<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For Quarter Ended September 30, 1999
Commission File Number 0-23876
SMURFIT-STONE CONTAINER CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 43-1531401
- -------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
150 North Michigan Avenue, Chicago, Illinois 60601
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(Address of principal executive offices) (Zip Code)
(312) 346-6600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 30, 1999, the registrant had outstanding 217,664,638 shares
of common stock, $.01 par value per share.
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
(In millions, except per share data) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,792 $ 758 $ 5,227 $ 2,286
Costs and expenses
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,488 633 4,459 1,909
Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . 165 68 536 205
Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 11
---------------------------------------------------
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . 137 57 221 172
Other income (expense)
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (140) (48) (436) (148)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (1) 60 (2)
---------------------------------------------------
Income (loss) from continuing operations before
income taxes, minority interest, extraordinary item
and cumulative effect of accounting change . . . . . . . . . . . . . 0 8 (155) 22
Benefit from (provision for) income taxes . . . . . . . . . . . . . . . . . . . (9) (5) 35 (14)
Minority interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (6)
---------------------------------------------------
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change . . . . . . . . . . . (11) 3 (126) 8
Discontinued operations
Income (loss) from discontinued operations, net of income
tax benefit (provision) of $4 and $(3) for the three
months ended September 30, 1999 and 1998 and $4 and $(14)
for the nine months ended September 30, 1999 and 1998 . . . . . . . . (4) 5 (1) 22
---------------------------------------------------
Income (loss) before extraordinary item and
cumulative effect of accounting change . . . . . . . . . . . . . . (15) 8 (127) 30
Extraordinary item
Loss from early extinguishment of debt, net of income
tax benefit of $1 for the three months ended September 30, 1999 and
$1 and $9 for the nine months ended September 30, 1999 and 1998 . . . (1) (2) (13)
Cumulative effect of accounting change
Start-up costs, net of income tax benefit of $2. . . . . . . . . . . . . (3)
---------------------------------------------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (16) $ 8 $ (129) $ 14
---------------------------------------------------
Basic earnings per common share
Income (loss) from continuing operations before
extraordinary item and accounting change . . . . . . . . . . . . . . . . $ (.05) $ .03 $ (.58) $ .07
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . (.02) .04 (.01) .20
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.01) (.11)
Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . (.03)
---------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (.07) $ .07 $ (.60) $ .13
---------------------------------------------------
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . 217 111 216 111
---------------------------------------------------
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations before
extraordinary item and accounting change . . . . . . . . . . . . . . . . $ (.05) $ .03 $ (.58) $ .07
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . (.02) .04 (.01) .20
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.01) (.11)
Cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . (.03)
---------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (.07) $ .07 $ (.60) $ .13
---------------------------------------------------
Weighted average shares outstanding. . . . . . . . . . . . . . . . . . . . . . . 217 112 216 112
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In millions, except share data) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 86 $ 155
Receivables, less allowances of $69 in 1999 and $70 in 1998 . . . . . . . . 889 743
Inventories
Work-in-process and finished goods . . . . . . . . . . . . . . . . . . 277 227
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . 466 546
----------------------------------------------
743 773
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 8 24
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 160
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 85 129
----------------------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,910 1,984
Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . 5,283 5,496
Timberland, less timber depletion . . . . . . . . . . . . . . . . . . . . . . . 287 276
Goodwill, less accumulated amortization of $128 in 1999 and $73 in 1998. . . . . 2,809 2,869
Investment in equity of non-consolidated affiliates . . . . . . . . . . . . . . 189 638
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322 368
----------------------------------------------
$ 10,800 $ 11,631
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . $ 331 $ 205
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675 533
Accrued compensation and payroll taxes . . . . . . . . . . . . . . . . . . 221 181
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 126
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 251 304
----------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 1,613 1,349
Long-term debt, less current maturities . . . . . . . . . . . . . . . . . . . . 5,631 6,428
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 959 1,026
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 954 1,113
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 81
Stockholders' equity
Preferred stock, par value $0.01 per share; 25,000,000 shares authorized;
none issued and outstanding . . . . . . . . . . . . . . . . . . . . .
Common stock, par value $.01 per share; 400,000,000 shares authorized,
217,664,638 and 214,959,041 issued and outstanding in 1999 and 1998,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 3,430 3,376
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . (1,872) (1,743)
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . (6) (1)
----------------------------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . 1,554 1,634
----------------------------------------------
$ 10,800 $ 11,631
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30, (In millions) 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (129) $ 14
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Extraordinary loss from early extinguishment of debt. . . . . . 3 22
Cumulative effect of accounting change for start-up costs . . . 5
Depreciation, depletion and amortization . . . . . . . . . . . 328 100
Amortization of deferred debt issuance costs . . . . . . . . . 11 5
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . (75) 13
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . (39)
Non-cash employee benefit expense . . . . . . . . . . . . . . . 29 4
Non-cash restructuring charge . . . . . . . . . . . . . . . . . 6
Foreign currency transaction gains . . . . . . . . . . . . . . (5)
Change in current assets and liabilities,
net of effects from acquisitions and dispositions
Receivables . . . . . . . . . . . . . . . . . . . . . . (165) (10)
Inventories . . . . . . . . . . . . . . . . . . . . . . 16 (21)
Prepaid expenses and other current assets . . . . . . . 29 (9)
Accounts payable and accrued liabilities . . . . . . . . 144 (50)
Interest payable . . . . . . . . . . . . . . . . . . . . 9 23
Income taxes . . . . . . . . . . . . . . . . . . . . . . 3
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (51) (10)
-------------- ------------------------
Net cash provided by operating activities . . . . . . . . . . . . . 111 89
-------------- ------------------------
Cash flow from investing activities
Property additions . . . . . . . . . . . . . . . . . . . . . . . . (101) (69)
Proceeds from property and investment
disposals and sale of businesses . . . . . . . . . . . . . . . 546 3
-------------- ------------------------
Net cash provided by (used for) investing activities. . . . . . . . 445 (66)
-------------- ------------------------
Cash flow from financing activities
Borrowings under bank credit facilities . . . . . . . . . . . . . 891
Payments of long-term debt . . . . . . . . . . . . . . . . . . . . (653) (898)
Proceeds from exercise of stock options . . . . . . . . . . . . . 27
Deferred debt issuance costs. . . . . . . . . . . . . . . . . . . . (13)
-------------- ------------------------
Net cash used for financing activities . . . . . . . . . . . . . . (626) (20)
-------------- ------------------------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . 1
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . (69) 3
Cash and cash equivalents
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 155 12
-------------- ------------------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86 $ 15
- --------------------------------------------------------------------------------------- ------------------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except share data)
1. SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements and notes thereto of
Smurfit-Stone Container Corporation ("SSCC" or the "Company") have been prepared
in accordance with the instructions to Form 10-Q and reflect all adjustments
which management believes necessary (which include only normal recurring
accruals) to present fairly the financial position, results of operations and
cash flows. These statements, however, do not include all information and
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. Interim results may not necessarily be indicative of results that
may be expected for any other interim period or for the year as a whole. These
financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in the SSCC Annual Report on Form
10-K for the year ended December 31, 1998, (the "1998 SSCC 10-K"), filed March
31, 1999 with the Securities and Exchange Commission.
SSCC, formerly Jefferson Smurfit Corporation, owns 100% of the common equity
interest in JSCE, Inc. and Stone Container Corporation ("Stone"). The Company
has no operations other than its investments in JSCE, Inc. and Stone. JSCE, Inc.
owns 100% of the equity interest in Jefferson Smurfit Corporation (U.S.) ("JSC
(U.S.)") and is the guarantor of the senior indebtedness of JSC (U.S.). JSCE,
Inc. has no other material operations other than its investment in JSC (U.S.).
JSC (U.S.) has extensive operations throughout the United States. Stone has
extensive domestic and international operations.
2. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. MERGER AND RESTRUCTURING
MERGER WITH STONE CONTAINER CORPORATION
On November 18, 1998, Stone merged with a wholly-owned subsidiary of the Company
(the "Merger"). The Merger was accounted for as a purchase business combination
and, accordingly, the results of the operations of Stone have been included in
the consolidated statements of operations of the Company after November 18,
1998. The cost to acquire Stone was preliminarily allocated to the assets
acquired and liabilities assumed according to their estimated fair values and is
subject to adjustment when additional information concerning asset and liability
valuations is finalized in the fourth quarter of 1999. The allocation is
expected to be impacted by the settlement of the pre-acquisition contingencies
relating to Stone's investment in Florida Coast Paper Company, L.L.C. (See
Note 10).
The litigation related to Stone's purchase of the common stock of Stone Savannah
River Pulp and Paper Company was settled during the third quarter of 1999 for
cash payments of approximately $32 million. The purchase price allocation has
been adjusted to reflect the settlement.
4
<PAGE>
RESTRUCTURING OF OPERATIONS
As part of the Company's continuing evaluation of all areas of its business in
connection with its merger integration, the Company recorded a $2 million
restructuring charge during the third quarter of 1999, and $11 million for the
nine months ended September 30, 1999 related to the permanent shutdown of
various facilities. Additional restructuring charges are expected in 1999 and
2000 as management finalizes its plans.
4. OTHER, NET
On January 21, 1999, the Company sold 16% (approximately 7.8 million shares) of
its interest in Abitibi-Consolidated Inc., a Canadian-based manufacturer and
marketer of publication paper ("Abitibi") for approximately $80 million. On
April 23, 1999, the Company sold its remaining interest (approximately 41
million shares) to an unaffiliated third party for net proceeds of approximately
$414 million. The proceeds have been applied to debt reduction. The Company
recorded a $39 million gain during the second quarter of 1999.
5. NON-CONSOLIDATED AFFILIATES
The Company has several non-consolidated affiliates that are engaged in paper
and packaging operations in North America, South America, Europe and Asia.
Investments in majority-owned affiliates where control does not exist and non
majority-owned affiliates are accounted for under the equity method.
The Company's significant non-consolidated affiliate at September 30, 1999, is
Smurfit-MBI (formerly MacMillan Bathurst, Inc.), a Canadian corrugated container
company, in which the Company owns a 50% interest. The remaining 50% interest is
owned by an affiliate of Jefferson Smurfit Group plc. Smurfit-MBI had net sales
of $100 million and $89 million for the three months, and $282 million and $266
million for the nine months ended September 30, 1999 and 1998, respectively.
Combined summarized financial information for all of the Company's
non-consolidated affiliates that are accounted for under the equity method of
accounting is presented below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
--------- ------- --------- ------
<S> <C> <C> <C> <C>
Results of operations (a)
Net sales.................................................. $ 206 $ 9 $ 1,246 $ 28
Cost of sales.............................................. 173 7 1,017 25
Income (loss) before income taxes, minority interest
and extraordinary charges............................... 5 1 (60) 1
Net income (loss).......................................... 5 (44)
</TABLE>
(a) Includes results of operations for each of the Company's affiliates for the
period it was accounted for under the equity method.
6. DISCONTINUED OPERATIONS
During February 1999 the Company adopted a formal plan to sell the operating
assets of its subsidiary, Smurfit Newsprint Corporation ("SNC"). Accordingly,
SNC is accounted for as discontinued operations in the accompanying consolidated
financial statements. The Company has restated its prior financial statements to
present the operating results of SNC as a discontinued operation. SNC revenues
were $66 million and $83 million for the three months ended September 30, 1999
and 1998. SNC revenues were $205 million and $243 million for the nine months
ended September 30, 1999 and 1998.
5
<PAGE>
Pursuant to a definitive agreement dated September 21, 1999 the Company sold its
Newberg, Oregon newsprint mill on November 10, 1999, for approximately $220
million, less an amount for an adjustment for working capital. Proceeds from the
sale were used to reduce debt. SNC is evaluating various options with respect to
the remaining operations.
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
--------- ------- --------- ------
<S> <C> <C> <C> <C>
Net income (loss)................................... $ (16) $ 8 $(129) $ 14
Other comprehensive income (loss), net of tax:
Foreign currency translation................... 4 (5)
----- --- ----- ----
Comprehensive income (loss)......................... $ (12) $ 8 $(134) $ 14
===== === ===== ====
</TABLE>
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change ............................... $ (11) $ 3 $ (126) $ 8
Denominator:
Denominator for basic earnings per share -
Weighted average shares ......................... 217 111 216 111
Effect of dilutive securities:
Employee stock options .......................... 1 1
------ ----- ------ -----
Denominator for diluted earnings per share -
Adjusted weighted average shares ................ 217 112 216 112
====== ===== ====== =====
Basic earnings (loss) per share from continuing
operations before extraordinary item and
cumulative effect of accounting change ............ $ (.05) $ .03 $ (.58) $ .07
====== ===== ====== =====
Diluted earnings (loss) per share from continuing
operations before extraordinary item and
cumulative effect of accounting change ............ $ (.05) $ .03 $ (.58) $ .07
====== ===== ====== =====
</TABLE>
For the three and nine month periods ended September 30, 1999, (1) options to
purchase four million shares of common stock under the treasury stock method,
(2) convertible debt effects of $1 million (two million shares) and $3 million
(five million shares), respectively, and (3) three million additional minority
interest shares with an earnings effect of $2 million and $6 million,
respectively, are excluded from the diluted earnings per share computation
because they are antidilutive.
6
<PAGE>
9. BUSINESS SEGMENT INFORMATION
The Company has two reportable segments: (1) Containerboard and Corrugated
Containers, and (2) Boxboard and Folding Cartons. The Containerboard and
Corrugated Containers segment is highly integrated. It includes a system of
mills and plants that produces a full line of containerboard that is converted
into corrugated containers. Corrugated containers are used to transport such
diverse products as home appliances, electric motors, small machinery, grocery
products, produce, books, tobacco and furniture. The Boxboard and Folding
Cartons segment is also highly integrated. It includes a system of mills and
plants that produces a broad range of coated recycled boxboard that is converted
into folding cartons. Folding cartons are used primarily to protect products,
such as food, fast food, detergents, paper products, beverages, health and
beauty aids and other consumer products, while providing point of purchase
advertising.
Other includes four non-reportable segments (specialty packaging, industrial
bags, reclamation and international) and corporate related items. Corporate
related items include income and expense not allocated to reportable segments,
goodwill amortization, interest expense, the adjustment to record inventory at
LIFO, and the elimination of intercompany profit.
A summary by business segment follows:
<TABLE>
<CAPTION>
Container-
Board & Boxboard
Corrugated & Folding
Containers Carton Other Total
---------- -------- ----- -----
<S> <C> <C> <C> <C>
Three Months Ended September 30,
1999
Revenues from external customers........... $ 1,164 $ 212 $ 416 $ 1,792
Intersegment revenues...................... 49 39 88
Segment profit (loss)...................... 165 13 (178) 0
1998
Revenues from external customers........... $ 426 $ 199 $ 133 $ 758
Intersegment revenues...................... 10 39 49
Segment profit (loss)...................... 25 19 (36) 8
Nine Months Ended September 30,
1999
Revenues from external customers........... $ 3,394 $ 617 $ 1,216 $ 5,227
Intersegment revenues...................... 145 107 252
Segment profit (loss)...................... 303 41 (499) (155)
1998
Revenues from external customers........... $ 1,280 $ 586 $ 420 $ 2,286
Intersegment revenues...................... 31 116 147
Segment profit (loss)...................... 92 47 (117) 22
</TABLE>
10. CONTINGENCIES
The Company's past and present operations include activities which are subject
to federal, state and local environmental requirements, particularly relating to
air and water quality. The Company faces potential environmental liability as a
result of violations of permit terms and similar authorizations that have
occurred from time to time at its facilities.
7
<PAGE>
The Company faces potential liability for response costs at various off-site
disposal sites which the Company has received notice that it may be a
potentially responsible party ("PRP"), as well as for certain hazardous
substance contamination of certain Company-owned properties. In estimating its
reserves for environmental remediation and future costs, the Company's estimated
liability reflects only the Company's expected share. In determining the
liability, the estimate takes into consideration the number of other PRP's at
each site, the identity and financial condition of such parties and experience
regarding similar matters.
Stone is a party to an Output Purchase Agreement (the "OPA") with Four M
Corporation ("Four M") and Florida Coast Paper Company, L.L.C. ("FCPC"), a joint
venture owned 50% by each of Stone and Four M. The OPA requires that Stone and
Four M each purchase one-half of the linerboard produced at FCPC's mill in Port
St. Joe, FL (the "FCPC Mill") at a minimum price sufficient to cover certain
obligations of FCPC. The OPA also requires Stone and Four M to use their best
efforts to cause the FCPC Mill to operate at a production rate not less than the
reported average capacity utilization of the U.S. linerboard industry. FCPC
indefinitely discontinued production at the FCPC Mill in August 1998. On April
2, 1999, FCPC and three related companies (the "FCPC Companies") filed a Chapter
11 bankruptcy petition in United States Bankruptcy Court in Wilmington,
Delaware. All of the obligations of the FCPC Companies are non-recourse to
Stone, and the bankruptcy filing has no effect on any of the indebtedness of
Stone or any other subsidiaries of the Company. On May 10, 1999, the Indenture
Trustee with respect to the first mortgage notes of FCPC (the "FCPC Notes")
commenced an adversary proceeding in the FCPC bankruptcy case against Stone and
certain other parties, including two former officers of Stone, which has been
stayed indefinitely by the Court. The complaint contains allegations that Stone
violated the provisions of the OPA and a subordinated credit agreement with
FCPC, breached certain fiduciary duties owed to the holders of the FCPC Notes,
and negligently discharged certain additional duties owed to the holders of the
FCPC Notes. On October 20, 1999, the FCPC Companies and a committee representing
the holders of the FCPC Notes filed a reorganization plan (the "Plan") that is
intended to resolve all matters relating to the bankruptcies of the FCPC
Companies. The Plan, which is supported by Stone and Four M, provides for the
settlement of all outstanding claims in the bankruptcies in exchange for cash
payments. The Plan also provides for the transfer of all of the assets of the
FCPC Companies, including the FCPC Mill, to Stone, as well as the release of the
pending adverse proceeding and all other claims relating to the bankruptcies of
the FCPC Companies against Stone, Four M and their affiliates, officers and
directors. Although the amount of the cash payments is subject to final
determination, the cash cost of the Plan to Stone is anticipated to be in the
range of $120 to $125 million and Stone will receive $25 million in value of
convertible preferred stock to be issued by Four M in satisfaction of its share
of the liabilities. The cost to acquire Stone will be adjusted in the fourth
quarter of 1999 to reflect this settlement. Confirmation of the Plan is
anticipated to occur in early 2000.
Subsequent to an understanding reached in December 1998, the Company and SNC
entered into a Settlement Agreement in January 1999 to implement a nationwide
class action settlement of claims involving Cladwood(R), a composite wood siding
product manufactured by SNC that has been used primarily in the construction of
manufactured or mobile homes. The Company recorded a $30 million pre-tax charge
to reflect amounts SNC has agreed to pay into a settlement fund, administrative
costs, plaintiffs' attorneys' fees, class representative payments and other
costs. The Company believes its reserve is adequate to pay eligible claims.
However, the number of claims, and the number of potential claimants who choose
not to participate in the settlement, could cause the Company to re-evaluate
whether the liabilities in connection with the Cladwood(R) cases could exceed
established reserves.
The Company is a defendant in a number of lawsuits and claims arising out of the
conduct of its business, including those related to environmental matters. While
the ultimate results of such suits or other proceedings against the Company
cannot be predicted with certainty, the management of the Company believes that
the resolution of these matters will not have a material adverse effect on its
consolidated financial condition or results of operations.
8
<PAGE>
11. WOODLANDS SALE
Pursuant to a definitive agreement dated as of July 28, 1999, as amended, the
Company sold its 820,000 acres of owned timberland and assigned its rights to
160,000 acres of leased timberland to a third party for $710 million on October
25, 1999. The Company received $225 million in cash at closing, with the balance
in the form of installment notes. The proceeds from the notes will be realized
by mid-November upon completion of a monetization program. The timberlands are
located in Florida, Georgia and Alabama. Proceeds from the sale were used to
reduce debt.
12. SUBSEQUENT EVENTS
On October 15, 1999, Stone entered into a new accounts receivable securitization
program (the "Securitization Program"). The new $250 million Securitization
Program provides for certain trade accounts receivable (the "Receivables") to be
sold to Stone Receivables Corporation, a bankruptcy remote special purpose
entity. The Receivables purchases were financed through the issuance of $200
million of Trade Receivables-Backed Certificates, Series 1999-1 ($176 million
Class A certificates at 0.5% plus LIBOR; $12 million Class B certificates at
.85% plus LIBOR and $12 million Class C certificates at 1.8% plus LIBOR) and up
to $50 million of Variable Funding Certificates, Series 1999-2 (daily commercial
paper rate). The Securitization Program has a final maturity of November 15,
2005. The transaction will be accounted for under Statement of Financial
Accounting Standards No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."
On October 15, 1999 JSC(U.S.) amended the JSC(U.S.) Credit Agreement to (i) ease
certain quarterly financial covenants for 1999 and 2000, (ii) permit the sale of
the timberlands and the Newberg mill, (iii) permit the cash proceeds
from these asset sales to be applied as prepayments against the JSC(U.S.) Credit
Agreement, and (iv) permit certain prepayments of other indebtedness.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
As discussed in the SSCC 1998 10K, a subsidiary of the Company merged with
Stone as of November 18, 1998 and Stone became a whollyowned subsidiary of the
Company.
<TABLE>
<CAPTION>
(In millions) Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales
Containerboard and corrugated containers................... $ 1,164 $ 426 $ 3,394 $ 1,280
Boxboard and folding cartons............................... 212 199 617 586
Other operations........................................... 416 133 1,216 420
------- ------ ------- -------
Total ..................................................... $ 1,792 $ 758 $ 5,227 $ 2,286
======= ====== ======= =======
Profit (loss)
Containerboard and corrugated containers................... $ 165 $ 25 $ 303 $ 92
Boxboard and folding cartons............................... 13 19 41 47
Other operations........................................... 23 8 71 25
------- ------ ------- -------
Total operations........................................... 201 52 415 164
Other, net................................................. (201) (44) (570) (142)
------- ------ ------- -------
Income (loss) from continuing operations
before income taxes, extraordinary item
and cumulative effect of accounting change............. $ 0 $ 8 $ (155) $ 22
======= ====== ======= =======
</TABLE>
For the three months ended September 30, 1999, net sales for the Company were
$1,792 million, an increase of 136% compared to the same period last year.
Operating profits for the Company for the three months ended September 30, 1999
were $201 million, an increase of $149 million compared to the same period last
year. The increases in net sales and operating profits compared to last year
were due primarily to Stone's operations acquired in the Merger. Net sales in
1999 were favorably impacted by higher average sales prices for the Company's
products and negatively impacted by the closure of operating facilities.
Operating profits were favorably impacted by higher average prices for the
Company's primary products. Other, net includes corporate revenues and expenses
and net interest expense. Other, net cost was higher in the 1999 period due
primarily to the Merger.
For the nine months ended September 30, 1999 net sales for the Company were
$5,227 million, an increase of 129% compared to the same period last year.
Operating profits of $415 million for the nine months ended September 30, 1999
were $251 million higher than the comparable period last year. The increases in
net sales and operating profits compared to last year were due primarily to
Stone's operations acquired in the Merger. Net sales were unfavorably impacted
by lower average sales prices for the Company's products in the first half of
1999 and the closure of operating facilities. Other, net cost was higher in the
1999 period due primarily to the Merger, higher LIFO expense and an $11 million
restructuring charge. Other, net cost was favorably impacted by a $39 million
gain on the sale of the shares of Abitibi in the second quarter of 1999.
The changes in net sales due to sales price and product mix, shipment volumes,
the Merger and other acquired, closed or sold operations for each of the
Company's segments is shown in the chart below.
10
<PAGE>
<TABLE>
<CAPTION>
(In millions)
Container-
board & Boxboard
Corrugated & Folding Other
Increase (Decrease) in Net Sales Due to: Containers Cartons Operations Total
- ---------------------------------------- ---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Three Months Ended September 30,
1999 Compared to 1998
- ---------------------
Sales price and product mix........................ $ 35 $ (3) $ 28 $ 60
Sales volume....................................... (32) 16 (3) (19)
Stone merger....................................... 758 261 1,019
Other acquisitions................................. 9 9
Closed or sold facilities.......................... (32) (3) (35)
------ ------ ----- ------
Total increase ................................ $ 738 $ 13 $ 283 $1,034
====== ====== ===== ======
Nine Months Ended September 30,
1999 Compared to 1998
- ---------------------
Sales price and product mix........................ $ 15 $ (12) $ (17) $ (14)
Sales volume....................................... (44) 43 8 7
Stone merger....................................... 2,208 815 3,023
Other acquisitions................................. 20 20
Closed or sold facilities.......................... (85) (10) (95)
------ ------ ----- ------
Total increase ................................ $2,114 $ 31 $ 796 $2,941
====== ====== ===== ======
</TABLE>
Containerboard and Corrugated Containers Segment
Net sales of $1,164 million for the three months ended September 30, 1999
increased 173% compared to last year and profits increased by $140 million to
$165 million. The increase in net sales and profits was due primarily to the
Merger. Net sales and profits for the Stone operations included in this segment
for the three months ended September 30, 1999 were $758 million and $110
million, respectively. Net sales were negatively impacted by the permanent
closure of three JSC(U.S.) containerboard mills in December 1998 and the closure
of four container plants in 1999. Operations for 1999 include a containerboard
machine acquired from Jefferson Smurfit Group plc in November 1998. Reclaimed
fiber cost on a per ton basis was higher in the third quarter of 1999 compared
to last year. Cost of goods sold as a percent of net sales decreased to 75% for
the three months ended September 30, 1999 compared to 86% for the same period
last year due to the Merger and higher sales prices.
The Company implemented price increases of $40 and $70 per ton for linerboard
and medium, respectively, in July 1999, with a corresponding increase for
corrugated containers beginning August 1. On average, linerboard prices in the
third quarter of 1999 were higher than last year by 15% and the average price of
corrugated containers was higher by 7%. Exclusive of Stone's operations,
containerboard shipments for the third quarter of 1999 decreased 18% compared to
last year due to the mill closures and shipments of corrugated containers
decreased 5% due principally to the closed facilities. The average price of SBS
in the third quarter of 1999 declined 1% and shipments were higher by 2%
compared to last year.
Net sales of $3,394 million for the nine months ended September 30, 1999,
increased 165% compared to last year and profits increased by $211 million to
$303 million. The increase in net sales and profits was due primarily to the
Merger. Net sales and profits for the Stone operations included in this segment
for the nine months ended September 30, 1999 were $2,208 million and $186
million, respectively. Net sales were negatively impacted by the permanent
closures mentioned above. Cost of goods sold as a percent of net sales decreased
to 81% for the nine months ended September 30, 1999, compared to 85% for the
same period last year due to the Merger and higher sales prices. Linerboard
prices for the year to date period
11
<PAGE>
were higher than last year by 2% and the average price of corrugated containers
was higher by 2%. Compared to last year, exclusive of Stone's operations,
containerboard shipments for the nine months ended September 30, 1999 decreased
18% due to the mill closures and shipments of corrugated containers decreased 3%
principally due to the closed facilities. The average price of SBS for the nine
months ending September 30, 1999 declined 4% compared to last year and shipments
were lower by 2%.
Boxboard and Folding Cartons Segment
For the three months ended September 30, 1999 net sales increased by 7% compared
to last year to $212 million and profits decreased by $6 million to $13 million.
The sales increase was due primarily to higher sales volume of folding cartons,
which increased by 7% compared to last year. Boxboard shipments increased by 15%
compared to last year. On average, boxboard prices were lower than last year by
12% and folding carton prices were comparable to last year. The lower sales
prices and higher reclaimed fiber costs had a negative effect on profits in the
third quarter of 1999 compared to last year. Cost of goods sold as a percent of
net sales increased to 85% for the three months ended September 30, 1999
compared to 82% for the same period last year due primarily to the effect of
lower prices.
For the nine months ended September 30, 1999 net sales increased by 5% compared
to last year to $617 million and profits decreased by $6 million to $41 million.
The sales increase was due to higher shipments of folding cartons, which
increased 8% compared to last year. Boxboard shipments were comparable to last
year. On average, boxboard prices were lower than last year by 12% and the price
of folding cartons was lower by 1%. The effect of the lower sales prices on
profits for the year to date period negated the effects of higher sales volume.
Reclaimed fiber cost for the year to date period was comparable to last year.
Cost of goods sold as a percent of net sales increased to 84% for the nine
months ended September 30, 1999 compared to 83% for the same period last year
due primarily to the effect of lower prices.
Other Operations
Net sales of $416 million for the Company's other operations for the three
months ended September 30, 1999 increased $283 million, or 213%, compared to
last year and profits increased by $15 million to $23 million, due primarily to
the results of the industrial bag and international operations, which were
acquired in the Merger. Other operations also include the Company's reclamation
and specialty packaging operations. Demand for reclaimed fiber, particularly for
old corrugated containers ("OCC"), the primary grade used by paper mills, was
strong in the second and third quarters of 1999 and sales prices increased.
Reclaimed fiber prices moved lower in September and the Company believes they
will drop further in the fourth quarter as a result of seasonal increases in
supply. Compared to last year, the average price of OCC in the third quarter was
higher by approximately $25 per ton and the price of old newsprint was higher by
approximately $5 per ton. Total tons of fiber reclaimed and brokered for the
three months ended September 30, 1999 increased 28% compared to last year due to
the additional fiber requirements as a result of the Merger.
Net sales of $1,216 million for the Company's other operations for the nine
months ended September 30, 1999 increased $796 million, or 190%, compared to
last year and profits increased by $46 million to $71 million, due primarily to
the results of the industrial bag and international operations. For the year to
date period, the average price of OCC was lower by approximately $15 per ton
compared to last year due to the low prices experienced in the first quarter of
1999. The price of old newsprint was comparable. Total tons of fiber
reclaimed and brokered for the nine months ended September 30, 1999 increased
27% compared to last year.
Discontinued Operations
During February 1999, the Company adopted a formal plan to sell the operating
assets of its subsidiary, SNC. Accordingly, SNC is accounted for as a
discontinued operation for all periods shown. In November 1999, the Company sold
its Newberg, Oregon newsprint mill (see "Liquidity and Capital Resources"). The
Newberg mill produces approximately 370,000 metric tons per year of recycled
content newsprint.
The Company had a loss from discontinued operations, net of tax, for the three
months ended September 30, 1999 of $4 million compared to a profit of $5 million
for the same period last year.
12
<PAGE>
SNC revenues were $66 million and $83 million for the third quarter of 1999
and 1998, respectively. On average, newsprint sales prices during the quarter
were lower than last year by 19% and shipments were lower by 3%.
Loss from discontinued operations, net of tax, for the nine months ended
September 30, 1999 was $1 million compared to income, net of tax, of $22 million
for the same period last year. SNC revenues were $205 million for the nine
months ending September 30, 1999 compared to $243 million for the same period in
1998. Many newsprint producers, including SNC, curtailed production during the
nine months ended September 30, 1999. On average, newsprint sales prices for the
year to date period were lower than last year by 13% and shipments were lower by
4%.
Costs and Expenses
The increases in costs and expenses compared to last year in the Company's
Consolidated Statements of Operations resulted primarily from the Merger. Such
increases were partially offset by elimination of cost for certain
containerboard mill operations which were permanently shut down in December
1998. The Company's overall cost of goods sold as a percent of net sales for the
three months ended September 30, 1999 decreased from 85% in 1998 to 83% in 1999
due primarily to the Merger and higher sales prices. For the nine months ended
September 30, 1999, cost of goods sold as a percent of net sales increased from
84% in 1998 to 85% in 1999 due to lower sales prices in the first half of 1999.
Selling and administrative expenses increased compared to 1998 due primarily to
the Merger.
Interest expense for the three months and nine months ended September 30, 1999
was higher than last year due primarily to the consolidation of Stone's interest
expense and higher levels of debt outstanding as a result of the Merger. Average
effective interest rates for the 1999 periods were comparable to last year.
The Company recorded an income tax benefit of $35 million on a pretax loss of
$155 million for the nine months ended September 30, 1999. The effective tax
rate for the stated period includes the effect of permanent differences from
applying purchase accounting.
STATISTICAL DATA
<TABLE>
<CAPTION>
(In thousands of tons, except as noted) Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Mill production:
Containerboard................................. 1,527 491 4,463 1,507
Solid bleached sulfate......................... 50 47 141 144
Kraft paper.................................... 99 327
Coated boxboard................................ 143 147 436 434
Corrugated shipments (billion sq. ft.)............. 23.2 7.5 68.8 22.3
Folding carton shipments........................... 146 138 434 401
Industrial bag shipments........................... 129 386
Fiber reclaimed and brokered....................... 1,648 1,291 4,869 3,833
</TABLE>
RESTRUCTURING AND MERGER SYNERGIES
As explained in the SSCC 1998 10K, the Company recorded a pretax charge of
$257 million in the fourth quarter of 1998 for restructuring costs related to
the permanent closure of certain JSC(U.S.) operations in 1998 in connection with
the Merger. The restructuring charge included provisions for costs associated
with (1) adjustment of property, plant and equipment of closed facilities to
fair value less costs to sell of $179 million, (2) facility closure costs of $42
million, (3) severance related costs of $27 million, and (4) other Merger
related costs of $9 million.
13
<PAGE>
In addition, the preliminary allocation of the cost to acquire Stone included an
adjustment to fair value of property, plant and equipment associated with the
permanent closure of certain facilities owned by Stone in 1998, liabilities for
the termination of certain Stone employees, and liabilities for longterm
commitments. Such exit liabilities amounted to $117 million, including (1)
facility closure costs of $9 million, (2) severance related costs of $14
million, (3) lease commitments of $38 million and (4) other commitments of $56
million.
As part of the Company's continuing evaluation of all areas of its business in
connection with its Merger integration, the Company recorded an $11 million
restructuring charge for the nine months ended September 30, 1999 related to the
permanent shutdown of six JSC(U.S.) facilities and adjusted purchase exit
liabilities by $20 million. The exit liabilities recorded for JSC(U.S.) and
Stone as of September 30, 1999 consisted of approximately $219 million of
anticipated cash expenditures. Since the Merger, through September 30, 1999,
approximately $76 million (35%) of the cash expenditures were incurred, the
majority of which related to severance and facility closure costs. The remaining
cash expenditures will continue to be funded through operations as originally
planned. Additional restructuring charges are expected in 1999 and 2000 as
management finalizes its plans. The cost to acquire Stone was preliminarily
allocated to the assets acquired and liabilities assumed according to their
estimated fair values and is subject to adjustment when additional information
concerning asset and liability valuations are finalized in the fourth quarter of
1999.
On October 20, 1999, the FCPC Companies and a committee representing the holders
of the FCPC Notes filed the Plan that is intended to resolve all matters
relating to the bankruptcies of the FCPC Companies (see Part II - Other
Information, Item 1. Legal Proceedings). Although the amount of cash payments
are subject to final determination, the cash cost of the Plan to Stone is
anticipated to be in the range of $120 to $125 million, and Stone will receive
$25 million in value of convertible preferred stock to be issued by Four M in
satisfaction of its share of the liabilities. The cost to acquire Stone will be
adjusted to reflect this settlement.
Merger synergies of $350 million per year are targeted by the end of 2000.
Approximately half of this amount is projected to come from optimizing the
combined manufacturing systems of JSC(U.S.) and Stone. Merger synergies,
including the benefits of mill shutdowns at the end of 1998 and staff headcount
reductions, for the nine months ended September 30, 1999 totaled approximately
$205 million. The cost to implement the savings achieved to date were
approximately $31 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended September
30, 1999 of $111 million, proceeds from the sale of assets of $546 million,
proceeds from exercise of stock options of $27 million and available cash of $69
million were used to fund property additions of $101 million and net debt
payments of $653 million.
On January 21, 1999, the Company sold 7.8 million shares of Abitibi for
approximately $80 million and on April 23, 1999, the Company sold its remaining
interest in Abitibi for approximately $414 million. Proceeds were applied to
reduce Stone's debt. The proceeds were sufficient to prepay the entire
outstanding balance of the Tranche B term loan and, in accordance with the Stone
Credit Agreement (as defined below), the revolving credit maturity date was
extended from April 30, 2000 to December 31, 2000.
Pursuant to a definitive agreement dated as of July 28, 1999, as amended, the
Company sold its 820,000 acres of owned timberland and assigned its rights to
160,000 acres of leased timberland to a third party for $710 million on October
25, 1999. The timberlands are located in Florida, Georgia and Alabama. The
Company received $225 million in cash at closing, with the balance in the form
of installment notes. The proceeds from the notes will be realized by
midNovember upon completion of a note monetization program. Pursuant to a
definitive agreement dated September 21, 1999, the Company sold its Newberg,
Oregon newsprint mill on November 10, 1999 for approximately $220 million, less
an amount for an adjustment for
14
<PAGE>
working capital. SNC is evaluating various options with respect to its remaining
operations. Proceeds from these sales were used to pay down the borrowings under
the JSC(U.S.) Credit Agreement.
On October 15, 1999, Stone entered into a new Securitization Program. The new
$250 million Securitization Program provides for Receivables to be sold to Stone
Receivables Corporation, a bankruptcy remote special purpose entity. The
Receivables purchases were financed through the issuance of $200 million
Series 19911 certificates and up to $50 million of Series 19992 variable
funding certificates. The Securitization Program has a final maturity
of November 15, 2000.
The credit facilities of JSC(U.S.) and Stone (the "JSC(U.S.) Credit Agreement"
and the "Stone Credit Agreement", respectively and collectively, the "Credit
Agreements") contain various business and financial covenants including, among
other things, (i) limitations on dividends, redemptions and repurchases of
capital stock, (ii) limitations on the incurrence of indebtedness, (iii)
limitations on capital expenditures and (iv) maintenance of certain financial
covenants. The Credit Agreements also require prepayments if JSC(U.S.) or Stone
have excess cash flows, as defined, or receive proceeds from certain asset
sales, insurance, issuance of equity securities or incurrence of certain
indebtedness. The obligations under the JSC(U.S.) Credit Agreement are
unconditionally guaranteed by the Company and certain of its subsidiaries. The
obligations under the Credit Agreements are secured by a security interest in
substantially all of the assets of JSC(U.S.) and Stone, respectively. Such
restrictions, together with the highly leveraged position of the Company, could
restrict corporate activities, including the Company's ability to respond to
market conditions, to provide for unanticipated capital expenditures or to take
advantage of business opportunities.
On January 22, 1999, Stone obtained a waiver from its bank group for
noncompliance with certain financial covenant requirements under the Stone
Credit Agreement as of December 31, 1998. Subsequently, on March 23, 1999, Stone
and its bank group amended the Stone Credit Agreement to further ease certain
quarterly financial covenant requirements for 1999.
On October 15, 1999 JSC(U.S.) amended the JSC(U.S.) Credit Agreement to (i) ease
certain quarterly financial covenants for 1999 and 2000, (ii) permit the sale of
the timberlands and the Newberg mill, (iii) permit the cash proceeds from
these asset sales to be applied as prepayments against the JSC(U.S.) Credit
Agreement, and (iv) permit certain prepayments of other indebtedness.
As mentioned above, the declaration of dividends by the Board of Directors is
subject to, among other things, certain restrictive provisions contained in the
Credit Agreements and certain note indentures. At September 30, 1999, Stone had
accumulated dividend arrearages of approximately $20 million related to a
series of its preferred stock.
Based upon covenants in the Stone Indentures, Stone is required to maintain
certain levels of equity. If the minimum equity levels are not maintained for
two consecutive quarters, the applicable interest rates on the Indentures are
increased by 50 basis points per semiannual interest period (up to a maximum of
200 basis points) until the minimum equity level is attained. Stone's equity
level was below the minimum equity level during most of 1998. As a result, the
interest rates increased. The interest rates on the Indentures returned to the
original interest rates on April 1, 1999 due to Stone's equity levels exceeding
the minimum on December 31, 1998.
As of September 30, 1999, JSC(U.S.) had $441 million of unused borrowing
capacity under the JSC(U.S.) Credit Agreement and Stone had $453 million of
unused borrowing capacity under the Stone Credit Agreement. The Company expects
that internally generated cash flows, proceeds from asset divestitures and
existing financing resources will be sufficient for the next several years to
meet its obligations, including debt service, restructuring payments, settlement
of the FCPC reorganization plan, settlement of certain litigation relating to
Cladwood'r' siding, expenditures under the Cluster Rule (as discussed in the
SSCC 1998 10K) and capital expenditures.
15
<PAGE>
YEAR 2000
The Year 2000 problem concerns the inability of computer systems and devices to
properly recognize and process datesensitive information when the year changes
to 2000. The Company depends upon its information technology ("IT") and non-IT
systems (used to run manufacturing equipment that contain embedded hardware or
software that must handle dates) to conduct and manage the Company's business.
The Company believes that, by replacing, repairing or upgrading the systems, the
Year 2000 issue can be resolved without material operational difficulties. The
Company expects to spend approximately $51 million through 1999 to correct the
Year 2000 problem, of which approximately $43 million has been incurred through
September 30, 1999. A large portion of these costs relate to enhancements that
will enable the Company to reduce or avoid costs and operate many of its
production facilities more efficiently. Some of these projects have been
accelerated in order to replace existing systems that cannot be brought into
compliance by the year 2000. The Company has utilized both internal and external
resources to evaluate the potential impact of the Year 2000 problem. The Company
is funding its Year 2000 effort with cash from operations and borrowings under
the Credit Agreements.
The Company's Year 2000 Program Management Office is responsible for guiding and
coordinating operating units in developing and executing their Year 2000 plans,
enabling the Company to share knowledge and work across operating units,
developing standard planning and formats for internal and external reporting,
consistent customer and vendor communications and where appropriate, the
development of contingency plans. The Company's Year 2000 program consists of
the following seven phases:
Phase 1: Planning/Awareness: The planning and awareness phase includes the
identification of critical business processes and components.
Phase 2: Inventory: During the inventory phase, Company personnel identified
systems that could potentially have a Year 2000 problem and categorized the
system as compliant, noncompliant, obsolete or unknown.
Phase 3: Triage: In the triage phase, every system is assigned a business risk
as high, medium, or low.
Phase 4: Detailed Assessment: The detailed assessment provides for a planned
schedule of remediation and estimated cost.
Phase 5: Remediation: Remediation involves what corrective action to take if
there is a Year 2000 problem, such as replacing, repairing or upgrading the
system, and concludes with the execution of system test.
Phase 6: Fallout: In the Fallout phase, the inventory will be kept up to date
and no new Year 2000 problems will be introduced.
Phase 7: Contingency Planning: The Company is developing contingency plans for
the most reasonable worst case scenarios.
The Company has completed the planning, inventory, triage, and detailed
assessment of its IT systems and is taking corrective action and testing the
new, upgraded or repaired systems. The Company identified ten high-risk IT
systems, of which seven have been remediated and three are scheduled for
completion in the fourth quarter of 1999.
The Company's operating facilities rely on control systems, which control and
monitor production, power, emissions and safety. The inventory, triage and
detailed assessment phases for all operating facilities were completed by the
end of the second quarter of 1999. The Company has substantially completed all
phases
16
<PAGE>
of its Year 2000 program for non-IT systems. At the end of the third quarter of
1999, 96% of the total inventoried systems were compliant.
The Year 2000 Program Management Office has compiled a list of mission critical
vendors. A mission critical vendor is a provider of goods or services without
which a facility could not function. Each of the mission critical vendors was
surveyed to insure that they are Year 2000 compliant or have a plan in place.
The status of mission critical vendors is being continually monitored and
updated.
The Company currently believes that it will be able to replace, repair or
upgrade all of its remaining noncompliant IT and non-IT systems affected by the
Year 2000 problem on a timely basis. In the event the Company does not complete
its plan to bring these systems into compliance before the year 2000, there
could be severe disruption in the operation of its process control and other
manufacturing systems, financial systems and administrative systems. Production
problems and delayed product deliveries could result in a loss of customers. The
production impact of a Year 2000 related failure varies significantly among the
facilities and any such failure could cause manufacturing delays, possible
environmental contamination or safety hazards. The most reasonably likely worst
case scenario is the occurrence of a Year 2000 related failure at one or more of
the Company's paper mills, which could include multiple paper machines. The
Company has the capability to produce and ship products from multiple geographic
locations should disruptions occur. Delays in invoicing customer shipments could
cause a slowdown in cash receipts, which could affect the Company's ability to
meet its financial obligations. To the extent customers experience Year 2000
problems that are not remediated on a timely basis, the Company may experience
material fluctuations in the demand for its products. The amount of any
potential liability and/or lost revenue cannot be reasonably estimated at this
time; however, such amounts could be material.
While the Company currently expects no material adverse consequences on its
financial condition or results of operations due to Year 2000 issues, the
Company's beliefs and expectations are based on certain assumptions that
ultimately may prove to be inaccurate. Each of the Company's operating
facilities is developing a specific contingency plan for their most reasonably
likely worst case scenarios. These plans were substantially completed as of the
end of the third quarter of 1999. The contingency plans provide for appropriate
actions to mitigate the effects of the Company's or significant vendors' failure
to remediate the Year 2000 problem in a timely manner including reacting to
utility outages, providing for alternate transportation, the continuation of
normal payroll cycles, arrangements for alternate vendors and business and
process control system disruption.
There is a risk that the Company's plans for achieving Year 2000 compliance may
not be completed on time. Critical items are on schedule and, for noncritical
items, the Company's plans would provide advance notice, and steps would be
taken to prevent potential injuries to employees and others, and to prevent
potential environmental contamination. Customers and suppliers would also
receive advance notice allowing them to implement alternate plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of certain market risks related to the Company, See Part II,
Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", in the
SSCC 1998 10K.
FOREIGN CURRENCY RISK
During the nine months ended September 30, 1999 the exchange rates for the
Canadian dollar and the German Mark strengthened (weakened) against the U.S.
dollar as compared to the rates at December 31, 1998 as follows:
17
<PAGE>
<TABLE>
<S> <C>
Rate at September 30, 1999 vs. December 31, 1998
Canadian dollar 4.0 %
German Mark (9.7)%
Average Rate for the nine months ended
September 30, 1999 vs. 1998
Canadian dollar (1.8)%
German Mark (1.7)%
</TABLE>
The Company has experienced foreign currency transaction gains and losses on the
translation of U.S. dollar denominated obligations of certain of its Canadian
subsidiaries, nonconsolidated affiliates and a German Mark obligation. The
Company recognized foreign currency transaction gains of $5 million during the
nine months ended September 30, 1999.
INTEREST RATE RISK
The Company's earnings and cash flows are significantly affected by the amount
of interest on its indebtedness. No significant change has occurred in the
Company's exposure to such risk for the nine months ended September 30, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1999, the FCPC Companies filed a Chapter 11 bankruptcy petition in
United states Bankruptcy Court in Wilmington, Delaware. The FCPC Companies are
50% owned by each of Stone and Four M. All of the obligations of the FCPC
Companies are nonrecourse to Stone, and the bankruptcy filing has no effect on
any of the indebtedness of Stone or any other subsidiaries of the Company. On
May 10, 1999, the Indenture Trustee with respect to FCPC Notes commenced an
adversary proceeding in the FCPC bankruptcy case against Stone and certain other
parties, including two former officers of Stone, which has been stayed
indefinitely by the Court. The Complaint contains allegations that Stone
violated the provisions of an output purchase agreement and a subordinated
credit agreement with FCPC, breached certain fiduciary duties owed to the
holders of the FCPC Notes, and negligently discharged certain additional duties
owed to the holders of the FCPC Notes. On October 20, 1999, the FCPC Companies
and a committee representing the holders of the FCPC Notes filed the Plan that
is intended to resolve all matters relating to the bankruptcies of the FCPC
Companies. The Plan, which is supported by Stone and Four M, provides for the
settlement of all outstanding claims in the bankruptcies in exchange for cash
payments. The Plan also provides for the transfer of all of the assets of the
FCPC Companies, including the FCPC Mill, to Stone, as well as the release of the
pending adverse proceeding and all other claims relating to the bankruptcies of
the FCPC Companies against Stone, Four M and their affiliates, officers and
directors. Although the amount of the cash payments are subject to final
determination, the cash cost of the Plan to Stone is anticipated to be in the
range of $120 to $125 million, and Stone will receive $25 million in value of
convertible preferred stock to be issued by Four M in satisfaction of its share
of the liabilities. The cost to acquire Stone will be adjusted in the fourth
quarter of 1999 to reflect this settlement. Confirmation of the Plan is
anticipated to occur in early 2000.
In September 1999, the Delaware Court of Chancery approved the terms of the
settlement of the consolidated class actions brought on behalf of all former
holders of Stone common stock in connection with the Merger, which has now
become final.
ITEM 2. CHANGE IN SECURITIES
None
18
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of September 30, 1999, Stone had accumulated dividend arrearages of
approximately $20 million related to a series of its preferred stock.
Declaration of dividends in respect of such stock is currently prohibited by
the terms of the Credit Agreement and certain note indentures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a) The following exhibits are included in this Form 10-Q.
<TABLE>
<S> <C>
10.1 Second Amendment of Amended and Restated Credit Agreement dated as
of October 15, 1999, among SSCC, JSCE, Inc., JSC(U.S.) and the
banks party thereto.
10.2 First Amendment of the SSCC 1998 Long-Term Incentive Plan.
10.3 Amendment of the Jefferson Smurfit Corporation Amended and Restated
1992 Stock Option Plan.
10.4 Amendment of the 1995 Long-Term Incentive Plan of Stone
(incorporated by reference to Exhibit 10.2 to Stone's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999).
10.5 Amendment of the Stone 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to Stone's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999).
10.6(a) Pooling and Servicing Agreement, dated October 1, 1999 by and among
Stone Receivables Corporation, as Transferor, Stone, as Securer, and
The Chase Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 10.1(a) to Stone's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999).
10.6(b) Series 1999-1 Supplement, dated as of October 15, 1999, among Stone
Receivables Corporation, as Transferor, Stone as Servicer, and The
Chase Manhattan Bank, as Trustee, under the Pooling and Servicing
Agreement (incorporated by reference to Exhibit 10.1(b) to Stone's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
10.6(c) Series 1999-2 Supplement, dated as of October 15, 1999, among Stone
Receivables Corporation, as Transferor, Stone as Servicer, and The
Chase Manhattan Bank, as Trustee, under the Pooling and Servicing
Agreement (incorporated by reference to Exhibit 10.1(c) to Stone's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
10.6(d) Receivables Purchase Agreement, dated October 15, 1999, between
Stone, the Seller and Stone Receivables Corporation, the Purchaser
(incorporated by reference to Exhibit 10.1(d) to Stone's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999).
11.1 Calculation of Per Share Earnings
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
27.1 Financial Data Schedule
</TABLE>
b) Reports on Form 8K
Form 8K dated October 25, 1999 was filed with the Securities and Exchange
Commission in connection with the sale by JSC(U.S.) of timberlands to a third
party for $710 million.
20
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMURFIT-STONE CONTAINER CORPORATION
-----------------------------------
(Registrant)
Date: November 12, 1999 /s/ Paul K. Kaufmann
-----------------------
Paul K. Kaufmann
Vice President and
Corporate Controller
(Principal Accounting Officer)
21
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as..................... 'r'
<PAGE>
Exhibit 10.1
SECOND AMENDMENT OF
AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT OF AMENDED AND RESTATED CREDIT AGREEMENT, dated as of
October 15, 1999 (this "Amendment"), is by and among Jefferson Smurfit
Corporation (U.S.), a Delaware corporation (the "Borrower"), Smurfit-Stone
Container Corporation, a Delaware corporation ("SSCC"), JSCE, Inc., a Delaware
corporation ("JSCE"), the undersigned financial institutions, including The
Chase Manhattan Bank ("Chase") and Bankers Trust Company ("BTCo"), in their
capacities as lenders (collectively, the "Lenders," and each individually, a
"Lender"), BTCo and Chase, as senior managing agents (in such capacity, the
"Senior Managing Agents"), and Chase, as administrative agent and collateral
agent (in such capacities, the "Administrative Agent" and the "Collateral
Agent," respectively).
RECITALS:
A. The Borrower, SSCC, JSCE, the Senior Managing Agents, the Administrative
Agent, the Collateral Agent and the Lenders are parties to that certain Amended
and Restated Credit Agreement dated as of November 18, 1998, as amended by that
certain First Amendment of Amended and Restated Credit Agreement dated as of
June 30, 1999 (the "Credit Agreement").
B. The Borrower, SSCC, JSCE, the Senior Managing Agents, the Administrative
Agent, the Collateral Agent and the Lenders desire to amend the Credit Agreement
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
SECTION 1. Defined Terms. Unless otherwise defined herein, all capitalized
terms used herein shall have the meanings given them in the Credit Agreement.
SECTION 2. Amendments to the Credit Agreement. The Credit Agreement is, as
of the Effective Date (as defined below), hereby amended as follows:
(a) Section 1.01 of the Credit Agreement is amended (i) by deleting
the "and" appearing at the end of clause (ii) of the definition of
"Subsidiary" and substituting a comma (",") therefor, and inserting
immediately prior to the period (".") now appearing at the end of such
definition, the following: ", and (iv) any of Finco, Monetization Sub,
Timberlands I (so long as the Timberlands Sale shall be completed prior to
November 30, 1999), Timberlands II (so long as the Timberlands Sale shall
be completed prior to November 30, 1999) and TNH"; and (ii) by adding
thereto (in alphabetical order) the following defined terms:
<PAGE>
"Borrower Preferred Stock" means that certain Series A
non-participating, non-voting preferred stock of the Borrower issued
to JSCE in connection with the 1999 Timberlands Sale having an initial
liquidation value of $1,000 per share, subject to accretion based on
the amount of dividends not paid in cash and the amount of any
make-whole premium in the event the dividend rate has been converted
to a fixed rate, issued on terms reasonably acceptable to the Senior
Managing Agents.
"Finco" means JSC Timber Finance Inc., a Delaware corporation,
together with its successors and permitted assigns.
"JSCE Preferred Stock" means that certain Series A
non-participating, non-voting preferred stock of JSCE issued to SSCC
in connection with the 1999 Timberlands Sale having an initial
liquidation value equal to $1,000 per share, subject to accretion
based on the amount of dividends not paid in cash and the amount of
any make-whole premium in the event the dividend rate has been
converted to a fixed rate, issued on terms reasonably acceptable to
the Senior Managing Agents.
"Monetization Sale" means the sale of the managing membership
interest in Monetization Sub by the Borrower in exchange for
approximately $30,000,000, on terms reasonably acceptable to the
Senior Managing Agents.
"Monetization Sub" means Timber Capital Holdings LLC, a Delaware
limited liability company, together with its successors and permitted
assigns.
"1999 Timberlands Sale" means the sale of certain real property
of the Borrower and its Subsidiaries (or Equity Interests in
Affiliates of the Borrower owing such real property) pursuant to that
certain Purchase and Sale Agreement, dated as of July 28, 1999, by and
between Rayonier Inc. and the Borrower, as modified by that certain
Letter Agreement, dated as of August 26, 1999, as amended on terms
reasonably satisfactory to the Senior Managing Agents, and the
monetization transactions of the Borrower and its Affiliates in
connection therewith, including, without limitation, the Monetization
Sale.
"Newberg Mill Sale" means the sale by SNC of the mill facility
and the related real and personal property (including inventory) of
SNC located in Newberg, Oregon or used exclusively in connection with
the operation of the Newberg, Oregon mill and the conduct of its
business, on terms reasonably acceptable to the Senior Managing
Agents.
"Timberlands I" means a newly formed Delaware limited liability
company, together with its successors and permitted assigns,
established solely for the purpose of consummating the 1999
Timberlands Sale.
-2-
<PAGE>
"Timberlands II" means a newly formed Delaware limited liability
company, together with its successors and permitted assigns,
established solely for the purpose of consummating the 1999
Timberlands Sale.
"TNH" means Timber Note Holdings LLC, a Delaware limited
liability company, together with its successors and permitted assigns.
(b) Section 2.13(b) of the Credit Agreement is amended to insert
immediately after the first occurrence of the phrase "Asset Sale" therein,
the following:
"(other than the issuance of the Borrower Preferred Stock and the JSCE
Preferred Stock, the transfer by the Borrower of its ownership
interests in Timberlands I and Timberlands II to Monetization Sub, and
the pledge of the JSCE Preferred Stock to secure Indebtedness
permitted under Section 7.01(s))".
and is further amended to insert immediately after the phrase "the
definition of the term 'Asset Sale'" the following:
"to the extent that such Asset Sale generates Net Cash Proceeds which,
when aggregated with the Net Cash Proceeds from other Asset Sales
consummated during the term of this Agreement are greater than
$10,000,000".
(c) Section 2.13(f) of the Credit Agreement is amended to insert the
following immediately prior to the period (".") now appearing at the end
thereof:
"; provided, further, that, subject to paragraph (i) below, the amount
of any such prepayment to be made in connection with each of the 1999
Timberlands Sale, the Monetization Sale and the Newberg Mill Sale
shall first be applied pro rata to the Tranche A Term Loan Repayment
Amounts and the Tranche B Term Loan Repayment Amounts occurring on
March 31, 2000 through September 30, 2001 until paid in full, and
thereafter, subject to paragraph (i) below, pro rata to the remaining
Tranche B Term Loan Repayment Amounts until paid in full, and
thereafter as otherwise provided above in this Section 2.13(f)".
(d) Section 6.10(b) of the Credit Agreement is hereby amended by
deleting the "and" appearing at the end of clause (i) in the first sentence
of Section 6.10(b) and substituting a comma (",") therefor, and inserting
the following immediately prior to the parenthesis (")") now appearing at
the end of the first sentence thereof:
"(iii) the JSCE Preferred Stock and the Borrower Preferred Stock, and
(iv) the ownership interests of any of the Loan Parties in Finco,
Monetization Sub, Timberlands I, Timberlands II and TNH."
-3-
<PAGE>
(f) Section 6.10(d) of the Credit Agreement is hereby amended by
re-lettering clauses (x), (y) and (z) thereof as clauses (1), (2) and (3)
and by inserting immediately after clause (3) thereof but before the
parenthesis (")") the following new clause (4): "and (4) the JSCE Preferred
Stock, the Borrower Preferred Stock, the incurrence of Indebtedness under
Sections 7.01(r) and (s), and the ownership of any ownership interests in
Finco, Monetization Sub, Timberlands I (so long as the 1999 Timberlands
Sale shall be completed prior to November 30, 1999), Timberlands II (so
long as the 1999 Timberlands Sale shall be completed prior to November 30,
1999) and TNH by any Loan Party".
(e) Section 7.01 of the Credit Agreement is hereby amended (i) to
delete the word "and" after clause (p) thereof; (ii) to delete the period
(".") now appearing at the end of clause (q) and substituting the phrase ";
and" therefor; and (iii) to insert the following new clauses (r) and (s) at
the end thereof:
"(r) subordinated Indebtedness of SSCC in a principal amount not to
exceed $100,000,000 and which Indebtedness shall be contributed by
SSCC to JSCE and Finco, by JSCE to the Borrower and by the Borrower to
Finco, and shall be on terms reasonably acceptable to the Senior
Managing Agents; and
(s) senior secured Indebtedness of SSCC in favor of Finco in an
initial principal amount not to exceed $455,000,000, subject to
accretion based on the amount of interest not paid in cash and the
amount of any make-whole premium in the event the interest rate has
been converted to a fixed rate, which Indebtedness shall be issued on
terms reasonably acceptable to the Senior Managing Agents."
(f) Section 7.02(a) of the Credit Agreement is amended (i) to delete
the word "and" after clause (vi) thereof; (ii) to delete the period (".")
now appearing at the end of clause (vii) and substituting the phrase ";
and" therefor; and (iii) to insert the following new clause (viii) at the
end thereof:
"(viii) Liens securing Indebtedness permitted under Section 7.01(s),
on terms reasonably acceptable to the Senior Managing Agents."
(g) Section 7.04 of the Credit Agreement is amended (i) to delete the
word "and" after clause (i) thereof; (ii) to delete the period (".") now
appearing at the end of clause (j) and substituting the phrase "; and"
therefor; and (iii) to insert the following new clause (k) at the end
thereof:
"(k) Investments (i) by SSCC in JSCE resulting from (a) the transfer
of up to $50,000,000 of promissory notes of SSCC and (b) the purchase
of up to $455,000,000 of the JSCE Preferred Stock, (ii) by JSCE in the
Borrower resulting from (a) the transfer of up to $50,000,000 of
promissory notes of SSCC and (b) the purchase of up to $455,000,000 of
the Borrower Preferred Stock, (iii) by the
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<PAGE>
Borrower and SSCC in Finco resulting from the transfer of up to
$50,000,000 of promissory notes of SSCC from each of SSCC and the
Borrower in exchange for not less than 100% of the ownership interests
in Finco in the aggregate, and the incurrence of Indebtedness of SSCC
under Section 7.01(s), (iv) by the Borrower in each of Timberland I
and Timberland II resulting from the transfer of all of the timberland
subject to the 1999 Timberlands Sale to each of Timberland I and
Timberland II in exchange for all of the ownership interests in
Timberland I and Timberland II, (v) by the Borrower and SNC in
Monetization Sub resulting from the transfer of all of the ownership
interests in Timberland I and Timberland II to Monetization Sub in
exchange for all of the ownership interest in Monetization Sub, and
(vi) by the Borrower in SNC resulting from the transfer by the
Borrower to SNC of a partial ownership interest in Monetization Sub,
in each case, in connection with the 1999 Timberlands Sale."
(h) Section 7.05 of the Credit Agreement is amended (i) to delete the
word "and" after clause (e) thereof; (ii) to delete the period (".") now
appearing at the end of clause (f) and substituting the phrase "; and"
therefor; and (iii) to insert the following new clause (g) at the end
thereof:
"(g) in connection with the Monetization Sale, the 1999
Timberlands Sale and the Newberg Mill Sale."
(i) Section 7.06(b) of the Credit Agreement is amended (i) by
inserting immediately after the first occurrence of the phrase "cash
dividends" now appearing in clause (i) thereof, the following: "(A) on the
Borrower Preferred Stock to JSCE to be used by JSCE to pay cash dividends
on the JSCE Preferred Stock and (B) on its common stock", (ii) by inserting
immediately after the phrase "cash dividends" now appearing in clause (ii)
thereof, the following: "(A) on the JSCE Preferred Stock to SSCC (or its
successors or assigns) out of the proceeds of the dividends referred to in
clause (i)(A) above and (B)", and (iii) by deleting the phrase "clause (i)"
now appearing in clause (ii) thereof and substituting therefor the phrase
"clause (i)(B)".
(j) Section 7.07 of the Credit Agreement is amended to (i) to delete
the word "and" after clause (f) thereof and substitute a comma (",")
therefor; (ii) to delete the period (".") now appearing at the end of
clause (g) and substituting the phrase "; and" therefor; and (iii) to
insert the following new clause (h) at the end thereof: "(h) the issuance
of the Indebtedness permitted under Sections 7.01(r) and (s) and payments
in respect thereof and the granting of any Liens permitted under Section
7.02(a)(viii)".
(k) Section 7.09(a) of the Credit Agreement is amended (i) by deleting
clause (iii) thereof in its entirety, and substituting the following new
clause (iii) therefor:
-5-
<PAGE>
"(iii) repurchasing, redeeming or otherwise extinguishing up to
$400,000,000 in aggregate principal amount (including any accrued and
unpaid interest and any premium thereon) of any Indebtedness"
and (ii) by inserting immediately prior to the period (".") now appearing
at the end thereof, the following:
", provided, further, that at the time of any such repurchase
permitted by clause (iii) above, the aggregate outstanding amount of
the Term Loans is less than or equal to $450,000,000"
(l) Section 7.11(a) of the Credit Agreement is amended to insert
immediately prior to the period (".") now appearing at the end thereof, the
following: ", (iii) the transfer by the Borrower, directly or indirectly,
of all of the ownership interests in Timberlands I and Timberlands II to
Rayonier Inc. or its Affiliate in connection with the 1999 Timberlands
Sale, and (iv) the issuance by the Borrower to JSCE of the Borrower
Preferred Stock and the issuance by JSCE to SSCC of the JSCE Preferred
Stock".
(m) Section 7.15 of the Credit Agreement is amended to delete the
ratios set forth opposite "September 30, 1999", "December 31, 1999" and
"March 31, 2000" and "June 30, 2000", and to substitute therefor the ratios
"1.50 to 1", "1.65 to 1" " 1.65 to 1" and "1.75 to 1", respectively.
(n) Section 7.16 of the Credit Agreement is amended (i) to insert
immediately after the phrase "all or substantially all of the Collateral"
now appearing in clause (a) thereof, the following: ", other than in
connection with the 1999 Timberlands Sale, the Newberg Mill Sale and the
Monetization Sale"; and (ii) to insert at the end of the first
parenthetical appearing in clause (b) thereof, the following: "or in
connection with either the 1999 Timberlands Sale or the Newberg Mill Sale".
(o) Section 7.17(a) of the Credit Agreement is hereby amended by (i)
inserting immediately after the phrase "any Permitted Timber Financing" now
appearing in the first sentence thereof, the following: ", and (iii) in
connection with the 1999 Timberlands Sale and the Newberg Mill Sale", and
(ii) inserting immediately after the phrase "Upon such compliance" now
appearing in the second sentence thereof, the following: "or in connection
with any transaction contemplated by clauses (ii) or (iii) above".
SECTION 3. Consent Under Pledge Agreement and Pledge of Rayonier Note. The
Senior Managing Agents, the Administrative Agent, the Collateral Agent and the
Lenders hereby consent to and agree that SSCC shall not be required to pledge
the JSCE Preferred Stock and JSCE shall not be required to pledge the Borrower
Preferred Stock, in each case, to the Collateral Agent under the Pledge
Agreement, and hereby waive any Default or Event of Default as a result thereof.
The Borrower further agrees that it shall cause any and all notes or other
instruments issued by Rayonier
-6-
<PAGE>
Inc. or its affiliates as partial consideration in connection with the 1999
Timberlands Sale (collectively, the "Rayonier Note") to be pledged to the
Collateral Agent as additional Collateral from the date of issuance thereof
until the date of completion of the Monetization Sale, and the Borrower shall
take (and shall cause its affiliates to take) all such action as may be
necessary to grant a first perfected security interest in the Rayonier Note in
favor of the Collateral Agent, including, without limitation, the delivery of
the original Rayonier Note to the Collateral Agent, together with any necessary
instrument of transfer.
SECTION 4. Conditions Precedent to Effectiveness of Amendment. This
Amendment shall become effective upon the date (the "Effective Date") when each
of the following conditions precedent has been satisfied:
(a) each of SSCC, JSCE, the Borrower and the requisite number of
Lenders required pursuant to Section 10.08 of the Credit Agreement shall
have executed and delivered this Amendment; and
(b) SNC shall have executed and delivered the Reaffirmation of
Guarantee attached hereto.
The consummation of the Newberg Mill Sale (as defined in the Credit
Agreement as amended hereby) on or after the Effective Date shall be subject to
the receipt by the Administrative Agent and the Collateral Agent of copies of
the purchase agreement and related documents in connection therewith, and such
additional Loan Documents, certificates, legal opinions and other documents as
required by the Credit Agreement as amended hereby and as the Senior Managing
Agents otherwise may reasonably request.
SECTION 5. Representations and Warranties of the Borrower. The Borrower
represents and warrants to the Lenders, the Senior Managing Agents, the
Administrative Agent and the Collateral Agent as follows:
(a) The representations and warranties contained in the Credit
Agreement and the other Loan Documents are true and correct in all material
respects at and as of the date hereof as though made on and as of the date
hereof (except to the extent specifically made with regard to a particular
date).
(b) No Default or Event of Default has occurred and is continuing.
(c) The execution, delivery and performance of this Amendment have
been duly authorized by all necessary action on the part of each of the
Loan Parties signatory hereto, and this Amendment has been duly executed
and delivered by each such Loan Party and is a legal, valid and binding
obligation of each such Loan Party enforceable against each such Loan Party
in accordance with its terms, except as the enforcement thereof may be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar
-7-
<PAGE>
laws affecting creditors' rights generally and general principles of equity
(regardless of whether such enforcement is sought in a proceeding in equity
or at law).
(d) The execution, delivery and performance of this Amendment do not
conflict with or result in a breach by any Loan Party signatory hereto of
any term of any material contract, loan agreement, indenture or other
agreement or instrument to which any such Loan Party is a party or is
subject.
SECTION 6. References to and Effect on the Credit Agreement.
(a) On and after the Effective Date each reference in the Credit
Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of
like import, and each reference to the Credit Agreement in the Loan
Documents and all other documents (the "Ancillary Documents") delivered in
connection with the Credit Agreement, shall mean and be a reference to the
Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement, the
Loan Documents and all other Ancillary Documents shall remain in full force
and effect and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of the Lenders, the
Senior Managing Agents, the Administrative Agent or the Collateral Agent
under the Credit Agreement, the Loan Documents or the Ancillary Documents.
(d) The Loan Parties signatory hereto acknowledge and agree that this
Amendment constitutes a "Loan Document" for purposes of the Credit
Agreement.
SECTION 7. Execution in Counterparts. This Amendment maybe executed in
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same instrument. This Amendment shall be binding upon the respective parties
hereto upon the execution and delivery of this Amendment by SSCC, JSCE, the
Borrower and the requisite number of Lenders required pursuant to Section 10.08
of the Credit Agreement regardless of whether it has been executed and delivered
by all of the Lenders. Delivery of an executed counterpart of a signature page
of this Amendment by facsimile transmission shall be effective as delivery of a
manually executed counterpart of this Amendment.
SECTION 8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND BE
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
INCLUDING, WITHOUT LIMITATION, 5-1401 OF THE GENERAL OBLIGATION LAWS OF NEW
YORK, BUT OTHERWISE WITHOUT REGARD TO THE INTERNAL CONFLICTS OF LAWS PROVISIONS
THEREOF.
-8-
<PAGE>
SECTION 9. Headings. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purposes.
SECTION 10. Successors and Assigns. This Amendment shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
[Signature Pages Follow]
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<PAGE>
REAFFIRMATION OF GUARANTEE
The undersigned acknowledges the foregoing Amendment with respect to the
Credit Agreement referred to therein, consents to the amendments set forth
therein and hereby reaffirms its obligations under the Guarantee Agreement (as
defined in the Credit Agreement).
Dated as of October 15, 1999
SMURFIT NEWSPRINT CORPORATION
By:___________________________________
Name: ________________________________
Title: _______________________________
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<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT
OF THE
SMURFIT-STONE CONTAINER CORPORATION 1998 LONG-TERM INCENTIVE PLAN
(Amended and Restated as of November 23, 1998)
WHEREAS, Smurfit-Stone Container Corporation (the "Company") maintains
the Smurfit-Stone Container Corporation 1998 Long-Term Incentive Plan (the
"Plan"); and
WHEREAS, the Company now considers it desirable to amend the Plan;
NOW, THEREFORE, pursuant to the power reserved to the Company by
Section 8(a) of the Plan, and by virtue of the authority delegated to the
undersigned officer by resolution of the Company's Board of Directors, the
Plan is hereby amended, effective as of July 1, 1999, by inserting the
following new Section 6(a)(v) to the Plan, immediately following
Section 6(a)(iv) thereof:
"(v) Restrictions on Cashless Exercise of Options. The
Company may make available, in its sole discretion, a
special sale and remittance procedure pursuant to which a
person exercising an Option concurrently provides
irrevocable written instructions (i) to a Company-designated
brokerage firm to effect the immediate sale of a portion of
the Shares to be received pursuant to the Option, and remit
to the Company, out of the sale proceeds available on the
settlement date, the minimum amount of funds required to
cover the aggregate exercise price payable for the Shares,
plus all applicable federal, state and local income and
employment taxes required to be withheld by the Company by
reason of such exercise, and (ii) to the Company to deliver
the certificates for the necessary Shares directly to such
brokerage firm in order to complete the sale. If the Company
makes such a special sale and remittance procedure
available, a person exercising an Option may pay the
exercise price of the Option with Shares issuable upon
exercise of the Option. In all other events, a person
exercising an Option may not pay the exercise price of the
Option with Shares issuable upon the Option's exercise."
* * *
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<PAGE>
IN WITNESS WHEREOF, on behalf of the Company, the undersigned officer has
executed this amendment this 1st day of July, 1999.
SMURFIT-STONE CONTAINER CORPORATION
By: /s/ Craig A. Hunt
Its: Vice President
-2-
<PAGE>
EXHIBIT 10.3
AMENDMENT
OF THE
JEFFERSON SMURFIT CORPORATION AMENDED AND RESTATED
1992 STOCK OPTION PLAN
(Amended and Restated as of May 1, 1997)
WHEREAS, Smurfit-Stone Container Corporation (the "Company") is the
successor corporation to Jefferson Smurfit Corporation, which established the
Jefferson Smurfit Corporation Amended and Restated 1992 Stock Option Plan (the
"Plan"); and
WHEREAS, the Company now considers it desirable to amend the Plan;
NOW, THEREFORE, pursuant to the power reserved to the Company by
Section 16(a) of the Plan, and by virtue of the authority delegated to the
undersigned officer by resolution of the Company's Board of Directors, the Plan
is hereby amended, effective as of July 1, 1999, by inserting the following
paragraph at the end of Section 6(g) of the Plan:
"Notwithstanding the foregoing, the following
restrictions on the 'cashless exercise' of an Option shall
apply. The Committee may make available, in its sole
discretion, a special sale and remittance procedure pursuant
to which an Optionee exercising an Option concurrently
provides irrevocable written instructions (i) to a
Committee-designated brokerage firm to effect the immediate
sale of a portion of the shares of Common Stock to be
received pursuant to the Option, and remit to the Company,
out of the sale proceeds available on the settlement date,
the minimum amount of funds required to cover the aggregate
Option Price payable for such shares, plus all applicable
federal, state and local income and employment taxes
required to be withheld by the Company by reason of such
exercise, and (ii) to the Company to deliver the
certificates for the necessary shares of Common Stock
directly to such brokerage firm in order to complete the
sale. If the Committee makes such a special sale and
remittance procedure available, an Optionee exercising an
Option may pay the aggregate Option Price with shares of
Common Stock issuable upon exercise of the Option (a
'cashless exercise'). In all other events, an Optionee
exercising an Option may not pay the aggregate Option Price
of the Option with shares of Common Stock issuable upon the
Option's exercise."
* * *
-1-
<PAGE>
IN WITNESS WHEREOF, on behalf of the Company, the undersigned officer
has executed this amendment this 1st day of July, 1999.
SMURFIT-STONE CONTAINER CORPORATION
By: /s/ Craig A. Hunt
Its: Vice President
-2-
<PAGE>
EXHIBIT 11.1
SMURFIT-STONE CONTAINER CORPORATION
CALCULATION OF PER SHARE EARNINGS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations
before extraordinary item and
cumulative effect of accounting change $ (11) $ 3 $ (126) $ 8
Discontinued operations (4) 5 (1) 22
Extraordinary item (1) (2) (13)
Cumulative effect of accounting charge (3)
------ ------ ------ -----
Net income (loss) $ (16) $ 8 $ (129) $ 14
====== ====== ====== =====
Weighted average shares outstanding
for basic earnings per share 217 111 216 111
Effect of diluted securities
Employee stock options 1 1
------ ------ ------ -----
Weighted average shares outstanding
for diluted earnings 217 112 216 112
====== ====== ====== =====
Basic per share amounts:
Income (loss) before extraordinary item $ (.05) $ .03 $ (.58) $ .07
Discontinued operations (.02) .04 (.01) .20
Extraordinary item (.01) (.11)
Cumulative effect of accounting change (.03)
------ ------ ------ -----
Net income (loss) $ (.07) $ .07 $ (.60) $ .13
====== ====== ====== =====
Diluted per share amounts:
Income (loss) before extraordinary item $ (.05) $ .03 $ (.58) $ .07
Discontinued operations (.02) .04 (.01) .20
Extraordinary item (.01) (.11)
Cumulative effect of accounting change (.03)
------ ------ ------ -----
Net income (loss) $ (.07) $ .07 $ (.60) $ .13
====== ====== ====== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CIK> 0000919226
<NAME> SMURFIT-STONE CONTAINER CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 86
<SECURITIES> 0
<RECEIVABLES> 958
<ALLOWANCES> 69
<INVENTORY> 743
<CURRENT-ASSETS> 1,910
<PP&E> 6,364
<DEPRECIATION> 1,081
<TOTAL-ASSETS> 10,800
<CURRENT-LIABILITIES> 1,613
<BONDS> 5,631
<COMMON> 2
0
0
<OTHER-SE> 1,554
<TOTAL-LIABILITY-AND-EQUITY> 10,800
<SALES> 5,227
<TOTAL-REVENUES> 5,227
<CGS> 4,459
<TOTAL-COSTS> 4,459
<OTHER-EXPENSES> 547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 436
<INCOME-PRETAX> (155)
<INCOME-TAX> 35
<INCOME-CONTINUING> (126)
<DISCONTINUED> (1)
<EXTRAORDINARY> (2)
<CHANGES> 0
<NET-INCOME> (129)
<EPS-BASIC> (.60)
<EPS-DILUTED> (.60)
</TABLE>
