal amount of 10 7/8 percent
Senior Subordinated Notes due 2008 (the "1996 Senior Subordinated Notes" and
together with the 1996 Senior Notes, the "1996 Notes").
On July 28, 1997, the Company completed an offering of $250 million
principal amount of 10 5/8 percent Senior Notes due 2007 (the "Initial Notes").
The net proceeds of this offering were applied to prepay certain revolving
credit borrowings under the Revolving Facility (without any commitment
reduction) and to refinance certain Tranche A term loans and other borrowings
under the Credit Agreement. A registration statement under the Securities Act of
1933, as amended, registering senior notes of the Company identical in all
material respects to the Initial Notes (the "Exchange Notes") offered in
exchange for the Initial Notes became effective October 1, 1997. On November 3,
1997, the Company completed its
F-16
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10 LONG-TERM DEBT --(Continued)
exchange offer of the Initial Notes for the Exchange Notes. The Initial Notes
and the Exchange Notes are referred to herein as the 1997 Notes.
In connection with the sale of Igaras on October 3, 2000, the Company
entered into Amendment No. 5 dated September 12, 2000, effective October 3,
2000, to the Credit Agreement. Pursuant to the amendment, the Company applied
$120 million and $25 million of the sale proceeds to its 2001 and 2002 term loan
maturities under the Term Loan Facility, respectively. The Company recognized a
loss on the early extinguishment of debt of approximately $2.1 million in the
fourth quarter of 2000. The Company applied the remaining portion of the
proceeds (approximately $48 million) to the Revolving Facility (without any
commitment reduction). In connection with Amendment No. 5, the Company canceled
its Machinery Facility. In addition, certain of the financial covenants included
in the Credit Agreement were amended.
On June 21, 2001, the Company completed an offering of $250 million
principal amount of 10 5/8 percent Senior Notes due 2007 (the "Initial 2001
Notes"). The Initial 2001 Notes were sold at a price of 103 percent of par. The
proceeds from this offering of approximately $251.5 million, net of
approximately $6 million of transaction fees and expenses, were applied to
prepay a portion of the outstanding borrowings under the Term Loan Facility.
During the second quarter of 2001, the Company recorded a non-cash,
extraordinary charge to earnings of approximately $2.8 million, net of tax of
nil, related to the write-off of the applicable portion of deferred debt
issuance costs on the term loans. In connection with this offering, on June 6,
2001, the Company entered into Amendment No. 6 to the Credit Agreement. The
amendment modified certain financial and other covenants, including minimum
EBITDA (as defined in the Credit Agreement) requirements, in the Credit
Agreement to reflect recent financial results and market and operating
conditions. A registration statement under the Securities Act registering senior
notes of the Company identical in all material respects to the Initial 2001
Notes (the "Exchange 2001 Notes") offered in exchange for the Initial 2001 Notes
became effective on August 27, 2001. On October 5, 2001, the Company completed
its exchange offer of the Initial 2001 Notes for the Exchange 2001 Notes. The
Initial 2001 Notes and the Exchange 2001 Notes are referred to herein as the
2001 Notes.
On August 10, 2001, the Company entered into an amendment and restatement of
the Credit Agreement (the "2001 Senior Secured Credit Agreement") with certain
lenders providing for senior secured credit facilities with aggregate
commitments not to exceed $635 million (the "2001 Facilities"), including a $335
million term loan facility (the "2001 Term Loan Facility") and a $300 million
revolving credit facility (the "2001 Revolving Facility"). The proceeds of the
initial borrowings under the 2001 Facilities of approximately $386.0 million,
including $51.0 million in revolving credit borrowings, were applied to repay in
full the outstanding borrowings under the Term Loan Facility and the Revolving
Facility and to pay approximately $12 million of the estimated $14 million of
fees and expenses incurred in connection with the amendment and restatement of
the Credit Agreement. During the third quarter of 2001, the Company recorded a
non-cash, extraordinary charge to earnings of approximately $6.0 million, net of
tax of nil, related to the write-off of the applicable remaining deferred debt
issuance costs on the Term Loan Facility and the Revolving Facility.
The 2001 Senior Secured Credit Agreement imposes restrictions on the
Company's ability to make capital expenditures and both the 2001 Senior Secured
Credit Agreement and the indentures governing the
F-17
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10 LONG-TERM DEBT --(Continued)
1996 Notes, the 1997 Notes and the 2001 Notes limit the Company's ability to
incur additional indebtedness. Such restrictions, together with the highly
leveraged nature of the Company, could limit the Company's ability to respond to
market conditions, meet its capital spending program, provide for unanticipated
capital investments or take advantage of business opportunities. The covenants
contained in the 2001 Senior Secured Credit Agreement, among other things,
restrict the ability of the Company and its subsidiaries to dispose of assets,
incur additional indebtedness, incur guarantee obligations, prepay other
indebtedness or amend other debt instruments, pay dividends, create liens on
assets, enter into sale and leaseback transactions, make investments, loans or
advances, make acquisitions, engage in mergers or consolidations, change the
business conducted by Riverwood and its subsidiaries, make capital expenditures
and engage in certain transactions with affiliates. The covenants contained in
the indentures governing the 1996 Notes, the 1997 Notes and the 2001 Notes also
impose restrictions on the operation of the Company's business.
The financial covenants in the 2001 Senior Secured Credit Agreement specify,
among other things, the following requirements for each four quarter period
ended during the following test periods:
Consolidated Consolidated
Debt to EBITDA(a) Interest Expense
Test Period Leverage Ratio Ratio
----------- ----------------- ----------------
September 30, 2001--December 30, 2002.................. 5.85 to 1.00 1.75 to 1.00
December 31, 2002--December 30, 2003................... 5.50 to 1.00 2.00 to 1.00
December 31, 2003--December 30, 2004................... 5.00 to 1.00 2.10 to 1.00
December 31, 2004--December 30, 2005................... 4.70 to 1.00 2.25 to 1.00
December 31, 2005--December 30, 2006................... 4.40 to 1.00 2.25 to 1.00
---------
Note:
(a) EBITDA as defined in the 2001 Senior Secured Credit Agreement
At December 31, 2001, the Company was in compliance with the financial
covenants in the 2001 Senior Secured Credit Agreement. The Company's ability to
comply in future periods with the financial covenants in the 2001 Senior Secured
Credit Agreement will depend on its ongoing financial and operating performance,
which in turn will be subject to economic conditions and to financial, business
and other factors, many of which are beyond the Company's control and will be
substantially dependent on the selling prices for the Company's products, raw
material and energy costs, and the Company's ability to successfully implement
its overall business and profitability strategies. If a violation of any of the
covenants occurred, the Company would attempt to get a waiver or an amendment
from its lenders, although no assurance can be given that the Company would be
successful in this regard. The 2001 Senior Secured Credit Agreement and the
indentures governing the 1996 Notes, 1997 Notes and 2001 Notes have covenants as
well as certain cross-default or cross-acceleration provisions; failure to
comply with these covenants in any agreement could result in a violation of such
agreement which could, in turn, lead to violations of other agreements pursuant
to such cross-default or cross-acceleration provisions.
F-18
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10 LONG-TERM DEBT --(Continued)
At December 31, 2001, the Company and its U.S. and international
subsidiaries had the following amounts available under revolving credit
facilities:
Total Total Amount
Amount Outstanding at Total Amount
of December 31, Available at
Commitments 2001 December 31, 2001
----------- -------------- -----------------
(In thousands of dollars)
Revolving Facility........................... $300,000 $35,429 $264,571
International Facilities..................... 14,581 10,015 4,566
-------- ------- --------
$314,581 $45,444 $269,137
======== ======= ========
The Company anticipates pursuing additional working capital financing for
its foreign operations as necessary. The Company believes that cash generated
from operations, together with amounts available under its 2001 Revolving
Facility and other available financing sources, will be adequate to permit the
Company to meet its debt service obligations, capital expenditure program
requirements, ongoing operating costs and working capital needs until the
maturity of the 2001 Revolving Facility, although no assurance can be given in
this regard. The Company's future financial and operating performance, ability
to service or refinance its debt and ability to comply with the covenants and
restrictions contained in its debt agreements, will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond the Company's control and will be substantially dependent on the
selling prices for the Company's products, raw material and energy costs, and
the Company's ability to successfully implement its overall business and
profitability strategies.
F-19
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10 LONG-TERM DEBT --(Continued)
Long-Term Debt at December 31 consisted of the following:
2001 2000
----------- -----------
(In thousands of dollars)
Senior Notes with interest payable semi-annually at 10.625
percent, payable in 2007.................................. $ 250,000 $ 250,000
Senior Notes with interest payable semi-annually at 10.25
percent, payable in 2006.................................. 250,000 250,000
Senior Subordinated Notes with interest payable
semi-annually at 10.875 percent, payable in 2008.......... 400,000 400,000
Senior Secured Term Loan Facility with interest payable at
various dates less than one year at floating rates (9.25
percent to 10.25 percent at December 31, 2000)............ -- 488,118
Senior Secured Term Loan Facility with interest payable at
various dates less than one year at floating rates (4.85
percent at December 31, 2001), payable through 2005....... 335,000 --
Senior Notes with interest payable semi-annually at 10.625
percent, payable in 2007.................................. 250,000 --
Senior Secured Revolving Facility with interest payable at
various dates less than one year at floating rates (4.67
percent to 6.5 percent at December 31, 2001) payable in
2005...................................................... 35,150 --
Senior Secured Revolving Facility with interest payable at
various dates less than one year at floating rates (9.14
percent to 10.5 percent at December 31, 2000)............. -- 124,550
Senior Subordinated Notes with interest payable
semi-annually at 11.25 percent, payable in 2002........... 804 804
Convertible Subordinated Notes with interest payable
semi-annually at 6.75 percent, payable in 2002,
convertible beginning March 27, 1996...................... 209 209
Pollution control revenue bonds with interest payable
semi-annually at 6.25 percent, payable through 2007....... 1,000 1,000
International Notes payable to banks with interest payable
at various dates at interest rates of 7.79 percent to 10.0
percent at December 31, 2001, payable through 2004........ 533 99
Capitalized leases with interest payable of 3.6 percent,
payable through 2005...................................... 2,099 2,785
Other....................................................... 29 32
---------- ----------
1,524,824 1,517,597
Less, current portion....................................... 1,742 716
---------- ----------
$1,523,082 $1,516,881
========== ==========
F-20
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10 LONG-TERM DEBT --(Continued)
The 2001 Term Loan Facility and the 2001 Revolving Facility were
collateralized by substantially all of the net assets (including the capital
stock of certain international subsidiaries) of the Company.
Long-term debt maturities and expirations of funded long-term working
capital commitments at December 31, 2001, were as follows:
(In thousands
of dollars)
-------------
2002........................................................ $ 1,742
2003........................................................ 75,769
2004........................................................ 75,779
2005........................................................ 220,506
2006........................................................ 250,000
After 2006.................................................. 901,028
----------
$1,524,824
==========
NOTE 11 REDEEMABLE COMMON STOCK
During the nine months ended December 31, 1996, Holding completed an
offering of Holding Common Stock to certain members of management and key
employees of the Company. As of December 31, 1996, the Company had issued
111,900 shares of Holding Class A Common Stock to Management Investors at fair
value for gross cash proceeds of $11.2 million. During 2000, the Company issued
5,000 shares of additional Redeemable Common Stock to Management Investors at
fair value for gross cash proceeds of $0.6 million. The common stock held by
Management Investors is mandatorily redeemable at fair market value as
determined by the Executive Committee of the Board of Directors and in certain
circumstances the Management Investors can require the Company to repurchase the
Holding Class A Common Stock. These shares are classified as Redeemable Common
Stock on the Consolidated Balance Sheets and are carried at their redemption
value at December 31, 2001. Accordingly, during 2001 and 2000, the Company
recorded a charge to Capital in Excess of Par Value of nil and $0.3 million,
respectively, due to a change in the redemption value from the beginning of the
year compared to the end of the year as determined considering a wide variety of
factors including a valuation report from an independent outside firm and
approved by the Executive Committee of the Board of Directors. During 2001 and
2000, the Company repurchased 3,000 and 450 shares of Redeemable Common Stock at
a weighted average price of $120.00 per share and $106.67 per share,
respectively.
In connection with the issuance of Redeemable Common Stock to Management
Investors, the Company has guaranteed loans, with full recourse, from a bank to
certain Management Investors totaling approximately $0.3 million and $0.7
million at December 31, 2001 and 2000, respectively.
NOTE 12 NON REDEEMABLE COMMON STOCK
On March 27, 1996, Holding completed an offering of 7,000,000 shares of
Class A Common Stock with a par value of $0.01 per share to certain
institutional investors for $700 million. Total Class A Common
F-21
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12 NON REDEEMABLE COMMON STOCK --(Continued)
Stock authorized for issuance at December 31, 2001 was 9,000,000 shares, of
which amount 7,067,180 shares were outstanding, including 67,180 shares issued
to Management Investors as Redeemable Common Stock (see Note 11). Also on
March 27, 1996, Holding completed an offering of 500,000 shares of Class B
Common Stock with a par value of $0.01 per share to an institutional investor
for $50 million. Total Class B Common Stock, which is non-voting, authorized for
issuance at December 31, 2001 was 3,000,000 shares, of which 500,000 shares were
outstanding.
NOTE 13 STOCK INCENTIVE PLANS
In 1996, the Company developed a Long-Term Incentive Plan (LTP) designed to
provide certain key executives and management options to purchase shares of
redeemable Class A Common Stock. Additionally, in 1999 the Company developed a
Supplemental Long-Term Incentive Plan (SLTP) to provide additional options to
certain key executives and management. The following table summarizes
information pertaining to options outstanding and exercisable at December 31,
2001:
Granted Exercisable
Weighted Weighted
Average Average
Number Exercise Vesting Number Exercise
Plan Grant Date Outstanding Price Reference Exercisable(8) Price
---- ------------------- ----------- -------- --------- -------------- -----------
LTP November 2000...... 4,800 $ 115 (1) 1,600 $ 115
SLTP November 2000...... 5,000 115 (2) 1,667 115
SLTP May-Dec, 1999...... 180,500 100 (3) 81,929 100
LTP June-Dec, 1999..... 50,200 100 (4) 14,480 100
LTP August 1998........ 22,500 100 (5) 9,600 100
LTP March 1997......... 225,000 75 (6) 172,833 75
LTP June 1996.......... 57,410 100 (7) 50,660 100
------------------- ------- ------- ------- -------- ------
Total.............. 545,410 $ 89.96 $332,769 $87.16
=================== ======= ======= ======== ======
---------
Notes:
(1) Options vest in five equal annual installments on the first five
anniversaries of the date of grant, subject to continuous employment.
(2) Options vest based upon a range of certain financial goals for two years.
Each year, the vesting starts at 30% for achievement of a minimum financial
target, and increases to a maximum of 50% per year, prorated on a
straight-line basis for achievement of certain results above the minimum.
Those options which do not vest in this period will vest, assuming the
employee is still employed, nine years and six months following the date of
grant.
(3) Options vest based upon a range of certain financial goals over the next
three years. Each year, the vesting starts at 20% for achievement of a
minimum financial target, and increases to a maximum of 33 1/3% per year,
prorated on a straight-line basis for achievement of certain financial
results above the minimum. Those options which do not vest in this
three-year period, will vest, assuming the employee is still employed at the
Company, on December 31, 2008.
F-22
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13 STOCK INCENTIVE PLANS (Continued)
(4) 35,600 of the options will vest in five equal annual installments on each
of the first five anniversaries of the date of grant, subject to continuous
employment. The remaining 14,600 options vest on the date that the Company
achieves certain financial targets. Should those options not vest as
described above, they will vest assuming the employee is still employed at
the Company, nine years and six months following the date of grant.
(5) 15,000 of the options will vest in four annual installments, on each of the
first four anniversaries of the date of grant, subject to continuous
employment, and the remaining 7,500 options will vest based on achievement
of certain financial goals or on February 19, 2008, whichever occurs first.
(6) 112,500 of these options will vest in five annual installments on each of
the first five anniversaries of the date of grant, subject to continuous
employment, and the remaining 112,500 have accelerated vesting based on
achievement of certain financial goals or on September 30, 2006, whichever
occurs first.
(7) 50,660 of the options will vest in five equal annual installments on the
first five anniversaries of the date of grant, subject to continuous
employment. The remaining 6,750 options vest on the date that the Company
achieves certain financial targets. Should those options not vest as
described above, they will vest assuming the employee is still employed at
the Company, nine years and six months following the date of grant.
(8) As of December 31, 2000 and 1999, there was exercisable options in the
amount of 277,397 and 157,241, respectively.
A summary of option activity during the three years ended December 31, 2001
is as follows:
Shares Exercise Price
-------- --------------
Outstanding--December 31, 1998.............................. 348,346 $ 83.85
Granted................................................... 237,300 100.00
Exercised................................................. (6,000) (100.00)
Canceled.................................................. (25,736) (100.00)
------- --------
Outstanding--December 31, 1999.............................. 553,910 $ 89.84
Granted................................................... 13,000 115.00
Exercised................................................. -- --
Canceled.................................................. (1,700) (100.00)
------- --------
Outstanding--December 31, 2000.............................. 565,210 $ 90.39
Granted................................................... -- --
Exercised................................................. (7,069) (120.00)
Canceled.................................................. (12,731) (103.77)
------- --------
Outstanding--December 31, 2001.............................. 545,410 $ 89.70
======= ========
The weighted average contractual life of the outstanding options at
December 31, 2001, is 6 years. The Company applies APB Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related
F-23
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13 STOCK INCENTIVE PLANS (Continued)
Interpretations in accounting for the Stock Options. Accordingly, the Company
recognizes compensation expense for Stock Options when the exercise price is
less than the related fair value at the date of grant or when the performance
criteria is met. During the years ended December 31, 2001, 2000 and 1999, the
Company recognized compensation expense of $1.5 million, $1.8 million, and
$0.7 million, respectively, related to Stock Options. The weighted average fair
value of the stock options was estimated to be $30.91 per option on the date of
grant for stock options granted in 2000, and $28.03 per option on the date of
grant for stock options granted in 1999. The Company used the Black-Scholes
option-pricing model to value the Stock Options with the following assumptions:
dividend yield of zero, no volatility, risk-free interest rates ranging from
5.304 to 6.75 percent, a zero forfeiture rate and an expected life of 3 to
10 years.
Had compensation expense for the Company's grants of stock options been
determined in accordance with Statement of Financial Standards No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION," Net (Loss) Income and basic and
diluted earnings per share would have been as follows:
Year Ended December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(in millions, except per share data)
Pro forma Net (Loss) Income................................ $ (78.3) $ 37.8 $ (57.0)
Pro forma Net (Loss) Income per common share
Basic.................................................... (10.35) 5.00 (7.54)
Diluted.................................................. (10.35) 4.92 (7.54)
NOTE 14 CURRENCY TRANSLATION ADJUSTMENT
An analysis of changes in the Cumulative Currency Translation Adjustment
included in Shareholders' Equity at December 31 was as follows:
2001 2000 1999
-------- -------- --------
(In thousands of dollars)
Cumulative currency translation adjustment at
beginning of period........................... $(29,051) $(15,431) $(15,493)
Currency translation adjustments................ (5,571) (13,620) 62
-------- -------- --------
$(34,622) $(29,051) $(15,431)
======== ======== ========
NOTE 15 CONTINGENCIES AND COMMITMENTS
Total rental expense was approximately $10.4 million, $11.7 million, and
$16.6 million for the years ended December 31, 2001, 2000, and 1999.
F-24
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15 CONTINGENCIES AND COMMITMENTS (Continued)
At December 31, 2001, total commitments of the Company under long-term,
non-cancelable contracts were as follows:
Payment Due by Period
--------------------------------------------------------------
Less than
Contractual Obligations 1 year 1-3 years 4-5 years After 5 years Total
----------------------- --------- --------- --------- ------------- ----------
(In thousands of dollars)
Long-Term Debt........... $ 1,742 $151,548 $470,506 $901,028 $1,524,824
Operating Leases......... 13,821 17,975 2,588 946 35,330
Unconditional Purchase
Obligations............ 31,345 16,373 14,693 69,556 131,967
------- -------- -------- -------- ----------
Total Contractual
Cash Obligations... $46,908 $185,896 $487,787 $971,530 $1,692,121
======= ======== ======== ======== ==========
As of December 31, 2001, the Company had approximately 4,100 employees
worldwide (excluding employees of joint ventures), approximately 3,000 of whom
were members of unions and covered by collective bargaining agreements.
The Company is committed to compliance with all applicable foreign, federal,
state and local environmental laws and regulations. Environmental law is,
however, dynamic rather than static. As a result, costs, which are unforeseeable
at this time, may be incurred when new laws are enacted, and when environmental
agencies adopt or revise rules and regulations.
F-25
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15 CONTINGENCIES AND COMMITMENTS (Continued)
In 1998, the U.S. Environmental Protection Agency adopted regulations
(generally referred to as the "cluster rules") that mandate more stringent
controls on air and water discharges from the United States pulp and paper
mills. The Company estimates that the capital spending that may be required to
comply with the cluster rules could reach $55 million to be spent at its two
U.S. paper mills over a seven-year period that began in 2000. The Company
estimates that it has spent approximately one-third of that amount for such
compliance.
In late 1995, the Louisiana Department of Environmental Quality ("DEQ")
notified the Predecessor of potential liability for the remediation of hazardous
substances at a wood treatment site in Shreveport, Louisiana that the
Predecessor or its predecessors previously operated, and at a former oil
refinery site in Caddo Parish, Louisiana which is on land that the Company
previously owned. In response to these notices, the Company has provided
additional information concerning these sites and has commenced its own
evaluation of any claims and remediation liabilities for which it may be
responsible. Subsequent to receipt in May 1996 of a Special Demand Letter from
DEQ to remediate the site in Shreveport, the Company performed a soil and
groundwater investigation at the site pursuant to an agreement with DEQ. In
August 2001, the Company entered into a Cooperative Agreement for Remedial
Action with DEQ and the landowners of the site, as well as a Mutual Release and
Settlement Agreement with the landowners. Under the Cooperative Agreement, the
Company will develop the remedial design and carry out the specified remediation
at the site. The Company has engaged a qualified contractor and expects
completion of the work by the end of 2002. In September 1996, the Company
received a Special Demand Letter from DEQ to remediate the site in Caddo Parish.
The Company performed a waste inventory and treatability study at the site and
subsequently met with DEQ in October 1999. On July 6, 2000, the Company and DEQ
entered into a Settlement Agreement that describes in detail the remedial
actions necessary for the Company to obtain full release of all future liability
at this site. The Company has contracted with a vendor to perform the remedial
actions as outlined in the Settlement Agreement and the work is currently
proceeding. The Company no longer owns the site since transferring the property
to another entity on October 22, 2000. The Company anticipates the remedial
actions outlined in the Settlement Agreement will be completed during the second
quarter of 2002 and, at that time, expects to be relieved of any future
liability.
The Company is involved in environmental remediation projects for certain
properties currently or formerly owned or operated by the Company, and at
certain waste disposal sites. Some of these projects are being addressed under
federal and state statutes, such as the Comprehensive Environmental Response,
Compensation and Liability Act and analogous state laws. The Company's costs
incertain instances cannot be reliably estimated until the remediation process
is substantially underway or liability has been addressed. To address these
contingent environmental costs, the Company has accrued reserves when such costs
are probable and can be reasonably estimated. The Company believes that, based
on current information and regulatory requirements, the accruals established by
the Company for environmental expenditures are adequate. Based on current
knowledge, to the extent that additional costs may be incurred that exceed the
accrued reserves, such amounts are not expected to have a material impact on the
results of operations, cash flows or financial condition of the Company,
although no assurance can be given that significant costs will not be incurred
in connection with clean-up activities at these properties, including the
Shreveport and Caddo Parish sites referred to above.
F-26
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15 CONTINGENCIES AND COMMITMENTS (Continued)
The Company is a party to a number of lawsuits arising out of the ordinary
conduct of its business. While there can be no assurance as to their ultimate
outcome, the Company does not believe that these lawsuits will have a material
impact on the results of operations, cash flows or financial condition of the
Company.
The Company has been a plaintiff in actions against The MeadWestvaco
Corporation, successor by merger to The Mead Corporation, and R.A. Jones
claiming infringement of the Company's patents for its packaging machines. The
patent in suit were found infringed but invalid by a jury in a trial against
R.A. Jones in August 2001. This finding of invalidity has been appealed to the
Court of Appeals for The Federal Circuit. The suit against MeadWestvaco was
dismissed by mutual agreement pending the outcome of the appeal of the decision
in the case against R.A. Jones.
In connection with the Merger, the former majority owner of the Company
agree to bear the cost of a Section 338(h)(10) election for U.S. federal tax
purposes and for purposes of state taxes for which the former majority owner and
the Company filed returns on a combined basis. The Company agreed to bear the
cost of this election for the purposes of other state taxes ("stand-alone
taxes"), including Louisiana income tax. During 1997, the Company paid $27.5
million in estimated Louisiana stand-alone taxes relating to the election. The
Company's calculation of its Louisiana tax was based on state law in effect at
the time of the Merger, including a 1993 amendment. In May 1997, the Louisiana
Supreme Court declared the 1993 amendment to be void under the Louisiana
Constitution, retroactive to 1993. After consultation with Louisiana tax
counsel, the Company filed its Louisiana income tax return for the period ended
March 27, 1996 in reliance on the Louisiana tax law in effect at the time of the
Merger, without the payment of any additional tax due to the voiding of the 1993
amendment.
The State of Louisiana completed its audit of the Company's tax return for
the period ended March 27, 1996 and on May 9, 2000, the Company received a
Notice of Proposed Tax Due for this period in the amount of $47.6 million in tax
plus statutory interest. On October 12, 2001, the Company entered into a
settlement agreement with the Louisiana Department of Revenue to pay
$29.5 million to the State of Louisiana to settle all Louisiana state income tax
issues (tax and interest) related to the period ended March 27, 1996 and the
nine month period ended December 31, 1996. As required by accounting principles
generally accepted in the United States of America, the Company recorded the
settlement as an increase to Goodwill, Net of Accumulated Amortization. The
Company made this payment on October 25, 2001 using funds borrowed under its
revolving credit facility. See Consolidated Statements of Cash Flows.
NOTE 16 PENSIONS
U.S. HOURLY AND SALARIED PENSION PLANS
All of the Company's U.S. hourly union employees are participants in the
Company's noncontributory defined benefit hourly plan (the "Hourly plan"). The
pension expense of the Hourly plan is based primarily on years of service and
the pension rate near retirement. The Company's U.S. salaried and non-union
hourly employees are participants in the Company's noncontributory defined
benefit plan that was established during 1992 (the "Salaried plan").
F-27
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16 PENSIONS (Continued)
The Company's funding policies with respect to its U.S. pension plans are to
contribute funds to trusts as necessary to at least meet the minimum funding
requirements of the U.S. Internal Revenue Code. Plan assets are invested
primarily in equities and fixed income securities.
(A) PENSION EXPENSE
The pension expense related to the Hourly plan and Salaried plan consisted
of the following:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(In thousands of dollars)
Components of net periodic pension cost
(credit):.............................
Service cost.......................... $ 5,142 $ 4,806 $ 5,395
Interest cost......................... 16,106 15,444 14,231
Expected return on plan assets........ (21,019) (22,101) (20,454)
Amortizations:
Prior service cost.................. 1,029 1,026 1,023
Actuarial (gain)/loss............... (10) (2,039) 53
------- ------- -------
Net periodic pension cost (credit).... $ 1,248 $(2,864) $ 248
======= ======= =======
Certain assumptions used in determining the pension expense related to the
Hour plan and Salaried plan were as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Assumptions:
Discount rate......................... 7.50% 7.50% 6.50%
Rate of increase in future
compensation levels................. 4.50% 4.50% 4.50%
Expected long-term rate of return on
plan assets........................... 8.50% 8.50% 8.50%
F-28
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16 PENSIONS (Continued)
(B) FUNDED STATUS
The funded status of the Company's U.S. Hourly plan and Salaried plan as of
December 31, were as follows:
2001 2000
----------- -----------
(In thousands of dollars)
Change in benefit obligation:
Benefit obligation at beginning of year............... $220,881 $206,445
Service cost.......................................... 5,142 4,806
Interest cost......................................... 16,106 15,444
Actuarial (gain) loss................................. (504) 6,085
Amendments............................................ 130 1,423
Benefits paid......................................... (13,511) (13,322)
-------- --------
Benefit obligation at end of year..................... $228,244 $220,881
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year........ $253,831 $266,455
Actual return on plan assets.......................... (12,783) 670
Employer contributions................................ 29 28
Benefits paid......................................... (13,511) (13,322)
-------- --------
Fair value of plan assets at end of year.............. $227,566 $253,831
======== ========
Plan assets (less than) in excess of projected benefit
obligation.......................................... $ (678) $ 32,950
Unrecognized net actuarial loss (gain)................ 9,252 (24,055)
Unrecognized prior service cost....................... 2,206 3,105
-------- --------
Net amount recognized................................. $ 10,780 $ 12,000
======== ========
Amounts recognized in the Consolidated Balance Sheets
consist of:
Prepaid pension cost.................................. $ 13,601 $ 14,468
Accrued pension liability............................. (2,821) (2,468)
-------- --------
Net amount recognized................................. $ 10,780 $ 12,000
======== ========
Assumptions:
Discount rate......................................... 7.50% 7.50%
Rates of increase in future compensation levels....... 4.50% 4.50%
INTERNATIONAL PENSION PLANS
(A) PENSION EXPENSE
The international defined benefit pension plans are both noncontributory and
contributory and are funded in accordance with applicable local laws. Assets of
the funded plans are invested primarily in
F-29
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16 PENSIONS (Continued)
equities and fixed income securities. The pension or termination benefits are
based primarily on years of service and the employees' compensation.
The pension expense related to the international plans consisted of the
following:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(In thousands of dollars)
Components of net periodic pension cost:
Service cost.......................... $ 431 $ 1,229 $1,647
Interest cost......................... 5,210 4,697 4,788
Expected return on plan assets........ (5,485) (5,384) (5,406)
Amortizations:
Actuarial loss...................... 2,072 -- 1,947
------- ------- ------
Net periodic pension cost............. $ 2,228 $ 542 $2,976
======= ======= ======
Assumptions:
Discount rate......................... 5.75% 5.50% 5.50%
Rates of increase in future
compensation levels................. 4.00% 4.00% 4.00%
Expected long-term rate of return on
plan assets......................... 6.00% 6.00% 6.50%
Approximately 295 employees participate in a multi-employer pension plan
that provides defined benefits to employees under certain union-employer
organization agreements. Pension expense for this plan was $3.5 million,
$4.0 million, and $4.8 million for the years ended December 31, 2001, 2000 and
1999, respectively.
Effective March 31, 2001, the Company's Defined Benefit Pension Plan in the
U.K. (the "U.K. Plan") was curtailed. No curtailment gain was recorded as the
unrecognized net loss of the U.K. Plan at March 31, 2001 exceeded any gain
calculated as a result of the curtailment. Effective March 31, 2001, the Company
began a defined contribution savings plan in the U.K. to replace the curtailed
U.K. Plan.
F-30
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16 PENSIONS (Continued)
(B) FUNDED STATUS
The following table sets forth the funded status of the international
pension plans as of December 31:
2001 2000
----------- -----------
(In thousands of dollars)
Change in benefit obligation:
Benefit obligation at beginning of year............... $101,529 $ 93,887
Service cost.......................................... 431 1,229
Interest cost......................................... 5,210 4,697
Plan participants contributions....................... 173 536
Amendments............................................ -- --
Actuarial (gain) loss................................. (6,431) 4,461
Benefits paid......................................... (4,358) (3,281)
-------- --------
Benefit obligation at end of year..................... $ 96,554 $101,529
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year........ $ 97,003 $ 96,784
Actual return on plan assets.......................... (5,524) 490
Employer contributions................................ 2,382 2,474
Plan participants contributions....................... 173 536
Benefits paid......................................... (4,358) (3,281)
-------- --------
Fair value of plan assets at end of year.............. $ 89,676 $ 97,003
======== ========
Plan assets less than projected benefit obligation.... $ (6,878) $ (4,526)
Unrecognized net actuarial loss....................... 8,099 5,909
-------- --------
Net amount recognized................................. $ 1,221 $ 1,383
======== ========
Amounts recognized in the Consolidated Balance Sheets
consist of:
Prepaid pension cost.................................. $ 1,221 $ 1,383
Accrued pension liability............................. -- --
-------- --------
Net amount recognized................................. $ 1,221 $ 1,383
======== ========
Assumptions:
Discount rate......................................... 5.75% 5.50%
Rates of increase in future compensation levels....... 4.00% 4.00%
As of December 31, 2001 and 2000, accrued retirement contributions for the
international pension plans included in Compensation and Employee Benefits on
the Consolidated Balance Sheets were $1.4 million and $1.6 million,
respectively.
F-31
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16 PENSIONS (Continued)
DEFINED CONTRIBUTION PLANS
The Company provides defined contribution plans for eligible U.S. employees.
Salaried employees may make contributions of up to 16 percent of their
compensation (6 percent pretax and 10 percent after tax). The Company matches
3 percent and may match up to a total of 6 percent of the eligible compensation,
depending on the Company's performance.
Hourly employees may make contributions of up to 16 percent of their
compensation (pretax and after tax percentages vary based on negotiated union
contracts). The Company matches various percentages of the eligible compensation
base on negotiated union contracts.
Contributions to these plans for the years ended December 31, 2001, 2000,and
1999 were $2.5 million, $2.3 million, and $2.4 million, respectively.
Accrued plan contributions included in Compensation and Employee Benefits on
the Consolidated Balance Sheets were $0.1 million and $0.1 million at
December 31, 2001 and 2000, respectively.
NOTE 17 OTHER POSTRETIREMENT BENEFITS
The Company sponsors postretirement health care plans that provide medical
and life insurance coverage to eligible salaried and hourly retired U.S.
employees and their dependents. No postretirement medical benefits are offered
to salaried employees who began employment after December 31, 1993.
The other postretirement benefits expense consisted of the following:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(In thousands of dollars)
Service cost............................ $ 272 $ 255 $ 291
Interest cost......................... 1,669 1,645 1,663
Amortizations:
Prior service cost.................. (162) (162) (162)
Actuarial loss...................... 151 124 184
------ ------ ------
Net periodic pension cost............. $1,930 $1,862 $1,976
====== ====== ======
Assumptions:
Discount rate......................... 7.5% 7.5% 6.5%
Initial health care cost trend rate... 7.5% 5.5% 5.5%
Ultimate health care cost trend
rate*............................... 5.0% 4.5% 4.5%
Ultimate year*........................ 2006 2001 2001
---------
* The salaried plan's cost was capped beginning in 1999.
F-32
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17 OTHER POSTRETIREMENT BENEFITS--(Continued)
The accrued postretirement benefit obligation at December 31 was as follows:
2001 2000
----------- -----------
(In thousands of dollars)
Change in benefit obligation:
Benefit obligation at beginning of year................ $ 22,703 $ 24,242
Service cost........................................... 272 255
Interest cost.......................................... 1,669 1,645
Actuarial loss (gain).................................. 2,013 (564)
Assumptions............................................ -- 176
Benefits paid.......................................... (3,717) (3,051)
-------- --------
Benefit obligation at end of year...................... $ 22,940 $ 22,703
======== ========
Fair value of plan assets at end of year............... -- --
-------- --------
Accumulated postretirement benefit obligation in excess
of plan assets....................................... $(22,940) $(22,703)
Unrecognized net actuarial loss........................ 2,660 860
Unrecognized prior service credit...................... (1,676) (1,838)
-------- --------
Total accrued postretirement benefit obligation...... $(21,956) $(23,681)
======== ========
Assumptions:
Discount rate.......................................... 7.50% 7.50%
Initial health care cost trend rate.................... 7.00% 7.50%
Ultimate health care cost trend rate*.................. 5.00% 5.00%
Ultimate year*......................................... 2006 2006
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
Health care trend rate sensitivity:
Effect on total of interest and service
cost components......................... $ 26 $ (24)
Effect on year-end postretirement benefit
obligation.............................. $234 $(211)
---------
* The salaried plan's cost was capped beginning in 1999.
NOTE 18 FOREIGN CURRENCY MOVEMENT EFFECT
Net international currency transaction (losses) gains included in
determining Income from Operations for the years ended December 31, 2001, 2000
and 1999 were $(1.4) million, $(0.1) million and $1.2 million, respectively.
F-33
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19 INCOME TAXES
The U.S. and international components of (Loss) Income before Income Taxes
and Equity in Net Earnings of Affiliates consisted of the following:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(In thousands of dollars)
U.S..................................... $(78,540) $30,274 $(53,190)
International........................... 18,626 9,778 (4,655)
-------- ------- --------
(Loss) Income before Income Taxes and
Equity in Net Earnings of
Affiliates............................ $(59,914) $40,052 $(57,845)
======== ======= ========
The provisions for Income Tax Expense on (Loss) Income before Income Taxes
and Equity in Net Earnings of Affiliates consisted of the following:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(In thousands of dollars)
Current:
U.S. Federal.......................... $ -- $ 850 $ --
U.S. State and Local.................. 1,651 (768) 1,787
International......................... 7,108 2,927 2,149
------ ------ ------
Total Current........................... 8,759 3,009 3,936
------ ------ ------
Income Tax Expense.................... $8,759 $3,009 $3,936
====== ====== ======
A reconciliation of Income Tax Expense on (Loss) Income before Extraordinary
Item and Cumulative Effect of a Change in Accounting Principle including Equity
in Net Earnings of Affiliates at the federal statutory rate of 35% compared with
the Company's actual Income Tax Expense is as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(In thousands of dollars)
Income (benefit) tax at U.S. statutory
rate.................................. $(20,970) $ 15,193 $(17,757)
U.S. federal taxes--AMT................. -- 850 --
U.S. state and local tax (benefit)...... 1,651 (768) 1,787
Limitation on use of U.S. net operating
losses................................ 27,490 (11,771) 16,128
International tax rate differences...... (47) (1,637) 2,850
Foreign withholding tax................. 635 1,142 928
-------- -------- --------
Income Tax Expense...................... $ 8,759 $ 3,009 $ 3,936
======== ======== ========
F-34
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19 INCOME TAXES --(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, were as follows:
2001 2000
----------- -----------
(In thousands of dollars)
Property, plant and equipment.......................... $(274,081) $(263,786)
Other.................................................. (5,321) (2,014)
--------- ---------
Gross deferred tax liabilities....................... $(279,402) $(265,800)
--------- ---------
Net operating loss carryforwards....................... 498,795 426,469
Other.................................................. (5,538) 6,955
--------- ---------
Gross deferred tax assets............................ 493,257 433,424
--------- ---------
Valuation allowance.................................... (219,747) (174,859)
--------- ---------
Net deferred tax liability........................... $ (5,892) $ (7,235)
========= =========
The Company has determined that, as of both December 31, 2001 and 2000, it
is more likely than not that no net deferred tax assets will be realized. The
valuation allowance of $219.7 million and $174.9 million at December 31, 2001
and 2000, respectively, is maintained on net deferred tax assets for which the
Company has not determined that realization is more likely than not.
The U.S. federal net operating loss carryforward amount totals
$1,136.4 million, and expires in 2012, 2013, 2019, 2020 and 2021 in the amounts
of $85.0 million, $421.5 million, $295.0 million, $196.8 million and
$138.1 million, respectively. International net operating loss carryforward
amounts total $114.5 million of which $9.5 million expire through 2011 and
$105.0 million have no expiration date.
Undistributed earnings intended to be reinvested indefinitely by the
international subsidiaries totaled approximately $42.0 million at December 31,
2001. No U.S. deferred income tax has been recorded on these undistributed
earnings.
NOTE 20 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
On June 21, 2001, the Company completed an offering of $250 million
principal amount of the Initial 2001 Notes, bearing interest at 10 5/8
percent.The net proceeds of this offering were applied to prepay a portion of
the outstanding borrowings under the Term Loan Facility resulting in a non-cash,
extraordinary charge to earnings of approximately $2.8 million, net of tax of
nil, related to the write-off of the applicable portion of deferred debt
issuance costs on the term loans.
On August 10, 2001, the Company entered into the 2001 Senior Secured Credit
Agreement. The proceeds of the initial borrowings under the 2001 Facilities of
approximately $386.0 million, including $51.0 million in revolving credit
borrowings, were applied to repay in full the outstanding borrowings under the
Term Loan Facility and the Revolving Facility and to pay approximately
$12 million of the estimated $14 million of fees and expenses incurred in
connection with the amendment and restatement of the Credit Agreement. During
the third quarter of 2001, the Company recorded a non-cash, extraordinary charge
to
F-35
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 20 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT -- (Continued)
earnings of approximately $6.0 million, net of tax of nil, related to the
write-off of the applicable remaining deferred debt issuance costs on the Term
Loan Facility and the Revolving Facility.
On October 3, 2000, the Company completed the sale of its 50 percent
investment in Igaras (see Note 6). The Company applied $120 million and
$25 million of the sale proceeds to its 2001 and 2002 term loan maturities under
theTerm Loan Facility, respectively. The Company recognized a loss on the early
extinguishment of debt of approximately $2.1 million in the fourth quarter of
2000.
NOTE 21 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to fluctuations in interest rates on its variablerate
debt and fluctuations in foreign currency transaction cash flows. The Company
actively monitors these fluctuations and uses derivative instruments from time
to time to manage its exposure. In accordance with its risk management strategy,
the Company uses derivative instruments only for the purpose of managing risk
associated with fluctuations in the cash flow of the underlying exposures
identified by management. The Company does not trade or use derivative
instruments with the objective of earning financial gains on interest or
currency rates, nor does it use leveraged instruments or instruments where there
are no underlying exposures identified. The Company's use of derivative
instruments may result in short-term gains or losses and may increase volatility
in its earnings.
On January 1, 2001, the Company adopted SFAS No. 133 which requires all
derivative instruments to be measured at fair value and recognized on the
balance sheet as either assets or liabilities. In addition, all derivative
instruments used in hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS No. 133. Upon adoption of SFAS
No.133, the Company recognized a one-time after-tax transition adjustment to
decrease earnings by approximately $0.5 million and decrease other comprehensive
income by approximately $1.1 million. These amounts have been presented as a
cumulative effect of change in accounting principle in the accompanying
Consolidated Statement of Operations and Comprehensive (Loss) Income for the
year ended December 31, 2001.
The following is a summary of the Company's derivative instruments as of
December 31, 2001 and the accounting policies it employs for each:
HEDGES OF ANTICIPATED CASH FLOWS
The following is a reconciliation of current period changes in the fair
value of the interest rate swap agreements, foreign currency forward and option
contracts which have been recorded as Accumulated Derivative Instruments Loss in
the accompanying Condensed Consolidated Balance Sheet at December 31,
F-36
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 21 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES --(Continued)
2001 and as Derivative Instruments Loss in the accompanying Consolidated
Statement of Operations and Comprehensive (Loss) Income for the year ended
December 31, 2001.
(In thousands
of dollars)
-------------
SFAS No. 133 transition adjustment...................... $(1,094)
Reclassification to earnings............................ 331
Current period decrease in fair value................... (3,807)
-------
Balance at December 31, 2001............................ $(4,570)
=======
During the year ended December 31, 2001, there was no ineffective portion
related to the changes in fair value of the interest rate swap agreements,
foreign currency forward and option contracts and there were no amounts excluded
from the measure of effectiveness. The balance of $4.6 million recorded in
Accumulated Derivative Instruments Loss at December 31, 2001 is expected to be
reclassified into future earnings, contemporaneously with and offsetting changes
in the related hedged exposure. The estimated amount to be reclassified into
future earnings as interest expense and other income over the next twelve months
through December 31, 2002 is approximately $5.4 million and $0.8 million,
respectively. The actual amount that will be reclassified to future earnings
over the next twelve months will vary from this amount as a result of changes in
market conditions. No amounts were reclassified to earnings during the fourth
quarter of 2001 in connection with forecasted transactions that were no longer
considered probable of occurring.
DERIVATIVES NOT DESIGNATED AS HEDGES
The Company has foreign currency forward contracts used to hedge the
exposure associated with foreign currency denominated receivables. These
contracts are presently being marked-to-market through the income statement and
will continue to be marked-to-market through the income statement.
NOTE 22 SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and cash paid (received), net of refunds, for income
and franchise taxes was as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(In thousands of dollars)
Interest........................ $145,752 $173,180 $169,623
======== ======== ========
Income and franchise taxes...... $ 32,483 $ 5,780 $ (5,293)
======== ======== ========
See Note 15 to the Consolidated Financial Statements.
F-37
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 23 RESTRUCTURING ACTIVITIES
In connection with the global restructuring program initiated in the fourth
quarter of 1998, the Company began reducing its European workforce by
approximately 300 employees and implemented other initiatives designed to
improve productivity and profitability across the global organization. The
initial cost of this program was approximately $25.6 million of which
approximately $0.8 million was used in December 1998 and related to severance
payments. The following table provides information that details payments on this
restructuring plan since December 31, 1998:
Other
Severance Exit Costs Total
--------- ---------- --------
(In thousands of dollars)
Balance at 12/31/98............................... 21,205 3,537 24,742
Charges against accrual in 1999................... (11,527) (791) (12,318)
------- ------ -------
Balance at 12/31/99............................... 9,678 2,746 12,424
Net charges against accrual in 2000............... (6,669) (2,499) (9,168)
------- ------ -------
Balance at 12/31/00............................... $ 3,009 $ 247 $ 3,256
Net charges against accrual in 2001............... (3,009) (247) (3,256)
------- ------ -------
Balance at 12/31/01............................... $ -- $ -- $ --
======= ====== =======
During 2000, the Company substantially completed the restructuring plan and
reduced the reserve by $4.8 million. In addition, $2.2 million of new
restructuring activities aligned with the overall objectives of the initial plan
were completed in 2000. The Company completed this program during 2001 resulting
in a reduction of its European workforce related to the 1998 restructuring by
approximately 250 employees.
NOTE 24 BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company reports its results in two business segments: Coated Board and
Containerboard. These segments are evaluated by the chief operating decision
maker based primarily on income from operations and EBITDA. The Coated Board
business segment includes the production and sale of coated board for beverage
carrierboard and folding cartons from its West Monroe, Louisiana and Macon,
Georgia mills and from its mill in Sweden; carton converting facilities in the
United States, Europe and Brazil; and the design, manufacture and installation
of packaging machinery related to the assembly of beverage cartons. The
Containerboard business segment includes the production and sale of linerboard,
corrugating medium and kraft paper from paperboard mills in the United States.
The Company's four separate geographic areas are the United States,
Central/South America, Europe and Asia-Pacific. The United States area includes
paper mills, beverage and folding carton plants, and packaging machinery
facilities. The Central/South America area includes beverage and folding carton
operations. The Europe area includes a coated recycled paperboard mill, beverage
and folding carton operations, and a packaging machinery facility. The
Asia-Pacific area includes beverage and folding carton operations.
F-38
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24 BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION -- (Continued)
Business segment information is as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(In thousands of dollars)
NET SALES:
Coated board......................................... $1,156,210 $1,065,813 $1,062,671
Containerboard....................................... 93,676 126,549 111,994
---------- ---------- ----------
$1,249,886 $1,192,362 $1,174,665
========== ========== ==========
INCOME FROM OPERATIONS:
Coated board......................................... $ 142,929 $ 161,372 $ 151,453
Containerboard....................................... (19,366) 5,183 (10,235)
Corporate(A)......................................... (25,511) 53,934 (20,755)
---------- ---------- ----------
$ 98,052 $ 220,489 $ 120,463
========== ========== ==========
EBITDA(F):
Coated board......................................... $ 280,410 $ 286,039 $ 269,509
Containerboard....................................... (986) 20,518 7,000
Corporate and eliminations........................... (11,190) (6,523) (3,034)
---------- ---------- ----------
$ 268,234 $ 300,034 $ 273,475
========== ========== ==========
RECONCILIATION OF INCOME FROM
OPERATIONS TO EBITDA:
Income from operations............................... $ 98,052 $ 220,489 $ 120,463
Add: Depreciation and amortization................... 137,258 143,541 142,597
Dividends from equity investments.................. 710 5,083 4,515
Other non-cash charges(E).......................... 32,214 (69,079) 5,900
---------- ---------- ----------
EBITDA(F)............................................ $ 268,234 $ 300,034 $ 273,475
========== ========== ==========
CAPITAL EXPENDITURES:
Coated board......................................... $ 51,852 $ 57,669 $ 42,505
Containerboard....................................... 2,562 3,231 3,782
Corporate............................................ 3,256 1,162 19,731
---------- ---------- ----------
$ 57,670 $ 62,062 $ 66,018
========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Coated board......................................... $ 115,868 $ 123,893 $ 120,991
Containerboard....................................... 13,787 17,252 18,068
Corporate............................................ 7,603 2,396 3,538
---------- ---------- ----------
$ 137,258 $ 143,541 $ 142,597
========== ========== ==========
2001 2000 1999
---------- ---------- ----------
(In thousands of dollars)
IDENTIFIABLE ASSETS AT DECEMBER 31:
Coated board(B).......................................... $1,759,787 $1,734,802 $1,824,297
Containerboard(B)........................................ 191,598 287,335 293,852
Corporate(C)............................................. 106,207 99,220 244,993
---------- ---------- ----------
$2,057,592 $2,121,357 $2,363,142
========== ========== ==========
F-39
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24 BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION -- (Continued)
Business geographic area information is as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(In thousands of dollars)
NET SALES:
United States................................... $ 939,985 $ 974,868 $ 966,006
Central/South America........................... 17,372 15,473 6,313
Europe.......................................... 203,393 208,794 228,503
Asia Pacific.................................... 188,309 97,357 80,522
Eliminations(D)................................. (99,173) (104,130) (106,679)
---------- ---------- ----------
$1,249,886 $1,192,362 $1,174,665
========== ========== ==========
INCOME FROM OPERATIONS:
United States................................... $ 67,947 $ 195,074 $ 131,070
Central/South America........................... (4,023) (925) (1,954)
Europe.......................................... 12,477 12,030 (2,779)
Asia Pacific.................................... 17,199 7,668 4,707
Eliminations(D)................................. 4,452 6,642 (10,581)
---------- ---------- ----------
$ 98,052 $ 220,489 $ 120,463
========== ========== ==========
2001 2000 1999
---------- ---------- ----------
(In thousands of dollars)
IDENTIFIABLE ASSETS AT DECEMBER 31:
United States..................................... $1,709,686 $1,805,760 $1,904,349
Central/South America............................. 29,330 35,851 10,803
Europe............................................ 147,050 142,502 165,799
Asia Pacific...................................... 64,893 38,569 36,228
Corporate(C)...................................... 106,207 99,220 244,993
Eliminations(D)................................... 426 (545) 970
---------- ---------- ----------
$2,057,592 $2,121,357 $2,363,142
========== ========== ==========
---------
Notes:
(A) Primarily consists of unallocated general corporate expenses and the gain on
the sale of Igaras (see Note 6) in 2000.
(B) Certain mill assets are allocated based on production.
(C) Corporate assets are principally the equity investment in Igaras (up to the
date of sale), (see Note 6), cash and equivalents, prepaid pension costs and
other prepayments, deferred loan costs, deferred tax assets and a portion of
property, plant and equipment.
(D) Represents primarily the elimination of intergeographic sales and profits
from transactions between the Company's U.S., Europe, Asia-Pacific and
Central/South America operations.
F-40
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24 BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION -- (Continued)
(E) Other non-cash charges include non-cash charges for LIFO accounting,
pension, postretirement and postemployment benefits, and amortization of
premiums on hedging contracts deducted in determining net income.
(F) EBITDA is defined as consolidated net income (exclusive of non-cash charges
resulting from purchase accounting during the periods subsequent to the
Merger) before consolidated interest expense, consolidated income taxes,
consolidated depreciation and amortization, and other non-cash charges
deducted in determining consolidated net income, extraordinary items and the
cumulative effect of accounting changes and earnings of, but including
dividends from, non-controlled affiliates. 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
Consolidated Statements of Operations or cash flow data. This definition of
EBITDA may not be comparable to other companies' definitions of EBITDA as it
is calculated based on the definition of EBITDA and GAAP as defined in the
2001 Senior Secured Credit Agreement.
NOTE 25 RELATED PARTY TRANSACTIONS
On November 18, 1999, the Company loaned $5.0 million to a principal
employee in a non-interest bearing note due March 26, 2002. On December 19,
2001, the Company extended the maturity of the loan through March 26, 2007. At
December 31, 2001 and 2000 this receivable was included in Other Assets on the
Consolidated Balance Sheets.
The Company receives certain management services provided by Clayton,
Dubilier and Rice, Inc. ("CD&R"), an affiliate of an equity investor in the
Company. Charges for such services, including reimbursement of expenses, totaled
approximately $0.5 million, $0.6 million, and $0.6 million for the years ended
December 31, 2001, 2000, and 1999, respectively, and were included in Selling,
General and Administrative in the Consolidated Statements of Operations and
Comprehensive (Loss) Income.
NOTE 26 NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations", which is effective January 1, 2002. SFAS No. 141 requires the
purchase method of accounting for business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interests method. The Company
adopted SFAS No. 141 on January 1, 2002 and does not believe that the adoption
will have a significant impact on its financial position and results of
operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS No. 142"), "GOODWILL AND OTHER INTANGIBLE ASSETS", which is
effective January 1, 2002. SFAS No. 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 also requires the Company
to complete a transitional
F-41
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 26 NEW ACCOUNTING PRONOUNCEMENTS --(Continued)
goodwill impairment test six months from the date of adoption. The adoption of
SFAS No. 142 will result in the discontinuation of amortization of goodwill
recorded at December 31, 2001 of approximately $8 million annually. Intangible
assets with a determinable life will continue to be amortized over that period.
The Company will adopt SFAS No. 142 as of January 1, 2002 and does not believe
that any impairment charges will result from the adoption.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS No. 144"), "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS", which is effective January 1, 2002. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets, as well as eliminating the exception to consolidation for a subsidiary
for which control is likely to be temporary. The Company adopted SFAS No. 144 on
January 1, 2002 and the adoption did not have a significant impact on its
financial position and results of operations.
NOTE 27 (LOSS) EARNINGS PER SHARE
The following table is a reconciliation of the numerators and denominators
used in computing basic and diluted earnings per common share (in thousands,
except per share data):
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Net (Loss) Income (numerator)........................ $(77,896) $38,282 $(54,671)
Shares (denominator).................................
Weighted average common shares outstanding........... 7,568 7,564 7,557
Common shares issuable upon exercise of stock options
(treasury stock method)............................ -- 121 --
Shares used in diluted computation................... 7,568 7,685 7,557
2001 2000 1999
-------- -------- --------
Basic (loss) earnings per share:
(Loss) earnings per share before extraordinary item and
cumulative effect of a change in accounting principal..... $ (9.07) $ 5.34 $(7.23)
Extraordinary loss per share on early extinguishment of
debt, net of tax of $0.................................... (1.15) (0.28) --
Cumulative effect per share of a change in accounting
principle, net of tax of $0............................... (0.07) -- --
------- ------ ------
Net (loss) income per share................................. $(10.29) $ 5.06 $(7.23)
======= ====== ======
2001 2000 1999
-------- -------- --------
Diluted (loss) earnings per share:
(Loss) earnings per share before extraordinary item and
cumulative effect of a change in accounting principal..... $ (9.07) $ 5.26 $(7.23)
Extraordinary loss per share on early extinguishment of
debt, net of tax of $0.................................... (1.15) (0.28) --
Cumulative effect per share of a change in accounting
principle, net of tax of $0............................... (0.07) -- --
------- ------ ------
Net (loss) income per share................................. $(10.29) $ 4.98 $(7.23)
======= ====== ======
F-42
RIVERWOOD HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 27 (LOSS) EARNINGS PER SHARE (Continued)
Employee stock options were not included in the computation of diluted
(loss) earnings per share for the years ended December 31, 2001 and 1999 because
they would have an antidilutive effect on the (loss) earnings per share. As of
December 31, 2001, options to purchase 545,410 shares of common stock were
outstanding with a weighted-average exercise price of $89.70 per share. As of
December 31, 1999, options to purchase 553,910 shares of common stock were
outstanding with a weighted-average exercise price of $89.84 per share.
NOTE 28 SUBSEQUENT EVENT
On April 23, 2002, the Company borrowed $250 million pursuant to an
amendment to its senior secured credit agreement and will apply the proceeds
therefrom to redeem in full the 1996 senior notes, which is expected to occur on
May 23, 2002. In addition, the Company borrowed approximately $12 million under
its revolving credit facility to pay fees and expenses related to the
refinancing transaction.
F-43
RIVERWOOD HOLDING, INC.
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
Results of operations for the four quarters of 2001 and 2000 are shown
below:
(Loss) Income Net (loss) income
Income Before per share
Net Gross From Extraordinary Net -------------------
(Quarter) Sales(F) Profit Operations Item (Loss) Income Basic Diluted
--------- ---------- -------- ---------- ------------- ------------- -------- --------
(In thousands of dollars)
2001
First................ $ 288,600 $ 50,719 $ 10,817 $(29,665) $(30,164) $ (3.99) $ (3.99)
Second(A)............ 340,873 73,172 36,918 (4,672) (7,442) (.98) (.98)
Third(B)............. 321,682 74,170 40,116 (1,828) (7,782) (1.03) (1.03)
Fourth(C)............ 298,731 49,766 10,201 (32,508) (32,508) (4.30) (4.30)
---------- -------- -------- -------- -------- -------- --------
Total.............. $1,249,886 $247,827 $ 98,052 $(68,673) $(77,896) $ (10.29) $ (10.29)
========== ======== ======== ======== ======== ======== ========
2000
First................ $ 286,329 $ 58,301 $ 24,096 $(21,163) $(21,163) $ (2.80) $ (2.80)
Second............... 321,725 72,933 43,349 (3,655) (3,655) (.48) (.48)
Third................ 293,826 66,147 37,543 (9,297) (9,297) (1.23) (1.23)
Fourth(D)(E)......... 290,482 71,130 115,501 74,514 72,397 9.57 9.42
---------- -------- -------- -------- -------- -------- --------
Total(G)........... $1,192,362 $268,511 $220,489 $ 40,399 $ 38,282 $ 5.06 $ 4.98
========== ======== ======== ======== ======== ======== ========
----------
Notes:
(A) During the second quarter of 2001, the Company recorded an extraordinary
charge to earnings of approximately $2.8 million, net of tax of nil, related
to the write-off deferred debt issuance costs (see Note 20 in Notes to
Consolidated Financial Statements).
(B) During the third quarter of 2001, the Company recorded an extraordinary
charge to earnings of approximately $6.0 million, net of tax of nil, related
to the write-off deferred debt issuance costs (see Note 20 in Notes to
Consolidated Financial Statements).
(C) During the fourth quarter of 2001, the Company recorded a charge of $12.3
million related to LIFO inventory valuation. The net debit relating to LIFO
inventory valuation for the year ended December 31, 2001, was $12.3 million
(see Note 5 in Notes to Consolidated Financial Statements).
(D) During the fourth quarter of 2000, the Company recorded a credit of $6.9
million related to LIFO inventory valuation. The net credit relating to LIFO
inventory valuation for the year ended December 31, 2000, was $6.9 million
(see Note 5 in Notes to Consolidated Financial Statements).
(E) On October 3, 2000, the Company completed the sale of the jointly-held
subsidiary Igaras and recognized a gain of approximately $70.9 million in
accordance with the sale (see Note 6 in Notes to Consolidated Financial
Statements). During the fourth quarter of 2000, the Company recorded an
extraordinary charge to earnings of approximately $2.1 million, net of tax
of nil, related to the write-off of the applicable portion of deferred debt
issuance costs (see Note 20 in Notes to Consolidated Financial Statements).
(F) The Company has reclassified the presentation of Net Sales and Cost of Sales
information to conform with the current presentation format and Emerging
Issues Task Force 00-10, "Accounting for Shipping and Handling Fees and
Costs". Shipping and handling costs totaled $15.0 million in the first
quarter of 2001, $17.0 million in the second quarter of 2001, $16.4 million
in the third quarter of 2001, $16.5 million in the fourth quarter of 2001,
$16.1 million in the first quarter of 2000, $17.2 million in the second
quarter of 2000, $15.3 million in the third quarter of 2000 and $15.1
million in the fourth quarter of 2000. See Note 2 in Notes to Consolidated
Financial Statements.
(G) Net (loss) income per share for the year 2000 does not equal the sum of the
2000 quarterly (loss) income per share amounts because employee stock
options were not included in the computation of diluted (loss) income per
share for the first, second and third quarters because they would have had
an antidilutive effect on the (loss) income per share.
F-44
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell or buy only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
Page
--------
Prospectus Summary..................... 1
Risk Factors........................... 10
Forward-Looking Statements and Industry
Data................................. 21
Use of Proceeds........................ 22
Dividend Policy........................ 22
Capitalization......................... 23
Dilution............................... 24
Selected Consolidated Financial and
Other Data........................... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 28
Business............................... 50
Management............................. 67
Principal Stockholders................. 87
Certain Relationships and Related Party
Transactions......................... 89
Description of Certain Indebtedness.... 91
Description of Capital Stock........... 96
Shares Eligible For Future Sale........ 102
Certain United States Federal Tax
Considerations For Non-U.S.
Holders.............................. 104
Underwriting........................... 107
Legal Matters.......................... 110
Experts................................ 110
Where You Can Find More Information.... 110
Index to Financial Statements.......... F-1
------------------------
Through and including , 2002 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
Shares
Riverwood Holding, Inc.
Common Stock
---------------------
[Logo]
---------------------
JOINT BOOK-RUNNING MANAGERS
Goldman, Sachs & Co.
Morgan Stanley
---------------
Deutsche Bank Securities
JPMorgan
Salomon Smith Barney
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Riverwood Holding, Inc. in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
SEC registration fee.................................... $32,200.00
NASD filing fee......................................... 30,500.00
Printing and engraving costs............................
Legal fees and expenses.................................
Accounting fees and expenses............................
Transfer Agent and Registrar fees.......................
Miscellaneous expenses..................................
----------
Total................................................... $
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, or DGCL, provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees)), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
Riverwood Holding, Inc.'s certificate of incorporation provides for the
indemnification of directors to the fullest extent permitted by the DGCL. In
addition, as permitted by the DGCL, the certificate of incorporation provides
that Riverwood Holding, Inc.'s directors shall have no personal liability to
II-1
Riverwood Holding, Inc. or its stockholders for monetary damages for breach of
fiduciary duty as a director, except (1) for any breach of the director's duty
of loyalty to Riverwood Holding, Inc. or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, (3) under Section 174 of the DGCL or (4) for any transaction
from which a director derived an improper personal benefit.
Riverwood Holding, Inc.'s by-laws provides for the indemnification of all
current and former directors and all current or former officers to the fullest
extent permitted by the DGCL.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to all securities issued or sold by
Riverwood Holding, Inc. in the last three years and not registered under the
Securities Act and does not reflect the stock split of Riverwood Holding, Inc.'s
common stock to be completed prior to the closing of this offering. Each of the
transactions described below was conducted in reliance upon the exemptions from
registration provided in Rule 701 promulgated under Section 3(b) of the
Securities Act and Section 4(2) of the Securities Act and the rules and
regulations promulgated thereunder.
On May 7, 1999, Riverwood Holding, Inc. issued stock options to an executive
officer of Riverwood Holding, Inc. to purchase 75,000 shares of common stock at
an exercise price of $100 per share.
On June 11, 1999, Riverwood Holding, Inc. sold an aggregate of 19,850 shares
of common stock to an executive officer and employees of Riverwood
Holding, Inc. for a purchase price of $100 per share.
On June 30, 1999, Riverwood Holding, Inc. issued stock options to its
executive officers and employees to purchase an aggregate of 99,833 shares of
common stock at an exercise price of $100 per share.
On June 30, 1999, Riverwood Holding, Inc. issued an aggregate of 18,577
incentive stock units to its executive officers and employees in consideration
of their services.
On August 3, 1999, Riverwood Holding, Inc. sold 4,000 shares of common stock
to an employee of Riverwood Holding, Inc. for a purchase price of $100 per
share.
On December 1, 1999, Riverwood Holding, Inc. issued stock options to an
executive officer of Riverwood Holding, Inc. to purchase 10,667 shares of common
stock at an exercise price of $100 per share.
On December 1, 1999, Riverwood Holding, Inc. issued 2,667 incentive stock
units to an executive officer of Riverwood Holding, Inc. in consideration of his
services.
On March 21, 2000, Riverwood Holding, Inc. sold 1,000 shares of common stock
to an executive officer of Riverwood Holding, Inc. for a purchase price of $100
per share.
On November 6, 2000, Riverwood Holding, Inc. issued stock options to its
employees to purchase 5,000 shares of common stock at an exercise price of $115
per share.
On November 6, 2000, Riverwood Holding, Inc. issued an aggregate of 1,000
incentive stock units to its employees in consideration of their services.
On November 6, 2000, Riverwood Holding, Inc. sold an aggregate of 4,000
shares of common stock to its employees for a purchase price of $100 per share.
On March 30, 2001, Riverwood Holding, Inc. sold 1,000 shares of common stock
to an executive officer of Riverwood Holding, Inc. for a purchase price of $100
per share.
On April 30, 2001, Riverwood Holding, Inc. sold 2,000 shares of common stock
to an executive officer of Riverwood Holding, Inc. for a purchase price of $100
per share.
II-2
Between January 1, 2002 and January 31, 2002, Riverwood Holding, Inc. issued
stock options to its executive officers and employees to purchase an aggregate
of 642,153 shares of common stock at an exercise price of $120 per share.
Between January 1, 2002 and January 31, 2002, Riverwood Holding, Inc. issued
an aggregate of 16,200 restricted stock units to its executive officers and
employees in consideration of their services.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
The following exhibits are included as exhibits to this Registration
Statement. Those exhibits below incorporated by reference herein are indicated
as such by the information supplied in the parenthetical thereafter. If no
parenthetical appears after an exhibit, such exhibit is filed herewith unless
otherwise indicated.
Exhibit
Number Description
------- ------------------------------------------------------------
1.1 -- Form of Underwriting Agreement.(*)
3.1 -- Amended and Restated Certificate of Incorporation of
Riverwood Holding, Inc.(*)
3.2 -- Amended and Restated By-Laws of Riverwood Holding, Inc.(*)
4.1 -- Form of Certificate for the Common Stock, par value $0.01
per share.(*)
4.2 -- Form of Rights Agreement.(*)
4.3 -- Amended and Restated Credit Agreement, dated as of August
10, 2001, among Riverwood International Corporation, the
several banks and other financial institutions from time to
time parties thereto, Bankers Trust Company, as syndication
agent, and The Chase Manhattan Bank, as administrative
agent. Filed as Exhibit 4.4 to Riverwood Holding, Inc.'s
Quarterly Report on Form 10-Q filed August 14, 2001
(Commission File No. 1-11113), and incorporated herein by
reference.
4.4 -- Amendment No. 1 and Waiver, dated as of April 23, 2002,
among Riverwood International Corporation, the several banks
and other financial institutions from time to time parties
thereto and JPMorgan Chase Bank (formerly known as The Chase
Manhattan Bank), as administrative agent.(*)
4.5 -- Indenture, dated March 27, 1996, among RIC Holding, Inc.,
Riverwood Holding, Inc., CDRO Acquisition Corporation and
Fleet National Bank of Connecticut, as trustee, relating to
the 10 1/4% Senior Notes due 2006 of Riverwood International
Corporation, together with the First Supplemental Indenture
and the Second Supplemental Indenture thereto. Filed as
Exhibit 4.6 to RIC Holding, Inc.'s Annual Report on Form
10-K filed April 16, 1996 (Commission File No. 1-11113), and
incorporated herein by reference.
4.6 -- Indenture, dated March 27, 1996, among RIC Holding, Inc.,
Riverwood Holding, Inc., CDRO Acquisition Corporation and
Fleet National Bank of Massachusetts, as trustee, relating
to the 10 7/8% Senior Subordinated Notes due 2008 of
Riverwood International Corporation, together with the First
Supplemental Indenture and the Second Supplemental Indenture
thereto. Filed as Exhibit 4.7 to RIC Holding, Inc.'s Annual
Report on Form 10-K filed April 16, 1996 (Commission File
No. 1-11113), and incorporated herein by reference.
II-3
Exhibit
Number Description
------- ------------------------------------------------------------
4.7 -- Indenture, dated as of July 28, 1997, among Riverwood
International Corporation, RIC Holding, Inc., Riverwood
Holding, Inc. and State Street Bank and Trust Company, as
trustee, relating to the 10 5/8% Senior Notes due 2007 of
Riverwood International Corporation. Filed as Exhibit 4.1 to
the Registration Statement on Form S-4 (Registration No.
333-33499) of Riverwood International Corporation, Riverwood
Holding, Inc. and RIC Holding, Inc. under the Securities Act
of 1933, as amended, and incorporated herein by reference.
4.8 -- Indenture, dated June 21, 2001, among Riverwood
International Corporation, RIC Holding Inc., Riverwood
Holding, Inc. and State Street Bank and Trust Company, as
trustee, relating to the 10 5/8% Senior Notes due 2007 of
Riverwood International Corporation. Filed as Exhibit 4.12
to Registration Statement on Form S-4 (Registration No.
333-67550) of Riverwood International Corporation, Riverwood
Holding, Inc. and RIC Holding, Inc. under the Securities Act
of 1933, as amended, and incorporated herein by reference.
5.1 -- Opinion of Debevoise & Plimpton.(*)
10.1 -- Wood Products Supply Agreement, dated as of October 18,
1996, between Plum Creek Timber Company, L.P. and Riverwood
International Corporation, including a list of omitted
annexes and an undertaking of Riverwood Holding, Inc. to
furnish supplementally a copy of any such omitted annex to
the Securities and Exchange Commission upon request. Filed
as Exhibit 2c to Riverwood Holding, Inc.'s Current Report on
Form 8-K filed October 21, 1996 (Commission File No.
1-11113), and incorporated herein by reference.
10.2 -- Form of Management Stock Subscription Agreement between
Riverwood Holding, Inc. and the purchasers named therein.
Filed as Exhibit 10.4 to Registration Statement on Form S-1
(Registration No. 33-80475) of Riverwood Holding, Inc. under
the Securities Act of 1933, as amended, and incorporated
herein by reference.
10.3 -- Form of Management Stock Option Agreement between Riverwood
Holding, Inc. and the grantees named therein. Filed as
Exhibit 10.5 to Registration Statement on Form S-1
(Registration No. 33-80475) of Riverwood Holding, Inc. under
the Securities Act of 1933, as amended, and incorporated
herein by reference.
10.4 -- Form of Registration and Participation Agreement among
Riverwood Holding, Inc. and certain stockholders of
Riverwood Holding, Inc. Filed as Exhibit 10.7 to
Registration Statement on Form S-1 (Registration No.
33-80475) of Riverwood Holding, Inc. under the Securities
Act of 1933, as amended, and incorporated herein by
reference.
10.5 -- Form of Riverwood Holding, Inc. Stock Incentive Plan. Filed
as Exhibit 10.10 to Registration Statement on Form S-1
(Registration No. 33-80475) of Riverwood Holding, Inc. under
the Securities Act of 1933, as amended, and incorporated
herein by reference.
10.6 -- Form of Stockholders Agreement between Riverwood Holding,
Inc. and the stockholders of Riverwood Holding, Inc. named
therein. Filed as Exhibit 10.11 to Registration Statement on
Form S-1 (Registration No. 33-80475) of Riverwood Holding,
Inc. under the Securities Act of 1933, as amended, and
incorporated herein by reference.
10.7 -- Form of Indemnification Agreement among Riverwood Holding,
Inc., RIC Holding, Inc., Riverwood International
Corporation, Clayton, Dubilier & Rice, Inc. and Clayton,
Dubilier & Rice Fund V Limited Partnership. Filed as Exhibit
10.8 to Registration Statement on Form S-1 (Registration No.
33-80475) of Riverwood Holding, Inc. under the Securities
Act of 1933, as amended, and incorporated herein by
reference.
10.8 -- Form of Consulting Agreement among Riverwood Holding, Inc.,
RIC Holding, Inc., Riverwood International Corporation and
Clayton, Dubilier & Rice, Inc. Filed as Exhibit 10.12 to
Registration Statement on Form S-1 (Registration No.
33-80475) of Riverwood Holding, Inc. under the Securities
Act of 1933, as amended, and incorporated herein by
reference.
II-4
Exhibit
Number Description
------- ------------------------------------------------------------
10.9 -- Management Stock Option Agreement, dated as of March 31,
1997, between Riverwood Holding, Inc. and Stephen M.
Humphrey. Filed as Exhibit 10.2 to Riverwood Holding Inc.'s
Quarterly Report on Form 10-Q filed May 9, 1997 (Commission
File No. 1-11113), and incorporated herein by reference.
10.10 -- Employment Agreement, dated as of July 14, 1997, among
Riverwood International Corporation, Riverwood Holding, Inc.
and Thomas M. Gannon. Filed as Exhibit 10.13 to Riverwood
Holding, Inc.'s Annual Report on Form 10-K filed March 5,
1999 (Commission File No. 1-11113), and incorporated herein
by reference.
10.11 -- Management Stock Option Agreement, dated as of August 19,
1998, between Riverwood Holding, Inc. and Thomas M. Gannon.
Filed as Exhibit 10.14 to Riverwood Holding, Inc.'s Annual
Report on Form 10-K filed March 5, 1999 (Commission File No.
1-11113), and incorporated herein by reference.
10.12 -- Form of Riverwood Holding, Inc. Supplemental Long-Term
Incentive Plan. Filed as Exhibit 10.15 to Riverwood Holding,
Inc.'s Annual Report on Form 10-K filed March 17, 2000
(Commission File No. 1-11113), and incorporated herein by
reference.
10.13 -- Employment Agreement, dated as of September 1, 1998, among
Riverwood International Corporation, Riverwood Holding, Inc.
and Daniel J. Blount. Filed as Exhibit 10.16 to Riverwood
Holding, Inc.'s Annual Report on Form 10-K filed March 17,
2000 (Commission File No. 1-11113), and incorporated herein
by reference.
10.14 -- Employment Agreement, dated as of November 1, 1998, among
Riverwood International Corporation, Riverwood Holding, Inc.
and Steven D. Saucier. Filed as Exhibit 10.17 to Riverwood
Holding, Inc.'s Annual Report on Form 10-K filed March 17,
2000 (Commission File No. 1-11113), and incorporated herein
by reference.
10.15 -- Agreement, dated as of November 18, 1999, between Riverwood
Holding, Inc. and Stephen M. Humphrey. Filed as Exhibit
10.18 to Riverwood Holding, Inc.'s Annual Report on Form
10-K filed March 17, 2000 (Commission File No. 1-11113), and
incorporated herein by reference.
10.16 -- Amended and Restated Employment Agreement, dated January 1,
2002, among Riverwood International Corporation, Riverwood
Holding, Inc. and Stephen M. Humphrey.*
10.17 -- Riverwood Holding, Inc. 2002 Management Incentive Plan.*
10.18 -- Amendment No. 1, dated as of December 19, 2001, between
Stephen M. Humphrey and Riverwood International Corporation,
to the Promissory Note, dated November 18, 1999, by
Stephen M. Humphrey. Filed as Exhibit 10.19 to Riverwood
Holding, Inc.'s Annual Report on Form 10-K filed March 11,
2002 (Commission File No. 1-11113), and incorporated herein
by reference.
10.19 -- Promissory Note, dated as of November 18, 1999, by Stephen
M. Humphrey. Filed as Exhibit 10.19 to Riverwood Holding,
Inc.'s Annual Report on Form 10-K filed March 17, 2000
(Commission File No. 1-11113), and incorporated herein by
reference.
21.1 -- List of subsidiaries. Filed as Exhibit 21 to Riverwood
Holding, Inc.'s Annual Report on Form 10-K filed March 8,
2001 (Commission File No. 1-11113), and incorporated herein
by reference.
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of Debevoise & Plimpton.(*)
24.1 -- Power of Attorney. Included on the signature page hereof.
------------------------
* To be filed by amendment.
II-5
(B) FINANCIAL STATEMENT SCHEDULE.
RIVERWOOD HOLDING, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
Balance (Credits) Charges Balance
Beginning to Costs and Deductions at End
(Classification) of Period Expenses (a) of Period
---------------- --------- ----------------- ---------- ---------
Year ended December 31, 2001:
Allowances Reducing the Assets in the Balance
Sheet:
Doubtful accounts receivable................. $ 2,769 $ 2,286 $(1,639) $ 3,416
Deferred tax assets.......................... 174,859 44,888 -- 219,747
-------- -------- ------- --------
Total...................................... $177,628 $ 47,174 $(1,639) $223,163
======== ======== ======= ========
Year ended December 31, 2000:
Allowances Reducing the Assets in the Balance
Sheet:
Doubtful accounts receivable................. $ 4,474 $ 404 $(2,109) $ 2,769
Deferred tax assets.......................... 214,911 (40,052) -- 174,859
-------- -------- ------- --------
Total...................................... $219,385 $(39,648) $(2,109) $177,628
-------- -------- ------- --------
Year ended December 31, 1999:
Allowances Reducing the Assets in the Balance
Sheet:
Doubtful accounts receivable................. $ 2,132 $ 3,148 $ (806) $ 4,474
Deferred tax assets.......................... 175,612 39,299 -- 214,911
-------- -------- ------- --------
Total...................................... $177,744 $ 42,447 $ (806) $219,385
======== ======== ======= ========
------------------------
NOTE:
(a) The reductions in the allowance for doubtful accounts receivable relate
principally to charges for which reserves were provided, net of recoveries.
ITEM 17. UNDERTAKINGS
The registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on May 3, 2002.
RIVERWOOD HOLDING, INC.
BY: /S/ STEPHEN M. HUMPHREY
-------------------------------------
Stephen M. Humphrey
Name:
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
TITLE:
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen M. Humphrey, Edward W. Stroetz, Jr. and
Thomas M. Gannon, jointly and severally, as his true and lawful attorney-in-fact
and agent, acting alone, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement and to sign any and all registration statements relating to the same
offering of securities as this Registration Statement that are filed pursuant to
Rule 462(b) of the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and any other regulatory authority, granting
unto said attorney-in-fact full power and authority to do and reform each and
every act and thing requisite or necessary to be done in connection therewith,
as person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of this Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ B. CHARLES AMES
------------------------------------------- Chairman of the Board of May 3, 2002
B. Charles Ames Directors
President, Chief Executive
/s/ STEPHEN M. HUMPHREY Officer and Director
------------------------------------------- (Principal Executive May 3, 2002
Stephen M. Humphrey Officer)
Senior Vice President and
/s/ DANIEL J. BLOUNT Chief Financial Officer
------------------------------------------- (Principal Financial and May 3, 2002
Daniel J. Blount Accounting Officer)
II-7
/s/ KEVIN J. CONWAY
------------------------------------------- Director May 3, 2002
Kevin J. Conway
/s/ LEON J. HENDRIX, JR.
------------------------------------------- Director May 3, 2002
Leon J. Hendrix, Jr.
/s/ HUBBARD C. HOWE
------------------------------------------- Director May 3, 2002
Hubbard C. Howe
/s/ ALBERTO CRIBIORE
------------------------------------------- Director May 3, 2002
Alberto Cribiore
/s/ BRIAN J. RICHMAND
------------------------------------------- Director May 3, 2002
Brian J. Richmand
/s/ LAWRENCE C. TUCKER
------------------------------------------- Director May 3, 2002
Lawrence C. Tucker
/s/ SAMUEL M. MENCOFF
------------------------------------------- Director May 3, 2002
Samuel M. Mencoff
/s/ G. ANDREA BOTTA
------------------------------------------- Director May 3, 2002
G. Andrea Botta
/s/ GIANLUIGI GABETTI
------------------------------------------- Director May 3, 2002
Gianluigi Gabetti
II-8
Exhibit Index
Exhibit
Number Description
------- ------------------------------------------------------------
1.1
-- Form of Underwriting Agreement.(*)
3.1
-- Amended and Restated Certificate of Incorporation of
Riverwood Holding, Inc.(*)
3.2
-- Amended and Restated By-Laws of Riverwood Holding, Inc.(*)
4.1
-- Form of Certificate for the Common Stock, par value $0.01
per share.(*)
4.2
-- Form of Rights Agreement.(*)
4.3
-- Amended and Restated Credit Agreement, dated as of August
10, 2001, among Riverwood International Corporation, the
several banks and other financial institutions from time to
time parties thereto, Bankers Trust Company, as syndication
agent, and The Chase Manhattan Bank, as administrative
agent. Filed as Exhibit 4.4 to Riverwood Holding, Inc.'s
Quarterly Report on Form 10-Q filed August 14, 2001
(Commission File No. 1-11113), and incorporated herein by
reference.
4.4
-- Amendment No. 1 and Waiver, dated as of April 23, 2002,
among Riverwood International Corporation, the several banks
and other financial institutions from time to time parties
thereto and JPMorgan Chase Bank (formerly known as The Chase
Manhattan Bank), as administrative agent.(*)
4.5
-- Indenture, dated March 27, 1996, among RIC Holding, Inc.,
Riverwood Holding, Inc., CDRO Acquisition Corporation and
Fleet National Bank of Connecticut, as trustee, relating to
the 10 1/4% Senior Notes due 2006 of Riverwood International
Corporation, together with the First Supplemental Indenture
and the Second Supplemental Indenture thereto. Filed as
Exhibit 4.6 to RIC Holding, Inc.'s Annual Report on Form
10-K filed April 16, 1996 (Commission File No. 1-11113), and
incorporated herein by reference.
4.6
-- Indenture, dated March 27, 1996, among RIC Holding, Inc.,
Riverwood Holding, Inc., CDRO Acquisition Corporation and
Fleet National Bank of Massachusetts, as trustee, relating
to the 10 7/8% Senior Subordinated Notes due 2008 of
Riverwood International Corporation, together with the First
Supplemental Indenture and the Second Supplemental Indenture
thereto. Filed as Exhibit 4.7 to RIC Holding, Inc.'s Annual
Report on Form 10-K filed April 16, 1996 (Commission File
No. 1-11113), and incorporated herein by reference.
4.7
-- Indenture, dated as of July 28, 1997, among Riverwood
International Corporation, RIC Holding, Inc., Riverwood
Holding, Inc. and State Street Bank and Trust Company, as
trustee, relating to the 10 5/8% Senior Notes due 2007 of
Riverwood International Corporation. Filed as Exhibit 4.1 to
the Registration Statement on Form S-4 (Registration No.
333-33499) of Riverwood International Corporation, Riverwood
Holding, Inc. and RIC Holding, Inc. under the Securities Act
of 1933, as amended, and incorporated herein by reference.
II-9
Exhibit
Number Description
------- ------------------------------------------------------------
4.8
-- Indenture, dated June 21, 2001, among Riverwood
International Corporation, RIC Holding Inc., Riverwood
Holding, Inc. and State Street Bank and Trust Company, as
trustee, relating to the 10 5/8% Senior Notes due 2007 of
Riverwood International Corporation. Filed as Exhibit 4.12
to Registration Statement on Form S-4 (Registration No.
333-67550) of Riverwood International Corporation, Riverwood
Holding, Inc. and RIC Holding, Inc. under the Securities Act
of 1933, as amended, and incorporated herein by reference.
5.1
-- Opinion of Debevoise & Plimpton.(*)
10.1
-- Wood Products Supply Agreement, dated as of October 18,
1996, between Plum Creek Timber Company, L.P. and Riverwood
International Corporation, including a list of omitted
annexes and an undertaking of Riverwood Holding, Inc. to
furnish supplementally a copy of any such omitted annex to
the Securities and Exchange Commission upon request. Filed
as Exhibit 2c to Riverwood Holding, Inc.'s Current Report on
Form 8-K filed October 21, 1996 (Commission File No.
1-11113), and incorporated herein by reference.
10.2
-- Form of Management Stock Subscription Agreement between
Riverwood Holding, Inc. and the purchasers named therein.
Filed as Exhibit 10.4 to Registration Statement on Form S-1
(Registration No. 33-80475) of Riverwood Holding, Inc. under
the Securities Act of 1933, as amended, and incorporated
herein by reference.
10.3
-- Form of Management Stock Option Agreement between Riverwood
Holding, Inc. and the grantees named therein. Filed as
Exhibit 10.5 to Registration Statement on Form S-1
(Registration No. 33-80475) of Riverwood Holding, Inc. under
the Securities Act of 1933, as amended, and incorporated
herein by reference.
10.4
-- Form of Registration and Participation Agreement among
Riverwood Holding, Inc. and certain stockholders of
Riverwood Holding, Inc. Filed as Exhibit 10.7 to
Registration Statement on Form S-1 (Registration No.
33-80475) of Riverwood Holding, Inc. under the Securities
Act of 1933, as amended, and incorporated herein by
reference.
10.5
-- Form of Riverwood Holding, Inc. Stock Incentive Plan. Filed
as Exhibit 10.10 to Registration Statement on Form S-1
(Registration No. 33-80475) of Riverwood Holding, Inc. under
the Securities Act of 1933, as amended, and incorporated
herein by reference.
10.6
-- Form of Stockholders Agreement between Riverwood Holding,
Inc. and the stockholders of Riverwood Holding, Inc. named
therein. Filed as Exhibit 10.11 to Registration Statement on
Form S-1 (Registration No. 33-80475) of Riverwood Holding,
Inc. under the Securities Act of 1933, as amended, and
incorporated herein by reference.
10.7
-- Form of Indemnification Agreement among Riverwood Holding,
Inc., RIC Holding, Inc., Riverwood International
Corporation, Clayton, Dubilier & Rice, Inc. and Clayton,
Dubilier & Rice Fund V Limited Partnership. Filed as Exhibit
10.8 to Registration Statement on Form S-1 (Registration No.
33-80475) of Riverwood Holding, Inc. under the Securities
Act of 1933, as amended, and incorporated herein by
reference.
II-10
Exhibit
Number Description
------- ------------------------------------------------------------
10.8
-- Form of Consulting Agreement among Riverwood Holding, Inc.,
RIC Holding, Inc., Riverwood International Corporation and
Clayton, Dubilier & Rice, Inc. Filed as Exhibit 10.12 to
Registration Statement on Form S-1 (Registration No.
33-80475) of Riverwood Holding, Inc. under the Securities
Act of 1933, as amended, and incorporated herein by
reference.
10.9
-- Management Stock Option Agreement, dated as of March 31,
1997, between Riverwood Holding, Inc. and Stephen M.
Humphrey. Filed as Exhibit 10.2 to Riverwood Holding Inc.'s
Quarterly Report on Form 10-Q filed May 9, 1997 (Commission
File No. 1-11113), and incorporated herein by reference.
10.10
-- Employment Agreement, dated as of July 14, 1997, among
Riverwood International Corporation, Riverwood Holding, Inc.
and Thomas M. Gannon. Filed as Exhibit 10.13 to Riverwood
Holding, Inc.'s Annual Report on Form 10-K filed March 5,
1999 (Commission File No. 1-11113), and incorporated herein
by reference.
10.11
-- Management Stock Option Agreement, dated as of August 19,
1998, between Riverwood Holding, Inc. and Thomas M. Gannon.
Filed as Exhibit 10.14 to Riverwood Holding, Inc.'s Annual
Report on Form 10-K filed March 5, 1999 (Commission File No.
1-11113), and incorporated herein by reference.
10.12
-- Form of Riverwood Holding, Inc. Supplemental Long-Term
Incentive Plan. Filed as Exhibit 10.15 to Riverwood Holding,
Inc.'s Annual Report on Form 10-K filed March 17, 2000
(Commission File No. 1-11113), and incorporated herein by
reference.
10.13
-- Employment Agreement, dated as of September 1, 1998, among
Riverwood International Corporation, Riverwood Holding, Inc.
and Daniel J. Blount. Filed as Exhibit 10.16 to Riverwood
Holding, Inc.'s Annual Report on Form 10-K filed March 17,
2000 (Commission File No. 1-11113), and incorporated herein
by reference.
10.14
-- Employment Agreement, dated as of November 1, 1998, among
Riverwood International Corporation, Riverwood Holding, Inc.
and Steven D. Saucier. Filed as Exhibit 10.17 to Riverwood
Holding, Inc.'s Annual Report on Form 10-K filed March 17,
2000 (Commission File No. 1-11113), and incorporated herein
by reference.
10.15
-- Agreement, dated as of November 18, 1999, between Riverwood
Holding, Inc. and Stephen M. Humphrey. Filed as Exhibit
10.18 to Riverwood Holding, Inc.'s Annual Report on Form
10-K filed March 17, 2000 (Commission File No. 1-11113), and
incorporated herein by reference.
10.16
-- Amended and Restated Employment Agreement, dated January 1,
2002, among Riverwood International Corporation, Riverwood
Holding, Inc. and Stephen M. Humphrey.*
10.17
-- Riverwood Holding, Inc. 2002 Management Incentive Plan.*
10.18
-- Amendment No. 1, dated as of December 19, 2001, between
Stephen M. Humphrey and Riverwood International Corporation,
to the Promissory Note, dated November 18, 1999, by
Stephen M. Humphrey. Filed as Exhibit 10.19 to Riverwood
Holding, Inc.'s Annual Report on Form 10-K filed March 11,
2002 (Commission File No. 1-11113), and incorporated herein
by reference.
II-11
Exhibit
Number Description
------- ------------------------------------------------------------
10.19
-- Promissory Note, dated as of November 18, 1999, by Stephen
M. Humphrey. Filed as Exhibit 10.19 to Riverwood Holding,
Inc.'s Annual Report on Form 10-K filed March 17, 2000
(Commission File No. 1-11113), and incorporated herein by
reference.
21.1
-- List of subsidiaries. Filed as Exhibit 21 to Riverwood
Holding, Inc.'s Annual Report on Form 10-K filed March 8,
2001 (Commission File No. 1-11113), and incorporated herein
by reference.
23.1
-- Consent of Deloitte & Touche LLP.
23.2
-- Consent of Debevoise & Plimpton.(*)
24.1
-- Power of Attorney. Included on the signature page hereof.
------------------------
* To be filed by amendment.
II-12