**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2003**

 

**Commission file number 1-13182**

 

**RIVERWOOD HOLDING, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                         |   | **58-2205241**                         |
|------------------------------------------------------|--------|----------------------------------------|
| (State  of incorporation)                            |   | (I.R.S.  Employer  Identification No.) |
|                                                 |   |                                   |
| **814 Livingston Court  Marietta, Georgia 30067**    |
| (Address of principal executive offices)             |
| (Zip Code)                                           |
|                                                 |
| **(770) 644-3000**                                   |
| (Registrant's telephone number, including area code) |

 

Indicate bycheck mark whether the registrant (1) has filed all reports to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes  o    No  ý

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).

 

Yes  o    No  ý

 

At August 4,2003, there were 7,049,180 shares and 500,000 shares of the registrant’s ClassA and Class B common stock, respectively, outstanding.

 

 

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# **PARTI. FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

As used in thisForm 10-Q, unless the context otherwise requires: ‘‘RIC’’ refers to thecorporation formerly named Riverwood International Corporation; the‘‘Predecessor’’ or the ‘‘Predecessor Company’’ refers to RIC and itssubsidiaries in respect of periods prior to the 1996 Merger (as definedherein); the ‘‘Company’’ refers to the registrant, Riverwood Holding, Inc., aDelaware corporation (‘‘Riverwood Holding’’) and its subsidiaries; ‘‘RICHolding’’ refers to RIC Holding, Inc., a Delaware corporation, successor bymerger to RIC and a wholly-owned subsidiary of Riverwood Holding; and‘‘Riverwood’’ refers to Riverwood International Corporation, a Delawarecorporation formerly named Riverwood International USA, Inc. and a wholly-ownedsubsidiary of RIC Holding.

 

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**RIVERWOOD HOLDING,INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In thousands ofdollars)**

**(unaudited)**

 
|                                                                                                                                                                                                                                                                |   | **June 30,  2003** |      | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|------------------------|--------|
| **ASSETS**                                                                                                                                                                                                                                                          |   |               |      |                   |   |
| Current Assets:                                                                                                                                                                                                                                                     |   |               |      |                   |   |
| Cash and Equivalents                                                                                                                                                                                                                                                |   | $                  | 4,167     |                   | $      | 13,757 |   |
| Receivables, Net of Allowances                                                                                                                                                                                                                                      |   | 157,784            |      | 137,284                |   |
| Inventories                                                                                                                                                                                                                                                         |   | 174,042            |      | 174,383                |   |
| Prepaid Expenses                                                                                                                                                                                                                                                    |   | 11,874             |      | 8,566                  |   |
| Total Current Assets                                                                                                                                                                                                                                                |   | 347,867            |      | 333,990                |   |
| Property, Plant and Equipment, Net of  Accumulated Depreciation of $826,913 at June 30, 2003 and $777,047 at  December 31, 2002                                                                                                                                     |   | 1,224,530          |      | 1,232,945              |   |
| Goodwill                                                                                                                                                                                                                                                            |   | 268,284            |      | 268,284                |   |
| Patents, Licenses and Trademarks, Net of  Accumulated Amortization of $25,913 and $24,029 at June 30, 2003 and December  31, 2002, respectively                                                                                                                     |   | 41,347             |      | 42,844                 |   |
| Other Assets                                                                                                                                                                                                                                                        |   | 78,673             |      | 79,609                 |   |
| Total Assets                                                                                                                                                                                                                                                        |   | $                  | 1,960,701 |                   | $      | 1,957,672 |   |
| **LIABILITIES**                                                                                                                                                                                                                                                     |   |               |      |                   |   |
| Current Liabilities:                                                                                                                                                                                                                                                |   |               |      |                   |   |
| Short-Term Debt                                                                                                                                                                                                                                                     |   | $                  | 96,621    |                   | $      | 98,696 |   |
| Accounts Payable and Other Accrued  Liabilities                                                                                                                                                                                                                     |   | 196,099            |      | 180,652                |   |
| Total Current Liabilities                                                                                                                                                                                                                                           |   | 292,720            |      | 279,348                |   |
| Long-Term Debt, Less Current Portion                                                                                                                                                                                                                                |   | 1,415,496          |      | 1,429,650              |   |
| Other Noncurrent Liabilities                                                                                                                                                                                                                                        |   | 128,449            |      | 116,148                |   |
| Total Liabilities                                                                                                                                                                                                                                                   |   | 1,836,665          |      | 1,825,146              |   |
| Contingencies and Commitments (Note 4)                                                                                                                                                                                                                              |   |               |      |                   |   |
| Class A Redeemable Common Stock $120/share  redemption value; 54,930 and 57,930 shares issued and outstanding at June 30,  2003 and December 31, 2002, respectively                                                                                                 |   | 6,591              |      | 6,951                  |   |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                       |   |               |      |                   |   |
| Common Stock par value $.01 per Share;                                                                                                                                                                                                                              |   |               |      |                   |   |
| Class A Common Stock, 9,000,000 shares  authorized; 7,054,930 and 7,057,930 shares designated at June 30, 2003 and  December 31, 2002, respectively; 7,000,000 shares of non-redeemable Common  Stock issued and outstanding at June 30, 2003 and December 31, 2002 |   | 70                 |      | 70                     |   |
| Class B Common Stock, 3,000,000 shares  authorized; 500,000 shares of non-redeemable Common Stock issued and  outstanding at June 30, 2003 and at December 31, 2002                                                                                                 |   | 5                  |      | 5                      |   |
| Capital in Excess of Par Value                                                                                                                                                                                                                                      |   | 748,748            |      | 748,748                |   |
| Accumulated Deficit                                                                                                                                                                                                                                                 |   | (531,286           | )         | (515,107               | )      |
| Accumulated Derivative Instruments Loss                                                                                                                                                                                                                             |   | (5,667             | )         | (6,135                 | )      |
| Minimum Pension Liability Adjustment                                                                                                                                                                                                                                |   | (71,304            | )         | (71,304                | )      |
| Cumulative Currency Translation Adjustment                                                                                                                                                                                                                          |   | (23,121            | )         | (30,702                | )      |
| Total Shareholders’ Equity                                                                                                                                                                                                                                     |   | 117,445            |      | 125,575                |   |
| Total Liabilities and Shareholders’ Equity                                                                                                                                                                                                                     |   | $                  | 1,960,701 |                   | $      | 1,957,672 |   |

 

See Notes to CondensedConsolidated Financial Statements.

 

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**RIVERWOOD HOLDING,INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**AND COMPREHENSIVEINCOME (LOSS)**

**(In thousands ofdollars)**

**(unaudited)**

 
|                                                                 |   | **Three Months Ended** |    | **Six Months Ended** |   |
|----------------------------------------------------------------------|--------|------------------------|---------|----------------------|--------|
|                                                                 |   | **June 30,  2003**     |    | **June 30,  2002**   |   | **June 30,  2003** |   | **June 30,  2002** |   |
|                                                                 |   |                   |    |                 |   |   |   |   |   |
| Net Sales                                                            |   | $                      | 338,607 |                 | $      | 334,428 |   | $ | 636,633 |   | $ | 625,612 |   |
| Cost of Sales                                                        |   | 276,290                |    | 259,817              |   | 516,179 |   | 493,672 |   |
| Selling, General and Administrative                                  |   | 30,832                 |    | 31,610               |   | 60,702 |   | 59,225 |   |
| Research, Development and Engineering                                |   | 1,903                  |    | 1,145                |   | 3,370 |   | 2,461 |   |
| Other Expense (Income), Net                                          |   | 389                    |    | 1,610                |   | 2,266 |   | (861 | ) |
| Income from Operations                                               |   | 29,193                 |    | 40,246               |   | 54,116 |   | 71,115 |   |
| Loss on Early Extinguishment of Debt                                 |   | —                 |    | (11,509              | )      | — |   | (11,509 | ) |
| Interest Income                                                      |   | 107                    |    | 613                  |   | 210 |   | 1,068 |   |
| Interest Expense                                                     |   | (33,818                | )       | (38,369              | )      | (67,798 | ) | (77,429 | ) |
| (Loss) before Income Taxes and Equity in  Net Earnings of Affiliates |   | (4,518                 | )       | (9,019               | )      | (13,472 | ) | (16,755 | ) |
| Income Tax Expense                                                   |   | 2,398                  |    | 998                  |   | 3,414 |   | 1,093 |   |
| Equity in Net Earnings of Affiliates                                 |   | 503                    |    | 332                  |   | 707 |   | 446 |   |
| Net (Loss)                                                           |   | (6,413                 | )       | (9,685               | )      | (16,179 | ) | (17,402 | ) |
| Other Comprehensive Income (Loss)                                    |   |                   |    |                 |   |   |   |   |   |
| Derivative Instruments Gain (Loss), Net of  Tax of $0                |   | 725                    |    | (612                 | )      | 468 |   | 538 |   |
| Foreign Currency Translation Adjustments,  Net of Tax of $0          |   | 6,074                  |    | 10,642               |   | 7,581 |   | 9,514 |   |
| Comprehensive Income (Loss)                                          |   | $                      | 386     |                 | $      | 345 |   | $ | (8,130 | ) | $ | (7,350 | ) |

 

See Notes toCondensed Consolidated Financial Statements.

 

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**RIVERWOOD HOLDING, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands ofdollars)**

**(unaudited)**

 
|                                                                               |   | **Six Months Ended** |    |
|------------------------------------------------------------------------------------|--------|----------------------|---------|
|                                                                               |   | **June 30, 2003**    |    | **June 30, 2002** |   |
| **Cash Flows from Operating  Activities:**                                         |   |                 |    |   |   |
| Net (Loss)                                                                         |   | $                    | (16,179 | ) | $ | (17,402 | ) |
| Noncash Items Included in Net (Loss):                                              |   |                 |    |   |   |
| Depreciation and Amortization                                                      |   | 62,029               |    | 64,688 |   |
| Loss on Early Extinguishment of Debt                                               |   | —               |    | 2,967 |   |
| Current and Deferred Income Taxes                                                  |   | 204                  |    | (96 | ) |
| Pension, Postemployment and Postretirement  Benefits Expense, Net of Contributions |   | 8,409                |    | 5,155 |   |
| Equity in Net Earnings of Affiliates, Net  of Dividends                            |   | (43                  | )       | 166 |   |
| Amortization of Deferred Debt Issuance  Costs                                      |   | 3,623                |    | 3,313 |   |
| Other                                                                              |   | (559                 | )       | (1,152 | ) |
| Changes in Operating Assets &  Liabilities:                                    |   |                 |    |   |   |
| Receivables                                                                        |   | (18,215              | )       | (24,676 | ) |
| Inventories                                                                        |   | 1,470                |    | (79 | ) |
| Prepaid Expenses                                                                   |   | (3,131               | )       | (2,219 | ) |
| Accounts Payable and Other Accrued  Liabilities                                    |   | 14,652               |    | (6,611 | ) |
| Other Noncurrent Liabilities                                                       |   | 2,850                |    | (1,974 | ) |
| Net Cash Provided by Operating Activities                                          |   | 55,110               |    | 22,080 |   |
|                                                                               |   |                 |    |   |   |
| **Cash Flows from Investing  Activities:**                                         |   |                 |    |   |   |
| Purchases of Property, Plant and Equipment                                         |   | (47,635              | )       | (23,182 | ) |
| Increase in Other Assets                                                           |   | (1,301               | )       | (4,284 | ) |
| Net Cash Used in Investing Activities                                              |   | (48,936              | )       | (27,466 | ) |
|                                                                               |   |                 |    |   |   |
| **Cash Flows from Financing  Activities:**                                         |   |                 |    |   |   |
| Borrowings under Revolving Credit  Facilities                                      |   | 273,300              |    | 164,150 |   |
| Payments on Revolving Credit Facilities                                            |   | (250,107             | )       | (136,046 | ) |
| Proceeds from Issuance of Debt                                                     |   | —               |    | 250,000 |   |
| Increase in Debt Issuance Costs                                                    |   | —               |    | (3,336 | ) |
| Premium paid on Early Extinguishment of  Debt                                      |   | —               |    | (8,542 | ) |
| Payments on Debt                                                                   |   | (38,915              | )       | (250,938 | ) |
| Repurchases of Redeemable Common Stock                                             |   | (360                 | )       | (420 | ) |
| Net Cash (Used in) Provided by Financing  Activities                               |   | (16,082              | )       | 14,868 |   |
| Effect of Exchange Rate Changes on Cash                                            |   | 318                  |    | 1,082 |   |
| Net (Decrease) Increase in Cash and  Equivalents                                   |   | (9,590               | )       | 10,564 |   |
| Cash and Equivalents at Beginning of Period                                        |   | 13,757               |    | 7,369 |   |
| Cash and Equivalents at End of Period                                              |   | $                    | 4,167   |   | $ | 17,933 |   |

 

See Notes toCondensed Consolidated Financial Statements.

 

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**RIVERWOOD HOLDING,INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

 

**NOTE 1 - ORGANIZATION AND BASIS OFPRESENTATION**

 

Riverwood Holding, Inc.(“Riverwood Holding”) and its wholly-owned subsidiary RIC Holding, Inc. (“RICHolding”) and the corporation formerly named CDRO Acquisition Corporation wereincorporated in 1995 to acquire the stock of its predecessor, the corporationformerly named Riverwood International Corporation (“RIC”).

 

On March 27, 1996, RiverwoodHolding, through its wholly-owned subsidiaries, acquired all of the outstandingshares of common stock of RIC. On such date, CDRO Acquisition Corporation wasmerged into RIC (“1996 Merger”).  RIC,as the surviving corporation in the 1996 Merger, became a wholly-owned subsidiaryof RIC Holding. On March 28, 1996, RIC transferred substantially all of itsproperties and assets to the corporation formerly named Riverwood InternationalUSA, Inc., other than the capital stock of Riverwood International USA, Inc.,and RIC was merged into RIC Holding. Thereupon, Riverwood International USA,Inc. was renamed ‘‘Riverwood International Corporation.” Upon consummation ofthe subsequent merger, RIC Holding, as the surviving corporation in thesubsequent merger, became the parent company of Riverwood InternationalCorporation (‘‘Riverwood International’’).

 

Riverwood Holding and RICHolding, a wholly-owned subsidiary, conducted no significant business and haveno independent assets or operations other than in connection with the 1996Merger and related transactions through March 27, 1996. Riverwood Holding andRIC Holding fully and unconditionally guarantee substantially all of the debtof Riverwood International.

 

In connection with the 1996Merger, the purchase method of accounting was used to establish and record anew cost basis for the assets acquired and liabilities assumed. The differencebetween the purchase price and the fair market values of the assets acquiredand liabilities assumed was recorded as goodwill.

 

References to the ‘‘Company’’are to Riverwood Holding and its subsidiaries.

 

The accompanying CondensedConsolidated Financial Statements of the Company included herein have beenprepared by the Company without an audit, pursuant to the rules and regulationsof the Securities and Exchange Commission (“SEC”). Certain information andfootnote disclosures normally included in the financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations. In the opinion of management, alladjustments, consisting of normal recurring adjustments necessary for a fairpresentation of the financial position, results of operations and cash flowsfor the interim periods presented have been made. The Condensed ConsolidatedBalance Sheet as of December 31, 2002 was derived from audited financialstatements.

 

**NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

For a summary ofthe Company’s significant accounting policies, please refer to the Company’sreport on Form 10-K/A filed with the SEC for the year ended December 31, 2002.

 

The preparation ofthe Condensed Consolidated Financial Statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the Condensed Consolidated Financial Statements and the reportedamounts of revenues and expenses during the reporting period. Actual amountscould differ from those estimates.

 

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The Company’sCondensed Consolidated Financial Statements include all significantsubsidiaries in which the Company has the ability to exercise direct orindirect control over operating and financial policies. Intercompanytransactions and balances are eliminated in consolidation.

 

Aspermitted by Statement of Financial Accounting Standards (“SFAS”) No. 123 *‘‘Accountingfor Stock-Based Compensation’’*, the Company continues to applyintrinsic value accounting for its stock option plans under AccountingPrinciples Board Opinion No. 25 (‘‘APB 25’’), *‘‘Accountingfor Stock Issued to Employees’’*. Compensation cost for stockoptions, if any, is measured as the excess of the market price of the Company’scommon stock at the date of grant over the exercise price to be paid by thegrantee to acquire the stock. The Company has adopted disclosure-onlyprovisions of SFAS No. 123 and SFAS No. 148, *‘‘Accounting for Stock-Based Compensation—Transitionand Disclosure—an Amendment of FASB Statement No. 123’’*. TheCompany’s pro forma net earnings based upon the fair value at the grant datesfor awards under the Company’s plans are disclosed below.

 

If theCompany had elected to recognize compensation expense based upon the fair valueat the grant dates for awards under these plans, the Company’s Net (Loss) wouldhave been as follows:

 
|                                                                                                                                               |   | **Three Months Ended** |   | **Six Months Ended** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
| **(In thousand of dollars)**                                                                                                                       |   | **June 30,  2003**     |   | **June 30,  2002**   |   | **June 30,  2003** |   | **June 30,  2002** | ** ** |
| Net (Loss), as reported                                                                                                                            |   | $                      | (6,413 | )                    | $      | (9,685 | ) | $ | (16,179 | ) | $ | (17,402 | ) |
| Deduct: Total additional stock-based  employee compensation cost, net of tax, that would have been included in Net  (Loss) under fair value method |   | (32                    | )      | (70                  | )      | (155 | ) | (126 | ) |
| Pro forma Net (Loss)                                                                                                                               |   | $                      | (6,445 | )                    | $      | (9,755 | ) | $ | (16,334 | ) | $ | (17,528 | ) |

 

TheCompany recognized compensation expense on stock options for which the exerciseprice was less than the fair value at the date of grant in the amount of $0.3million and $1.0 million for the three months ended June 30, 2003 and 2002, and$0.6 million and $1.1 million for the six months ended June 30, 2003 and 2002,respectively.

 

The Company hasreclassified the presentation of certain prior period information to conform tothe current presentation format.

 

The Company haspreviously restated its results of operations for the first three quarters of2002 to report its investment in Rengo Riverwood Packaging Ltd. (“Rengo”) usingthe equity method.

 

**NOTE 3 - INVENTORIES**

 

The major classes ofinventories were as follows:

 
| **(In thousands of dollars)** |   | **June 30, 2003** |    | **December 31, 2002** |   |
|-------------------------------|--------|-------------------|---------|-----------------------|--------|
|                          |   |              |    |                  |   |
| Finished goods                |   | $                 | 71,632  |                  | $      | 78,518 |   |
| Work-in-process               |   | 16,357            |    | 15,175                |   |
| Raw materials                 |   | 46,661            |    | 42,841                |   |
| Supplies                      |   | 39,392            |    | 37,849                |   |
| Total                         |   | $                 | 174,042 |                  | $      | 174,383 |   |

 

Raw materials and consumablesused in the production process such as wood chips and chemicals are valued atpurchase cost on a FIFO basis upon receipt. Work in progress and finished goodsinventories

 

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are valued at the cost of rawmaterial consumed plus direct manufacturing costs (such as labor, utilities andsupplies) as incurred and a proportion of manufacturing overhead.

 

In the fourth quarter of 2002,the Company changed its method of valuing inventory from the last-in, first-out(‘‘LIFO’’) method to the first-in, first-out (“FIFO”) method as over time theFIFO method more closely matches revenues with costs. The FIFO method moreaccurately reflects the cost related to the actual physical flow of rawmaterials and finished goods inventory. Accordingly, the Company believes theFIFO method of valuing inventory will result in a better measurement ofoperating results. All previously reported results were restated to reflect theretroactive application of the accounting change as required by generallyaccepted accounting principles in the United States.

 

**NOTE 4 - CONTINGENCIES AND COMMITMENTS**

 

The Company is committed tocompliance with all applicable foreign, federal, state and local environmentallaws and regulations. Environmental law is, however, dynamic rather thanstatic. As a result, costs that are unforeseeable at this time, may be incurredwhen new laws are enacted, and when environmental agencies adopt or revise rulesand regulations. In general, the environmental laws that the Company is subjectto regulate discharges and emissions of constituents to the air, soil andwater, prescribe procedures for the use, reuse, reclamation, recycling anddisposal of designated waste materials and impose liability and requirementsrelating to the cleanup of contamination. In certain instances, stateenvironmental laws may be stricter than their federal counterparts.

 

The federal CleanAir Act imposes stringent limits on air emissions, establishes a federal permitprogram (Title V) and provides for civil and criminal enforcement sanctions. Inresponse to these requirements, in the early 1990’s the Company switched fromsolvent-based to water-based inks and varnishes at its converting operations inorder to reduce and meet requirements with respect to emissions of volatileorganic compounds. Where necessary, the Company’s plants have received orsubmitted an application to the appropriate permitting authority for a Title Vpermit.

 

The federal Clean Water Actestablishes a system of minimum national effluent standards for each industry,water quality standards for the nation’s waterways and a permit program thatprovides discharge limitations. It also regulates releases and spills of oiland hazardous materials and wastewater and stormwater discharges. The Company’smill in West Monroe, Louisiana is the only one of the Company’s facilities thatis a direct discharger to a water body and a permit currently covers itsdischarges to the Ouachita River. The Company’s other operations discharge topublicly owned treatment works and are subject to pretreatment requirements andlimitations.

 

The federal ComprehensiveEnvironmental Response, Compensation and Liability Act (‘‘CERCLA’’) establishesliability for waste generators, current and former site owners and operatorsand others in connection with releases of hazardous materials. In severalinstances, the Company has been identified as a Potentially Responsible Party(‘‘PRP’’) under CERCLA and similar state laws. These actions are not material.

 

In 1998, the U.S. EnvironmentalProtection Agency adopted regulations (generally referred to as the “clusterrules’’) that mandated more stringent controls on air and water discharges fromUnited States pulp and paper mills. Over the next three years, the Companyanticipates that it will spend approximately $22 million at its two U.S. millsto comply with these regulations (before giving effect to the Graphic Merger).These costs have not been accrued, but rather are a part of the Company’scapital expenditure plan. Most of these costs are anticipated to be incurred inthe first two quarters of 2005.

 

The Company isinvolved in environmental investigation and remediation projects for certainproperties currently or formerly owned or operated by the Company, and atcertain waste disposal sites. Some of these projects are being addressed underfederal and state statutes, such as the CERCLA and analogous state laws. TheCompany’s costs in certain instances cannot be reliably estimated until theremediation process is substantially underway or liability has been addressed.The Company accrues reserves for these contingencies when the liability isprobable and the costs are reasonably estimable. The Company

 

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has accrued thefollowing amounts for environmental losses as of June 30, 2003: approximately$0.3 million for the Line Avenue Site described below, approximately $0.3million for the Shoreline Refinery Site described below, and approximately $0.1million for general environmental matters. The Company is not aware of anymaterial unaccrued loss that is reasonably estimable where liability isprobable. The Company believes that based on current information and regulatoryrequirements, its accruals for environmental matters are adequate. However,there can be no assurance that the Company will not incur significant costs inexcess of accrued amounts in connection with remediation activities and otherenvironmental matters.

 

In late 1995, the LouisianaDepartment of Environmental Quality (the ‘‘DEQ’’) notified the Predecessor ofpotential liability for the remediation of hazardous substances at a formerwood treatment site in Shreveport, Louisiana (known as the Line Avenue Site)that the Predecessor or its predecessors previously operated. In August 2001,the Company entered into an agreement with the DEQ and the landowners toremediate the site. The agreement required the removal of soils containingwood-treating constituents in excess of regulatory standards, consolidation ofthese soils in a sub-portion of the site, capping of the sub-portion, land userestrictions, future operations and maintenance (‘‘O&M’’) to ensure theintegrity of the cap, long-term monitoring of the groundwater, and a recordedprohibition on the use of on-site groundwater. The Company contracted with aqualified contractor to remediate the site at a cost of approximately $1.3million. In addition, each of the O&M and groundwater monitoring costs forthe initial five years are expected to be approximately $0.1 million (no suchcosts are estimated beyond the initial five-year period). As of June 30, 2003,all of the required soil excavation and consolidation has been completed. TheCompany completed construction of the cap in July 2003. As of June 30, 2003,the Company has paid its contractor approximately $1.1 million to remediate thesite. The Company has been reimbursed approximately half of these costs from aPRP that has entered into a settlement agreement with the Company. The Companyowes its contractor approximately $0.2 million in connection with activities atthe site.

 

On July 6, 2000, the Companyand the DEQ entered into a Settlement Agreement for remediation of a site inCaddo Parish, Louisiana (known as the Shoreline Refinery Site). The principalcontamination at this site was an approximately 5 acre impoundment of oil-basedsludge that appeared to originate from an oil refinery that was operated byprior operators. The remedial action contemplated by the Settlement Agreementrequired the neutralization, stabilization and consolidation of sludges andsoils at the site, capping of the consolidated materials, the establishment ofa vegetative cover, and five years of post-closure care of the capped area. TheCompany contracted to complete the remedial action in accordance with the termsof the Settlement Agreement. In a November 26, 2002 letter to the Company, theDEQ stated that all required construction activities were accomplished and thatthe five-year post-closure care and reporting period would commence. TheCompany conveyed the property to its contractor on October 22, 2000. Based onthe terms of the Settlement Agreement, the DEQ’s November 26, 2002 letter andthe fact that the property has been sold to the Company’s contractor, theCompany does not expect to incur additional costs in connection with this site.

 

The Company is a party to anumber of lawsuits arising out of the ordinary conduct of its business. Whilethere can be no assurance as to their ultimate outcome, the Company does notbelieve that these lawsuits will have a material impact on the results ofoperations, cash flows or financial condition of the Company. As of June 30,2003, the Company has accrued an aggregate of approximately $0.2 million forseveral tort, workers compensation and former employee related claims andlawsuits. The Company is not aware of any material unaccrued loss that isreasonably estimable where liability is probable.

 

The Company hasbeen a plaintiff in actions filed in the U.S. District Court for the NorthernDistrict of Georgia against The MeadWestvaco Corporation (‘‘MeadWestvaco’’),successor by merger to The Mead Corporation, and R.A. Jones Co. Inc. (‘‘R.A.Jones’’) claiming infringement of the Company’s patents for its packagingmachines and seeking damages sufficient to compensate for such infringement.The patents in suit were found infringed but invalid by a jury in a trialagainst R.A. Jones in August 2001. This finding of invalidity as to U.S. PatentNos. 5,666,789 and 5,692,361 was appealed to the Court of Appeals for theFederal Circuit (the ‘‘CAFC’’). The suit against MeadWestvaco was dismissed bymutual

 

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agreement, subjectto being refiled, pending the outcome of the appeal of the decision in the caseagainst R.A. Jones. The CAFC vacated the holding of invalidity as to U.S.Patent Nos. 5,666,789 and 5,692,361 and remanded to the District Court fordetermination of proper inventive entity. The finding of infringement wasaffirmed by the CAFC. Further proceedings consistent with the decision of theCAFC will follow in the District Court.

 

**NOTE 5 – BUSINESS SEGMENT INFORMATION**

 

The Company reports its resultsin two business segments: Coated Board and Containerboard. These segments areevaluated by the chief operating decision maker based primarily on income fromoperations. The Company’s reportable segments are strategic business units thatoffer different products. The Coated Board business segment includes theproduction and sale of coated board for its beverage multiple packaging andconsumer products packaging businesses from its West Monroe, Louisiana andMacon, Georgia mills and from its mill in Norrköping, Sweden; carton convertingfacilities in the United States, Europe and Brazil; and the design, manufactureand installation of packaging machinery related to the assembly of beveragecartons. The Containerboard business segment includes the production and saleof linerboard, corrugating medium and kraft paper from paperboard mills in theUnited States.

 

Business segment information isas follows:

 
|                          |   | **Three  Months Ended** |    | **Six  Months Ended** |   |
|-------------------------------|--------|-------------------------|---------|-----------------------|--------|
| **(In thousands of dollars)** |   | **June  30,  2003**     |    | **June  30,  2002**   |   | **June  30,  2003** |   | **June  30,  2002** |   |
| NET SALES:                    |   |                    |    |                  |   |   |   |   |   |
| Coated Board                  |   | $                       | 319,130 |                  | $      | 315,753 |   | $ | 595,042 |   | $ | 587,779 |   |
| Containerboard                |   | 19,477                  |    | 18,675                |   | 41,591 |   | 37,833 |   |
|                          |   | $                       | 338,607 |                  | $      | 334,428 |   | $ | 636,633 |   | $ | 625,612 |   |
|                          |   |                    |    |                  |   |   |   |   |   |
| INCOME FROM OPERATIONS:       |   |                    |    |                  |   |   |   |   |   |
| Coated Board                  |   | $                       | 43,132  |                  | $      | 50,957 |   | $ | 82,012 |   | $ | 95,095 |   |
| Containerboard                |   | (6,404                  | )       | (4,888                | )      | (13,081 | ) | (13,164 | ) |
| Corporate And Eliminations    |   | (7,535                  | )       | (5,823                | )      | (14,815 | ) | (10,816 | ) |
|                          |   | $                       | 29,193  |                  | $      | 40,246 |   | $ | 54,116 |   | $ | 71,115 |   |

 

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**NOTE 6 – DERIVATIVE INSTRUMENTS AND HEDGINGACTIVITIES**

 

The Company isexposed to fluctuations in interest rates on its variable rate debt andfluctuations in foreign currency transaction cash flows. The Company activelymonitors these fluctuations and uses derivative instruments from time to timeto manage its exposure. In accordance with its risk management strategy, theCompany uses derivative instruments only for the purpose of managing riskassociated with fluctuations in the cash flow of the underlying exposuresidentified by management. The Company does not trade or use derivativeinstruments with the objective of earning financial gains on interest orcurrency rates, nor does it use leveraged instruments or instruments wherethere are no underlying exposures identified. The Company’s use of derivativeinstruments may result in short-term gains or losses and may increasevolatility in its earnings.

 

The following is a summary ofthe Company’s derivative instruments as of June 30, 2003 and the accountingpolicies it employs:

 

# ***Hedges of Anticipated Cash Flows***

 

The following is areconciliation of current period changes in the fair value of the interest rateswap agreements and foreign currency forward and option contracts which havebeen recorded as Accumulated Derivative Instruments Loss in the accompanyingCondensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002and as Derivative Instruments Gain (Loss) in the accompanying CondensedConsolidated Statement of Operations and Comprehensive Income (Loss) for thesix months ended June 30, 2003.

 
| **(In thousands of dollars)**         |   |   |   |
|---------------------------------------|--------|--------|--------|
|                                  |   |   |   |
| Balance at December 31, 2001          |   | $      | (4,570 | ) |
| Reclassification to earnings          |   | 6,014  |   |
| Current period decrease in fair value |   | (7,579 | )      |
| Balance at December 31, 2002          |   | (6,135 | )      |
| Reclassification to earnings          |   | (2,699 | )      |
| Current period increase in fair value |   | 3,167  |   |
| Balance at June 30, 2003              |   | $      | (5,667 | ) |

 

At June 30, 2003,there was no material ineffective portion related to the changes in fair valueof the interest rate swap agreements or foreign currency option contracts andthere were no amounts excluded from the measure of effectiveness.

 

The Company usesinterest rate swap agreements to fix a portion of its variable rate Term LoanFacility to a fixed rate in order to reduce the impact of interest rate changeson future income. The differential to be paid or received under theseagreements is recognized as an adjustment to interest expense related to thedebt. At June 30, 2003, the Company had interest rate swap agreements with anotional amount of $330 million, which expire on various dates through the year2003 and 2004 under which the Company will pay fixed rates of 2.21% to 3.52%and receive three-month LIBOR.

 

The balance of$5.7 million recorded in Accumulated Derivative Instruments Loss at June 30,2003 is expected to be reclassified into future earnings, contemporaneouslywith and offsetting changes in the related hedged exposure. The estimatedamount to be reclassified into future earnings as interest expense over thenext twelve months through June 30, 2004 is approximately $4.0 million. Theactual amount that will be reclassified to future earnings over the next twelvemonths may vary from this amount as a result of changes in market conditions.No amounts were reclassified to earnings during 2003 in connection withforecasted transactions that were no longer considered probable of occurring.

 

 

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*Derivatives not Designated as Hedges*

 

The Company hasforeign currency forward contracts used to hedge the exposure associated withforeign currency denominated receivables. These contracts are presently beingmarked-to-market through the income statement and will continue to bemarked-to-market through the income statement.

 

The Company enters intofixed price natural gas contracts designed to effectively hedge prices for asubstantial portion of its natural gas requirements at its two U.S. mills. Thepurpose of the fixed price natural gas contracts is to eliminate or reduceprice risk with a focus on making cash flows more predictable. As of June 30,2003, the Company had entered into contracts to hedge substantially all of itsnatural gas requirements for its two U.S. mills through January 31, 2004. Thecontract price and fair value of these natural gas contracts was approximately$14.2 million and $16.8 million, respectively. These contracts are notaccounted for as derivative instruments under SFAS No. 133, as they qualify forthe normal purchase exemption.

 

**NOTE 7 – NEW ACCOUNTING PRONOUNCEMENTS**

 

In June 2001, the FASB issued SFAS No. 143, *‘‘Accounting for Asset RetirementObligations’’*(‘‘SFAS No. 143’’), which is effective January 1,2003. SFAS No. 143 addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs. The Company adopted SFAS No. 143 effective January 1,2003 and the adoption did not have a significant impact on its financialposition and results of operations.

 

In April 2002, the FASB issuedSFAS No. 145, *‘‘Rescission of FASB Statements No. 4, 44, and 64,**Amendment ofFASB Statement No. 13, and Technical Corrections as of April 2002’’*(‘‘SFAS No. 145’’). This statement rescinds SFAS No. 4, *‘‘Reporting Gains and Losses fromExtinguishment of Debt’’* (‘‘SFAS No. 4’’) and an amendment of theStatement, SFAS No. 64, *‘‘Extinguishments of Debt Made to Satisfy**Sinking-FundRequirements.’’* This Statement also rescinds SFAS No. 44, *‘‘Accountingfor Intangible**Assets of Motor Carriers.’’* This statementamends SFAS No. 13, *‘‘Accounting for Leases’’*, to eliminate aninconsistency between the required accounting for sale-leaseback transactionsand the required accounting for certain lease modifications that have economiceffects that are similar to sale-leaseback transactions. The Company adoptedSFAS No. 145 effective January 1, 2003 and the adoption resulted in areclassification of expenses from Extraordinary Loss on Early Extinguishment ofDebt to Loss on Early Extinguishment of Debt included in (Loss) before IncomeTaxes and Equity in Net Earnings of Affiliates of approximately $11.5 million,$8.7 million and $2.1 million for the years ended December 31, 2002, 2001 and2000, respectively, associated with the rescission of SFAS No. 4.

 

In July 2002, the FASB issuedSFAS No. 146, *‘‘Accounting for Costs Associated with Exit or Disposal Activities’’*(‘‘SFAS No. 146’’), which was effective December 31, 2002. SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force (‘‘EITF’’) IssueNo. 94-3, *‘‘LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).’’*This Statement requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred, and concludesthat an entity’s commitment to an exit plan does not by itself create a presentobligation that meets the definition of a liability. This Statement alsoestablishes that fair value is the objective of initial measurement of theliability. The provisions of this Statement are effective for exit or disposalactivities that are initiated after December 31, 2002, with early applicationencouraged. The Company adopted SFAS No. 146 effective January 1, 2003 and theadoption did not have a significant impact on its financial position andresults of operations.

 

In December 2002, the FASB issuedSFAS No. 148, *‘‘Accounting for Stock-Based Compensation— Transition and Disclosure,Amendment of SFAS No. 123’’* (‘‘SFAS No. 148’’). This Statementprovides additional transition guidance for those entities that elect tovoluntarily adopt the provisions of SFAS No. 123, *‘‘Accounting for Stock-BasedCompensation.’’* Furthermore, SFAS No. 148 mandates new disclosuresin both interim and year-end financial statements within the Company’sSignificant Accounting

 

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Policies footnote. The Companyhas elected not to adopt the recognition provisions of SFAS No. 123, as amendedby SFAS No. 148 (See Note 2).

 

In April 2003, the FASB issuedSFAS No. *149“Amendment of Statement 133 on Derivative Instruments and Hedging Activities,*”(“SFAS No. 149”). This statement will be applied prospectively and is effectivefor contracts entered into or modified after June 30, 2003. The statement willbe applicable to existing contracts and new contracts entered into after June30, 2003. The Company does not expect that the adoption of SFAS No.149 willhave a material effect on the Company’s financial statements.

 

In May 2003, the FASB issuedSFAS No. 150 “*Accounting for Certain Financial Instruments with Characteristics ofLiabilities and Equity,*” (“SFAS No. 150”). This statementestablishes standards for classification of certain financial instruments thathave characteristics of both liabilities and equity in the statement offinancial position. This Statement is effective for all contracts created ormodified after the date the Statement was issued and otherwise effective at thebeginning of the first interim period beginning after June 15, 2003. Managementdoes not expect the adoption of SFAS No. 150 to have a material impact on itsfinancial condition or results of operations.

 

The Emerging Issues Task Force(“EITF”) issued EITF No. 00-21, *“Revenue Arrangements with Multiple Deliverables”*(“EITF No. 00-21”), which is effective for revenue arrangements entered into infiscal periods beginning after June 15, 2003. EITF No. 00-21 addresses certainaspects of the accounting by a vendor for arrangements under which it willperform multiple revenue-generating activities. The Company does not believethat the adoption of EITF No. 00-21 will have a significant impact on itsfinancial position and results of operations.

 

**NOTE 8 - DEFINITIVE MERGER AGREEMENT**

 

On March 25, 2003,Riverwood Holding, Riverwood Acquisition Sub LLC, a Delaware limited liabilitycompany and a wholly-owned subsidiary of Riverwood Holding (‘‘Merger Sub’’),and Graphic Packaging International Corporation, a Colorado corporation(‘‘Graphic’’), entered into the Agreement and Plan of Merger (the “MergerAgreement’’). Pursuant to the Merger Agreement and other related transactiondocuments, Graphic will merge with and into Merger Sub (the ‘‘GraphicMerger’’). Prior to consummation of the Graphic Merger, Riverwood Holding willeffect a stock split. In connection with the Graphic Merger, the shareholdersof Graphic will receive one share of Riverwood Holding common stock andassociated Riverwood Holding shareholder rights for each share of Graphiccommon stock and associated Graphic shareholder rights they own immediatelyprior to the Graphic Merger. The Merger Agreement has been approved by therespective Boards of Directors of Riverwood Holding and Graphic. Consummationof the Graphic Merger is subject to customary closing conditions.

 

In connection with theexecution of the Merger Agreement, Riverwood Holding and certain majorshareholders of Graphic entered into a Voting Agreement, dated March 25, 2003(the ‘‘Voting Agreement’’), pursuant to which such shareholders agreed to votefor the Graphic Merger and against any other transaction involving Graphic. Inaddition, pursuant to the Voting Agreement and as a condition to theeffectiveness of the Graphic Merger, The Grover C. Coors Trust (the “Trust”),the holder of Graphic’s 10% Series B Convertible Preferred Stock (the‘‘Preferred Stock’’) has agreed to convert all of the outstanding shares of thePreferred Stock into Graphic common stock. In consideration for the Trust’sconversion of the Preferred Stock, Riverwood Holding has agreed to pay theTrust, in cash, a conversion payment, in an amount equal to the estimated presentvalue, calculated using a discount rate of 8.5%, of dividends payable to theTrust on the Preferred Stock from the effective time of the Graphic Mergerthrough August 15, 2005, the first date on which Graphic could have redeemedthe Preferred Stock. Riverwood Holding currently anticipates that the paymentin consideration for the conversion of the Preferred Stock will beapproximately $19.8 million.

 

**NOTE 9 - SUBSEQUENT EVENT**

 

On July 17, 2003, RiverwoodHolding’s Form S-4 registration statement for the registration under theSecurities Act of 1933 of the shares of Riverwood Holding common stock beingissued to Graphic stockholders in the Graphic Merger was declared effective bythe SEC. On August 7, 2003, at a special meeting of Graphic stockholders, the Graphicstockholders voted to approve the Merger Agreement. The Graphic Merger isexpected to close on August 8, 2003, subject to customary closing conditions.

 

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**NOTE 10 – SUBSEQUENT ADOPTION OF AN ACCOUNTINGPRONOUNCEMENT**

 

As discussed in Note 7, theCompany adopted SFAS No. 145 effective January 1, 2003 and the adoptionresulted in a reclassification of expenses from Extraordinary Loss on EarlyExtinguishment of Debt to Loss on Early Extinguishment of Debt included in(Loss) before IncomeTaxes and Equity in Net Earnings of Affiliates ofapproximately $11.5 million, $8.7 million and $2.1 million for the years endedDecember 31, 2002, 2001 and 2000 respectively, associated with the rescissionof SFAS No. 4.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

*Unless otherwise indicated, the following discussion and analysis doesnot give effect to the Graphic Merger (defined below) and the relatedtransactions.  Accordingly, thisdiscussion and analysis does not reflect the significant impact that theGraphic Merger and the related transactions will have on the Company.*

 

**General**

 

The Companyreports its results in two business segments: Coated Board (relating to theCompany’s coated unbleached kraft paperboard (‘‘CUK Board’’) used in itsbeverage multiple packaging and consumer products packaging businesses) andContainerboard. The Coated Board business segment includes (1) the productionand sale of CUK Board for cartons from the Company’s West Monroe, Louisiana andMacon, Georgia mills and white lined chip board (‘‘WLC’’) from its paper millin Norrköping, Sweden; (2) carton converting plants in the United States,Europe and Brazil; and (3) the design, manufacture and installation ofpackaging machinery related to the assembly of cartons for beverage andnon-beverage consumer products applications. The Containerboard businesssegment includes the production and sale of linerboard, corrugating medium andkraft paper from paperboard mills in the United States. The Company intends tostop producing linerboard as it continues to shift production capacity tohigher margin CUK Board.

 

The table below sets forthEBITDA as defined in the Company’s Senior Secured Credit Agreement, (definedbelow), which we refer to as “Credit Agreement EBITDA”. Credit Agreement EBITDAas presented below is a financial measure that is used in the Senior SecuredCredit Agreement.  Credit AgreementEBITDA is not a defined term under accounting principles generally accepted inthe United States and should not be considered as an alternative to income fromoperations or net income as a measure of operating results or cash flows as ameasure of liquidity. Credit Agreement EBITDA differs from the term “EBITDA”(earnings before interest expense, income tax expense, and depreciation andamortization) as it is commonly used. In addition to adjusting net income to exclude interest expense, incometax expense, and depreciation and amortization, Credit Agreement EBITDA alsoadjusts net income by excluding certain other items and expenses, as specifiedbelow. The Senior Secured Credit Agreement requires the Company to comply witha specified debt to Credit Agreement EBITDA leverage ratio and a specifiedCredit Agreement EBITDA to consolidated interest expense ratio for specifiedperiods. The specific ratios are set out under “—Financial Condition,Liquidity, and Capital Resources” below.

 

Borrowings under the SeniorSecured Credit Agreement are a key source of the Company’s liquidity. TheCompany’s ability to borrow under the Senior Secured Credit Agreement isdependent on, among other things, its compliance with the financial ratiocovenants referred to in the preceding paragraph. Failure to comply with thesefinancial ratio covenants would result in a violation of the Senior SecuredCredit Agreement and, absent a waiver or amendment from the lenders under suchagreement, permit the acceleration of all outstanding borrowings under theSenior Secured Credit Agreement.

 

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The calculation of CreditAgreement EBITDA for the periods indicated is set forth below:

 
|                                 |   | **Three  Months Ended** |   | **Six  Months Ended** |   |
|--------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(In thousands of dollars)**        |   | **June  30, 2003**      |   | **June  30, 2002**    |   | **June  30, 2003** |   | **June  30, 2002** |   |
| Net (Loss)                           |   | $                       | (6,413 | )                     | $      | (9,685 | ) | $ | (16,179 | ) | $ | (17,402 | ) |
| Income Tax Expense                   |   | 2,398                   |   | 998                   |   | 3,414 |   | 1,093 |   |
| Interest Expense, Net                |   | 33,711                  |   | 37,756                |   | 67,588 |   | 76,361 |   |
| Depreciation and Amortization        |   | 30,868                  |   | 32,585                |   | 62,029 |   | 64,688 |   |
| Equity in Net Earnings of Affiliates |   | (503                    | )      | (332                  | )      | (707 | ) | (446 | ) |
| Other non-cash charges (A)           |   | 6,426                   |   | 5,685                 |   | 9,984 |   | 4,961 |   |
| Dividends from equity investments    |   | 664                     |   | —                |   | 664 |   | 612 |   |
| Loss on Early Extinguishment of Debt |   | —                  |   | 11,509                |   | — |   | 11,509 |   |
| Credit Agreement EBITDA (B)          |   | $                       | 67,151 |                  | $      | 78,516 |   | $ | 126,793 |   | $ | 141,376 |   |

** **

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**Notes:**

(A) Other non-cashcharges include non-cash charges for pension, postretirement and postemploymentbenefits, and amortization of premiums on hedging contracts deducted indetermining net income.

 

(B) Credit Agreement EBITDA iscalculated in accordance with the definitions contained in the Company’s  Senior Secured Credit Agreement. CreditAgreement EBITDA is defined as consolidated net income (exclusive of non-cashcharges resulting from purchase accounting during the periods subsequent to theMarch 1996 Merger) before consolidated interest expense, consolidated incometaxes, consolidated depreciation and amortization, and other non-cash chargesdeducted in determining consolidated net income, extraordinary items and thecumulative effect of accounting changes and earnings of, but includingdividends from, non-controlled affiliates.

 

**BusinessTrends and Initiatives**

** **

The Company’s netsales, income from operations and cash flow from operations are influenced bysales volume and selling prices for its products and raw material and energycosts, and are affected by a number of significant business, economic andcompetitive factors. Many of these factors are not within the Company’scontrol. Historically, in the Coated Board business segment, the Company hasexperienced stable pricing for its integrated beverage carton products, andmoderate cyclical pricing for its cartonboard, which historically has beenprincipally sold in the open market. The Company’s cartonboard sales areaffected by competition from competitors’ CUK Board and other substrates— solidbleached sulfate (‘‘SBS’’), recycled clay coated news (‘‘CCN’’) and, internationally,WLC—as well as by general market conditions.

 

In the Containerboard businesssegment, conditions in the cyclical worldwide commodity paperboard markets havea substantial impact on the Company’s Containerboard sales. During the firstsix months of 2003, the Company did not take any market related downtime at itsU.S. mills. The Company does not expect to take any market related downtimeduring 2003.

 

Energy, includingnatural gas, fuel oil and electricity, represents a significant portion of theCompany’s manufacturing costs. During the first six months of 2003, theCompany’s financial results were negatively affected by energy costs whencompared to the first six months of 2002. The Company entered into fixed pricenatural gas contracts designed to mitigate the impact of future cost increasesfor its natural gas requirements at its two U.S. mills through and includingJanuary 31, 2004, and will continue to evaluate its position.

 

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In the fourth quarter of 2002,the Company was notified by Coca-Cola Enterprises (‘‘CCE’’) that CCE will notrenew its supply contract with the Company. Under this contract, which expiredon March 31, 2003, the Company supplied to CCE beverage cartons made from theCompany’s CUK Board, packaging machines and related services. The Company’ssupply contracts with its independent Coca-Cola bottling company customers arenot subject to CCE’s non-renewal notification. CCE’s action did not impact theCompany’s 2002 results of operations. The impact on the Company’s 2003 resultsof operations will depend, in part, on the extent to which the Company suppliesbeverage cartons to CCE during a phase-out period that began on April 1, 2003,which the Company continues to discuss with CCE. The Company continues toexplore opportunities to replace the volumes that it will lose as a result ofCCE’s decision by seeking to increase sales to existing and new customers andto develop new applications for its CUK Board. The Company continues toevaluate the impact of these developments and the recent increase in beveragemarket competitiveness on its future pricing for its beverage packagingproducts. The Company can provide no assurances that it will be able to replaceall or any portion of the volumes it had expected to supply to CCE in 2003 andfuture periods or that it will be able to maintain current pricing levels onits beverage packaging products. If the Company cannot replace such volumes,the Company estimates that its volumes will be negatively impacted byapproximately 17,000 tons in 2003 and 36,000 tons in 2004 and thereafter. In2002, the CCE business represented approximately 5% of the Company’sconsolidated net sales.

 

The Company is pursuing anumber of long-term initiatives designed to improve productivity andprofitability. The Company realigned its business into commercially-focusedoperating units, implemented a global restructuring program, implemented anumber of cost saving measures and effected several management changes. TheCompany is continuing to implement a global Total Quality Systems (‘‘TQS’’)initiative which uses statistical process control to help design and manage alltypes of activities including production and maintenance.

 

In addition, the Company iscontinuing to implement a strategy focused on the expansion into thehigh-growth segments of the consumer products packaging market. The Company istargeting segments of the non-beverage consumer products packaging market whereit intends to capitalize on its expertise in beverage multiple packaging.

 

The Company is implementing aninitiative designed to enhance the competitiveness of its beverage cartonconverting operations. This initiative is expected to add new manufacturingtechnology, add press capacity and consolidate certain of the Company’sbeverage carton converting operations. The Company expects to make a capitalinvestment of approximately $75 million through 2005.

 

The Company expects capitalexpenditures will range from $110 million to $120 million in 2003 (beforegiving effect to the Graphic Merger) as the Company invests to improve itsprocess capabilities, in packaging machinery, and to comply with environmentalcluster rules. See ‘‘—Environmental and Legal Matters.’’ The Company isaccelerating certain capital driven cost reduction projects that will deliverbenefits in 2004 and 2005. The Company continues to evaluate its currentoperations and assets with a view to rationalizing its operations and improvingprofitability, in particular with respect to its international convertingassets and strategy. Finally, the Company is continuing to focus on reducingworking capital and increasing liquidity.

 

Packaging machinery placementsduring the first six months of 2003 decreased approximately 33% when comparedto the first six months of 2002. This decrease was partially due to the timingof shipments. The Company expects packaging machinery placements for 2003 to becomparable to 2002. The Company has been and will continue to be selective infuture packaging machinery placements to ensure appropriate returns.

** **

On March 25, 2003, RiverwoodHolding, Riverwood Acquisition Sub LLC, a Delaware limited liability companyand a wholly-owned subsidiary of Riverwood Holding (‘‘Merger Sub’’), andGraphic Packaging International Corporation, a Colorado corporation(‘‘Graphic’’), entered into the Agreement and Plan of

 

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Merger (the ‘‘MergerAgreement’’). Pursuant to the Merger Agreement and other related transactiondocuments, Graphic will merge with and into Merger Sub (the ‘‘GraphicMerger’’). Prior to consummation of the Graphic Merger, Riverwood Holding willeffect a stock split. In connection with the Graphic Merger, the shareholdersof Graphic will receive one share of Riverwood Holding common stock andassociated Riverwood Holding shareholder rights for each share of Graphiccommon stock and associated Graphic shareholder rights they own immediatelyprior to the Graphic Merger. The Merger Agreement has been approved by therespective Boards of Directors of Riverwood Holding and Graphic. Consummationof the Graphic Merger is subject to customary closing conditions.

 

In connection with theexecution of the Merger Agreement, Riverwood Holding and certain major shareholdersof Graphic entered into a Voting Agreement, dated March 25, 2003 (the ‘‘VotingAgreement’’), pursuant to which such shareholders agreed to vote for theGraphic Merger and against any other transaction involving Graphic. Inaddition, pursuant to the Voting Agreement and as a condition to theeffectiveness of the Graphic Merger, The Grover C. Coors Trust (the “Trust”),the holder of Graphic’s 10% Series B Convertible Preferred Stock (the‘‘Preferred Stock’’) has agreed to convert all of the outstanding shares of thePreferred Stock into Graphic common stock. In consideration for the Trust’sconversion of the Preferred Stock, Riverwood Holding has agreed to pay theTrust, in cash, a conversion payment, in an amount equal to the estimatedpresent value, calculated using a discount rate of 8.5%, of dividends payableto the Trust on the Preferred Stock from the effective time of the GraphicMerger through August 15, 2005, the first date on which Graphic could haveredeemed the Preferred Stock. Riverwood Holding currently anticipates that thepayment in consideration for the conversion of the Preferred Stock will beapproximately $19.8 million.

** **

On July 17, 2003, RiverwoodHolding’s Form S-4 registration statement for the registration under theSecurities Act of 1933 of the shares of Riverwood Holding common stock beingissued to Graphic stockholders in the Graphic Merger was declared effective bythe Securities and Exchange Commission. On August 7, 2003, at a special meetingof Graphic stockholders, the Graphic stockholders voted to approve the MergerAgreement. The Graphic Merger is expected to close on August 8, 2003, subjectto customary closing conditions.

 

**Critical AccountingPolicies**

 

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires the Company to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.These estimates and assumptions are based on historical experience and variousother factors that are believed to be reasonable under the circumstances.Actual results could differ from these estimates under different assumptions orconditions.

 

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The Company believes thefollowing accounting policies are the most critical since these policiesrequire significant judgment or involve complex estimations that are importantto the portrayal of the Company’s financial conditions and operating results:

 

•  RevenueRecognition — The Company receives revenue from the sales of manufacturedproducts, the leasing of packaging machinery, and the servicing of packagingmachinery.  The Company recognizes salesrevenue when the following criteria are met: persuasive evidence of anagreement exists, delivery has occurred or services have been rendered, theCompany’s price to the buyer is fixed and determinable, and collectibility ofthe sales price is reasonably assured. Delivery is not considered to haveoccurred until the customer takes title and assumes the risks and rewards ofownership.  The timing of revenuerecognition is largely dependent on shipping terms.  Revenue is recorded at the time of shipment for terms designatedas free on board, or f.o.b., shipping point. For sales transactions designated f.o.b. destination, revenue isrecorded when the product is delivered to the customer’s delivery site.  The Company recognizes revenues on itsannual and multi-year carton supply contracts as the shipment occurs inaccordance with the shipping terms discussed above.

 

Payments from packagingmachinery use agreements are recognized on a straight-line basis over the termof the agreements.  Service revenue onpackaging machinery is recorded at the time of service.

 

Discounts and allowances arecomprised of trade allowances, cash discounts, and sales returns. Cashdiscounts and sales returns are estimated using historical experience. Tradeallowances are based on the estimated obligations and historical experience.Rebates are determined based on the quantity purchased and are recorded at thetime of sale.

 

•  InventoryCosting — The Company’s inventories are stated at the lower of cost or marketwith cost determined principally by the first-in, first-out (‘‘FIFO’’) basis(see Note 3 in Notes to the Condensed Consolidated Financial Statements).Average cost basis is used to determine the cost of supplies inventories. Rawmaterials and consumables used in the production process such as wood chips andchemicals are valued at purchase cost on a FIFO basis upon receipt. Work inprogress and finished goods inventories are valued at the cost of raw materialconsumed plus direct manufacturing costs (such as labor, utilities andsupplies) as incurred and a proportion of manufacturing overhead.  Inventories are stated net of an allowancefor slow-moving and obsolete inventory, which is based on estimates. If thecondition of the inventories or the state of the Company’s business woulddeteriorate, additional allowances may be required which would reduce income.

 

•  Recovery ofLong-Lived Assets — The Company reviews long-lived assets, including goodwilland certain identifiable intangibles for impairment whenever events orcircumstances indicate that the carrying value of an asset may not berecoverable. Upon determination that the carrying value of the assets isimpaired, the Company would record an impairment charge or loss.

 

•  Legal Accruals,Environmental Expenditures and Remediation Liabilities — The Company facesuncertainties relating to pending litigation and environmental investigationand remediation obligations. The Company records accruals for such items basedon estimates developed in consultation with legal counsel and environmentalconsultants at the time when the liability is probable and the costs arereasonably estimated. While there can be no assurance as to the ultimateoutcome of any current lawsuits, claims or investigations relating to suchuncertainties, the Company does not believe that such uncertainties will have amaterial adverse impact on the results of operations, cash flows or financialcondition of the Company. However, future uncertainties may have a materialadverse impact on the results of operations, cash flows or financial conditionof the Company.

 

•  RetirementRelated Benefits — The Company sponsors defined benefit plans, or the plans,for eligible employees and retirees. The effect of the plans on itsConsolidated Financial Statements is subject to many assumptions. The Companybelieves that the most critical assumptions are (1) the discount rate; (2) therate of increase in future compensation levels; and (3) the expected long-termrate of return on plan assets. The projected unit credit cost method is usedfor valuation purposes.

 

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The Company determines itsdiscount rate on its measurement date primarily by reference to annualizedrates earned on high quality fixed income investments and yield-to-maturityanalysis specific to its estimated future benefit payments. The lowering of theCompany’s discount rate by 1.0% would have increased its fiscal year 2002pension expense by approximately $1.5 million. The Company has decreased itsdiscount rate from 7.5% in 2002 to 6.5% in 2003.

 

The Company’s rate of increasein future compensation levels is based primarily on labor contracts currentlyin effect with its employees under collective bargaining agreements andexpected future pay rate increases for its other employees. Increasing its rateof increase in future compensation levels by 1.0% would have increased itsfiscal year 2002 pension expense by approximately $0.5 million. The Companydoes not expect to change the rate of increase in future compensation levelsfrom the 4.5% rate in 2002 during 2003.

 

The expected long-term rate ofreturn on its plan assets is based primarily on plan-specific asset/liabilityinvestment studies performed by outside consultants and recent and historicalreturns on its plans’ assets. The lowering of its expected long-term rate ofreturn by 1.0% would have increased its fiscal year 2002 pension expense byapproximately $2.2 million. The Company expects that it will decrease theexpected long-term rate of return from 8.5% in 2002 to approximately 8.0% in2003.

 

Non-cash pension expenserecorded by the Company for the twelve month period ended December 31, 2002 wasapproximately $4.0 million; no cash contributions were made to the plans by theCompany during the twelve month period ended December 31, 2002.

 

Recent declines in the equitymarkets have caused the market value of the plan assets to decrease. As aresult, a minimum pension liability adjustment of $71.3 million was recorded in2002 as a reduction of shareholders’ equity.

 

20

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**RESULTSOF OPERATIONS**

 

The Company haspreviously restated its results of operations for the first three quarters of2002, to report its investment in Rengo Riverwood Packaging Ltd. (“Rengo”)using the equity method and to report its change in its method of determiningthe cost of inventories from the last-in, first-out method to the FIFO method.

 
|                                  |   | **Three Months Ended** |    | **Six Months Ended**     |    |
|---------------------------------------|--------|------------------------|---------|--------------------------|---------|
|                                  |   |                   |    | **Increase  (Decrease)** |    |   |   |   |   | **Increase  (Decrease)** |   |   |   |
| **(In thousands of dollars)**         |   | **June 30,  2003**     |    | **From Prior  Period**   |    | **June 30,  2002** |   | **June 30,  2003** |   | **From Prior  Period** |   | **June 30,  2002** |   |
| Net Sales (Segment Data):             |   |                   |    |                     |    |   |   |   |   |   |   |   |   |
| Coated Board                          |   | $                      | 319,130 |                     | 1.1     | % | $ | 315,753 |   | $ | 595,042 |   | 1.2 | % | $ | 587,779 |   |
| Containerboard                        |   | 19,477                 |    | 4.3                      |    | 18,675 |   | 41,591 |   | 9.9 |   | 37,833 |   |
| Net Sales                             |   | 338,607                |    | 1.2                      |    | 334,428 |   | 636,633 |   | 1.8 |   | 625,612 |   |
| Cost of Sales                         |   | 276,290                |    | 6.3                      |    | 259,817 |   | 516,179 |   | 4.6 |   | 493,672 |   |
| Gross Profit                          |   | 62,317                 |    | (16.5                    | )       | 74,611 |   | 120,454 |   | (8.7 | ) | 131,940 |   |
| Selling, General and Administrative   |   | 30,832                 |    | (2.5                     | )       | 31,610 |   | 60,702 |   | 2.5 |   | 59,225 |   |
| Research, Development and Engineering |   | 1,903                  |    | 66.2                     |    | 1,145 |   | 3,370 |   | 36.9 |   | 2,461 |   |
| Other Expense (Income), Net           |   | 389                    |    | (75.8                    | )  | 1,610 |   | 2,266 |   | NM |   | (861 | ) |
| Income from Operations                |   | $                      | 29,193  |                     | (27.5   | )% | $ | 40,246 |   | $ | 54,116 |   | (23.9 | )% | 71,115 |   |
|                                  |   |                   |    |                     |    |   |   |   |   |   |   |   |   |
| Income (Loss) from Operations         |   |                   |    |                     |    |   |   |   |   |   |   |   |   |
| (Segment Data):                       |   |                   |    |                     |    |   |   |   |   |   |   |   |   |
| Coated Board                          |   | $                      | 43,132  |                     | (15.4   | )% | $ | 50,957 |   | $ | 82,012 |   | (13.8 | )% | 95,095 |   |
| Containerboard                        |   | (6,404                 | )       | (31.0                    | )       | (4,888 | ) | (13,081 | ) | 0.6 |   | (13,164 | ) |
| Corporate and Eliminations            |   | (7,535                 | )       | (29.4                    | )       | (5,823 | ) | (14,815 | ) | (37.0 | )  | (10,816 | ) |
| Income from Operations                |   | $                      | 29,193  |                     | (27.5   | )% | $ | 40,246 |   | $ | 54,116 |   | (23.9 | )% | 71,115 |   |
|                                  |   |                   |    |                     |    |   |   |   |   |   |   |   |   |
| Other Financial Data:                 |   |                   |    |                     |    |   |   |   |   |   |   |   |   |
|                                  |   |                   |    |                     |    |   |   |   |   |   |   |   |   |
| Net Sales:                            |   |                   |    |                     |    |   |   |   |   |   |   |   |   |
| Carrierboard                          |   | $                      | 227,755 |                     | (0.2    | )% | $ | 228,222 |   | $ | 411,766 |   | (1.1 | )% | $ | 416,330 |   |
| Cartonboard                           |   | 59,980                 |    | 0.1                      |    | 59,898 |   | 119,144 |   | 2.7 |   | 116,062 |   |
| White lined chip board                |   | 23,335                 |    | 21.5                     |    | 19,208 |   | 48,197 |   | 26.0 |   | 38,243 |   |
| Containerboard                        |   | 19,477                 |    | 4.3                      |    | 18,675 |   | 41,591 |   | 9.9 |   | 37,833 |   |
| Other (A)                             |   | 8,060                  |    | (4.3                     | )       | 8,425 |   | 15,935 |   | (7.1 | ) | 17,144 |   |

 

----

NM = Not Meaningful

 

Note:

 

**(A) Other primarilyrepresents revenue recognized from packaging machinery service and useagreements and sales of certain by-products.**

 

21

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**Paperboard Shipments**

 

The followingrepresents shipments of coated board and containerboard to outside customers.Shipments of coated board represent sales to customers of beverage carrierboardand folding cartonboard. Shipments of white lined chip board represent sales tocustomers of WLC produced at the Swedish Mill. Shipments of containerboardrepresent sales to customers of linerboard, corrugating medium, kraft paper andvarious other items. Other primarily represents shipments of certainby-products. Total shipments for the three months and six months ended June 30,2003 and 2002 were as follows:

 
|                        |   | **Three Months Ended** |   | **Six Months Ended**     |   |
|-----------------------------|--------|------------------------|--------|--------------------------|--------|
|                        |   |                   |   | **Increase  (Decrease)** |   |   |   |   |   | **Increase  (Decrease)** |   |   |   |
| **(In  thousands of tons)** |   | **June 30,  2003**     |   | **From Prior  Period**   |   | **June 30,  2002** |   | **June 30,  2003** |   | **From Prior  Period** |   | **June 30,  2002** |   |
| Coated Board                |   |                   |   |                     |   |   |   |   |   |   |   |   |   |
| Carrierboard                |   | 186.8                  |   | (0.3                     | )%     | 187.4 |   | 339.2 |   | (0.8 | )% | 342.1 |   |
| Cartonboard                 |   | 89.1                   |   | (6.3                     | )      | 95.1 |   | 179.1 |   | (2.8 | ) | 184.2 |   |
| White Lined Chip Board      |   | 38.7                   |   | (0.3                     | )      | 38.8 |   | 81.7 |   | 4.6 |   | 78.1 |   |
| Containerboard              |   | 57.3                   |   | 3.2                      |   | 55.5 |   | 122.4 |   | 8.3 |   | 113.0 |   |
| Other                       |   | 2.3                    |   | (53.1                    | )      | 4.9 |   | 5.9 |   | (48.2 | ) | 11.4 |   |
|                        |   | 374.2                  |   | (2.0                     | )%     | 381.7 |   | 728.3 |   | (0.1 | )% | 728.8 |   |

 

**SECOND QUARTER 2003 COMPARED WITH SECONDQUARTER 2002**

 

**Net Sales**

 

As a result of the factorsdescribed below, the Company’s Net Sales in the second quarter of 2003increased by $4.2 million, or 1.2%, to $338.6 million from $334.4 million inthe second quarter of 2002. Net Sales in the Coated Board business segmentincreased by $3.3 million, or 1.1%, to $319.1 million in the second quarter of2003 from $315.8 million in the second quarter of 2002, due primarily to thepositive impact of foreign currency exchange rates. This increase was somewhatoffset by lower pricing in North American beverage markets and lower volumes ininternational consumer products markets, both primarily as a result ofincreased market competitiveness. Net Sales in the Containerboard businesssegment increased by $0.8 million, or 4.3%, to $19.5 million in the secondquarter of 2003 from $18.7 million in the second quarter of 2002, due primarilyto higher linerboard volumes somewhat offset by lower medium volumes andpricing as a result of a slight downturn in medium market conditions.

 

**Gross Profit**

 

As a result of the factorsdiscussed below, the Company’s Gross Profit for the second quarter of 2003decreased by $12.3 million, or 16.5%, to $62.3 million from $74.6 million inthe second quarter of 2002. The Company’s gross profit margin decreased to18.4% in the second quarter of 2003 from 22.3% in the second quarter of 2002.

 

22

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The following table displaysthe gross profit for each of the Company’s segments:

 
|           |   | **Three Months Ended** |    |
|----------------|--------|------------------------|---------|
|           |   |                   |    | **%****Increase  (Decrease)** |   |   |   |
|           |   | **June 30,  2003**     |    | **From Prior  Period** |   | **June 30,  2002** |   |
| Coated Board   |   |                   |    |   |   |   |   |
| Net Sales      |   | $                      | 319,130 |   | 1.1 | % | $ | 315,753 |   |
| Cost of Sales  |   | 251,339                |    | 5.8 |   | 237,635 |   |
| Gross Profit   |   | $                      | 67,791  |   | (13.2 | )% | $ | 78,118 |   |
|           |   |                   |    |   |   |   |   |
| Containerboard |   |                   |    |   |   |   |   |
| Net Sales      |   | $                      | 19,477  |   | 4.3 | % | $ | 18,675 |   |
| Cost of Sales  |   | 24,951                 |    | 12.5 |   | 22,182 |   |
| Gross Profit   |   | $                      | (5,474  | ) | (56.1 | )% | $ | (3,507 | ) |

 

Gross Profit in the CoatedBoard business segment decreased by $10.3 million, or 13.2%, to $67.8 millionin the second quarter of 2003 from $78.1 million in the second quarter of 2002,while its gross profit margin decreased to 21.2% in the second quarter of 2003from 24.7% in the second quarter of 2002. The decrease in Coated Board GrossProfit was due primarily to lower pricing in North American beverage markets asa result of increased beverage market competitiveness, lower margin product mixin North American beverage markets, higher energy costs and higher non-cashpension costs as a result of the decline in market values of the Company’spension assets due to unfavorable market conditions and recently renewed unioncontracts. These decreases were somewhat offset by higher Net Sales as a resultof the factors discussed above and worldwide cost reductions as a result ofsavings gained from the Company’s profit improvement initiatives. Gross Profitin the Containerboard business segment decreased by $2.0 million to a loss of$5.5 million in the second quarter of 2003 from a loss of $3.5 million in thesecond quarter of 2002, while its gross profit margin decreased to (28.1)% inthe second quarter of 2003 from (18.8)% in the second quarter of 2002. Thedecrease in Containerboard Gross Profit resulted principally from lower mediumpricing as a result of a slight downturn in market conditions.

 

**Selling, General and Administrative**

 

Selling, General andAdministrative expenses decreased by $0.8 million, or (2.5)%, to $30.8 millionin the second quarter of 2003 from $31.6 million in the second quarter of 2002,due primarily to lower incentive compensation expenses somewhat offset bynon-capitalizable costs related to the Graphic Merger. As a percentage of NetSales, Selling, General and Administrative expenses decreased to 9.1% in thesecond quarter of 2003 from 9.5% in the second quarter of 2002.

 

**Research, Development and Engineering**

 

Research, Development andEngineering expenses increased by $0.8 million, or 66.2%, to $1.9 million inthe second quarter of 2003 from $1.1 million in the second quarter of 2002, dueprimarily to higher research and development investing relating to products ofthe Company’s two U.S. mills and packaging machinery.

 

23

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**Other Expense (Income), Net**

 

Other Expense (Income), Net,was $0.4 million in the second quarter of 2003 as compared to $1.6 million in thesecond quarter of 2002. This change was principally due to lower expensesassociated with the Company’s hedging programs.

 

**Income from Operations**

 

Primarily as a result of thefactors discussed above, the Company’s Income from Operations in the second quarterof 2003 decreased by $11.0 million, or 27.5%, to $29.2 million from $40.2million in the second quarter of 2002, while its operating margin decreased to8.6% in the second quarter of 2003 from 12.0% in the second quarter of 2002.Income from Operations in the Coated Board business segment decreased by $7.8million, or 15.4%, to $43.1 million in the second quarter of 2003 from $51.0million in the second quarter of 2002, while the operating margin decreased to13.5% in the second quarter of 2003 from 16.1% in the second quarter of 2002,primarily as a result of the factors described above. Income from Operations inthe Containerboard business segment decreased by $1.5 million, or 31.0%, to aloss of $6.4 million in the second quarter of 2003 from a loss of $4.9 millionin the second quarter of 2002, while the operating margin decreased to (32.9)%in the second quarter of 2003 from (26.2)% in the second quarter of 2002,primarily as a result of the factors described above.

 

**Fluctuations in U.S. Currency Exchange Rates**

 

The weakening of the U.S.dollar currency exchange rates as compared to the Euro and other Europeancurrencies and the Japanese Yen had a modest impact on Net Sales, Gross Profit,Income from Operations, and operating expenses during the second quarter of2003.

 

24

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**FIRSTSIX MONTHS 2003 COMPARED WITH FIRST SIX MONTHS 2002**

 

**Net Sales**

 

As a result of the factorsdescribed below, the Company’s Net Sales in the first six months of 2003increased by $11.0 million, or 1.8%, to $636.6 million from $625.6 million inthe first six months of 2002. Net Sales in the Coated Board business segmentincreased by $7.2 million, or 1.2%, to $595.0 million in the first six monthsof 2003 from $587.8 million in the first six months of 2002, due primarily tothe positive impact of foreign currency exchange rates. This increase wassomewhat offset by lower pricing in North American beverage markets and lowervolumes in international consumer products markets, both primarily as a resultof increased market competitiveness. Net Sales in the Containerboard businesssegment increased by $3.8 million, or 9.9%, to $41.6 million in the first sixmonths of 2003 from $37.8 million in the first six months of 2002, due primarilyto higher medium volumes and higher linerboard pricing, somewhat offset byslightly lower medium pricing due to changing conditions in the respectivemarkets.

 

**Gross Profit**

 

As a result of the factorsdiscussed below, the Company’s Gross Profit in the six months of 2003 decreasedby $11.4 million, or 8.7%, to $120.5 million from $131.9 million in the firstsix months of 2002. The Company’s gross profit margin decreased to 18.9% in thefirst six months of 2003 from 21.1% in the first six months of 2002.

 

The following table displaysthe gross profit for each of the Company’s segments:

 
|           |   | **Six Months Ended** |    |
|----------------|--------|----------------------|---------|
|           |   |                 |    | %**Increase(Decrease)** |   |   |   |
|           |   | **June 30,  2003**   |    | **From Prior  Period** |   | **June 30,  2002** |   |
| Coated Board   |   |                 |    |   |   |   |   |
| Net Sales      |   | $                    | 595,042 |   | 1.2 | % | $ | 587,779 |   |
| Cost of Sales  |   | 463,558              |    | 4.1 |   | 445,104 |   |
| Gross Profit   |   | $                    | 131,484 |   | (7.8 | )% | $ | 142,675 |   |
|           |   |                 |    |   |   |   |   |
| Containerboard |   |                 |    |   |   |   |   |
| Net Sales      |   | $                    | 41,591  |   | 9.9 | % | $ | 37,833 |   |
| Cost of Sales  |   | 52,621               |    | 8.3 |   | 48,568 |   |
| Gross Profit   |   | $                    | (11,030 | ) | (2.7 | )% | $ | (10,735 | ) |

 

Gross Profit in the CoatedBoard business segment decreased by $11.2 million, or 7.8%, to $131.5 millionin the first six months of 2003 from $142.7 million in the first six months of2002, while its gross profit margin decreased to 22.1% in the first six monthsof 2003 from 24.3% in the first six months of 2002. The decrease in CoatedBoard Gross Profit was due primarily to lower pricing in North Americanbeverage markets as a result of increased beverage market competitiveness,lower margin product mix in North American beverage markets, higher energycosts and higher non-cash pension costs as a result of the decline in marketvalues of the Company’s pension assets due to unfavorable market conditions andrecently renewed union contracts. These decreases were somewhat offset byhigher Net Sales as a result of the factors discussed above and worldwide costreductions as a result of savings gained from the Company’s profit improvementinitiatives. Gross Profit in the Containerboard business segment decreased by $0.3million to a loss of $11.0 million in the first six months of 2003 from a lossof $10.7 million in the first six

 

25

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months of 2002, while its grossprofit margin decreased to (26.5)% in the first six months of 2003 from (28.4)%in the first six months of 2002. The decrease in Containerboard Gross Profitresulted principally from slightly lower medium pricing as a result of a slightdownturn in market conditions.

 

**Selling, General and Administrative**

 

Selling, General andAdministrative expenses increased by $1.5 million, or 2.5%, to $60.7 million inthe first six months of 2003 from $59.2 million in the first six months of2002, due primarily to non-capitalizable costs related to the Graphic Merger,increased activities to support the Company’s consumer products packagingbusiness, and inflation, somewhat offset by lower incentive compensationexpenses. As a percentage of Net Sales, Selling, General and Administrativeexpenses was 9.5% in the first six months of 2003 and 2002.

 

**Research, Development and Engineering**

 

Research, Development andEngineering expenses increased by $0.9 million, or 36.9%, to $3.4 million inthe first six months of 2003 from $2.5 million in the first six months of 2002,due primarily to higher research and development investing relating to productsof the Company’s two U.S. mills and packaging machinery.

 

**Other Expense (Income), Net**

 

Other Expense (Income), Net,was $2.3 million in the first six months of 2003 as compared to $(0.9) millionin the first six months of 2002. This change was principally due to a non-cashpension adjustment recorded in the first six months of 2002 and the approximate$1.9 million charge in the first six months of 2003 recorded to write offdeferred costs associated with the withdrawal of the proposed initial publicoffering of Riverwood Holding’s common stock, somewhat offset by lower expensesassociated with the Company’s hedging programs.

 

**Income from Operations**

 

Primarily as a result of thefactors discussed above, the Company’s Income from Operations in the first sixmonths of 2003 decreased by $17.0 million, or 23.9%, to $54.1 million from$71.1 million in the first six months of 2002, while its operating margindecreased to 8.5% in the first six months of 2003 from 11.4% in the first sixmonths of 2002. Income from Operations in the Coated Board business segmentdecreased by $13.1 million, or 13.8%, to $82.0 million in the first six monthsof 2003 from $95.1 million in the first six months of 2002, while the operatingmargin decreased to 13.8% in the first six months of 2003 from 16.2% in thefirst six months of 2002, primarily as a result of the factors described above.Income from Operations in the Containerboard business segment decreased by $0.1million, or 0.6%, to a loss of $13.1 million in the first six months of 2003from a loss of $13.2 million in the first six months of 2002, while theoperating margin increased to (31.5)% in the first six months of 2003 from(34.8)% in the first six months of 2002, primarily as a result of the factorsdescribed above.

 

**Fluctuations in U.S. Currency Exchange Rates**

 

The weakening of the U.S.dollar currency exchange rates as compared to the Euro and other Europeancurrencies and the Japanese Yen had a modest impact on Net Sales, Gross Profit,Income from Operations, and operating expenses during the first six months of2003.

 

26

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**LOSS ON EARLY EXTINGUISHMENT OF DEBT,INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, AND EQUITY IN NETEARNINGS OF AFFILIATES**

 

**Loss on Early Extinguishment of Debt**

 

On April 23, 2002, the Companyborrowed $250 million pursuant to an amendment to its Senior Secured CreditAgreement. The proceeds were applied to redeem in full the $250 millionaggregate principal amount of 10 1/4% Senior Notes due 2006.  In addition, the Company borrowed $12million under its Revolving Facility (as defined herein) to pay fees, costs andexpenses related to the refinancing transaction. In the second quarter of 2002,the Company recorded a non-cash charge to earnings of approximately $3.0million, related to the write-off of remaining debt issuance costs on the 1996Senior Notes and a charge of approximately $8.6 million, related to the callpremium paid upon redemption of the 1996 Senior Notes.

 

**Interest Income**

 

Interest Income decreased by$0.9 million to $0.2 million in the first six months of 2003 from $1.1 millionin the first six months of 2002 due primarily to lower average interest ratesand interest received in the first six months of 2002 on monies held in escrow.

 

**Interest Expense**

 

Interest Expense decreased by$9.6 million to $67.8 million in the first six months of 2003 from $77.4million in the first six months of 2002 due primarily to lower average interestrates as a result of market interest rates and the second quarter 2002refinancing.

 

**Income Tax Expense**

 

During the first six months of2003, the Company recognized an income tax expense of $3.4 million on (Loss)before Income Taxes of $(13.5) million. During the first six months of 2002,the Company recognized an income tax expense of $1.1 million on (Loss) beforeIncome Taxes of $(16.8) million. Income Tax Expense on income earned in theUnited States and certain foreign countries for the first six months of both2003 and 2002 was fully offset by a reduction to valuation allowances recordedfor those countries. Income Tax Expense for the first six months of 2003 and2002 primarily represents Income Tax Expense on income earned in other foreigncountries where no valuation allowance is recorded. Since income earned inthose foreign countries was higher for the first six months of 2003 incomparison to the first six months of 2002, Income Tax Expense was higher forthe same period.

 

**Equity in Net Earnings of Affiliates**

 

Equity in Net Earnings ofAffiliates increased by $0.3 million to $0.7 million in the first six months of2003 from $0.4 million in the first six months of 2002 as a result of improvedoperations of the Company's non-consolidated joint venture, Rengo.

 

27

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**FINANCIAL CONDITION, LIQUIDITY AND CAPITALRESOURCES**

 

The Companybroadly defines liquidity as its ability to generate sufficient cash flow fromoperating activities to meet its obligations and commitments. In addition,liquidity includes the ability to obtain appropriate debt and equity financingand to convert into cash those assets that are no longer required to meetexisting strategic and financial objectives. Therefore, liquidity cannot beconsidered separately from capital resources that consist of current orpotentially available funds for use in achieving long-range business objectivesand meeting debt service commitments.

 

The Company’s netsales, income from operations and cash flows from its operations are subject tomoderate seasonality with demand usually increasing in the spring and summerdue to the seasonality of the worldwide beverage multiple packaging markets.

 

**Cash Flows**

 

Cash and Equivalents decreasedby approximately $13.8 million in the first six months of 2003. Cash providedby operating activities in the first six months of 2003 totaled $55.1 million,compared to $22.1 million in the first six months of 2002. This improvement wasprincipally due to favorable changes in operating assets and liabilities,primarily accounts payable and other accrued liabilities and receivables, asthe Company continues to focus on reducing its working capital levels. Cashused in investing activities in the first six months of 2003 totaled $48.9million, compared to $27.5 million in the first six months of 2002. This changewas principally due to a 105.5% increase in purchases of property, plant andequipment related to increased spending for improved process capabilities. Cashused in financing activities in the first six months of 2003 totaled $16.1million, compared to a source of cash of $14.9 million in the first six monthsof 2002. This change was principally due to lower net borrowings under theCompany’s revolving credit facilities. Depreciation and amortization during thefirst six months of 2003 totaled approximately $62.0 million and is expected tobe approximately $125 million to $135 million in 2003.

 

**Liquidity and Capital Resources**

 

The Company’s liquidity needsarise primarily from debt service on its substantial indebtedness and from thefunding of its capital expenditures, ongoing operating costs and workingcapital.

 

The Senior SecuredCredit Agreement, dated August 10, 2001, among the Company and certain lenders,as amended (the “Senior Secured Credit Agreement”), provides for a $335 millionterm loan facility (the “2001 Term Loan Facility”), a $250 million term loanfacility (the “2002 Term Loan Facility” and, together under the 2001 Term LoanFacility, the “Term Loan Facilities”) and a $300 million revolving creditfacility (the “Revolving Facility” and, collectively, the “Facilities”).

 

As of June 30, 2003, theCompany had outstanding approximately $1,488 million of long-term debt,consisting primarily of $400 million aggregate principal amount of its 10 7/8%Senior Subordinated Notes due 2008 (the “Senior Subordinated Notes”), $500million  aggregate principal amount ofits 10 5/8% Senior Notes due 2007 (“Senior Notes”), $545 million outstandingunder the Term Loan Facilities, $40 million under the Revolving Facility, andother debt issues and facilities.

 

The Company anticipatesentering into the following financing transactions (the “Related FinancingTransactions”) in connection with the Graphic Merger:

 

•                  The closing ofthe new senior secured credit facilities for the combined company providing forapproximately $1.6 billion of term loan and revolving credit commitments.

 

•                  The sale by thecombined company of $425 million aggregate principal amount of senior notes and $425 million  aggregate principal amount of seniorsubordinated notes.

 

28

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•                  The repayment ofall outstanding amounts under the Senior Secured Credit Agreement and thetermination of all commitments therein.

 

•                    Thepurchase or redemption of all outstanding Senior Notes and Senior SubordinatedNotes.

 

**Debt Service**

 

Principal andinterest payments under the 2001 Term Loan Facility, the Revolving Facility andthe 2002 Term Loan Facility, together with principal and interest payments onthe Senior Notes and the Senior Subordinated Notes, represent significantliquidity requirements for the Company. The 2001 Term Loan Facility matures onDecember 31, 2006 and amortizes in semi-annual installments of $37.5 millionbeginning 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 millionand $92.5 million in 2003, 2004, 2005 and 2006 respectively. The 2002 Term LoanFacility amortizes in semi-annual installments of $2.5 million annually in eachof 2003, 2004, 2005 and 2006 with the remaining principal due at maturity onMarch 31, 2007. The Revolving Facility matures on December 31, 2006.

 

The loans underthe Facilities bear interest at floating rates based upon the interest rateoption elected by the Company. The term loans under the Senior Secured CreditAgreement bore interest as of June 30, 2003 at an average rate per annum of3.8%. The Senior Notes and the Senior Subordinated Notes bear interest at ratesof 10 5/8% and 10 7/8%, respectively. The loans under the Revolving Facilitybore interest as of June 30, 2003 at an average rate per annum of 5.4%.

 

Interest expense in 2003 isexpected to be approximately $130 million to $135 million, includingapproximately $7 million of non-cash amortization of deferred debt issuancecosts. During the first six months of 2003, cash paid for interest wasapproximately $65.7 million.

 

The Company expects that itsworking capital and business needs will require it to continue to have accessto the Revolving Facility or a similar revolving credit facility after thematurity date, and that the Company accordingly will have to extend, renew,replace or otherwise refinance such facility at or prior to such date. Noassurance can be given that it will be able to do so. The Company has in thepast refinanced and in the future may seek to refinance its debt prior to therespective maturities of such debt.

 

The Company uses interest rateswap agreements to fix a portion of its variable rate term loans to a fixedrate 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 asan adjustment to interest expense related to that debt. At June 30, 2003, theCompany had interest rate swap agreements with a notional amount of $330million, under which the Company will pay fixed rates of 2.21% to 3.52% andreceive three-month LIBOR.

 

**Covenant Restrictions**

 

The Senior SecuredCredit Agreement, which governs the Facilities, imposes restrictions on theCompany’s ability to make capital expenditures and both the Senior SecuredCredit Agreement and the indentures governing the Senior Subordinated Notes andthe Senior 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 itscapital spending program, provide for unanticipated capital investments or takeadvantage of business opportunities. The covenants contained in the SeniorSecured Credit Agreement, among other things, restrict the ability of theCompany and its subsidiaries to dispose of assets, incur additionalindebtedness, incur guarantee obligations, prepay other indebtedness or amendother debt instruments, pay dividends, create liens on assets, enter into saleand leaseback transactions, make investments, loans or advances, makeacquisitions, engage in mergers or consolidations, change the businessconducted by the Company and its subsidiaries, make

 

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capitalexpenditures and engage in certain transactions with affiliates. The covenantscontained in the indentures governing the Senior Subordinated Notes and theSenior Notes also impose restrictions on the operation of the Company’sbusiness.

 

The financial covenants in theSenior Secured Credit Agreement specify, among other things, the followingrequirements for each four quarter period ended during the following testperiods:

 
| **Test Period**                       |   | **Consolidated Debt to  Credit Agreement EBITDA  Leverage Ratio** |   | **Credit Agreement EBITDA to Consolidated  Interest Expense Ratio** |   |
|---------------------------------------|--------|-------------------------------------------------------------------|--------|--------------------------------------------------------------------------|--------|
| 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                                                             |   |

 

At June 30, 2003,the Company was in compliance with the financial covenants in the SeniorSecured Credit Agreement. The Company’s ability to comply in future periodswith the financial covenants in the Senior Secured Credit Agreement will dependon its ongoing financial and operating performance, which in turn will besubject to economic conditions and to financial, business and other factors,many of which are beyond the Company’s control and will be substantially dependenton the selling prices for the Company’s products, raw material and energycosts, and the Company’s ability to successfully implement its overall businessand profitability strategies (see “—Outlook”). If a violation of any of thecovenants occurred, the Company would attempt to get a waiver or an amendmentfrom its lenders, although no assurance can be given that the Company would besuccessful in this regard. The Senior Secured Credit Agreement and theindentures governing the Senior Subordinated Notes and the Senior Notes havecovenants as well as certain cross-default or cross-acceleration provisions;failure to comply with these covenants in any agreement could result in aviolation of such agreement which could, in turn, lead to violations of other agreementspursuant to such cross-default or cross-acceleration provisions.

 

The Senior Secured CreditAgreement is collateralized by substantially all of the Company’s assets.

 

**Capital Expenditures**

 

The Company’scapital spending for the first six months of 2003 was approximately $47.6million, up 105.5% from $23.2 million in the first six months of 2002. Duringthe first six months of 2003, the Company had capital spending of approximately$40.7 million for improving process capabilities, approximately $5.7 millionfor manufacturing packaging machinery and approximately $1.2 million forcompliance with cluster rules. Total capital spending for 2003 is expected tobe between $110 million and $120 million (before giving effect to the GraphicMerger) and is expected to relate principally to improving the Company’sprocess capabilities (approximately $98 million to $108 million), theproduction of packaging machinery (approximately $10 million) and environmentalcluster rules compliance (approximately $2 million). The Company isaccelerating certain capital driven cost reduction projects that will deliverbenefits in 2004 and 2005. Over the next three years, the Company anticipatesthat it will spend approximately $22 million at its two U.S. mills to complywith the cluster rules (before giving effect to the Graphic Merger).

 

**Financing Sources and Cash Flows**

 

The RevolvingFacility matures on December 31, 2006. At June 30, 2003, the Company and itsU.S. and international subsidiaries had the following amounts of commitments,amounts outstanding and amounts available under revolving credit facilities:

 

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| **(In thousands of dollars)** |   | **Total Amount of  Commitments** |    | **Total Amount  Outstanding** |   | **Total Amount  Available (A)** |   |
|-------------------------------|--------|----------------------------------|---------|-------------------------------|--------|---------------------------------|--------|
|                          |   |                             |    |                          |   |                            |   |
| Revolving Facility            |   | $                                | 300,000 |                          | $      | 40,150                          |   | $ | 259,208 |   |
| International Facilities      |   | 19,176                           |    | 12,795                        |   | 6,381                           |   |
|                          |   | $                                | 319,176 |                          | $      | 52,945                          |   | $ | 265,589 |   |

 

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Note:

(A) In accordancewith its debt agreements, the Company’s availability under its Revolving Facilityas of June 30, 2003 has been reduced by the amount of standby letter of creditsissued of approximately $0.6 million. 

 

The Company is requiredby its insurance company to have a standby letter of credit to secure paymentof Workers’ Compensation claims. The letter of credit, with a value of $0.4million, expired on February 20, 2003 and was subsequently extended. The letterof credit will automatically be extended without amendment for successive oneyear periods from the current expiration date and any future expiration dateunless at least 45 days prior to the expiration date the Company is notifiedthat the financial institution elects not to renew.

 

In addition, the Ohio Bureau ofWorkers’ Compensation requires the Company to have a standby letter of creditfor non-performance according to the conditions and obligations as providedunder Workers’ Compensation law. It is a further condition of the letter ofcredit to cover all injuries or occupational disease claims incurred in anyperiod prior to and/or during the present term should the Company not perform.The letter of credit, with a value of $0.2 million, was renewed on September20, 2002 and is automatically extended without amendment for successive oneyear periods from the current expiration date and any future expiration dateunless at least 60 days prior to the expiration date the Company is notifiedthat the financial institution elects not to renew.

 

The Companyanticipates pursuing additional working capital financing for its foreign operationsas necessary. The Company believes that cash generated from operations,together with amounts available under its Revolving Facility and otheravailable financing sources, will be adequate to permit the Company to meet itsdebt service obligations, capital expenditure program requirements, ongoingoperating costs and working capital needs until the maturity of the RevolvingFacility, although no assurance can be given in this regard. The Company’sfuture financial and operating performance, ability to service or refinance itsdebt and ability to comply with the covenants and restrictions contained in itsdebt agreements (see ‘‘—Covenant Restrictions’’), will be subject to futureeconomic conditions and to financial, business and other factors, many of whichare beyond the Company’s control and will be substantially dependent on theselling prices and demand for the Company’s products, raw material and energycosts, and the Company’s ability to successfully implement its overall businessand profitability strategies.

 

**Derivative Instruments and Hedging Activities**

 

The Company isexposed to fluctuations in interest rates on its variable rate debt andfluctuations in foreign currency transaction cash flows. The Company activelymonitors these fluctuations and uses derivative instruments from time to timeto manage its exposure. In accordance with its risk management strategy, theCompany uses derivative instruments only for the purpose of managing riskassociated with fluctuations in the cash flow of the underlying exposuresidentified by management. The Company does not trade or use derivativeinstruments with the objective of earning financial gains on interest orcurrency rates, nor does it use leveraged instruments or instruments wherethere are no underlying exposures identified. The Company’s use of derivativeinstruments may result in short-term gains or losses and may increasevolatility in its earnings.

 

The following is a summary ofthe Company’s derivative instruments as of June 30, 2003 and the accountingpolicies it employs:

 

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# ***Hedges of Anticipated Cash Flows***

 

The following is areconciliation of current period changes in the fair value of the interest rateswap agreements and foreign currency forward and option contracts which havebeen recorded as Accumulated Derivative Instruments Loss in the accompanyingCondensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002and as Derivative Instruments Gain (Loss) in the accompanying CondensedConsolidated Statement of Operations and Comprehensive Income (Loss) for thesix months ended June 30, 2003.

 
| **(In thousands of dollars)**         |   |   |   |
|---------------------------------------|--------|--------|--------|
| Balance at December 31, 2001          |   | $      | (4,570 | ) |
| Reclassification to earnings          |   | 6,014  |   |
| Current period decrease in fair value |   | (7,579 | )      |
| Balance at December 31, 2002          |   | (6,135 | )      |
| Reclassification to earnings          |   | (2,699 | )      |
| Current period increase in fair value |   | 3,167  |   |
| Balance at June 30, 2003              |   | $      | (5,667 | ) |

 

At June 30, 2003,there was no material ineffective portion related to the changes in fair valueof the interest rate swap agreements or foreign currency option contracts andthere were no amounts excluded from the measure of effectiveness.

 

The Company usesinterest rate swap agreements to fix a portion of its variable rate Term LoanFacility to a fixed rate in order to reduce the impact of interest rate changeson future income. The differential to be paid or received under theseagreements is recognized as an adjustment to interest expense related to thedebt. At June 30, 2003, the Company had interest rate swap agreements with anotional amount of $330 million, which expire on various dates through the year2003 and 2004 under which the Company will pay fixed rates of 2.21% to 3.52%and receive three-month LIBOR.

 

The balance of$5.7 million recorded in Accumulated Derivative Instruments Loss at June 30,2003 is expected to be reclassified into future earnings, contemporaneouslywith and offsetting changes in the related hedged exposure. The estimatedamount to be reclassified into future earnings as interest expense over thenext twelve months through June 30, 2004 is approximately $4.0 million. Theactual amount that will be reclassified to future earnings over the next twelvemonths may vary from this amount as a result of changes in market conditions.No amounts were reclassified to earnings during 2003 in connection withforecasted transactions that were no longer considered probable of occurring.

 

*Derivatives not Designated as Hedges*

 

The Company hasforeign currency forward contracts used to hedge the exposure associated withforeign currency denominated receivables. These contracts are presently beingmarked-to-market through the income statement and will continue to bemarked-to-market through the income statement.

 

The Company enters intofixed price natural gas contracts designed to effectively hedge prices for asubstantial portion of its natural gas requirements at its two U.S. mills. Thepurpose of the fixed price natural gas contracts is to eliminate or reduce pricerisk with a focus on making cash flows more predictable. As of June 30, 2003,the Company had entered into contracts to hedge substantially all of itsnatural gas requirements for its two U.S. mills through January 31, 2004. Thecontract price and fair value of these natural gas contracts was approximately$14.2 million and $16.8 million, respectively. These contracts are notaccounted for as derivative instruments under SFAS No. 133, as they qualify forthe normal purchase exemption.

 

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**Environmentaland Legal Matters**

 

The Company is committed tocompliance with all applicable foreign, federal, state and local environmentallaws and regulations. Environmental law is, however, dynamic rather than static.As a result, costs that are unforeseeable at this time, may be incurred whennew laws are enacted, and when environmental agencies adopt or revise rules andregulations. In general, the environmental laws that the Company is subject toregulate discharges and emissions of constituents to the air, soil and water,prescribe procedures for the use, reuse, reclamation, recycling and disposal ofdesignated waste materials and impose liability and requirements relating tothe cleanup of contamination. In certain instances, state environmental lawsmay be stricter than their federal counterparts.

 

The federal CleanAir Act imposes stringent limits on air emissions, establishes a federal permitprogram (Title V) and provides for civil and criminal enforcement sanctions. Inresponse to these requirements, in the early 1990’s the Company switched fromsolvent-based to water-based inks and varnishes at its converting operations inorder to reduce and meet requirements with respect to emissions of volatileorganic compounds. Where necessary, the Company’s plants have received orsubmitted an application to the appropriate permitting authority for a Title Vpermit.

 

The federal Clean Water Actestablishes a system of minimum national effluent standards for each industry,water quality standards for the nation’s waterways and a permit program thatprovides discharge limitations. It also regulates releases and spills of oiland hazardous materials and wastewater and stormwater discharges. The Company’smill in West Monroe, Louisiana is the only one of the Company’s facilities thatis a direct discharger to a water body and a permit currently covers itsdischarges to the Ouachita River. The Company’s other operations discharge topublicly owned treatment works and are subject to pretreatment requirements andlimitations.

 

The federal ComprehensiveEnvironmental Response, Compensation and Liability Act (‘‘CERCLA’’) establishesliability for waste generators, current and former site owners and operatorsand others in connection with releases of hazardous materials. In severalinstances, the Company has been identified as a Potentially Responsible Party(‘‘PRP’’) under CERCLA and similar state laws. These actions are not material.

 

In 1998, the U.S. EnvironmentalProtection Agency adopted regulations (generally referred to as the “clusterrules’’) that mandated more stringent controls on air and water discharges fromUnited States pulp and paper mills. Over the next three years, the Companyanticipates that it will spend approximately $22 million at its two U.S. millsto comply with these regulations (before giving effect to the Graphic Merger).These costs have not been accrued, but rather are a part of the Company’scapital expenditure plan. Most of these costs are anticipated to be incurred inthe first two quarters of 2005.

 

The Company isinvolved in environmental investigation and remediation projects for certainproperties currently or formerly owned or operated by the Company, and atcertain waste disposal sites. Some of these projects are being addressed underfederal and state statutes, such as the CERCLA and analogous state laws. TheCompany’s costs in certain instances cannot be reliably estimated until theremediation process is substantially underway or liability has been addressed.The Company accrues reserves for these contingencies when the liability isprobable and the costs are reasonably estimable. The Company has accrued thefollowing amounts for environmental losses as of June 30, 2003: approximately$0.3 million for the Line Avenue Site described below, approximately $0.3million for the Shoreline Refinery Site described below, and approximately $0.1million for general environmental matters. The Company is not aware of anymaterial unaccrued loss that is reasonably estimable where liability isprobable.  The Company believes thatbased on current information and regulatory requirements, its accruals forenvironmental matters are adequate. However, there can be no assurance that theCompany will not incur significant costs in excess of accrued amounts inconnection with remediation activities and other environmental matters.

 

In late 1995, the LouisianaDepartment of Environmental Quality (the ‘‘DEQ’’) notified the Predecessor ofpotential liability for the remediation of hazardous substances at a formerwood treatment site in

 

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Shreveport, Louisiana (known asthe Line Avenue Site) that the Predecessor or its predecessors previouslyoperated. In August 2001, the Company entered into an agreement with the DEQand the landowners to remediate the site. The agreement required the removal ofsoils containing wood-treating constituents in excess of regulatory standards,consolidation of these soils in a sub-portion of the site, capping of thesub-portion, land use restrictions, future operations and maintenance(‘‘O&M’’) to ensure the integrity of the cap, long-term monitoring of thegroundwater, and a recorded prohibition on the use of on-site groundwater. TheCompany contracted with a qualified contractor to remediate the site at a costof approximately $1.3 million. In addition, each of the O&M and groundwatermonitoring costs for the initial five years are expected to be approximately$0.1 million (no such costs are estimated beyond the initial five-year period).As of March 31, 2003, all of the required soil excavation and consolidation hasbeen completed. The Company completed construction of the cap in July 2003. Asof June 30, 2003, the Company has paid its contractor approximately $1.1million to remediate the site. The Company has been reimbursed approximatelyhalf of these costs from a PRP that has entered into a settlement agreementwith the Company. The Company owes it contractor approximately $0.2 million inconnection with activities at the site.

 

On July 6, 2000, the Companyand the DEQ entered into a Settlement Agreement for remediation of a site inCaddo Parish, Louisiana (known as the Shoreline Refinery Site). The principalcontamination at this site was an approximately 5 acre impoundment of oil-basedsludge that appeared to originate from an oil refinery that was operated byprior operators. The remedial action contemplated by the Settlement Agreementrequired the neutralization, stabilization and consolidation of sludges andsoils at the site, capping of the consolidated materials, the establishment ofa vegetative cover, and five years of post-closure care of the capped area. TheCompany contracted to complete the remedial action in accordance with the termsof the Settlement Agreement. In a November 26, 2002 letter to the Company, theDEQ stated that all required construction activities were accomplished and thatthe five-year post-closure care and reporting period would commence. TheCompany conveyed the property to its contractor on October 22, 2000.  Based on the terms of the settlementagreement, the DEQ’s November 26, 2002 letter and the fact that the propertyhas been sold to the Company’s contractor, the Company does not expect to incuradditional costs in connection with this site.

 

The Company is a party to anumber of lawsuits arising out of the ordinary conduct of its business. Whilethere can be no assurance as to their ultimate outcome, the Company does notbelieve that these lawsuits will have a material impact on the results ofoperations, cash flows or financial condition of the Company. As of June 30,2003, the Company has accrued an aggregate of approximately $0.2 million forseveral tort, workers compensation and former employee related claims andlawsuits. The Company is not aware of any material unaccrued loss that isreasonably estimable where liability is probable.

 

The Company hasbeen a plaintiff in actions filed in the U.S. District Court for the NorthernDistrict of Georgia against The MeadWestvaco Corporation (‘‘MeadWestvaco’’),successor by merger to The Mead Corporation, and R.A. Jones Co. Inc. (‘‘R.A.Jones’’) claiming infringement of the Company’s patents for its packagingmachines and seeking damages sufficient to compensate for such infringement.The patents in suit were found infringed but invalid by a jury in a trialagainst R.A. Jones in August 2001. This finding of invalidity as to U.S. PatentNos. 5,666,789 and 5,692,361 was appealed to the Court of Appeals for the Federal Circuit (the ‘‘CAFC’’). The suitagainst MeadWestvaco was  dismissed bymutual agreement, subject to being refiled, pending the outcome of the appealof the  decision in the case againstR.A. Jones. The CAFC vacated the holding of invalidity as to U.S. Patent Nos.5,666,789 and 5,692,361 and remanded to the District Court for determination ofproper inventive entity. The finding of infringement was affirmed by the CAFC.Further proceedings consistent with the decision of the CAFC will follow in theDistrict Court.

 

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**Information Concerning Forward-LookingStatements**

 

Certain of thestatements contained in this report (other than the financial statements andother statements of historical fact) are forward-looking statements, including,without limitation, (i) the statements in ‘‘—Business Trends and Initiatives’’concerning (a) the Company’s expectation regarding downtime during 2003, (b)the improvements which the Company’s long-term initiatives, including, withoutlimitation, its TQS and beverage carton converting operations initiatives, aredesigned to achieve, (c) the Company’s expectation that capital expenditureswill range from $110 million to $120 million in 2003, (d) the Company’sexpectations regarding the impact of CCE’s non-renewal notification, (e) theclosing of the Graphic Merger is subject to the satisfaction of a number ofsignificant conditions, and (f) the Company’s expectations regarding packagingmachinery placements; (ii) the statements in ‘‘—Financial Condition, Liquidityand Capital Resources’’ concerning (a) the Company’s expectation thatdepreciation and amortization for 2003 will be approximately $125 million to$135 million, (b) the Company’s expectation about entering into the RelatedFinancing Transactions, (c) the Company’s expectation that 2003 interestexpense will be approximately $130 million to $135 million, includingapproximately $7 million of non-cash amortization of deferred debt issuancecosts, (d) the Company’s belief that cash generated from operations, togetherwith amounts available under available financing sources, will be adequate topermit the Company to meet its debt service obligations, capital expenditureprogram requirements, ongoing operating costs and working capital needs untilthe maturity of the Revolving Facility, and (e) the Company’s expectations withrespect to capital spending that may be required to comply with the clusterrules and that, based on current knowledge, environmental costs are not expectedto have a material impact on the results of operations, cash flows or financialcondition of the Company, (iii) other statements as to management’s or theCompany’s expectations and beliefs presented in this ‘‘Management’s Discussionand Analysis of Financial Condition and Results of Operations.’’

 

Forward-looking statements aremade based upon management’s current expectations and beliefs concerning futuredevelopments and their potential effects upon the Company. There can be noassurance that future developments will be in accordance with management’sexpectations or that the effect of future developments on the Company will bethose anticipated by management. The important factors described elsewhere inthis report (including, without limitation, those discussed in ‘‘—FinancialCondition, Liquidity and Capital Resources’’), the Company’s Report on Form10-K/A for the year ended December 31, 2002 or in other Securities and ExchangeCommission filings of the Company, could affect (and in some cases have affected)the Company’s actual results and could cause such results to differ materiallyfrom estimates or expectations reflected in such forward-looking statements.

 

While the Companyperiodically reassesses material trends and uncertainties affecting the Company’sresults of operations and financial condition in connection with itspreparation of management’s discussion and analysis of results of operationsand financial condition contained in its quarterly and annual reports, theCompany does not intend to review or revise any particular forward-lookingstatement referenced in this report in light of future events.

 

**Recent Accounting Pronouncements**

 

In June 2001, the FASB issued SFAS No. 143, *‘‘Accounting for Asset RetirementObligations’’*(‘‘SFAS No. 143’’), which is effective January 1,2003. SFAS No. 143 addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs. The Company adopted SFAS No. 143 effective January 1,2003 and the adoption did not have a significant impact on its financialposition and results of operations.

 

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In April 2002, the FASB issuedSFAS No. 145, *‘‘Rescission of FASB Statements No. 4, 44, and 64,**Amendment ofFASB Statement No. 13, and Technical Corrections as of April 2002’’*(‘‘SFAS No. 145’’). This statement rescinds SFAS No. 4, *‘‘Reporting Gains and Losses fromExtinguishment of Debt’’* (‘‘SFAS No. 4’’) and an amendment of the Statement,SFAS No. 64, *‘‘Extinguishments of Debt Made to Satisfy**Sinking-FundRequirements.’’* This Statement also rescinds SFAS No. 44, *‘‘Accountingfor Intangible**Assets of Motor Carriers.’’* This statementamends SFAS No. 13, *‘‘Accounting for Leases’’*, to eliminate aninconsistency between the required accounting for sale-leaseback transactionsand the required accounting for certain lease modifications that have economiceffects that are similar to sale-leaseback transactions. The Company adoptedSFAS No. 145 effective January 1, 2003 and the adoption resulted in areclassification of expenses from Extraordinary Loss on Early Extinguishment ofDebt to Loss on Early Extinguishment of Debt included in (Loss) before IncomeTaxes and Equity in Net Earnings of Affiliates of approximately $11.5 million,$8.7 million and $2.1 million for the years ended December 31, 2002, 2001 and2000, respectively, associated with the rescission of SFAS No. 4.

 

In July 2002, the FASB issuedSFAS No. 146, *‘‘Accounting for Costs Associated with Exit or Disposal Activities’’*(‘‘SFAS No. 146’’), which was effective December 31, 2002. SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force (‘‘EITF’’) IssueNo. 94-3, *‘‘LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).’’*This Statement requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred, and concludesthat an entity’s commitment to an exit plan does not by itself create a presentobligation that meets the definition of a liability. This Statement alsoestablishes that fair value is the objective of initial measurement of theliability. The provisions of this Statement are effective for exit or disposalactivities that are initiated after December 31, 2002, with early applicationencouraged. The Company adopted SFAS No. 146 effective January 1, 2003 and theadoption did not have a significant impact on its financial position andresults of operations.

 

In December 2002, the FASBissued SFAS No. 148, *‘‘Accounting for Stock-Based Compensation— Transitionand Disclosure, Amendment of SFAS No. 123’’* (‘‘SFAS No. 148’’). ThisStatement provides additional transition guidance for those entities that electto voluntarily adopt the provisions of SFAS No. 123, *‘‘Accounting for Stock-BasedCompensation.’’* Furthermore, SFAS No. 148 mandates new disclosuresin both interim and year-end financial statements within the Company’sSignificant Accounting Policies footnote. The Company has elected not to adoptthe recognition provisions of SFAS No. 123, as amended by SFAS No. 148. See Note2 in Notes to the Condensed Consolidated Financial Statements.

 

In April 2003, the FASB issuedSFAS No. *149“Amendment of Statement 133 on Derivative Instruments and Hedging Activities,*”(“SFAS No. 149”).  This statement will be applied prospectivelyand is effective for contracts entered into or modified after June 30, 2003.The statement will be applicable to existing contracts and new contractsentered into after June 30, 2003. The Company does not expect that the adoptionof SFAS No.149 will have a material effect on the Company’s financialstatements.

 

In May 2003, the FASB issuedSFAS No. 150 “*Accounting for Certain Financial Instruments with Characteristics ofLiabilities and Equity,*” (“SFASNo. 150”). This statement establishes standards for classification of certainfinancial instruments that have characteristics of both liabilities and equityin the statement of financial position. This Statement is effective for allcontracts created or modified after the date the Statement was issued andotherwise effective at the beginning of the first interim period beginningafter June 15, 2003.  Management doesnot expect the adoption of SFAS No. 150 to have a material impact on itsfinancial condition or results of operations.

 

The Emerging Issues Task Force (“EITF”)issued EITF No. 00-21, *“Revenue Arrangements with Multiple Deliverables”*(“EITF No. 00-21”), which is effective for revenue arrangements entered into infiscal periods beginning after June 15, 2003. EITF No. 00-21 addresses certainaspects of the accounting by a vendor for arrangements under which it willperform multiple revenue-generating activities. The Company does not believethat the adoption of EITF No. 00-21 will have a significant impact on itsfinancial position and results of operations.

 

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**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

For a discussionof certain market risks related to the Company, see Part II, Item 7A,“Quantitative and Qualitative Disclosure about Market Risk”, in the Company’sAnnual Report on Form 10-K/A for the fiscal period ended December 31, 2002.There have been no significant developments with respect to derivatives orexposure to market risk during the first six months of 2003. See Note 6 inNotes to Condensed Consolidated Financial Statements and “—Liquidity andCapital Resources”.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

(a)                                  **Evaluationof disclosure controls and procedures.**  The Company’s chief executive officer and its chief financialofficer, based on their evaluation of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of theperiod covered by this quarterly report on Form 10-Q, performed under thesupervision and with the participation of the Company’s management, haveconcluded that the Company’s disclosure controls and procedures are adequateand effective.

 

(b)                                 **Changes ininternal controls over financial reporting.**  There was no change in the Company’sinternal control over financial reporting that occurred during the Company’slast fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

 

**PART II - OTHER INFORMATION**

 

**ITEM1.**                                  **Legal Proceedings.**

 

Not applicable

 

**ITEM2.****                                  Changesin Securities and Use of Proceeds.**

 

Not applicable

 

**ITEM3.****                                  DefaultsUpon Senior Securities.**

 

Not applicable

 

**ITEM4.****                                  Submissionof Matters to a Vote of Security Holders**.

 

On May 6, 2003, a writtenconsent of stockholders in lieu of an annual meeting was executed by thestockholders of the Company to elect the Directors of the Company.

 

On June 9, 2003, a writtenconsent of stockholders in lieu of a meeting was executed by the stockholdersof the Company to approve the 2003 Directors Stock Incentive Plan.

 

On June 13, 2003, a writtenconsent of stockholders in lieu of a meeting was executed by the stockholdersof the Company to approve the 2002 Stock Incentive Plan.

 

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**ITEM5.           Other Information.**

 

Not applicable

 

**ITEM6.           Exhibits and Reports on Form8-K.**

 

(a)          Exhibits.

 
| 31     |   | Certifications  required by Rule 13a-14(a).                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------|
|   |   |                                                                                          |
| 32     |   | Certifications  required by Section 1350 of Chapter 63 of Title 18 of the United States Code. |

 

(b)         Reports on Form 8-K.

 

Filed on May14, 2003 reporting its first quarter 2003 results.

 

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**SIGNATURE**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized as of 7th day of August, 2003.

 

 
|                       | RIVERWOOD HOLDING, INC. |                                                |
|----------------------------|-------------------------|-----------------------------------------------------|
|                       | (Registrant)            |
|                       |                    |
|                       |                    |
| Date:  August 7, 2003 | By:                     |
|                       | /s/                     | Edward W.  Stroetz Jr.                              |   |
|                       |                    | Edward W.  Stroetz Jr.                              |
|                       |                    | Secretary                                           |
|                       |                    |
|                       |                    |
| Date:  August 7, 2003 | By:                     |
|                       | /s/                     | Daniel J.  Blount                                   |   |
|                       |                    | Daniel J.  Blount                                   |
|                       |                    | Senior Vice  President and  Chief Financial Officer |

 

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