<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 June 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
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(312) 346-6600
---------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
--------------------------------------------------------
(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 June 30, 1999, the registrant had outstanding 217,038,787 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 Six Months Ended
June 30, June 30,
-------------------------------------------------------------
(In millions, except per share data) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ...................................................... $1,730 $ 764 $3,435 $1,528
Costs and expenses
Cost of goods sold ......................................... 1,457 639 2,971 1,276
Selling and administrative expenses ........................ 196 69 371 137
Restructuring charge ....................................... 4 9
-------------------------------------------------------------
Income from operations ................................... 73 56 84 115
Other income (expense)
Interest expense, net ...................................... (143) (49) (296) (100)
Other, net ................................................. 47 57 (1)
-------------------------------------------------------------
Income (loss) from continuing operations before
income taxes, minority interest, extraordinary item
and cumulative effect of accounting change ............. (23) 7 (155) 14
Benefit from (provision for) income taxes ...................... 2 (5) 44 (9)
Minority interest expense ...................................... (2) (4)
-------------------------------------------------------------
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change ........ (23) 2 (115) 5
Discontinued operations
Income (loss) from discontinued operations, net of income
tax benefit (provision) of $1 and $(5) for the three
months ended June 30, 1999 and 1998 and $0 and $(11)
for the six months ended June 30, 1999 and 1998 ........ (1) 9 3 17
------------------------------------------------------------
Income (loss) before extraordinary item and
cumulative effect of accounting change ............... (24) 11 (112) 22
Extraordinary item
Loss from early extinguishment of debt, net of income
tax benefit of $1 in 1999 and $9 in 1998 ............... (1) (1) (13)
Cumulative effect of accounting change
Start-up costs, net of income tax benefit of $2 .......... (3)
-------------------------------------------------------------
Net income (loss) .............................................. $ (25) $ 11 $ (113) $ 6
-------------------------------------------------------------
Basic earnings per common share
Income (loss) from continuing operations before
extraordinary item and accounting change ................. $ (.11) $ .02 $ (.53) $ .05
Discontinued operations .................................... (.01) .08 .01 .15
Extraordinary item ......................................... (.12)
Cumulative effect of accounting change ..................... (.03)
-------------------------------------------------------------
Net income (loss) ........................................ $ (.12) $ .10 $ (.52) $ .05
-------------------------------------------------------------
Weighted average shares outstanding ............................ 216 111 216 111
-------------------------------------------------------------
Diluted earnings per common share
Income (loss) from continuing operations before
extraordinary item and accounting change ................. $ (.11) $ .02 $ (.53) $ .04
Discontinued operations .................................... (.01) .08 .01 .15
Extraordinary item ......................................... (.11)
Cumulative effect of accounting change ..................... (.03)
-------------------------------------------------------------
Net income (loss) ........................................ $ (.12) $ .10 $ (.52) $ .05
-------------------------------------------------------------
Weighted average shares outstanding ............................ 216 113 216 113
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(In millions, except share data) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents .......................................................... $ 143 $ 155
Receivables, less allowances of $84 in 1999 and $85 in 1998 ........................ 830 743
Inventories
Work-in-process and finished goods .............................................. 249 227
Materials and supplies .......................................................... 461 546
----------------------
710 773
Refundable income taxes ............................................................ 9 24
Deferred income taxes .............................................................. 121 160
Prepaid expenses and other current assets .......................................... 110 129
----------------------
Total current assets ......................................................... 1,923 1,984
Net property, plant and equipment ...................................................... 5,332 5,496
Timberland, less timber depletion ...................................................... 277 276
Goodwill, less accumulated amortization of $110 in 1999 and $73 in 1988 ................ 2,831 2,869
Investment in equity of non-consolidated affiliates .................................... 182 638
Other assets ........................................................................... 351 368
----------------------
$ 10,896 $ 11,631
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt ............................................... $ 415 $ 205
Accounts payable ................................................................... 620 533
Accrued compensation and payroll taxes ............................................. 219 181
Interest payable ................................................................... 111 126
Other current liabilities .......................................................... 269 304
----------------------
Total current liabilities .................................................... 1,634 1,349
Long-term debt, less current maturities ................................................ 5,629 6,428
Other long-term liabilities ............................................................ 1,005 1,026
Deferred income taxes .................................................................. 984 1,113
Minority interest ...................................................................... 86 81
Stockholders' equity
Preferred stock, par value $.01 per share; 25,000,000 shares authorized;
none issued and outstanding
Common stock, par value $.01 per share; 400,000,000 shares authorized,
217,038,787 and 214,959,041 issued and outstanding in 1999 and 1998, respectively 2 2
Additional paid-in capital ......................................................... 3,422 3,376
Retained earnings (deficit) ........................................................ (1,856) (1,743)
Accumulated other comprehensive income (loss) ...................................... (10) (1)
----------------------
Total stockholders' equity ................................................... 1,558 1,634
----------------------
$ 10,896 $ 11,631
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, (In millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ................................................ $(113) $ 6
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Extraordinary loss from early extinguishment of debt ...... 2 22
Cumulative effect of accounting change for start-up costs.. 5
Depreciation, depletion and amortization .................. 219 66
Amortization of deferred debt issuance costs .............. 7 4
Deferred income taxes ..................................... (69) 1
Gain on sale of assets .................................... (39)
Non-cash employee benefit expense ......................... 29 4
Non-cash restructuring charge ............................. 6
Foreign currency transaction gains ........................ (6)
Change in current assets and liabilities,
net of effects from acquisitions and dispositions
Receivables .......................................... (113) (3)
Inventories .......................................... 48 (26)
Prepaid expenses and other current assets ............ (2) (8)
Accounts payable and accrued liabilities ............. 112 (48)
Interest payable ..................................... (15)
Income taxes ......................................... 4 12
Other, net ................................................ (10) (4)
-------------------
Net cash provided by operating activities .................... 60 31
-------------------
Cash flow from investing activities
Property additions ........................................... (69) (47)
Proceeds from property and investment
disposals and sale of businesses .......................... 546 3
-------------------
Net cash provided by (used for) investing activities ......... 477 (44)
-------------------
Cash flow from financing activities
Borrowings under bank credit facilities ...................... 891
Payments of long-term debt ................................... (569) (862)
Proceeds from exercise of stock options ...................... 18
Deferred debt issuance costs ................................ . (13)
-------------------
Net cash provided by (used for) financing activities ......... (551) 16
-------------------
Effect of exchange rate changes on cash .......................... 2
Increase (decrease) in cash and cash equivalents ................. (12) 3
Cash and cash equivalents
Beginning of period .......................................... 155 12
-------------------
End of period ................................................ $ 143 $ 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, 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 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 operations of Stone have been included in the
consolidated statements of operations of the Company after November 18, 1998.
The cost to acquire Stone has been preliminarily allocated to the assets
acquired and liabilities assumed according to their estimated fair values and
are subject to adjustment when additional information concerning asset and
liability valuations is finalized. In addition, the allocation may be impacted
by changes in pre-acquisition contingencies, identified during the allocation
period by the Company, relating to its investment in Florida Coast Paper Company
L.L.C.
The litigation related to Stone's purchase of the common stock of Stone Savannah
River Pulp and Paper Corporation was settled in July 1999 for a cash payment of
$30.6 million. Existing purchase accounting reserves will be adjusted to reflect
the settlement.
RESTRUCTURING OF JSC (U.S.) 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 $4 million
restructuring charge during the second quarter of 1999, and $9 million for the
six months ended June 30, 1999 related to the permanent shutdown of various
facilities. Additional restructuring charges are expected in 1999 as management
finalizes its plans.
4
<PAGE>
4. OTHER SIGNIFICANT EVENTS
During the second quarter of 1999, the Company recorded a $26 million charge in
selling and administrative expenses related to the cashless exercise of stock
options under the Jefferson Smurfit Corporation stock option plan.
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 outside third party for net proceeds of approximately $414
million. The proceeds have been applied to debt reduction. The Company recorded
a $39 million gain in other, net 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 June 30, 1999, is
Smurfit-MBI (formerly MacMillan Bathurst, Inc.), a Canadian corrugated container
company, in which the Company owns a 50% interest, that had net sales of $98
million and $95 million for the three months, and $182 million and $177 million
for the six months ended June 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 Six Months Ended
June 30, June 30,
------------------ --------------------
1999 1998 1999 1998
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Results of operations
Net sales........................................ $ 223 $ 9 $ 1,040 $ 19
Cost of sales.................................... 182 8 844 18
Income (loss) before income taxes, minority
interest and extraordinary charges............. 2 (65)
Net income (loss)................................ 1 (49)
</TABLE>
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 $65 million and $80 million for the three months ended June 30, 1999 and
1998. SNC revenues were $139 million and $160 million for the six months ended
June 30, 1999 and June 30, 1998.
5
<PAGE>
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
1999 1998 1999 1998
----- ----- ----- ------
<S> <C> <C> <C> <C>
Net income (loss) ............................ $ (25) $ 11 $(113) $ 6
Other comprehensive income (loss), net of tax:
Foreign currency translation .............. 2 (9)
----- ----- ----- ------
Comprehensive income (loss) .................. $ (23) $ 11 $(122) $ 6
===== ===== ===== ======
</TABLE>
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 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 ............................ $ (23) $ 2 $(115) $ 5
DENOMINATOR:
Denominator for basic earnings per share -
weighted average shares ....................... 216 111 216 111
Effect of dilutive securities:
Employee stock options ........................ 2 2
----- ----- ----- -----
Denominator for diluted earnings per share -
adjusted weighted average shares .............. 216 113 216 113
===== ===== ===== =====
Basic earnings (loss) per share from continuing
operations before extraordinary item and
cumulative effect of accounting change ......... $(.11) $ .02 $(.53) .05
===== ===== ===== =====
Diluted earnings (loss) per share from continuing
operations before extraordinary item and
cumulative effect of accounting change ......... $(.11) $ .02 $(.53) $ .04
===== ===== ===== =====
</TABLE>
For the three and six month periods ended June 30, 1999, (1) options to purchase
four million shares of common stock under the treasury stock method, (2)
convertible debt to acquire one million shares of common stock with an earnings
effect of $.5 million and $ 1 million, respectively, and (3) three million
additional minority interest shares with an earnings effect of $2 million and $4
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, 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 June 30,
1999
Revenues from external customers... $ 1,129 $ 208 $ 393 $1,730
Intersegment revenues.............. 48 32 80
Segment profit (loss).............. 88 15 (126) (23)
1998
Revenues from external customers... $ 435 $ 192 $ 137 $ 764
Intersegment revenues.............. 10 40 50
Segment profit (loss).............. 32 14 (39) 7
Six Months Ended June 30,
1999
Revenues from external customers... $ 2,230 $ 405 $ 800 $ 3,435
Intersegment revenues.............. 96 68 164
Segment profit (loss).............. 138 28 (321) (155)
1998
Revenues from external customers... $ 854 $ 387 $ 287 $ 1,528
Intersegment revenues.............. 21 77 98
Segment profit (loss).............. 67 28 (81) 14
</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 sites with
respect to which the Company has received notice that it may be a potentially
responsible party ("PRP"), as well as contamination of certain Company-owned
properties, concerning hazardous substance contamination. 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.
In April 1998, a suit was filed against Stone in Los Angeles Superior Court by
Chesterfield Investments L.P. ("Chesterfield"), and D.P. Investments L.P.
("DPI"), alleging that Stone owes such parties approximately $120 million
relating to Stone's purchase of common stock of Stone Savannah River Pulp and
Paper Corporation ("SSR"). In 1991, Stone purchased the shares of common stock
of SSR held by Chesterfield and DPI for approximately $6 million plus a
contingent payment payable in March 1998 based upon the post-closing performance
of the operations of SSR from 1991 through 1997. Stone concluded a settlement of
the case with DPI, which had a 30% interest in the contingent payment in 1998.
Chesterfield continued to pursue the case as to the remaining 70% of the
contingent payment, which was settled in July 1999 for a cash payment of $30.6
million. Existing purchase accounting reserves will be adjusted to reflect the
settlement.
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 filed a Chapter 11 bankruptcy petition
in United States Bankruptcy Court in Wilmington, Delaware. All of the
obligations of FCPC and the related entities 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.
While Stone believes that such allegations are without merit, it is unable to
predict the likely outcome of this action or its impact on the FCPC bankruptcy
proceeding at this time.
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. SUBSEQUENT EVENT - WOODLANDS SALE
On July 29, 1999, the Company reached a definitive agreement to sell 820,000
acres of owned timberland and assign its rights to 160,000 acres of leased
timberland to a third party for $725 million. The timberlands are located in
Florida, Georgia and Alabama. The agreement is subject to regulatory approvals
and is expected to close in the fourth quarter of 1999.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
As discussed in the Company's Annual Report filed on Form 10-K for the year
ended December 31, 1998 (the "SSCC 1998 10-K"), a subsidiary of the Company
merged with Stone as of November 18, 1998 and Stone became a wholly-owned
subsidiary of the Company.
<TABLE>
<CAPTION>
(In millions) Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1999 1988 1999 1988
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales
Containerboard and corrugated containers......... $ 1,129 $ 435 $ 2,230 $ 854
Boxboard and folding cartons..................... 208 192 405 387
Other operations................................. 393 137 800 287
-------- -------- -------- --------
Total ........................................... $ 1,730 $ 764 $ 3,435 $ 1,528
======== ======== ======== ========
Profit (loss)
Containerboard and corrugated containers......... $ 88 $ 32 $ 138 $ 67
Boxboard and folding cartons..................... 15 14 28 28
Other operations................................. 20 8 47 17
-------- -------- -------- --------
Total operations................................. $ 123 $ 54 $ 213 $ 112
Other, net....................................... (146) (47) (368) (98)
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes, extraordinary item
and cumulative effect of accounting change..... $ (23) $ 7 $ (155) $ 14
======== ======== ======== ========
</TABLE>
For the three months ended June 30, 1999, net sales for the Company were $1,730
million, an increase of 126% compared to the same period last year. Operating
profits for the Company for the three months ended June 30, 1999 were $123
million, an increase of $69 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 were
unfavorably impacted by lower average sales prices for the Company's products in
1999 and the closure or sale of operating facilities. Operating profits were
favorably impacted by lower fiber and board costs. Other, net includes corporate
revenues and expenses and net interest expense. Other, net cost for the three
months ended June 30, 1999 was higher than last year by $99 million due
primarily to the consolidation of Stone's corporate expenses and interest, a $4
million restructuring charge and interest expense on higher levels of debt as a
result of the Merger. 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.
For the six months ended June 30, 1999, net sales for the Company were $3,435
million, an increase of 125% compared to the same period last year. Operating
profits of $213 million for the six months ended June 30, 1999 were $101 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 1999 and the closure or sale of
operating facilities. Operating profits were favorably impacted by lower fiber
and board costs. Other, net cost for the six months ended June 30, 1999 was
higher than last year by $270 million due primarily to the consolidation of
Stone's corporate expenses and interest, higher LIFO expense, a $9 million
restructuring charge and interest expense on higher levels of debt as a result
of the Merger. The increases in Other, net cost were partially offset by the
gain on the sale of the shares of Abitibi.
10
<PAGE>
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.
<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 June 30, 1999 Compared to 1998
Sales price and product mix............... $ (7) $ (5) $ (14) $ (26)
Sales volume.............................. (1) 21 9 29
Stone merger.............................. 725 265 990
Other acquisitions........................ 6 6
Closed or sold facilities................ (29) (4) (33)
------- ------- ------ ------
Total increase ........................ $ 694 $ 16 $ 256 $ 966
====== ======= ====== ======
Six Months Ended June 30, 1999 Compared to 1998
Sales price and product mix............... $ (37) $ (9) $ (45) $ (91)
Sales volume.............................. (2) 27 11 36
Stone merger.............................. 1,450 554 2,004
Other acquisitions........................ 11 11
Closed or sold facilities................. (46) (7) (53)
------ ------- ------ ------
Total increase ........................ $1,376 $ 18 $ 513 $1,907
====== ======= ====== ======
</TABLE>
Containerboard and Corrugated Containers Segment
Net sales of $1,129 million for the three months ended June 30, 1999 increased
160% compared to last year and profits increased by $56 million to $88 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 June 30, 1999 were $725 million and $45 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. Profits were favorably impacted by
lower board cost and improving sales prices for corrugated containers. Fiber
cost began to move higher near the end of the second quarter of 1999, but, on
average, was lower compared to last year. Cost of goods sold as a percent of net
sales decreased to 83% for the three months ended June 30, 1999 compared to 84%
for the same period last year.
Market conditions in the containerboard industry have improved in 1999 and,
during the first quarter of 1999, the Company implemented price increases of $50
and $60 per ton for linerboard and medium, respectively. A second price increase
was implemented in July, 1999 amounting to $40 per ton for liner and $70 per ton
for medium, with a corresponding increase for corrugated containers effective
August 1. On average, linerboard prices in the second quarter of 1999 were
comparable to last year and the average price of corrugated containers was
higher by 3%. Exclusive of Stone's operations, containerboard shipments for the
second quarter of 1999 increased 22% and shipments of corrugated containers
decreased 1% compared to last year. The average price of SBS in the second
quarter of 1999 declined 4% and shipments were lower by 7% compared to last
year.
Net sales of $2,230 million for the six months ended June 30, 1999, increased
161% compared to last year and profits increased by $71 million to $138 million.
The increase in net sales and profits was due primarily
11
<PAGE>
to the Merger. Net sales and profits for the Stone operations included in this
segment for the six months ended June 30, 1999 were $1,450 million and $76
million, respectively. Net sales were negatively impacted by the permanent
closures mentioned above and lower average sales prices for containerboard and
SBS. Profits were favorably impacted by lower board cost and improving sales
prices for corrugated containers. Fiber cost in 1999 declined compared to last
year. For the six months ended June 30, cost of goods sold as a percent of net
sales was 84% for both 1999 and 1998. Linerboard prices for the year to date
period were lower than last year by 4% and the average price of corrugated
containers was higher by 1%. Exclusive of Stone's operations, containerboard
shipments for the six months ended June 30, 1999, increased 20% compared to last
year and shipments of corrugated containers decreased 1% principally due to the
closed facilities. The average price of SBS in the first half of 1999 declined
6% compared to last year and shipments were lower by 5%.
Boxboard and Folding Cartons Segment
For the three months ended June 30, 1999 net sales increased by 8% compared to
last year to $208 million and profits increased by $1 million to $15 million.
The sales increase was due primarily to higher sales volume of folding cartons,
which increased by 13% compared to last year. Boxboard shipments increased by
1%. On average, boxboard prices were lower than last year by 12% and folding
carton prices were lower by 1%. The lower sales prices had a negative effect on
profits, but the effects of higher sales volume, lower board cost and lower
fiber cost more than offset the decline. Cost of goods sold as a percent of net
sales for the three months ended June 30, 1999 was 84%, unchanged from last
year.
For the six months ended June 30, 1999 net sales increased by 5% compared to
last year to $405 million. The year to date sales increase was also due to
higher shipments of folding cartons, which increased 9% compared to last year.
Boxboard shipments declined 7%. On average, boxboard prices were lower than last
year by 12% and the average price of folding cartons was lower by 1%. Profits
for the six months ended June 30, 1999 were unchanged compared to last year at
$28 million. The effect of the lower sales prices on profits for the year to
date period negated the effects of higher sales volume, lower board cost and
lower fiber cost. Cost of goods sold as a percent of net sales for the six
months ended June 30, 1999 was 84%, unchanged from last year.
Other Operations
Net sales of $393 million for the Company's other operations for the three
months ended June 30, 1999 increased $256 million, or 187%, compared to last
year and profits increased by $12 million to $20 million, due primarily to the
results of the industrial bag and international operations of Stone. 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, increased in the
second quarter of 1999 and sales prices began to increase. The June price of OCC
increased approximately $30 per ton and is expected to be significantly higher
in the third quarter. Compared to last year however, the average price of OCC in
the second quarter was lower by approximately $18 per ton. The price of old
newsprint in the second quarter was lower by approximately $5 per ton compared
to last year. Total tons of fiber reclaimed and brokered for the three months
ended June 30, 1999 increased 29% compared to last year.
Net sales of $800 million for the Company's other operations for the six months
ended June 30, 1999 increased $513 million, or 179%, compared to last year and
profits increased by $30 million to $47 million, due primarily to the results of
the industrial bag and international operations of Stone. For the year to date
period, the average price of OCC was lower by approximately $35 per ton compared
to last year and the price of old newsprint was comparable. Total tons of fiber
reclaimed and brokered for the six months ended June 30, 1999 increased 27%
compared to last year.
12
<PAGE>
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 a discontinued operation for all periods shown. The
Company had a loss from discontinued operations, net of tax, for the three
months ended June 30, 1999 of $1 million compared to a profit of $9 million for
the same period last year. Newsprint inventories within the industry continue to
be excessive, with deteriorating prices. Many newsprint producers, including the
Company, announced the curtailment of production in the first half of 1999. SNC
revenues were $65 million and $80 million for the second quarter of 1999 and
1998, respectively. Average newsprint sales prices were lower than last year by
15% and shipments during the quarter were lower than last year by 3%.
Income from discontinued operations, net of tax, for the six months ended June
30, 1999 was $3 million compared to $17 million for the same period last year.
SNC revenues were $139 million and $160 million for the first half of 1999 and
1998, respectively. Average newsprint sales prices for the year to date period
were lower than last year by 10% and shipments were lower than last year 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 Stone 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 June 30, 1999 was unchanged compared to last year at 84% and
for the six months ended June 30, 1999 increased from 84% in 1998 to 86% in
1999. Selling and administrative expenses also increased compared to 1998 due to
the Merger.
Interest expense for the three months and six months ended June 30, 1999 were
higher than last year due primarily to the consolidation of Stone's interest
expense and higher levels of debt 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 $44 million on a pretax loss of
$155 million for the six months ended June 30, 1999. The effective tax rate for
the stated period includes the effect of permanent differences from applying
purchase accounting.
RESTRUCTURING AND MERGER SYNERGIES
As explained in the SSCC 1998 10-K, the Company recorded a pre-tax 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.
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 long-term
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 a $9 million
restructuring charge during the first half of 1999 related to the permanent
shutdown of four JSC(U.S.) corrugated container facilities and adjusted
exit
13
<PAGE>
liabilities by $4 million for the closure of two Stone corrugated container
facilities. Additional restructuring charges are expectedin 1999 as management
finalizes its plans.
The exit liabilities recorded for JSC(U.S.) and Stone consisted of approximately
$202 million of anticipated cash expenditures. Since the Merger, through June
30, 1999, approximately $61 million (30%) 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,
approximately 50% of which will be paid by the end of 1999, as originally
planned.
Merger synergies of at least $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. Synergy savings in 1999,
less costs to implement these savings, are expected to exceed $200 million.
Merger synergies, including the benefits of mill shutdowns at the end of 1998
and staff headcount reductions, through the first half of 1999 totaled
approximately $113 million.
STATISTICAL DATA
<TABLE>
<CAPTION>
(In thousands of tons, except as noted) Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Mill production:
Containerboard......................... 1,476 498 2,936 1,016
Solid bleached sulfate................. 47 48 91 97
Kraft paper............................ 115 228
Coated boxboard........................ 143 142 293 287
Corrugated shipments (billion sq. ft.).... 22.8 7.6 45.6 14.8
Folding carton shipments.................. 147 130 288 263
Industrial bag shipments.................. 127 257
Fiber reclaimed and brokered.............. 1,630 1,263 3,221 2,542
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June 30, 1999
of $60 million, proceeds from the sale of assets of $546 million, proceeds from
exercise of stock options of $18 million and available cash of $12 million were
used to fund property additions of $69 million and net debt payments of $569
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.
The Company intends to sell or liquidate additional assets, including its
woodlands operations, its remaining newsprint operations and other non-core
businesses. On July 29, 1999, the Company reached a definitive agreement to sell
820,000 acres of owned timberland and assign its rights to 160,000 acres of
leased timberland to a third party for $725 million. The timberlands are located
in Florida, Georgia and Alabama. The agreement is subject to regulatory
approvals and is expected to close in the fourth quarter of 1999. Proceeds from
asset sales are required to be used to pay down the borrowings under the
JSC(U.S.) Credit Agreement.
Stone has a $210 million accounts receivable securitization program (the
"Securitization Program") whereby certain trade accounts receivable are sold to
Stone Receivables Corporation, a wholly owned, bankruptcy
14
<PAGE>
remote, limited purpose subsidiary. In December 1999, the Securitization Program
will discontinue the purchase of additional trade accounts receivable and
convert to a repayment program in March of 2000. Therefore, the $210 million
Securitization Program is classified as a current maturity of long-term debt as
of June 30, 1999. It is the Company's intention to refinance the Securitization
Program in 1999 on terms and conditions similar to the existing program.
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
non-compliance 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.
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 June 30, 1999, Stone had
accumulated dividend arrearages of $18 million related to 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 minimum equity levels
exceeding the minimum on December 31, 1998.
As of June 30, 1999, JSC(U.S.) had $417 million of unused borrowing capacity
under its credit agreement and Stone had $538 million of unused borrowing
capacity under its 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 certain litigation
relating to Cladwood'r' siding and capital expenditures.
YEAR 2000
The Year 2000 problem concerns the inability of computer systems and devices to
properly recognize and process date-sensitive 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. While
it is difficult, at present, to fully quantify the overall cost of this work,
the Company expects to spend approximately $54 million through 1999 to correct
the Year 2000 problem, of which approximately $35 million has been incurred
through June 30, 1999. A large portion of these costs relate to enhancements
that will enable the Company to reduce or avoid costs and operate
15
<PAGE>
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, non-compliant, 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 five have been remediated, four are scheduled to be
substantially completed in the third quarter of 1999, and one is 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 complete as of the
end of the second quarter of 1999. The Company had retained a third party to
assist with the verification and validation of these three phases. The Company
expects to have substantially completed all phases of its Year 2000 program, for
non-IT systems, by the end of the third quarter of 1999. At the end of the
second quarter of 1999, 92% 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.
Additional evaluation of those vendors, whose failure would have a substantial
impact and/or have provided an inadequate response, is ongoing. This process is
anticipated to be substantially complete by the end of the third quarter of
1999.
16
<PAGE>
The Company currently believes that it will be able to replace, repair or
upgrade all of its 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
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 should be substantially complete by the
end of the third quarter of 1999. The Company will also seek to take 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 increasing the
inventory of critical raw materials and supplies, increasing finished goods
inventories, switching to alternative energy sources, and making arrangements
for alternate vendors.
There is a risk that the Company's plans for achieving Year 2000 compliance may
not be completed on time. However, failure to meet critical milestones being
identified in the Company's plans would provide advance notice, and steps would
be taken to prevent injuries to employees and others, and to prevent
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 10-K.
FOREIGN CURRENCY RISK
During the six months ended June 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:
<TABLE>
<S> <C>
Rate at June 30, 1999 vs. December 31, 1998
Canadian dollar 3.8 %
German Mark (13.4)%
Average Rate for the six months ended June 30, 1999 vs. 1998
Canadian dollar (3.7)%
German Mark ( .3)%
</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, non-consolidated affiliates and a German Mark obligation. The
Company recognized foreign currency transaction gains of $6 million during the
six months ended June 30, 1999.
17
<PAGE>
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 six months ended June 30, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1998, a suit was filed against Stone in Los Angeles Superior Court by
Chesterfield Investments L.P. ("Chesterfield"), and D.P. Investments L.P.
("DPI"), alleging that Stone owed such parties approximately $120 million
relating to Stone's purchase of common stock of Stone Savanna River Pulp and
Paper Corporation ("SSR"). In 1991, Stone purchased the shares of common stock
of SSR held by Chesterfield and DPI for approximately $6 million plus a
contingent payment payable in March 1998 based upon the post-closing performance
of the operations of SSR from 1991 through 1997. Stone concluded a settlement of
the case with DPI, which had a 30% interest in the contingent payment, in 1998.
Chesterfield continued to pursue the case as to the remaining 70% of the
contingent payment, which was settled in July 1999 for a cash payment of $30.6
million. Existing purchase accounting reserves will be adjusted to reflect the
settlement.
In April 1999, Florida Coast Paper Company L.L.C. ("FCPC") and three related
companies filed a Chapter 11 bankruptcy petition in United States Bankruptcy
Court in Wilmington, Delaware. FCPC and the related entities are 50% owned by
Stone. All of the obligations of FCPC and the related entities 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 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. While Stone believes that such
allegations are without merit, it is unable to predict the likely outcome of
this action or its impact on the FCPC bankruptcy proceeding at this time.
In May 1999, the Superior Court of Washington issued its final approval of the
settlement of the nationwide class action pending in King County, Washington
against the Company and SNC involving claims regarding Cladwood'r' siding
manufactured by SNC. All other pending class actions relating to Cladwood'r'
have been subsequently dismissed.
In May 1999, the Delaware Court of Chancery approved the terms of the settlement
of the consolidated class action brought against Stone on behalf of the holders
of its Series E Cumulative Exchangeable Preferred Stock, which has now become
final.
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
18
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Annual Meeting of Stockholders was held on May 27, 1999. At the
meeting, stockholders voted on (i) the election of nine directors for terms of
office expiring at the Annual Meeting of Stockholders in 2000 and (ii) the
ratification of the appointment of Ernst & Young LLP as independent auditors of
the Company for 1999. Voting on each matter was as follows:
<TABLE>
<CAPTION>
Votes Votes Withheld/
For Against Abstentions
---- ------- -----------
<S> <C> <C> <C>
1. Election of Directors
Ray M. Curran 200,551,534 0 1,014,053
Richard A. Giesen 200,522,613 0 1,042,974
Alan E. Goldberg 200,001,294 0 1,564,293
Richard W. Graham 200,526,279 0 1,039,308
James J. O'Connor 200,481,698 0 1,083,889
Jerry K. Pearlman 200,479,182 0 1,086,405
Thomas A. Reynolds, III 199,170,461 0 2,395,126
Dermot F. Smurfit 200,529,335 0 1,036,252
Michael W.J. Smurfit 200,544,879 0 1,020,708
2. Ratification of Auditors 201,401,574 69,353 94,660
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are included in this Form 10-Q.
10.1 First Amendment of Amended and Restated Credit Agreement, dated as of
June 30, 1999, among SSCC, JSCE, JSC (U.S.) and the Banks party
thereto.
10.2 Second Amendment of Amended and Restated Credit Agreement, dated as
of June 30, 1999, among Stone, the Financial Institutions signatory
thereto and Bankers Trust Company, as agent (incorporated by
reference to Exhibit 10.1 to Stone's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999).
11.1 Calculation of Per Share Earnings
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
19
<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: August 13, 1999 /s/ Paul K. Kaufmann
---------------- -----------------------------------
Paul K. Kaufmann
Vice President and
Corporate Controller
(Principal Accounting Officer)
20
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as.......................'r'
<PAGE>
FIRST AMENDMENT OF
AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT OF AMENDED AND RESTATED CREDIT AGREEMENT, dated as
of June 30, 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 (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 to Permit the Liability
Management Transactions. 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 by adding
thereto (in alphabetical order) the following defined term:
"Liability Management Transactions" means the series of
transactions described on Schedule 1.01(g) hereto.
and by adding at the end of the definition of "Subsidiary" the parenthetical
phrase "(including SCC RMMI and SCC AMMI)".
<PAGE>
Section 1.01 is further amended by adding at the end thereof a new
paragraph to read as follows:
The following terms are defined in Schedule 1.01(g) to the
Credit Agreement:
"JSC AMMI"
"JSC Newco"
"JSC Newco Note"
"JSC RMMI"
"SCC AMMI"
"SCC RMMI"
"SNC Note"
(b) Section 7.01 of the Credit Agreement is amended by deleting
the word "and" after paragraph (n) thereof; by deleting the period at
the end of paragraph (o) thereof and substituting a semicolon therefor;
and by adding a new paragraph (p) thereto to read as follows:
(p) the assumption by JSC Newco of the liabilities of the
Borrower related to the Brewton, Alabama mill and the assumption
by JSC RMMI and JSC AMMI of post-retirement medical liabilities
and active medical liabilities, respectively, of the Borrower, in
each case pursuant to the Liability Management Transactions; and
(c) Section 7.04 of the Credit Agreement is amended by deleting
"[Intentionally Omitted]" from paragraph (e) thereof and substituting
therefor the following:
(i) loans or advances evidenced by the SNC Note and the
JSC Newco Note pursuant to the Liability Management Transactions,
provided that such notes are unsecured and otherwise in form and
substance satisfactory to the Senior Managing Agents, and it
being agreed that the SNC Note and JSC Newco Note will not be
required to be pledged to the Collateral Agent as Collateral;
(ii) loans or advances made by the Borrower to JSC RMMI and JSC
AMMI on a revolving credit basis pursuant to the Liability
Management Transactions, provided that such loans are unsecured
and incurred pursuant to a revolving credit agreement, notes and
other documentation in form and substance satisfactory to the
Senior Managing Agents and that such notes are delivered to the
Collateral Agent and pledged by the Borrower to the Collateral
Agent for the benefit of the Secured Parties pursuant to the
Pledge Agreement; (iii) the Investment by the Borrower in the
Class C Voting Preferred Stock of JSC RMMI and JSC AMMI and the
contribution of the SNC Note and the JSC Newco Note to JSC RMMI
and JSC AMMI, respectively, pursuant to the Liability Management
Transactions; (iv) the
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<PAGE>
Investment by SSCC in the Class B Non-Voting Preferred Stock of
JSC RMMI and JSC AMMI pursuant to the Liability Management
Transactions; (v) the Investment by JSCE in the Class A Common
Stock of JSC RMMI and JSC AMMI pursuant to the Liability
Management Transactions; and (vi) additional capital
contributions to JSC RMMI and JSC AMMI pursuant to the
stockholders' agreements contemplated by the Liability Management
Transactions, provided that such stockholders' agreements are in
form and substance satisfactory to the Senior Managing Agents.
(d) Section 7.05 of the Credit Agreement is amended by deleting
the word "and" after paragraph (d) thereof; by deleting the period at
the end of paragraph (e) thereof, substituting a semicolon therefor and
adding the word "and" thereafter; and by adding a new paragraph (f)
thereto to read as follows:
(f) the Borrower may contribute the properties and assets
(other than the real property and any IRB-secured property) of
the Brewton, Alabama mill, and may lease the real property and
IRB-secured property of the Brewton, Alabama mill on a long-term
basis and for nominal consideration, to JSC Newco pursuant to the
Liability Management Transactions (it being agreed that such
contribution and lease may be made or consummated notwithstanding
the provisions of any Security Agreement or any Mortgage),
provided that (A) the Borrower shall designate JSC Newco as a
Material Subsidiary, and the Borrower and JSC Newco shall comply
with the applicable provisions of Section 6.10 (except that no
leasehold mortgage shall be required with respect to such lease),
and (B) such lease is in form and substance satisfactory to the
Senior Managing Agents.
(e) Section 7.06 of the Credit Agreement is amended by adding at
the end thereof a new paragraph (e) to read as follows:
(e) Notwithstanding the provisions of Section 7.06(a),
pursuant to the Liability Management Transactions, (i) SNC and
JSC Newco may issue the SNC Note and JSC Newco Note,
respectively, as dividends to the Borrower; (ii) the Borrower may
acquire the Class C Voting Preferred Stock of JSC RMMI and JSC
AMMI; and (iii) SSCC may acquire the Class B Non-Voting Preferred
Stock of JSC RMMI and JSC AMMI.
(f) Section 7.11 of the Credit Agreement is amended by deleting
from paragraph (b) thereof the reference to "paragraphs (c) and (d)
below" and substituting therefor the words "paragraphs (c), (d) and (e)
below" and by adding a new paragraph (e) at the end thereof to read as
follows:
(e) Notwithstanding paragraphs (a) and (b) above, pursuant
to the Liability Management Transactions, (i) JSCE may acquire
JSC RMMI and JSC AMMI as
-3-
<PAGE>
Subsidiaries, provided that JSCE shall pledge its Class A Common
Stock in such Subsidiaries to the Collateral Agent for the
benefit of the Secured Parties pursuant to the Pledge Agreement,
but such Subsidiaries shall not be deemed to be Material
Subsidiaries or required to comply with Section 6.10; (ii) SSCC
may acquire JSC RMMI and JSC AMMI as Subsidiaries, provided that
SSCC shall pledge its Class B Non-Voting Preferred Stock in such
Subsidiaries to the Collateral Agent for the benefit of the
Secured Parties pursuant to the Pledge Agreement; and (iii) JSCE
may acquire the Class C Voting Preferred Stock of JSC RMMI and
JSC AMMI and may sell such stock to any other Person for cash at
fair value.
(g) The Credit Agreement is further amended by adding a new
Schedule 1.01(g) thereto in the form of Schedule 1.01(g) attached to
this Amendment.
SECTION 3. Further Amendment to the Credit Agreement. The Credit
Agreement is, as of the Effective Date, hereby further amended as follows:
(a) Section 7.01 is further amended by adding a new paragraph (q)
at the end thereof to read as follows:
(q) Guarantees by the Borrower with respect to bonds
issued to support the Borrower's workers' compensation and other
obligations (other than Indebtedness) incurred in the ordinary
course of business.
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 Required Lenders
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 Liability Management Transactions (as described on
Schedule 1.01(g) attached hereto) on or after the Effective Date shall be
subject to the receipt by the Administrative Agent and the Collateral Agent of
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:
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<PAGE>
(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 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 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
-5-
<PAGE>
shall be binding upon the respective parties hereto upon the execution and
delivery of this Amendment by SSCC, JSCE, the Borrower and the Required Lenders
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,
WITHOUT REGARD TO THE INTERNAL CONFLICTS OF LAWS PROVISIONS THEREOF.
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>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers, all as of the date and year
first above written.
SMURFIT-STONE CONTAINER
CORPORATION (formerly named
JEFFERSON SMURFIT CORPORATION)
By: /s/Charles A. Hinrichs
______________________________________
Name: Charles A. Hinrichs
____________________________________
Title: Vice President and Treasurer
__________________________________
JEFFERSON SMURFIT CORPORATION (U.S.)
By: /s/Charles A. Hinrichs
______________________________________
Name: Charles A. Hinrichs
____________________________________
Title: Vice President and Treasurer
__________________________________
JSCE, INC.
By: /s/Charles A. Hinrichs
______________________________________
Name: Charles A. Hinrichs
____________________________________
Title: Vice President and Treasurer
__________________________________
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<PAGE>
BANKERS TRUST COMPANY,
individually and as Fronting Bank and
Senior Managing Agent
By: /s/Robert R. Telesca
______________________________________
Name: Robert R. Telesca
____________________________________
Title: Assistant Vice President
__________________________________
-8-
<PAGE>
THE CHASE MANHATTAN BANK, individually
and as Administrative Agent, Collateral
Agent and Senior Managing Agent
By: /s/Jonathan Twichell
______________________________________
Name: Jonathan Twichell
____________________________________
Title: Vice President
__________________________________
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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 June 30, 1999
SMURFIT NEWSPRINT CORPORATION
By: /s/Charles A. Hinrichs
_________________________________
Name: Charles A. Hinrichs
_______________________________
Title: Vice President and Treasurer
_____________________________
-10-
<PAGE>
EXHIBIT 11.1
SMURFIT-STONE CONTAINER CORPORATION
CALCULATION OF PER SHARE EARNINGS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -------------------
1999 1998 1999 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations
before extraordinary item and
cumulative effect of accounting change $ (23) $ 2 $ (115) $ 5
Discontinued operations (1) 9 3 17
Extraordinary item (1) (1) (13)
Cumulative effect of accounting charge (3)
------- ------- ------- --------
Net income (loss) $ (25) $ 11 $ (113) $ 6
======== ======= ======== =======
Weighted average shares outstanding
for basic earnings per share 216 111 216 111
Effect of diluted securities
Employee stock options 2 2
------- -------- ------- -------
Weighted average shares outstanding
for diluted earnings 216 113 216 113
======== ======== ======== =======
Basic per share amounts:
Income (loss) before extraordinary item $ (.11) $ .02 $ (.53) $ .05
Discontinued operations (.01) .08 .01 .15
Extraordinary item (.12)
Cumulative effect of accounting change (.03)
------- ------ -------- -------
Net income (loss) $ (.12) $ .10 $ (.52) $ .05
========= ======== ======== =======
Diluted per share amounts:
Income (loss) before extraordinary item $ (.11) $ .02 $ (.53) $ .04
Discontinued operations (.01) .08 .01 .15
Extraordinary item (.11)
Cumulative effect of accounting change (.03)
------- ------ ------- -------
Net income (loss) $ (.12) $ .10 $ (.52) $ .05
========= ======== ======== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CIK> 0000919226
<NAME> SMURFIT-STONE CONTAINER CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 143
<SECURITIES> 0
<RECEIVABLES> 914
<ALLOWANCES> 84
<INVENTORY> 710
<CURRENT-ASSETS> 1,923
<PP&E> 6,320
<DEPRECIATION> 988
<TOTAL-ASSETS> 10,896
<CURRENT-LIABILITIES> 1,634
<BONDS> 5,629
<COMMON> 2
0
0
<OTHER-SE> 1,556
<TOTAL-LIABILITY-AND-EQUITY> 10,896
<SALES> 3,435
<TOTAL-REVENUES> 3,435
<CGS> 2,971
<TOTAL-COSTS> 2,971
<OTHER-EXPENSES> 380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 296
<INCOME-PRETAX> (155)
<INCOME-TAX> 44
<INCOME-CONTINUING> (115)
<DISCONTINUED> 3
<EXTRAORDINARY> (1)
<CHANGES> 0
<NET-INCOME> (113)
<EPS-BASIC> (.52)
<EPS-DILUTED> (.52)
</TABLE>
